nrc20210630_10q.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

☒	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

	For the quarterly period ended June 30, 2021

☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

	For the transition period from ________ to ________

Commission File Number 001-35929

National Research Corporation

(Exact name of Registrant as specified in its charter)

Delaware		47-0634000
(State or other jurisdiction of		(I.R.S. Employer
incorporation or organization)		Identification No.)

	1245 Q Street, Lincoln, Nebraska 68508
	(Address of principal executive offices) (Zip Code)

	(402) 475-2525
	(Registrant’s telephone number, including area code)

Securities registered pursuant to 12(b) of the Act:

Title of Each Class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock, $.001 par value	NRC	The NASDAQ stock market

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.

Large accelerated filer	☐	Accelerated filer	☒
Non-accelerated filer	☐	Smaller reporting company	☐
		Emerging growth company	☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act.) Yes ☐ No ☒

Indicate the number of shares outstanding of each of the issuer’s classes of common stock as of the latest practicable date.

Common Stock, $.001 par value, outstanding as of July 23, 2021: 25,439,013

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NATIONAL RESEARCH CORPORATION

FORM 10-Q INDEX

For the Quarter Ended June 30, 2021

			Page No.

PART I.	FINANCIAL INFORMATION

	Item 1.	Financial Statements

		Condensed Consolidated Balance Sheets	3
		Condensed Consolidated Statements of Income	4
		Condensed Consolidated Statements of Comprehensive Income	5
		Condensed Consolidated Statements of Shareholders’ Equity	6-7
		Condensed Consolidated Statements of Cash Flows	8
		Notes to Condensed Consolidated Financial Statements	9-20

	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	21-28

	Item 3.	Quantitative and Qualitative Disclosures About Market Risk	28

	Item 4.	Controls and Procedures	28

PART II.	OTHER INFORMATION

	Item 1.	Legal Proceedings	29

	Item 1A.	Risk Factors	29

	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	29

	Item 6.	Exhibits	30

	Signatures		31

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Special Note Regarding Forward-Looking Statements

Certain matters discussed in this Quarterly Report on Form 10-Q are “forward-looking statements” within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended. These forward-looking statements can generally be identified as such because the context of the statement includes phrases such as National Research Corporation, doing business as NRC Health (“NRC Health,” the “Company,” “we,” “our,” “us” or similar terms), “believes,” “expects,” “may,” “could,” “anticipates,” or the use of words such as “would,” “may,” “could,” or “should,” or other words of similar import. Similarly, statements that describe our future plans, objectives or goals are also forward-looking statements. In this Quarterly Report on Form 10-Q, statements regarding the future impact of adopting new accounting standards, value and utility of, and market demand for, our service offerings, future opportunities for growth with respect to new and existing clients, our future ability to compete and the types of firms with which we will compete, future adequacy of our liquidity sources, future revenue sources, future capital expenditures and the sources of cash to fund such capital expenditures, the expected impact of pending claims and contingencies, the future outcome of uncertain tax positions, our future use of owned and leased real property, the source of funds for future payments of deferred purchase price obligations and other cash expenses, the future phase out of LIBOR and applicable replacement benchmark rates and the expected impact of the COVID-19 pandemic and related government mandates and recommendations, among others, are forward-looking statements. Such forward-looking statements are subject to certain risks and uncertainties which could cause actual results or outcomes to differ materially from those currently anticipated. Factors that could affect actual results or outcomes include, without limitation, the following factors:

●

The likelihood that the COVID-19 pandemic will adversely affect our sales, earnings, financial condition and liquidity;

●

The possibility of non-renewal of our client service contracts and retention of key clients;

●

Our ability to compete in our markets, which are highly competitive with new market entrants, and the possibility of increased price pressure and expenses;

●

The effects of an economic downturn;

●

The impact of consolidation in the healthcare industry;

●

The impact of federal healthcare reform legislation or other regulatory changes;

●

Our ability to attract and retain key managers and other personnel;

●

The possibility that our intellectual property and other proprietary information technology could be copied or independently developed by our competitors;

●

The possibility for failures or deficiencies in our information technology platform;

●

The possibility that we could be subject to cyber-attacks, security breaches or computer viruses; and

●

The factors set forth under the caption “Risk Factors” in Part I, Item 1A of our Annual Report on Form 10-K, as such section may be updated or supplemented by Part II, Item 1A of our subsequently filed Quarterly Reports on Form 10-Q (including this Report) and various disclosures in our press releases, stockholder reports, and other filings with the Securities and Exchange Commission.

