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



Our purpose is to enable human understanding. Our solutions enable health care
organizations to understand what matters most to each person they serve. We are
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. Our heritage,
proprietary methods, and holistic approach enable our partners to better
understand the people they care for and design experiences that inspire loyalty
and trust, while also facilitating regulatory compliance and the shift to
population-based health management. Our ability to measure what matters most and
systematically capture, analyze and deliver insights based on self-reported
information from patients, families and consumers is critical in today's
healthcare market. We believe that access to and analysis of our extensive
consumer-driven information is becoming more valuable as healthcare providers
increasingly need to more deeply understand and engage the people they serve to
build customer loyalty.



Our portfolio of subscription-based solutions provides actionable information
and analysis to healthcare organizations across a range of mission-critical,
constituent-related elements, including patient experience, service recovery,
care transitions, health risk assessments, employee engagement, reputation
management, and brand loyalty. We partner with clients across the continuum of
healthcare services. Our clients include integrated health systems, post-acute
providers and payer organizations. We 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.



The outbreak of COVID-19, and the associated responses, have impacted our
business in a variety of ways.  Governments have implemented business and travel
restrictions, recommended social distancing and other guidelines, and
temporarily suspended the requirement for certain healthcare organizations to
periodically assess the performance of the care they provide (although many
providers continue to do so). Many businesses, including many of our clients,
have de-emphasized external business opportunities and restricted in-person
meetings while shifting their attention toward addressing COVID-19 planning,
business disruptions, higher costs, and revenue shortfalls. At NRC, our
workforce remains intact and highly engaged.  The vast majority of our
associates are working remotely, and to date we have been capable of providing
our services without significant disruption. Historically, we have relied on
national travel as part of our sales efforts, but as a result of the pandemic we
have placed a temporary hold on all company related travel. We expect limited
travel to resume in the third quarter of 2021. The duration and severity of the
COVID-19 pandemic and associated responses on our business, including the impact
on our revenue, expenses, and cash flows, cannot be predicted at this time.
Based on the foregoing, we do not expect our recent revenue and earnings growth
to be indicative of future expectations.  We do, however, expect to have
adequate sources of liquidity to meet our current and expected needs for the
foreseeable future.



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Results of Operations



The following table and graphs set forth, for the periods indicated, selected
financial information derived from our consolidated financial statements,
including amounts expressed as a percentage of total revenue and the percentage
change in such items versus the prior comparable period (please note that all
columns may not add up to 100% due to rounding). The trends illustrated in the
following table and graphs may not necessarily be indicative of future results.
The discussion that follows the information should be read in conjunction with
our consolidated financial statements.



Due to changes in our corporate reporting structure in the three-month period
ended March 31, 2021, certain associates moved between departments. As a result,
the related salaries and benefits and company incentive expenses are included in
Selling, general and administrative expenses in 2021 instead of Direct as in the
2020 period. The total amount of the reclassified expenses in 2021 was $535,000.



                                              Three months ended
                                                   March 31,
                                               2021          2020

Revenue:                                         100.0 %      100.0 %

Operating expenses:
Direct                                            33.7         37.0
Selling, general and administrative               26.8         25.8
Depreciation, amortization and impairment          5.6          4.1
Total operating expenses                          66.1         66.9

Operating income                                  33.9 %       33.1 %








                         [[Image Removed: graphs.jpg]]

Three Months Ended March 31, 2021, Compared to Three Months Ended March 31, 2020





Revenue. Revenue for the three-month period ended March 31, 2021, increased 4.7%
to $35.5 million, compared to $33.9 million in the three-month period ended
March 31, 2020. The increase was primarily due to new customer sales, as well as
increases in sales to the existing client base.  This was partially offset by a
decrease of $605,000 in conference revenue in the three-month period ended March
31, 2021 in comparison to the same period in 2020 due to the timing of
conferences and a virtual format in 2021 compared to a live format in 2020.



