UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
Quarterly Report pursuant to Section 13 or 15(d) of the Securities Exchange Act
of 1934
For the quarterly period ended September 30, 2011
Commission File No.: 000-27701
HealthStream, Inc.
(Exact name of registrant as specified in its charter)
Tennessee | |||
62-1443555 | |||
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | ||
209 10th Avenue South, Suite 450 Nashville, Tennessee | 37203 | ||
(Address of principal executive offices) | (Zip Code) |
(615) 301-3100
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yesþx Noo¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yesþx Noo¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer | ¨ | Accelerated filer | x | |||||
Smaller reporting company | ¨ |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yeso¨ Noþx
As of October 27, 2011, 22,211,085April 23, 2012, 26,108,635 shares of the registrant’s common stock were outstanding.
HEALTHSTREAM, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
September 30, | December 31, | |||||||
2011 | 2010 | |||||||
(Unaudited) | ||||||||
ASSETS | ||||||||
Current assets: | ||||||||
Cash and cash equivalents | $ | 30,236 | $ | 17,868 | ||||
Investments in short-term marketable securities | — | 5,703 | ||||||
Restricted cash | 15 | 85 | ||||||
Interest receivable | — | 51 | ||||||
Accounts receivable, net of allowance for doubtful accounts of $152 and $157 at September 30, 2011 and December 31, 2010, respectively | 13,141 | 11,069 | ||||||
Accounts receivable — unbilled | 1,117 | 1,314 | ||||||
Deferred tax assets, current | 3,437 | 3,437 | ||||||
Prepaid royalties, net of amortization | 1,913 | 3,145 | ||||||
Other prepaid expenses and other current assets | 1,844 | 1,599 | ||||||
Total current assets | 51,703 | 44,271 | ||||||
Property and equipment: | ||||||||
Equipment | 16,088 | 14,348 | ||||||
Leasehold improvements | 4,048 | 2,738 | ||||||
Furniture and fixtures | 2,384 | 2,027 | ||||||
22,520 | 19,113 | |||||||
Less accumulated depreciation and amortization | (16,386 | ) | (15,288 | ) | ||||
6,134 | 3,825 | |||||||
Capitalized software development, net of accumulated amortization of $7,673 and $5,887 at September 30, 2011 and December 31, 2010, respectively | 7,746 | 4,333 | ||||||
Goodwill | 21,147 | 21,147 | ||||||
Intangible assets, net of accumulated amortization of $8,712 and $8,043 at September 30, 2011 and December 31, 2010, respectively | 2,175 | 2,844 | ||||||
Deferred tax assets, noncurrent | 2,445 | 5,347 | ||||||
Other assets | 85 | 244 | ||||||
Total assets | $ | 91,435 | $ | 82,011 | ||||
LIABILITIES AND SHAREHOLDERS’ EQUITY | ||||||||
Current liabilities: | ||||||||
Accounts payable | $ | 1,302 | $ | 2,375 | ||||
Accrued liabilities | 4,123 | 4,121 | ||||||
Accrued compensation and related expenses | 1,499 | 1,506 | ||||||
Deferred revenue | 20,488 | 16,740 | ||||||
Capital lease obligations | — | 4 | ||||||
Total current liabilities | 27,412 | 24,746 | ||||||
Other long-term liabilities | 458 | 474 | ||||||
Commitments and contingencies | — | — | ||||||
Shareholders’ equity: | ||||||||
Common stock, no par value, 75,000 shares authorized; 22,211 and 21,805 shares issued and outstanding at September 30, 2011 and December 31, 2010, respectively | 98,844 | 97,227 | ||||||
Accumulated deficit | (35,279 | ) | (40,431 | ) | ||||
Accumulated other comprehensive loss | — | (5 | ) | |||||
Total shareholders’ equity | 63,565 | 56,791 | ||||||
Total liabilities and shareholders’ equity | $ | 91,435 | $ | 82,011 | ||||
March 31, | December 31, | |||||||
2012 | 2011 | |||||||
(Unaudited) | ||||||||
ASSETS | ||||||||
Current assets: | ||||||||
Cash and cash equivalents | $ | 24,268 | $ | 76,904 | ||||
Marketable securities – short-term | 61,284 | 6,552 | ||||||
Accounts receivable, net of allowance for doubtful accounts of $149 and $149 | 16,324 | 16,014 | ||||||
Accounts receivable - unbilled | 1,046 | 1,316 | ||||||
Deferred tax assets, current | 4,140 | 5,080 | ||||||
Prepaid royalties, net of amortization | 1,859 | 3,409 | ||||||
Other prepaid expenses and other current assets | 1,980 | 1,804 | ||||||
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Total current assets | 110,901 | 111,079 | ||||||
Property and equipment: | ||||||||
Equipment | 16,472 | 16,362 | ||||||
Leasehold improvements | 4,193 | 4,170 | ||||||
Furniture and fixtures | 2,642 | 2,545 | ||||||
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23,307 | 23,077 | |||||||