Shareholders, potential investors and other readers are urged to consider these and other factors in evaluating the forward-looking statements and are cautioned not to place undue reliance on such forward-looking statements. The forward-looking statements included are only made as of the date of this Quarterly Report on Form 10-Q and we undertake no obligation to publicly update such forward-looking statements to reflect subsequent events or circumstances, except as required by the federal securities laws.

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PART I – Financial Information

ITEM 1. Financial Statements

NATIONAL RESEARCH CORPORATION AND SUBSIDIARY

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except share amounts and par value)

	June 30, 2021			December 31, 2020
	(unaudited)
Assets
Current assets:
Cash and cash equivalents	$	48,899		$	34,690
Trade accounts receivable, less allowance for doubtful accounts of $107 and $120, respectively		14,157			13,923
Prepaid expenses		3,575			2,645
Income taxes receivable		153			1,235
Other current assets		805			1,619
Total current assets		67,589			54,112

Net property and equipment		11,525			11,726
Intangible assets, net		1,937			1,410
Goodwill		61,640			57,255
Deferred contract costs, net		4,642			4,555
Operating lease right-of-use assets		1,134			1,308
Other		3,382			3,057
Total assets	$	151,849		$	133,423

Liabilities and Shareholders’ Equity
Current liabilities:
Current portion of notes payable, net unamortized debt issuance costs	$	4,168		$	4,061
Accounts payable		338			1,095
Accrued wages and bonuses		7,075			6,460
Accrued expenses		4,621			3,184
Income taxes payable		512			-
Deferred revenue		16,848			15,585
Deferred acquisition consideration		1,973			-
Dividends payable		3,053			-
Other current liabilities		1,391			1,296
Total current liabilities		39,979			31,681

Notes payable, net of current portion and unamortized debt issuance costs		24,434			26,547
Deferred income taxes		7,409			7,265
Other long-term liabilities		3,662			3,615
Total liabilities		75,484			69,108

Shareholders’ equity:
Preferred stock, $0.01 par value, authorized 2,000,000 shares, none issued		--			--
Common stock, $0.001 par value; authorized 110,000,0000 shares in 2021 and 60,000,000 shares in 2020, issued 30,850,131 in 2021 and 30,775,154 in 2020, outstanding 25,439,013 in 2021 and 25,390,968 in 2020		31			31
Additional paid-in capital		172,844			171,785
Retained earnings (accumulated deficit)		(49,304	)		(61,375	)
Accumulated other comprehensive loss, foreign currency translation adjustment		(2,269	)		(2,399	)
Treasury stock, at cost; 5,411,118 Common shares in 2021 and 5,384,186 Common shares in 2020		(44,937	)		(43,727	)
Total shareholders’ equity		76,365			64,315
Total liabilities and shareholders’ equity	$	151,849		$	133,423

See accompanying notes to condensed consolidated financial statements

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NATIONAL RESEARCH CORPORATION AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(In thousands, except for per share amounts, unaudited)

	Three months ended June 30,						Six months ended June 30,
	2021			2020			2021			2020

Revenue	$	36,425		$	31,166		$	71,889		$	65,026

Operating expenses:
Direct		12,536			11,634			24,476			24,180
Selling, general and administrative		10,016			8,852			19,536			17,600
Depreciation, amortization and impairment		1,634			1,405			3,618			2,777
Total operating expenses		24,186			21,891			47,630			44,557

Operating income		12,239			9,275			24,259			20,469

Other income (expense):
Interest income		3			2			6			13
Interest expense		(423	)		(450	)		(855	)		(914	)
Other, net		75			(270	)		96			360

Total other income (expense)		(345	)		(718	)		(753	)		(541	)

Income before income taxes		11,894			8,557			23,506			19,928

Provision for income taxes		2,950			842			5,330			458

Net income	$	8,944		$	7,715		$	18,176		$	19,470

Earnings Per Share of Common Stock:
Basic Earnings Per Share	$	0.35		$	0.31		$	0.71		$	0.78
Diluted Earnings Per Share	$	0.35		$	0.30		$	0.71		$	0.76

