NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1.
|
BASIS OF CONSOLIDATION AND PRESENTATION
|
National Research Corporation, doing business as NRC Health (“NRC Health,” the “Company,” “we,” “our,” “us” or similar terms), is a leading provider of analytics and insights that facilitate measurement and improvement of the patient and employee experience while also increasing patient engagement and customer loyalty for healthcare providers, payers and other healthcare organizations in the United States and Canada. The Company
’s solutions enable its clients to understand the voice of the customer with greater clarity, immediacy and depth.
The Company
’s six operating segments are aggregated into one reporting segment because they have similar economic characteristics and meet the other aggregation criteria from the Financial Accounting Standards Board (“FASB”) guidance on segment disclosure. The six operating segments are Experience, The Governance Institute, Market Insights, Transparency, NRC Health Canada and Transitions (formerly Connect), which offer a portfolio of solutions that address specific needs around market insight, experience, transparency and governance for healthcare providers, payers and other healthcare organizations.
The condensed consolidated balance sheet of the Company at December 31, 2016, was derived from the Company
’s audited consolidated balance sheet as of that date. All other financial statements contained herein are unaudited and, in the opinion of management, include all adjustments (consisting only of normal recurring adjustments) the Company considers necessary for a fair presentation of financial position, results of operations and cash flows in accordance with accounting principles generally accepted in the United States.
Information and footnote disclosures included in financial statements prepared in accordance with accounting principles generally accepted in the United States have been condensed or omitted. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto that are included in the Company
’s Form 10-K for the year ended December 31, 2016, filed with the Securities and Exchange Commission (the “SEC”) on March 3, 2017.
The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make certain estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates.
The condensed consolidated financial statements include the accounts of the Company and its wholly-owned subsidiary, National Research Corporation Canada, doing business as NRC Health Canada. The condensed consolidated statement of income for the
nine months ended September 30, 2016 also included Customer-Connect LLC. Customer-Connect LLC became a wholly-owned subsidiary in March 2016 and was previously a variable interest entity for which NRC Health was deemed the primary beneficiary. On June 30, 2016, Customer-Connect LLC was dissolved. All significant intercompany transactions and balances have been eliminated.
The functional currency of the Company
’s foreign subsidiary, National Research Corporation Canada, doing business as NRC Health Canada, is the subsidiary’s local currency. The Company translates the assets and liabilities of its foreign subsidiary at the period-end rate of exchange and its foreign subsidiary’s income statement balances at the average rate prevailing during the period. The Company records the resulting translation adjustment in accumulated other comprehensive loss, a component of shareholders’ equity. Since the undistributed earnings of the Company’s foreign subsidiary are considered to be indefinitely reinvested, no taxes were provided for on currency translation adjustments arising from converting the investment denominated in a foreign currency to U.S. dollars. Gains and losses related to transactions denominated in a currency other than the subsidiary’s local currency and short-term intercompany accounts are included in other income (expense) in the condensed consolidated statements of income.
Equity Investments
The Company acquires equity investments to promote business and strategic objectives.
For investments that do not have a readily determinable fair value, the Company applies either cost or equity method of accounting depending on the nature of its investment and its ability to exercise significant influence. Investments are periodically analyzed to determine whether or not there are any indicators of impairment and written down to fair value if the investment has incurred an other than temporary impairment. During the three-month period ended September 30, 2017, the Company acquired a $1.3 million investment in convertible preferred stock of PracticingExcellence.com, Inc., a privately-held Delaware Corporation (“PX”), which is carried
at cost and included in other non-current assets.
The Company has a seat on PX's board of directors and the Company's investment, which is not considered to be in-substance common stock, represents approximately 15.7% of the issued and outstanding equity interests in PX at September 30, 2017.
Reclassifications
Reclassifications have been made from noncurrent deferred income taxes to other noncurrent liabilities in the 2016 condensed consolidated balance sheet to present the unrecognized tax benefits related to state taxes gross of federal tax benefits, consistent with the 2017 financial statement presentation. There was no impact on the previously reported net income and earnings per share.
