NRC Health: Form 10-Q for the period ended Sep 30, 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.

We have led the charge 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. Guided by its uniquely empathic heritage, our patient-focused approach, unmatched market research, and emphasis on consumer preferences are transforming the healthcare experience, leading to strong outcomes for patients and health systems.

Our portfolio of Artificial Intelligence (“AI”)-enabled 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, rounding, and brand loyalty. We partner and engage deeply 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. 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.

Effective September 29, 2025, Shane Harrison began serving as our Executive Vice President and Chief Financial Officer. Mr. Harrison brings a strong background in finance and strategic planning, most recently serving as Senior Vice President – Corporate Finance and Investor Relations at PowerSchool, a leading K-12 education SaaS provider. Upon the effectiveness of Mr. Harrison’s appointment as Chief Financial Officer he became our principal financial officer and Michael D. Hays, the Company’s Chairman, ceased serving as our principal financial officer.

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 September 30, 2025, Compared to Three Months Ended September 30, 2024

(In thousands, except percentages)

Revenue. Revenue in the 2025 period decreased compared to the 2024 period by $1.2 million. This was mainly from decreased recurring revenue of $1.6 million in our existing client base, partially offset by an increase in revenue from new clients of $0.3 million. We view Total Recurring Contract Value, or TRCV, a measure of revenue under all renewable contracts for their respective renewal periods, as a leading indicator of revenue expectations. Our TRCV metric represents the total revenue projected under all renewable contracts for their respective next renewal periods, assuming no upsells, downsells, price increases, or cancellations, measured as of the most recent quarter end. TRCV increased slightly in the fourth quarter of 2024 and increased further sequentially in each of the first, second, and third quarters of 2025. 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, such as upsells, downsells, price increases, or cancellations, may affect this general expectation.

Direct expenses. Variable expenses decreased $1.8 million in the 2025 period compared to the 2024 period primarily due to lower conference costs due to the timing of our annual Human Understanding Beyond (HUB) event which occurred in the fourth quarter of 2025 compared to the third quarter of 2024. Variable expenses as a percentage of revenue were 14% and 19% 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.

Selling, general and administrative expenses. Selling, general and administrative expenses increased in the 2025 period compared to the 2024 period primarily due to increased salary and benefits of $1.1 million and legal and accounting expenses of $0.3 million. The increase in salaries and benefits is primarily due to implementing new compensation arrangements in 2025 for our CEO and executive leaders. These increases were partially offset by decreased marketing expenses of $0.5 million.

Depreciation and amortization. Depreciation and amortization expenses increased in 2025 compared to the 2024 period due to increased depreciation on our building and related furnishings due to our building renovations being completed during 2025.

Total other expense. Total other expense increased in the 2025 period compared to the 2024 period primarily due to higher interest expense of $0.8 million mainly from higher borrowings outstanding on our Delayed Draw Term Loan, partially offset by lower average borrowings and interest rates on the 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 deductible limitations on executive compensation related to cash bonuses in the second quarter of 2025. 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.

Total Recurring Contract Value. TRCV at September 30, 2025 was higher compared to September 30, 2024, primarily due to the growth in new subscription product sales, which was partially offset by customer subscription losses and reductions.

Nine Months Ended September 30, 2025, Compared to Nine Months Ended September 30, 2024

(In thousands, except percentages)

Revenue. Revenue in the 2025 period decreased compared to the 2024 period by $4.0 million. This was mainly from decreased recurring revenue of $5.0 million in our existing client base, partially offset by an increase in revenue from new clients of $1.1 million.

Direct expenses. Variable expenses decreased $1.8 million in the 2025 period compared to the 2024 period primarily from lower conference expenses due to the timing of our annual Human Understanding Beyond (HUB) event which occurred in the fourth quarter of 2025 compared to the third quarter of 2024 and lower data collection expenses. Variable expenses as a percentage of revenue were 15% and 16% in the 2025 and 2024 periods, respectively. Fixed expenses decreased $2.3 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 computer equipment and supplies to support product development. 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 increased in the 2025 period compared to the 2024 period primarily due to increased salary and benefits, including stock compensation expense, of $8.6 million and legal and accounting expenses of $0.6 million. The increase in salaries and benefits is primarily due to implementing new compensation arrangements for our CEO and executive leaders. These increases were partially offset by decreased marketing expenses of $2.3 million and reduced recruiting expenses of $0.4 million.

Depreciation and amortization. Depreciation and amortization expenses increased in 2025 compared to the 2024 period due to increased depreciation on our building and furnishings due to our building renovations completed during 2025 and increased intangible amortization from the Nobl acquisition.

