• | expenses, delays, and difficulties in identifying and developing new products or services and integrating such new products or services into our existing organization; |
• | inability to leverage or evolve our customer and partner facing technology platform and applications; |
inability to leverage our operational and financial systems and processes sufficiently to support our growth;
• | inability to leverage our operational and financial systems and processes sufficiently to support our growth; |
inability to generate sufficient revenue from our products to offset investment costs;
• | inability to generate sufficient revenue from our products to offset investment costs; |
inability to effectively identify, manage, and exploit existing and emerging market opportunities;
• | inability to effectively identify, manage, and benefit from existing and emerging market opportunities; |
inability to maintain our existing customer relationships;
• | inability to maintain our existing customer relationships; |
increased competition from new and existing competitors;
• | inability to identify, attract, and retain partners; |
lengthy sales cycles, or customers delaying purchasing decisions or payments due to economic conditions;
• | inability to maintain our corporate culture; |
reduced spending within our target markets;
• | increased competition from new and existing competitors; |
failure of the market for our products and services to grow to a sufficient size or at a sufficient rate; and
• | lengthy sales cycles, or customers delaying purchasing decisions or payments due to economic conditions; |
• | reduced spending by customers within our target markets; |
inability to hire sufficient number of qualified employees to execute and support the growth of the Company.
• | the loss of a significant customer, including through acquisitions or consolidations; |
• | a negative change in the financial condition or creditworthiness of our customers; |
• | failure of the market for our products and services to grow to a sufficient size or at a sufficient rate; |
• | negative impact on our customers and our business related to the ongoing impact of the pandemic (or concerns over the possibility of another public health crisis or pandemic); and |
• | inability to hire sufficient number of qualified employees to execute and support the growth of the Company. |
If any of these risks are realized, our business, and our competitive position in the industry, could suffer.
In addition, we may be unable to effectively execute on our One HealthStream approach of operating and managing the Company on a consolidated, enterprise basis. Our ability to effectively execute this strategy is dependent upon various factors, including our ability to achieve anticipated operational efficiencies and to effectively implement the operational and management changes associated with this strategy without adversely impacting the services we provide. In the event that we are unable to effectively execute on this strategy or are otherwise adversely affected by our shift to this One HealthStream approach, our business and financial results may be adversely affected.
A deterioration of public health conditions associated with COVID-19, a future pandemic, epidemic, or public health event, or a future catastrophic event, could adversely affect our business and financial results.
If public health conditions related to COVID-19 significantly worsen, our business and financial results could be adversely impacted. Moreover, conditions related to COVID-19 continue to evolve, and we may not be able to predict or effectively respond to future developments.
We face a wide variety of risks related to potential future public health crises, epidemics, pandemics, or similar events, including as a result of the potential impact of any such events on our healthcare customers that could in turn adversely impact us. If a new health epidemic or outbreak were to occur, our business and financial results could be adversely impacted, including in a similar or more extensive manner to how our business was adversely impacted by COVID-19. If any such event were to occur or if public health conditions in the U.S. were to significantly deteriorate, our business and financial results could be adversely affected.
Our business could also be adversely impacted by catastrophic events (particularly in areas where we have office locations and/or where we have network infrastructure), such as fires, earthquakes, hurricanes, natural disasters, civil unrest, military conflicts or warfare (such as the war in the Ukraine or the conflict in the Middle East), geographic instability, terrorist attacks, pandemics or other public health emergencies, or the effects of climate change (such as drought, flooding, wildfires, increased storm severity and sea level rise).
We may be unable to effectively identify, complete, or integrate the operations of acquisitions, joint ventures, collaborative arrangements, or other strategic investments, which would inhibit our ability to execute upon our growth strategy.
As part of our growth strategy, we actively review possible acquisitions, joint ventures, collaborative arrangements, or strategic investments that complement or enhance our business. WeHowever, we may not be ableunable to identify,source or complete or integrate the operations of suchfuture acquisitions, joint ventures, collaborative arrangements, or other strategic investments.investments on acceptable terms or at all. In addition, if we finance acquisitions, joint ventures, collaborative arrangements, or other strategic initiatives by issuing equity securities, our existing shareholders may be diluted, which could affect the market price of our stock. As a result, if we fail to properly evaluate and execute acquisitions, andjoint ventures, collaborative arrangements, or strategic investments, our businessperformance or prospects may be seriously harmed. Some of the risksRisks that we may encounter in implementing our acquisition, joint venture, collaborative arrangement, or strategic investment strategies include:
expenses, delays or difficulties in identifying and integrating acquired companies or joint venture operations, collaborative arrangements or other strategic investments into our organization;
• | expenses, delays, or difficulties in identifying and integrating acquired companies or joint venture operations, collaborative arrangements, or other strategic investments into our organization and to otherwise realize expected synergies; |
inability to retain personnel associated with acquisitions, joint ventures, collaborative arrangements or other strategic investments;
• | the possibility that we may become responsible for substantial contingent or unanticipated liabilities as the result of an acquisition, joint venture, collaborative arrangement, or other strategic investment; |
diversion of management’s attention from other initiatives and/orday-to-day operations to effectively execute our growth strategy; and
• | inability to retain key personnel associated with acquired companies, joint ventures, collaborative arrangements, or other strategic investments; |
• | loss of material customers or contracts and other key business relations associated with acquired companies, joint ventures, collaborative arrangements, or other strategic investments; |
• | diversion of management’s attention from other initiatives and/or day-to-day operations to effectively execute our growth strategy; |
• | the incorporation of products associated with acquired companies, joint ventures, collaborative arrangements, or other strategic investments into our product lines; |
• | the increasing demands on our operational and informational technology systems which may arise from any such acquired companies or joint venture operations, collaborative arrangements, or other strategic investments; |
• | potentially insufficient internal controls over financial activities or financial reporting at any such acquired company that could impact us on a consolidated basis; |
• | the financial performance of acquired entities, joint ventures, collaborative arrangements, or other strategic investments may have a negative impact on our financial performance; and |
• | an inability to generate sufficient revenue, profit, and cash flow from acquisitions, joint ventures, collaborative arrangements, or other strategic investments to offset our investment costs. |
Moreover, although we conduct what we believe to be a prudent level of investigation regarding the operating, financial, and information security conditions of acquired companies, joint ventures, collaborative arrangements, or other strategic investments, an unavoidable level of risk remains regarding the operating performance, financial condition and potential liabilities of, and the information and cyber security risks associated with, these businesses, and we may not be able to offset our investment costs.fully assess these risks until a transaction has been completed.
Our ability to accurately forecast revenue for certain products and services
In addition, a significant portion of the purchase price of companies we acquire may be hindered by customer scheduling.
Whileallocated to acquired goodwill, which must be assessed for impairment at least annually, or to intangible assets, which are assessed for impairment upon certain triggering events. In the revenuefuture, if our acquisitions do not yield expected returns, we receive from particular products and services in our subscription business may be predictable during the term of the applicable contract, the performance ofrequired to take charges to our subscription business may become more subject to fluctuations between quarterly periods asoperating results based on this impairment assessment process, which could harm our solution offerings diversify and become more sophisticated. Certain project-based products, such as consulting, certain content development, and professional services,operating results.
We are subject to the customers’ involvementrisks associated with our equity investments, including partial or complete loss of invested capital, and significant changes in the provision of the product or service. The timing and magnitudefair value of these project-based product and service contracts may vary widely from quarter to quarter and year to year, and thus may affectinvestments could adversely impact our ability to accurately forecast quarterly and annual financial performance. In addition, some products, including thoseresults.
We have invested in, our Workforce Development and Provider Solutions segments, can require significant implementation lead times
and resources, and may requirecontinue to invest in, early-to-late stage companies for strategic reasons and to support key business initiatives, and we may not realize a levelreturn on our equity investments. Many such companies generate net losses and the market for their products, services, or technologies may be slow to develop or never materialize.
Further, valuations of change management efforts fromnon-marketable equity investments are inherently complex due to the lack of readily available market data. We may experience additional volatility to our clients, which may also impactfinancial results due to changes in market prices of our abilitymarketable equity investments, the valuation and timing of observable price changes or impairments of our non-marketable equity investments, including impairments to accurately forecast financial performance.such investments as a result of current negative macroeconomic conditions, and changes in the proportionate share of earnings and losses or impairment of our equity investments accounted for under the equity method. This volatility could be material to our results in any particular period.
Our ability to accurately forecast revenuefinancial performance may be affected bydifficult to predict as the result of lengthy and widely varying sales cycles.cycles and other factors.
The period from our initial contact with a potential customer and theirsuch customer’s first purchase of our solution typically ranges from three to nine months, and in some cases has extended much further.may be significantly longer. Sales of additional solutions to existing customers may also experience sales cycles ranging from three to nine months, or longer. The range in the sales cycle can be impacted by multiple factors, including an increasing trend towards more formal request for proposal processes and more competition within our industry, delays associated with the impact of the pandemic, as well as formal budget timelines which impact timing of purchases by target customers. New products, including those that may compete with or replace our former product offerings, tend to have a longer and more unpredictable revenue ramp period because of varying customer adoption rates. As a result of these factors, we have only limitedour ability to forecastaccurately predict the timing and type of initial sales. This,sales may be limited. Moreover, while the revenue we receive from particular products and services in turn, makes itour subscription business may be predictable during the term of the applicable contract, the performance of our subscription business may become more difficultsubject to fluctuations between quarterly periods as our solution offerings are increasingly diversified and become more sophisticated. Certain professional services contracts are subject to the customers’ involvement in the provision of the product or service. The timing and magnitude of these product and service contracts may vary widely from quarter to quarter and year to year, and thus may affect our ability to accurately forecast quarterly and annualour financial performance. In addition, some products can require significant implementation lead times and resources and may require a level of change management efforts from our clients, which may also limit our ability to accurately predict our financial performance. Additionally, our ability to accurately predict our financial performance may be further limited as we expand our revenue generating model such that third parties may pay network connection fees based on sales they make.
We may not be able to maintain our competitive position against current and potential competitors, especially those with significantly greater financial, technical, marketing, or other resources.
Several
Many of our competitors and many potential competitors have longer operating histories and significantly greater financial, technical, marketing, or other resources than we do. We encounter direct competition from both large and small talent and human resource management companies and other companies focused on workforce development in the healthcare industry, as well as companiesproviding solutions that offer provider solutions.compete with those we offer. Given the profile and growth of the healthcare industry and the ongoing need for training, simulation, scheduling, credentialing, and other information products and services, it is likely that additional competitors will emerge. We believe we maintain a competitive advantage againstAdditionally, mergers of or other strategic transactions by our competitors by offering a comprehensive array of products and services; however,could weaken our competitive position. Moreover, our lack of market diversification resulting from our concentration on the healthcare industry may make us susceptible to losing market share to our competitors who also offer solutions, and in some cases a more robust suite of solutions, to a cross-section of industries. These companies may be able to respond more quickly than we can to new or changing opportunities, technologies, standards, or customer requirements. Additionally, given the evolving nature of technology, our technology enabled offerings may be disrupted by innovative or emerging technologies, such as artificial intelligence, blockchain, Web3, or quantum computing technologies, and such disruption could adversely impact our ability to compete. Further, most of our customer agreements are for terms ranging from one to threefive years, with no obligation to renew. The terms of these agreements may enable customers to more easily shift to one of our competitors.competitors following the expiration of the agreement.
Expanding our business model such that third parties may pay network connection fees in exchange for the ability to deliver their products through our technology platform and have them featured as part of our ecosystem may result in unpredictability and/or harm to the operational and financial performance of our business.
The Company has expanded its business model by offering third parties the ability to utilize their sales teams to market and sell their third-party products and have such products delivered through the Company’s technology platform, provided such third parties pay a network connectivity fee when such products are sold to customers in our network. Given that these third parties are responsible for their products and the marketing and selling thereof, the Company may not always be able to ensure the operational, financial, or security-related performance or impact of products controlled by a third party. While we have contractual protections with third parties regarding their products, including but not limited to service levels, information security, confidentiality, data rights, and indemnification against certain breaches, these may not be sufficient to ensure the predictability or performance of such products, or potential negative impacts related thereto.
The failure to maintain and strengthen our relationships with strategicecosystem partners or significant changes in the terms of the agreements we have with themecosystem partners may have an adverse impact on our ability to successfully market, our productssell, and services.deliver certain product and service offerings.
We have entered into contracts with strategic ecosystempartners, including content, application, infrastructure, technology, and retail channel vendors. Our ability to increase the sales of our products and services depends in part upon maintaining and strengthening relationships with these current and future strategic ecosystempartners. Most of these contracts are on anon-exclusive basis. Certain strategic ecosystempartners may offer multiple products and services, from multiple distinct companies, including, in some instances, products or services which may compete with ourother products and services.services we offer. Moreover, under contracts with some of our strategicecosystem partners, we may be bound by provisions that restrict our ability to market and sell our products and services to certain potential customers. The success of these contractual arrangements will depend in part upon the strategicecosystem partners’ own competitive, marketing, and strategic considerations, including the relative advantages for such strategicecosystem partners in using alternative products being developed and marketed by them or our competitors, rather than our products and services.
Moreover, most of our agreements with ecosystem partners are for initial terms of three or more years. These partners may choose not to renew their agreements with us or may terminate their agreements early if we do not fulfill our contractual obligations. If our partners terminate or fail to renew their agreements with us on as favorable terms, such as through a reduction in our revenue share arrangement, it could result in a reduction in the number of solutions we are able to distribute, declines in the number of subscribers to our platform, and decreased revenues. Some of our agreements with our ecosystem partners are non-exclusive, and our competitors offer, or could offer, solutions that are similar to or the same as those we offer. If our current partners offer or otherwise make available their products and services to users or our competitors on more favorable terms than those offered to us or increase our license fees, our competitive position, revenue, and our profit margins and prospects could be harmed.
We cannot guarantee that we will be able to maintain and strengthen our relationships with strategicecosystem partners, that we will be successful in effectively integrating or enhancing such partners’ products and technology, including without limitation through our single platform strategy, with, into, or through our own, or that such relationships will be successful in generating additional revenue. If any of these strategicecosystem partners have negative experiences with our products and services, or seek to amend or terminate the financial or other terms of the contracts or arrangements we have with them, we may need to increase our organizational focus on the types of services and solutions they sell and alter our development, integration, and/or distribution strategies, which may divert our planned efforts and resources from other projects.
Lastly, we
We could also be subject to claims and liability or related expenses as a result of the activities, products, or services of these strategicecosystem partners and/or our actual or alleged acts or omissions with regard to these strategic partners. Even if these claims do not result in liability to us, investigating and defending these claims could be expensive, time-consuming and result in suspension of or interference with certain offerings to our clients and/or adverse publicity that could harm our business.
We may not be able to retain distribution rights from our contentecosystem partners, which could adversely affectimpact our business and results of operations.business.
Most of our agreements with content and technology providers are for initial terms of three or more years. These partners may choose not to renew their agreements with us or may terminate the agreements early if we do not fulfill our contractual obligations. If a significant number of our partners terminate or fail to renew their agreements with us on as favorable terms, such as a reduction in our revenue share arrangement, it could result in a reduction in the number of courses and solutions we are able to distribute and decreased revenues. Most of our agreements with our content partners arenon-exclusive, and our competitors offer, or could offer, content or solutions that are similar to or the same as ours. If our current partners offer or otherwise make available their products and services to users or our competitors on more favorable terms than those offered to us, or increase our license fees, our competitive position, revenue, and our profit margins and prospects could be harmed. In addition, the failure by our partners to deliver high-quality content and technology, and to revise their content and technology, in response to user demand and evolving healthcare
advances and trends could result in customer dissatisfaction and inhibit our ability to attract and retain subscribers.
We may not be able to develop new products and services or enhancements to our existing products and services, or be able to achieve widespread acceptance of new products, services, or features, or keep pace with technological developments.
Our growth strategy depends in part on our ability to generate revenue growth through sales to new customers as well as increasing sales of additional subscriptions and other products and services to existing customers. Our identification of additional features, content, products, and services may not result in timely development of complementary products. In addition, the success of certain new products and services may be dependent on continued growth in our customer base. Furthermore, we are not able to accurately predict the volume or speed with which existing and new customers willmay adopt such new products and services. Because healthcare technology continues to changeevolve and evolve,regulatory and industry requirements and standards are subject to change, we may be unable to accurately predict and develop new products, features, content, and other products to address the needs of the healthcare industry. We may not be able to develop such new products, features, content, and other products, in a cost-effective and competitive manner. Further, the new products, services, and enhancements we develop may introduce significant defects into or otherwise negatively impact our core softwaretechnology platform. While all new products and services are subject to testing and quality control, all software and software-based services are subject to errors and malfunctions. If we release new products, services, and/or enhancements with bugs, defects, or errors or that cause bugs, defects, or errors in existing products, it could result in lost revenues and/or reduced ability to meet contractual obligations and would be detrimental to our business and reputation. If new products, features, or content are not accepted or integrated by new or existing customers, we may not be able to recover the cost of this development, and our financial performance willmay be harmed.adversely affected. Continued growth and maintenance of our customer population is dependent on our ability to continue to provide relevant products and services in a timely manner. The success of our business will depend on our ability to continue providing our products and services as well as enhancing our content, product, and service offerings that address the needs of healthcare organizations.organizations in a timely manner.
We may be unable to continue to license our third partythird-party software, on which a portion of our product and service offerings rely, or we may experience errors in this software, which could increaseadversely impact our costs and decrease our revenue.business.
We use technology components in some of our products that have been licensed from third parties. Future licenses to these technologies may not be available to us on commercially reasonable terms or at all. The loss of or inability to obtain or maintain any of these licenses could result in delays in the introduction of new products and services or could force us to discontinue offering portions of solutions until equivalent technology, if available, is identified, licensed, and integrated. In addition, customers may choose not to renew their agreements with us or to terminate their agreements early if we lose or are unable to maintain licenses to some of our product components. If our customers terminate or fail to renew their agreements with us on as favorable terms, it could result in a reduction in the number of content and solutions we are able to distribute, declines in the number of subscribers to our offerings, and decreased revenues. The operation of our products would be impaired if errors occur in third party technology or content that we incorporate, and we may incur additional costs to repair or replace the defective technology or content. It may be difficult for us to correct any errors in third party products because the products are not within our control. Accordingly, our revenue could decrease, and our costs could increase in the event of any errors in this technology. Furthermore, we may become subject to legal claims related to licensed technology based on product liability, infringement of intellectual property, or other legal theories. Even if these claims do not result in liability to us, investigating and defending these claims could be expensive and time-consuming and could result in suspension of or interference with certain offerings to our clients and/or adverse publicity that could harm our business.
Financial Risks
A significant portion of our revenue is generated from a relatively small number of customers.
We derive a substantial portion of our revenues from a relatively small number of customers. A termination or material modification of our agreements with any of our significant customers or a failure of these customers to renew their contracts on favorable terms, or at all, could have an adverse effect on our business.
A significant portion of our business is subject to renewal each year.renewal. Therefore, renewals have a significant impact on our revenue and operating results.
For the year ended December 31, 2017,2023, approximately 69%96% of our net revenue was derived from our workforce subscription-based solution products.SaaS-based subscriptions and software licensing agreements. Our subscription-basedproduct and service contracts typically range from one to five years in length, and customers have no obligationare not obligated to renew their subscriptions for our products or servicescontract with us after the expiration of the subscription agreement, andtheir contract term expires; in fact, some customers have elected not to renew their subscription.contract, and this risk has increased as the result of current negative macroeconomic conditions. In addition, our customers may renew at a lower pricingprice or activityvolume level. Our customers’ renewals may decline or fluctuate as a result of a number of factors, including but not limited to, their dissatisfaction with our service, a dissipation or cessation of their need for one or more of our products or services, pricing, or competitive product offerings. If we are unable to renew a substantial portion of the contracts that are up for renewal or maintain our pricing, our results of operations and financial condition could be adversely affected. For example,
Failure to adequately optimize our direct sales infrastructure will impede our growth.
We continue to need to optimize our sales infrastructure in order to grow our customer base and our business. Identifying and recruiting qualified personnel and training them in our sales methodology, our sales systems, and the requirement mandated by CMS for healthcare organizationsuse of our software requires significant time, expense, and attention. Moreover, the current competitive labor market has increased the challenge of recruiting and retaining qualified sales representatives. It can take significant time before our sales representatives are fully trained and productive. Our business may be adversely affected if our efforts to transition to theICD-10 coding system, effective in October 2015, generated significant demand forexpand and train ourICD-10 readiness training courseware from 2012 through 2015, when subscriptions for that product positively influenced the Company’s revenue and operating income. However, direct sales of that product have ceased and revenue and operating income from that product declined significantly during 2016 and have ceased altogether as of December 31, 2017. HealthStream Provider Solutions product and service contracts typically range from one to three years in length, and customers are not obligated to renew their contract with us after their contract expires. If our customersteams do not renew their arrangements for our services,generate a corresponding increase in revenues. In particular, if we are unable to hire, develop, and retain talented sales personnel or if their activitynew direct sales personnel are unable to achieve desired productivity levels decline,in a reasonable period of time, we may not be able to realize the expected benefits of this investment or increase our revenue may decline and our business will suffer.
We may be unable to accurately predict the timing of revenue recognition from sales activity as it is often dependent on achieving certain events or performance milestones, and this inability could impact our operating results.
Our ability to recognize revenue is dependent upon several factors including the transfer of customer-specific information such as unique subscriber IDs, which are requiredin order for us to implement customers on our subscription-based platform and certain platform applications. Accordingly, ifIf customers do not provide us with the specified information required to complete implementations in a timely manner, our ability to recognize revenue willmay be delayed, which could adversely impact our operating results. In addition, implementation completion and acceptance of our subscription-based platform and certain platform applications by our customers must be achieved and delivery of services is required in connection with subscription-basedMoreover, some products for us to recognize revenue. Some products, including those in our Provider Solutions segment, can require significant implementation lead times and the rate at which customer orders move from backlog to revenue generation in connection with these products may significantly affect the timing of revenue recognition.
Because we recognize revenue from subscriptions for our products and services over the term of the subscription period, downturns or upturns in new sales and renewals may not be immediately reflected in our operating results.
During the year ended December 31, 2017,2023, we recognized approximately 69%96% of our revenue from customers monthly over the terms of their subscription or software licensing agreements, which generally have initial contract terms ranging from one to five years. As a result, much of the revenue we report in each quarter is related to subscription or licensing agreements entered into during previous quarters. Consequently, a decline in new or renewed subscription or licensing agreements in any one quarter will not necessarily be fully reflected in the revenue in that quarter and will negatively affect our revenue in future quarters. In addition, we may be unable to adjust our cost structure in a timely manner, or at all, to reflect this reduced revenue. Accordingly, the effect of significant downturns in new sales, renewals, and market acceptance of our products and services may not be fully reflected in our results of operations until future periods. Additionally, our subscription model also makes it difficult for us to rapidly increase our revenue through additional sales in any period, as revenue from new customers must be recognized over the applicable subscription term. Finally,
Moreover, as noted above, we generally have contract terms ranging from one to five years, and the fees payable under a majority of costs associated with our sales cyclescontracts were often determined without reference to any increases in the consumer price index or similar inflation-related metric over the term of such contract, although we intend to implement such provisions going forward to the extent possible. As such, particularly for longer term contracts, we have been, and may continue to be, adversely impacted by inflationary conditions such as those that the U.S. economy is currently experiencing given that the fees that we are incurred up front before revenue recognition commences, and therefore periodsreceiving during the outstanding term of strong sales performancesuch contracts will not be impacted by general price increases resulting from inflation whereas such inflationary conditions may increase the amount of labor, capital, and other expenditures we incur in connection with the operation of our costs in the near term, negatively affecting our financial performance.business.
We may not be able to meet our strategic business objectives unless we obtain additional financing, which may not be available to us on favorable terms or at all.
We believe that our existing cash and cash equivalents, marketable securities, cash generated from operations, and available borrowings under our revolving credit facility will be sufficient to meet anticipated working capital needs, new product development and capital expenditures for at least the next 12 months. However, we may need to raise additional funds in orderfor various purposes, including to:
develop new, or enhance existing, services or products;
• | develop new or enhance existing products, services, and technology; |
respond to competitive pressures;
• | respond to competitive pressures; |
finance working capital requirements;
• | finance working capital requirements; |
acquire or invest in complementary businesses, technologies, content or products; or
• | acquire or invest in complementary businesses, technologies, content, or products; or |
• | otherwise effectively execute our growth strategy. |
otherwise effectively execute our growth strategy.
At December 31, 2017,2023, we had approximately $131.1$71.1 million in cash, cash equivalents, and marketable securities. In addition, in connection with the sale of our Patient Experience business for $65.5 million in cash, which was completed in February 2018, we anticipate recording apre-tax book gain in the first quarter of 2018 between $34.0 million and $38.0 million. Following this disposition, our Board of Directors declared a dividend of $1.00 per common share, or approximately $32.5 million, payable on April 3, 2018 to shareholders of record on March 6, 2018. We also have up to $50.0 million of availability under our Revolving Credit Facility, subject to certain covenants, which expires in November 2018. We expect to incur approximately $20.0 million of capital expenditures, software development and content purchases during 2018.October 2026.
We actively review possible business acquisitions to complement or enhance our products and services. We may not have adequate cash and investments or availability under our Revolving Credit Facility to consummate one or more of these acquisitions. We cannot assure yoube assured that if we need additional financing, that it will be available on terms favorable to us or at all. Moreover, elevated interest rate levels and current economic uncertainty have led to disruption and volatility in financial and capital markets and could lead to future disruption and/or volatility. Moreover, if elevated interest rate levels persist, this could increase the costs associated with any future financing activities. If adequate funds are not available or are not available on acceptable terms, our ability to fund expansion, take advantage of available opportunities, develop or enhance services or products, or otherwise respond to competitive pressures would be significantly limited. If we raise additional funds by issuing equity or convertible debt securities, the percentage ownership of our existing shareholders may be reduced.
We have significant goodwill andGoodwill, identifiable intangible assets, long-lived assets, and strategic investments recorded on our balance sheet that may be subject to impairment losses that wouldcould reduce our reported assets and earnings.
As of December 31, 2017, our balance sheet included goodwill of $110.3 million and net identifiable intangible assets of $68.8 million.
There are inherent uncertainties in the estimates, judgments, and assumptions used in assessing recoverability of goodwill, intangible assets, long-lived assets, and intangible assets.strategic investments. Economic, legal, regulatory, competitive, reputational, contractual, and other factors could result in future declines in the operating results of our business units or market values that do not support the carrying value of goodwill, identifiable intangible assets, long-lived assets, and identifiable
intangible assets.strategic investments. Moreover, the risk of such declines in operating results and market values, and thus, potential goodwill impairment, may be increased by current negative macroeconomic conditions. If the value of our goodwill, and/or intangible assets, long-lived assets, or strategic investments is impaired, accounting rulesprinciples require us to reduce their carrying value and report an impairment charge, which would reduce our reported assets and earnings for the period in which an impairment is recognized.
We may be affected by healthcare reform efforts and other changes in the healthcare industry that impact us and our clients.
Our clients are concentrated in the healthcare industry, which is subject to changing regulatory, economic, and political conditions. In 2017, we observed an increase in bankruptcies among healthcare providers. This decrease in creditworthiness among certainrecent years, there have been significant changes at the federal and state levels, many of our customers along with other economic challenges facing the healthcare sector caused our bad debt expense to increase from $640,000 in 2016 to $1.8 million in 2017. Continuance or escalation of this development could result in our inability to collect amounts owed from existing clientswhich have been aimed at reducing costs and decrease our ability to gain new clients, which could adversely impact our revenue, results of operations,government spending and ability to execute on our growth strategy.
The U.S. Congress and certain state legislatures have passed or are considering laws and regulations intended to result in major changes to the U.S. healthcare system.increasing access for health insurance. The most prominent of these reform efforts, the Patient Protection and Affordable Care Act, as amended by the Healthcare and Education Reconciliation Act of 2010 (collectively, Affordable Care Act)the ACA), was designed to increase access to affordableaffects how healthcare services are covered, delivered, and reimbursed and expanded health insurance for U.S. citizens and improve quality of care, but it also has reduced government program spending and imposed operating costs and changes on many of our clients.
However, efforts by the presidential administration and certain members of Congress to repeal or make significant changes to the Affordable Care Act, its implementation and/or its interpretation have cast considerable uncertainty on the future of the law. For as part of tax reform legislation enacted in December 2017, Congress eliminated the financial penalty associated with the individual mandate, effective January 2019, which may impact the number of individuals that elect to purchase health insurance. In addition, a presidential executive ordercoverage. The ACA has been, signed that directs agenciesand continues to minimize “economicbe, subject to legislative and regulatory burdens” of the Affordable Care Act.changes and court challenges. There is uncertainty regarding whether, when, and how the Affordable Care ActACA will be further changed what alternative provisions, if any, will be enacted, the timing of enactment and implementation of alternative provisions, the impact of alternative provisions on providers as well as other healthcare industry participants, and how the law will be interpreted and implemented. Changes by
Other recent health reform initiatives and proposals at the federal and state levels include those focused on price transparency and out-of-network charges, such as the No Surprises Act, and those intended to advance value-based payment efforts. Some members of Congress have proposed significantly expanding the coverage of government-funded programs, while others have proposed reducing them. At the state level, there has been increasing acceptance of interstate licensure compacts and uniformity in licensure requirements, which may reduce continuing education requirements for some professionals and impact demand for our services. Other industry participants, such as large employer groups and their affiliates, may also introduce financial or government agencies could eliminatedelivery system reforms or alter provisions beneficial to us while leaving in place provisions reducing our reimbursement.otherwise intensify competitive pressures. Some of the recent changes in the healthcare industry have driven consolidation, particularly among health insurance providers.providers, which could affect the size of our customer base. Other reforms or industry participants,changes may reduce payments from third-party healthcare payers, including Medicare and Medicaid, to our customers.
There is uncertainty regarding whether, when, and what other health reform initiatives will be adopted and the impact of such as large employer groups and their affiliates, may intensify competitive pressures. Efforts to repealefforts on the healthcare industry. Any legal or change the Affordable Care Act or implement other initiatives intended to reform healthcare delivery and financial systems may have an adverse effect on our clients. Any such regulatory developments, as well as other healthcare-related or other developments affecting participants in the healthcare industry. that adversely impact the business or financial condition of our clients could reduce the amount of business we receive from such clients and thus have an adverse effect on our results of operations.
We may not be able to demonstrate compliance with Sarbanes-Oxley discover weaknesses in our internal controls over financial reporting, which may adversely affect investor confidence in the accuracy and completeness of our financial reports and consequently the market price of our securities.
Section 404 in a timely manner, andof the correctionSarbanes-Oxley Act of any deficiencies identified during annual audits may be costly and could harm our business.
Sarbanes-Oxley Section 4042002 requires our management to report on and requires our independent public accounting firm to attest to, the effectiveness of our internal controls over financial reporting. The rules governing the standards to be met are complex and may require significant process review, documentation, and testing, as well as remediation efforts for any identified deficiencies. This process of review, documentation, testing, and remediation may result in increased expenses and require significant attention from management and other internal and external resources. These requirements may also extend to acquired entities and our efforts to integrate those operations into our system of internal controls. Any material weaknesses identified during this process may preclude us from asserting the effectiveness of our internal controls. This may negatively affect our stock price if we cannot effectively remediate the issues identified in a timely manner.
Changes in accounting standards issued by the Financial Accounting Standards Board, or FASB, including the new revenue recognition accounting standard, could adversely effect on our balance sheet, revenue, and results of operations, and could require a significant expenditure of time, attention and resources, especially by senior management.
Our accounting and financial reporting policies conform to GAAP, which are periodically revised and/or expanded. The application of accounting principles is also subject to varying interpretations over time. Accordingly, we are required to adopt new or revised accounting standards or comply with revised interpretations that are issued from time to time by various parties, including accounting standard setters and those who interpret the standards, such as the FASB and the SEC and our independent registered public accounting firm. Changes to regulations concerning revenue recognition could require us to alter our current revenue accounting practices and cause us to either defer revenue into a future period, or to recognize lower revenue in a current period. Likewise, changes to regulations concerning expense recognition could require us to alter our current expense accounting practices and cause us to defer recognition of expense into a future period, or to recognize increased expenses in a current period. Such changes could also cause us to alter the manner in which we contract for, sell, and incentivize sales of products and services. Changes to either revenue recognition or expense recognition accounting practices could affect our financial results.
In May 2014, the Financial Accounting Standards Board issued Accounting Standards UpdateNo. 2014-09, Revenue from Contracts with Customers (Topic 606) (“ASU2014-09”), which supersedes nearly all existing revenue recognition guidance. We have adopted
this standard utilizing the modified retrospective approach effective as of January 1, 2018. The updated guidance states that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The guidance also provides for additional disclosures with respect to revenues and cash flows arising from contracts with customers. We will be finalizing our determination regarding the financial impact of the adoption of this accounting standard on our future financial statements in the first quarter of 2018, but it is possible that the adoption of such standard could have an adverse impact on the timing of our revenue recognition and thus adversely impact the amount of our revenue in any particular period.
Risks Related to Sales, Marketing and Competition
Our operating margins could be affected if our ongoing refinement to pricing models for our products and services is not accepted by our customers and the market.
We continue to make changes in the pricing of our product and service offerings so as to increase revenue and meet the needs of our customers. We cannot predict whether the current pricing of our products and services, or any ongoing refinements we make will be accepted by our existing customer base or by prospective customers. If our customers and potential customers decide not to accept our current or future pricing or product and service offerings, it could have an adverse effect on our business and results of operations.
Risks Related to Operations
Our operating margins could be affected if our ongoing refinement to pricing models for our products and services is not accepted by our customers and the market.
We continue to make changes in the pricing of our offerings so as to increase revenue and meet the needs of our customers. We cannot predict whether the current pricing of our offerings or any ongoing refinements we make will be accepted by our existing customer base or by prospective customers. If our customers and potential customers decide not to accept our current or future pricing or offerings, it could have an adverse effect on our business and results of operations. Additionally, ecosystem partners establish the price for some of the products we market and sell, and we do not have control over such price setting or customer acceptance thereof or reaction thereto.
We may be unable to adequately develop our systems, processes, and support in a manner that will enable us to meet the demand for our products and services.
We have provided our online products and services for over 18 yearsa significant period of time and continue to expand our ability to provide our solutions on both a subscription and transactional basis over the Internet or otherwise. Our future success will depend on our ability to effectively develop and maintain our infrastructure, including procurement of additional hardware and software, integrate and tointeroperate with third party systems, and implement the services, including customer support, necessary to meet the demand for our products and services.offerings. Our inability from time to time to successfully develop the necessary systems and implement the necessary services on a timely basis may result in our customers experiencing delays, interruptions, and/or errors in their service. Such delays or interruptions may cause customers to become dissatisfied with our service and move to competing providers of workforce development and provider solutions services.providers. If this happens, our reputation, results of operations, and financial condition could be adversely affected.
Our business operations could be significantly disrupted if we lose members of, orWe operate in a challenging market for talent and may fail to attract and integrate new members to, ourretain qualified personnel, including key management team.personnel.
Our future performance is substantially dependent on the continued services of our management team and our ability to attract, retain, and motivate them. The loss of the services of any of our officers or senior managers, or the inability to attract additional officers or senior managers as appropriate, could harm our business, as we may not be able to find suitable replacements. We do not have employment agreements with any of our key personnel, other than our chief executive officer, and we do not maintain any “key person” life insurance policies.