Fair Value Measurements
The Company
’s valuation techniques are based on maximizing observable inputs and minimizing the use of unobservable inputs when measuring fair value. Observable inputs reflect readily obtainable data from independent sources, while unobservable inputs reflect the Company’s market assumptions. The inputs are then classified into the following hierarchy: (1) Level 1 Inputs—quoted prices in active markets for identical assets and liabilities; (2) Level 2 Inputs—observable market-based inputs other than Level 1 inputs, such as quoted prices for similar assets or liabilities in active markets, quoted prices for similar or identical assets or liabilities in markets that are not active, or other inputs that are observable or can be corroborated by observable market data; and (3) Level 3 Inputs—unobservable inputs.
Commercial paper and Eurodollar deposits are included in cash equivalents and are valued at amortized cost, which approximates fair value due to their short-term nature. Eurodollar deposits are United States dollars deposited in a foreign bank branch of a United States bank and have daily liquidity. Both of these are included as a Level 2 measurement in the table below.
The following details the Company
’s financial assets and liabilities within the fair value hierarchy at September 30, 2017 and December 31, 2016:
Fair Values Measured on a Recurring Basis
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
|
|
(In thousands)
|
|
As of September 30, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money Market Funds
|
|
$
|
12,586
|
|
|
$
|
--
|
|
|
$
|
--
|
|
|
$
|
12,586
|
|
Commercial Paper
|
|
|
--
|
|
|
|
12,948
|
|
|
|
--
|
|
|
|
12,948
|
|
Eurodollar Deposits
|
|
|
--
|
|
|
|
10,008
|
|
|
|
--
|
|
|
|
10,008
|
|
Total
|
|
$
|
12,586
|
|
|
$
|
22,956
|
|
|
$
|
--
|
|
|
$
|
35,542
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money Market Funds
|
|
$
|
11,200
|
|
|
$
|
--
|
|
|
$
|
--
|
|
|
$
|
11,200
|
|
Commercial Paper
|
|
|
--
|
|
|
|
21,450
|
|
|
|
--
|
|
|
|
21,450
|
|
Total
|
|
$
|
11,200
|
|
|
$
|
21,450
|
|
|
$
|
--
|
|
|
$
|
32,650
|
|
The Company
’s long-term debt is recorded at historical cost. The following are the carrying amounts and estimated fair values, using a Level 2 discounted cash flow analysis based primarily on estimated current rates available for debt of the same remaining duration and adjusted for nonperformance and credit risk:
|
|
September 30,
2017
|
|
|
December 31,
2016
|
|
|
|
(In thousands)
|
|
Total carrying amounts of long-term debt
|
|
$
|
1,693
|
|
|
$
|
3,540
|
|
Estimated fair value of long-term debt
|
|
$
|
1,690
|
|
|
$
|
3,533
|
|
The Company believes that the carrying amounts of trade accounts receivable, accounts payable and accrued expenses approximate their fair value due to the short maturity of those instruments.
Long-lived assets that are not recognized or disclosed at fair value in the financial statements on a recurring basis, which includes property and equipment, goodwill, intangibles, and cost method investments are measured at fair value in certain circumstances (for example, when there is evidence of impairment). As of September 30, 2017, and December 31, 2016, there was no indication of impairment related to these assets.
The effective tax rate for the three-month period ended
September 30, 2017 increased to 42.1% compared to 35.3% for the same period in 2016 mainly due to $384,000 of additional tax expense from non-deductible proposed recapitalization expenses (see Note 9).
The effective tax rate for the nine-month period ended September 30, 2017 increased to 35.9% compared to 33.8% for the same period in 2016. The increase in the effective tax rate for the nine-month period ended September 30, 2017 was primarily due to $384,000 of additional tax expense from non-deductible proposed recapitalization expenses, increases in the estimated state tax rates as well as a greater proportion of United States income subject to higher tax rates than Canadian income. The Company also had reduced tax expense in 2016 of $105,000 from United States federal tax examination adjustments, net of interest and penalties, and state tax return adjustments decreasing tax expense. These are partially offset by increased tax benefits of $149,000 in 2017 from the exercise of options and dividends paid to non-vested shareholders.