Weighted average shares and share equivalents outstanding:
Basic		25,426			25,148			25,420			25,060
Diluted		25,645			25,680			25,656			25,702

See accompanying notes to condensed consolidated financial statements

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NATIONAL RESEARCH CORPORATION AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(In thousands, unaudited)

	Three months ended June 30,				Six months ended June 30,
	2021		2020		2021		2020

Net income	$	8,944	$	7,715	$	18,176	$	19,470
Other comprehensive income (loss):
Foreign currency translation adjustment		74		461		130		(663	)
Other comprehensive income (loss)	$	74	$	461	$	130	$	(663	)

Comprehensive Income	$	9,018	$	8,176	$	18,306	$	18,807

See accompanying notes to condensed consolidated financial statements.

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NATIONAL RESEARCH CORPORATION AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

(In thousands except share and per share amounts, unaudited)

	Common Stock		Additional Paid-in Capital			Retained Earnings (Accumulated Deficit)			Accumulated Other Comprehensive Income (Loss)			Treasury Stock			Total
Balances at December 31, 2020	$	31	$	171,785		$	(61,375	)	$	(2,399	)	$	(43,727	)	$	64,315
Purchase of 26,932 shares treasury stock		--		--			--			--			(1,210	)		(1,210	)
Issuance of 68,284 common shares for the exercise of stock options		--		911			--			--			--			911
Non-cash stock compensation expense		--		(54	)		--			--			--			(54	)
Other comprehensive income, foreign currency translation adjustment		--		--			--			56			--			56
Net income		--		--			9,232			--			--			9,232
Balances at March 31, 2021	$	31	$	172,642		$	(52,143	)	$	(2,343	)	$	(44,937	)	$	73,250
Non-cash stock compensation expense		--		202			--			--			--			202
Dividends declared of $0.24 per common share		--		--			(6,105	)		--			--			(6,105	)
Other comprehensive income, foreign currency translation adjustment		--		--			--			74			--			74
Net income		--		--			8,944			--			--			8,944
Balances at June 30, 2021	$	31	$	172,844		$	(49,304	)	$	(2,269	)	$	(44,937	)	$	76,365

See accompanying notes to condensed consolidated financial statements.

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NATIONAL RESEARCH CORPORATION AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

(In thousands except share and per share amounts, unaudited)

	Common Stock		Additional Paid-in Capital		Retained Earnings (Accumulated Deficit)			Accumulated Other Comprehensive Income (Loss)			Treasury Stock			Total
Balances at December 31, 2019	$	30	$	162,154	$	(93,357	)	$	(2,209	)	$	(33,726	)	$	32,892
Purchase of 75,980 shares treasury stock		--		--		--			--			(4,425	)		(4,425	)
Issuance of 260,481 common shares for the exercise of stock options		--		3,145		--			--			--			3,145
Non-cash stock compensation expense		--		332		--			--			--			332
Dividends declared of $0.21 per common share		--		--		(5,278	)		--			--			(5,278	)
Other comprehensive loss, foreign currency translation adjustment		--		--		--			(1,124	)		--			(1,124	)
Net income		--		--		11,755			--			--			11,755
Balances at March 31, 2020	$	30	$	165,631	$	(86,880	)	$	(3,333	)	$	(38,151	)	$	37,297
Purchase of 38,369 shares treasury stock		--		--		--			--			(2,077	)		(2,077	)
Issuance of 148,284 common shares for the exercise of stock options		1		2,036		--			--			--			2,037
Forfeitures of 6,793 restricted common shares		--		--		--			--			--			--
Non-cash stock compensation expense		--		141		--			--			--			141
Other comprehensive income, foreign currency translation adjustment		--		--		--			461			--			461
Net income		--		--		7,715			--			--			7,715
Balances at June 30, 2020	$	31	$	167,808	$	(79,165	)	$	(2,872	)	$	(40,228	)	$	45,574

See accompanying notes to condensed consolidated financial statements.