WeMoreover, current competitive labor market conditions may not be ablemake it more difficult for us to attract hire and retain a sufficient number of qualified employees and, as a result, we may not be able to effectively executekey management personnel.
In addition, our growth strategy or maintain the quality of our services.
Our future success will depend on our ability to attract, train, motivate, and retain other highly skilled technical, managerial, marketing, sales, and customer support coaching, and survey personnel. CompetitionWe continue to face competition for certain personnel, is intense, especially for software developers, web designers, user experience and interaction designers, and sales personnel, and we may be unable to successfully attract sufficiently qualified personnel.personnel where needed. Additionally, current competitive labor market conditions have increased, and may continue to increase, our labor costs as well as the difficulty of hiring and retaining qualified personnel where needed. We have experienced in the past, and continue to experience, difficulty hiring qualified personnel in a timely manner for these positions.certain positions, and we may not be able to fill certain positions in desired geographic areas or at all. The pool of qualified technical personnel, in particular, is limited in Nashville, Tennessee, where our headquarters are located. Similar challenges exist within our Provider Solutions segment in our locations in San Diego, California,limited. Many of the companies with which we compete for experienced personnel have greater resources than we have and Boulder, Colorado.some of these companies may offer more lucrative compensation packages. We will also needanticipate needing to continue to maintain or increase the size of our staff to support our anticipated growth, without compromising the quality of our offerings or customer service. Our inability to locate, attract, hire, integrate, and retain qualified personnel in sufficient numbers may reduce the quality of our services and impair our ability to grow.grow and adversely impact our financial performance.
A significant portion of our workforce have been working remotely since 2020 and we expect a significant portion to continue working remotely under our hybrid workplace model. If we are unable to effectively maintain this hybrid work environment long-term, then we may experience increased attrition, a less cohesive workforce, reduced performance, and less innovation, which may adversely impact our business and financial results.
We may not be able to upgrade our hardware and software technology infrastructure quickly enough to effectively meet demand for our services or our operational needs.
We must continue to obtain reasonably priced, commercially available hardware, operating software, and hosting services, as well as continue to enhance our software and systems to accommodate the increased use of our platform, the increased content in our library, the expanding amount and type of data we store on behalf of our customers, and the resulting increase in operational demands on our business, including as imposed by new and changing legal and regulatory requirements applicable to our business. Decisions about hardware and software enhancements are based in part on estimated forecasts of the growth in demand for our services. This growth in demand for our services is difficult to forecast and the potential audience for our services is widespread and dynamic. If we are unable to increase the data storage and processing capacity of our systems at least as fast as the growth in demand, our customers may encounter delays or disruptions in their service. Unscheduled downtime or reduced response time of our platforms could harm our business and also could discourage current and potential customers from using or continuing to use our
services and reduce future revenue. If we are unable to acquire, update, or enhance our technology infrastructure and systems quickly enough to effectively meet increased operational demands on our business, that may also have an adverse effect on our results of operations or financial condition. Further, asour applications necessarily must integrate with a variety of systems and technologies. As we develop our platformsplatform and applications and rely on ever changing and improving technologies, we may be impeded by our customers’ and ecosystem partners’ inability to adopt new technologies such as web browsers,and technology standards upon which new platform enhancements may be based.
Our network infrastructure and computer systems and software may fail.
An unexpected event (including but not limited to a cyber-security incident, such as a ransomware attack, denial-of-service attack, security compromise, or other attempts to misappropriate our confidential information; telecommunications failure, fire, earthquake,failure; vandalism; fire; earthquake; public health crisis, such as an epidemic or pandemic; or other catastrophic loss) at or impacting our Internet service providers’ facilities, or at ouron-site data center facilities, or our public-cloud infrastructure providers, could cause the loss of critical data and prevent us from offering our products and services for an unknown period of time. Our or a third party's disaster recovery planning cannot account for all eventualities, or may not be sufficient to mitigate against or recover from any of these events. We also may incur increased operating expenses to recover data, including ransom payments made to cyber-attackers, repair or remediate systems, equipment or facilities, and to protect ourselves from such disruptions. In addition, we may encounter challenges as a result of increased acceptance of remote work environments. For example, the daily activities and productivity of our workforce is now more closely tied to key vendors, such as video conference services, consistently delivering their services without material disruption. Our ability to deliver information using the Internet and to operate in a remote working environment may be impaired because of infrastructure failures, service outages at third party Internet providers, malicious attacks or other factors. System downtime could negatively affect our reputation and ability to sell our products and services and may expose us to significant third-party claims. Our cyber liability and business interruption insurance may not adequately compensate us for losses that may occur. In addition, we rely on third parties to securely store our archived data, house our web serverinfrastructure and network systems, and connect us to the Internet. While our service providers have planned for certain contingencies, the failure by any of these third parties to provide these services satisfactorily and our inability to find suitable replacements would impair our ability to access archives and operate our systems and software, and our customers may encounter delays. Such disruptions could harm our reputation and cause customers to become dissatisfied and possibly take their business to a competing provider, which would adversely affect our revenues.financial performance.
We may lose users and lose revenue if our security measures fail.
If the security measures that we use to protect customer or personal information are ineffective, we may lose users of our services, which could reduce our revenue, tarnish our reputation, and subject us to significant liability. We rely on security and authentication technology licensed from third parties. With this technology, we perform real-time credit card authorization and verification, as well as the encryption of other selected secure customer data. We cannot predict whether these security measures could be circumvented by new technological developments. Further, the audit processes, penetration and vulnerability testing, and controls used within our production platforms may not be sufficient to identify and prevent errors or deliberate misuse. In addition, our software, databases and servers may be vulnerable to computer viruses, physical or electronic attacks, and similar disruptions. We may need to spend significant resources to protect against security breaches or to alleviate problems caused by any breaches. We cannot assure that we can prevent all security breaches.
A data breach or securitycybersecurity incident could result in a loss of confidential data, give rise to remediation and other expenses, expose us to liability under HIPAA, the Health Information Technology for Economicfederal and Clinical Health Act (HITECH), state data protection and data privacy laws,requirements, foreign data privacy regulations, consumer protection laws, common law theories, orand other laws, rules and regulations, subject us to litigation and federalgovernmental inquiries and state governmental inquiries,actions, damage our reputation, and otherwise be disruptive toadversely impact our financial results and business.
We collect and store personal data and sensitive information, including intellectual property, Protected Health Information (PHI) as defined under HIPAA and other individually identifiable health information, provider credentialing and privileging data, education records, and other personally identifiablesensitive personal information, on our networks. In addition, there are a variety of other national, foreign, and international laws and regulations that apply to the collection, use, retention, protection, security, disclosure, transfer, and other processing of personal data, including, but not limited to: the Family Educational Rights and Privacy Act (FERPA), the European Union’s General Data Protection Regulation (GDPR), the United Kingdom's General Data Protection Regulation (which implements the GDPR into U.K. law), Canada's Personal Information Protection and Electronic Documents Act (PIPEDA), Australia's Privacy Act 1988, and New Zealand's Privacy Act 2020. In addition, various states, including California, Virginia, Colorado, Utah, and Connecticut, have passed data privacy laws, and federal lawmakers have proposed additional legislation. The laws and regulations to which we are subject are rapidly evolving and changing and could have an adverse effect on our operations. Companies’ obligations and requirements under these laws and regulations are subject to uncertainty in how they may be interpreted by government authorities and regulators. The costs of compliance with, and the other burdens imposed by, these and other laws or regulatory actions may increase our operational costs, affect our customers’ willingness to permit us to use and store personal data and sensitive information, prevent us from selling our products or services, and/or affect our ability to invest in or jointly develop products. We may be exposed to litigation, including through private rights of action, regulatory fines, penalties, or other sanctions and damage to our reputation if the personal, confidential, or proprietary information of our customers is not handled in compliance with these laws or is otherwise mishandled or misused by us or any of our suppliers, ecosystem partners, counterparties, or other third parties, or if such third parties do not have appropriate controls in place to protect such personal, confidential, or proprietary information. We may also face audits or investigations by one or more domestic or foreign government agencies relating to our compliance with these regulations.
The secure maintenance of thispersonal data and sensitive information is critical to our business operations. As a result, the continued development and enhancement of controls, processes, and practices designed to protect our information systems from attack, damage, or unauthorized access remain a priority for us. WeIf the security measures that we use to protect personal data and sensitive information, or other data of our customers and business relations, are ineffective, we may lose users of our services, which could reduce our revenue, tarnish our reputation, and subject us to significant liability. In addition, if our subcontractors, subprocessors, or various other vendors and service providers on which we rely fail or if they fail to use adequate security or data protection processes or use personal data and sensitive information in an unpermitted or improper manner, we may be liable for losses as a result of their breach and, as a result, we may incur damage to our reputation. Additionally, our costs and efforts associated with obtaining and maintaining certain certifications related to data privacy and protection may also increase, to the extent we are able to obtain or maintain such certifications at all.
The current cyber threat environment presents increased risk for all companies, including companies in our industry, and cyberattacks have become increasingly frequent, sophisticated, and difficult to detect. While we have implemented multiple layers of security measures to protect this confidentialpersonal data and sensitive information that we collect and store, there is no assurance that these security measures will not be circumvented, including by new technological developments. Moreover, advanced new attacks that may be directed at us or our third-party vendors create risk of cybersecurity incidents, including ransomware, malware, and phishing incidents. We may also be subject to attacks in which malicious actors seek to, and potentially succeed in, exploiting our products or services as a vector to compromise the security or integrity of our customers, partners, or vendors. Additionally, in the current environment, it has become increasingly prevalent for malicious actors to target vendors, such as ourselves, as a means through technology,which to gain unauthorized access to the systems and sensitive information of organizations such as healthcare providers, which comprise our primary customer base. In addition, the rapid evaluation and increased adoption of artificial technologies may heighten our cybersecurity risks by making cybersecurity attacks more difficult to detect, contain, and mitigate. Further, the audit processes, penetration and vulnerability testing, and controls used within our production platforms may not be sufficient to identify and prevent errors or deliberate misuse. Moreover, our software, databases, and servers may contain vulnerabilities or irregularities that lead to computer viruses, physical or electronic attacks, and similar disruptions. Further, we may be at increased risk because we outsource certain services or functions to, or have systems that interface with, third parties. Our contracts with service providers typically require them to implement and maintain adequate security controls, but we may not have the ability to effectively monitor these security measures. As a result, inadequacies of third-party security controls may not be detected until after a cybersecurity incident has occurred. For example, third-party IT vendors may not provide us with fixes or updates to hardware or software in a manner as to avoid an unauthorized loss, access, or disclosure of data or to address a known vulnerability, which may subject us to known threats and cause system failures or disruptions. Third-party vendors that store or have access to our data may not have effective controls, processes, or practices to protect our information or systems from attack, damage, or unauthorized access. These risks may be heightened in connection with employees and service providers working from remote work environments, as our dependency on certain service providers, such as video conferencing and web conferencing services, has significantly increased. In addition, to access our network, products, and services, customers and other third parties may use personal mobile computing devices that are outside of our network environment and subject to their own security risks.
We are regularly the target of cybersecurity attacks and other threats that could have a security impact, and we expect to continue to experience an increase in cybersecurity threats in the future. Moreover, in spite of our security measures, we have experienced data and cybersecurity incidents from time to time in the course of our business and have handled those incidents in accordance with our internal policies and our people, and our defenses are monitored and routinely tested internally and by external parties. Despite these efforts,understanding of applicable laws.
There is no assurance that we, or the third parties with which we interact, will not experience a cybersecurity incident or data breach in the future that will materially affect us. In the future, data breaches or security incidentincidents could result from a variety of circumstances and events, including third-partythird party action or inaction, system errors or downtime, employee negligence or error, malfeasance, computer viruses, failures during the process of upgrading or replacing software, databases, or components thereof, power outages, hardware failures, telecommunication failures, user errors, catastrophic events, or threats from malicious persons and groups, new vulnerabilities, and advanced new attacks against information systems. In addition, third party ITsystems, including those against our vendors and customers. Moreover, because the techniques used in cybersecurity attacks change frequently and may not providebe immediately recognized, we may experience cybersecurity incidents that remain undetected for an extended time. Any such security incidents and data breaches involving us or third parties with fixes or updates to hardware or softwarewhich we interact could result in a manner as to avoid anbusiness and operational interruptions and delays; the loss, unauthorized loss oraccess, misappropriation, acquisition, use, disclosure, or corruption of data; result in our inability to address a known vulnerability, which may subject us to known threatsaccess data; damage or downtime as a result of those delays.
adversely impact our information systems; damage our reputation; adversely impact our relationship with key customers and other business relations; and otherwise adversely impact our business. There can be no assurance that we will not be subject to datacybersecurity incidents that bypass our security measures, result in loss of personal data or other confidential information, or disrupt our information systems or business. Data incidents could result in interruptions, delays, loss, access, misappropriation, and disclosure or corruption of data and could damage our reputation. In addition, data and cybersecurity incidents, particularly if a large number of individuals are affected or if the compromised information is highly sensitive, could expose us and our customers to liability under privacy, security, and consumer protection laws, such as HIPAA, FERPA, and state privacy laws, and foreign data privacy regulations, or subject us to litigation under these or other laws, including common law theories, andtheories. Moreover, such incidents could subject us to federal and state governmental disclosure requirements, inquiries, or enforcement, especiallyresult in civil monetary penalties, settlement agreements, corrective action plans, and monitoring requirements, require us to devote significant management resources to address and respond to any such cybersecurity events, interfere with the pursuit of other important business strategies, and/or cause us to incur additional expenditures, which could be material, including to investigate such events, remedy cybersecurity problems, recover lost data, and adapt systems and practices in response to such events. Moreover, there is no assurance that any remedial actions will meaningfully limit the success of future attempts to breach our information systems or the information systems of third parties with which we interact. In addition, our cyber liability and business interruption insurance may not cover or adequately compensate us for losses that may occur in connection with any cybersecurity incident.
Furthermore, we have acquired a number of companies, products, services, and technologies in recent years. Although we devote significant resources to address any security issues with respect to such acquisitions, we still may inherit additional security risks when we integrate those companies within HealthStream. Moreover, if a large number of individuals are affected or if the compromised information is highly sensitive. Like many other organizations, we have experienced data incidents from timehigh-profile security breach occurs with respect to timean industry peer, our customers and potential customers may lose trust in the coursesecurity of our business and handled these incidentssolutions in accordance with our internal policies and understanding of the applicable laws.general.
As cyberthreats to personal data, sensitive information, and other threats toour confidential information continue to evolve and increase, we may be required to continue to expend significant additional resources to continue tomaintain, modify, or enhance our internal processes, governance, or protective measures, or to investigate and remediate any security vulnerabilities. The occurrence of a data incident and the resulting potential costs and liabilities could have an adverse effect
For information on our financial positioncybersecurity risk management, strategy, and resultsgovernance, see Item 1C. Cybersecurity.
We may experience errors or omissions in our software products or processes, including those that deliver provider credentialing, privileging, and payer enrollment services for our hospitals and medical practicehealthcare customers and those that administer and report on hospitalhealthcare facility performance, and these errors could result in action taken against us that could harm our business.
Hospitals and medical practices use our credentialing, privileging, and payer enrollment software to manage, validate, and maintain their providers’ and other staff credentials and authorization to practice in a particular facility and to maintain authorization to perform care covered by insurance providers. In some instances, we rely on sources outside the Company for information that we use in our credentialing and privileging products. If errors or omissions occur that inaccurately validate or invalidate the credentials of a provider or staff, or improperly deny or authorize a provider or staff to practice in a hospital or medical practice, these errors or omissions could result in litigation brought against us either by our customers, the provider or staff member, or other interested parties. For example, an important element in a malpractice case brought against a hospital or other provider could be the validation of proper credentialing for the provider, and any errors or omissions in our products that provide these services could subject us to claims. Further, a list of providers’ privileges may be made available to the general public by hospitals and medical practices, and errors in credentialing and privileging may result in damage to the hospital, medical practice, or provider.
Certain survey data will continue to be reported by us in relation to the Shared Contracts (as defined and described below), such as the survey data included as part of our CAHPS® Hospital survey is used by CMS to determine, in part, the amount of reimbursement payments to hospitals, and any errors in data collection, survey sampling, or statistical reporting could result in reduced reimbursements to our hospital customers if we are unable to correct these errors or ensure that they are corrected, and this could, in turn, result in litigation or claims against us. Further, this survey data reported to CMS is then published by CMS to the general public, and any errors we experience that result in incorrect scoring of our hospital customer We may result in damage to that hospital’s reputation, and the hospital may in turn bring litigation against us.
We mayalso be required to indemnify against such claims and defending against any such claims could be costly and time-consuming and could negatively affect our business.
Thenon-renewal of our existing agreements with Laerdal could adversely affect our business and future results of operations.may not be fully insured.
As previously announced, Laerdal Medical A/S, a Norwegian company (“Laerdal”), provided notice that, upon the December 31, 2018 expiration of our existing agreements with Laerdal regarding the HeartCode and Resuscitation Quality Improvement (RQI) products, Laerdal does not intend to continue these existing agreements or enter into new agreements with HealthStream in relation to such products.Our Joint Marketing and Licensing Agreements with Laerdal for HeartCode and for RQI, respectively, will expire on December 31, 2018.
Revenues associated with the sales of HeartCode and RQI products have been significant in recent years, although margins on such products have been lower than HealthStream’s average margin. While we are in active negotiations to deliver resuscitation programs to our customers following the expiration of our agreements with Laerdal, there is no assurance that we will be successful in these efforts. To the extent we are not successful in these efforts and new resuscitation programs do not generate revenue and/or earnings in a manner that supplants the impact of these Laerdal agreements, our revenue and results of operations will be adversely affected.
There are certain risks associated with the sale of our Patient Experience business which was completed in February 2018.
In February 2018, we completed the sale of our PX business to Press Ganey. As a result of this transaction, we are now highly dependent on the success of our two remaining business segments, our workforce solutions segment and provider solutions segment. In addition, in connection with the sale of our PX business to Press Ganey, we agreed to indemnify Press Ganey with respect to certain matters, including the breach of our representations, warranties and covenants contained in the agreements related to this transaction. A material breach or inaccuracy of these representations, warranties and covenants in any of the agreements related to those transactions could lead to a claim against us, which could require us to pay substantial sums and incur related costs and expenses.
In addition, many of the customer contracts associated with the PX business were shared contracts (“Shared Contracts”) under which we provide services in connection with our existing businesses and under which we previously (prior to the closing of the sale of our Patient Experience business) provided services in connection with the Patient Experience business. Under the terms of our agreement with Press Ganey, these Shared Contracts will be retained by us; however, Press Ganey will provide services to our customers under these Shared Contracts to the extent related to the Patient Experience business (and will be entitled to receive the benefit of payments made by our customers in connection therewith) until such time that Press Ganey obtains a replacement contract and/or an assignment with respect to the portion of the Shared Contract that relates to the Patient Experience business. As a result, if Press Ganey is unable to satisfy its obligations under the Shared Contracts or if other issues arise in connection this arrangement, we could incur operational or reputational losses that may adversely affect our results of operations or business. Moreover, under the terms of our transition services agreement with Press Ganey, we will provide certain technology, financial and operational transitional services for a period of time following the closing (not to exceed one year). In connection therewith, we have certain obligations (including indemnification obligations) in respect of which we may incur additional expense or liability.
Risks Related to Government Regulation, Content, and Intellectual Property
Government regulation may subject us to investigation, litigation, or liability or require us to change the way we do business.
The laws and regulations that govern our business change rapidly.rapidly, are often inconsistent between jurisdictions, and in certain respects have become, and may continue to become, more complex and restrictive. Evolving areas of law that are relevant to our business include privacy and security laws, proposed encryption laws, content regulation, information security accountability regulation, sales and use tax laws, laws related to the use of artificial intelligence and machine learning applications, and regulations and attempts to regulate activities on the Internet. For example, we are directly subject to certain requirements of the HIPAA privacy and security regulations. In addition, we are required through contractsbusiness associate agreements with our customers known as “business associate agreements” to protect the privacy and security of certain personal andprotected health related information. Further, government laws and regulations such as the Affordable Care Act, that directly affect our customers can have an indirect impact on our business. We may also be required to develop features, enhancements, or modifications to our products to support our customers’ evolving compliance obligations. This may require us to divert development and other resources from other areas, incur significant expenditures, or, if we are unsuccessful in delivering these features, enhancements, or modifications, result in monetary damages, loss of revenue or customers, reputational harm, or other adverse impacts to our business.
We may lose sales from existing or potential customers or incur significant expenses if states impose or assess sales and use taxes on our services to a greater degree than is currently the case or we inherit potential state sales and use tax compliance issues in connection with acquisitions we may make from time to time. A successful assertion by one or more states that we should collect sales or uses taxes on the sale of our services to a greater degree than is our current practice could result in substantial tax liabilities for past sales, decrease our ability to compete on pricing with other vendors, and otherwise harm our business. Each state has different rules and regulations governing sales and use taxes, and these rules and regulations are subject to varying interpretations that may change over time. There can be no assurance that we will not be subject to sales and use taxes or related interest or penalties for past sales in states where we believe we are not subject to such taxes.
We are also subject to income and other taxes in the United States as well as in those states and foreign jurisdictions in which we do business. Changes in federal tax laws applicable to U.S. corporations and/or other laws, or interpretations of tax laws by taxing authorities or other standard setting bodies, could increase our tax obligations and adversely impact our results of operations. Additionally, we may be subject to taxes and tax laws in foreign jurisdictions where we do business.
The rapidly evolving and uncertain regulatory and technology environment could require us to change how we do business or incur additional costs. It may be difficult to predict how changes to these laws and regulations might affect our business. Our currentWhile we strive to adhere our practices and past privacyprocedures to the laws that are applicable to our business, we may not be able to timely adapt to evolving rules and security practices, including any breachesregulations, interpretations, and regulator discretion. Further, a regulator or court could disagree with our interpretation of protected health information or other data, could be subject to review or other investigation by various statethese laws and federal regulatory authorities or could become the subject of future litigation.
regulations. Failure to comply with applicable lawslegal or regulatory requirements in the U.S. or in any of the countries in which we operate could result in significant legal and regulations, including those governing privacy and security, could subject usfinancial exposure, damage to civil and criminal penalties,our reputation, subject us to contractual penalties (including termination of our customer agreements), adversely affect our ability to retain clients and attract new clients, damage our reputation, or otherwise have a detrimental impactmaterial adverse effect on our business.business operations, financial condition, and results of operations.
Any reduction or change in the regulation of continuing education and training in the healthcare industry may adversely affect our business.
A portion of our business model is dependent in part on required training and continuing education for healthcare professionals and other healthcare workers resulting from regulations of state and federal agencies, state licensing boards, and professional organizations. Any change in these regulations and professional standards that reduce the requirements for continuing education and training for the healthcare industry could harm our business. In addition, a portion of our business with pharmaceutical and medical device manufacturers and hospitals is predicated on our ability to maintain accreditation status with organizations such as the ACCME ANCC, and ACPE.ANCC. The failure to maintain status as an accredited provider of educational and other services could have a detrimental effect on our business.
We may be liable to third parties for content that is sold or made available from our online library.by us.
We may be liable to third parties for the content in our online librarysold or made available by us if the text, graphics, software, or other content in our librarytherein violates copyright, trademark, or other intellectual property rights, if our contentecosystem partners violate their contractual obligations to others by providing content to our library,that we sell or make available, or if the content is inaccurate, incomplete, or does not conform to accepted standards of care in the healthcare profession. Further, we may be liable to these contentecosystem partners if we improperlyallow access or release and lose control of their contentintellectual property stored on our platform either due to security issues or through improper release to customers who have not paid for access to this content.such intellectual property. We attempt to minimize these types of liabilities by requiring representations and warranties relating to our contentintellectual property partners’ ownership of the rights to distribute as well as the accuracy of their content.intellectual property. We also take necessary measures to review this contentintellectual property ourselves. Although our agreements with our contentecosystem partners in most instances contain provisions providing for indemnification by the content providersecosystem partners in the event of inaccurate content,intellectual property, our contentecosystem partners may not have the financial resources to meet these indemnification obligations. Alleged liability could harm our business by damaging our reputation, requiring us to incur legal costs in defense, exposing us to awards of damages and costs, and diverting management’s attention away from our business.
Protection of certain intellectual property may be difficult and costly, and our inability to protect our intellectual property could reduce the value of our products and services.services or reduce our competitive advantage.
Despite our efforts to protect our intellectual property rights, as well as the intellectual property rights of our strategicecosystem partners, a third party could, without authorization, copy or otherwise misappropriate our content, information from our databases, or other intellectual property, including that of our third party strategicthird-party ecosystem partners. Our agreements with employees, consultants, and others who participate in development activities could be breached and result in our trade secrets becoming known. Alternatively, competitors and other third parties may independently develop or create content or systems that do not infringe our intellectual property rights. We may not have adequate remedies for such breaches or protections against such competitor developments. In addition, the laws of some foreign countries do not protect our proprietary rights to the same extent as the laws of the United States, and effective intellectual property protection may not be available in those jurisdictions.
Our business could be harmed if unauthorized parties infringe upon or misappropriate our intellectual property, proprietary systems, content, platform, applications, services, or other information or the intellectual property of our strategicecosystem partners. Our efforts to protect our intellectual property through copyright, trademarks, trade secrets, patents, and other controls,forms of protection, as well as our efforts to protect the intellectual property of our strategicecosystem partners, may not be adequate. For instance, we may not be able to secure trademark or service mark registrations for marks in the United States or in foreign countries or to secure patents for our proprietary products and services, and even if we are successful in obtaining patent and/or trademark registrations, these registrations may be opposed or invalidated by a third party. We also have certain contractual obligations to protect the intellectual property of our strategicecosystem partners and could be required to indemnify such strategicecosystem partners if we do not adequately provide such protections.
There has been substantial litigation in the software services and healthcare technology industries regarding intellectual property assets, particularly patents. Third parties may claim infringement by us with respect to current and future products, trademarks, or other proprietary rights, and we may counterclaim against such third parties in such actions. Any such claims or counterclaims could be time-consuming, result in costly litigation, divert management’s attention, cause product release delays, require us to redesign our products, restrict our use of the intellectual property subject to such claim, or require us to enter into royalty or licensing agreements, any of which could have an adverse effect upon our business, financial condition, and operating results. Such royalty and licensing agreements may not be available on terms acceptable to us, if at all.
We may be liable for infringing the intellectual property rights of others.
Our competitors may develop similar intellectual property, duplicate our products and/or services,offerings, or design around any patents or other intellectual property rights we hold. In the future, litigationLitigation may be necessary to enforce our intellectual property rights or to determine the validity and scope of the patents, intellectual property, or other proprietary rights of third parties, which could be time consuming and costly and have an adverse effect on our business and financial condition. Intellectual property infringement claims could be made against us and our ecosystem partners, especially as the number of our competitors grows. These claims, even if not meritorious, could be expensive and divert our attention from operating our company and result in a temporary inability to use the intellectual property subject to such claim. In addition, if we, our ecosystem partners, and/or our affiliates and customers become liable to third parties for infringing their intellectual property rights, we could be required to pay a substantial damage award and develop comparablenon-infringing intellectual property, to obtain a license, or to cease providing the content or services that contain the infringing intellectual property. We may be unable to developnon-infringing intellectual property or obtain a license on commercially reasonable terms, if at all.
A variety
We use open source software in our products, which could subject us to litigation or other state, national, foreign,actions.
We use open source software in our products and international laws and regulations apply to the collection,may use retention, protection, security, disclosure, transfer, and other processing of personal data. Many foreign data privacy regulations (including the General Data Protection Regulation (GDPR), which becomes effectivemore open source software in the European Union on May 25, 2018, and China’s new Cybersecurity Law) are more stringent than those infuture. From time to time, there have been claims challenging the United States. These laws and regulations are rapidly evolving and changing, andownership of open source software against companies that incorporate it into their products. As a result, we could be subject to suits by parties claiming ownership of what we believe to be open source software. Litigation could be costly for us to defend, have an adversea negative effect on our operations. Companies’operating results and financial condition, or require us to devote additional research and development resources to change our products. In addition, if we were to combine our proprietary software products with open source software in a certain manner, we could, under certain of the open source licenses, be required to release the source code of our proprietary software products to the public. If we inappropriately use open source software, we may be required to re-engineer our products, discontinue the sale of our products, or take other remedial actions.
Our sources of data might restrict our use of or refuse to license data, which could adversely impact our ability to provide certain products or services.
A portion of the data that we use is either purchased or licensed from third parties or public records or is obtained from our customers for specific customer engagements. We believe that we have all rights necessary to use the data that is incorporated into our products and services. However, if new laws or regulations impose restrictions on our use of the data or regulators’ or courts’ interpretations result in restrictions of the data that we currently use in our products and services, or a large number of data providers withdraw their data from us, our ability to provide our products and fulfill our contractual obligations to our customers could be materially adversely impacted.
Risks Related to International Operations
We face risks arising from our international operations.
We have international operations in several countries outside of the United States, including Canada, Australia, and requirements under theseNew Zealand. Conducting our business internationally, particularly with expansion into countries in which we have limited experience, subjects us to a variety of risks that that we do not necessarily face to the same degree in the U.S. These risks include, among others:
• | unexpected changes or differences in regulatory requirements, including with respect to taxes, trade laws, tariffs, export quotas, custom duties, or other trade restrictions; |
• | differing labor regulations; |
• | differing income and non-income based tax rates and laws; |
• | regulations relating to data privacy and security, cross-border data transfers, and the unauthorized use of, or access to, commercial and personal information; |
• | potential penalties or other adverse consequences for violations of anti-corruption, anti-bribery, and other similar laws and regulations, including the U.S. Foreign Corrupt Practices Act; |
• | greater difficulty in supporting and localizing our products; |
• | unrest and/or changes in a specific country’s or region’s social, political, legal, health, or economic conditions or other geopolitical developments (such as developments arising from the ongoing conflict between Russia and Ukraine, increasing tensions between China and Taiwan, and the ongoing conflict in the Middle East); |
• | challenges inherent in efficiently managing an increased number of employees over large geographic distances, including the need to implement appropriate systems, controls, policies, benefits, and compliance programs; |
• | currency exchange rate fluctuations; |
• | uncertainties regarding the interpretation and enforceability of legal requirements, including limited or unfavorable intellectual property protection and the enforceability of contract rights; |
• | competition with companies or other services that may understand local markets better than we do; |
• | increased financial accounting and reporting burdens and complexities associated with implementing and maintaining adequate internal controls; |
• | regulations, health guidelines, and safety protocols in foreign jurisdictions related to the pandemic; and |
• | restrictions on repatriation of earnings. |
Risks Related to Ownership of Our Common Stock
It may be difficult for a third party to acquire our company.
Tennessee corporate law and our charter and bylaws contain provisions that could delay, defer, or prevent a change in control of our company or our management. These provisions could also discourage proxy contests and make it more difficult for you and other shareholders to elect directors and take other corporate actions. These provisions in our organizational documents:
• | authorize us to issue "blank check" preferred stock, which is preferred stock that can be created and issued by the board of directors, without prior shareholder approval, with rights senior to those of common stock; |
• | provide for a staggered board of directors comprised of three classes such that it would take three successive annual meetings to replace all directors; |
• | prohibit shareholder action by written consent; |
• | do not provide shareholders with the right to call a special shareholders meeting; and |
• | establish advance notice requirements for submitting nominations for election to the board of directors and for proposing matters that can be acted upon by shareholders at a meeting. |
In addition, we are subject to uncertaintycertain provisions of Tennessee law which limit, in how they may be interpreted by government authorities and regulators. The costs of compliance with, and the other burdens imposed by, these and other laws or regulatory actions may increase our operational costs, prevent us from selling our products or services, and/or affectsome cases, our ability to investengage in certain business combinations or jointly develop products. We may also face auditstransactions with significant shareholders.
These provisions, either alone or investigationsin combination with each other, give our current directors a substantial ability to influence the outcome of a proposed acquisition of the Company. These provisions would apply even if an acquisition or other significant corporate transaction was considered beneficial by onesome of our shareholders. If a change in control or more domesticchange in management is delayed or foreign government agencies relatingprevented by these provisions, the market price of our securities could decline.
There is no assurance that we will not discontinue or reduce the amount of our current quarterly dividend.
Our payment of dividends, as well as the rate at which we pay dividends, is subject to the discretion of our board of directors and compliance with these regulations.applicable legal requirements and our credit agreement, and our board of directors retains the power to modify, suspend, or cancel our dividend policy in any manner and at any time that our board may deem necessary or appropriate.
The Tax Cuts and Jobs Act could significantly impact the Company.
The Tax Cuts and Jobs Act of 2017 (“Tax Act”), which was signed into law on December 22, 2017, makes significant changes to the taxation of U.S. business entities. These changes include a permanent reduction to the federal corporate income tax rate to 21 percent from 35 percent, among others. The Company is currently evaluating the Tax Act with its professional advisors; the full impact of the Tax Act on the Company in future periods cannot be determined at this time and the Company provides no assurances in that regard.
Item1B.Unresolved Staff Comments
None.
Cybersecurity Risk Management Program
The Company’s cybersecurity risk management program is designed to employ industry best practices, including ongoing enhancement of governance, risk, and compliance management, regular updates to our response planning and protocols, security policy and standards maintenance, and new technology implementation to proactively monitor vulnerabilities and reduce risk, including processes designed to identify material cybersecurity risks associated with our use of third-party service providers. This program includes the engagement of consulting firms and other third parties.
A key component of our cybersecurity risk management program is our incident response policy, which provides for evaluation, response, and reporting procedures in connection with a cybersecurity incident. Under this policy, we have established an incident response team (IRT), a multi-disciplinary management-level team led by the Company’s Chief Technology Officer (CTO) and comprised of the Company’s Chief Executive Officer (CEO), General Counsel/Compliance Officer, Chief Financial Officer, and EVP, Corporate Strategy. The policy provides that the IRT will conduct an initial assessment in the event of a cybersecurity incident meeting certain criteria elevated for the review of the IRT. In such event, the policy provides that the IRT will assess whether a cybersecurity incident has the potential to materially impact the Company and whether public disclosure is required or advisable in connection therewith, and further provides that, if appropriate, any such cybersecurity incident may be further elevated for the review of senior management, the Audit Committee and/or the Board of Directors.
The Company maintains cyber liability insurance to help mitigate potential liabilities resulting from cybersecurity matters. While we maintain cybersecurity insurance, the costs related to cybersecurity threats or disruptions may not be fully insured. We do not believe that any risks we have identified to date, including as a result of any previous cybersecurity incidents, have materially affected or are reasonably likely to materially affect us, including our business strategy, results of operations or financial condition. However, despite our security measures, there is no assurance that we or the third parties with which we interact, have not identified or experienced, or will not experience a cybersecurity incident in the future that will materially affect us. For additional information regarding the risks to us associated with cybersecurity incidents, see “A data breach or cybersecurity incident could result in a loss of confidential data, give rise to remediation and other expenses, expose us to liability under federal and state data protection and data privacy requirements, foreign data privacy regulations, consumer protection laws, common law theories, and other laws, rules and regulations, subject us to litigation and governmental inquiries and actions, damage our reputation, and otherwise adversely impact our financial results and business” included in Part I, Item 1A of this Form 10-K.