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Direct expenses. Direct expenses decreased 4.8% to $11.9 million for the
three-month period ended March 31, 2021, compared to $12.5 million in the same
period in 2020. This was due to decreases in variable expenses of $103,000 and
fixed expenses of $502,000. Variable expenses decreased due to less postage,
printing, and paper costs partially offset by higher contracted services
primarily resulting from changes in survey methodologies and decreased
conference expenses due to the timing and virtual format of conferences. Fixed
expenses decreased primarily as a result of decreased contracted services and
lower travel and meal costs due to restricted travel associated with COVID-19,
partially offset by increased salary and benefit costs. Direct expenses
decreased as a percentage of revenue to 33.7% in 2021, from 37.0% in 2020, as
revenue increased by 4.7% while expenses for the same period decreased by 4.8%.



Selling, general and administrative expenses. Selling, general and
administrative expenses increased 8.8% to $9.5 million for the three-month
period ended March 31, 2021, compared to $8.7 million for the same period in
2020, primarily due to increases in software and platform hosting expenses of
$344,000, higher contracted services of $380,000, increased salary and benefit
costs of $218,000, higher accounting and legal costs of $81,000 and additional
building lease costs of $69,000. These were partially offset by lower travel and
meal costs of $358,000 due to restricted travel associated with COVID-19.
Selling, general and administrative expenses increased as a percentage of
revenue to 26.8% in 2021, from 25.8% in 2020, as revenue increased by 4.7% while
expenses for the same period increased by 8.8%.



Depreciation, amortization and impairment. Depreciation, amortization and
impairment was $2.0 million for the three-month period ended March 31, 2021 and
$1.4 million for the three-month period ended 2020. The increase was primarily
due to our transformation to a distributed workforce environment, which includes
building renovations in our headquarters, as well as subleasing a remote office
location which resulted in an ROU asset impairment of $324,000. Depreciation
expense increased due to shortening the estimated useful lives of certain
building assets of $194,000. Depreciation, amortization and impairment expense
increased as a percentage of revenue to 5.6% for the three-month period ended
March 31, 2021 from to 4.0% in 2020, as revenue increased by 4.7% while expenses
for the same period increased by 44.7%.



Other income (expense). Other expense, net was $408,000 for the three-month
period ended March 31, 2021, compared to other income, net of $176,000 for the
same period in 2020, primarily due to decreased interest expense and foreign
exchange rate changes. Interest expense decreased to $432,000 in 2021 from
$465,000 for the same period in 2020 primarily due to the declining balance on
our term loan. Other income decreased to $21,000 in 2021 compared to $630,000
for the same period of 2020 primarily due to revaluation on intercompany
transactions due to changes in the foreign exchange rate.



Income tax provision. Income tax provision was $2.4 million for the three-month
period ended March 31, 2021, compared to a $385,000 benefit for the same period
in 2020. The effective tax rate for the three-month period ended March 31, 2021
increased to to 20.5% compared to a 3.4% tax benefit for the same period in 2020
mainly due to decreased tax benefits of $2.8 million from the exercise and
vesting of share-based compensation awards and higher state income taxes.

Liquidity and Capital Resources





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.  No dividends were declared or paid in the three-month
period ended March 31, 2021. Dividends were declared and paid in April 2021 of
$3.1 million, which were funded with cash on hand. Our board of directors
considers whether to declare a dividend and the amount of any dividends declared
on a quarterly basis.



As of March 31, 2021, our principal sources of liquidity included $43.5 million
of cash and cash equivalents, up to $30 million of unused borrowings under our
line of credit and up to $15 million on our delayed draw term note. Of this
cash, $5.1 million was held in Canada. The delayed draw term note can only be
used to fund permitted future business acquisitions or repurchasing our Common
Stock.



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Working Capital

We had working capital of $25.3 million and $22.4 million on March 31, 2021 and December 31, 2020, respectively.





The change was primarily due to increases in cash and cash equivalents of $8.8
million and prepaid expenses of $753,000. This was partially offset by increases
in income taxes payable of $1.0 million and deferred revenue of $2.0 million,
the addition of deferred acquisition consideration of $2.0 million, and
decreases of $1.1 million in income taxes receivable and $676,000 in other
current assets.