The Company
’s term note is payable in monthly installments of $212,468. Borrowings under the term note bear interest at an annual rate of 3.12%. The outstanding balance of the term note at September 30, 2017 was $1.7 million.
The Company also has a revolving credit note which was amended and extended effective June 30, 2017 with a maturity date of June 30, 2018. The maximum aggregate amount available under the revolving credit note is $12.0 million. Borrowings under the revolving credit note bear interest at a variable annual rate, with three rate options at the discretion of management as follows: (1) 2.1% plus the one-month London Interbank Offered Rate (“LIBOR”) or (2) 2.1% plus the one-, two- or three- month LIBOR rate, or (3) the bank
’s one-, two, three, six, or twelve month Money Market Loan Rate. As of September 30, 2017 the revolving credit note did not have a balance and the Company had the capacity to borrow $12.0 million.
The term note and revolving credit note are secured by certain of the Company
’s assets, including the Company’s land, building, trade accounts receivable and intangible assets. The term note and revolving credit note contain various restrictions and covenants applicable to the Company, including requirements that the Company maintain certain financial ratios at prescribed levels and restrictions on the ability of the Company to consolidate or merge, create liens, incur additional indebtedness or dispose of assets. As of September 30, 2017, the Company was in compliance with its financial covenants.
4.
|
SHARE-BASED COMPENSATION
|
The Company measures and recognizes compensation expense for all share-based payments based on the grant-date fair value of those awards. All of the Company
’s existing stock option awards and unvested stock awards have been determined to be equity-classified awards.
The Company
’s 2001 Equity Incentive Plan provided for the granting of stock options, stock appreciation rights, restricted stock, performance shares and other share-based awards and benefits up to an aggregate of 1,800,000 shares of class A common stock and 300,000 shares of class B common stock. Stock options granted could have been either nonqualified or incentive stock options. Stock options vest over one to five years following the date of grant and option terms are generally five to ten years following the date of grant.
The Company
’s 2004 Non-Employee Director Stock Plan, as amended (the “2004 Director Plan”), is a nonqualified plan that provides for the granting of options with respect to 3,000,000 shares of class A common stock and 500,000 shares of class B common stock. The 2004 Director Plan provides for grants of nonqualified stock options to each director of the Company who is not employed by the Company. On the date of each annual meeting of shareholders of the Company, options to purchase 36,000 shares of class A common stock and 6,000 shares of class B common stock are granted to directors that are elected or retained as a director at such meeting. Stock options vest one year following the date of grant and option terms are generally ten years following the date of grant, or three years in the case of termination of the outside director’s service.
The Company
’s 2006 Equity Incentive Plan provides for the granting of stock options, stock appreciation rights, restricted stock, performance shares and other share-based awards and benefits up to an aggregate of 1,800,000 shares of class A common stock and 300,000 shares of class B common stock. Stock options granted may be either incentive stock options or nonqualified stock options. Vesting terms vary with each grant and option terms are generally five to ten years following the date of grant.
The Company granted options to purchase
299,917 shares of the Company’s class A common stock and 49,986 shares of the class B common stock during the nine-month period ended September 30, 2017. Options to purchase shares of common stock were granted with exercise prices equal to the fair value of the common stock on the date of grant. The fair value of the stock options granted was estimated using a Black-Scholes valuation model with the following assumptions:
|
|
2017
|
|
|
2016
|
|
|
|
Class A
|
|
|
Class B
|
|
|
Class A
|
|
|
Class B
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expected dividend yield at date of grant
|
|
2.46
|
to
|
2.87%
|
|
|
7.99
|
to
|
8.10%
|
|
|
2.96
|
to
|
3.02%
|
|
|
6.67
|
to
|
8.12%
|
|
Expected stock price volatility
|
|
32.20
|
to
|
32.62%
|
|
|
26.47
|
to
|
27.18%
|
|
|
31.33
|
to
|
34.61%
|
|
|
27.64
|
to
|
31.77%
|
|
Risk-free interest rate
|
|
2.08
|
to
|
2.33%
|
|
|
2.08
|
to
|
2.33%
|
|
|
1.36
|
to
|
2.12%
|
|
|
1.36
|
to
|
2.12%
|
|
Expected life of options (in years)
|
|
6
|
to
|
8
|
|
|
6
|
to
|
8
|
|
|
6
|
to
|
8
|
|
|
6
|
to
|
8
|
|
The risk-free interest rate assumptions were based on the U.S. Treasury yield curve in effect at the time of the grant. The expected volatility was based on historical monthly price changes of the Company
’s common stock based on the expected life of the options at the date of grant. The expected life of options is the average number of years the Company estimates that options will be outstanding. The Company considers groups of associates that have similar historical exercise behavior separately for valuation purposes.