Cybersecurity Governance
The Company’s cybersecurity risk management processes are integrated into the Company’s overall risk management program. In this regard, our Board of Directors has designated the Audit Committee as being primarily responsible for overseeing risk management at a board level, and has delegated certain specific categories of risk oversight matters to the Audit Committee as well as to the other standing committees of the Board, within their respective areas of responsibilities. Additionally, the Audit Committee makes periodic reports to the Board regarding briefing and reports provided by management and advisors regarding various risk oversight matters as well as the Audit Committee’s own analysis and conclusions regarding the adequacy of the Company’s risk management program.
As part of its board-level risk oversight responsibilities, the Audit Committee provides oversight of the Company’s privacy, data, cyber security, and information security risk exposures. Further, at a management level, the Company’s cybersecurity risk management program is led by our CTO, who reports to the Company’s CEO. Our CTO was appointed as the Company’s senior vice president and chief technology officer in July 2017. Our CTO has expertise in cybersecurity risk management through his more than 20 years of experience in healthcare technology, including his service with us as well as his service as chief technology officer at other organizations prior to joining the Company in 2017. On a quarterly basis, the Company’s CTO reports to the Audit Committee regarding the Company’s cybersecurity program. The CTO also reports to the Audit Committee on a quarterly basis regarding remediation activities, if any, along with related security metrics, in connection with any areas where cybersecurity threats have been identified.
Our principal office is located in Nashville, Tennessee, which is primarily used to support our workforce solutions operations and corporate functions. Our lease for approximately 73,00092,000 square feet at this location expireswill end in April 2019, at or near which time we expect to relocate our corporate headquarters to nearby space with approximately 66,000 square feet in Nashville, the lease for which we entered into in April 2017.October 2031. As of December 31, 2017,2023, we leased other facilities in Columbia, Maryland (such leased facility was included in the sale of our PX business); Nashville, Tennessee; Jericho, New York; Brentwood, Tennessee; San Diego, California; Chicago, Illinois; and Boulder, Colorado.
None.
Not applicable.
Item5.Market for Registrant’sRegistrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Our common stock is traded on the Nasdaq Global Select Market under the symbol “HSTM”. Our common stock began trading on the Nasdaq National Market on April 14, 2000.
The following table sets forth, for each quarter of the two most recent years, the high and low closing prices per share of our common stock as reported on the Nasdaq Global Select Market:
Common Stock Price | ||||||||||||||||
2017 | 2016 | |||||||||||||||
High | Low | High | Low | |||||||||||||
First Quarter | $ | 25.56 | $ | 21.45 | $ | 22.35 | $ | 18.20 | ||||||||
Second Quarter | 30.89 | 23.39 | 26.58 | 21.17 | ||||||||||||
Third Quarter | 26.39 | 22.50 | 27.65 | 23.73 | ||||||||||||
Fourth Quarter | 24.81 | 22.37 | 28.39 | 22.06 | ||||||||||||
As of February 13, 2018,14, 2024, the Company had a total of 10,57613,901 shareholders, including 5471,087 registered holders and 10,02912,814 beneficial holders.
DIVIDEND POLICY
We declared
On February 20, 2023, we announced that our board of directors approved a $1.00 per common share specialquarterly dividend policy (the "Dividend policy"). During the year ended December 31, 2023, the Board of Directors authorized the following quarterly dividends under the Dividend Policy:
Dividend Payment Date | Dividend Declaration Date | Dividend Per Share | Record Date | Cash Outlay | ||||||
April 28, 2023 | February 20, 2023 | $ | 0.025 | April 17, 2023 | $ | 767,000 | ||||
June 23, 2023 | April 24, 2023 | 0.025 | June 12, 2023 | 767,000 | ||||||
| September 29, 2023 | July 24, 2023 | 0.025 | September 18, 2023 | 767,000 | ||||||
December 22, 2023 | October 23, 2023 | 0.025 | December 11, 2023 | 757,000 | ||||||
Total dividends | $ | 0.10 | $ | 3,058,000 | ||||||
Additionally, as previously announced, on February 19, 2024, the Board approved a quarterly cash dividend withof $0.028 per share, representing an increase of twelve percent (12%) over the proceeds from the divestiture of the Patient Experience business segmentprevious quarter's dividend payment, payable on April 3, 2018March 22, 2024 to shareholdersholders of record on March 6, 2018. We do not anticipate paying normal11, 2024.
The Dividend Policy and the declaration and payment of each quarterly cash dividend will be subject to our board’s continuing determination that the policy and the declaration of dividends thereunder are in the future as we intend to retain earnings for use in the operationbest interests of our business.stockholders and are in compliance with applicable law and our credit agreement. Our board retains the power to modify, suspend, or cancel the dividend policy in any manner and at any time that our board may deem necessary or appropriate.
See the table labeled “Securities Authorized for Issuance Under Equity Compensation Plans” to be contained in our 2018 Proxy Statement, incorporated by reference in Part III, Item 12
STOCK PERFORMANCE GRAPH
The graph below comparesmatches HealthStream, Inc.’s's cumulative 5-year total shareholder return on common stock with the cumulative total returns of companies on the NasdaqNASDAQ Composite Indexindex and the Nasdaq Computer & Data Processing Index forDow Jones US Software TSM index. The graph tracks the performance of a $100 investment in our common stock and in each of the last five fiscal years ended December 31, 2017, assuming an initial investment of $100. Data for the Nasdaq Composite Index and the Nasdaq Computer & Data Processing Index assumeindex (with the reinvestment of dividends.all dividends) from 12/31/2018 to 12/31/2023.
The comparisons in the graph below are based on historical data and are not necessarily indicative of future performance of our common stock.
COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN(1)
Among HealthStream, Inc., the Nasdaq Composite Index
And the Nasdaq Computer & Data Processing Index
12/18 | 12/19 | 12/20 | 12/21 | 12/22 | 12/23 | |||||||||||||||||||
HealthStream, Inc. | $ | 100.00 | $ | 112.63 | $ | 90.43 | $ | 109.15 | $ | 102.86 | $ | 112.38 | ||||||||||||
NASDAQ Composite | 100.00 | 136.69 | 198.10 | 242.03 | 163.28 | 236.17 | ||||||||||||||||||
Dow Jones US Software TSM | 100.00 | 145.25 | 214.46 | 282.55 | 188.80 | 300.75 | ||||||||||||||||||
The stock price performance included in this graph is not necessarily indicative of future stock price performance.
(1) $100 invested on 12/31/12 in stock or index, including reinvestment of dividends. Fiscal year ending December 31.
RECENT SALES OF UNREGISTERED SECURITIES
None.
ISSUER PURCHASES OF EQUITY SECURITIES
None.
Item 6.Selected Financial Data
The selected statementOn September 13, 2023, the Company announced a share repurchase program authorized by the Company’s Board of income and balance sheet data forDirectors under which the past five years is derived from our audited consolidated financial statements. You should readCompany may purchase up to $10.0 million of its common stock. Pursuant to this authorization, repurchases may be made in the following selected financial data in conjunction with our consolidated financial statements andopen market, including under a Rule 10b5-1 plan, through privately negotiated transactions, or otherwise. Under this program, during 2023, the notes to those statements and “Management’s Discussion and AnalysisCompany repurchased 404,188 shares of Financial Condition and Resultscommon stock at an aggregate fair value of Operations” located elsewhere in this report.
In February 2018 HealthStream divested its PX business to Press Ganey. The results$8.9 million, reflecting an average price per share of operations for$22.07 (excluding the PX business are included within the consolidated statementcost of income data set forth below.
broker commissions). In addition, HealthStream acquired substantially all ofany future repurchases under the assets of Baptist Leadership Group on September 9, 2013, Health Care Compliance Strategies, Inc. on March 3, 2014, HealthLine Systems, Inc. on March 16, 2015, Performance Management Services, Inc. on June 30, 2016, Nursing Registry Consultants Corporation on July 25, 2016, and MAI on August 8, 2016. The results of operations for these acquired companies are included within our consolidated statement of income data effective from the respective date of acquisition. Revenues mayauthorization will be subject to fluctuations as discussed further in “Management’s Discussionprevailing market conditions, liquidity and Analysis of Financial Conditioncash flow considerations, applicable securities laws requirements (including under Rule 10b-18 and Results of Operations” located elsewhere in this report. As a result of these factors, the annual results presented below are not comparable. The operating results for any single year are not necessarily indicativeRule 10b5-1 of the resultsSecurities Exchange Act of 1934, as applicable), and other factors. The share repurchase program is scheduled to terminate on the earlier of March 31, 2024 or when the maximum dollar amount has been expended. This share repurchase program may be expected in the future.suspended or discontinued at any time.
| Year Ended December 31, | ||||||||||||||||||||
| (in thousands, except per share data) | ||||||||||||||||||||
2017 | 2016 | 2015 | 2014 | 2013 | ||||||||||||||||
STATEMENT OF INCOME DATA: | ||||||||||||||||||||
Revenues, net | $ | 247,662 | $ | 225,974 | $ | 209,002 | $ | 170,690 | $ | 132,274 | ||||||||||
Total operating costs and expenses | 237,862 | 220,407 | 195,445 | 154,315 | 117,608 | |||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Operating income | 9,800 | 5,567 | 13,557 | 16,375 | 14,666 | |||||||||||||||
Net income | $ | 10,004 | $ | 3,755 | $ | 8,621 | $ | 10,394 | $ | 8,418 | ||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Net income per share – basic | $ | 0.31 | $ | 0.12 | $ | 0.29 | $ | 0.38 | $ | 0.31 | ||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Net income per share – diluted | $ | 0.31 | $ | 0.12 | $ | 0.28 | $ | 0.37 | $ | 0.30 | ||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Weighted average shares of common stock outstanding – basic | 31,861 | 31,721 | 30,057 | 27,570 | 26,853 | |||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Weighted average shares of common stock outstanding – diluted | 32,196 | 32,068 | 30,436 | 28,023 | 27,663 | |||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
BALANCE SHEET DATA: | ||||||||||||||||||||
Cash and cash equivalents | $ | 84,768 | $ | 49,634 | $ | 82,010 | $ | 81,995 | $ | 59,537 | ||||||||||
Marketable securities | 46,350 | 53,540 | 66,976 | 38,973 | 48,659 | |||||||||||||||
Accounts receivable, net | 40,849 | 44,805 | 36,348 | 33,167 | 25,314 | |||||||||||||||
Goodwill and intangible assets | 179,114 | 188,129 | 139,039 | 56,709 | 44,616 | |||||||||||||||
Working capital | 98,662 | 82,467 | 120,459 | 97,352 | 90,912 | |||||||||||||||
Total assets | 411,074 | 396,000 | 379,569 | 257,262 | 212,594 | |||||||||||||||
Deferred revenue – current and noncurrent | 75,256 | 76,401 | 69,448 | 57,373 | 38,168 | |||||||||||||||
Shareholders’ equity | 300,170 | 286,108 | 280,320 | 167,859 | 149,433 | |||||||||||||||
The table below sets forth activity under the stock repurchase plan for the three months ended December 31, 2023.
Period | (a) Total number of shares (or units) purchased | (b) Average price paid per share (or unit)(1) | (c) Total number of shares (or units) purchased as part of publicly announced plans or programs | (d) Maximum number (or approximate dollar value) of shares (or units) that may yet be purchased under the plans or programs | ||||||||||||
Month #1 (October 1 - October 31) | 305,098 | $ | 22.22 | 305,098 | $ | 1,079,336 | ||||||||||
Month #2 (November 1 - November 30) | — | — | — | 1,079,336 | ||||||||||||
Month #3 (December 1 - December 31) | — | — | — | 1,079,336 | ||||||||||||
Total | 305,098 | $ | 22.22 | 305,098 | $ | 1,079,336 | ||||||||||
| (1) | The weighted average price paid per share of common stock does not include the cost of broker commissions. |
Item7.Management’sManagement’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion of the financial condition and results of operations of HealthStream should be read in conjunction with “Selected Financial Data” and HealthStream’s Consolidated Financial Statements and related notes thereto included elsewhere in this report. This discussion contains forward-looking statements that involve risks and uncertainties. HealthStream’s actual results may differ significantly from the results discussed and those anticipated in these forward-looking statements as a result of many factors, including, but not limited to, thosethe risks described under “Risk Factors”Risk Factors and elsewhere in this report.report, as well as additional risks or uncertainties not presently known to us or that we currently deem immaterial.
The following discussion addresses our 2023 and 2022 results and year-to-year comparisons between 2023 and 2022. A discussion of year-to-year comparisons between 2022 and 2021 can be found in our Annual Report on Form 10-K for the fiscal year ended December 31, 2022, filed with the SEC on February 28, 2023, under Part II, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
OVERVIEW
HealthStream provides workforce development and provider solutionsprimarily SaaS based applications for healthcare organizations—all designed to assess and develop the people that deliver patient care, which, in turn, supports the improvement ofimprove business and clinical outcomes by supporting the people who deliver patient care. We are focused on helping individuals and organizations in healthcare meet their ongoing learning, clinical development, credentialing, and scheduling needs. We also provide our solutions to nursing schools and nursing students.
Our business is managed and organized around our single platform strategy, also referred to as our One HealthStream approach. At the center of this single platform strategy is our hStream technology platform. By enabling our applications through hStream, we believe that stand-alone applications, which already provide a powerful value proposition on their own, are beginning to leverage each other to more efficiently and effectively empower our customers to manage their businesses and improve their outcomes. Workforce Solutions productsFurther, the Company’s internal structure and executive leadership are likewise shaped by the organizing principle of a single platform, including with regard to technology, operations, accounting, internal reporting (including the nature of information reviewed by our key decision makers), organizational structure, compensation, performance assessment, and resource allocation.
All of our solutions are powered by our hStream technology platform that enables activity across HealthStream's diverse ecosystem of applications. Our underlying solutions are comprised primarily of SaaS, subscription-based applications that are used by healthcare organizations to meet a broad range of their training, certification, competency assessment, performance appraisal,workforce development needs around learning, clinical development, credentialing, and development needs. Provider Solutions productsscheduling. Our solutions are usedalso utilized by nursing schools as they prepare the healthcare workforce of tomorrow and by nursing students as they prepare to enter that workforce. Our numerous content libraries allow customers to subscribe to a wide array of courseware, which includes content from leading healthcare and nursing associations, medical and healthcare publishers, and other content providers. Our scheduling solutions provide organizations with the tools to visualize and manage real-time clinical staff scheduling to enable them to optimize their workforce, reduce costs, and improve care. Our flagship credentialing, privileging, and enrollment solution, CredentialStream, provides customers an intuitive, modern user experience with a continual stream of enhancements, evidence-based content, and curated data, all of which provides healthcare organizations forwith tools to support the provider lifecycle management from recruiting, application submission, verification of licensure and other credentials, privileging, appointments by credentialing privileging, call center,committees, enrollment, network, management, onboarding, and enrollment needs. HealthStream’sperformance evaluations of providers.
As HealthStream's business continues to evolve, we remain solely dedicated to the healthcare market and our primary customers includecontinue to be healthcare organizations pharmaceutical and medical device companies,across the continuum of care and other participants in the healthcare industry.
On February 12, 2018, the Company divested its PX business to Press Ganey for $65.5 million in cash (subject to adjustment based on the working capital of the PX business at closing), of which $6.5 million will be held in escrow for a period of time following the disposition as a source of recovery for indemnification claims by Press Ganey. The sale of the PX business was effected by (i) the contribution by the Company of specified assets and certain liabilities used in the PX business to a newly-formed wholly-owned subsidiary of the Company, and (ii) immediately thereafter, the sale by the Company to Press Ganey of all of the outstanding equity interests such wholly-owned subsidiary. In connection with such contribution, the Company retained certain liabilities related to the PX business.
Prior the disposition of the PX business, our Patient Experience Solutions products provided our customers information about patients’ experiences and how to improve them, workforce engagement, physician relations, and community perceptions of their services.Our results of operations for the years ended December 31, 2017, December 31, 2016 and December 31, 2015 presented in this Annual Report on Form10-K include the results of the PX business. Beginning with the quarter ending March 31, 2018, the historical financial results of the PX business for periods prior to the closing of the disposition of the PX business will be reflected in the Company’s consolidated financial statements as discontinued operations. This sale of the PX business resulted in the Company’s divestiture of the Company’s patient experience solutions business segment.
HealthStream anticipates recording apre-tax book gain in the first quarter of 2018 on the sale of its PX business between $34.0 million to $38.0 million. With the proceeds from this transaction, our Board of Directors declared a $1.00 per common share special cash dividend payable on April 3, 2018 to shareholders of record on March 6, 2018. For additional information regarding the disposition of the PX business, including certain pro forma financial information reflecting the disposition of the PX business, see our Current Report on Form8-K filed on February 12, 2018.
Revenues for the year ended December 31, 20172023 were approximately $247.7$279.1 million, compared to $226.0$266.8 million for the year ended December 31, 2016,2022, an increase of 10%5%. Revenues were positively impacted from recent acquisitions (detailed below) in the amount of $3.1 million and growth in several product categories. The contributions from growth in subscription revenues and recent acquisitions more than offset the decline of $1.7 million from professional services revenues. Gross margins improved to 65.9% during 2023, compared to 65.8% in 2022. Operating income increased by 76%29% to $9.8$16.0 million for 2017,2023, compared to $5.6$12.4 million for 2016.2022. Net income increased by 166% to $10.0$15.2 million for 2017,2023, compared to $3.8$12.1 million for 2016.2022. Earnings per share (EPS) were $0.31$0.50 per share (diluted) for 20172023, compared to $0.12$0.39 per share (diluted) for 2016. Revenues from HealthStream Workforce Solutions grew by 6%, or $10.0 million; revenues from HealthStream Patient Experience Solutions declined by 3%, or $1.1 million; and revenues from HealthStream Provider Solutions grew by 53%, or $12.8 million.2022. As of December 31, 2017,2023, the Company had approximately 4.775.79 million total subscribers,contracted subscriptions to hStream, our Platform-as-a-Service technology which characterizes our single platform approach, compared to 5.54 million contract subscriptions at December 31, 2022. During 2023, the Company deployed capital to fund the acquisition of whicheeds that was completed during 2022 for a purchase price equal to approximately 4.65$6.6 million were fully implemented subscribers onin cash. The purchase consideration paid for eeds was included in accrued liabilities in the Company's Consolidated Balance Sheet as of December 31, 2022 and was paid January 2023. The Company also repurchased approximately $8.9 million of common stock under its SaaS-based platform.share repurchase programs, incurred $1.1 million of severance charges associated with the elimination of 33 job roles as part of the consolidation of HealthStream's business under a single platform strategy, and paid $3.1 million in cash dividends. As of December 31, 2017,2023, cash and investment balances approximated $131.1$71.1 million, and the Company maintained full availability under its $50.0 million revolving credit facility.
Since the beginning of 2022, we completed two acquisitions. We acquired CloudCME in May 2022 and substantially all of the assets of eeds in December 2022. For additional information regarding acquisitions, please see Note 8 of the Consolidated Financial Statements included elsewhere in this report.
RECENT DEVELOPMENTS
Macroeconomic conditions in the U.S. continue to be challenging in various respects, including as the result of ongoing inflationary pressures, elevated interest rate levels, challenging labor market conditions, and uncertain geopolitical conditions. In this regard, we have experienced, and believe that many of our customers have experienced, increased labor, supply chain, capital, and other expenditures associated with current inflationary pressures. These conditions impacting the U.S. economy and our customers in the healthcare industry have adversely affected, and may continue to adversely impact, our business and results of operations.
While the COVID-19 pandemic continues to cause some level of uncertainty, including with regard to the pandemic's various and unpredictable impacts on our healthcare customers and, in turn, our business, the impact of the pandemic itself on public health and economic conditions has significantly lessened and normalized to the point of reaching an endemic stage. As our business is focused on providing solutions to healthcare organizations, we continue to closely monitor any developments related to COVID-19 and remain prepared to modify our operating approaches to address COVID 19-related developments or other public health related events as they may arise.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Preparation of our Consolidated Financial Statements requires us to make estimates and assumptions affecting the reported amounts of assets and liabilities at the date of the financial statements, reported amounts of revenues and expenses during the reporting period, and related disclosures. In the Notes to our Consolidated Financial Statements, we describe our significant accounting policies used in preparing the Consolidated Financial Statements. Our policies are evaluated on an ongoing basis and are drawn from historical experience and other assumptions that we believe to be reasonable under the circumstances. Actual results could differ under different assumptions or conditions. Our management has identified the following critical accounting policies for the areas that are materially impacted by estimates and assumptions.
Revenue Recognition
Revenues are recognized from subscription-based workforce development productswhen or as control of the promised goods or services is transferred to the customer in an amount that reflects the consideration the Company expects to be entitled in exchange for transferring those goods or services. Our contracts with customers often contain promises for multiple goods and content subscriptions basedservices. For these contracts, the Company accounts for the promised goods and services in its contracts as separate performance obligations if they are distinct. The contract price, which represents transaction price when the contract reflects a fixed fee arrangement, or management’s estimate of variable consideration including application of the constraint when the contract does not have a fixed fee, is allocated to the separate performance obligations on a per person subscription basis, and in some cases on a per licenserelative standalone selling price basis. Fees areWe generally determine standalone selling prices based on the size of the facilities’ or organizations’ employee user populationstandard list price for each product, taking into consideration certain factors, including contract length and the service offerings to which they subscribe. Subscription-based revenue is recognized ratably over the service periodnumber of the underlying contract. Implementation services revenue is deferred until the subscription-based product is implemented, at which time revenues are recognized ratably over the subscription service period. All other service revenues are recognized as the related services are performedsubscriptions or products are delivered.
Revenues from provider solutions products are predominantly related to software licensing and support/maintenance renewals. Revenues derived from the license of installed software products are recognized using the residual method upon delivery of the software when vendor specific objective evidence (VSOE) of fair value for the undelivered elementslicenses purchased within the contract can be established. For installed software products, ifcontract. Judgment is required in determining whether performance obligations are distinct, standalone selling prices, and the Company cannot objectively determine the fair valueamount of each undelivered element based on the VSOE of fair value, the Company defers revenue recognition until all elements are delivered, all services have been performed, or until fair value can be objectively determined. Software support and maintenance revenues are recognized ratably over the term of the related agreement.variable consideration to reflect as transaction price.
Revenues from patient experience services are recognized when survey results are delivered to customers via either Internet-based reporting throughout the survey period or by providing final survey results once all services are complete. A significant portion of revenues for survey and reporting services that are provided through the use of Internet-based reporting methodologies are recognized using the proportional performance method, reflecting recognition throughout the service period which corresponds with the survey cycle and reporting access by the customer, which typically ranges from one to five months. If survey results are delivered to the customer after all services have been completed, then the corresponding revenues are recognized in full in the period such results are provided to the customer. Coaching and consulting revenues are generally recognized using the proportional performance method as these services are performed throughout the contract term. All other revenues are recognized as the related services are performed or products are delivered to the customer. Revenues for these services can be subject to seasonal factors based on customers’ requirements that can impact the timing, frequency, and volume of survey cycles.
Revenues from professional services primarily include consulting and content development services. Fees are based on the time and efforts involved, and revenue is recognized upon completion of performance milestones using the proportional performance method.
The Company offers training services for clients to facilitate integration of its software solutions. Fees for training are based on the time and efforts of the personnel involved. Training revenues are generally recognized upon completion of training services.
In May 2014, the FASB issued ASU2014-09, Revenue from Contracts with Customers (Topic 606), which supersedes the revenue recognition requirements in Topic 605, Revenue Recognition, and most industry-specific revenue recognition guidance throughout the Industry Topics of the Accounting Standards Codification. The Company will adopt this standard using the modified retrospective approach effective January 1, 2018. For additional information regarding the Company’s adoption of this standard and its potential impact on the Company, see “Recent Accounting Pronouncements” below under “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
Accounting for Income Taxes
The Company accounts for income taxes using the asset and liability method, whereby deferred tax assets and liabilities are determined based on the temporary differences between the financial statement and tax bases of assets and liabilities measured at tax rates that will be in effect for the year in which the differences are expected to affect taxable income. Management periodically assessesevaluates all available evidence, both positive and negative, to determine whether, based on the weight of that evidence, a valuation allowance is needed. We assess the realizability of itsour deferred tax assets, and to the extent that we believe a recovery is not likely, we establish a valuation allowance to reduce the deferred tax asset to the amount we estimate will be recoverable. TheAs of December 31, 2023, the Company maintainsestablished a valuation allowance of approximately $1.1$2.0 million for the portion of its deferred tax assets that are not more likely than not expected to be realized.realized, compared to a valuation allowance of $1.9 million as of December 31, 2022.
Software Development Costs
Capitalized software development includes costs to develop and maintain our products and applications, including our SaaS-based workforce development platform products and our survey reporting applications, which are accounted for as internal use software. For internal use software development, once planning is completed andGoodwill
Goodwill represents the software development process begins, internal costs and payments to third parties associated withexcess of purchase price in a business combination over the software development efforts are capitalized when the life expectancy is greater than one year and the anticipated cash flows are expected to exceed the costfair value of the related asset. During 2017 and 2016, we capitalized approximately $12.5 million and $10.0 million, respectively, for software development. Such amounts are included in the accompanying consolidated balance sheets under the caption “capitalized software development.” The Company amortizes capitalized software development costs over their expected life of three years using the straight-line method. Capitalized software development costs are subject to a periodic impairment review in accordance with our impairment review policy. In connection with capitalized software development, significant estimates involve the assessment of the development period for new products and feature enhancements, as well as the expected useful life of underlying software, feature enhancements, or product created. Once capitalized, software development costs are subject to the policies and estimates described below regarding goodwill, intangibles, and other long-lived assets.
Goodwill, Intangibles, and Other Long-lived Assets
The Company evaluatesnet identifiable assets acquired. We evaluate goodwill for impairment at the reporting unit level by assessing whether it is more likely than not that the fair value of a reporting unit exceeds its carrying value. If this assessment concludes that it is more likely than not that the fair value of a reporting unit exceeds its carrying value, then goodwill is not considered impaired and no further impairment testing is required. Conversely, if the assessment concludes that it is more likely than not that the fair value of a reporting unit is less than its carrying value, a goodwill impairment test is performed to compare the fair value of the reporting unit to its carrying value. The Company determines fair value of theits reporting unitsunit using both income and market basedmarket-based models. Our models contain significant assumptions and accounting estimates about discount rates, future cash flows, and terminal values that could materially affect our operating results or financial position if they were to change significantly in the future and could result in an impairment. We perform our goodwill impairment assessment whenever events or changes in facts or circumstances indicate that impairment may exist and also during the fourth quarter each year. Intangible assets and other long-lived assets are also reviewed for events or changes in facts and circumstances, both internally and externally, which may indicate an impairment is present. We measure any impairment using observable market values or discounted future cash flows from the related long-lived assets. The cash flow estimates and discount rates incorporate management’s best estimates, using appropriate and customary assumptions and projections at the date of evaluation.
Allowance for Doubtful Accounts
The Company estimates the allowance for doubtful accounts using both a specific andnon-specific identification method. Management’s evaluation includes reviewing past due accounts on acase-by-case basis and determining whether an account should be reserved based on the facts and circumstances surrounding each potentially uncollectible account. An allowance is also maintained for accounts not specifically identified For 2023, our qualitative assessment indicated that may become uncollectible in the future. Uncollectible accounts arewritten-off in the period management believes it has exhausted every opportunity to collect payment from the customer. Bad debt expense is recorded when events or circumstances indicate an additional allowance is necessary based on our specific andnon-specific identification approach. Our allowance for doubtful accounts totaled approximately $2.2 million as of December 31, 2017.
Stock Based Compensation
The Company recognizes compensation expense using a fair-value based method for costs related to share based payments including stock options and restricted share units. Measurement of such compensation expense requires significant estimation and assumptions; however, we believe that the Black Scholes option pricing model used for calculating the fair value of our stock based compensation plans providesreporting unit substantially exceeded the carrying value such that a reasonable measurement methodology using a framework that is widely adopted.quantitative assessment was not necessary.
As
$3.3 million of stock based compensation expense was recorded, respectively. The Company has historically granted equity based awards to both its management group and members of the Company’s board of directors on an annual basis under stockholder-approved plans, and expects to continue providing equity awards to these groups for the foreseeable future. The Company also provides grants of equity based awards when new members of the management group begin their employment, or when new members join the Company’s board of directors. As of December 31, 2017, total future compensation cost related tonon-vested awards not yet recognized was approximately $3.4 million net of estimated forfeitures, with a weighted average expense recognition period of 2.6 years. Future compensation expense recognition for new equity based award grants will vary depending on the timing and size of new awards granted, changes in the market price or volatility of our common stock, changes in risk-free interest rates, or if actual forfeitures vary significantly from initial estimates.
RESULTS OF OPERATIONS
Revenues and Expense Components
The following descriptions of the components of revenues and expenses apply to the comparison of results of operations.
Revenues, net. Revenues forThe products and services generating revenues are increasingly oriented around and drive value in relation to our HealthStream Workforce Solutions business segmenthStream technology platform and consist primarily consist of the following products and services: provision of services through our SaaS-based platform, authoring tools,learning management applications, a variety of training and development content subscriptions, staff scheduling software solutions, competency and performance appraisal tools, training, implementation and onboarding, consulting services content development, online sales training courses, and a variety of other educational activities to serve professionals that work within healthcare organizations. Revenues fororganizations, and our HealthStream Patient Experience Solutions business segment (prior to our disposition of such business) consisted of quality and satisfaction surveys, data analyses of survey results, coaching/consulting services, and other research-based measurement tools focused on patients, employees, physicians, and other members of the community. Revenues for our HealthStream Provider Solutions business segment consist of proprietary software applications tothat help facilitate provider credentialing, privileging, call center, and enrollment administration for healthcare organizations.
Cost of Revenues (excluding depreciation and amortization). Cost of revenues (excluding depreciation and amortization) consistsconsist primarily of salaries and employee benefits, stock basedstock-based compensation, employee travel and lodging, materials, outsourced phone survey support, contract labor, hosting costs, third party software licensing costs, and other direct expenses associated with revenues, as well as royalties paid by us to content providers based on a percentage of revenues.providers. Personnel costs within cost of revenues are associated with individuals that facilitate product delivery;delivery, provide services; conduct, process, and manage customer surveys;services, handle customer support calls or inquiries;inquiries, manage the technology infrastructure for our hosted applications;applications, manage content, and survey services; coordinate content maintenance services; and provide training or implementation services.
Product Development.Product development consists primarily of salaries and employee benefits, contract labor, stock basedstock-based compensation, employee travel and lodging, costs associated with the development of new software and feature enhancements, new products, third party software licensing costs, and costs associated with maintaining and developing our platform products. Personnel costs within product development include our systems teams, application development, quality assurance teams, product managers, and other personnel associated with software and product development.
Sales and Marketing.Sales and marketing consistsconsist primarily of salaries commissions and employee benefits, stock basedcommissions, stock-based compensation, employee travel and lodging, third party software licensing costs, advertising, trade shows, customer conferences, promotions, and related marketing costs. We have historically hosted a national customer conference in Nashville, Tennessee known as “Summit,” a significant portion of the costs of which are included in sales and marketing expenses. Personnel costs within sales and marketing include our sales teams and marketing personnel.
Other General and Administrative Expenses. Other general and administrative expenses consist primarily of salaries and employee benefits, stock basedstock-based compensation, employee travel and lodging, facility costs,expenses, office expenses, fees for professional services, business development and acquisition relatedacquisition-related costs, third party software licensing costs, and other operational expenses. Personnel costs within general and administrative expenses include individuals associated with normal corporate functions, (accounting,including accounting, legal, business development, human resources, administrative, internal information systems, and executive management).management.
Depreciation and Amortization. Depreciation and amortization consist of fixed asset depreciation, amortization of intangibles considered to have definite lives, and amortization of capitalized software development.
Other Income (Expense)(Loss), Net. The primary component of other income is interest income related to interest earned on cash and cash equivalents and investments in marketable securities. The primary component of other expense is interest expense related to our revolving credit facility. In addition, the income or loss attributed to equity method investments and fair value adjustments related to non-marketable equity investments is included in this category.
2017
2023 Compared to 20162022
Revenues, net.Revenues increased approximately $21.7$12.2 million, or 10%5%, to $247.6$279.1 million for 20172023 from $226.0$266.8 million for 2016. 2022. The revenue growth was attributable to growth in several product categories, including contribution of $3.1 million, or 1%, from our recent acquisitions. Subscription revenues increased $14.0 million, or 6%, but were partially offset by $1.7 million of declines from professional services revenues.
A comparison of revenues by business segmentrevenue source is as follows (in thousands):
| Revenues by Business Segment: | 2017 | 2016 | Percentage Change | |||||||||
Workforce Solutions | $ | 178,061 | $ | 168,040 | 6% | |||||||
Patient Experience Solutions | 32,763 | 33,850 | (3)% | |||||||||
Provider Solutions | 36,838 | 24,084 | 53% | |||||||||
|
|
|
| |||||||||
Total revenues, net | $ | 247,662 | $ | 225,974 | 10% | |||||||
|
|
|
| |||||||||
% of Revenues | ||||||||||||
Workforce Solutions | 72% | 74% | ||||||||||
Patient Experience Solutions | 13% | 15% | ||||||||||
Provider Solutions | 15% | 11% | ||||||||||
Year Ended December 31, | ||||||||||||
2023 | 2022 | Percentage Change | ||||||||||
Subscription services | $ | 267,935 | $ | 253,960 | 6 | % | ||||||
Professional services | 11,128 | 12,866 | -14 | % | ||||||||
Total revenues, net | $ | 279,063 | $ | 266,826 | 5 | % | ||||||
% of Revenues | ||||||||||||
Subscription services | 96 | % | 95 | % | ||||||||
Professional services | 4 | % | 5 | % | ||||||||
Revenues for HealthStream Workforce Solutions, which are primarily subscription-based, increased approximately $10.1 million, or 6%, to $178.1 million for 2017 from $168.0 million for 2016. Revenues in 2017 were positively influenced by growth in content subscriptions and our enterprise applications, but were partially offset by an expected decline inICD-10 readiness revenues. Revenues fromICD-10 readiness products declined by $7.6 million to $909,000 in 2017 compared to $8.5 million in 2016. The requirement mandated by CMS for healthcare organizations to transition to theICD-10 coding system was effective in October 2015, and generated significant demand for ourICD-10 readiness training courseware from 2012 through 2015. However, as a result of the effectiveness of such mandate in October 2015, sales of that product have ceased and there will not be renewals of the specificICD-10 readiness product. Implemented subscribers increased by 4% during 2017 to 4.65 million subscribers at the end of 2017 compared to 4.47 million subscribers at the end of 2016. Additionally, total subscribers increased by 5%, with 4.77 million total subscribers at December 31, 2017 compared to 4.55 million total subscribers at December 31, 2016.
Revenues for HealthStream Patient Experience Solutions decreased approximately $1.1 million, or 3%, to $32.8 million for 2017 from $33.9 million for 2016. Revenues from Patient Insights™ surveys, our survey research product that generates recurring revenues, decreased by $386,000, or 1%, to $26.3 million for 2017 from $26.7 million for 2016. The decline in our patient survey revenues is partially due to changes in product mix, such as the adoption of oure-survey products, which have both lower revenue and cost per survey than our traditional phone survey products. Revenues from other products, including surveys conducted on annual orbi-annual cycles and consulting/coaching services, collectively decreased by $701,000, or 10%, compared to 2016 due to fewer engagements compared to 2016.
Revenues for HealthStream Provider Solutions increased approximately $12.8 million, or 53%, to $36.8 million for 2017 from $24.1 million for 2016. Revenues from the MAI acquisition, which was consummated in August 2016, accounted for $8.1 million of the increase in revenues during 2017. Revenues from other provider solutions products accounted for the remaining $4.7 million increase in revenues in 2017.
