NRC Health: Form 10-Q for the period ended Mar 31, 2025

The following discussion of our results of operations and financial conditions should be read in conjunction with our condensed consolidated financial statements and related notes appearing elsewhere in this Quarterly Report on Form 10-Q.

Our purpose is to humanize healthcare and support organizations in their understanding of each unique individual. Our commitment to Human Understanding® helps leading healthcare systems get to know each person they serve not as point-in-time insights, but as an ongoing relationship. Our end-to-end solutions enable our clients to understand what matters most to each person they serve – before, during, after, and beyond clinical encounters – to gain a longitudinal understanding of how life and health intersect, with the goal of developing lasting, trusting relationships. Our ability to measure what matters most and systematically capture, analyze, and deliver insights based on self-reported information from patients, families, and consumers is critical in today’s healthcare market. We believe access to and analysis of our extensive consumer-driven information is increasingly valuable as healthcare providers need to better understand and engage the people they serve to create long-term relationships and build loyalty.

Our portfolio of subscription-based solutions provides actionable information and analysis to healthcare organizations across a range of mission-critical, constituent-related elements, including patient experience, service recovery, care transitions, employee engagement, reputation management, and brand loyalty. We partner with clients across the continuum of healthcare services and believe this cross-continuum positioning is a unique and an increasingly important capability as evolving payment models drive healthcare providers and payers towards a more collaborative and integrated service model.

On February 26, 2025, our Board of Directors appointed Trent Green as our Chief Executive Officer and to serve as a director, both effective June 1, 2025. Mr. Green brings more than 25 years of healthcare leadership experience, most recently serving as Chief Executive Officer of Amazon One Medical and previously as Chief Operating Officer of Legacy Health. Upon the effectiveness of Mr. Green’s appointment as Chief Executive Officer, Mr. Hays will transition to the role of Chairman.

Results of Operations

The following table sets forth, for the periods indicated, selected financial information derived from our condensed consolidated financial statements and the percentage change in such items versus the prior comparable period, as well as other key financial metrics. The discussion that follows the information should be read in conjunction with our condensed consolidated financial statements.

Three Months Ended March 31, 2025, Compared to Three Months Ended March 31, 2024

Revenue. Revenue in the 2025 period decreased compared to the 2024 period by $1.8 million. This was mainly from decreased recurring revenue of $2.1 million in our existing client base, partially offset by an increase in revenue from new clients of $353,000. We view total Recurring Contract Value, or TRCV, a measure of revenue under all renewable contracts for their respective annual renewal periods, as a leading indicator of revenue expectations. TRCV declined for several quarters prior to the fourth quarter of 2024, when it increased slightly and increased further sequentially in the first quarter 2025. We believe the expansion of our product and services portfolio during 2024, along with a broader sales effort, led to improved sales and retention in the fourth quarter compared with the prior several quarters. Despite this sequential quarterly improvement, TRCV was lower for the first quarter of 2025 compared to the first quarter of 2024. There is a lag between changes in TRCV (next twelve months) and revenue (trailing twelve months). Generally, if we are able to sustain growth in TRCV, we would expect revenue growth to follow within the next few quarters (and vice versa). However, intervening events may affect this general expectation.

Direct expenses. Variable expenses increased $267,000 in the 2025 period compared to the 2024 period primarily due to higher conference costs due to more conferences in the 2025 period than the 2024 period, partially offset by lower data collection expenses. Variable expenses as a percentage of revenue were 17% and 15% in the 2025 and 2024 periods, respectively. Fixed expenses decreased $1.1 million primarily due to decreased salary and benefit costs from workforce reduction and automation implemented in the fourth quarter of 2024 partially offset by increased contracted services to support investments in our Human Understanding solutions. We expect to continue to invest in providing innovative solutions to our clients, which could cause direct expenses to fluctuate as a percentage of revenue.