Income taxes receivable and payable changed due to the timing of income tax
payments. Prepaid expenses changed due to the timing of payments, and other
current assets changed due to the timing of receipts on state tax incentives.
The deferred acquisition consideration was due to the acquisition in the
three-month period ended March 31, 2021. 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. The deferred revenue
balances as of March 31, 2021, and December 31, 2020, were $17.6 million and
$15.6 million, respectively.



The deferred revenue balance is primarily due to timing of initial billings on
new and renewal contracts. We typically invoice clients for services before they
have been completed. Billed amounts are recorded as billings in excess of
revenue earned, or deferred revenue, on our consolidated financial statements,
and are recognized as income when earned. In addition, when work is performed in
advance of billing, we record this work as revenue earned in excess of billings,
or unbilled revenue. Substantially all deferred revenue and all unbilled revenue
will be earned and billed respectively, within 12 months of the respective
period ends.



Cash Flow Analysis



A summary of operating, investing, and financing activities is shown in the
following table:



                                                Three Months Ended March 31,
                                                  2021                 2020
                                                       (In thousands)
Provided by operating activities             $       14,408       $        5,523
Used in investing activities                         (4,238 )               (590 )
Used in financing activities                         (1,429 )             (7,536 )
Effect of exchange rate change on cash                   23                 (893 )
Net change in cash and cash equivalents               8,764

(3,496 ) Cash and cash equivalents at end of period $ 43,454 $ 10,021

Cash Flows from Operating Activities





Cash flows from operating activities consist of net income adjusted for non-cash
items including depreciation, amortization and impairment, deferred income
taxes, share-based compensation and related taxes, reserve for uncertain tax
positions and the effect of working capital changes.



Net cash provided by operating activities was $14.4 million for the three-month
period ended March 31, 2021, which included net income of $9.2 million, plus
non-cash charges (benefits) for deferred income taxes, depreciation,
amortization and impairment, reserve for uncertain tax positions and non-cash
share-based compensation totaling $2.1 million. Changes in working capital
increased cash flows from operating activities by $3.1 million, primarily from
an increase in deferred revenue and accrued expenses, wages and bonuses; and
decreases in operating lease assets and liabilities, net and changes in income
taxes receivable and payable. Deferred revenue will vary based on the timing and
frequency of billings on annual agreements and income taxes receivable and
payable vary based on timing of payments. Accrued expenses, wages and bonuses
which fluctuate due to the timing of accrued expenses, wages and bonuses and
included the deferral of employer payroll taxes from the Coronavirus Aid,
Relief, and Economic Security Act (the "CARES Act"). These increases to cash
flows were partially offset by increases in trade accounts receivable, prepaid
expenses and other current assets, and deferred contact costs, and a decrease in
accounts payable, which fluctuate due to the timing of payments of prepaids and
accounts payable and the timing of direct and incremental costs directly related
to sales.



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Net cash provided by operating activities was $5.5 million for the three-month
period ended March 31, 2020, which included net income of $11.8 million, plus
non-cash charges (benefits) for deferred income taxes, depreciation and
amortization, reserve for uncertain tax positions and share-based compensation
and related taxes totaling $2.1 million. Net changes in assets and liabilities
decreased cash flows from operating activities by $8.4 million, primarily due to
increases in trade accounts receivable, prepaid and other current assets,
deferred contract costs, net and insurance receivable, as well as decreases in
accounts payable, accrued expenses, wages, bonuses and profit sharing, and
income taxes receivable and payable which fluctuate due to the timing of
payments of prepaids, accounts payable and accrued expenses, direct and
incremental costs directly related to sales and the timing of income tax
payments. These decreases to cash flows were partially offset by increases in
deferred revenue, which will vary based on the timing and frequency of billings
on annual agreements.

Cash Flows from Investing Activities

Net cash used for investing activities was $4.2 million in the three months ended March 31, 2021. These expenditures consisted of $3.0 million for acquisition consideration and $1.2 million for purchases of property and equipment including leasehold improvements and computer software and hardware.