The following table summarizes stock option activity under the Company
’s 2001 and 2006 Equity Incentive Plans and the 2004 Director Plan for the nine months ended September 30, 2017:
|
|
Number of
Options
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Weighted Average
Remaining
Contractual Terms
(Years)
|
|
|
Aggregate
Intrinsic
Value
(In thousands)
|
|
Class A
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2016
|
|
|
1,705,483
|
|
|
$
|
12.31
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
299,917
|
|
|
$
|
22.13
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(161,784
|
)
|
|
$
|
11.01
|
|
|
|
|
|
|
$
|
1,808
|
|
Forfeited
|
|
|
(60,982
|
)
|
|
$
|
21.35
|
|
|
|
|
|
|
|
|
|
Outstanding at
September 30, 2017
|
|
|
1,782,634
|
|
|
$
|
13.77
|
|
|
|
5.54
|
|
|
$
|
42,651
|
|
Exercisable at
September 30, 2017
|
|
|
1,310,361
|
|
|
$
|
12.04
|
|
|
|
4.46
|
|
|
$
|
33,621
|
|
Class B
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2016
|
|
|
250,493
|
|
|
$
|
29.70
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
49,986
|
|
|
$
|
42.90
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(12,000
|
)
|
|
$
|
28.41
|
|
|
|
|
|
|
$
|
142
|
|
Forfeited
|
|
|
(10,163
|
)
|
|
$
|
41.53
|
|
|
|
|
|
|
|
|
|
Outstanding at
September 30, 2017
|
|
|
278,316
|
|
|
$
|
31.69
|
|
|
|
5.74
|
|
|
$
|
6,044
|
|
Exercisable at
September 30, 2017
|
|
|
200,550
|
|
|
$
|
29.06
|
|
|
|
4.66
|
|
|
$
|
4,884
|
|
As of
September 30, 2017, the total unrecognized compensation cost related to non-vested stock option awards was approximately $1.5 million and $186,000 for class A and class B common shares, respectively, which is expected to be recognized over a weighted average period of 2.46 years and 2.56 years for class A and class B common stock shares, respectively.
The following table summarizes information for the
nine months ended September 30, 2017 regarding non-vested stock granted to associates under the 2001 and 2006 Equity Incentive Plans:
|
|
Class A
Shares
Outstanding
|
|
|
Class A
Weighted
Average
Grant Date
Fair Value
Per Share
|
|
|
Class B
Shares
Outstanding
|
|
|
Class B
Weighted
Average
Grant Date
Fair Value
Per Share
|
|
Outstanding at December 31, 2016
|
|
|
174,487
|
|
|
$
|
13.93
|
|
|
|
29,081
|
|
|
$
|
37.21
|
|
Granted
|
|
|
--
|
|
|
|
--
|
|
|
|
--
|
|
|
|
--
|
|
Vested
|
|
|
--
|
|
|
|
--
|
|
|
|
--
|
|
|
|
--
|
|
Forfeited
|
|
|
(19,314
|
)
|
|
$
|
14.26
|
|
|
|
(3,219
|
)
|
|
$
|
34.69
|
|
Outstanding at
September 30, 2017
|
|
|
155,173
|
|
|
$
|
13.89
|
|
|
|
25,862
|
|
|
$
|
37.53
|
|
As of
September 30, 2017, the total unrecognized compensation cost related to non-vested stock awards was approximately $1.0 million and is expected to be recognized over a weighted average period of 2.42 years.