Selling, general and administrative expenses. Selling, general and administrative expenses decreased in the 2025 period compared to the 2024 period primarily due to decreased marketing expenses of $688,000 and reduced legal and accounting fees of $259,000. While we continue to invest in product development and sales, our goal is to drive efficiencies and savings in overall costs to offset such investments. Selling, general and administrative expenses are expected to increase due to increased compensation expense related to certain executives and our new CEO. We expect a $3.6 million (based on the price of our common stock at April 25, 2025) charge during the second quarter of 2025 for Mr. Green's signing bonus and quarterly non-cash charges of approximately $447,000 (based on the price of our common stock on April 25, 2025) for Mr. Green's equity grant beginning in June 2025 and continuing through the third anniversary of the grant. Additionally, in light of Mr. Green’s appointment, two other executives were awarded similar compensation arrangements, which will result in a charge of $1.7 million in April 2025 for cash bonuses and quarterly non-cash charges of $207,000 beginning in April 2025 and continuing through March 2028. In consideration for the foregoing compensation, the long-term cash incentive plan was terminated and the unvested performance awards were forfeited for these two executives.

Depreciation and amortization. Depreciation, amortization and impairment expenses increased in 2025 compared to the 2024 period due to increased software investment amortization and intangible amortization from the Nobl acquisition partially offset by less building, furniture and computer equipment depreciation. We expect our depreciation and amortization to increase slightly given continued software and intangible amortization, as well as depreciation on the building renovations when completed in 2025.

Operating income and margin. Operating income decreased in the 2025 period compared to the 2024 period primarily due to the decline in revenue, but operating margin increased in the 2025 period compared to the 2024 period due to the decrease in marketing expenses, legal and accounting, and salary and benefit costs partially offsetting the reduction in revenue. In the near term, we expect operating income and margin to increase due to revenue and cost initiatives, excluding the impact of the executive compensation charges described above.

Total other expense. Total other expense increased in the 2025 period compared to the 2024 period primarily due to higher interest expense of $294,000 mainly from higher borrowings outstanding on our Delayed Draw Term Loan, partially offset by lower average borrowings and interest rates on the Revolving Loan. Other expense is expected to increase in future periods due to additional borrowings on our Delayed Draw Term Loan and Revolving Loan.

Provision for income taxes and effective tax rate. The effective tax rate increased in the 2025 period compared to the 2024 period primarily due to decreased tax benefits from share-based compensation awards, an increase in the effective rate related to state income taxes which fluctuates based on various apportionment factors and rates for the states we operate in. The provision for income taxes increased due to the increase in the effective tax rate partially offset by the decrease in income before income taxes.

Recurring Contract Value. Recurring contract value at March 31, 2025 was lower compared to March 31, 2024 primarily due to the lack of growth in new contracts to replace losses. Our retention rate remained fairly consistent from prior years. Recurring contract value increased at March 31, 2025 compared to December 31, 2024 as year-to-date new sales surpassed year-to-date losses. Our recurring contract value metric represents the total revenue projected under all renewable contracts for their respective next annual renewal periods, assuming no upsells, downsells, price increases, or cancellations, measured as of the most recent quarter end.

Liquidity and Capital Resources

Our Board of Directors has established priorities for capital allocation, which prioritize funding of innovation and growth investments, including merger and acquisition activity as well as internal projects. The secondary priority is capital allocation for quarterly dividends and share repurchases.

As of March 31, 2025, our principal sources of liquidity included $2.5 million of cash and cash equivalents, up to $26.5 million of unused borrowings under our Revolving Loan and an additional $47.6 million on our Delayed Draw Term Loan.

Our cash flows from operating activities consist of net income adjusted for non-cash items including depreciation and amortization, deferred income taxes, share-based compensation, reserve for uncertain tax positions, loss on extinguishment of debt, change in fair value of contingent consideration, and the effect of working capital changes. Cash provided by operating activities decreased primarily due to working capital changes, mainly consisting of changes in trade accounts receivable primarily due to timing of initial billings and collections for new and renewal contracts, prepaid expenses and other current assets primarily due to the timing of our annual business insurance and other service agreements, accrued expenses, wages and bonuses, deferred revenue and income taxes payable and receivable mainly due to the timing of payments, partially offset by changes in accounts payable. Cash provided by operating activities was also partially offset by an increase in net income net of non-cash items.

See the Condensed Consolidated Statements of Cash Flows included in this report for the detail of our operating cash flows.