Less accumulated depreciation and amortization | (17,078 | ) | (16,990 | ) | ||||
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6,229 | 6,087 | |||||||
Marketable securities – long-term | 6,002 | 5,996 | ||||||
Capitalized software development, net of accumulated amortization of $8,982 | 8,302 | 7,940 | ||||||
Goodwill | 21,147 | 21,147 | ||||||
Intangible assets, net of accumulated amortization of $9,148 and $8,930 | 1,739 | 1,957 | ||||||
Other assets | 31 | 31 | ||||||
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Total assets | $ | 154,351 | $ | 154,237 | ||||
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LIABILITIES AND SHAREHOLDERS’ EQUITY | ||||||||
Current liabilities: | ||||||||
Accounts payable | $ | 1,426 | $ | 2,585 | ||||
Accrued liabilities | 3,904 | 5,492 | ||||||
Accrued compensation and related expenses | 672 | 1,612 | ||||||
Deferred revenue | 24,233 | 22,759 | ||||||
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Total current liabilities | 30,235 | 32,448 | ||||||
Deferred tax liabilities, noncurrent | 323 | 323 | ||||||
Other long term liabilities | 620 | 551 | ||||||
Commitments and contingencies | — | — | ||||||
Shareholders’ equity: | ||||||||
Common stock, no par value, 75,000 shares authorized; 26,098 and 25,896 | 155,247 | 154,409 | ||||||
Accumulated deficit | (32,067 | ) | (33,487 | ) | ||||
Accumulated other comprehensive loss | (7 | ) | (7 | ) | ||||
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Total shareholders’ equity | 123,173 | 120,915 | ||||||
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Total liabilities and shareholders’ equity | $ | 154,351 | $ | 154,237 | ||||
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See accompanying notes to the condensed consolidated financial statements.
1
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(In thousands, except per share data)
Three Months Ended September 30, | ||||||||
2011 | 2010 | |||||||
Revenues, net | $ | 20,618 | $ | 16,616 | ||||
Operating costs and expenses: | ||||||||
Cost of revenues (excluding depreciation and amortization) | 7,915 | 6,274 | ||||||
Product development | 1,946 | 1,750 | ||||||
Sales and marketing | 3,810 | 3,358 | ||||||
Other general and administrative expenses | 2,782 | 2,401 | ||||||
Depreciation and amortization | 1,471 | 1,143 | ||||||
Total operating costs and expenses | 17,924 | 14,926 | ||||||
Income from operations | 2,694 | 1,690 | ||||||
Other income (expense): | ||||||||
Interest and other income | 5 | 4 | ||||||
Interest and other expense | (13 | ) | (9 | ) | ||||
Total other expense, net | (8 | ) | (5 | ) | ||||
Income before income tax provision | 2,686 | 1,685 | ||||||
Income tax provision | 890 | 889 | ||||||
Net income | $ | 1,796 | $ | 796 | ||||
Net income per share: | ||||||||
Basic | $ | 0.08 | $ | 0.04 | ||||
Diluted | $ | 0.08 | $ | 0.04 | ||||
Weighted average shares of common stock outstanding: | ||||||||
Basic | 22,164 | 21,807 | ||||||
Diluted | 23,496 | 22,511 | ||||||
Three Months Ended March 31, | ||||||||
2012 | 2011 | |||||||
Revenues, net | $ | 23,674 | $ | 18,506 | ||||
Operating costs and expenses: | ||||||||
Cost of revenues (excluding depreciation and amortization) | 9,575 | 7,070 | ||||||
Product development | 1,869 | 1,786 | ||||||
Sales and marketing | 5,536 | 3,508 | ||||||
Other general and administrative expenses | 2,819 | 2,542 | ||||||
Depreciation and amortization | 1,534 | 1,043 | ||||||
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Total operating costs and expenses | 21,333 | 15,949 | ||||||
Income from operations | 2,341 | 2,557 | ||||||
Other income (expense), net | 19 | 20 | ||||||
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Income before income tax provision | 2,360 | 2,577 | ||||||
Income tax provision | 940 | 1,051 | ||||||
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Net income | $ | 1,420 | $ | 1,526 | ||||
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Earnings per share: | ||||||||
Basic | $ | 0.05 | $ | 0.07 | ||||
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Diluted | $ | 0.05 | $ | 0.07 | ||||
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Weighted average shares of common stock outstanding: | ||||||||
Basic | 25,999 | 21,837 | ||||||
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Diluted | 27,335 | 22,969 | ||||||
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See accompanying notes to the condensed consolidated financial statements.