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NATIONAL RESEARCH CORPORATION AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands, unaudited)

	Six months ended
	June 30,
	2021			2020
Cash flows from operating activities:
Net income	$	18,176		$	19,470
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation, amortization and impairment		3,618			2,777
Deferred income taxes		140			328
Reserve for uncertain tax positions		156			143
Non-cash share-based compensation expense		149			473
Loss on disposal of property and equipment		1			-
Net changes in assets and liabilities:
Trade accounts receivable		(40	)		(8,382	)
Prepaid expenses and other current assets		(449	)		(557	)
Deferred contract costs, net		(87	)		(379	)
Operating lease assets and liabilities, net		61			(1	)
Accounts payable		(717	)		(338	)
Accrued expenses, wages, bonuses		1,967			713
Income taxes receivable and payable		1,597			(263	)
Deferred revenue		994			(81	)
Net cash provided by operating activities		25,566			13,903

Cash flows from investing activities:
Purchases of property and equipment		(2,805	)		(1,427	)
Acquisition consideration		(3,000	)		--
Net cash used in investing activities		(5,805	)		(1,427	)

Cash flows from financing activities:
Borrowings on line of credit		-			-
Payments on line of credit		-			-
Payments on notes payable		(2,023	)		(1,600	)
Payments on finance lease obligations		(246	)		(124	)
Proceeds from the exercise of share-based awards		162			538
Payment of employee payroll tax withholdings on share-based awards exercised		(460	)		(1,859	)
Payment of dividends on common stock		(3,053	)		(10,517	)
Net cash used in financing activities		(5,620	)		(13,562	)

Effect of exchange rate changes on cash		68			(474	)
Change in cash and cash equivalents		14,209			(1,560	)
Cash and cash equivalents at beginning of period		34,690			13,517
Cash and cash equivalents at end of period	$	48,899		$	11,957

Supplemental disclosure of cash paid for:
Interest, net of capitalized amounts	$	801		$	884
Income taxes	$	3,432		$	261
Supplemental disclosure of non-cash investing and financing activities:
Finance lease obligations originated for property and equipment	$	--		$	105
Stock tendered to the Company for cashless exercise of stock options in connection with equity incentive plans	$	749		$	4,644
Deferred acquisition consideration	$	1,950			--

See accompanying notes to condensed consolidated financial statements.

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NATIONAL RESEARCH CORPORATION AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(1)

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Description of business and basis of 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 organizations in the United States and Canada. Our purpose is to enable human understanding. Our solutions enable health care organizations to understand what matters most to each person they serve. Our portfolio of solutions represents a unique set of capabilities that individually and collectively provide value to our clients.

In March 2021, we changed our operating segments from six to one to reflect a change in corporate reporting structure to the Company’s Chief Executive Officer and chief operating decision maker.

Our condensed consolidated balance sheet at December 31, 2020 was derived from our 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) that we consider 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 our Form 10-K for the year ended December 31, 2020, filed with the Securities and Exchange Commission (the “SEC”) on March 5, 2021.

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 consolidated financial statements include the accounts of the Company and our wholly-owned subsidiary, National Research Corporation Canada. All significant intercompany transactions and balances have been eliminated.

Our Canadian subsidiary uses as its functional currency the local currency of the country in which it operates. It translates its assets and liabilities into U.S. dollars at the exchange rate in effect at the balance sheet date. It translates its revenue and expenses at the average exchange rate during the period. We include translation gains and losses in accumulated other comprehensive income (loss), a component of shareholders’ equity. Gains and losses related to transactions denominated in a currency other than the functional currency of the country in which we operate and short-term intercompany accounts are included in other income (expense) in the condensed consolidated statements of income.

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Revenue Recognition

We derive a majority of our revenues from our annually renewable subscription-based service agreements with our customers, which include performance measurement and improvement services, healthcare analytics and governance education services. Such agreements are generally cancelable on short or no notice without penalty. See Note 3 for further information about our contracts with customers. We account for revenue using the following steps:

	●	Identify the contract, or contracts, with a customer;
	●	Identify the performance obligations in the contract;
	●	Determine the transaction price;
	●	Allocate the transaction price to the identified performance obligations; and

●

Recognize revenue when, or as, we satisfy the performance obligations.