We had a working capital deficit of $17.4 million and $16.3 million on March 31, 2025 and December 31, 2024, respectively. The change was primarily due to decreases in cash and cash equivalents and increases in the borrowings outstanding on our Revolving Loan and accounts payable. These were partially offset by increases in accounts receivable and prepaid expenses primarily due to the timing of our annual business insurance payment and other service agreements and decreases in the current portion of our long-term debt, accrued expenses and deferred revenue. Cash and cash equivalents decreased mainly due to the repurchase of shares of our common stock for treasury. We also borrowed on our Revolving Loan to fund the share repurchases. Accounts payable and accrued expenses vary due to the timing of payments. Trade accounts receivable increased due to timing of billing and collections. Our working capital is significantly impacted by our large deferred revenue balances which will vary based on the timing and frequency of billings on annual agreements. Notwithstanding our working capital deficit on March 31, 2025, we believe that our existing sources of liquidity, including cash and cash equivalents, borrowing availability, and operating cash flows will be sufficient to meet our projected capital and debt maturity needs for the foreseeable future.

Cash used in investing activities primarily consisted of purchases of property and equipment including computer software and hardware, building improvements, and furniture and equipment.

Cash used in financing activities consisted of payments for debt issuance costs and payments on our notes payable related to our extinguishment of debt and new credit agreement, payments on our Revolving Loan and finance lease obligations. We also used cash to pay contingent consideration related to our 2024 acquisition of Nobl Health, repurchase shares of our common stock for treasury, to pay dividends on common stock and for payment of payroll tax withholdings on options exercised. This was partially offset by cash provided from borrowings on our notes payable under our new credit agreement and Revolving Loan and proceeds from the exercise of stock options.

Our material cash requirements include the following contractual and other obligations:

Cash dividends of $2.8 million were paid in the three months ended March 31, 2025. Dividends of $2.7 million were declared in the three months ended March 31, 2025 and paid in April 2025. The dividends were paid from cash on hand and borrowings on our Revolving Loan. Our Board of Directors considers whether to declare a dividend and the amount of any dividends declared on a quarterly basis.

Capital Expenditures

We paid cash of $3.0 million for capital expenditures in the three months ended March 31, 2025. These expenditures consisted mainly of computer software development for our Human Understanding solutions and building renovations to our headquarters. We estimate future costs related to our headquarters building renovations to be $3.7 million in 2025, which we expect to fund through operating cash flows and borrowings on the Revolving Loan and Delayed Draw Term Loan.

Debt

Our Credit Agreement includes (i) a $30.0 million revolving credit facility (the “Revolving Loan”) and (ii) a $110.0 million delayed draw-down term facility (“the “Delayed Draw Term Loan” and, together with the Revolving Loan, the “Credit Facilities”). The Delayed Draw Term Loan includes an accordion feature that, so long as no event of default exists or would exist after giving effect to such increase, allows us to request an increase in the Delayed Draw Term Loan of up to the lesser of (x) $25.0 million and (y) our EBITDA as of the preceding four fiscal quarters, exercisable in increments of $10.0 million (or the remaining available amount of the accordion, if less). We may use the Delayed Draw Term Loan to fund permitted future business acquisitions, repurchases of our common stock, capital expenditures or payment of dividends and the Revolving Loan to fund ongoing working capital needs and for other general corporate purposes.

Interest accrues and is payable monthly at a floating rate equal to the one-month Term SOFR plus a percentage per annum determined by our cash flow leverage ratio, ranging from 2.25% to 2.75% (6.67% at March 31, 2025).

The outstanding balance on the Delayed Draw Term Loan was $62.2 million at March 31, 2025. Principal amounts outstanding are due and payable monthly during the term of the Delayed Draw Term Loan, in equal monthly installments to amortize the aggregate outstanding principal balance by (i) 5% during each of the first three years and (ii) 7.5% during each of the fourth and fifth years following the date of such loan. All outstanding principal and interest on the Delayed Draw Term Loan are due and payable in full at the maturity date, February 6, 2030. We had the availability to borrow an additional $47.6 million on the Delayed Draw Term Loan at March 31, 2025.

Principal amounts outstanding under the Revolving Loan are due and payable in full at maturity at February 6, 2028. As of March 31, 2025, we had $3.5 million of borrowings outstanding and the availability to borrow $26.5 million on the Revolving Loan. Our weighted average short-term borrowings for the three month periods ended March 31, 2025 and 2024 were $2.0 million and $9.1 million, respectively. The weighted average interest rate on short-term borrowings during the three month periods ended March 31, 2025 and 2024 was 6.67% and 7.69%, respectively.

We are obligated to pay ongoing unused commitment fees quarterly in arrears at a percentage per annum determined by our cash flow leverage ratio, ranging from 0.15% to 0.30%, based on the actual daily unused portions of the Revolving Loan and the Delayed Draw Term Loan, respectively.