Cost of Revenues (excluding depreciation and amortization).Cost of revenues increased approximately $9.4$3.9 million, or 10%4%, to $106.0$95.0 million for 20172023 from $96.6$91.1 million for 2016.2022. Cost of revenues as a percentage of revenues was approximately 43%were 34% of revenues for both 20172023 and 2016.
Cost of revenues for HealthStream Workforce Solutions increased approximately $7.9 million to $75.3 million and approximated 42% and 40% of revenues for HealthStream Workforce Solutions for 2017 and 2016, respectively.2022. The increase in both amount and as a percentage of revenuesexpense is primarily associated with increased royalties paid by us resulting from growth in content subscription revenueshigher costs for third-party software, cloud hosting, and increased personnel costs. Cost of revenues for HealthStream Patient Experience Solutions decreased approximately $2.9 million to $18.8 million and approximated 57% and 64% of revenues for HealthStream Patient Experience Solutions for 2017 and 2016, respectively. The decrease in both amount and as a percentage of revenue is primarily due to reductions in personnel costs and lower costs associated with declines in phone based survey volume compared to 2016. Cost of revenues for HealthStream Provider Solutions increased approximately $4.3 million to $11.9 million and approximated 32% of HealthStream Provider Solutions revenues for both 2017 and 2016. The increase in amount and as a percentage of revenue is primarily the result of the MAI acquisition and additions to personnel and increased hosting costs.royalties.
Product Development. Product development expenses decreased approximately $1.0increased $1.2 million, or 3%, to $27.9$45.5 million for 20172023 from $28.9$44.3 million for 2016.2022. Product development expenses as a percentage of revenues were approximately 11%16% and 13%17% of revenues for 20172023 and 2016, respectively.
Product development expenses for HealthStream Workforce Solutions decreased approximately $800,000 to $19.6 million and
approximated 11% and 12% of revenues for HealthStream Workforce Solutions for 2017 and 2016,2022, respectively. The decreaseincrease in amount and as a percentage of revenuesexpense is primarily due to lower outsourced labor expenses, butincreased personnel costs, including severance costs associated with the previously disclosed elimination of 33 job roles as part of the consolidation of HealthStream's business under a single platform strategy, partially offset by an increase in personnel costs. Product development expenseslabor capitalized for HealthStream Patient Experience Solutions decreased approximately $912,000 to $3.8 million and approximated 11% and 14% of revenues for HealthStream Patient Experience Solutions for 2017 and 2016, respectively. The decrease in both amount and as a percentage of revenue is due to higher labor capitalization for internal software development and lower outsourced labor costs, partially offset by an increase in personnel costs. Product development expenses for HealthStream Provider Solutions increased approximately $714,000 to $4.5 million and approximated 12% and 16% of revenues for HealthStream Provider Solutions for 2017 and 2016, respectively. The increase in amount is primarily associated with the MAI acquisition and additions to personnel over the year, but partially offset by higher labor capitalization for internal software development.internally developed software.
Sales and Marketing. Sales and marketing expenses, including personnel costs, increased approximately $3.9$1.6 million, or 10%4%, to $42.9$45.7 million for 20172023 from $39.0$44.1 million for 2016.2022. Sales and marketing expenses were approximately 17%as a percentage of revenues for both 2017 and 2016.
Sales and marketing expenses for HealthStream Workforce Solutions increased approximately $2.9 million to $31.4 million and approximated 18%were 16% and 17% of revenues for HealthStream Workforce Solutions for 20172023 and 2016,2022, respectively. The increase in amount and as a percentage of revenuesexpense is primarily due to additions toincreased personnel and highercosts, including severance costs as noted above, sales commissions, compared to 2016. Sales and travel costs, which were partially offset by a decrease in marketing expenses for HealthStream Patient Experience Solutions increased approximately $235,000 to $4.3 million and approximated 13% and 12% of revenues for HealthStream Patient Experience Solutions for 2017 and 2016, respectively. The increase in both amount and as a percentage of revenues is primarily due to higher sales commissions compared to 2016. Sales and marketing expenses for HealthStream Provider Solutions increased approximately $674,000 to $5.9 million and approximated 16% and 22% of revenues for HealthStream Provider Solutions for 2017 and 2016, respectively. The increase in amount is primarily the result of higher sales commissions resulting from growth in sales. The unallocated corporate portion of sales and marketing expenses increased by $165,000 to $1.3 million over 2016 primarily due to higher personnel costs and increased marketing spending.expenses.
Other General and Administrative Expenses. Other general and administrative expenses increased approximately $1.1decreased $1.2 million, or 3%, to $34.8$35.7 million for 20172023 from $33.7$36.9 million for 2016.2022. Other general and administrative expenses as a percentage of revenues were approximately13% and 14% and 15% of revenues for 20172023 and 2016, respectively.
Other general and administrative expenses for HealthStream Workforce Solutions increased approximately $2.1 million to $8.1 million and approximated 5% and 4% of revenues for HealthStream Workforce Solutions for 2017 and 2016,2022, respectively. The increase in amount and as a percentage of revenuesdecrease is primarily due to higher facilitylower software expenses, employee recruitment and onboarding expenses, telecom expenses, and personnel costs, and increases in technology infrastructure investments. Other general and administrative expenses for HealthStream Patient Experience Solutions increased approximately $89,000 to $2.9 million and approximated 9% and 8% of revenues for HealthStream Patient Experience Solutions for 2017 and 2016, respectively. The increase in amount and as a percentage of revenues is due to an increase in general administrative expenses. Other general and administrative expenses for HealthStream Provider Solutions increased approximately $1.7 million to $5.5 million and approximated 15% and 16% of revenues for HealthStream Provider Solutions for 2017 and 2016, respectively. The increase in amount is primarily associated with increased facility costs, contract labor, and higher bad debt expense. The unallocated corporate portion of other general and administrative expenses decreased approximately $2.7 million to $18.2 million over 2016, primarily due to lower professional service expenses as a result of the implementation of a new financial systems platform and the MAI transaction during the prior year period, reductions to contract labor, and reductions of other general administrative expenses, butwhich were partially offset by implementation costs for compliance with ASC 606.an increase in bad debt expense.
Depreciation and Amortization.Depreciation and amortization increased approximately $4.1$3.2 million, or 18%8%, to $26.3$41.1 million for 20172023 from $22.2$37.9 million for 2016.2022. The increase primarily resulted from higher amortization of capitalized software, development, amortization of intangible assets from recent acquisitions, andpartially offset by lower depreciation expense associated with capital expenditures.expense.
Other Income (Expense)(Loss), Net. Other income (expense)(loss), net was income of approximately $733,000$2.5 million for 20172023 compared to $581,000$3.1 million for 2016. The increase is primarily due to an increase in2022. Other income for 2023 consisted of interest income fromearned on cash and investments during the year ended December 31, 2023 as well as an additional $0.4 million gain recognized upon the settlement and release of escrowed proceeds related to a prior sale of a non-marketable equity investment. Other income for 2022 consisted of the $2.7 million gain recorded upon the sale of a non-marketable equity investment during the year ended December 31, 2022 as well as the $0.9 million gain recorded due to the change in marketable securities.fair value of our previously held minority interest in CloudCME that was remeasured upon acquiring the remaining ownership interest of CloudCME during the year ended December 31, 2022, partially offset by losses attributed to equity method investments.
Income Tax Provision.The Company recorded a provision for income taxes of approximately $529,000 for 2017 compared to $2.4$3.3 million and $3.5 million for 2016.2023 and 2022, respectively. The Company’s effective tax rate was approximately 5%18% for 20172023 compared to approximately 39%22% for 2016.2022. The decrease inCompany's effective tax rate primarily reflects the statutory corporate income tax expense during 2017 israte, the net effect of state taxes, foreign income taxes, and the effect of various permanent tax differences. During the year ended December 31, 2023, the Company recorded discrete tax benefits of $0.4 million, which consisted of tax benefits in the amount of $0.9 million resulting primarily attributable tofrom changes in apportionment rules in Tennessee upon the enactment of the Tennessee Works Tax CutsAct and Jobs Act onstock-based awards in the amount of $0.1 million, partially offset by $0.2 million of discrete tax expense related to reserves for uncertain tax positions and $0.4 million of discrete tax expense associated with merging VerityStream into HealthStream. During the year ended December 22, 2017,31, 2022, the Company recorded discrete tax expense of $0.6 million, which reduced the corporate federal incomeincluded tax rate from 35%expense related to 21%. This changeuncertain tax positions and changes in state tax law resulted in an income tax benefitrates.
Net Income. Net income increased approximately $6.2$3.1 million, or 166%26%, to $10.0$15.2 million for 20172023 compared to $3.8$12.1 million for 2016.2022. Earnings per diluted share were $0.50 per share (diluted) for 2023, compared to $0.39 per share (diluted) for 2022.
Adjusted EBITDA increased 15% to $61.3 million for 2023 compared to $53.4 million for 2022. The increase resulted from the factors mentioned above. Earnings per diluted share were $0.31 per share for 2017 compared to $0.12 per diluted share for 2016.
Adjusted EBITDA (ais a non-GAAP financial measure which we define as net income excluding the impact of the deferred revenue write-downs associated with fair value accounting for acquired businesses and before interest, income taxes, stock basedstock-based compensation, and depreciation and amortization) increased approximately 27% to approximately $37.9 million for 2017 compared to $29.9 million for 2016. The increase resulted fromamortization, and changes in fair value of, including gains (losses) on the factors mentioned above.sale of, non-marketable equity investments. See Reconciliation"Reconciliation ofNon-GAAP Financial MeasuresMeasures" below for oura reconciliation of this calculation to measuresthe most comparable measure under US GAAP.
2016 ComparedU.S. GAAP and information regarding why this non-GAAP financial measure provides useful information to 2015
Revenues, net.Revenues increased approximately $16.9 million, or 8%, to $225.9 million for 2016 from $209.0 million for 2015. A comparison of revenues by business segment is as follows (in thousands):investors.
| Revenues by Business Segment: | 2016 | 2015 | Percentage Change | |||||||||
Workforce Solutions | $ | 168,040 | $ | 161,293 | 4% | |||||||
Patient Experience Solutions | 33,850 | 34,189 | (1)% | |||||||||
Provider Solutions | 24,084 | 13,520 | 78% | |||||||||
|
|
|
| |||||||||
Total revenues, net | $ | 225,974 | $ | 209,002 | 8% | |||||||
|
|
|
| |||||||||
% of Revenues | ||||||||||||
Workforce Solutions | 74% | 77% | ||||||||||
Patient Experience Solutions | 15% | 16% | ||||||||||
Provider Solutions | 11% | 7% | ||||||||||
Revenues for HealthStream Workforce Solutions, which are primarily subscription-based, increased approximately $6.7 million, or 4%, to $168.0 million compared to 2015. RevenuesKey Business Metrics
Our management utilizes the following key financial and non-financial metrics in 2016 were positively influenced by growth in courseware subscriptions andconnection with managing our enterprise applications, but were partially offset by an expected decline inICD-10 readiness revenues. Revenues fromICD-10 readiness products declined by $18.2 million to $8.5 million in 2016 compared to $26.7 million in 2015. The requirement mandated by CMS for healthcare organizations to transition to theICD-10 coding system was effective in October 2015, and generated significant demand for ourICD-10 readiness training courseware from 2012 through 2015. However, as a resultbusiness.
• | Revenues, net. Revenues, net, reflect income generated by the sales of goods and services related to our operations and reflect deferred revenue write-downs associated with fair value accounting for acquired businesses. Revenues, net, were $279.1 million for the year ended December 31, 2023 compared to $266.8 million for the year ended December 31, 2022. Management utilizes revenue in connection with managing our business and believes that this metric provides useful information to investors as a key indicator of the growth and success of our products. |
• | Adjusted EBITDA. Adjusted EBITDA, calculated as set forth below under “Reconciliation of Non-GAAP Financial Measures,” is utilized by our management in connection with managing our business and provides useful information to investors because adjusted EBITDA reflects net income adjusted for certain GAAP accounting, non-cash, and/or non-operating items, as more specifically set forth below, which may not fully reflect the underlying operating performance of our business. We also believe that adjusted EBITDA is useful to many investors to assess the Company’s ongoing results from operations. Additionally, short-term cash incentive bonuses and certain performance-based equity award grants are based on the achievement of adjusted EBITDA (as defined in applicable bonus and equity grant documentation) targets. Adjusted EBITDA was $61.3 million for the year ended December 31, 2023, compared to $53.4 million for the year ended December 31, 2022. |
• | Capital Expenditures. Capital expenditures represent cash payments incurred for purchases of property and equipment and during the development phase for projects to develop software and content. Capital expenditures were $28.0 million for the year ended December 31, 2023 compared to $25.1 million for the year ended December 31, 2022. Management utilizes this metric in connection with managing the allocation of capitalized expenditures in which the Company invests related to the development of its products and believes that this metric is a key indicator of investment in products relative to their current and expected performance. |
• | Net Income. Net income represents revenues, net less all expenses. Net income was $15.2 million for the year ended December 31, 2023 compared to $12.1 million for the year ended December 31, 2022. Management utilizes net income in connection with managing our business, including with regard to our capital deployment strategies. |
Reconciliation of such mandate in October 2015, sales of that product have ceased and there will not be renewals of the specificICD-10 readiness product. Implemented subscribers decreased by less than 1% during 2016 to 4.47 million subscribers at the end of 2016 compared to 4.48 million subscribers at the end of 2015. Additionally, total subscribers decreased by less than 2%, with 4.55 million total subscribers at December 31, 2016 compared to 4.62 million total subscribers at December 31, 2015.
Revenues for HealthStream Patient Experience Solutions decreased approximately $343,000, or 1%, to $33.9 million compared to 2015. Revenues from Patient Insights™ surveys, our survey research product that generates recurring revenues, decreased by $239,000, or 1% compared to 2015. The decline in our patient survey revenues is partially due to changes in product mix, such as the adoption of oure-survey products, which have both lower revenue and cost per survey than our traditional phone survey products. Revenues from other products, including surveys conducted on annual orbi-annual cycles and consulting/coaching services, collectively decreased by $101,000, or 1%, compared to 2015.
Revenues for HealthStream Provider Solutions increased approximately $10.6 million, or 78%, to $24.1 million compared to 2015. Revenues from both the HLS and MAI acquisitions, which were consummated in March 2015 and August 2016, respectively, accounted for the majority of the increase in revenues during 2016. Revenues from the MAI acquisition, which was consummated on August 8, 2016, were approximately $2.6 million during 2016.
Cost of Revenues (excluding depreciation and amortization).Cost of revenues increased approximately $7.2 million, or 8%, to $96.6 million for 2016 from $89.4 million for 2015. Cost of revenues as a percentage of revenues was approximately 43% of revenues for both 2016 and 2015. Cost of revenues for HealthStream Workforce Solutions increased approximately $3.8 million to $67.4 million and approximated 40% and 39% of revenues for HealthStream Workforce Solutions for 2016 and 2015, respectively. The increase in both amount and as a percentage of revenues is primarily associated with increased royalties paid by us resulting from growth in courseware subscription revenues, increased personnel costs, and other support costs. The increase was partially offset by a decrease in stock based compensation. Cost of revenues for HealthStream Patient Experience Solutions decreased approximately $697,000 to $21.7 million and approximated 64% and 65% of revenues for HealthStream Patient Experience Solutions for 2016 and 2015, respectively. The decrease in amount is primarily associated with lower personnel costs and stock based compensation. Cost of revenues for HealthStream Provider Solutions increased approximately $4.1 million to $7.6 million and approximated 32% and 26% of HealthStream Provider Solutions revenues for 2016 and 2015, respectively. The increase in amount and as a percentage of revenues is primarily the result of increased personnel and related costs, including additional personnel from MAI.
Product Development. Product development expenses increased approximately $4.7 million, or 19%, to $28.9 million for 2016 from $24.2 million for 2015. Product development expenses as a percentage of revenues were approximately 13% and 12% of revenues for 2016 and 2015, respectively.
Product development expenses for HealthStream Workforce Solutions increased approximately $1.0 million to $20.4 million and approximated 12% of revenues for HealthStream Workforce Solutions for both 2016 and 2015. The increase in amount is due to additional personnel expenses associated with new product development initiatives for our subscription-based products. This increase was partially offset by lower stock based compensation. Product development expenses for HealthStream Patient Experience Solutions
increased approximately $2.3 million to $4.7 million and approximated 14% and 7% of revenues for HealthStream Patient Experience Solutions for 2016 and 2015, respectively. The increase in both amount and as a percentage of revenue is due to additional personnel expenses associated with new product development initiatives. Product development expenses for HealthStream Provider Solutions increased approximately $1.3 million to $3.8 million and approximated 16% and 18% of revenues for HealthStream Provider Solutions for 2016 and 2015, respectively. The increase in amount is primarily the result of increased personnel costs, including additional personnel from MAI.
Sales and Marketing. Sales and marketing expenses, including personnel costs, increased approximately $3.4 million, or 10%, to $39.0 million for 2016 from $35.6 million for 2015. Sales and marketing expenses were approximately 17% of revenues for both 2016 and 2015.
Sales and marketing expenses for HealthStream Workforce Solutions increased approximately $1.6 million to $28.6 million and approximated 17% of revenues for HealthStream Workforce Solutions for both 2016 and 2015. The increase in amount is mainly due to additional personnel, sales commissions, and increased marketing spending. Sales and marketing expenses for HealthStream Patient Experience Solutions decreased approximately $446,000 to $4.1 million and approximated 12% and 13% of revenues for HealthStream Patient Experience Solutions for 2016 and 2015, respectively. The decrease in both amount and as a percentage of revenues is primarily due to reduced marketing personnel and related costs. Sales and marketing expenses for HealthStream Provider Solutions increased approximately $1.7 million to $5.2 million and approximated 22% and 26% of revenues for HealthStream Provider Solutions for 2016 and 2015, respectively. The increase in amount is primarily the result of increased personnel costs, sales commissions, and marketing spending. The unallocated corporate portion of sales and marketing expenses increased by $584,000 to $1.1 million primarily due to additional marketing personnel and related costs.
Other General and Administrative Expenses. Other general and administrative expenses increased approximately $4.4 million, or 15%, to $33.7 million for 2016 from $29.3 million for 2015. Other general and administrative expenses as a percentage of revenues were approximately 15% and 14% of revenues for 2016 and 2015, respectively.
Other general and administrative expenses for HealthStream Workforce Solutions increased approximately $1.4 million to $6.1 million over 2015 primarily associated with increased technology infrastructure investments. Other general and administrative expenses for HealthStream Patient Experience Solutions increased approximately $443,000 to $2.8 million over 2015 due to additional personnel and facility costs. Other general and administrative expenses for HealthStream Provider Solutions increased approximately $1.3 million to $3.8 million over 2015 primarily associated with increased personnel expenses and facility costs, including costs associated with the MAI acquisition. The unallocated corporate portion of other general and administrative expenses increased approximately $1.3 million to $20.9 million over 2015, primarily associated with additional personnel and related costs, higher due diligence costs of approximately $260,000 to , and costs associated with the implementation of a new financial systems platform of approximately $600,000, which was substantially completed during the second quarter of 2016.
Depreciation and Amortization.Depreciation and amortization increased approximately $5.2 million, or 31%, to $22.2 million for 2016 from $17.0 million for 2015. The increase primarily resulted from amortization of capitalized software development, amortization of intangible assets from recent acquisitions (including amortization of software acquired for resale), and depreciation expense associated with capital expenditures.
Other Income (Expense), Net. Other income (expense), net was income of approximately $581,000 for 2016 compared to $162,000 for 2015. The increase is primarily associated with a gain recorded in relation to the acquisition of all of the remaining outstanding stock of Nursing Registry Consultants Corporation (see Note 5 in the Notes to Consolidated Financial Statements for further discussion), an increase in interest income from investments in marketable securities, and lower interest expense.
Income Tax Provision.The Company recorded a provision for income taxes of approximately $2.4 million for 2016 compared to $5.1 million for 2015. The Company’s effective tax rate was approximately 39% for 2016 compared to approximately 37% for 2015. The decrease in income tax expense during 2016 is attributable to lower taxable income compared to the prior year period.
Net Income. Net income decreased approximately $4.8 million, or 56%, to $3.8 million for 2016 compared to $8.6 million for 2015. The decrease resulted from the factors mentioned above. Earnings per diluted share were $0.12 per share for 2016 compared to $0.28 per diluted share for 2015.
Adjusted EBITDA (anon-GAAP financial measure which we define as net income before interest, income taxes, stock based compensation, and depreciation and amortization) decreased approximately 12% to approximately $29.9 million for 2016 compared to $33.8 million for 2015. The decrease resulted from the factors mentioned above. See Reconciliation ofNon-GAAP Financial Measures below for our reconciliation of this calculation to measures under US GAAP.
Other Developments
As previously announced, Laerdal Medical A/S, a Norwegian company (“Laerdal”), provided notice that, upon the December 31, 2018 expiration of our existing agreements with Laerdal regarding the HeartCode and Resuscitation Quality Improvement (“RQI”) products, Laerdal does not intend to continue these existing agreements or enter into new agreements with HealthStream in relation to such products. Our Joint Marketing and Licensing Agreements with Laerdal for HeartCode and for RQI, respectively, remain unaltered and continue in effect through December 31, 2018. Up to that expiration date, we retain the right to offer HeartCode and RQI licenses that extend through December 31, 2020. We retain exclusivity of RQI sales to our existing customer network through the agreement expiration date of December 31, 2018 and are prohibited from selling substantially similar products to HeartCode and RQI during that time.
Revenues associated with the sales of HeartCode and RQI products have been significant in recent years, although margins on such products have been lower than HealthStream’s average margin. We are actively engaged in efforts to broaden the scope and utilization of our simulation-related offerings to include a range of clinical competencies that extend beyond resuscitation, and integrate with our platform in ways that HeartCode and RQI never have. We intend to bring to market a broadened scope of simulation-based offerings, including— following the December 31, 2018 expiration date of our agreements with Laerdal—resuscitation programs. We believe these efforts have the potential to give rise to additional and higher margin opportunities than currently exist under the Laerdal agreements for HeartCode and RQI, and will likely feature solutions with a lower price point than our current offerings. However, there is no assurance that we will be successful in these efforts, and to the extent that new simulation-based or other solutions do not generate revenue and/or earnings following the December 31, 2018 expiration date in a manner that supplants the impact of these agreements with Laerdal, our revenue and results of operations following this expiration date may be adversely affected.
Reconciliation ofNon-GAAP Financial Measures
This report contains certainnon-GAAP financial measures, includingnon-GAAP net income,non-GAAP operating income, andAnnual Report on Form 10-K presents adjusted EBITDA, which areis a non-GAAP financial measure used by management in analyzing the Company’sour financial results and ongoing operational performance. Thesenon-GAAP financial measures should not be considered as a substitute for, or superior to, measures of financial performance which are prepared in accordance with US GAAP and may be different fromnon-GAAP financial measures used by other companies.
In order to better assess the Company’s financial results, management believes that adjusted EBITDAnet income excluding the impact of the deferred revenue write-downs associated with fair value accounting for acquired businesses (as discussed in greater detail below) and before interest, income taxes, stock-based compensation, depreciation and amortization, changes in fair value of, including gains (losses) on the sale of, non-marketable equity investments, and the de-recognition of non-cash expense resulting form the paid-time off expense reduction in the first quarter if 2021 (adjusted EBITDA), is a useful measure for evaluating the operating performance of the Company because adjusted EBITDA reflects net income adjusted for certain GAAP accounting, non-cash, and and/or non-operating items. The Company believes items which we believe, in any such case, are not fully reflective of the underlying operating performance of our business. We also believe that adjusted EBITDA is also used by manyuseful to investors and securities analysts to assess the Company’s results from current operations. Adjusted EBITDA is anon-GAAP financial measureongoing operating performance and should not be considered as a measure of financial performance under US GAAP. Because adjusted EBITDA is not a measurement determined in accordance with US GAAP, it is susceptible to varying calculations. Accordingly, adjusted EBITDA, as presented, may not be comparable to other similarly titled measures of other companies.
The Company understands that, although adjusted EBITDA is frequently used by investors and securities analysts in their evaluation of companies, this measure has limitations as an analytical tool, and should not be considered in isolation, or as a substitute for an analysis ofcompare the Company’s results as reported under US GAAP.
Management addresses these inherent limitations associated with using adjusted EBITDA through disclosure of such limitations, presentation of our financial statements in accordance with US GAAP,operating performance between periods. Additionally, short-term cash incentive bonuses and reconciliationcertain performance-based equity awards are based on the achievement of adjusted EBITDA to net income,(as defined in applicable bonus and equity grant documentation) targets.
As noted above, the most directly comparable US GAAP measure.
In recent years, includingdefinition of adjusted EBITDA includes an adjustment for the March 2015 acquisitionimpact of HLS and the August 2016 acquisition of MAI,deferred revenue write-downs associated with fair value accounting for acquired businesses. Prior to the Company has acquired businesses whose net tangible assets include deferred revenue. In accordance with GAAP reporting requirements,early adopting ASU 2021-08 effective January 1, 2022, following the completion of any such acquisition by the Company, maythe Company was required to record a write-down ofthe acquired deferred revenue toat fair value as defined in GAAP. IfGAAP, which typically resulted in a write-down of the acquired deferred revenue. When the Company iswas required to record a write-down of deferred revenue, it may resultresulted in lower recognized revenue, operating income, and net income in subsequent periods.
In connection therewith, this report presents belownon-GAAP revenues,non-GAAP operating income andnon-GAAP net income, which in each Revenue for any such case reflects the corresponding GAAP figures adjusted to exclude the impact of the deferred revenue write-down associated with fair value accounting for acquired businesses as referenced above. Management believes that the presentation of thesenon-GAAP financial measures assists investors in understanding the Company’s performance between periods by excluding the impact of this deferred revenue write-down and provides a useful measure of the ongoing performance of the Company. Both on a quarterly andyear-to-date basis, the revenue for the acquired business iswas deferred and was typically recognized over aone-to-two year period following the completion of any particular acquisition, so our GAAP revenues for thisone-to-two year period willwould not reflect the full amount of revenues that would have been reported if the acquired deferred revenue was not written down to fair value. A reconciliationManagement believes that including an adjustment in the definition of thesenon-GAAP financial measuresadjusted EBITDA for the impact of the deferred write-downs associated with fair value accounting for businesses acquired prior to the correspondingJanuary 1, 2022 effective date of the Company's adoption of ASU 2021-08 provides useful information to investors because the deferred revenue write-down recognized in periods after an acquisition may, given the nature of this non-cash accounting impact, cause our GAAP measures is set forth below.
2017 2016 2015 GAAP net income Interest income Interest expense Income tax provision Stock based compensation expense Depreciation and amortization Adjusted EBITDA GAAP operating income Adjustment for deferred revenue write-down Non-GAAP operating income GAAP net income Adjustment for deferred revenue write-down, net of tax Non-GAAP net income $ 10,004 $ 3,755 $ 8,621 (870 ) (574 ) (401 ) 131 102 188 529 2,393 5,098 1,852 1,968 3,280 26,283 22,207 16,997 $ 37,929 $ 29,851 $ 33,783 $ 9,800 $ 5,567 $ 13,557 1,621 3,838 6,822 $ 11,421 $ 9,405 $ 20,379 $ 10,004 $ 3,755 $ 8,621 1,295 2,345 4,287 $ 11,299 $ 6,100 $ 12,908
FINANCIAL OUTLOOK FOR 2018
The Company provides projectionsfinancial results during such periods to not fully reflect our underlying operating performance and other forward-looking informationthus adjusting for this amount may assist in this “Financial Outlook for 2018” section within “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” This section contains many forward-looking statements, particularly relating tocomparing the Company’s future financial performance. These forward-looking statementsresults of operations between periods. Following the adoption of ASU 2021-08, contracts acquired in an acquisition completed on or after January 1, 2022 are estimates based on information currently available tomeasured as if the Company are made pursuant tohad originated the safe harbor provisions ofcontract (rather than the Private Securities Litigation Reform Act of 1995 and are subject to the precautionary statements set forth in the introduction in Part I of this Annual Report on Form10-K and the risks and uncertainties described in Item 1A, Risk Factors and elsewhere in this document. Actual results are likely to differ, and in the past have differed, materially from those forecast bycontract being measured at fair value) such that, for such acquisitions, the Company depending on the outcome of various factors, including, but not limitedno longer records deferred revenue write-downs associated with acquired businesses (for acquisitions completed prior to those set forth in Item 1A, Risk Factors.
As noted above,January 1, 2022, the Company adopted the newcontinues to record deferred revenue recognition standard (ASC 606), utilizing the modified retrospective approach effective January 1, 2018, such that the Company will recognize revenue under this new standardwrite-downs associated with fair value accounting for periods beginning on and after January 1, 2018, but will continue2022 consistent with this prior standard). Through December 31, 2023, the Company continued to report resultsinclude an adjustment in the definition of adjusted EBITDA for periodsthe impact of deferred revenue write-downs from business acquired prior to January 1, 2018 under the old revenue recognition standard (ASC 605). To allow for comparability against 2017 results, the financial outlook below with respect to anticipated 2018 results does not include2022 given the impact of ASC 606 but instead has been determined utilizing the ASC 605such deferred revenue recognition standard.
Beginning withon our financial statementsresults.
Adjusted EBITDA is a non-GAAP financial measure and should not be considered as a measure of financial performance under GAAP. Because adjusted EBITDA is not a measurement determined in accordance with GAAP, adjusted EBITDA is susceptible to varying calculations. Accordingly, adjusted EBITDA, as presented, may not be comparable to other similarly titled measures of other companies and has limitations as an analytical tool.
This non-GAAP financial measure should not be considered as a substitute for, or superior to, measures of financial performance which are prepared in accordance with U.S. GAAP.
A reconciliation of adjusted EBITDA to the most directly comparable GAAP measure (net income) for the quarter ending March 31, 2018, the historical financial results of the PX business for periods prior to the closing of this transaction will be reflected in the Company’s consolidated financial statements as discontinued operations. Accordingly, this financial outlook does not include (a) the gain on the sale of our Patient Experience business, which we completed on February 12, 2018, or (b) the results of our Patient Experience business during the period in 2018 prior to the sale of such business, or the results of our Patient Experience in 2017 for financial outlook comparison purposes.
For 2018 we anticipate that consolidated revenues will increase six to eight percent as compared to 2017. We anticipate that revenue growth in our Workforce Solutions segment will be in the four to six percent range and our Provider Solutions segment to grow 10 to 20 percent when compared to 2017.
We anticipate operating income for 2018 to increase between 20 and 30 percent as compared to 2017.
We anticipate that capital expenditures will be approximately $20 million during 2018. We expect the annual effective income tax rate to range between 26 percent and 28 percent for 2018.
This guidance does not include the impact of any acquisitions that we may complete during 2018.
SELECTED QUARTERLY OPERATING RESULTS
The following tables set forth selected statements of income data for each of the four quarters in the periodsyears ended December 31, 20172023 and December 31, 2016, respectively. The information for each quarter has been prepared on the same basis as the audited statements included in other parts of this report and, in our opinion, includes all adjustments, consisting of only normal recurring adjustments, necessary for a fair presentation of the results of operations for these periods. You should read this information in conjunction with HealthStream’s Consolidated Financial Statements and related notes thereto included elsewhere in this report. The operating results for any quarter are not necessarily indicative of the results to be expected in the future.
Revenues from our subscription-based products are recognized ratably over the subscription term. Patient experience revenues are impacted by seasonal factors resulting from the volume, timing, and frequency of survey cycles.2022, is set forth below (in thousands).
Quarter Ended | ||||||||||||||||
March 31, 2017 | June 30, 2017 | September 30, 2017 | December 31, 2017 | |||||||||||||
| (In thousands, except per share data) | ||||||||||||||||
STATEMENT OF INCOME DATA: | ||||||||||||||||
Revenues, net | $ | 59,870 | $ | 61,481 | $ | 63,553 | $ | 62,758 | ||||||||
Total operating costs and expenses | 58,037 | 58,626 | 59,571 | 61,629 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Operating income | 1,833 | 2,855 | 3,982 | 1,129 | ||||||||||||
Net income | $ | 1,285 | $ | 2,266 | $ | 2,504 | $ | 3,948 | ||||||||
|
|
|
|
|
|
|
| |||||||||
Net income per share(1): | ||||||||||||||||
Basic | $ | 0.04 | $ | 0.07 | $ | 0.08 | $ | 0.12 | ||||||||
|
|
|
|
|
|
|
| |||||||||
Diluted | $ | 0.04 | $ | 0.07 | $ | 0.08 | $ | 0.12 | ||||||||
|
|
|
|
|
|
|
| |||||||||
Weighted average shares of common stock outstanding: | ||||||||||||||||
Basic | 31,774 | 31,876 | 31,893 | 31,902 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Diluted | 32,104 | 32,229 | 32,217 | 32,236 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Quarter Ended | ||||||||||||||||
March 31, 2016 | June 30, 2016 | September 30, 2016 | December 31, 2016 | |||||||||||||
| (In thousands, except per share data) | ||||||||||||||||
STATEMENT OF INCOME DATA: | ||||||||||||||||
Revenues, net | $ | 54,078 | $ | 54,793 | $ | 58,367 | $ | 58,737 | ||||||||
Total operating costs and expenses | 51,592 | 52,477 | 57,081 | 59,258 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Operating income (loss) | 2,486 | 2,316 | 1,286 | (521) | ||||||||||||
Net income (loss) | $ | 1,501 | $ | 1,403 | $ | 1,162 | $ | (311) | ||||||||
|
|
|
|
|
|
|
| |||||||||
Net income (loss) per share(1): | ||||||||||||||||
Basic | $ | 0.05 | $ | 0.04 | $ | 0.04 | $ | (0.01) | ||||||||
|
|
|
|
|
|
|
| |||||||||
Diluted | $ | 0.05 | $ | 0.04 | $ | 0.04 | $ | (0.01) | ||||||||
|
|
|
|
|
|
|
| |||||||||
Weighted average shares of common stock outstanding: | ||||||||||||||||
Basic | 31,666 | 31,736 | 31,739 | 31,743 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Diluted | 31,974 | 32,071 | 32,107 | 31,743 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
2023 | 2022 | |||||||
GAAP net income | $ | 15,213 | $ | 12,091 | ||||
Deferred revenue write-down | 212 | 267 | ||||||
Interest income | (2,356 | ) | (444 | ) | ||||
Interest expense | 124 | 132 | ||||||
Income tax provision | 3,298 | 3,494 | ||||||
Stock-based compensation expense | 4,153 | 3,554 | ||||||
Depreciation and amortization | 41,076 | 37,945 | ||||||
Change in fair value of non-marketable equity investments | (425 | ) | (3,596 | ) | ||||
Adjusted EBITDA | $ | 61,295 | $ | 53,443 | ||||
(1) – Due to the nature
Liquidity and Capital Resources
Net cash provided by operating activities was approximately $46.7$64.0 million during 20172023, compared to $24.2$51.2 million during 2016,2022, an increase of 93%25%. The primary sourcesincrease resulted from improved operating results, including efficiencies realized after the previously disclosed elimination of 33 jobs roles as part of the consolidation of HealthStream's business under a single platform strategy, and higher cash were generated from receipts fromcollections compared to the sales of our products and services.prior year. The number of days sales outstanding (DSO) was 6346 days for 2017 compared to 66 days for 2016.both 2023 and 2022. The Company calculates DSO by dividing the average accounts receivable balance (excluding unbilled and other receivables) by average daily revenues for the year. The Company’s primary sources of cash were receipts generated from the sales of our products and services. The primary uses of cash to fund operations included personnel expenses, sales commissions, royalty payments, payments for contract labor and other direct expenses associated with delivery of our products and services, income tax payments, and general corporate expenses.