Net cash used for investing activities was $590,000 in the three months ended March 31, 2020. These expenditures consisted mainly of computer software classified in property and equipment.

Cash Flows from Financing Activities





Net cash used in financing activities was $1.4 million in the three months ended
March 31, 2021. We used cash to repay borrowings under the term notes totaling
$1.0 million and for finance lease obligations of $122,000. We also used cash to
pay payroll tax withholdings related to share-based compensation of $460,000,
partially offset by $162,000 of proceeds from the exercise of share-based
awards.



Net cash used in financing activities was $7.5 million in the three months ended
March 31, 2020. We used cash to repay borrowings under the term notes totaling
$959,000 and for finance lease obligations of $58,000. We also used cash to pay
$5.2 million of dividends on our common stock, and to pay payroll tax
withholdings related to share-based compensation of $1.3 million.

The effect of changes in foreign exchange rates increased cash and cash equivalents by $23,000 in the three months ended March 31, 2021 and decreased cash and cash equivalents by $893,000 in the three months ended March 31, 2020.





Capital Expenditures



Cash paid for capital expenditures was $1.2 million for the three months ended
March 31, 2021. These expenditures consisted mainly of leasehold improvements
and computer software and hardware. In addition to continued expenditures for
computer software and hardware in 2021, we expect substantially higher capital
expenditures for building improvements, with the total amount yet to be
determined, which we expect to be funded through cash generated from operations.



Debt and Equity



Our amended and restated credit agreement (the "Credit Agreement") with First
National Bank of Omaha ("FNB") includes (i) a $30,000,000 revolving credit
facility (the "Line of Credit"), (ii) a $33,002,069 term loan (the "Term Loan")
and (iii) a $15,000,000 delayed draw-dawn term facility (the "Delayed Draw Term
Loan" and, together with the Line of Credit and the Term Loan, the "Credit
Facilities"). The Delayed Draw Term Loan may be used to fund any permitted
future business acquisitions or repurchases of our Common Stock and the Line of
Credit can be used to fund ongoing working capital needs and for other general
corporate purposes.



The Term Loan is payable in monthly installments of $462,988 through May 2025,
with a balloon payment due at maturity in May 2025. The Term Loan bears interest
at a fixed rate per annum of 5%.



Borrowings under the Line of Credit and the Delayed Draw Term Loan, if any, bear
interest at a floating rate equal to the 30-day London Interbank Offered Rate
plus 225 basis points (2.36% at March 31, 2021). Interest on the Line of Credit
accrues and is payable monthly. Principal amounts outstanding under the Line of
Credit are due and payable in full at maturity, in May 2023. As of March 31,
2021, the Line of Credit did not have a balance. There were no borrowings on the
Line of Credit for the three-month period ended March 31, 2021. There have been
no borrowings on the Delayed Draw Term Loan since origination.



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We are obligated to pay ongoing unused commitment fees quarterly in arrears pursuant to the Line of Credit and the Delayed Draw Term Loan facility at a rate of 0.20% per annum based on the actual daily unused portions of the Line of Credit and the Delayed Draw Term Loan facility, respectively.





The Credit Agreement contains customary representations, warranties, affirmative
and negative covenants (including financial covenants) and events of default.
The negative covenants include, among other things, restrictions regarding the
incurrence of indebtedness and liens, repurchases of our Common Stock and
acquisitions, subject in each case to certain exceptions. Pursuant to the Credit
Agreement, we are required to maintain a minimum fixed charge coverage ratio of
1.10x for all testing periods throughout the term(s) of the Credit Facilities,
which calculation excludes, unless our liquidity falls below a specified
threshold, (i) any cash dividend in a fiscal quarter that, together with all
other cash dividends paid or declared during such fiscal quarter, exceeds
$5,500,000 in total cash dividends paid or declared, (ii) the portion of the
purchase price for any permitted share repurchase of our shares paid with cash
on hand, and (iii) the portion of any acquisition consideration for a permitted
acquisition paid with cash on hand. We are also required to maintain a cash flow
leverage ratio of 3.00x or less for all testing periods throughout the term(s)
of the Credit Facilities. As of March 31, 2021, we were in compliance with our
financial covenants.