Our revenue arrangements with a client may include combinations of more than one service offering which may be executed at the same time, or within close proximity of one another. We combine contracts with the same customer into a single contract for accounting purposes when the contract is entered into at or near the same time and the contracts are negotiated together. For contracts that contain more than one separately identifiable performance obligation, the total transaction price is allocated to the identified performance obligations based upon the relative stand-alone selling prices of the performance obligations. The stand-alone selling prices are based on an observable price for services sold to other comparable customers, when available, or an estimated selling price using a cost-plus margin or residual approach. We estimate the amount of total contract consideration we expect to receive for variable arrangements based on the most likely amount we expect to earn from the arrangement based on the expected quantities of services we expect to provide and the contractual pricing based on those quantities. We only include some or a portion of variable consideration in the transaction price when it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur. We consider the sensitivity of the estimate, our relationship and experience with the client and variable services being performed, the range of possible revenue amounts and the magnitude of the variable consideration to the overall arrangement. Our revenue arrangements do not contain any significant financing element due to the contract terms and the timing between when consideration is received and when the service is provided.

Our arrangements with customers consist principally of four different types of arrangements: 1) subscription-based service agreements; 2) one-time specified services performed at a single point in time; 3) fixed, non-subscription service agreements; and 4) unit-priced service agreements.

Subscription-based services - Services that are provided under subscription-based service agreements are usually for a twelve- month period and represent a single promise to stand ready to provide reporting, tools and services throughout the subscription period as requested by the customer. These agreements are renewable at the option of the customer at the completion of the initial contract term for an agreed upon price increase each year. These agreements represent a series of distinct monthly services that are substantially the same, with the same pattern of transfer to the customer as the customer receives and consumes the benefits throughout the contract period. Accordingly, subscription services are recognized ratably over the subscription period. Subscription services are typically billed annually in advance but may also be billed on a quarterly and monthly basis.

One-time services – These agreements typically require us to perform a specific one-time service in a particular month. We are entitled to a fixed payment upon completion of the service. Under these arrangements, we recognize revenue at the point in time we complete the service and it is accepted by the customer.

Fixed, non-subscription services – These arrangements typically require us to perform an unspecified amount of services for a fixed price during a fixed period of time. Revenues are recognized over time based upon the costs incurred to date in relation to the total estimated contract costs. In determining cost estimates, management uses historical and forecasted cost information which is based on estimated volumes, external and internal costs and other factors necessary in estimating the total costs over the term of the contract. Changes in estimates are accounted for using a cumulative catch-up adjustment which could impact the amount and timing of revenue for any period.

Unit-price services – These arrangements typically require us to perform certain services on a periodic basis as requested by the customer for a per-unit amount which is typically billed in the month following the performance of the service. Revenue under these arrangements is recognized over the time the services are performed at the per-unit amount.

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Revenue is presented net of any sales tax charged to our clients that we are required to remit to taxing authorities. We recognize contract assets or unbilled receivables related to revenue recognized for services completed but not invoiced to the clients. Unbilled receivables are classified as receivables when we have an unconditional right to contract consideration. A contract liability is recognized as deferred revenue when we invoice clients in advance of performing the related services under the terms of a contract. Deferred revenue is recognized as revenue when we have satisfied the related performance obligation.

Deferred Contract Costs

Deferred contract costs, net is stated at gross deferred costs less accumulated amortization. We defer commissions and incentives, including payroll taxes, if they are incremental and recoverable costs of obtaining a renewable customer contract. Deferred contract costs are amortized over the estimated term of the contract, including renewals, which generally ranges from three to five years. The contract term was estimated by considering factors such as historical customer attrition rates and product life. The amortization period is adjusted for significant changes in the estimated remaining term of a contract. An impairment of deferred contract costs is recognized when the unamortized balance of deferred contract costs exceeds the remaining amount of consideration we expect to receive net of the expected future costs directly related to providing those services. We have elected the practical expedient to expense contract costs when incurred for any nonrenewable contracts with a term of one year or less. We deferred incremental costs of obtaining a contract of $605,000 and $599,000 in the three months ended June 30, 2021 and 2020, respectively. We deferred incremental costs of obtaining a contract of $1.5 million and $2.2 million in the six-month periods ended June 30, 2021 and 2020, respectively. Deferred contract costs, net of accumulated amortization was $4.6 million at June 30, 2021 and December 31, 2020. Total amortization by expense classification for the three and six-months ended June 30, 2021 and 2020 was as follows:

	Three months ended June 30, 2021		Three months ended June 30, 2020		Six months ended June 30, 2021		Six months ended June 30, 2020
	(In thousands)
Direct Expenses	$	41	$	60	$	73	$	178
Selling, general and administrative expenses		740		851		1,363		1,624
Total amortization	$	781	$	911	$	1,436	$	1,802

Additional expense included in selling, general and administrative expenses for impairment of costs capitalized due to lost clients was $15,000 and $3,000 for the three months ended June 30, 2021 and 2020, respectively and $22,000 and $4,000 in the six months ended June 30, 2021 and 2020, respectively.