Net cash used in investing activities was approximately $11.6$56.6 million during 2017 and $56.72023, compared to $28.4 million during 2016.2022. During 2017,2023, the Company purchased $83.3spent $6.6 million for the acquisition of substantially all of the assets of eeds (note: the eeds was acquisition was consummated on December 31, 2022, but was funded in January 2023 such that the purchase price for eeds impacted net cash used in investing activities during the year ended December 31, 2023), invested in marketable securities spent $11.9of $50.3 million, made payments for capitalized software development purchased $6.0of $25.8 million, ofand purchased property and equipment and invested $500,000 in a cost method investee.of $2.2 million. These uses of cash were partially offset by $28.3 million in maturities of marketable securities. During 2022, the Company paid $3.9 million in cash (plus shares issued by the Company in a private placement), net of cash acquired, for the acquisition of CloudCME, and on a net basis paid $0.1 million upon settling post-closing adjustments related to the ComplyALIGN and Rievent acquisitions which closed during 2021 (resulting in a net cash outflow of $4.0 million), invested in marketable securities of $90.1 million. During 2016, the Company utilized $55.3$13.5 million, (net of cash acquired) for acquisitions, purchased $107.0 million of marketable securities, spent $9.7 millionmade payments for capitalized software development of $23.3 million, and purchased $5.1 million of property and equipment.equipment of $1.8 million. These uses of cash were partially offset by $10.6 million in maturities of marketable securities of $119.4and $3.5 million andin proceeds from the sale of long lived assets of $975,000.
Cash provided byused in financing activities was approximately $1,000$13.0 million during 2017 and $46,0002023, compared to $23.7 million during 2016. During 2017, the2022. The primary sourceuses of cash fromin financing activities resulted from $413,000 fromduring 2023 included $8.9 million for repurchases of common stock, $3.1 million for the exercise of employee stock options. The primary usepayment of cash during 2017 related to $412,000dividends, $0.9 million for payments of payroll taxes from stock basedrelated to stock-based compensation, arrangements.and $0.1 million associated with the renewal of the revolving credit facility loan agreement. During 2016,2022, the primary sourceuse of cash fromin financing activities resulted from $217,000included $23.1 million for repurchases of excess tax benefits from equity awardscommon stock and $145,000 from the exercise of employee stock options. The primary uses of cash during 2016 related to $316,000$0.6 million for payments of payroll taxes from stock based compensation arrangements.related to stock-based compensation.
On October 6, 2023, the Company entered into a new revolving credit facility, which amended and replaced our prior revolving credit facility. There currently are no outstanding borrowings under the new revolving credit facility. For additional information regarding the new revolving credit facility, see Note 12 to the Consolidated Financial Statements included herein.
Our balance sheet reflectsreflected positive working capital of $98.7$11.8 million at December 31, 20172023, compared to $82.5negative working capital of $2.8 million at December 31, 2016.2022. The increase in working capital was primarily due to netincreases in cash provided by operating activities, partially offset by an increase in current liabilities.and cash equivalents and marketable securities. The Company’s primary source of liquidity is $131.1was $71.1 million of cash and cash equivalents and marketable securities.securities as of December 31, 2023. The Company also has a $50.0 million revolving credit facility loan agreement, all of which was available at December 31, 2017.2023.
On February 20, 2023, our Board approved a quarterly dividend policy. The Board of Directors authorized the following quarterly dividend payments during 2023 pursuant to this policy:
Dividend Payment Date | Dividend Declaration Date | Dividend Per Share | Record Date | Cash Outlay | ||||||
April 28, 2023 | February 20, 2023 | $ | 0.025 | April 17, 2023 | $ | 767,000 | ||||
June 23, 2023 | April 24, 2023 | 0.025 | June 12, 2023 | 767,000 | ||||||
| September 29, 2023 | July 24, 2023 | 0.025 | September 18, 2023 | 767,000 | ||||||
December 22, 2023 | October 23, 2023 | 0.025 | December 11, 2023 | 757,000 | ||||||
Total dividends | $ | 0.10 | $ | 3,058,000 | ||||||
The dividend policy and the declaration and payment of each quarterly cash dividend will be subject to our Board’s continuing determination that the policy and the declaration of dividends thereunder are in the best interests of our stockholders and are in compliance with applicable law and our credit agreement. Our Board retains the power to modify, suspend, or cancel the dividend policy in any manner and at any time that our Board may deem necessary or appropriate.
The Company's contractual obligations arising in the normal course of business primarily consist of operating lease obligations and purchase obligations. The amounts included as contractual obligations represent the non-cancelable portion of agreements or the minimum cancellation fee. As further discussed in Note 13 to the Company's Consolidated Financial Statements, as of December 31, 2023, we had operating lease obligations of approximately $29.0 million, of which $4.3 million is expected to be paid within 12 months. The Company's purchase obligations that represent non-cancelable contractual obligations primarily relate to information technology assets and our revolving credit facility, which facility is described further in Note 12 to the Company's Consolidated Financial Statements. As of December 31, 2023, the Company had purchase obligations of $9.2 million, with $6.5 million expected to be paid within 12 months. We believe that our existing cash and cash equivalents, marketable securities, cash generated from operations, and available borrowings under our revolving credit facility will be sufficient to meet anticipated working capital needs, new product development, effect any share repurchases we may elect to make, pay our quarterly cash dividends, and fund capital expenditures for at least the next 12 months.months and for the foreseeable future thereafter.
The Company’s growth strategy includes acquiring businesses that provide complementary productproducts and services. It is anticipated that future acquisitions, if any, would be effected through cash consideration, stock consideration, or a combination of both. The issuance of our stock as consideration for an acquisition or to raise additional capital could have a dilutive effect on earnings per share and could adversely affect our stock price. The revolving credit facility contains financial covenants and availability calculations designed to set a maximum leverage ratio of outstanding debt to consolidated EBITDA (as defined in our credit facility) and an interest coverage ratio of consolidated EBITDA to interest expense. Therefore, the maximum borrowings against the revolving credit facility would be dependent on the covenant values at the time of borrowing. As of December 31, 2017,2023, the Company was in material compliance with all covenants. There can be no assurance that amounts available for borrowing under our revolving credit facility will be sufficient to consummate any possible acquisitions, and we cannot assure yoube assured that if we need additional financing, that it will be available on terms favorable to us or at all. Failure to generate sufficient cash flow from operations or raise additional capital when required in sufficient amounts and on terms acceptable to us could harm our business, financial condition, and results of operations.
Off-Balance Sheet Arrangements and Contractual Obligations
The Company’soff-balance sheet arrangements primarily consist of operating leases, contractual obligations, and our revolving credit facility, which is described further in Note 13 to the Company’s consolidated financial statements contained elsewhere in this report.
The following table presents a summary of future anticipated payments due by the Company under contractual obligations with firm minimum commitments as of December 31, 2017, excluding amounts already recorded in the consolidated balance sheets (in thousands):
| Payments due by period | ||||||||||||||||||||
Less than 1 | 1-3 years | 3-5 years | More than 5 years | Total | ||||||||||||||||
Operating leases | $ | 4,720 | $ | 7,415 | $ | 7,494 | $ | 20,361 | $ | 39,990 | ||||||||||
Purchase obligations | 1,849 | 2,434 | -- | -- | 4,283 | |||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Total | $ | 6,569 | $ | 9,849 | $ | 7,494 | $ | 20,361 | $ | 44,273 | ||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Recent Accounting Pronouncements
In May 2014,November 2023, the FASBFinancial Accounting Standards Board (FASB) issued ASU2014-09, Revenue from ContractsAccounting Standards Update (ASU) 2023-07, Segment Reporting (Topic280):Improvements to Reportable Segment Disclosures. The new guidance requires disclosures of significant reportable segment expenses that are regularly provided to the CODM and other segment items on an interim and annual basis. Entities with Customers (Topic 606), which supersedesa single reportable segment will also be required to apply the revenue recognitiondisclosure requirements in Topic 605, Revenue Recognition,ASU 2023-07 on an interim and most industry-specific revenue recognition guidance throughout the Industry Topics of the Accounting Standards Codification.annual basis. The updated guidance states that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The guidance also provides for additional disclosures with respect to revenues and cash flows arising from contracts with customers. The standardASU will be effective for the first interim period within annual reporting periods beginning after December 15, 2017,2023, and the Company will adopt the standard using the modified retrospective approach effective January 1, 2018. In preparation for adoption of the standard, the Company implemented internal controls and key system functionality to enable the preparation of financial information and has reached conclusions on key accounting assessments related to the standard.
The most significant impact of the standard relates to capitalizing costs to acquire contracts, which have historically been expensed as incurred. As of December 31, 2017, the Company’s sales commission plans have included multiple payments, including initial payments in the period a customer contract is obtained and deferred payments either 15 or 27 months after the initial payment. Under the standard, only the initial payment is subject to capitalization as the deferred payments require a substantive performance condition of the employee. These initial commission payments will be capitalized in the period a customer contract is obtained and will be amortized consistent with the transfer of the goods or services to the customer over the expected period of benefit. The expected period of benefit is the contract term, except when the commission payment is expected to provide economic benefit to the Company for a period longer than the contract term, such as for new customer or incremental sales where renewals are expected and renewal commissions are not commensurate with initial commissions. Such commissions will be amortized over the greater of contract term or technological obsolescence period when the
underlying contracted products are technology-based, such as for the SaaS-based platforms, or the expected customer relationship period when the underlying contracted products are not technology-based, such as for patient experience survey products.
Additionally, the standard impacts several of the Company’s revenue streams. The primary streams affected are professional services and patient experience surveys. For professional services, the identification of performance obligations and the related timing of revenue recognition is changing such that revenues will be recognized earlier, during the period of service delivery, rather than over the related product’s contractual term. For patient experience surveys, revenues will correlate to survey delivery, which approximates ratable recognition over the contractual term, rather than the current method of spreading quarterly revenue over the five-month life cycle of the patient experience survey cycle.
The Company will finalize its calculation of the financial impact of the adoption of this accounting standard on its future consolidated financial statements in the first quarter of 2018. The Company anticipates adjustments to retained earnings of no more than $10 million and $16 million, net of related tax effects, upon adoption for revenue recognition and sales commissions, respectively. It is possible that the adoption of this standard could have an adverse impact on the timing of our revenue recognition and thus adversely impact the amount of our revenue in a particular period.
In January 2016, the FASB issued ASU2016-01, Financial Instruments – Overall (Sub Topic825-10), which addresses certain aspects of the recognition, measurement, presentation, and disclosure of financial instruments. The guidance will, among other things, require equity investments (except those accounted for under the equity method of accounting or those that result in consolidation of the investee) to be measured at fair value with changes in fair value recognized in net income. The standard will be effective for the first interim periodperiods within annual reporting periodsfiscal years beginning after December 15, 2017, and early2024. Early adoption of the ASU is permitted for only limited aspects of such guidance. The Company plansand should be applied retrospectively to adopt this ASU on January 1, 2018, and is currently reviewing this standard to assessall prior periods presented in the impact on its future consolidated financial statements.
In February 2016, the FASB issued ASU2016-02, Leases (Topic 842), which requires lessees to recognize assets and liabilities for most leases. The recognition, measurement and presentation of expenses and cash flows arising from a lease by a lessee is not expected to significantly change under such guidance; however, the Company is currently reviewing this standard to assessevaluating the impact on its future consolidated financial statements. The standard will be effective for the first interim period within annual reporting periods beginning after December 15, 2018,of adopting ASU 2023-07 and early adoption is permitted. The Company expects to adopt this ASU on January 1, 2019, andfor the year ending December 31, 2024.
In December 2023, the FASB issued ASU 2023-09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures, which requires public entities to provide disclosure of disaggregated information in the entity’s tax rate reconciliation, as well as disclosure of income taxes paid disaggregated by jurisdiction. The ASU is effective for fiscal years beginning after December 15, 2024, with early adoption permitted. The Company is currently evaluating the impact that adoption of thisadopting ASU will have on its consolidated financial position and results2023-09.
Item7A.Quantitative and Qualitative Disclosures about Market Risk
The Company is exposed to market risk from changes in interest rates.rates, foreign currency risk, and investment risk. We do not have any foreign currency exchange rate risk ormaterial commodity price risk.
Interest Rate Risk
As of December 31, 2017,2023, the Company had no outstanding debt. We may become subject to interest rate market risk associated with any future borrowings under our revolving credit facility. The interest rate under the revolving credit facility varies depending on the interest rate option selected by the Company plus a margin determined in accordance with a pricing grid. We are exposed to market risk with respect to our cash and investment balances, which approximated $131.1$71.1 million at December 31, 2017.2023. Assuming a hypothetical 10% decrease in interest rates, interest income from cash and investments would decrease on an annualized basis by approximately $183,000.$0.3 million.
Foreign Currency Risk
We have foreign currency risks related to our revenue and operating expenses denominated in currencies other than the U.S. dollar, including Canadian dollar, New Zealand dollar, and Australian dollar. Increases and decreases in our foreign-denominated revenue from movements in foreign exchange rates are often partially offset by the corresponding decreases or increases in our foreign-denominated operating expenses.
To the extent that our international operations grow, our risks associated with fluctuation in currency rates will become greater, and we will continue to assess our approach to managing this risk. In addition, currency fluctuations or a weakening U.S. dollar can increase the costs of our international operations. To date, we have not entered into any foreign currency hedging contracts although we may do so in the future.
Investment Risk
The Company’s investment policy and strategy is focused on investing in highly rated securities, with the objective of minimizing the potential risk of principal loss. The Company’s policy limits the amount of credit exposure to any single issuer and sets limits on the average portfolio maturity.
We have an investment portfolio that includes strategic investments in privately held companies, which primarily include early-stage companies. We primarily invest in healthcare technology companies that we believe can help expand our ecosystem. We may continue to make these types of strategic investments as opportunities arise that we find attractive. We may experience additional volatility to our Consolidated Financial Statements due to changes in market prices, observable price changes, and impairments to our strategic investments. These changes could be material based on market conditions and events.
The above market risk discussion and the estimated amounts presented areforward-looking statements of market risk assuming the occurrence of certain adverse market conditions. Actual results in the future may differ materially from those projected as a result of actual developments in the market.
Item8.Financial Statements and Supplementary Data
HEALTHSTREAM, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page | |||
Reports of Independent Registered Public Accounting Firm (PCAOB ID: 42) | |||
Report of Independent Registered Public Accounting Firm
To the Shareholders and the Board of Directors of HealthStream, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of HealthStream, Inc. (the Company) as of December 31, 20172023 and December 31, 2016,2022, the related consolidated statements of income, comprehensive income, shareholders’shareholders' equity and cash flows for each of the three years in the period ended December 31, 2017,2023, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 20172023 and 2016,2022, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2017,2023, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’sCompany's internal control over financial reporting as of December 31, 2017,2023, based on criteria established in Internal Control-IntegratedControl—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) and our report dated February 26, 2018,2024 expressed an unqualified opinion thereon.
Basis for Opinion
These financial statements are the responsibility of the Company’sCompany's management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures includeincluded examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments. The communication of the critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Revenue Recognition | ||
Description of the Matter | As described in Note 1 of the consolidated financial statements, the Company recognizes revenue when control of the promised goods or services is transferred to the customer in an amount that reflects the consideration the Company expects to be entitled in exchange for transferring those goods or services. The Company’s contracts with customers often contain promises for multiple goods and services. The Company accounts for the promised goods and services in its contracts as separate performance obligations if they are distinct. The transaction price is then allocated to the separate performance obligations on a relative standalone selling price basis. Auditing the Company’s accounting for revenue recognition was challenging due to the judgment and effort required to analyze the Company’s contracts to determine whether promised goods and services are distinct performance obligations and to determine stand-alone selling prices used to allocate the transaction price to those performance obligations. | |
How We Addressed the Matter in Our Audit | We obtained an understanding, evaluated the design and tested the operating effectiveness of controls over the Company's process to identify and evaluate performance obligations and determine the stand-alone selling prices used to allocate the transaction price to those performance obligations. Among other procedures to evaluate management’s identification and determination of the distinct performance obligations, we obtained an understanding of the Company’s various product and service offerings and tested the application of the revenue recognition accounting requirements to determine which performance obligations were distinct. To test management’s determination of relative standalone selling price for each performance obligation, we performed audit procedures that included, among others, assessing the methodology applied and testing the data underlying the Company’s calculations. We inspected a sample of customer contracts to assess management’s treatment of significant terms and tested the amounts recognized as revenue or recorded in deferred revenue. |
/s/ Ernst & Young LLP
We have served as the Company’s auditor since 1998. Nashville, Tennessee
|
Report of Independent Registered Public Accounting Firm
To the Shareholders and the Board of Directors of HealthStream, Inc.
Opinion on the Internal Control Over Financial Reporting
We have audited HealthStream, Inc.’s internal control over financial reporting as of December 31, 2017,2023, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria). In our opinion, HealthStream, Inc. (the Company) maintained, in all material respects, effective internal control over financial reporting as of December 31, 2017,2023, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of HealthStream, Inc.the Company as of December 31, 20172023 and 2016, and2022, the related consolidated statements of income, comprehensive income, shareholders’ equity and cash flows for each of the three years in the period ended December 31, 2017,2023, and the related notes and our report dated February 26, 2018,2024 expressed an unqualified opinion thereon.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Annual Report on Internal Control Overover Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with the respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.
Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ Ernst & Young LLP
/s/ Ernst & Young LLP |
Nashville, Tennessee |
February 26, 2024 |
Nashville, Tennessee
February 26, 2018
HEALTHSTREAM, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands)
| December 31, | December 31, | December 31, | December 31, | |||||||||||||
2017 | 2016 | 2023 | 2022 | |||||||||||||
| ASSETS | ||||||||||||||||
Current assets: | ||||||||||||||||
Cash and cash equivalents | $ | 84,768 | $ | 49,634 | $ | 40,333 | $ | 46,023 | ||||||||
Marketable securities | 46,350 | 53,540 | 30,800 | 7,885 | ||||||||||||
Accounts receivable, net of allowance for doubtful accounts of $2,205 and $863 at December 31, 2017 and 2016, respectively | 40,849 | �� | 44,805 | |||||||||||||
Accounts receivable, net of allowance of $781 and $544 at December 31, 2023 and 2022, respectively | 34,346 | 36,730 | ||||||||||||||
Accounts receivable- unbilled | 2,602 | 2,581 | 4,100 | 5,980 | ||||||||||||
Prepaid royalties, net of amortization | 16,174 | 18,183 | 10,202 | 9,071 | ||||||||||||
Prepaid software maintenance and subscriptions | 7,397 | 6,034 | ||||||||||||||
Other prepaid expenses and other current assets | 8,985 | 8,694 | 3,032 | 2,654 | ||||||||||||
|
| |||||||||||||||
Total current assets | 199,728 | 177,437 | 130,210 | 114,377 | ||||||||||||
Property and equipment, net of accumulated depreciation of $25,862 and $20,527 at December 31, 2017 and December 31, 2016, respectively | 8,992 | 10,245 | ||||||||||||||
Capitalized software development, net of accumulated amortization of $41,884 and $31,787 at December 31, 2017 and 2016, respectively | 18,697 | 16,310 | ||||||||||||||
Property and equipment, net of accumulated depreciation of $19,503 and $20,280 at December 31, 2023 and 2022, respectively | 13,005 | 15,483 | ||||||||||||||
Capitalized software development, net of accumulated amortization of $127,009 and $105,025 at December 31, 2023 and 2022, respectively | 40,643 | 37,118 | ||||||||||||||
Operating lease right of use assets, net | 20,114 | 22,759 | ||||||||||||||
Goodwill | 110,298 | 109,765 | 191,379 | 192,398 | ||||||||||||
Customer-related intangibles, net of accumulated amortization of $18,027 and $11,539 at December 31, 2017 and 2016, respectively | 59,958 | 66,446 | ||||||||||||||
Other intangible assets, net of accumulated amortization of $7,966 and $4,906 at December 31, 2017 and 2016, respectively | 8,858 | 11,918 | ||||||||||||||
Customer-related intangibles, net of accumulated amortization of $57,095 and $48,552 at December 31, 2023 and 2022, respectively | 54,742 | 61,269 | ||||||||||||||
Other intangible assets, net of accumulated amortization of $16,603 and $12,818 at December 31, 2023 and 2022, respectively | 13,289 | 20,284 | ||||||||||||||
Deferred commissions | 31,700 | 28,344 | ||||||||||||||
Non-marketable equity investments | 3,772 | 3,276 | 4,134 | 4,518 | ||||||||||||
Other assets | 771 | 603 | 726 | 1,191 | ||||||||||||
|
| |||||||||||||||
Total assets | $ | 411,074 | $ | 396,000 | $ | 499,942 | $ | 497,741 | ||||||||
|
| |||||||||||||||
| LIABILITIES AND SHAREHOLDERS’ EQUITY | ||||||||||||||||
Current liabilities: | ||||||||||||||||
Accounts payable | $ | 4,836 | $ | 3,127 | $ | 7,465 | $ | 7,287 | ||||||||
Accrued royalties | 12,877 | 13,161 | 4,556 | 5,443 | ||||||||||||
Accrued liabilities | 11,062 | 8,146 | 22,717 | 25,014 | ||||||||||||
Accrued compensation and related expenses | 3,337 | 1,994 | ||||||||||||||
Deferred revenue | 68,954 | 68,542 | 83,623 | 79,469 | ||||||||||||
|
| |||||||||||||||
Total current liabilities | 101,066 | 94,970 | 118,361 | 117,213 | ||||||||||||
Deferred tax liabilities | 1,926 | 5,968 | 16,132 | 17,996 | ||||||||||||
Deferred revenue, noncurrent | 6,302 | 7,859 | 2,169 | 2,937 | ||||||||||||
Other long term liabilities | 1,610 | 1,095 | ||||||||||||||
Operating lease liability, noncurrent | 20,247 | 23,321 | ||||||||||||||
Other long-term liabilities | 2,281 | 2,210 | ||||||||||||||
Commitments and contingencies | - | - | ||||||||||||||
Shareholders’ equity: | ||||||||||||||||
Common stock, no par value, 75,000 shares authorized; 31,908 and 31,748 shares issued and outstanding at December 31, 2017 and 2016, respectively | 282,666 | 280,813 | ||||||||||||||
Common stock, no par value, 75,000 shares authorized; 30,298 and 30,579 shares issued and outstanding at December 31, 2023 and 2022, respectively | 249,075 | 254,832 | ||||||||||||||
Retained earnings | 17,542 | 5,346 | 92,368 | 80,213 | ||||||||||||
Accumulated other comprehensive loss | (38) | (51) | (691 | ) | (981 | ) | ||||||||||
|
| |||||||||||||||
Total shareholders’ equity | 300,170 | 286,108 | 340,752 | 334,064 | ||||||||||||
|
| |||||||||||||||
Total liabilities and shareholders’ equity | $ | 411,074 | $ | 396,000 | $ | 499,942 | $ | 497,741 | ||||||||
|
| |||||||||||||||
See accompanying notes to the consolidated financial statements.
HEALTHSTREAM, INC.
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data)
| For the Year Ended December 31, | Year Ended December 31, | |||||||||||||||||||||||
2017 | 2016 | 2015 | 2023 | 2022 | 2021 | |||||||||||||||||||
Revenues, net | $ | 247,662 | $ | 225,974 | $ | 209,002 | $ | 279,063 | $ | 266,826 | $ | 256,712 | ||||||||||||
Operating costs and expenses: | ||||||||||||||||||||||||
Cost of revenues (excluding depreciation and amortization) | 106,000 | 96,634 | 89,386 | 95,021 | 91,143 | 91,033 | ||||||||||||||||||
Product development | 27,899 | 28,897 | 24,214 | 45,540 | 44,277 | 41,659 | ||||||||||||||||||
Sales and marketing | 42,915 | 39,004 | 35,589 | 45,743 | 44,146 | 39,457 | ||||||||||||||||||
Other general and administrative expenses | 34,765 | 33,665 | 29,259 | 35,664 | 36,866 | 39,695 | ||||||||||||||||||
Depreciation and amortization | 26,283 | 22,207 | 16,997 | 41,076 | 37,945 | 36,813 | ||||||||||||||||||
|
|
| ||||||||||||||||||||||
Total operating costs and expenses | 237,862 | 220,407 | 195,445 | 263,044 | 254,377 | 248,657 | ||||||||||||||||||
Operating income | 9,800 | 5,567 | 13,557 | 16,019 | 12,449 | 8,055 | ||||||||||||||||||
Other income, net | 733 | 581 | 162 | |||||||||||||||||||||
|
|
| ||||||||||||||||||||||
Other income (loss), net | 2,492 | 3,136 | (289 | ) | ||||||||||||||||||||
Income before income tax provision | 10,533 | 6,148 | 13,719 | 18,511 | 15,585 | 7,766 | ||||||||||||||||||
Income tax provision | 529 | 2,393 | 5,098 | 3,298 | 3,494 | 1,921 | ||||||||||||||||||
|
|
| ||||||||||||||||||||||
Net income | $ | 10,004 | $ | 3,755 | $ | 8,621 | $ | 15,213 | $ | 12,091 | $ | 5,845 | ||||||||||||
|
|
| ||||||||||||||||||||||
Net income per share: | ||||||||||||||||||||||||
Basic | $ | 0.31 | $ | 0.12 | $ | 0.29 | $ | 0.50 | $ | 0.39 | $ | 0.19 | ||||||||||||
|
|
| ||||||||||||||||||||||
Diluted | $ | 0.31 | $ | 0.12 | $ | 0.28 | $ | 0.50 | $ | 0.39 | $ | 0.18 | ||||||||||||
|
|
| ||||||||||||||||||||||
Weighted average shares of common stock outstanding: | ||||||||||||||||||||||||
Basic | 31,861 | 31,721 | 30,057 | 30,571 | 30,648 | 31,534 | ||||||||||||||||||
|
|
| ||||||||||||||||||||||
Diluted | 32,196 | 32,068 | 30,436 | 30,673 | 30,717 | 31,618 | ||||||||||||||||||
|
|
| ||||||||||||||||||||||
Dividends declared per share | $ | 0.10 | $ | — | $ | — | ||||||||||||||||||
See accompanying notes to the consolidated financial statements.
HEALTHSTREAM, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)
| For the Year Ended December 31, | Year Ended December 31, | |||||||||||||||||||||||
2017 | 2016 | 2015 | 2023 | 2022 | 2021 | |||||||||||||||||||
Net income | $ | 10,004 | $ | 3,755 | $ | 8,621 | $ | 15,213 | $ | 12,091 | $ | 5,845 | ||||||||||||
Other comprehensive income, net of taxes: | ||||||||||||||||||||||||
Unrealized gain (loss) on marketable securities | 13 | 19 | (33) | |||||||||||||||||||||
|
|
| ||||||||||||||||||||||
Foreign currency translation adjustments | 283 | (1,091 | ) | 99 | ||||||||||||||||||||
Unrealized gain on marketable securities | 7 | 4 | 6 | |||||||||||||||||||||
Total other comprehensive income (loss) | 13 | 19 | (33) | 290 | (1,087 | ) | 105 | |||||||||||||||||
|
|
| ||||||||||||||||||||||
Comprehensive income | $ | 10,017 | $ | 3,774 | $ | 8,588 | $ | 15,503 | $ | 11,004 | $ | 5,950 | ||||||||||||
|
|
| ||||||||||||||||||||||
See accompanying notes to the consolidated financial statements.
HEALTHSTREAM, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’SHAREHOLDERS’ EQUITY
(In thousands)
| Retained | Accumulated | |||||||||||||||||||
| Earnings | Other | Total | ||||||||||||||||||
| Common Stock | (Accumulated | Comprehensive | Shareholders’ | |||||||||||||||||
Shares | Amount | Deficit) | Income (Loss) | Equity | ||||||||||||||||
Balance at December 31, 2014 | 27,677 | 174,926 | (7,030) | (37) | 167,859 | |||||||||||||||
Net income | - | - | 8,621 | - | 8,621 | |||||||||||||||
Comprehensive loss | - | - | - | (33 | ) | (33 | ) | |||||||||||||
Issuance of common stock | 3,870 | 98,014 | - | - | 98,014 | |||||||||||||||
Stock donated to Company | (54 | ) | - | - | - | - | ||||||||||||||
Stock based compensation | - | 3,280 | - | - | 3,280 | |||||||||||||||
Tax benefits from equity awards | - | 3,008 | - | - | 3,008 | |||||||||||||||
Common stock issued under stock plans, net of shares withheld for employee taxes | 154 | (429 | ) | - | - | (429 | ) | |||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Balance at December 31, 2015 | 31,647 | 278,799 | 1,591 | (70) | 280,320 | |||||||||||||||
Net income | - | - | 3,755 | - | 3,755 | |||||||||||||||
Comprehensive income | - | - | - | 19 | 19 | |||||||||||||||
Stock based compensation | - | 1,968 | - | - | 1,968 | |||||||||||||||
Tax benefits from equity awards | - | 217 | - | - | 217 | |||||||||||||||
Common stock issued under stock plans, net of shares withheld for employee taxes | 101 | (171) | - | - | (171) | |||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Balance at December 31, 2016 | 31,748 | 280,813 | 5,346 | (51) | 286,108 | |||||||||||||||
Cumulative effect of accounting change | - | - | 2,192 | - | 2,192 | |||||||||||||||
Net income | - | - | 10,004 | - | 10,004 | |||||||||||||||
Comprehensive income | - | - | - | 13 | 13 | |||||||||||||||
Stock based compensation | - | 1,852 | - | - | 1,852 | |||||||||||||||
Common stock issued under stock plans, net of shares withheld for employee taxes | 160 | 1 | - | - | 1 | |||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Balance at December 31, 2017 | 31,908 | $ | 282,666 | $ | 17,542 | $ | (38) | $ | 300,170 | |||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
| Common Stock | Retained | Accumulated Other Comprehensive | Total Shareholders’ | |||||||||||||||||
Shares | Amount | Earnings | (Loss)/Income | Equity | ||||||||||||||||
Balance at December 31, 2020 | 31,493 | $ | 271,784 | $ | 62,277 | $ | 1 | $ | 334,062 | |||||||||||
Net income | — | — | 5,845 | — | 5,845 | |||||||||||||||
Comprehensive income | — | — | — | 105 | 105 | |||||||||||||||
Stock donated to Company (held in treasury) | (94 | ) | — | — | — | — | ||||||||||||||
Stock-based compensation | — | 5,303 | — | — | 5,303 | |||||||||||||||
Common stock issued under stock plans, net of shares withheld for employee taxes | 131 | (1,182 | ) | — | — | (1,182 | ) | |||||||||||||
Repurchase of common stock | (203 | ) | (5,114 | ) | — | — | (5,114 | ) | ||||||||||||
Balance at December 31, 2021 | 31,327 | 270,791 | 68,122 | 106 | 339,019 | |||||||||||||||
Net income | — | — | 12,091 | — | 12,091 | |||||||||||||||
Comprehensive loss | — | — | — | (1,087 | ) | (1,087 | ) | |||||||||||||
Issuance of common stock in acquisition | 209 | 4,084 | — | — | 4,084 | |||||||||||||||
Stock-based compensation | — | 3,554 | — | — | 3,554 | |||||||||||||||
Common stock issued under stock plans, net of shares withheld for employee taxes | 95 | (565 | ) | — | — | (565 | ) | |||||||||||||
Repurchase of common stock | (1,052 | ) | (23,032 | ) | — | — | (23,032 | ) | ||||||||||||
Balance at December 31, 2022 | 30,579 | 254,832 | 80,213 | (981 | ) | 334,064 | ||||||||||||||
Net income | — | — | 15,213 | — | 15,213 | |||||||||||||||
Comprehensive income | — | — | — | 290 | 290 | |||||||||||||||
Dividends declared on common stock ($0.100 per share) | — | — | (3,058 | ) | — | (3,058 | ) | |||||||||||||
Stock-based compensation | — | 4,153 | — | — | 4,153 | |||||||||||||||
Common stock issued under stock plans, net of shares withheld for employee taxes | 123 | (934 | ) | — | — | (934 | ) | |||||||||||||
Excise tax on repurchase of common stock | — | (47 | ) | — | — | (47 | ) | |||||||||||||
Repurchase of common stock | (404 | ) | (8,929 | ) | — | — | (8,929 | ) | ||||||||||||
Balance at December 31, 2023 | 30,298 | $ | 249,075 | $ | 92,368 | $ | (691 | ) | $ | 340,752 | ||||||||||
See accompanying notes to the consolidated financial statements.