2
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
(In thousands, except per share data)
Nine Months Ended September 30, | ||||||||
2011 | 2010 | |||||||
Revenues, net | $ | 60,175 | $ | 48,114 | ||||
Operating costs and expenses: | ||||||||
Cost of revenues (excluding depreciation and amortization) | 22,623 | 17,643 | ||||||
Product development | 5,644 | 4,999 | ||||||
Sales and marketing | 11,674 | 9,369 | ||||||
Other general and administrative expenses | 8,009 | 6,885 | ||||||
Depreciation and amortization | 3,868 | 3,769 | ||||||
Total operating costs and expenses | 51,818 | 42,665 | ||||||
Income from operations | 8,357 | 5,449 | ||||||
Other income (expense): | ||||||||
Interest and other income | 43 | 13 | ||||||
Interest and other expense | (35 | ) | (31 | ) | ||||
Total other income (expense), net | 8 | (18 | ) | |||||
Income before income tax provision | 8,365 | 5,431 | ||||||
Income tax provision | 3,213 | 2,481 | ||||||
Net income | $ | 5,152 | $ | 2,950 | ||||
Net income per share: | ||||||||
Basic | $ | 0.23 | $ | 0.14 | ||||
Diluted | $ | 0.22 | $ | 0.13 | ||||
Weighted average shares of common stock outstanding: | ||||||||
Basic | 22,001 | 21,759 | ||||||
Diluted | 23,272 | 22,358 | ||||||
Three Months Ended March 31, | ||||||||
2012 | 2011 | |||||||
Net income | $ | 1,420 | $ | 1,526 | ||||
Other comprehensive income, net of taxes: | ||||||||
Unrealized gain on marketable securities | — | 4 | ||||||
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Total other comprehensive income | — | 4 | ||||||
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Comprehensive income | $ | 1,420 | $ | 1,530 | ||||
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See accompanying notes to the condensed consolidated financial statements.
3
CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY (UNAUDITED)NINE
THREE MONTHS ENDED SEPTEMBER 30, 2011
MARCH 31, 2012
(In thousands)
Accumulated Other | Total | |||||||||||||||||||
Common Stock | Accumulated | Comprehensive | Shareholders’ | |||||||||||||||||
Shares | Amount | Deficit | (Loss) | Equity | ||||||||||||||||
Balance at December 31, 2010 | 21,805 | $ | 97,227 | $ | (40,431 | ) | $ | (5 | ) | $ | 56,791 | |||||||||
Net income | — | — | 5,152 | — | 5,152 | |||||||||||||||
Unrealized gain on investments in marketable securities | — | — | — | 5 | 5 | |||||||||||||||
Stock based compensation expense | — | 597 | — | — | 597 | |||||||||||||||
Exercise of stock options | 406 | 1,020 | — | — | 1,020 | |||||||||||||||
Balance at September 30, 2011 | 22,211 | $ | 98,844 | $ | (35,279 | ) | $ | — | $ | 63,565 | ||||||||||
Common Stock | Accumulated | Accumulated Other Comprehensive | Total Shareholders’ | |||||||||||||||||
Shares | Amount | Deficit | (Loss) | Equity | ||||||||||||||||
Balance at December 31, 2011 | 25,896 | $ | 154,409 | $ | (33,487 | ) | $ | (7 | ) | $ | 120,915 | |||||||||
Net income | — | — | 1,420 | — | 1,420 | |||||||||||||||
Other comprehensive income | — | — | — | — | ||||||||||||||||
Stock based compensation expense | — | 242 | — | — | 242 | |||||||||||||||
Exercise of stock options | 202 | 596 | — | — | 596 | |||||||||||||||
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Balance at March 31, 2012 | 26,098 | $ | 155,247 | $ | (32,067 | ) | $ | (7 | ) | $ | 123,173 | |||||||||
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See accompanying notes to the condensed consolidated financial statements.