Trade Accounts Receivable

Trade accounts receivable are recorded at the invoiced amount. The allowance for doubtful accounts is our best estimate of the amount of probable credit losses in our existing accounts receivable, determined based on our historical write-off experience, current economic conditions and reasonable and supportable forecasts about the future. We review the allowance for doubtful accounts monthly. Account balances are charged off against the allowance after all means of collection have been exhausted and the potential for recovery is considered remote.

The following table provides the activity in the allowance for doubtful accounts for the six months ended June 30, 2021 and 2020 (In thousands):

	Balance at Beginning of Period		Bad Debt Expense (Benefit)		Write-offs		Recoveries		Balance at End of Period

Six months ended June 30, 2021	$	120	$	25	$	47	$	9	$	107
Six months ended June 30, 2020	$	144	$	40	$	62	$	21	$	143

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Leases

We determine whether a lease is included in an agreement at inception. Operating lease right-of-use (“ROU”) assets are included in operating lease right-of-use assets in our consolidated balance sheet. Finance lease assets are included in property and equipment. Operating and finance lease liabilities are included in other current liabilities and other long term liabilities. Certain lease arrangements may include options to extend or terminate the lease. We include these provisions in the ROU assets and lease liabilities only when it is reasonably certain that we will exercise that option. Lease expense for operating lease payments is recognized on a straight-line basis over the lease term and is included in direct expenses and selling, general and administrative expenses. Our lease agreements do not contain any residual value guarantees.

ROU assets represent our right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease payments during the lease term. ROU assets and lease liabilities are recorded at lease commencement based on the estimated present value of lease payments. Because the rate of interest implicit in each lease is not readily determinable, we use our estimated incremental collateralized borrowing rate at lease commencement, to calculate the present value of lease payments. When determining the appropriate incremental borrowing rate, we consider our available credit facilities, recently issued debt and public interest rate information.

We elected the practical expedient to account for lease and non-lease components as a single lease component for all asset classifications. We have also made a policy election to not record short-term leases with a duration of 12 months or less on the balance sheet.

Due to remote working arrangements, we reassessed our office needs and subleased our Seattle location under an agreement considered to be an operating lease beginning in May 2021. We have not been legally released from our primary obligations under the original lease and therefore we continue to account for the original lease separately. During the six months ended June 30, 2021, we recorded an ROU asset impairment charge of $324,000, which was the amount by which the carrying value of the Seattle office lease ROU asset exceeded the fair value. We estimated the fair value based on the discounted cash flows of estimated net rental income for the office space subleased. The ROU asset impairment charge is included in depreciation, amortization and impairment expenses. There were no ROU asset impairment charges in 2020. Rent income from the sublessee are included in the statement of operations on a straight-line basis as an offset to rent expense associated with the original operating lease included in other expenses.

Fair Value Measurements

Our 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 our 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; (3) Level 3 Inputs—unobservable inputs.

The following details our financial assets within the fair value hierarchy at June 30, 2021 and December 31, 2020:

	Level 1		Level 2		Level 3		Total
	(In thousands)
As of June 30, 2021
Money Market Funds	$	5,646	$	-	$	-	$	5,646
Total Cash Equivalents	$	5,646	$	-	$	-	$	5,646

As of December 31, 2020
Money Market Funds	$	5,015	$	--	$	--	$	5,015
Total Cash Equivalents	$	5,015	$	--	$	--	$	5,015

There were no transfers between levels during the three and six-month periods ended June 30, 2021.