HEALTHSTREAM, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
| For the Year Ended December 31, | ||||||||||||
2017 | 2016 | 2015 | ||||||||||
OPERATING ACTIVITIES: | ||||||||||||
Net income | $ | 10,004 | $ | 3,755 | $ | 8,621 | ||||||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||||||
Depreciation and amortization | 26,283 | 22,207 | 16,997 | |||||||||
Deferred income taxes | (2,045) | 1,786 | 392 | |||||||||
Share based compensation expense | 1,852 | 1,968 | 3,280 | |||||||||
Excess tax benefits from equity awards | - | (217) | (3,008) | |||||||||
Provision for doubtful accounts | 1,813 | 640 | 284 | |||||||||
Loss (gain) onnon-marketable equity investments | 5 | (121) | 117 | |||||||||
Gain on sale of long-lived assets | - | - | (72) | |||||||||
Loss on disposal of fixed assets | 97 | - | - | |||||||||
Other | 408 | 1,026 | 1,401 | |||||||||
Changes in assets and liabilities, net of business combinations: | ||||||||||||
Accounts and unbilled receivables | 1,125 | (6,079) | (736) | |||||||||
Prepaid royalties | 2,008 | (4,008) | (1,006) | |||||||||
Other prepaid expenses and other current assets | (225) | (1,462) | (1,372) | |||||||||
Other assets | (168) | 305 | 1,110 | |||||||||
Accounts payable | 2,284 | (1,319) | (137) | |||||||||
Accrued royalties | (29) | 3,691 | (202) | |||||||||
Accrued liabilities, accrued compensation and related expenses, and other long-term | 4,106 | (884) | 3,075 | |||||||||
Deferred revenue | (806) | 2,946 | 6,173 | |||||||||
|
|
|
|
|
| |||||||
Net cash provided by operating activities | 46,712 | 24,234 | 34,917 | |||||||||
|
|
|
|
|
| |||||||
INVESTING ACTIVITIES: | ||||||||||||
Business combinations, net of cash acquired | - | (55,255) | (88,075) | |||||||||
Proceeds from maturities of marketable securities | 90,073 | 119,395 | 54,799 | |||||||||
Purchases of marketable securities | (83,279) | (106,965) | (84,228) | |||||||||
Payments to acquire equity method investments | - | - | (1,000) | |||||||||
Payments to acquire cost method investments | (500) | - | (1,000) | |||||||||
Proceeds for sale of long-lived assets | - | 975 | - | |||||||||
Payments associated with capitalized software development | (11,856) | (9,721) | (7,265) | |||||||||
Purchases of property and equipment | (6,017) | (5,085) | (8,094) | |||||||||
|
|
|
|
|
| |||||||
Net cash used in investing activities | (11,579) | (56,656) | (134,863) | |||||||||
|
|
|
|
|
| |||||||
FINANCING ACTIVITIES: | ||||||||||||
Proceeds from issuance of common stock | - | - | 98,014 | |||||||||
Proceeds from exercise of stock options | 413 | 145 | 328 | |||||||||
Proceeds from borrowings under revolving line of credit facility | - | - | 28,000 | |||||||||
Repayments under revolving line of credit facility | - | - | (28,000) | |||||||||
Taxes paid related to net settlement of equity awards | (412) | (316) | (756) | |||||||||
Excess tax benefits from equity awards | - | 217 | 3,008 | |||||||||
Payment of earn-outs related to business combinations | - | - | (633) | |||||||||
|
|
|
|
|
| |||||||
Net cash provided by financing activities | 1 | 46 | 99,961 | |||||||||
|
|
|
|
|
| |||||||
Net increase (decrease) in cash and cash equivalents | 35,134 | (32,376) | 15 | |||||||||
Cash and cash equivalents at beginning of year | 49,634 | 82,010 | 81,995 | |||||||||
|
|
|
|
|
| |||||||
Cash and cash equivalents at end of year | $ | 84,768 | $ | 49,634 | $ | 82,010 | ||||||
|
|
|
|
|
| |||||||
SUPPLEMENTAL CASH FLOW INFORMATION: | ||||||||||||
Interest paid | $ | 101 | $ | 76 | $ | 190 | ||||||
|
|
|
|
|
| |||||||
Income taxes paid | $ | 638 | $ | 2,496 | $ | 2,648 | ||||||
|
|
|
|
|
| |||||||
NON-CASH INVESTING AND FINANCING ACTIVITIES: | ||||||||||||
Receivable from sale of long-lived assets | $ | - | $ | - | $ | 975 | ||||||
|
|
|
|
|
| |||||||
Year Ended December 31, | ||||||||||||
2023 | 2022 | 2021 | ||||||||||
OPERATING ACTIVITIES: | ||||||||||||
Net income | $ | 15,213 | $ | 12,091 | $ | 5,845 | ||||||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||||||
Depreciation and amortization | 41,076 | 37,945 | 36,813 | |||||||||
Stock-based compensation | 4,153 | 3,554 | 5,303 | |||||||||
Amortization of deferred commissions | 11,495 | 10,599 | 9,169 | |||||||||
Provision for credit losses | 1,021 | 385 | 723 | |||||||||
Deferred income taxes | (1,725 | ) | 710 | 1,539 | ||||||||
(Gain) loss on disposal of fixed assets | — | (25 | ) | 21 | ||||||||
Loss on equity method investments | 384 | 747 | 462 | |||||||||
Non-cash paid time off expense | — | — | (1,011 | ) | ||||||||
Change in fair value of non-marketable equity investments | (425 | ) | (3,596 | ) | (279 | ) | ||||||
Other | (891 | ) | 3 | 184 | ||||||||
Changes in operating assets and liabilities: | ||||||||||||
Accounts and unbilled receivables | 3,243 | (7,770 | ) | 10,344 | ||||||||
Prepaid royalties | (1,131 | ) | 84 | 416 | ||||||||
Other prepaid expenses and other current assets | (1,243 | ) | 2,329 | 1,772 | ||||||||
Deferred commissions | (14,852 | ) | (14,931 | ) | (13,274 | ) | ||||||
Other assets | 328 | 208 | 52 | |||||||||
Accounts payable and accrued expenses | 4,825 | 3,742 | (4,329 | ) | ||||||||
Accrued royalties | (887 | ) | 406 | (3,772 | ) | |||||||
Deferred revenue | 3,386 | 4,707 | (7,593 | ) | ||||||||
Net cash provided by operating activities | 63,970 | 51,188 | 42,385 | |||||||||
INVESTING ACTIVITIES: | ||||||||||||
Business combinations, net of cash acquired | (6,621 | ) | (3,965 | ) | (4,705 | ) | ||||||
Proceeds from maturities of marketable securities | 28,250 | 10,625 | 9,931 | |||||||||
Purchases of marketable securities | (50,268 | ) | (13,467 | ) | (5,223 | ) | ||||||
Proceeds from sale of fixed assets | — | 26 | — | |||||||||
Proceeds from sale of non-marketable equity investments | 47 | 3,494 | 1,370 | |||||||||
Payments to acquire non-marketable equity investments | — | — | (1,750 | ) | ||||||||
Payments associated with capitalized software development | (25,806 | ) | (23,334 | ) | (21,929 | ) | ||||||
Purchases of property and equipment | (2,200 | ) | (1,768 | ) | (3,417 | ) | ||||||
Net cash used in investing activities | (56,598 | ) | (28,389 | ) | (25,723 | ) | ||||||
FINANCING ACTIVITIES: | ||||||||||||
Taxes paid related to net settlement of equity awards | (934 | ) | (565 | ) | (1,182 | ) | ||||||
Payment of debt issue costs | (118 | ) | — | — | ||||||||
Repurchases of common stock | (8,929 | ) | (23,137 | ) | (5,008 | ) | ||||||
Payment of cash dividends | (3,058 | ) | — | (19 | ) | |||||||
Net cash used in financing activities | (13,039 | ) | (23,702 | ) | (6,209 | ) | ||||||
Effect of exchange rate changes on cash and cash equivalents | (23 | ) | 21 | (114 | ) | |||||||
Net (decrease) increase in cash and cash equivalents | (5,690 | ) | (882 | ) | 10,339 | |||||||
Cash and cash equivalents at beginning of period | 46,023 | 46,905 | 36,566 | |||||||||
Cash and cash equivalents at end of period | $ | 40,333 | $ | 46,023 | $ | 46,905 | ||||||
SUPPLEMENTAL CASH FLOW INFORMATION: | ||||||||||||
Interest paid | $ | 132 | $ | 99 | $ | 132 | ||||||
Income taxes paid (refunded) | $ | 2,611 | $ | 718 | $ | (92 | ) | |||||
See accompanying notes to the consolidated financial statements.
HEALTHSTREAM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Reporting Entity and Segments
Description of Business
HealthStream, Inc. (the “Company”"Company") was incorporated in 1990 as a Tennessee corporation and is headquartered in Nashville, Tennessee. As of December 31, 2017, theThe Company operated in three segments: HealthStream Workforce Solutions, HealthStream Patient Experience Solutions, and HealthStream Provider Solutions. Workforce Solutions products consist ofsoftware-as-a-service (“SaaS”primarily provides Software-as-a-Service ("SaaS") based servicesapplications for healthcare organizations—all designed to improve business and subscription-based solutions to meetclinical outcomes by supporting the ongoing training, certification, assessment, and development needs of the healthcare community. These solutions provide,people who deliver and track online education for our customers in the United States through our SaaS model. Patient Experience products offerpatient care. The Company is focused on helping healthcare organizations a wide range of qualitymeet their ongoing clinical development, talent management, training, education, assessment, competency management, safety and satisfaction surveys, consulting services, analyses of survey results,compliance, scheduling, and other research-based services. Provider Solutions products offer healthcare organizations software applications for administering and tracking provider credentialing, privileging, call center, and enrollment activities.
Recently Adopted Accounting Standards
needs. The Company adopted the Financial Accounting Standards Board (“FASB”) Accounting Standards Update (“ASU”)2016-09, Improvementsis organized and operated according to Employee Share-Based Payment Accounting, effective January 1, 2017. As a result of the adoption, the Company recorded an adjustment to retained earnings of approximately $2.2 million to recognize deferred tax assets associated with previous excess tax benefits on stock based compensation that had not been previously recognized because the related tax deduction had not reduced income taxes payable. The Company elected to continue to estimate expected forfeitures rather than account for them as they occur and to prospectively reflect the presentation of excess tax benefits on the statement of cash flows as an operating activity. In addition, effective January 1, 2017, excess tax benefits or deficiencies from equity based awards is reflected in the statement of income as a component of the provision for income taxes.
In January 2017, the FASB issued ASU2017-04, Simplifying the Test for Goodwill Impairment, which simplifies the measurement of goodwill by eliminating Step 2 from the goodwill impairment test. With the elimination of Step 2, entities will measure goodwill for impairment by comparing the fair value of the reporting unitits One HealthStream approach, with its carrying amount. An impairment charge should be recognized forhStream technology platform at the amountcenter of that approach. Increasingly, SaaS-based applications in its diverse ecosystem of solutions utilize its proprietary hStream technology platform to enhance their value proposition by which the carrying amount exceeds the reporting unit’s fair value, only to the extent of the carrying value of goodwill allocated to that reporting unit. The Company elected to early adopt ASU2017-04 effective January 1, 2017creating interoperability with and is required to apply the new guidance on a prospective basis. The adoption is not expected to have a material effect on the Company’s consolidated financial statements. The Company anticipates the new guidance will make the goodwill impairment evaluation process more efficient and cost effective.among other applications.
Recognition of Revenue
Revenues
In accordance with Accounting Standards Codification ("ASC") 606,Revenue from Contracts with Customers, the Company's revenues are derived fromrecognized when control of the promised goods or services is transferred to the customer in an amount that reflects the consideration the Company expects to be entitled in exchange for transferring those goods or services.
Revenue is recognized based on the following five step model:
• | Identification of the contract with a customer |
• | Identification of the performance obligations in the contract |
• | Determination of the transaction price |
• | Allocation of the transaction price to the performance obligations in the contract |
• | Recognition of revenue when, or as, the Company satisfies a performance obligation |
Subscription revenues primarily consist of fees in consideration of providing services through ourcustomers access to one or more of its SaaS-based workforce development platform products,solutions and/or courseware subscriptions, provisionas well as fees related to licensing agreements, all of surveywhich include routine customer support and researchtechnology enhancements. Revenue is generally recognized over time during the contract term beginning when the service is made available to the customer. Subscription contracts are generally non-cancelable, one to five years in length, and billed annually, semi-annually, quarterly, or monthly in advance.
Professional services salesrevenues primarily consist of software licensing arrangements, software maintenancefees for implementation and support,onboarding services, consulting, and training. The majority of professional services custom courseware development,contracts are billed in advance based on a fixed price basis, and other educationrevenue is recognized over time as the services are performed. For both subscription services and trainingprofessional services, the time between billing the customer and when performance obligations are satisfied is generally not significant.
Contracts with customers often contain promises for multiple goods and services. For these contracts, the Company accounts for the promised goods and services in its contracts as separate performance obligations if they are distinct. The contract price, which represents transaction price when the contract reflects a fixed fee arrangement, or management’s estimate of variable consideration including application of the constraint when the contract does not have a fixed fee, is allocated to the separate performance obligations on a relative standalone selling price basis. The Company generally determines standalone selling prices based on the standard list price for each product, taking into consideration certain factors, including contract length and the number of subscriptions within the contract.
The Company recognizes revenue when it is realized or realizablereceives payments from customers based on billing schedules established in its contracts. Accounts receivable - unbilled represent contract assets related to its conditional right to consideration for subscription and earned. The Company considers revenue realized or realizable and earned when persuasive evidenceprofessional services contracts where performance has occurred under the contract. Accounts receivable are primarily comprised of trade receivables that are recorded at the invoice amount, net of an arrangement exists, prices are fixed or determinable, services and products are providedallowance for credit losses, when the right to the customer and collectability is probable or reasonably assured.
Revenue recognized from software and other arrangements is allocated to each element of the arrangement based on the relative fair values of the elements. While elements include software products and post contract customer support, the fair value of each element is based on vendor specific objective evidence (“VSOE”). For installed software products, if fair value cannot be determined for each undelivered element of the arrangement, all revenue from the arrangement is deferred until fair value can be determined or until all elements of the arrangement are delivered and customer acceptance has occurred. Sales of the Company’s SaaS-based workforce development platform products include customer support, implementation services, and training; therefore all revenues are deferred until the SaaS-based product is implemented, at which time revenues are recognized ratably over the subscription service period. In the event that circumstances occur which give rise to uncertainty regarding the collectibility of contracted amounts, revenue recognition is suspended until such uncertainty is resolved. Fees for these services are billed on either a monthly, quarterly, or annual basis.
Revenues derived from the delivery of services through the Company’s SaaS-based workforce development platform products and courseware subscriptions are recognized ratably over the term of the subscription service agreement or over the historical usage period, if usage typically differs from the subscription period. Training revenues are generally recognized upon the completion of training.
HEALTHSTREAM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)Deferred revenue represents contract liabilities that are recorded when cash payments are received or are due in advance of satisfaction of performance obligations.
Revenues derived from the license
Basis of the software, when VSOE of fair value for the undelivered elements within the contract can be established. If the Company cannot objectively determine the fair value of each undelivered element based on the VSOE of fair value, the Company defers revenue recognition until all elements are delivered, all services have been performed, or until fair value can be objectively determined. Software support and maintenance revenues are recognized ratably over the term of the related agreement.Presentation
Revenues recognized from the Company’s survey and research services are determined using both the proportional performance method and the completed contract method. Revenues are generally earned over the estimated survey cycle, which typically ranges from less than one month to up to five months. The survey cycle is generally initiated based on the receipt of the first survey response and runs through provision of related survey reports to the customer. If survey results are not available to the customer during the survey fielding cycle, revenues are recognized at time of report delivery. Revenues for coaching and consulting engagements are recognized using the proportional performance method over the term of the underlying contract. Fees for survey services are billed upon initiation of the survey cycle, with progress billings made throughout the survey cycle. Fees for coaching and consulting engagements are billed upon initiation of the engagement with progress billings throughout the term of the contract.
Revenues from professional services and courseware development services are recognized upon the completion of performance milestones and deliverables using the proportional performance method. All other revenues are recognized as the related services are performed or products are delivered. Fees for these services are generally billed at project initiation and upon completion of various milestones.
Principles of Consolidation
The consolidated financial statementsConsolidated Financial Statements include the accounts of the Company and itswholly-owned wholly owned subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation.
Business Segments
The Company’s chief operating decision maker ("CODM") is its Chief Executive Officer. Since January 1, 2023, the Company’s business has been organized and managed around a consolidated, enterprise approach, including with regard to technology, operations, accounting, internal reporting (including the nature of information reviewed by the CODM), organization structure, compensation, performance assessment, and resource allocation. The Company’s CODM uses consolidated financial information to make operating decisions, assess financial performance, and allocate resources. Discrete financial information to measure profitability is not prepared at any other level. Taking these factors into account, since January 1, 2023, the Company has a single reportable segment, such that the Company has presented historical financial information and comparable performance on a single segment basis in this Annual Report on Form 10-K for the year ended December 31, 2023.
Use of Estimates
The consolidated financial statementsConsolidated Financial Statements are prepared in accordance with U.S.United States generally accepted accounting principles. These accounting principles require management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates and such differences could be material to the consolidated financial statements.Consolidated Financial Statements.
Cash Equivalents
The Company considers cash equivalents to be unrestricted, highly liquid investments with initial maturities of less than three months.
Marketable Securities
Marketable securities are classified as available for sale and are stated at fair market value, with the unrealized gains and losses, net of tax, reported in other accumulated comprehensive income (loss) on the accompanying consolidated balance sheets.Consolidated Balance Sheets. Realized gains and losses and declines in market value judgeddue to be other than temporarycredit-related factors on investments in marketable securities are included in interest and other income, net on the accompanying consolidated statementsConsolidated Statements of income.Income. The cost of securities sold is based on the specific identification method. Interest and dividends on securities classified as available for sale are included in other income, (expense)net on the accompanying consolidated statementsConsolidated Statements of income.Income. Premiums and discounts are amortized over the life of the related available for sale security as an adjustment to the yield using the effective interest method.
AccountsReceivable-Unbilled
Accountsreceivable-unbilled represents
Deferred Commissions
Deferred commissions represent incremental costs to acquire contracts with customers, such as the following: 1) revenue earnedsales commission payment and recognized on contracts accounted for usingassociated payroll taxes, which are capitalized and amortized consistent with the proportional performance method for which invoices have not been generatedtransfer of the goods or contractual billing dates have not been reached; and 2)services to the difference between billings for contracts containing escalated pricingcustomer over the expected period of benefit. Capitalized contract costs are included under the caption deferred commissions in the accompanying Consolidated Balance Sheets. The expected period of benefit is the contract term, except when the capitalized commission is expected to provide economic benefit to the Company for a period longer than the contract term, such as for new customer or incremental sales where renewals are expected and renewal commissions are not commensurate with initial commissions. Non-commensurate commissions are amortized over the greater of the agreement and the recognitioncontract term or technological obsolescence period of revenue ratably over the subscription period.
Deferred Revenue
Deferred revenue represents amounts that have been billed or collected in advance of revenue recognition. The Company typically invoices customers in quarterly,bi-annual, or annual installments. Deferred revenue is reduced as services are provided and the revenue recognition criteria are met.
HEALTHSTREAM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Prepaid Royalties
Prepaid Royalties
Prepaid royalties representsrepresent advance payments associated withto business partners under revenue sharing arrangements for which the sale of third partyCompany sells and delivers such partner products such as courseware subscriptions.to its customers. Royalties are typically paid in advance at the commencement of the revenue cyclesubscription period or periodically throughout the revenue cycle,subscription period, such as in quarterly,bi-annual, or annual installments. Royalty payments are amortized over the term of the underlying subscription contracts, which generally range from 12one to 36 months,five years, in order to match the direct royalty costs to the same period the subscription revenue is recognized. Amortization of prepaid royalties is included under the caption “costcost of revenues (excluding depreciation and amortization)” in the accompanying consolidated statementsConsolidated Statements of income.Income.
Allowance for Doubtful AccountsCredit Losses
The Company estimates its allowance for doubtfulcredit losses based on its historical collection experience, a review in each period of the aging status of the then-outstanding accounts using a specific identification method in which management considers the factsreceivable, and circumstances surrounding each potentially uncollectible receivable. An allowance is also maintained for accounts that are not specifically identified that may become uncollectible in the future.external market factors. Uncollectible receivables arewritten-off in the period management believes it has exhausted every opportunityits ability to collect payment from the customer. Bad debt expense isExpected credit losses are recorded when events or circumstances indicate an additional allowance is required based onunder the Company’s specific identification approach.caption other general and administrative expenses in the accompanying Consolidated Statements of Income.
Changes in the allowance for doubtful accountscredit losses and the amounts charged to bad debt expense for the threeyears ended December 31,2023 were as follows (in thousands):
Allowance Balance at Beginning of Period | Charged to Costs and Expenses | Write-offs | Allowance Balance at End of Period | |||||||||||||
2017 | $ | 863 | $ | 1,813 | $ | (471 | ) | $ | 2,205 | |||||||
2016 | $ | 303 | $ | 640 | $ | (80 | ) | $ | 863 | |||||||
2015 | $ | 331 | $ | 284 | $ | (312 | ) | $ | 303 | |||||||
Allowance Balance at Beginning of Period | Charged to Costs and Expenses | Write-offs | Allowance Balance at End of Period | |||||||||||||
2023 | $ | 544 | $ | 1,021 | $ | (784 | ) | $ | 781 | |||||||
2022 | 853 | 385 | (694 | ) | 544 | |||||||||||
2021 | 549 | 723 | (419 | ) | 853 | |||||||||||
Capitalized Software and Content Development
Capitalized software and content development is stated on the basis of cost and is presented net of accumulated amortization. The Company capitalizes costs incurred during the software development phase for projects when such costs are material.to develop software and content. These assets are generally amortized using the straight-line method over three years. The Company capitalized approximately $12.5$25.5 million and $10.0$23.8 million during 20172023 and 2016,2022, respectively. Amortization of capitalized software development was approximately $10.1$22.0 million, $7.7$18.9 million, and $6.2$15.6 million during 2017, 2016,2023, 2022, and 2015,2021, respectively. Maintenance and operating costs are expensed as incurred. As of December 31, 2017 2023 and 2016,2022, there were no capitalized software development costs for external computer software developed for resale.
Fair Value Measurements
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in the principal or most advantageous market in an orderly transaction between market participants at the measurement date. The fair value hierarchy prioritizes the inputs to valuation techniques used in measuring fair value. There are three levels to the fair value hierarchy based on the reliability of inputs, as follows:
Level1 – Observable inputs that reflect quoted prices (unadjusted) for identical assets or liabilities in active markets.
Level2 – Inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly.
Level3 – Unobservable inputs in which little or no market data exists, therefore requiring the Company to develop its own assumptions.
The Company evaluates assets and liabilities subject to fair value measurements on a recurring basis to determine the appropriate level at which to classify them for each reporting period. This determination requiresmay require significant judgments to be made by the Company. At December 31, 2017 2023 and 2016, our2022, the Company's assets measured at fair value on a recurring basis consisted of marketable securities, which are classified as available for sale (see Note 4 – Marketable Securities). The Company did not have any financial liabilities that were subject to fair value measurements as of such dates.
Property and Equipment
Property and equipment are stated on the basis of cost. Depreciation and amortization areis provided on thestraight-line method over the following estimated useful lives, except for assets under capital leases and leasehold improvements, which are amortized over the shorter of the estimated useful life or their respective lease term.
Years | ||||
Furniture and fixtures | 5 - 7 | |||
Equipment | 3 | |||
| ||||
HEALTHSTREAM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Goodwill
Goodwill and Intangible Assets
Goodwill represents the excess of purchase price in a business combination over the fair value of the net identifiable assets acquired.acquired, including intangible assets. The carrying amount of ourits goodwill is evaluated for impairment at least annually during the fourth quarter and whenever events or changes in facts or circumstances indicate that impairment may exist. In accordance with ASC 350,Intangibles – Goodwill and Other, companies may opt to first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. A qualitative assessment includes factors such as financial performance, industry and market metrics, and other factors affecting the reporting unit. If this assessment concludes that it is more likely than not that the fair value of a reporting unit exceeds its carrying value, then goodwill is not considered impaired and no further impairment testing is required. Conversely, if the qualitative assessment concludes that it is more likely than not that the fair value of a reporting unit is less than its carrying value, wethe Company must then compare the fair value of the reporting unit to its carrying value. The Company determines fair value of the reporting unitsunit using both income and market basedmarket-based models. These models require the use of various assumptions relating to cash flow projections, growth rates, discount rates, and terminal value calculations. There were no goodwill impairments identified or recorded for the years ended December 31, 2017, 20162023, 2022, or 2015.2021.
Intangible Assets
The Company estimates fair values of intangible assets using the income and cost methods, which are based on management’s estimates and assumptions. As of December 31, 2017,2023, intangible assets include customer relationships, internally-developed technology and patents,internally developed technologies, non-competition agreements, and trade names. These intangibleIntangible assets that are considered to have definite useful lives and are being amortized on a straight linestraight-line basis over periods ranging between threetwo and thirteeneighteen years. The weighted average amortization period for definite lived intangible assets as of December 31, 20172023 was 11.111.7 years. Intangible assets considered to have indefinite useful lives are evaluated for impairment at least annually during the fourth quarter, and all intangible assets are reviewed for impairment whenever events or changes in facts or circumstances indicate that the carrying amount of the assets may not be recoverable. There were no intangible asset impairments identified or recorded for the years ended December 31, 2017, 2016,2023, 2022, or 2015.2021.
Long-Lived Assets
Long-lived assets to be held for use are reviewed for events or changes in facts and circumstances, both internally and externally, which may indicate that an impairment oflong-lived assets held for use is present. Purchases of long-lived assets (including capitalized software and content development costs) totaled $27.3 million, $25.9 million, and $23.4 million for the years ended December 31, 2023, 2022, and 2021, respectively. The Company measures any impairment using observable market values or discounted future cash flows from the related long-lived assets. The cash flow estimates and discount rates incorporate management’s best estimates, using appropriate and customary assumptions and projections at the date of evaluation. Management periodically evaluates whether the carrying value oflong-lived assets, including intangible assets, property and equipment, capitalized software development, deferred commissions, and other assets will be recoverable. There were no long-lived asset impairments identified or recorded for the years ended December 31, 2017, 2016,2023, 2022, or 2015.2021.
Non-Marketable Equity Investments
Non-marketable equity investments in limited liability companies with specific ownership accounts for each investor not resulting in a controlling financial interest are accounted for using the equity method whenof accounting. Non-marketable equity investments of preferred stock in corporations that do not result in a controlling financial interest are accounted for using the Company can exercise significant influence over the investee. Investmentsmeasurement alternative for which the Company is equity investments that do not able to exercise significant influence over the investee are have readily determinable fair values. Accounting Standards Update ("ASU") 2016-01,Financial Instruments – Overall (Subtopic 825-10) requires equity investments (except those accounted for under the cost method.equity method of accounting or those that result in consolidation of the investee) to be measured at fair value with changes in fair value recognized in net income. The fair value of non-marketable equity investments is not estimated if there are no identified events or changes in circumstances that may have a significant adverse effect on the fair value of the investment. The proportionate share of income or loss from equity method investments and any changes in fair value of investments accounted for using the measurement alternative are recorded under the caption “otherother income, net”net in the accompanying consolidated statementsConsolidated Statements of income.Income.
Financial Instruments
The Company has various financial instruments, including cash and cash equivalents, accounts receivable, accounts receivable-unbilled, accounts payable, and accrued liabilities, and deferred revenue.liabilities. The carrying amounts of these financial instruments approximate fair value because of the short termshort-term maturity or short termshort-term nature of such instruments. The Company also has marketable securities, which are recorded at approximate fair value based on quoted market prices or alternative pricing sources (see Note 4 – Marketable Securities) and non-marketable equity investments, which are recorded under the equity method or under the measurement alternative (see Note 15 - Non-Marketable Equity Investments).
Advertising
The Company expenses the costs of advertising as incurred. Advertising expense for the years ended December 31, 2017, 2016,2023, 2022, and 20152021 was approximately $1.0$1.5 million, $1.0$1.9 million, and $1.1$1.9 million, respectively.respectively, and is included under the caption sales and marketing expense in the accompanying Consolidated Statements of Income.
Shipping and Handling Costs
Shipping and handling costs that are associated with ourdelivering products and services are included inunder the caption cost of revenues.
HEALTHSTREAM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Income Taxes
Income taxes are accounted for using the asset and liability method, whereby deferred tax assets and liabilities are determined based on the temporary differences between the financial statement and tax bases of assets and liabilities measured at tax rates that will be in effect for the year in which the differences are expected to affect taxable income. Management evaluates all available evidence, both positive and negative, to determine whether, based on the weight of that evidence, a valuation allowance is needed. Future realization of the tax benefit of an existing deductible temporary difference or carryforward ultimately depends on the existence of sufficient taxable income of the appropriate character within the carryback or carryforward period available under the tax law. There are four possible sources of taxable income that may be available under the tax law to realize a tax benefit for deductible temporary differences and carryforwards: 1)1) future reversals of existing taxable temporary differences, 2)2) future taxable income exclusive of reversing temporary differences and carryforwards, 3)3) taxable income in prior carryback year(s) if carryback is permitted under the tax law, and 4)4) tax-planning strategies that would, if necessary, be implemented to realize deductible temporary differences or carryforwards prior to their expiration. Management reviews the realizability of its deferred tax assets each reporting period to identify whether any significant changes in circumstances or assumptions have occurred that could materially affect the realizability of deferred tax assets. As of December 31, 2017,2023, the Company had established a valuation allowance of $1.1$2.0 million for the portion of its net deferred tax assets that are not more likely than not expected to be realized.
The Company accounts for income tax uncertainties using amore-likely-than-not more-likely-than-not recognition threshold based on the technical merits of the tax position taken. Tax positions that meet themore-likely-than-not more-likely-than-not recognition threshold are measured in order to determine the tax benefit to be recognized in the financial statements. The Company expenses any penalties or interest associated with tax obligations as general and administrative expenses and interest expense, respectively.
Earnings per Share
Basic earnings per share is computed by dividing the net income available to common shareholders for the period by the weighted average number of common shares outstanding during the period. Diluted earnings per share is computed by dividing the net income for the period by the weighted average number of common and common equivalent shares outstanding during the period. Common equivalent shares are composed of incremental common shares issuable upon the exercise of stock options and restricted share units subject to vesting. The dilutive effect of common equivalent shares is included in diluted earnings per share by application of the treasury stock method. Common equivalent shares that have an anti-dilutive effect on diluted net income per share have beenare excluded from the calculation of diluted weighted average shares outstanding for the years ended December 31, 2017, 2016, and 2015.outstanding.
Concentrations of Credit Risk and Significant Customers
The Company’s credit risks relate primarily to cash and cash equivalents, marketable securities, and accounts receivable. The Company places its temporary excess cash investments in high quality,short-term money market instruments. At times, such investments may be in excess of the FDIC insurance limits. Marketable securities consist primarily of investment grade corporate debt securities and certificates of deposit.U.S. treasuries.
The Company sells its products and services to various companies in the healthcare industry that are primarily located in the United States. CreditCustomer credit worthiness evaluations of our customers’ financial condition are performed on an ongoingas-needed basis, whichand the Company generally require requires no collateral from customers. An allowance for doubtful accountscredit losses is maintained for potentially uncollectible accounts receivable. The Company did not have any single customer representing over 10% of net revenues or accounts receivable during 2017, 2016, or 2015.as of the years ended December 31, 2023, 2022, or 2021, respectively.
Stock Based
Stock-Based Compensation
As of December 31, 2017,2023, the Company maintains three stock basedmaintained two stock-based compensation plans under which awards are outstanding, as described in Note 11.10. The Company accounts for stock basedstock-based compensation using the fair-value based method for costs related to share-based payments, including stock options and restricted share units. The Company uses the Black Scholes option pricing model for calculating the fair value of option awards issued under its stock basedstock-based compensation plan.plans. The Company measures compensation cost of restricted share units based on the closing fair market value of the Company’s stock on the date of grant. Stock basedStock-based compensation cost is measured at the grant date, based on the fair value of the award that is ultimately expected to vest, and is recognized as an expense over the requisite service period. The Company recognizes tax benefits or deficiencies from stock basedstock-based compensation if an excess tax benefit or deficiency is realized. Excess tax benefits and deficiencies are reflected in the statementConsolidated Statements of incomeIncome as a component of the provision for income taxes when realized.
HEALTHSTREAM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Leases
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)The Company has several non-cancelable agreements to lease office space. For leases with a lease term greater than 12 months, the Company recognizes a right-of-use ("ROU") asset and a lease liability on the balance sheet at the lease commencement date. Lease liabilities and their corresponding ROU assets are recorded based on the present value of the future lease payments over the expected lease term.
NewlyThe Company does not have any lease contracts that contain: (1) an option to extend that the Company is reasonably certain to exercise, (2) an option to terminate that the Company is reasonably certain not to exercise, or (3) an option to extend (or not to terminate) in which exercise of the option is controlled by the lessor. Additionally, the Company does not have any leases with residual value guarantees or material restrictive covenants. Most of the Company’s lease agreements contain provisions for escalating rent payments over the terms of the leases, which escalations are either fixed within the contract or are variable based on the consumer price index.
The Company’s leases do not contain readily determinable implicit discount rates, and as such the Company must use its incremental borrowing rate to discount the future lease payments based on information available at lease commencement. The incremental borrowing rate was estimated by determining the rate of interest that the Company would have to pay to borrow on a collateralized basis over a similar term an amount equal to the lease payments in a similar economic environment.
Foreign Currency
The functional currency for the Company’s subsidiaries is determined based on the primary economic environment in which the subsidiary operates. The Company translates the assets and liabilities of its non-U.S. dollar functional currency subsidiaries into U.S. dollars using exchange rates in effect at the end of each period. Revenues and expenses for these subsidiaries are translated using rates that approximate those in effect during the period. Gains and losses from these translations are recognized as cumulative translation adjustments included in accumulated other comprehensive income in the Consolidated Balance Sheets.
Recently Issued Accounting StandardsPronouncementsNotYet Adopted
In May 2014, November 2023, the FASBFinancial Accounting Standards Board ("FASB") issued ASU2014-09, Revenue from Contracts2023-07,Segment Reporting (Topic280):Improvements to Reportable Segment Disclosures. The new guidance requires disclosures of significant reportable segment expenses that are regularly provided to the CODM and other segment items on an interim and annual basis. Entities with Customers (Topic 606), which supersedesa single reportable segment will also be required to apply the revenue recognitiondisclosure requirements in Topic 605, Revenue Recognition,ASU 2023-07 on an interim and most industry-specific revenue recognition guidance throughout the Industry Topics of the Accounting Standards Codification.annual basis. The updated guidance states that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The guidance also provides for additional disclosures with respect to revenues and cash flows arising from contracts with customers. The standardASU will be effective for the first interim period within annual reporting periods beginning after December 15, 2017, 2023, and the Company will adopt the standard using the modified retrospective approach effective January 1, 2018. In preparation forinterim periods within fiscal years beginning after December 15, 2024. Early adoption of the standard, the Company implemented internal controlsASU is permitted and key system functionalityshould be applied retrospectively to enable the preparation of financial information and has reached conclusions on key accounting assessments related to the standard.
The most significant impact of the standard relates to capitalizing costs to acquire contracts, which have historically been expensed as incurred. As of December 31, 2017, the Company’s sales commission plans have included multiple payments, including initial paymentsall prior periods presented in the period a customer contract is obtained and deferred payments either 15 or 27 months after the initial payment. Under the standard, only the initial payment is subject to capitalization as the deferred payments require a substantive performance condition of the employee. These initial commission payments will be capitalized in the period a customer contract is obtained and will be amortized consistent with the transfer of the goods or services to the customer over the expected period of benefit. The expected period of benefit is the contract term, except when the commission payment is expected to provide economic benefit to the Company for a period longer than the contract term, such as for new customer or incremental sales where renewals are expected and renewal commissions are not commensurate with initial commissions. Such commissions will be amortized over the greater of contract term or technological obsolescence period when the underlying contracted products are technology-based, such as for the SaaS-based platforms, or the expected customer relationship period when the underlying contracted products are not technology-based, such as for patient experience survey products.
Additionally, the standard impacts several of the Company’s revenue streams. The primary streams affected are professional services and patient experience surveys. For professional services, the identification of performance obligations and the related timing of revenue recognition is changing such that revenues will be recognized earlier, during the period of service delivery, rather than over the related product’s contractual term. For patient experience surveys, revenues will correlate to survey delivery, which approximates ratable recognition over the contractual term, rather than the current method of spreading quarterly revenue over the five-month life cycle of the patient experience survey cycle.
The Company will finalize its calculation of the financial impact of the adoption of this accounting standard on its future consolidated financial statements in the first quarter of 2018. The Company anticipates adjustments to retained earnings of no more than $10 million and $16 million, net of related tax effects, upon adoption for revenue recognition and sales commissions, respectively.
In January 2016, the FASB issued ASU2016-01, Financial Instruments – Overall (Sub Topic825-10), which addresses certain aspects of the recognition, measurement, presentation, and disclosure of financial instruments. The guidance will, among other things, require equity investments (except those accounted for under the equity method of accounting or those that result in consolidation of the investee) to be measured at fair value with changes in fair value recognized in net income. The standard will be effective for the first interim period within annual reporting periods beginning after December 15, 2017, and early adoption is permitted for only limited aspects of such guidance. The Company plans to adopt this ASU on January 1, 2018, and is currently reviewing this standard to assess the impact on its future consolidated financial statements.