5.
|
GOODWILL AND OTHER INTANGIBLE ASSETS
|
The following represents a summary of changes in the Company
’s carrying amount of goodwill for the nine months ended September 30, 2017:
|
|
(In thousands)
|
|
Balance as of December 31, 2016
|
|
$
|
57,861
|
|
Foreign currency translation
|
|
|
175
|
|
Balance as of
September 30, 2017
|
|
$
|
58,036
|
|
Intangible assets consisted of the following:
|
|
September
30, 2017
|
|
|
December 31, 2016
|
|
|
|
(In thousands)
|
|
Non-amortizing other intangible assets:
|
|
|
|
|
|
|
|
|
Trade name
|
|
$
|
1,191
|
|
|
$
|
1,191
|
|
Amortizing other intangible assets:
|
|
|
|
|
|
|
|
|
Customer related
|
|
|
9,349
|
|
|
|
9,331
|
|
Technology
|
|
|
1,359
|
|
|
|
1,110
|
|
Trade name
|
|
|
1,572
|
|
|
|
1,572
|
|
Total other intangible assets
|
|
|
13,471
|
|
|
|
13,204
|
|
Accumulated amortization
|
|
|
(10,539
|
)
|
|
|
(10,080
|
)
|
Other intangible assets, net
|
|
$
|
2,932
|
|
|
$
|
3,124
|
|
6.
|
PROPERTY AND EQUIPMENT
|
|
|
September
30, 2017
|
|
|
December 31, 2016
|
|
|
|
(In thousands)
|
|
Property and equipment
|
|
$
|
41,183
|
|
|
$
|
37,890
|
|
Accumulated depreciation
|
|
|
(29,094
|
)
|
|
|
(26,084
|
)
|
Property and equipment, net
|
|
$
|
12,089
|
|
|
$
|
11,806
|
|
Net income per share of class A common stock and class B common stock is computed using the two-class method. Basic net income per share is computed by allocating undistributed earnings to common shares and using the weighted-average number of common shares outstanding during the period.
Diluted net income per share is computed using the weighted-average number of common shares and, if dilutive, the potential common shares outstanding during the period. Potential common shares consist of the incremental common shares issuable upon the exercise of stock options and vesting of restricted stock. The dilutive effect of outstanding stock options is reflected in diluted earnings per share by application of the treasury stock method.
The liquidation rights and the rights upon the consummation of an extraordinary transaction are the same for the holders of class A common stock and class B common stock. Other than share distributions and liquidation rights, the amount of any dividend or other distribution payable on each share of class A common stock will be equal to one-sixth (1/6
th) of the amount of any such dividend or other distribution payable on each share of class B common stock. As a result, the undistributed earnings for each period are allocated based on the contractual participation rights of the class A and class B common stock as if the earnings for the period had been distributed.
For the three months ended
September 30, 2016, 156,610 options of class A shares and 118,830 options of class B shares have been excluded from the diluted net income per share computation because the exercise or grant price exceeded the fair market value. For the three months ended September 30, 2016, an additional 351,620 options of class A shares were excluded as their inclusion would be anti-dilutive.