Total other expense. Total other expense increased in the 2025 period compared to the 2024 period primarily due to higher interest expense of $1.5 million mainly from higher borrowings outstanding on our Delayed Draw Term Loan, partially offset by lower average borrowings and interest rates on the Revolving Loan.

Provision for income taxes and effective tax rate. The provision for income taxes decreased due to the decrease in income before income taxes, partially offset by the increase in the effective tax rate. The effective tax rate increased in the 2025 period compared to the 2024 period primarily due to deductible limitations on executive compensation related to cash bonuses in the second quarter of 2025.

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 September 30, 2025, our principal sources of liquidity included $2.2 million of cash and cash equivalents, up to $30 million of unused borrowings under our Revolving Loan, and an additional $27.6 million on our Delayed Draw Term Loan, excluding the accordion feature.

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 for the nine months ended September 30, 2025 decreased compared to the nine months ended September 30, 2024, primarily due to the decrease in net income, and working capital changes that reduced cash flow. Working capital changes mainly consisted of changes in trade accounts receivable and prepaid expenses and other current assets primarily due to the timing of our annual business insurance and other service agreements. These reductions in cash flow were partially offset by changes in accrued expenses, wages and bonuses, deferred revenue and income taxes payable and receivable mainly due to the timing of payments. Accounts receivable and deferred revenue vary based on the timing and frequency of billings and payments on customer agreements.

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 $18.2 million and $16.3 million on September 30, 2025 and December 31, 2024, respectively. The change was primarily due to decreases in cash and cash equivalents and increases in accrued wages and bonuses, deferred revenue, and income taxes payable. These changes 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 and accrued expenses. Cash and cash equivalents decreased mainly due to the repurchase of shares of our common stock for treasury, payments for building renovations and dividend paid on common stock. 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 September 30, 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 primarily consisted of repurchases of our common stock for treasury, payment of dividends on common stock, payments on our Revolving Loan, and payoff of our Former Term Loan. These were partially offset by net borrowings under our Delayed Draw Term Loan.

Cash dividends of $8.3 million were paid in the nine months ended September 30, 2025. Dividends of $2.7 million were declared in the three months ended September 30, 2025, and paid in October 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 $9.6 million for capital expenditures in the nine months ended September 30, 2025. These expenditures consisted mainly of building renovations to our headquarters and computer software development for our product portfolio solutions.

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% (6.63% at September 30, 2025).

The outstanding balance on the Delayed Draw Term Loan was $80.4 million at September 30, 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 $27.6 million on the Delayed Draw Term Loan at September 30, 2025, excluding the accordion feature.

Principal amounts outstanding under the Revolving Loan are due and payable in full at maturity at February 6, 2028. As of September 30, 2025, we had no borrowings outstanding and the availability to borrow $30.0 million on the Revolving Loan. Our weighted average short-term borrowings for the three month periods ended September 30, 2025 and 2024, were $1.1 million and $8.0 million, respectively. Our weighted average short-term borrowings for the nine month periods ended September 30, 2025 and 2024, were $3.8 million and $9.0 million, respectively. The weighted average interest rate on short-term borrowings during the three month periods ended September 30, 2025 and 2024, was 6.68% and 7.65%, respectively. The weighted average interest rate on short-term borrowings during the nine month periods ended September 30, 2025 and 2024, was 6.67% and 7.67%, 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 and a cash flow leverage ratio of 3.50x or less for all testing periods throughout the term of the Credit Facilities. As of September 30, 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 space. As of September 30, 2025, we had fixed lease payments of $514,000 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 $2.4 million as of September 30, 2025. See Note 3, "Income Taxes", to the Condensed Consolidated Financial Statements contained in this report for income tax related information.

On July 4, 2025, the One Big Beautiful Bill Act was signed into law in the U.S., which contains a broad range of tax reform provisions affecting businesses. We are evaluating the full effects of the legislation on our estimated annual effective tax rate and cash tax position, but we do not expect that the legislation will have a material impact on our financial statements.

Stock Repurchase Program

In April 2025 our Board of Directors approved a 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 authorization follows our recent repurchase of all shares remaining under the prior repurchase authorization.

During the three months ended September 30, 2025, we repurchased 618,264 shares of our common stock under the 2025 Program for an aggregate of $9.3 million. As of September 30, 2025, there are no remaining shares authorized for repurchase under the 2025 Program.

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 and Chief 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 and our Chief 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 and our Chief 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 September 30, 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.