All obligations under the Credit Facilities are to be guaranteed by each of our direct and indirect wholly owned domestic subsidiaries, if any, and, to the extent required by the Credit Agreement, direct and indirect wholly owned foreign subsidiaries (each, a "guarantor").





The Credit Facilities are secured, subject to permitted liens and other agreed
upon exceptions, by a first-priority lien on and perfected security interest in
substantially all of our and our guarantors' present and future assets
(including, without limitation, fee-owned real property, and limited, in the
case of the equity interests of foreign subsidiaries, to 65% of the outstanding
equity interests of such subsidiaries).



LIBOR is currently expected to be phased out beginning in 2021 through 2023. The
one-week and two-month LIBOR rates are expected to retire on December 31, 2021.
The overnight, one-month, three-month, six-month and 12-month LIBOR rates are
expected to be published through June 2023. We are required to pay interest on
borrowings under our Line of Credit and Delayed Draw Term Loan at floating rates
based on the one-month LIBOR. Future debt that we may incur may also require
that we pay interest based upon LIBOR. Under the terms of our Credit Agreement
with FNB, if LIBOR becomes unavailable during the term of the agreement, FNB
may, in its discretion and in a manner consistent with market practice,
designate a substitute index. We currently expect that the determination of
interest under our Credit Agreement would be revised as to provide for an
interest rate that approximates the existing interest rate as calculated in
accordance with LIBOR. Despite our current expectations, we cannot be sure that
if LIBOR is phased out or transitioned, the changes to the determination of
interest under our agreements would approximate the current calculation in
accordance with LIBOR. We do not know what standard, if any, will replace LIBOR
if it is phased out or transitioned.



We have finance leases for computer equipment, office equipment, printing and
inserting equipment. The balance of the finance leases as of March 31, 2021, was
$1.1 million.



Shareholders' equity increased $8.9 million to $73.2 million at March 31, 2021,
from $64.3 million at December 31, 2020. The increase was mainly due to net
income of $9.2 million and changes in the cumulative translation adjustment of
$56,000. This was partially offset by share repurchases exceeding the cost of
stock options exercised of $299,000 and shared-based compensation benefit of
$54,000.



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Contractual Obligations



We had contractual obligations to make payments in the following amounts in the
future as of March 31, 2021:



                                    Total         Less than         One to           Three to          After
Contractual Obligations(1)         Payments       One Year        Three Years       Five Years       Five Years
(In thousands)
Operating leases                  $    1,839     $       510     $         993     $        336     $         --
Finance leases                         1,194             395               786               13               --
Uncertain tax positions(2)                --              --                --               --               --
Long-term debt                        34,155           4,167            11,112           18,876               --
Total                             $   37,188     $     5,072     $      12,891     $     19,225     $         --

(1) Amounts are inclusive of interest payments, where applicable.

(2) We have $850,000 in liabilities associated with uncertain tax positions. We

are unable to reasonably estimate the expected cash settlement dates of these


    uncertain tax positions with the taxing authorities.




We generally do not make unconditional, non-cancelable purchase commitments. We
enter into purchase orders in the normal course of business, but these purchase
obligations do not exceed one year.



Stock Repurchase Program



Our Board of Directors authorized the repurchase of up to 2,250,000
then-existing class A shares and 375,000 then-existing class B shares of common
stock in the open market or in privately negotiated transactions under a stock
repurchase program that was originally approved in February 2006 and
subsequently amended in May 2013. In connection with the Recapitalization in
April 2018, our Board of Directors further amended the stock repurchase program
to eliminate the repurchase of the former class B common stock. As of March 31,
2021, the remaining number of shares of Common Stock that could be purchased
under this authorization was 280,491 shares.

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, 2020 that have a material impact on our Condensed Consolidated Financial Statements and the related Notes.

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