|
|
For the Three Months
Ended September
30, 2017
|
|
|
For the Three Months
Ended
September 30, 2016
|
|
|
|
Class A
Common
Stock
|
|
|
Class B
Common
Stock
|
|
|
Class A
Common
Stock
|
|
|
Class B
Common
Stock
|
|
|
|
(In thousands, except per share data)
|
|
Numerator for net income per share - basic:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
2,062
|
|
|
$
|
2,091
|
|
|
$
|
2,345
|
|
|
$
|
2,384
|
|
Allocation of distributed and undistributed income to unvested restricted stock shareholders
|
|
|
(15
|
)
|
|
|
(15
|
)
|
|
|
(21
|
)
|
|
|
(21
|
)
|
Net income attributable to common shareholders
|
|
$
|
2,047
|
|
|
$
|
2,076
|
|
|
$
|
2,324
|
|
|
$
|
2,363
|
|
Denominator for net income per share - basic:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding - basic
|
|
|
20,788
|
|
|
|
3,514
|
|
|
|
20,716
|
|
|
|
3,511
|
|
Net income per share
– basic
|
|
$
|
0.10
|
|
|
$
|
0.59
|
|
|
$
|
0.11
|
|
|
$
|
0.67
|
|
Numerator for net income per share - diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to common shareholders for basic computation
|
|
$
|
2,047
|
|
|
$
|
2,076
|
|
|
$
|
2,324
|
|
|
$
|
2,363
|
|
Denominator for net income per share - diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding
– basic
|
|
|
20,788
|
|
|
|
3,514
|
|
|
|
20,716
|
|
|
|
3,511
|
|
Weighted average effect of dilutive securities
– stock options
|
|
|
952
|
|
|
|
106
|
|
|
|
352
|
|
|
|
45
|
|
Denominator for diluted earnings per share
– adjusted weighted average shares
|
|
|
21,740
|
|
|
|
3,620
|
|
|
|
21,068
|
|
|
|
3,556
|
|
Net income per share
– diluted
|
|
$
|
0.09
|
|
|
$
|
0.57
|
|
|
$
|
0.11
|
|
|
$
|
0.66
|
|
For the
nine months ended September 30, 2016, the Company had 506,250 options of class A shares and 56,728 options of class B shares, respectively, which have been excluded from the diluted net income per share computation because the exercise or grant price exceeded the fair market value. For the nine months ended September 30, 2017 and 2016, an additional 91,385 and 204,170 options of class A shares and 15,231 and 47,429 of Class B shares were excluded as their inclusion would be anti-dilutive, respectively.
|
|
For the
Nine Months
Ended September
30, 2017
|
|
|
For the
Nine Months
Ended
September 30, 2016
|
|
|
|
Class A
Common
Stock
|
|
|
Class B
Common
Stock
|
|
|
Class A
Common
Stock
|
|
|
Class B
Common
Stock
|
|
|
|
(In thousands, except per share data)
|
|
Numerator for net income per share - basic:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
8,151
|
|
|
$
|
8,275
|
|
|
$
|
7,339
|
|
|
$
|
7,454
|
|
Allocation of distributed and undistributed income to unvested restricted stock shareholders
|
|
|
(63
|
)
|
|
|
(64
|
)
|
|
|
(64
|
)
|
|
|
(64
|
)
|
Net income attributable to common shareholders
|
|
$
|
8,088
|
|
|
$
|
8,211
|
|
|
$
|
7,275
|
|
|
$
|
7,390
|
|
Denominator for net income per share - basic:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding
– basic
|
|
|
20,759
|
|
|
|
3,514
|
|
|
|
20,712
|
|
|
|
3,503
|
|
Net income per share
– basic
|
|
$
|
0.39
|
|
|
$
|
2.34
|
|
|
$
|
0.35
|
|
|
$
|
2.11
|
|
Numerator for net income per share - diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to common shareholders for basic computation
|
|
$
|
8,088
|
|
|
$
|
8,211
|
|
|
$
|
7,275
|
|
|
$
|
7,390
|
|
Denominator for net income per share - diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding
– basic
|
|
|
20,759
|
|
|
|
3,514
|
|
|
|
20,712
|
|
|
|
3,503
|
|
Weighted average effect of dilutive securities
– stock options
|
|
|
778
|
|
|
|
81
|
|
|
|
305
|
|
|
|
54
|
|
Denominator for diluted earnings per share
– adjusted weighted average shares
|
|
|
21,537
|
|
|
|
3,595
|
|
|
|
21,017
|
|
|
|
3,557
|
|
Net income per share
– diluted
|
|
$
|
0.38
|
|
|
$
|
2.28
|
|
|
$
|
0.35
|
|
|
$
|
2.08
|
|
A
director of the Company serves as an officer of Ameritas Life Insurance Corp. (“Ameritas”). In connection with the Company’s regular assessment of its insurance-based associate benefits, which is conducted by an independent insurance broker, and the costs associated therewith, the Company purchases dental and vision insurance for certain of its associates from Ameritas. The total value of these purchases was $63,000 and $59,000 for the three-month periods ended September 30, 2017 and 2016, respectively, and $183,000 and $174,000 for the nine-month periods ended September 30, 2017 and 2016, respectively.