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Our long-term debt described in Note 5 is recorded at historical cost. The fair value of long-term debt is classified in Level 2 of the fair value hierarchy and was estimated based primarily on estimated current rates available for debt of the same remaining duration and adjusted for nonperformance and credit. The following are the carrying amount and estimated fair values of long-term debt:

	June 30, 2021		December 31, 2020
	(In thousands)
Total carrying amount of long-term debt	$	28,691	$	30,713
Estimated fair value of long-term debt	$	30,303	$	32,943

The carrying amounts of accounts receivable, accounts payable, and accrued expenses approximate their fair value. All non-financial assets that are not recognized or disclosed at fair value in the financial statements on a recurring basis, which includes ROU assets, 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 June 30, 2021, and December 31, 2020, there was no indication of impairment related to these assets other than the Seattle office ROU asset. We estimated the fair value of the Seattle office ROU using discounted cash flows of the sublease based on management’s most recent projections, which are considered level 3 inputs in the fair value hierarchy.

Annually, we consider whether the recorded goodwill and indefinite lived intangibles have been impaired. However, goodwill and intangibles must be tested between annual tests if an event occurs or circumstances change to indicate that it is more likely than not that an impairment loss has been incurred (“triggering event”).

In connection with the March 2021 revision to our operating segments, our previous reporting units were combined into one reporting unit. We performed an interim qualitative analysis immediately before and after the reorganization and concluded that the fair value of our reporting units likely exceeded the carrying values and no impairments were recorded. Following the reorganization, we considered the current and expected future economic and market conditions, including the impact of the COVID-19 pandemic, on our reporting unit. We also assessed our current market capitalization compared to book value, forecasts and margins in our last quantitative impairment testing. We concluded that a triggering event has not occurred which would require an additional interim impairment test to be performed as it is not more likely than not that an impairment loss had been incurred at June 30, 2021.

Commitments and Contingencies

From time to time, we are involved in certain claims and litigation arising in the normal course of business. Management assesses the probability of loss for such contingencies and recognizes a liability when a loss is probable and estimable. Legal fees, net of estimated insurance recoveries, are expensed as incurred. We do not believe the final disposition of claims at June 30, 2021 will have material adverse effect on our consolidated financial position, results of operations or liquidity.

Recent Accounting Pronouncements Not Yet Adopted

In March 2020, FASB issued ASU No. 2020-04, "Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting", which provides optional expedients and exceptions for applying generally accepted accounting principles (GAAP) to contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met. The amendments apply only to contracts, hedging relationships, and other transactions that reference LIBOR or another reference rate expected to be discontinued because of reference rate reform. The amendments are effective for all entities as of March 12, 2020 through December 31, 2022. We expect to apply the optional expedient for contract modification to account for the change in the reference rate on impacted credit facilities prospectively by adjusting the effective interest rate.

(2)

ACQUISITION

On January 4, 2021, we acquired substantially all assets and assumed certain liabilities of PatientWisdom, Inc., a company with a health engagement solution that will further our purpose of operationalizing human understanding through tangible and actionable insights. $3.0 million of the total $5.0 million all-cash consideration was paid at closing. We are required to pay the remaining $2.0 million no later than February 1, 2022, subject to offset for indemnification claims as provided in the purchase agreement. The closing payment was funded, and we expect to fund the deferred portion of the purchase price, with cash on hand. The acquisition was accounted for as a business combination, using the acquisition method of accounting, which requires, among other things, certain assets acquired and liabilities assumed to be recognized at their fair values as of the acquisition date.

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The following table summarizes the preliminary fair value of assets acquired and liabilities assumed at the acquisition date.

Amount of Identified Assets Acquired and Liabilities Assumed
	($ in thousands)
Current Assets	$	184
Property and equipment		10
Customer related		100
Technology		600
Goodwill		4,340
Total assets acquired	$	5,234
Current liabilities		284
Net assets acquired	$	4,950

The identifiable intangible assets are being amortized over their estimated useful lives of 5 years. The goodwill and identifiable intangible assets are deductible for tax purposes. Goodwill related to the acquisition was primarily attributable to anticipated synergies and other intangibles that do not qualify for separate recognition.

The financial results associated with the PatientWisdom assets we acquired and liabilities we assumed are included in our consolidated financial statements from the date of acquisition, although the amounts are insignificant for 2021. Pro-forma information has not been presented because the amounts for 2021 are insignificant. Acquisition-related costs of $8,000 and $119,000 are included in selling, general and administrative expenses for the three and six-month periods ended June 30, 2021.

(3)

CONTRACTS WITH CUSTOMERS

SEC Form 10-Q filed by National Research Corporation