The Credit Agreement is collateralized by substantially all of our assets, subject to permitted liens and other agreed exceptions, and contains customary representations, warranties, affirmative and negative covenants (including financial covenants) and events of default. The negative covenants include, among other things, restrictions regarding the incurrence of indebtedness and liens, repurchases of our common stock and acquisitions, subject in each case to certain exceptions. Pursuant to the Credit Agreement, we are required to maintain a minimum fixed charge coverage ratio of 1.10x for all testing periods throughout the terms of the Credit Facilities, which calculation excludes, unless our liquidity falls below a specified threshold, (i) any cash dividend in a fiscal quarter that, together with all other cash dividends paid or declared during such fiscal quarter, exceeds $5.5 million in total cash dividends paid or declared, (ii) the portion of the purchase price for any permitted share repurchase of our shares paid with cash on hand, (iii) the portion of any acquisition consideration for a permitted acquisition paid with cash on hand, and (iv) up to $32.5 million of costs associated with our building renovation from or after January 1, 2023. We are also required to maintain a cash flow leverage ratio of 3.50x or less for all testing periods throughout the term of the Credit Facilities. As of March 31, 2025, we were in compliance with our financial covenants.

Leases

We have lease arrangements for certain computer, office, printing and inserting equipment as well as office and data center space. As of March 31, 2025, we had fixed lease payments of $574,000 and $10,000 for operating and finance leases, respectively payable within 12 months.

Taxes

The liability for gross unrecognized tax benefits related to uncertain tax positions was $2.2 million as of March 31, 2025. See Note 3, "Income Taxes", to the Condensed Consolidated Financial Statements contained in this report for income tax related information.

Stock Repurchase Program

In May 2022, our Board of Directors authorized the repurchase of 2.5 million shares of common stock (the “2022 Program”). Under the 2022 Program we are authorized to repurchase from time-to-time shares of our outstanding common stock on the open market or in privately negotiated transactions. There are no remaining shares that can be purchased under the 2022 Program at March 31, 2025.

In April 2025 our Board of Directors approved a new stock repurchase authorization of up to 1.0 million shares of our common stock (the “2025 Program”). We are authorized to repurchase shares of our outstanding common stock from time-to-time on the open market or in privately negotiated transactions, provided that the maximum dollar amount repurchased shall not exceed $20 million without further consent. The timing and amount of stock repurchases will depend on a variety of factors, including market conditions as well as corporate and regulatory considerations. The stock repurchase authorization may be suspended, modified, or discontinued at any time and we have no obligation to repurchase any amount of our common stock in connection with the repurchase authorization. The repurchase authorization has no set expiration date. The new authorization follows our recent repurchase of all shares remaining under the 2022 Program.

During the three months ended March 31, 2025, we repurchased 307,709 shares of our common stock under the 2022 Program for an aggregate of $5.0 million.

Critical Accounting Estimates

There have been no changes to our critical accounting estimates described in the Annual Report on Form 10-K for the year ended December 31, 2024 that have a material impact on our Condensed Consolidated Financial Statements and the related Notes.

There are no material changes to the disclosures regarding our market risk exposures made in its Annual Report on Form 10-K for the year ended December 31, 2024.

Our management, with the participation of our Chief Executive Officer (who services as our principal executive officer and our principal financial officer), has evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934) as of the end of the period covered by this report, and our Chief Executive Officer (who serves as our principal executive officer and our principal financial officer) have concluded that, as of the end of such period, our disclosure controls and procedures were effective.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Accordingly, even effective internal control over financial reporting can only provide reasonable assurance of achieving its control objectives.

We have confidence in our internal controls and procedures. Nevertheless, our management, including our Chief Executive Officer (who serves as our principal executive officer and our principal financial officer), does not expect that our disclosure procedures and controls or our internal controls will prevent all errors or intentional fraud. An internal control system, no matter how well-conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of such internal controls are met. Further, the design of an internal control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. As a result of the inherent limitations in all internal control systems, no evaluation of controls can provide absolute assurance that all our control issues and instances of fraud, if any, have been detected.

There have been no changes in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934) that occurred during the quarter ended March 31, 2025 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

The significant risk factors known to us that could materially adversely affect our business, financial condition, or operating results are described in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2024.