Mr. Hays, the Chief Executive Officer, majority shareholder and director of the Company, is an owner of 14% of the equity interest of Nebraska Global Investment Company LLC (“Nebraska Global”).
The Company, directly or indirectly through its former subsidiary Customer-Connect LLC, purchased certain services from Nebraska Global, primarily consisting of software development services. The total value of these purchases were $68,000 and $488,000 in the three-month and nine-month periods ended September 30, 2016, respectively. There were no purchases from Nebraska Global in 2017.
Mr. Hays incurred approximately $538,000 of fees and expenses in connection with exploring strategic alternatives for the Company, including the proposed recapitalization (see Note 9), for which the Company has reimbursed Mr. Hays in the three and nine-month periods ended September 30, 2017.
During the three months ended September 30, 2017, t
he Company acquired a cost method investment in convertible preferred stock of PX. Prior to the investment, the Company entered into an agreement with PX, under which the Company acts as a reseller of PX services (the “PX reseller agreement”). Additionally, the Company acquired content licenses from PX for content that the Company includes in certain of its subscription services. The total revenue earned from the PX reseller agreement in the three and nine month periods ended September 30, 2017 was $159,000 and $454,000, respectively. There was no revenue earned during the three and nine month periods ended September 30, 2016. The total amount paid for licensed content from PX in the three and nine-month periods ended September 30, 2017 was $250,000. There were no such purchases in 2016.
9.
|
PROPOSED RECAPITALIZATION
|
In September 2017, the Company
’s Board of Directors approved a 1-for-1,764,560 reverse stock split of the Company’s class B common stock followed by a 1,764,560-for-1 forward stock split that will cash out all holders of the Company's class B common stock, other than the Company's founder and chief executive officer.
In
September 2017, the Company entered into a commitment letter with First National Bank of Omaha, which expires on December 29, 2017, to provide a senior secured term loan of $70 million, a senior secured delayed draw term loan facility of $20 million and a senior secured revolving line of credit facility in an amount equal to $10 million.
The proposed
recapitalization is subject to closing of financing and approval by the holders of the Company’s class A common stock, class B common stock and both classes of stock voting together as a group.
The Company incurred expenses related to the
proposed recapitalization of approximately $975,000 and $1.1 million in the three and nine months ended September 30, 2017, respectively, which are included in selling and administrative expenses. These expenses include
the amount reimbursed to Mr. Hays (see Note 8).
10
.
|
RECENT ACCOUNTING PRONOUNCEMENTS
|
In May 2014, the FASB issued Accounting Standards Update ("ASU") 2014-09,
Revenue from Contracts with Customers (Topic 606)
(“ASU 2014-09”). ASU 2014-09 requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. ASU 2014-09 will replace most existing revenue recognition guidance in accounting principles generally accepted in the United States when it becomes effective. The standard is effective for annual and interim reporting periods in fiscal years beginning after December 15, 2017, with early adoption allowed for years beginning after December 15, 2016. An entity may choose to adopt ASU 2014-09 either retrospectively or through a cumulative effect adjustment as of the start of the first period for which it applies the standard. The Company is currently in the process of evaluating the impact that this new guidance will have on its consolidated financial statements as well as developing and testing changes to our processes and systems. Due to cost benefit considerations reviewed during the second quarter of 2017, the Company now plans to adopt the guidance beginning January 1, 2018 by recording a cumulative effect adjustment rather than retrospectively, as previously planned. The Company currently expects the most significant changes to result from deferring commissions and recognizing the expense over the estimated life of the client relationship rather than expensing as incurred, which is the Company’s current practice, and estimating variable consideration at the outset of the contract.