In February 2016, the FASB issued ASU2016-02, Leases (Topic 842), which requires lessees to recognize assets and liabilities for most leases. The recognition, measurement and presentation of expenses and cash flows arising from a lease by a lessee is not expected to significantly change under such guidance; however, the Company is currently reviewing this standard to assessevaluating the impact on its future consolidated financial statements. The standard will be effective for the first interim period within annual reporting periods beginning after December 15, 2018,of adopting ASU 2023-07 and early adoption is permitted. The Company expects to adopt this ASU on January 1, 2019, andfor the year ending December 31, 2024.
In December 2023, the FASB issued ASU 2023-09,Income Taxes (Topic 740): Improvements to Income Tax Disclosures, which requires public entities to provide disclosure of disaggregated information in the entity’s tax rate reconciliation, as well as disclosure of income taxes paid disaggregated by jurisdiction. The ASU is effective for fiscal years beginning after December 15, 2024, with early adoption permitted. The Company is currently evaluating the impact that adoption of adopting this ASU will have on its consolidated financial position and results of operations.ASU.
HEALTHSTREAM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
2. SHAREHOLDERS’ EQUITY
Common Stock
The Company is authorized to issue up to 75 million shares of common stock. The number of common shares issued and outstanding as of December 31, 2017 2023 and 20162022 was approximately 31.930.3 million and 31.730.6 million, respectively.
Preferred Stock
The Company is authorized to issue up to 10 million shares of preferred stock in one or more series, having the relative voting powers, designations, preferences, rights and qualifications, limitations or restrictions, and other terms as the Board of Directors may fix in providing for the issuance of such series, without any vote or action of the shareholders. As of December 31, 2023 and 2022, there were no shares of preferred stock issued or outstanding.
Dividends on Common Stock
On February 20, 2023, the Company's Board of Directors ("Board") approved a quarterly cash dividend policy, marking the first dividend policy adopted by the Company ("Dividend Policy"). During the year ended December 31, 2023, the Board declared the following quarterly dividends under the Dividend Policy:
Dividend Payment Date | Dividend Declaration Date | Dividend Per Share | Record Date | Cash Outlay | ||||||
April 28, 2023 | February 20, 2023 | $ | 0.025 | April 17, 2023 | $ | 767,000 | ||||
June 23, 2023 | April 24, 2023 | 0.025 | June 12, 2023 | 767,000 | ||||||
| September 29, 2023 | July 24, 2023 | 0.025 | September 18, 2023 | 767,000 | ||||||
December 22, 2023 | October 23, 2023 | 0.025 | December 11, 2023 | 757,000 | ||||||
Total dividends | $ | 0.10 | $ | 3,058,000 | ||||||
Additionally, on February 19, 2024, the Board approved the Company’s first quarter 2024 cash dividend of $0.028 per share, payable on March 22, 2024to holders of record on March 11, 2024.
Share Repurchase Plan
On November 30, 2021, the Company's Board of Directors authorized a share repurchase program to repurchase up to $20.0 million of the Company's outstanding shares of common stock. This share repurchase program concluded on March 8, 2022, when the maximum dollar amount authorized under the program was expended. Under this program, the Company repurchased a total of 853,023 shares through open market purchases at an aggregate value of $20.0 million, reflecting an average price per share of $23.45 (excluding the cost of broker commissions). During the year ended December 31, 2022, the Company repurchased 649,739 shares pursuant to this share repurchase program at an aggregate fair value of $14.9 million, based on an average price per share of $22.92 (excluding the cost of broker commissions).
On March 14, 2022, the Company's Board of Directors approved an expansion of the Company's share repurchase program by authorizing the repurchase of up to an additional $10.0 million of the Company's outstanding shares of common stock. The share repurchase expired on March 13, 2023. During the year ended December 31, 2022, the Company repurchased 402,050 shares at an aggregate fair value of $8.1 million, reflecting an average price per share of $20.19 (excluding the cost of broker commissions). No repurchases occurred under this share repurchase program during the year ended December 31, 2023.
On September 13, 2023, the Company announced that the Board authorized a share repurchase program to repurchase up to $10.0 million of the Company's outstanding shares of common stock. The share repurchase program is scheduled to terminate on the earlier of March 31, 2024, or when the maximum dollar amount has been expended. During the year ended December 31, 2023, the Company repurchased 404,188 shares at an aggregate fair value of $8.9 million, reflecting an average price per share of $22.07 (excluding the cost of broker commissions).
3. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings per share for the three years ended December 31, 20172023 (in thousands, except per share amounts):
Year Ended December 31, | ||||||||||||||||||||||||
2017 | 2016 | 2015 | 2023 | 2022 | 2021 | |||||||||||||||||||
Numerator: | ||||||||||||||||||||||||
Net income | $ | 10,004 | $ | 3,755 | $ | 8,621 | $ | 15,213 | $ | 12,091 | $ | 5,845 | ||||||||||||
|
|
| ||||||||||||||||||||||
Denominator: | ||||||||||||||||||||||||
Weighted-average shares outstanding | 31,861 | 31,721 | 30,057 | 30,571 | 30,648 | 31,534 | ||||||||||||||||||
Effect of dilutive shares | 335 | 347 | 379 | 102 | 69 | 84 | ||||||||||||||||||
|
|
| ||||||||||||||||||||||
Weighted-average diluted shares | 32,196 | 32,068 | 30,436 | 30,673 | 30,717 | 31,618 | ||||||||||||||||||
|
|
| ||||||||||||||||||||||
Basic earnings per share | $ | 0.31 | $ | 0.12 | $ | 0.29 | ||||||||||||||||||
|
|
| ||||||||||||||||||||||
Diluted earnings per share | $ | 0.31 | $ | 0.12 | $ | 0.28 | ||||||||||||||||||
|
|
| ||||||||||||||||||||||
Net income per share: | ||||||||||||||||||||||||
Basic | $ | 0.50 | $ | 0.39 | $ | 0.19 | ||||||||||||||||||
Diluted | $ | 0.50 | $ | 0.39 | $ | 0.18 | ||||||||||||||||||
Potentially dilutive shares representing approximately 58,000, 38,000,252,000, 183,000, and 16,00078,000 shares of common stock for the years ended December 31, 2017, 2016,2023, 2022, and 2015,2021, respectively, were excluded from the calculation of diluted earnings per share because their effect would have been anti-dilutive.
4. MARKETABLE SECURITIES
At December 31, 2017 2023 and 2016,2022, the fair value of marketable securities, which were all classified as available for sale, included the following (in thousands):
December 31, 2017 | December 31, 2023 | |||||||||||||||||||||||||||||||
| Adjusted Cost | Unrealized Gains | Unrealized Losses | Fair Value | Adjusted Cost | Unrealized Gains | Unrealized Losses | Fair Value | |||||||||||||||||||||||||
Level 2: | ||||||||||||||||||||||||||||||||
Corporate debt securities | $ | 41,900 | $ | 1 | $ | (39) | $ | 41,862 | ||||||||||||||||||||||||
Government-sponsored enterprise debt securities | 4,488 | 1 | (1) | 4,488 | ||||||||||||||||||||||||||||
|
|
|
| |||||||||||||||||||||||||||||
U.S. government debt securities | $ | 30,791 | $ | 10 | $ | (1 | ) | $ | 30,800 | |||||||||||||||||||||||
Total | $ | 46,388 | $ | 2 | $ | (40) | $ | 46,350 | $ | 30,791 | $ | 10 | $ | (1 | ) | $ | 30,800 | |||||||||||||||
|
|
|
| |||||||||||||||||||||||||||||
December 31, 2016 | ||||||||||||||||||||||||||||||||
| Adjusted Cost | Unrealized Gains | Unrealized Losses | Fair Value | |||||||||||||||||||||||||||||
Level 2: | ||||||||||||||||||||||||||||||||
Corporate debt securities | $ | 44,486 | $ | - | $ | (50) | $ | 44,436 | ||||||||||||||||||||||||
Government-sponsored enterprise debt securities | 9,105 | 1 | (2) | 9,104 | ||||||||||||||||||||||||||||
|
|
|
| |||||||||||||||||||||||||||||
Total | $ | 53,591 | $ | 1 | $ | (52) | $ | 53,540 | ||||||||||||||||||||||||
|
|
|
| |||||||||||||||||||||||||||||
December 31, 2022 | ||||||||||||||||
Adjusted Cost | Unrealized Gains | Unrealized Losses | Fair Value | |||||||||||||
Level 2: | ||||||||||||||||
U.S. government debt securities | $ | 7,882 | $ | 3 | $ | — | $ | 7,885 | ||||||||
Total | $ | 7,882 | $ | 3 | $ | — | $ | 7,885 | ||||||||
The carrying amounts of the marketable securities reported in the consolidated balance sheetsConsolidated Balance Sheets approximate fair value based on quoted market prices or alternative pricing sources and models utilizing market observable inputs. As of December 31, 2017, the Company does not consider any of its marketable securities to be other than temporarily impaired. During the years ended December 31, 2017 2023 and 2016,2022, the Company did not reclassify recognize any items out of accumulated other comprehensive income to net income.allowance for credit impairments on its available for sale debt securities. All investments in marketable securities are classified as a current assetassets on the balance sheetConsolidated Balance Sheets because the underlying securities mature within one year from the balance sheet date.
HEALTHSTREAM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
5. BUSINESS COMBINATIONSRevenue Recognition
Revenues are recognized when control of the promised goods or services is transferred to the customer in an amount that reflects the consideration the Company expects to be entitled in exchange for transferring those goods or services.
The following table represents revenues disaggregated by revenue source for the three years ended December 31, 2023, 2022, and 2021 (in thousands). Sales taxes are excluded from revenues.
Year Ended December 31, | ||||||||||||
2023 | 2022 | 2021 | ||||||||||
Subscription services | $ | 267,935 | $ | 253,960 | $ | 243,617 | ||||||
Professional services | 11,128 | 12,866 | 13,095 | |||||||||
Total revenues, net | $ | 279,063 | $ | 266,826 | $ | 256,712 | ||||||
For the years ended December 31, 2023, 2022, and 2021, the Company recognized $1.0 million, $0.4 million, and $0.7 million, respectively, in impairment losses on receivables and contract assets arising from contracts with customers.
During the years ended December 31, 2023, 2022, and 2021, the Company recognized revenues of $79.6 million, $71.4 million, and $62.3 million, respectively, from amounts included in deferred revenue at the beginning of the respective period. As of December 31, 2023, $541 million of revenue is expected to be recognized from remaining performance obligations under contracts with customers. The Company expects to recognize revenue on approximately 42% of these remaining performance obligations over the 12 months ending December 31, 2024, with the remaining amounts recognized thereafter.
Morrisey Associates, Inc.Sales Commissions
On August 8, 2016, Echo, Inc. (“Echo”),
Sales commissions earned by the Company's sales employees are considered incremental and recoverable costs of obtaining a wholly owned subsidiary of the Company, acquired all of the outstanding stock of Morrisey Associates, Inc. (“MAI”),contract with a Chicago, Illinois based company that provides credentialing and privileging software to healthcare organizations. The acquisition of MAI allows the Company to expand its credentialing and privileging product offerings and solutions to healthcare organizations. The consideration paid for MAI consisted of approximately $48.0 million in cash, which the Company funded with cash on hand, and was not subject to any post-closing working capital or similar adjustment.customer. The Company incurred approximately $953,000 in transaction costs, allrecorded amortization of which were incurred duringdeferred commissions of $11.5 million, $10.6 million, and $9.2 million for the yearyears ended December 31, 2016. The transaction costs were recorded2023, 2022, and 2021, respectively, which is included in other generalsales and administrativemarketing expenses in the consolidated statementsaccompanying Consolidated Statements of income. Income.
6. PROPERTY AND EQUIPMENT
Property and equipment consist of the following (in thousands):
December 31, | ||||||||
2023 | 2022 | |||||||
Equipment | $ | 12,541 | $ | 15,843 | ||||
Leasehold improvements | 14,937 | 14,937 | ||||||
Furniture and fixtures | 5,030 | 4,983 | ||||||
Gross property and equipment | 32,508 | 35,763 | ||||||
Accumulated depreciation and amortization | (19,503 | ) | (20,280 | ) | ||||
Property and equipment, net | $ | 13,005 | $ | 15,483 | ||||
Depreciation of property and equipment totaled $4.2 million, $4.5 million, and $6.3 million for the years ended December 31, 2023, 2022, and 2021, respectively.
7. GOODWILL AND INTANGIBLE ASSETS
The resultschanges in the carrying amount of operationsgoodwill for MAIthe years ended December 31, 2023 and 2022 are as follows (in thousands):
2023 | ||||
Balance at January 1, 2023 | $ | 192,398 | ||
Post-closing adjustment for eeds | (1,305 | ) | ||
Effect of exchange rate changes | 286 | |||
Balance at December 31, 2023 | $ | 191,379 | ||
2022 | ||||
Balance at January 1, 2022 | $ | 182,501 | ||
Acquisition of CloudCME | 6,819 | |||
Acquisition of eeds | 3,568 | |||
Post-closing adjustment for ANSOS | 267 | |||
Post-closing adjustment for ComplyALIGN | 40 | |||
Post-closing adjustment for Rievent | 46 | |||
Effect of exchange rate changes | (843 | ) | ||
Balance at December 31, 2022 | $ | 192,398 | ||
Intangible assets other than goodwill that are considered to have beenfinite useful lives include customer-related intangibles consisting of customer relationships, which are amortized over their estimated useful lives ranging from eight to eighteen years, and other intangible assets consisting of developed technology, non-competition agreements, and trade names, which are amortized over their estimated useful lives ranging from two to ten years. The Company also previously recorded an indefinite lived intangible for a trade name valued at $0.7 million. However, in January 2023, the Company reassessed the future expected use of the indefinite lived trade name such that beginning in 2023, it is being amortized over a ten year remaining useful life and is therefore included in the Company’s consolidated financial statements fromfuture annual amortization expense table below. Amortization of intangible assets was $14.9 million, $14.5 million, and $14.9 million for the date of acquisitionyears ended December 31, 2023, 2022, and 2021, respectively.
Identifiable intangible assets are also included in the HealthStream Provider Solutions segment.
A summarycomprised of the purchase pricefollowing (in thousands):
As of December 31, 2023 | As of December 31, 2022 | |||||||||||||||||||||||
Gross Amount | Accumulated Amortization | Net | Gross Amount | Accumulated Amortization | Net | |||||||||||||||||||
Customer related | $ | 111,837 | $ | (57,095 | ) | $ | 54,742 | $ | 109,821 | $ | (48,552 | ) | $ | 61,269 | ||||||||||
Other | 29,892 | (16,603 | ) | 13,289 | 33,102 | (12,818 | ) | 20,284 | ||||||||||||||||
Total | $ | 141,729 | $ | (73,698 | ) | $ | 68,031 | $ | 142,923 | $ | (61,370 | ) | $ | 81,553 | ||||||||||
The expected future annual amortization expense for the years ending December 31, is as follows (in thousands):
Cash paid at closing | $ | 44,120 | ||
Cash held in escrow | 3,880 | |||
|
| |||
Total consideration paid | $ | 48,000 | ||
|
|
2024 | $ | 13,348 | ||
2025 | 12,528 | |||
2026 | 9,453 | |||
2027 | 8,669 | |||
2028 | 5,472 | |||
Thereafter | 18,561 | |||
Total | $ | 68,031 |
The following table summarizes the fair value
8. BUSINESS COMBINATIONS
Accounts receivable, net | $ | 2,406 | ||
Prepaid royalties and other prepaid assets | 187 | |||
Property and equipment | 75 | |||
Deferred tax assets | 1,377 | |||
Goodwill | 21,000 | |||
Intangible assets | 27,400 | |||
Accounts payable and accrued liabilities | (776) | |||
Deferred revenue | (3,669) | |||
|
| |||
Net assets acquired | $ | 48,000 | ||
|
|
The excess purchase price over the fair values of net tangible and intangible assets was recorded as goodwill. The fair values of tangible and identifiable intangible assets, deferred revenue, and other liabilities assumed were based on management’s estimates and assumptions. The goodwill balance was primarily attributed to the assembled workforce, additional market opportunities from offering MAI’s products, and expected synergies from integrating MAI with other products or other combined functional areas within the Company. During the three months ended September 30, 2017, the Company determined that a portion of the acquired accounts receivable required an adjustment to net realizable value and a portion of the assumed liabilities would not be satisfied and therefore recorded a measurement period adjustment, which on a net basis, increased goodwill by approximately $533,000. The measurement period adjustment has no effect on current period or prior period earnings. The goodwill balance, including the measurement period adjustment, is deductible for U.S. income tax purposes. The net tangible assets include deferred revenue, which was adjusted down from a book value at the acquisition date of $8.3 million to an estimated fair value of $3.7 million. The $4.6 million write-down of deferred revenue will result in lower revenues than would have otherwise been recognized for such services.
The following table sets forth the components of identifiable intangible assets and their estimated useful lives as of the acquisition date (in thousands):
| Fair value | Useful life | |||||||
Customer relationships | $ | 21,400 | 13 years | |||||
Developed technology | 5,400 | 5 years | ||||||
Trade name | 600 | 6 years | ||||||
|
| |||||||
Total intangible assets subject to amortization | $ | 27,400 | ||||||
|
| |||||||
HEALTHSTREAM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
5. BUSINESS COMBINATIONS (continued)
The amounts of revenue and operating loss of MAI included in the Company’s consolidated statement of income from the date of acquisition of August 8, 2016 to the period ending December 31, 2016 are as follows (in thousands):
| ||||
| ||||
The following unaudited pro forma financial information summarizes the combined results of operations of the Company and MAI, which was significant for purposes of the unaudited pro forma financial information disclosure, as though the companies were combined as of January 1, 2016 (in thousands, except per share data):
Year Ended December 31, | ||||||||
2017 | 2016 | |||||||
Total revenues | $ | 248,942 | $ | 236,205 | ||||
|
|
|
| |||||
Net income | $ | 10,958 | $ | 6,610 | ||||
|
|
|
| |||||
Basic earnings per share | $ | 0.34 | $ | 0.21 | ||||
|
|
|
| |||||
Diluted earnings per share | $ | 0.34 | $ | 0.21 | ||||
|
|
|
| |||||
These unaudited pro forma combined results of operations include certain adjustments arising from the acquisition such as adjustment for amortization of intangible assets, depreciation of property and equipment, and fair value adjustments of acquired deferred revenue balances. The unaudited pro forma combined results of operations is for informational purposes only and is not indicative of what the Company’s results of operations would have been had the transaction occurred at the beginning of the period presented or to project the Company’s results of operations in any future period.
The unaudited pro forma financial information for the years ended December 31, 2017 and 2016 combines the historical results of the Company and MAI for the years ended December 31, 2017 and 2016 and the pro forma adjustments listed above.
HealthLine Systems
A summary of the purchase price is as follows (in thousands):
Cash paid | $ | 89,850 | ||
Cash held in escrow | 679 | |||
|
| |||
Total consideration paid | $ | 90,529 | ||
|
|
The following table summarizes the fair value of the assets acquired and liabilities assumed as of the date of acquisition (in thousands):
Cash | $ | 54 | ||
Accounts receivable, net | 3,052 | |||
Prepaid assets | 546 | |||
Property and equipment | 200 | |||
Deferred tax assets | 2,523 | |||
Goodwill | 43,798 | |||
Intangible assets | 47,200 | |||
Accounts payable and accrued liabilities | (1,085) | |||
Deferred revenue | (5,979) | |||
|
| |||
Net assets acquired | $ | 90,309 | ||
|
|
HEALTHSTREAM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
5. BUSINESS COMBINATIONS (continued)
The total consideration paid does not equal the fair value of assets acquired and liabilities assumed due to the post measurement period adjustment discussed below. The excess of purchase price over the fair values of net tangible and intangible assets has been recorded as goodwill. The fair values of tangible and identifiable intangible assets, deferred tax assets, deferred revenue, and other liabilities are based on management’s estimates and assumptions. Included in the assets and liabilities assumed is an estimated indemnification asset of $300,000 and a contingent liability of $700,000, both of which are associated with tax liabilities. The contingent liability is measured based on management’s estimate of a range of probable outcomes. The goodwill balance is primarily attributed to the assembled workforce, additional market opportunities from offering HLS’s products, and expected synergies from integrating HLS with other products or other combined functional areas within the Company. During the three months ended March 31, 2016, the Company received notice of an indemnification claim from the former owners of HLS pursuant to the terms of the membership interest purchase agreement. The terms of such agreement require the Company to indemnify such owners for incremental taxes incurred as the result of the structure of the acquisition, which had favorable tax aspects to the Company. The Company recorded a measurement period adjustment in relation to the claim that increased goodwill by approximately $2.2 million during the three months ended March 31, 2016. The additional goodwill is deductible for U.S. income tax purposes. The goodwill balance excluding such measurement period adjustment is also deductible for U.S. income tax purposes. During the three months ended September 30, 2016, the Company agreed to settle this indemnification claim for approximately $2.4 million in respect of such tax indemnification provision in the membership interest purchase agreement, a difference of approximately $200,000 from the $2.2 million measurement period adjustment. The Company surpassed the one year measurement period as of the period ended March 31, 2016; accordingly, in accordance with requisite accounting guidance, the $200,000 difference has been reflected as a charge against net income for the year ended December 31, 2016. The net tangible assets include deferred revenue, which was adjusted down from a book value at the acquisition date of $15.0 million to an estimated fair value of $6.0 million. The $9.0 million write-down of deferred revenue will result in lower revenues than would have otherwise been recognized for such services.
The following table sets forth the components of identifiable intangible assets and their estimated useful lives as of the acquisition date (in thousands):
Fair value | Useful life | |||||||
Customer relationships | $ | 42,600 | 13 years | |||||
Developed technology | 3,700 | 5 years | ||||||
Trade names | 900 | 6 years | ||||||
|
| |||||||
Total intangible assets subject to amortization | $ | 47,200 | ||||||
|
| |||||||
The amounts of revenue and operating loss of HLS included in the Company’s consolidated statement of income from the date of acquisition of March 16, 2015 to the period ending December 31, 2015 are as follows (in thousands):
Total revenues | $ | 8,543 | ||
|
| |||
Operating loss | $ | (2,541 | ) | |
|
|
The following unaudited pro forma financial information summarizes the combined results of operations of the Company and HLS, which was significant for purposes of the unaudited pro forma financial information disclosure, as though the companies were combined as of January 1, 2015 (in thousands, except per share data):
Year Ended December 31, | ||||||||
2016 | 2015 | |||||||
Total revenues | $ | 227,834 | $ | 219,108 | ||||
|
|
|
| |||||
Net income | $ | 4,924 | $ | 13,551 | ||||
|
|
|
| |||||
Basic earnings per share | $ | 0.16 | $ | 0.45 | ||||
|
|
|
| |||||
Diluted earnings per share | $ | 0.15 | $ | 0.44 | ||||
|
|
|
| |||||
These unaudited pro forma combined results of operations include certain adjustments arising from the acquisition such as adjustment for amortization of intangible assets, depreciation of property and equipment, fair value adjustments of acquired deferred revenue balances, and interest expense associated with borrowings under a revolving credit facility by the Company to partially fund the acquisition. The unaudited pro forma combined results of operations is for informational purposes only and is not indicative of what the Company’s results of operations would have been had the transaction occurred at the beginning of the period presented or to project the Company’s results of operations in any future period.
The unaudited pro forma financial information for the years ended December 31, 2016 and 2015 combines the historical results of the Company and HLS for the years ended December 31, 2016 and 2015 and the pro forma adjustments listed above.
HEALTHSTREAM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
5. BUSINESS COMBINATIONS (continued)
Other Business Combinations
On June 30, 2016, the Company acquired all of the stock of Performance Management Services, Inc. (“PMSI”), a Company based in Tustin, California focused on competency-based performance development for nurses, for $4.0 million in cash and up to an additional $500,000$4.1 million in shares of contingent consideration.HealthStream's common stock issued through a private placement at closing. The Company previously held a minority interest in CloudCME of approximately 18%. Acquisition-related transaction costs were $0.1 million. The acquisition including associated transaction costs, is not considered material to the Company’s financial statements. The Company accounted for the acquisition as a business combination and has allocated the purchase consideration based on management’s estimates of fair value. Net assets acquired were $9.6 million. Based on the fair value of assets acquired and liabilities assumed, including intangible assets of $3.8 million, goodwill of $6.8 million was established. The results of operations for PMSICloudCME are included in the Company’s consolidated financial statementsConsolidated Financial Statements from the date of acquisition and are included in the HealthStream Workforce Solutions segment.
acquisition.
6. PROPERTY AND EQUIPMENT
Property and equipment consistacquisition.
9. INCOME TAXES
| December 31, | ||||||||
2017 | 2016 | |||||||
Equipment | $ | 25,396 | $ | 20,885 | ||||
Leasehold improvements | 5,291 | 5,025 | ||||||
Furniture and fixtures | 4,167 | 4,862 | ||||||
|
|
|
| |||||
Gross property and equipment | 34,854 | 30,772 | ||||||
Accumulated depreciation and amortization | (25,862) | (20,527) | ||||||
|
|
|
| |||||
Property and equipment, net | $ | 8,992 | $ | 10,245 | ||||
|
|
|
| |||||
DepreciationComponents of property and equipment totaled approximately $6.6 million, $6.8 million, and $5.3 million for the years ended December 31, 2017, 2016, and 2015, respectively.
7. GOODWILL
The changes in the carrying amount of goodwill for the years ended December 31, 2017 and 2016earnings before income taxes are as follows (in thousands):
Workforce | Patient Experience | Provider | Total | |||||||||||||
Balance at January 1, 2017 | $ | 16,381 | $ | 24,154 | $ | 69,230 | $ | 109,765 | ||||||||
Acquisition of Morrisey Associates, Inc. | - | - | 533 | 533 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Balance at December 31, 2017 | $ | 16,381 | $ | 24,154 | $ | 69,763 | $ | 110,298 | ||||||||
|
|
|
|
|
|
|
| |||||||||
Workforce | Patient Experience | Provider | Total | |||||||||||||
Balance at January 1, 2016 | $ | 12,336 | $ | 24,154 | $ | 46,583 | $ | 83,073 | ||||||||
Acquisition of HealthLine Systems, LLC. | - | - | 2,180 | 2,180 | ||||||||||||
Acquisition of Morrisey Associates, Inc. | - | - | 20,467 | 20,467 | ||||||||||||
Other business combinations | 4,045 | - | - | 4,045 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Balance at December 31, 2016 | $ | 16,381 | $ | 24,154 | $ | 69,230 | $ | 109,765 | ||||||||
|
|
|
|
|
|
|
| |||||||||
During the three months ended September 30, 2017, the Company recorded approximately $533,000 of additional goodwill in relation to the August 2016 acquisition of Morrisey Associates, Inc. Such amount relates to the measurement period adjustment previously mentioned in Note 5 under the caption “Morrisey Associates, Inc.”
HEALTHSTREAM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Year Ended December 31, | ||||||||||||
2023 | 2022 | 2021 | ||||||||||
United States | $ | 18,472 | $ | 15,777 | $ | 8,006 | ||||||
Foreign | 39 | (192 | ) | (240 | ) | |||||||
Earnings before income taxes | $ | 18,511 | $ | 15,585 | $ | 7,766 | ||||||
8. INTANGIBLE ASSETS
Intangible assets other than goodwill are considered to have finite useful lives. Customer-related intangibles include customer relationships and are amortized over their estimated useful lives ranging from five to thirteen years. Other intangible assets includenon-competition agreements, technology and patents, and trade names and are amortized over their estimated useful lives ranging from three to nine years. Amounts presented below as of December 31, 2017 and December 31, 2016 are inclusive of identifiable intangible assets recorded in relation to our acquisitions of Morrisey Associates, Inc. and HealthLine Systems, LLC, as well as other business combinations (see Note 5 – Business Combinations). Amortization of intangible assets was approximately $9.5 million, $7.8 million, and $5.6 million for the years ended December 31, 2017, 2016, and 2015, respectively.
Identifiable intangible assets are comprised of the following (in thousands):
As of December 31, 2017 | As of December 31, 2016 | |||||||||||||||||||||||
| Gross Amount | Accumulated Amortization | Net | Gross Amount | Accumulated Amortization | Net | |||||||||||||||||||
Customer related | $ | 77,985 | $ | (18,027) | $ | 59,958 | $ | 77,985 | $ | (11,539) | $ | 66,446 | ||||||||||||
Other | 16,824 | (7,966) | 8,858 | 16,824 | (4,906) | 11,918 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Total | $ | 94,809 | $ | (25,993) | $ | 68,816 | $ | 94,809 | $ | (16,445) | $ | 78,364 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
The expected future annual amortization expense for the years ending December 31, is as follows (in thousands):
2018 | $ | 9,438 | ||
2019 | 8,792 | |||
2020 | 8,139 | |||
2021 | 7,356 | |||
2022 | 6,277 | |||
Thereafter | 28,814 | |||
|
| |||
Total | $ | 68,816 | ||
|
|
9. BUSINESS SEGMENTS
The Company provides services to healthcare organizations and other members within the healthcare industry. The Company’s services are focused on the delivery of workforce development products and services (“HealthStream Workforce Solutions”), survey and research services (“HealthStream Patient Experience Solutions”), and provider credentialing, privileging, call center, and enrollment products and services (“HealthStream Provider Solutions”).
The Company measures segment performance based on operating income before income taxes and prior to the allocation of certain corporate overhead expenses, interest income, interest expense, gains and losses from equity investments, and depreciation. The Unallocated component below includes corporate functions, such as accounting, human resources, legal, investor relations, administrative and executive personnel, depreciation, a portion of amortization, and certain other expenses, which are not currently allocated in measuring segment performance. The following is the Company’s business segment information as of and for the years ended December 31, 2017, 2016 and 2015 (in thousands).
| Revenues, net: | 2017 | 2016 | 2015 | |||||||||
Workforce Solutions | $ | 178,061 | $ | 168,040 | $ | 161,289 | ||||||
Patient Experience Solutions | 32,763 | 33,850 | 34,193 | |||||||||
Provider Solutions | 36,838 | 24,084 | 13,520 | |||||||||
|
|
|
|
|
| |||||||
Total revenues, net | $ | 247,662 | $ | 225,974 | $ | 209,002 | ||||||
|
|
|
|
|
| |||||||
| Operating income: | 2017 | 2016 | 2015 | |||||||||
Workforce Solutions | $ | 33,579 | $ | 37,329 | $ | 39,986 | ||||||
Patient Experience Solutions | 1,491 | (522) | 1,548 | |||||||||
Provider Solutions | 879 | (2,443) | (2,559) | |||||||||
Unallocated | (26,149) | (28,797) | (25,418) | |||||||||
|
|
|
|
|
| |||||||
Total operating income | $ | 9,800 | $ | 5,567 | $ | 13,557 | ||||||
|
|
|
|
|
| |||||||
HEALTHSTREAM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
9. BUSINESS SEGMENTS (continued)
Assets * | Purchases of long-lived assets | Depreciation and amortization | ||||||||||||||||||||||||||||||
2017 | 2016 | 2017 | 2016 | 2015 | 2017 | 2016 | 2015 | |||||||||||||||||||||||||
Workforce Solutions | $ | 90,055 | $ | 96,323 | $ | 9,888 | $ | 9,266 | $ | 11,403 | $ | 9,982 | $ | 8,243 | $ | 6,693 | ||||||||||||||||
Patient Experience Solutions | 34,198 | 35,988 | 2,764 | 1,123 | 2,007 | 1,510 | 1,144 | 1,061 | ||||||||||||||||||||||||
Provider Solutions | 150,797 | 155,011 | 3,619 | 2,026 | 332 | 8,147 | 6,061 | 3,986 | ||||||||||||||||||||||||
Unallocated | 136,024 | 108,678 | 1,762 | 2,135 | 1,617 | 6,644 | 6,759 | 5,257 | ||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||
Total | $ | 411,074 | $ | 396,000 | $ | 18,033 | $ | 14,550 | $ | 15,359 | $ | 26,283 | $ | 22,207 | $ | 16,997 | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||
* Segment assets include accounts and unbilled receivables, prepaid royalties, prepaid and other current assets, other assets, capitalized software development, certain property and equipment, and intangible assets. Cash and cash equivalents and marketable securities are not allocated to individual segments, and are included within Unallocated. A significant portion of property and equipment assets are included within Unallocated.
10. INCOME TAXES
The provision (benefit) for income taxes is comprised of the following (in thousands):
| Year Ended December 31, | Year Ended December 31, | |||||||||||||||||||||||
2017 | 2016 | 2015 | 2023 | 2022 | 2021 | |||||||||||||||||||
Current federal | $ | 1,679 | $ | (271) | $ | 3,608 | $ | 4,066 | $ | 1,972 | $ | 5 | ||||||||||||
Current state | 895 | 877 | 1,098 | 942 | 923 | 406 | ||||||||||||||||||
Current foreign | 15 | (110 | ) | (29 | ) | |||||||||||||||||||
Deferred federal | (2,192) | 1,489 | 501 | (1,493 | ) | 495 | 926 | |||||||||||||||||
Deferred state | 147 | 298 | (109) | (214 | ) | 239 | 699 | |||||||||||||||||
|
|
| ||||||||||||||||||||||
Deferred foreign | (18 | ) | (25 | ) | (86 | ) | ||||||||||||||||||
Provision for income taxes | $ | 529 | $ | 2,393 | $ | 5,098 | $ | 3,298 | $ | 3,494 | $ | 1,921 | ||||||||||||
|
|
| ||||||||||||||||||||||
A reconciliation of income taxes at the statutory federal income tax rate to the provision for income taxes included in the accompanying consolidated statementsConsolidated Statements of incomeIncome is as follows (in thousands):
| Year Ended December 31, | Year Ended December 31, | |||||||||||||||||||||||
2017 | 2016 | 2015 | 2023 | 2022 | 2021 | |||||||||||||||||||
Federal tax provision at the statutory rate | $ | 3,687 | $ | 2,152 | $ | 4,802 | $ | 3,887 | $ | 3,274 | $ | 1,631 | ||||||||||||
State income tax provision, net of federal benefit | 424 | 539 | 673 | 528 | 975 | 1,297 | ||||||||||||||||||
Tax credits | (583) | (560) | (425) | (1,197 | ) | (1,227 | ) | (717 | ) | |||||||||||||||
Change in state valuation allowance | 322 | 308 | (8) | |||||||||||||||||||||
Tax Act revaluation of deferred tax balances | (2,685) | - | - | |||||||||||||||||||||
Change in valuation allowance | 3 | 51 | (272 | ) | ||||||||||||||||||||
Adjustments for prior year taxes | (19 | ) | (261 | ) | (13 | ) | ||||||||||||||||||
Changes in uncertain tax positions | 167 | 767 | (10 | ) | ||||||||||||||||||||
Other | (636) | (46) | 56 | (71 | ) | (85 | ) | 5 | ||||||||||||||||
|
|
| ||||||||||||||||||||||
Provision for income taxes | $ | 529 | $ | 2,393 | $ | 5,098 | $ | 3,298 | $ | 3,494 | $ | 1,921 | ||||||||||||
|
|
| ||||||||||||||||||||||
Management periodically assesses the realizability of its deferred tax assets, and to the extent that a recovery is not likely, a valuation allowance is established to reduce the deferred tax asset to the amount estimated to be recoverable. At December 31, 2017,2023, the Company has a valuation allowance of $1.1$2.0 million exists.recorded against deferred tax assets for state net operating losses and certain foreign deferred tax assets.