In January 2016, the FASB issued ASU 2016-01,
Financial Instruments—Overall: Recognition and Measurement of Financial Assets and Financial Liabilities
. ASU 2016-01 changes certain recognition, measurement, presentation and disclosure aspects related to financial instruments. ASU 2016-01 is effective for financial statements issued for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. Early adoption is not permitted. The Company believes its adoption will not significantly impact the Company’s results of operations and financial position.
In February 2016, the FASB issued ASU 2016-02,
Leases
(Topic 842)
. This ASU requires lessees to recognize a lease liability and a right-to-use asset for all leases, including operating leases, with a term greater than twelve months on its balance sheet. This ASU is effective in fiscal years beginning after December 15, 2018, with early adoption permitted, and requires a modified retrospective transition method. As of September 30, 2017, the Company had approximately $1.8 million of operating lease commitments which would be recorded on the balance sheet under the new guidance. However, the Company is currently in the process of further evaluating the impact that this new guidance will have on its consolidated financial statements and does not plan to elect early adoption.
In June 2016, the FASB issued ASU 2016-13,
Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments
. This ASU will require the measurement of all expected credit losses for financial assets, including trade receivables, held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. The guidance is effective for annual reporting periods beginning after December 15, 2019 and interim periods within those fiscal years. The Company believes its adoption will not significantly impact the Company’s results of operations and financial position.
In August 2016, the FASB issued ASU 2016-15,
Statement of Cash Flows (Topic 230) Classification of Certain Cash Receipts and Cash Payments
which eliminates the diversity in practice related to eight cash flow classification issues. This ASU is effective for the Company on January 1, 2018 with early adoption permitted. The Company plans to adopt this ASU on January 1, 2018 and believes its adoption will not significantly impact the Company’s results of operations and financial position.
In October 2016, the FASB issued ASU 2016-16,
Intra-Entity Transfers of Asset Other Than Inventory
(“ASU 2016-16”), which requires entities to recognize the tax consequences of intercompany asset transfers other than inventory transfers in the period in which the transfer takes place. ASU 2016-16 is effective for fiscal years and interim periods within fiscal years beginning after December 15, 2017. ASU 2016-16 is to be adopted using a modified retrospective approach with a cumulative effect adjustment to retained earnings as of the beginning of the period of adoption. The cumulative effect adjustment will include recognition of the income tax consequences of intra-entity transfers of assets other than inventory that occur before the adoption date. The Company believes the adoption of ASU 2016-16 will not significantly impact the Company’s consolidated financial statements.
In November 2016, the FASB issued ASU 2016-18,
Statement of Cash Flows (Topic 230), Restricted Cash
(“ASU 2016-18”), which requires that the amounts generally described as restricted cash or restricted cash equivalents be included with cash and cash equivalents when reconciling the beginning-of-the period and end-of-period total amounts shown on the statement of cash flows. ASU 2016-18 does not provide a definition of restricted cash or restricted cash equivalents. ASU 2016-18 is effective for fiscal years and interim periods beginning after December 15, 2017. The Company does not expect the adoption of ASU 2016-18 to have any impact on the consolidated financial statements.
In January 2017, the FASB issued ASU 2017-04,
Intangibles—Goodwill and Other (Topic 350), Simplifying the Test for Goodwill Impairment
(“ASU 2017-04”). The new guidance eliminates Step 2 of the goodwill impairment testing which requires the fair value of individual assets and liabilities of a reporting unit to be determined when measuring goodwill impairment. The new guidance may result in different amounts of impairment that could be recognized compared to existing guidance. In addition, failing step 1 of the impairment test may not result in impairment under existing guidance. However, under the revised guidance, failing step 1 will always result in a goodwill impairment. ASU 2017-04 is to be applied prospectively for goodwill impairment testing performed in years beginning after December 15, 2019. The Company plans to adopt this guidance early with its annual impairment testing as of October 1, 2017 but does not believe the adoption will impact the Company's results of operations or financial position.