As of December 31, 2017,2023, the Company had federal, state, and foreign net operating loss carryforwards of $19.5 million. These$3.3 million, $9.0 million, and $8.4 million, respectively. Certain losses have an indefinite carryforward period, while other loss carryforwards will expire in years 20182030 through 2027.2043. A portion of the net operating loss carryforwards are subject to annual limitations under Internal Revenue Code Section 382. The annual limitations could result in the expiration of net operating loss and tax credit carryforwards before they are fully utilized. The Company is subject to income taxation at the federal, foreign, and various state levels. The Company is under examination by the Internal Revenue Service for the 2018 tax year, and it has agreed to finalization of this examination and does not expect the adjustment to exceed the uncertain tax position previously recorded. The Company is no longer subject to U.S. federal tax examinations for tax years 2015 through 2017.before 2020, and with few exceptions, the Company is not subject to examination by foreign or state tax authorities for tax years which ended before 2020. Loss carryforwards and credit carryforwards generated or utilized in years earlier than 20152020 are also subject to examination and adjustment. The Company has completed examinations with the Internal Revenue Service for tax years 2013 and 2014. The Company has research and development tax credit carryforwards of $2.3 million that expire in varying amounts through 2037. As of December 31, 2017, the Company had alternative minimum tax credit carryforwards of $837,000 that are available to offset future regular tax liabilities and do not expire.
On December 22, 2017, the President signed into law the Tax Cuts and Jobs Act (the “Tax Act”), reducing the U.S. corporate income tax rate to 21% effective January 1, 2018. Under ASC 740, the effects of new legislation are recognized in the period that includes the date of enactment. The estimated impact as of December 31, 2017 was to remeasure our deferred tax liability by $2.7 million, which has been reflected in our effective tax rate reconciliation. This impact is our most reasonable estimate at this time; however, we are still analyzing certain aspects of the Tax Act and refining our calculations, which could potentially impact future taxable income.
HEALTHSTREAM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
10. INCOME TAXES (continued)
A reconciliation of the beginning and ending liability for gross unrecognized tax benefits at December 31, 2017 and 2016, are as follows (in thousands):
| December 31, | December 31, | |||||||||||||||
2017 | 2016 | 2023 | 2022 | |||||||||||||
Balance at beginning of year | $ | 397 | $ | 658 | $ | 1,036 | $ | 300 | ||||||||
Additions for tax positions in the current year | 10 | 64 | ||||||||||||||
Additions for tax positions in current year | 298 | 743 | ||||||||||||||
Reductions for tax positions of prior years | (47) | (325) | (174 | ) | (7 | ) | ||||||||||
|
| |||||||||||||||
Balance at end of year | $ | 360 | $ | 397 | $ | 1,160 | $ | 1,036 | ||||||||
|
| |||||||||||||||
Upon reaching the final determination of the 2018 IRS examination, which resulted in a reduction to the research & development tax credit for 2018, the Company evaluated its research & development credit realizability for all open tax years. Taking into consideration the subjectivity of this credit qualification, the Company increased the reserve for uncertain tax positions by $0.1 million during the current year.
The Company recognized approximately $3,000$43,000 and $18,000$31,000 for interest and penalties related to unrecognized tax benefits within the provision for income taxes during the years ended December 31, 2017 2023 and 2016,2022, respectively. Unrecognized tax benefits included tax positions of approximately $337,000$1.2 million and $350,000 at $1.0 million for the years ended December 31, 2017 2023 and 2016,2022, respectively, that if recognized would impact the Company’s effective tax rate. The reduction for tax positions of prior years reflected in the table above as of December 31, 2017, relates to (a) an item considered to be effectively settled with the IRS, and (b) amended returns filed with the state of Wisconsin. The Company estimates that it is reasonably possible the liability for unrecognized tax benefits could decrease up to $23,000 within the next 12 months.
Deferred federal and state income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of deferred tax assets and deferred tax liabilities are as follows (in thousands):
| December 31, | December 31, | |||||||||||||||
2017 | 2016 | 2023 | 2022 | |||||||||||||
Deferred tax assets: | ||||||||||||||||
Allowance for doubtful accounts | $ | 548 | $ | 332 | ||||||||||||
Allowance for credit losses | $ | 202 | $ | 142 | ||||||||||||
Accrued liabilities | 1,981 | 1,275 | 1,013 | 1,111 | ||||||||||||
Lease liability | 5,931 | 6,896 | ||||||||||||||
Tax credits | 3,115 | 1,397 | 467 | 362 | ||||||||||||
Stock based compensation | 841 | 1,171 | ||||||||||||||
Stock-based compensation | 1,161 | 1,064 | ||||||||||||||
Deferred revenue | 1,467 | 1,818 | 628 | 653 | ||||||||||||
Depreciation | 617 | 1,119 | ||||||||||||||
Basis difference on investments | 327 | 316 | ||||||||||||||
Net operating loss carryforwards | 1,015 | 743 | 3,282 | 4,069 | ||||||||||||
|
| |||||||||||||||
Total deferred tax assets | 9,911 | 8,171 | 12,684 | 14,297 | ||||||||||||
Less: Valuation allowance | (1,110 | ) | (654 | ) | (1,992 | ) | (1,947 | ) | ||||||||
|
| |||||||||||||||
Deferred tax assets, net of valuation allowance | 8,801 | 7,517 | 10,692 | 12,350 | ||||||||||||
Deferred tax liabilities: | ||||||||||||||||
Deductible goodwill | 2,917 | 3,267 | 6,829 | 5,691 | ||||||||||||
Nondeductible intangible assets | 1,330 | 2,523 | 2,087 | 2,878 | ||||||||||||
Right of use assets | 5,130 | 6,001 | ||||||||||||||
Prepaid assets | 1,881 | 1,894 | 10,285 | 9,302 | ||||||||||||
Capitalized software development | 4,599 | 5,801 | 181 | 3,415 | ||||||||||||
|
| |||||||||||||||
Depreciation | 1,914 | 2,548 | ||||||||||||||
Basis difference on investments | 151 | 128 | ||||||||||||||
Total deferred tax liabilities | 10,727 | 13,485 | 26,577 | 29,963 | ||||||||||||
|
| |||||||||||||||
Net deferred tax liabilities | $ | (1,926 | ) | $ | (5,968 | ) | $ | 15,885 | $ | 17,613 | ||||||
|
| |||||||||||||||
HEALTHSTREAM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)The Company realized $0.1 million of excess tax deductions related to stock-based awards during the year ended December 31, 2023, which was reflected in the statement of income as a component of the provision for income taxes.
10. STOCK-BASED COMPENSATION
11. STOCK BASED COMPENSATION
Stock Incentive PlansPlan
The Company’s Company has outstanding stock-based awards under its 2016 Omnibus Incentive Plan (“("2016 Plan” Plan"), 2010 Stock and 2022 Omnibus Incentive Plan (“2010 Plan”("2022 Plan"), (collectively, the "2016 Plan" and 2000 Stock Incentive Plan (“2000 Plan”; collectively, the 2016 Plan, the 2010 Plan, and the 2000 Plan,"2022 Plan", referred to as the “Plan”"Plans") authorize. The 2022 Plan authorizes the grant of options, restricted share units (“RSUs”("RSUs"), or other forms of stock basedstock-based compensation to employees, officers, directors, and others, and such grants must be approved by the Compensation Committee of the Board of Directors. Options granted under the Plan have terms of no more than ten years, with certain restrictions. The2022 Plan allows the Compensation Committee of the Board of Directors to determine the vesting period and parameters of each grant. The vesting period of the options and RSUs granted has historically ranged from immediate vesting toincluded annual vesting over a period of up to fourfive years, generally beginning one year after the grant date. As of December 31, 2017, approximately 1.3 million shares of unissued common stock remained reserved for future stock incentive grants under the 2016 Plan. The Company issues new2023, 1,061,235 shares of common stock when options are exercised or when RSUs become vested.were available to be granted under the 2022 Plan.
Stock Option Activity
A summary of activity and various other information relative to stock options for the year ended December 31, 20172023 is presented in the tables belowas follows (in thousands, except weighted-average exercise price).
| Weighted- | Weighted- | |||||||||||||||||||||||
| Common | Average | Aggregate | Common | Average | Aggregate | |||||||||||||||||||
Shares | Exercise Price | Intrinsic Value | Shares | Exercise Price | Intrinsic Value | |||||||||||||||||||
Outstanding at beginning of period | 476 | $ | 6.74 | 90 | $ | 20.34 | ||||||||||||||||||
Granted | - | - | — | — | ||||||||||||||||||||
Exercised | (100) | 4.13 | — | — | ||||||||||||||||||||
Expired | - | - | — | — | ||||||||||||||||||||
Forfeited | - | - | — | — | ||||||||||||||||||||
|
| |||||||||||||||||||||||
Outstanding at end of period | 376 | $ | 7.44 | $ | 5,912 | 90 | $ | 20.34 | $ | 602 | ||||||||||||||
|
|
| ||||||||||||||||||||||
Exercisable at end of period | 376 | $ | 7.44 | $ | 5,912 | 59 | $ | 20.34 | $ | 391 | ||||||||||||||
|
|
| ||||||||||||||||||||||
The aggregate intrinsic value for stock options in the table above represents the total difference between the Company’s closing stock price on December 29, 2017 (the2023 (the last trading day of the year) of $23.16$27.03 per share and the option exercise price, multiplied by the number ofin-the-money in-the money options as of December 31, 2017.2023. The weighted average remaining contractual term of options outstanding at December 31, 20172023 was 0.97 years. Options exercisable at December 31, 2017 have a weighted average remaining contractual term of 0.9 years.
Other information relative to option activity during the three years ended December 31, 2017 is as follows (in thousands):
2017 | 2016 | 2015 | ||||||||||
Total grant date fair value of stock options vested | $ | - | $ | - | $ | 232 | ||||||
|
|
|
|
|
| |||||||
Total intrinsic value of stock options exercised | $ | 1,973 | $ | 820 | $ | 1,662 | ||||||
|
|
|
|
|
| |||||||
Cash proceeds from exercise of stock options | $ | 413 | $ | 145 | $ | 328 | ||||||
|
|
|
|
|
| |||||||
Restricted Share Unit Activity
A summary of activity relative to RSUs for the year ended December 31, 20172023 is as follows (in thousands, except weighted averageweighted-average grant date fair value):
| Weighted- | |||||||||||||||
| Number of | Average | Aggregate | |||||||||||||
RSU’s | Grant Date Fair Value | Intrinsic Value | |||||||||||||
Outstanding at beginning of period | 253 | $ | 23.36 | ||||||||||||
Granted | 111 | 23.43 | |||||||||||||
Vested | (77) | 24.21 | |||||||||||||
Forfeited | (28) | 23.39 | |||||||||||||
|
|
|
| ||||||||||||
Outstanding at end of period | 259 | $ | 23.13 | $ | 6,002 | ||||||||||
|
|
|
|
|
| ||||||||||
HEALTHSTREAM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
11. STOCK BASED COMPENSATION (continued)
Weighted- | ||||||||||||
Number of | Average Grant Date | Aggregate | ||||||||||
RSU’s | Fair Value | Intrinsic Value | ||||||||||
Outstanding at beginning of period | 532 | $ | 22.49 | |||||||||
Granted | 268 | 24.67 | ||||||||||
Vested | (159 | ) | 23.55 | |||||||||
Forfeited | (22 | ) | 23.63 | |||||||||
Outstanding at end of period | 619 | $ | 23.12 | $ | 16,727 | |||||||
The aggregate fair value of RSUs that vested during the year ended December 31, 2017 2023 and 2016,2022, as of the respective vesting dates, was approximately $1.9$3.8 million and $1.5$3.1 million, respectively. A portion of RSUs that vested in 20172023 and 20162022 werenet-share settled such that the Company withheld shares with value equivalent to the employees’ minimum statutory obligation for the applicable income and other employment taxes and remitted the cash to the appropriate taxing authorities. The total shares withheld for RSUstaxes during 20172023 and 20162022 were 17,12236,000 and 15,373,28,000, respectively, and were based on the value of the RSUs on their respective settlement dates as determined by the Company’s closing stock price. Total payments related to RSUs for the employees’ tax obligations to taxing authorities were approximately $412,000$0.9 million in 2017, $316,0002023, $0.6 million in 2016,2022, and $230,000$0.5 million in 2015,2021, and are reflected as a financing activity within the consolidated statementsConsolidated Statements of cash flows. Thesenet-share settlements had the effectCash Flows.
Stock-Based Compensation
Stock Based Compensation
Total stock basedstock-based compensation expense which is recorded in our consolidated statementsthe Consolidated Statements of income, recordedIncome for the years ended December 31, is as follows (in thousands):
| Years Ended December 31, | Years Ended December 31, | |||||||||||||||||||||||
2017 | 2016 | 2015 | 2023 | 2022 | 2021 | |||||||||||||||||||
Cost of revenues (excluding depreciation and amortization) | $ | 76 | $ | 144 | $ | 824 | $ | 183 | $ | 155 | $ | 944 | ||||||||||||
Product development | 258 | 178 | 569 | 692 | 608 | 1,164 | ||||||||||||||||||
Sales and marketing | 240 | 239 | 547 | 485 | 239 | 759 | ||||||||||||||||||
Other general and administrative | 1,278 | 1,407 | 1,340 | 2,793 | 2,552 | 2,436 | ||||||||||||||||||
|
|
| ||||||||||||||||||||||
Total stock based compensation expense | $ | 1,852 | $ | 1,968 | $ | 3,280 | ||||||||||||||||||
|
|
| ||||||||||||||||||||||
Total stock-based compensation expense | $ | 4,153 | $ | 3,554 | $ | 5,303 | ||||||||||||||||||
The Company amortizes the fair value of all stock basedstock-based awards, net of estimated forfeitures, on a straight-line basis over the requisite service period, which generally is the vesting period. As of December 31, 2017,2023, total unrecognized compensation expense related tonon-vested stock options and RSUs was approximately $3.4$6.5 million, net of estimated forfeitures, with a weighted average expense recognition period remaining of 2.562.5 years. The Company realized approximately $426,000$0.1 million of excess tax benefitsdeductions related to stock basedstock-based awards during the year ended December 31, 2017,2023, which was reflected in the statementConsolidated Statement of incomeIncome as a component of the provision for income taxes.
Stock based compensation cost for RSUs is measured based on the closing fair market value of the Company’s stock on the date of grant. Stock based compensation cost for stock options is estimated at the grant date based on the fair value calculated using theBlack-Scholes method. The Company did not grant any stock options during 2017, 2016, or 2015.
Stock Awards
During June 2015,December 2021, the Company’s Chief Executive Officer, (“CEO”), Robert A. Frist, Jr., entered into an agreement with the Company pursuant to which he contributed 54,24186,494 of his personally owned shares of HealthStream, Inc. common stock (valued at $2.25 million) to the Company, without any consideration paid to him.him, for the benefit of the Company’s employees. In connection with this contribution,therewith, effective December 29,2021 the Company approved the grantaward of 49,31086,494 fully vested shares of HealthStream, Inc. common stock to over 6001,000 employees whoof the Company under the HealthStream, Inc. 2016 Omnibus Incentive Plan. These shares were not otherwise eligible to receive equity awards and had at least one year of service withissued in December 2021. As required by ASC Topic 718,Compensation – Stock Compensation, ("ASC 718") the Company. The Company recognized approximately $1.5$2.25 million of stock basedstock-based compensation expense for these stock awards during the three months ended June 30, 2015 December 31, 2021 based on the closing fair market value of the Company’s stock on the date of the Company’s approval of these grants. In connection with these equity awards, effective in the second quarter of 2015, the Company withheld shares with value equivalent to the employees’ minimum statutory obligation for the applicable income and other employment taxes, and remitted the cash to the appropriate taxing authorities. The total shares withheld were 17,279, and were based on the value of the stock awards on the date of the Company’s approval of these grants, as determined by the Company’s closing stock price on that date. Total payments related to the employees’ tax obligations to taxing authorities for these stock awards were approximately $526,000,$0.7 million and are reflected as a financing activity within the consolidated statementsConsolidated Statement of cash flowsCash Flows for 2021. In addition, the year ended employer taxes and expenses associated with these grants were $0.2 million and were recorded as an expense during December 31, 2015. These share withholdings had the effect2021. Mr. Frist contributed an additional 7,113 of share repurchases by the Company as they reduced and retired the numberhis personally owned shares to cover these costs. The receipt of shares otherwise issuablefrom Mr. Frist in connection with the withholding of shares as set forth above are presented on the Company’s Statement of Shareholders’ Equity in a similar manner as a resultshare repurchase (i.e., reduction of the stock awards and did not represent an expense to the Company.outstanding shares).
HEALTHSTREAM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
12. EMPLOYEE BENEFIT PLAN401(k) Plan
401(k) Plan
The Company has a defined-contribution employee benefit plan (“401(k) Plan”)(401(k) Plan) incorporating provisions of Section 401(k)401(k) of the Internal Revenue Code. Employees must have attained the age of 21 and have completed thirty days of service to be eligible to participate in the 401(k)401(k) Plan. Under the provisions of the 401(k)401(k) Plan, a plan member may make contributions, on atax-deferred basis, subject to IRS limitations. The Company elected to provide eligible employees with matching contributions totaling approximately $909,000, $391,000,$1.6 million, $1.5 million, and $645,000$2.0 million for the years ended December 31, 2017, 2016,2023, 2022, and 2015,2021, respectively.
13.
12. DEBT
At December 31, 2017 2023 and 2016,2022, the Company had no debt outstanding.
Revolving Credit Facility
The
On October 6, 2023, the Company entered into a First Amendment toan Amended and Restated Revolving Credit Agreement (“("Revolving Credit Facility”Facility"), amending the Revolving Credit Facility dated as of November 24, 2014, as amended, with SunTrust Bank (“SunTrust”), extendingcertain lenders party thereto from time to time, and Truist, as Administrative Agent for the maturity date to November 24, 2018.lenders. Under the Revolving Credit Facility, the Company may borrow up to $50.0 million, which includes a $5.0 million swing lineswingline sub-facility and a $5.0 million letter of creditsub-facility, as well as an accordion feature that allows the Company to increase the Revolving Credit Facility by a total of up to $25.0 million, subject to securing additional commitments from existing lenders or new lending institutions. The Revolving Credit Facility has a maturity date of October 6, 2026.
The Company's obligations under the Revolving Credit Facility are unsecured. In addition, if the Company forms or acquires any domestic subsidiaries, the loans and other obligations under the Revolving Credit Facility will be guaranteed by each of the Company’ssuch domestic subsidiaries.
At the Company’s election, the borrowings under the Revolving Credit Facility, other than the swingline loans, bear interest at either (1)(1) a base rate defined as the highest of (a) the rate which the Administrative Agent announces from time to time as its prime lending rate, as in effect from time to time, or (b) the Federal Funds Rate, as in effect from time to time, plus one-half of one percent (0.50%) per annum (any changes in such rates to be effective as of the date of any change in such rate), plus in each case an applicable margin that varies with the company’s funded debt leverage ratio; or (2) a term secured overnight financing rate (“SOFR”) defined as the greater of (a)(i) the forward-looking term rate based on SOFR determined as of the reference time for such interest period with a term equivalent to such interest period plus (ii) a term SOFR adjustment equal to 0.10% per annum and (b) zero, plus, in each case, an applicable margin that varies with the Company’s consolidated total leverage ratio. The Company’s borrowings under the swingline loans bear interest at the base rate plus the applicable margin. The initial applicable margin for base rate loans is 0.50% and the initial applicable margin SOFR loans is 1.50%. The applicable margins will be adjusted quarterly, in each case two (2) business days after the Administrative Agent's receipt of the Company's quarterly financial statements. The Company is also required to pay a commitment fee accruing on the unused revolving commitment, which fee initially is 20 basis points per annum and a letter of credit fee, accruing at a rate per annum equal to the highest of SunTrust’s prime rate or 0.5% in excess of the Federal Funds Rate or 1.0% in excess ofone-month LIBOR (the “Base Rate”), plus an applicable margin, or (2) the one, two, three, orsix-month per annum LIBOR for deposits in the applicable currency (the “Eurocurrency Rate”), as selected by the Company, plus an applicable margin. The applicable margin for Eurocurrency RateSOFR loans dependsthen in effect on the Company’s funded debt leverage ratio and varies from 1.50% to 2.00%. The applicable margin for Base Rate loans depends on the Company’s funded debt leverage ratio and varies from 0.50% to 1.50%. Commitment fees anddaily average amount of such lender’s letter of credit fees are also payable under the Revolving Credit Facility. exposure.
Principal is payable in full at maturity on November 24, 2018,October 6, 2026, and there are no scheduled principal payments prior to maturity. The CompanyInterest on base rate loans and swingline loans is required to pay a commitment fee ranging between 20payable quarterly in arrears, and 30 basis points per annuminterest on SOFR loans is payable at the end of each interest period, and in the average daily unused portioncase of interest periods longer than three months, on each day which occurs every three months after the Revolving Credit Facility, depending on the Company’s funded debt leverage ratio.initial date of such interest period.
The purpose of the Revolving Credit Facility is for general working capital needs, permitted acquisitions (as defined in the LoanAmended and Restated Revolving Credit Agreement), and for stock repurchase and/or redemption transactions that the Company may authorize.
The
In addition, the Revolving Credit Facility requires the Company to meet certain financial tests, including, without limitation:
• | a funded debt leverage ratio (consolidated debt/consolidated EBITDA) of not greater than 3.0 to 1.0; and |
• | an interest coverage ratio (consolidated EBITDA/consolidated interest expense) of not less than 3.0 to 1.0. |
In addition, the Revolving Credit Facility contains certain customary affirmative and negative covenants that, among other things, restrict additional indebtedness, liens and encumbrances, changes to the character of the Company’s business, acquisitions, asset dispositions, mergers and consolidations, sale or discount of receivables, creation or acquisitions of additional subsidiaries, and other matters customarily restricted in such agreements.
In addition, the Revolving Credit Facility requires the Company to meet certain financial tests, including, without limitation:
a funded debt leverage ratio (consolidated debt/consolidated EBITDA) of not greater than 3.0 to 1.0; and
an interest coverage ratio (consolidated EBITDA/consolidated interest expense) of not less than 3.0 to 1.0.
As of December 31, 2017,2023, the Company was in material compliance with all covenants. There were no balances outstanding on the Revolving Credit Facility as of December 31, 20172023 and there were no borrowings under the Revolving Credit Facility during the year ended December 31, 2017.2023.
13. LEASES
14. LEASES
The Company hasnon-cancellableCompany’s operating leases primarily for office spacelease expense as presented in other general and hosting facilities. Some lease agreements contain provisions for escalating rent payments overadministrative expense in the initial termsConsolidated Statements of the lease. The Company accounts for these leases by recognizing rent expense on astraight-line basisIncome was $4.6 million, $4.3 million, and adjusting the deferred rent expense liability$5.5 million for the difference betweentwelve months ended December 31, 2023, 2022, and 2021, respectively. Cash paid for amounts included in thestraight-line rent expense and the amount measurement of rent paid. The terms of theoperating lease agreements generally provide the Company the option to renew. Total rent expense under all operating leasesliabilities was approximately $7.6 million, $5.6$4.4 million and $4.3$4.7 million for the years ended December 31, 2017, 2016, 2023 and 2015,2022, respectively.
HEALTHSTREAM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
14. LEASES (continued)The table below presents the lease-related assets and liabilities recorded on the Consolidated Balance Sheets as of December 31, 2023 and 2022 (in thousands).
Year Ended December 31, | |||||||||
2023 | 2022 | ||||||||
Assets | Classification | ||||||||
Operating lease right-of-use assets | Operating lease right of use assets, net | $ | 20,114 | $ | 22,759 | ||||
Total leased assets | $ | 20,114 | $ | 22,759 | |||||
Liabilities | |||||||||
Operating lease liabilities, current | Accounts payable and accrued expenses | $ | 2,974 | $ | 2,840 | ||||
Operating lease liabilities, noncurrent | Operating lease liability, noncurrent | 20,247 | 23,321 | ||||||
Total operating lease liabilities | $ | 23,221 | $ | 26,161 | |||||
Future rental payment commitments at
The table below presents the maturities of lease liabilities under non-cancellable leases as of December 31, 2017 undernon-cancelable operating leases, with initial terms of one year or more, are as follows2023 (in thousands):.
2018 | $ | 4,720 | ||
2019 | 3,495 | |||
2020 | 3,920 | |||
2021 | 3,750 | |||
2022 | 3,744 | |||
Thereafter | 20,361 | |||
|
| |||
Total minimum lease payments | $ | 39,990 | ||
|
|
2024 | $ | 4,296 | ||
2025 | 4,022 | |||
2026 | 3,650 | |||
2027 | 3,385 | |||
2028 | 3,453 | |||
Thereafter | 10,163 | |||
Total undiscounted lease payments | $ | 28,969 | ||
Less imputed interest | 5,748 | |||
Total lease liabilities | $ | 23,221 |
The Company subleases certain of its office space included above undernon-cancellable leases and is due to receive future minimum rental payments of approximately $148,000$0.2 million and $37,000 for the yearyears ended December 31, 2018.2024 and 2025, respectively.
14. LITIGATION
15. COLLABORATIVE ARRANGEMENT
The Company participates in a collaborative arrangement, SimVenturesTM, with Laerdal Medical A/S (“Laerdal Medical”), which is ending effective March 1, 2018. The Company receives 50 percent of the profits or losses generated from this collaborative arrangement. The parties did not form a separate legal entity as part of the collaborative arrangement; therefore, the Company accounts for SimVentures as a collaborative arrangement in accordance with applicable accounting guidance. For the year ended December 31, 2017, the Company recorded approximately $2.2 million of revenues and $1.2 million of expenses related to the collaborative arrangement. For the year ended December 31, 2016, the Company recorded approximately $2.7 million of revenues and $1.4 million of expenses related to the collaborative arrangement. For the year ended December 31, 2015, the Company recorded approximately $2.2 million of revenues and $1.8 million of expenses related to the collaborative arrangement.
16. LITIGATION
In connection with its business, the Company is from time to time involved in various legal actions. The litigation process is inherently uncertain, and it is possible that the resolution of such matters might have a material adverse effect upon the financial condition and/or results of operations of the Company. However, in the opinion of the Company’s management, matters currently pending or threatened against the Company are not expected to have a material adverse effect on the financial position or results of operations of the Company.
HEALTHSTREAM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
17. RELATED PARTY TRANSACTIONS
DuringThe aggregate carrying amount of non-marketable equity investments accounted for using the three monthsmeasurement alternative for equity investments that do not have readily determinable fair values was $1.5 million for both the years ended June 30, 2015, the Company’s CEO, Robert A. Frist, Jr.December 31, 2023 and 2022, entered into an agreement withwhich the Company pursuantevaluates for impairment at each reporting period. There have been no adjustments recorded due to which he contributed 54,241changes in the fair value of his personally owned shares of HealthStream, Inc. common stock tothe non-marketable equity investments the Company without any consideration paid to him. In connection with this contribution, the Company approved the grantheld as of 49,310 shares of common stock to over 600 employees, with aDecember 31, 2023 and 2022. The fair market value of approximately $1.5 million. Mr. Frist contributed 4,931non-marketable equity investments is not estimated if there are no identified events or changes in circumstances that may have a significant adverse effect on the fair value of the contributed shares noted above to take into account the estimated Company costs, such as administrative expenses and employer payroll taxes associated with the grants (See Note 11).investment.
18. SUBSEQUENT EVENTS
On February 12, 2018, the Company divested its Patient Experience (“PX”) business to Press Ganey Associates (“Press Ganey”) for $65.5 million in cash (subject to adjustment based on the working capital
Item 9.Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Item9A.Controls and Procedures
Evaluation of Disclosure Controls and Procedures
HealthStream’s chief executive officer and principal financial officer have reviewed and evaluated the effectiveness of the Company’s disclosure controls and procedures (as defined in Rules13a-15(e) and15d-15(e) promulgated under the Securities Exchange Act of 1934 (the “Exchange Act”)Exchange Act)) as of December 31, 2017.2023. Based on that evaluation, the chief executive officer and principal financial officer have concluded that HealthStream’s disclosure controls and procedures were effective to ensure that the information required to be disclosed by the Company in the reports the Company files or submits under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and the information required to be disclosed in the reports the Company files or submits under the Exchange Act was accumulated and communicated to the Company’s management, including its principal executive and principal financial officer, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.
Management’s
Management’s Annual Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined inRules 13a-15(f) and15d-15(f) under the Exchange Act, and for assessing the effectiveness of internal control over financial reporting. The Company’s internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with GAAP. The Company’s internal control over financial reporting includes those policies and procedures that: (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with GAAP, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the Company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Management assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2017.2023. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control-Integrated Framework (2013 Framework). Management’s assessment included an evaluation of the design of our internal control over financial reporting and testing of the operational effectiveness of our internal control over financial reporting. Management believes that, as of December 31, 2017,2023, the Company’s internal control over financial reporting was effective based on those criteria. The Company’s independent registered public accounting firm, Ernst & Young LLP, has issued an audit report on the Company’s internal control over financial reporting, which appears in Item 8 of this Annual Report on Form10-K.
Changes in Internal Control over Financial Reporting
There were no changes in HealthStream’s internal control over financial reporting that occurred during the fourth quarter of 20172023 that have materially affected, or that are reasonably likely to materially affect, HealthStream’s internal control over financial reporting.
None. Without limiting the generality of the foregoing, during the three months ended December 31, 2023, no director or officer of the Company adopted or terminated any “Rule 10b5-1 trading arrangement,” or any “non-Rule 10b-5 trading arrangement,” as such terms are defined in Item 408(a) of Regulation S-K.
Item9C.Disclosure Regarding Foreign Jurisdictions that Prevent Inspections
None.
Item10.Directors, Executive Officers and Corporate Governance
Information as to directorsrequired by Item 10 of the Company and corporate governancePart III is incorporated by reference from the information to be contained in our proxy statement for the 20182024 Annual Meeting of Shareholders (2018(2024 Proxy Statement) that wethe Company will file with the Securities and Exchange Commission within 120 days of the end of the fiscal year to which this report relates. Pursuant to General Instruction G(3), certain information concerning executive officers of the Company is included in Part I of this Form10-K, under the caption “Executive Officers of the Registrant.”Information about our Executive Officers.
Incorporated
Information required by Item 11 of Part III is incorporated by reference from the information to be contained in the Company’s 20182024 Proxy Statement.
Item12.Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Incorporated
Information required by Item 12 of Part III is incorporated by reference from the information to be contained in the Company’s 20182024 Proxy Statement.
Item13.Certain Relationships and Related Transactions, and Director Independence
Incorporated
Information required by Item 13 of Part III is incorporated by reference from the information to be contained in the Company’s 20182024 Proxy Statement.
Item14.Principal Accounting Fees and Services
Incorporated
Information required by Item 14 of Part III is incorporated by reference from the information to be contained in the Company’s 20182024 Proxy Statement.
Item15.Exhibits, Financial Statement Schedules
(a)(1) Financial Statements
Reference is made to the financial statements included in Item 8 to this Report on Form10-K.
(a)(2) Financial Statement Schedules
All schedules are omitted because they are not applicable or the required information is shown in the Consolidated Financial Statements or the notes thereto.
(a)(3) Exhibits
32.1 | ||
32.2 | ||
| 97 | HealthStream, Inc. Amended and Restated Compensation Recoupment Policy | |
101.1 INS | XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document. | |
101.1 SCH | Inline XBRL Taxonomy Extension Schema | |
101.1 CAL | Inline XBRL Taxonomy Extension Calculation Linkbase | |
101.1 DEF | Inline XBRL Taxonomy Extension Definition Linkbase | |
101.1 LAB | Inline XBRL Taxonomy Extension Label Linkbase | |
101.1 PRE | Inline XBRL Taxonomy Extension Presentation Linkbase | |
104 | Cover Page Interactive Data File (formatted in Inline XBRL and included in Exhibit 101.1) | |
* | Incorporated by reference to Registrant’s Registration Statement on FormS-1, as amended (Reg.No. 333-88939). | |
 | Management contract or compensatory plan or arrangement | |
(1) | ||
| Incorporated by reference from exhibit filed on our Current Report on Form8-K, dated | |
| Incorporated by reference from exhibit filed on our Current Report on Form8-K, dated October 23, 2023. | |
(3) | Incorporated by reference from exhibit filed on our Annual Report on Form 10-K, for the year ended December 31, 2019, filed with the SEC on February 26, 2020. | |
(4) | Incorporated by reference from exhibit filed on our Annual Report on Form 10-K, for the year ended December 31, 2021, filed with the SEC on February 28, 2022. | |
| (5) | Incorporated by reference from exhibit filed on our Current Report on Form 8-K, dated July 25, 2005. | |
| Incorporated by reference from exhibit filed on our Current Report on Form8-K, dated | |
| Incorporated by reference from exhibit filed on our Quarterly Report on Form10-Q, for the quarterly period ended March 31, | |
|
| |
| Incorporated by reference from exhibit filed on our Current Report on Form8-K, dated | |
|
| |
(9) | Incorporated by reference from exhibit filed on our Quarterly Report on Form10-Q, | |
|
| |
|
| |
|
| |
|
| |
| Incorporated by reference from exhibit filed on our Quarterly Report on Form10-Q, for the quarterly period ended June 30, 2017, filed with the SEC on July 31, 2017. | |
| Incorporated by reference from exhibit filed on our Current Report on Form8-K, dated November 14, 2017. | |
| Incorporated by reference from exhibit filed on our Current Report on Form8-K, dated | |
(13) | Incorporated by reference from exhibit filed on our Current Report on Form 8-K, dated October 28, 2020. | |
(14) | Incorporated by reference from exhibit filed on our Current Report on Form 8-K, dated May 16, 2018. | |
(15) | Incorporated by reference from exhibit filed on our Annual Report on Form 10-K, for the year ended December 31, 2020, filed with the SEC on February 26, 2021. | |
(16) | Incorporated by reference from exhibit filed on our Quarterly Report on Form 10-Q, for the quarterly period ended March 31, 2022, filed with the SEC on April 28, 2022. | |
| (17) | Incorporated by reference from exhibit filed on our Current Report on Form 8-K, dated May 31, 2022. | |
| (18) | Incorporated by reference from exhibit filed on our Quarterly Report on Form 10-Q, for the quarterly period ended June 30, 2023, filed with the SEC on July 27, 2023. | |
| (19) | Incorporated by reference from exhibit filed on our Annual Report on Form 10-K, for the year ended December 31, 2022, filed with the SEC on February 28, 2023. | |
| (20) | Incorporated by reference from exhibit filed on our Current Report on Form 8-K, dated October 6, 2023. |
None.
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized on this 26th26th day of February 2018.2024.
HEALTHSTREAM, INC. | |||
By:/s/ | |||
Robert A. Frist, Jr. | |||
Chief Executive Officer |
| ||
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the registrant and in the capacities and on the dates indicated:
Signature | Title(s) | Date | ||
/s/ |
| February 26, | ||
Robert A. Frist, Jr. | Chairman (Principal Executive Officer) | |||
/s/ | Chief Financial Officer and Senior Vice President | February 26, | ||
| (Principal Financial and Accounting Officer) | |||
/s/ | Director | February 26, | ||
Thompson Dent | ||||
/s/ | Director | February 26, | ||
Frank Gordon | ||||
/s/ | Director | February 26, | ||
| ||||
/s/ | Director | February 26, | ||
Jeffrey L. McLaren | ||||
/s/ | Director | February 26, | ||
| ||||
/s/ | Director | February 26, | ||
| ||||
/s/ | Director | February 26, | ||
| ||||
/s/ | Director | February 26, | ||
| ||||
|
| |||
Deborah Taylor Tate | ||||
65