4
Nine Months Ended September 30, | ||||||||
2011 | 2010 | |||||||
OPERATING ACTIVITIES: | ||||||||
Net income | $ | 5,152 | $ | 2,950 | ||||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||
Depreciation and amortization | 3,868 | 3,769 | ||||||
Stock based compensation expense | 597 | 498 | ||||||
Deferred income taxes | 2,902 | 2,338 | ||||||
Provision for doubtful accounts | 45 | 20 | ||||||
Changes in operating assets and liabilities: | ||||||||
Accounts and unbilled receivables | (1,920 | ) | (1,366 | ) | ||||
Restricted cash | 70 | 23 | ||||||
Prepaid royalties | 1,233 | 314 | ||||||
Other prepaid expenses and other current assets | (356 | ) | (402 | ) | ||||
Other assets | 243 | 134 | ||||||
Accounts payable | (1,073 | ) | (730 | ) | ||||
Accrued liabilities and accrued compensation and related expenses and other long-term liabilities | (21 | ) | (600 | ) | ||||
Deferred revenue | 3,748 | 4,869 | ||||||
Net cash provided by operating activities | 14,488 | 11,817 | ||||||
INVESTING ACTIVITIES: | ||||||||
Proceeds from maturities of investments in marketable securities | 10,351 | — | ||||||
Purchases of investments in marketable securities | (4,728 | ) | — | |||||
Payments associated with capitalized software development | (5,199 | ) | (1,586 | ) | ||||
Purchases of property and equipment | (3,560 | ) | (850 | ) | ||||
Net cash used in investing activities | (3,136 | ) | (2,436 | ) | ||||
FINANCING ACTIVITIES: | ||||||||
Proceeds from exercise of stock options | 1,020 | 469 | ||||||
Repurchase of common stock | — | (380 | ) | |||||
Payments on note payable | — | (307 | ) | |||||
Payments on capital lease obligations | (4 | ) | (7 | ) | ||||
Net cash provided by (used in) financing activities | 1,016 | (225 | ) | |||||
Net increase in cash and cash equivalents | 12,368 | 9,156 | ||||||
Cash and cash equivalents at beginning of period | 17,868 | 12,287 | ||||||
Cash and cash equivalents at end of period | $ | 30,236 | $ | 21,443 | ||||
Three Months Ended March 31, | ||||||||
2012 | 2011 | |||||||
OPERATING ACTIVITIES: | ||||||||
Net income | $ | 1,420 | $ | 1,526 | ||||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||
Depreciation and amortization | 1,534 | 1,043 | ||||||
Stock based compensation expense | 242 | 190 | ||||||
Deferred income taxes | 940 | 1,051 | ||||||
Changes in operating assets and liabilities: | ||||||||
Accounts and unbilled receivables | (40 | ) | (2,075 | ) | ||||
Prepaid royalties | 1,550 | 741 | ||||||
Other prepaid expenses and other current assets | (232 | ) | (186 | ) | ||||
Other assets | 146 | 91 | ||||||
Accounts payable | (1,160 | ) | (1,000 | ) | ||||
Accrued liabilities and accrued compensation and related expenses and other long-term liabilities | (2,460 | ) | (1,180 | ) | ||||
Deferred revenue | 1,474 | 3,342 | ||||||
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Net cash provided by operating activities | 3,414 | 3,543 | ||||||
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INVESTING ACTIVITIES: | ||||||||
Proceeds from maturities of investments in marketable securities | 3,500 | 2,135 | ||||||
Purchases of investments in marketable securities | (58,383 | ) | (4,728 | ) | ||||
Payments associated with capitalized software development | (1,000 | ) | (4,086 | ) | ||||
Purchases of property and equipment | (763 | ) | (708 | ) | ||||
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Net cash used in investing activities | (56,646 | ) | (7,387 | ) | ||||
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FINANCING ACTIVITIES: | ||||||||
Proceeds from exercise of stock options | 596 | 199 | ||||||
Payments on capital lease obligations | — | (2 | ) | |||||
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Net cash provided by financing activities | 596 | 197 | ||||||
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Net decrease in cash and cash equivalents | (52,636 | ) | (3,647 | ) | ||||
Cash and cash equivalents at beginning of period | 76,904 | 17,868 | ||||||
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Cash and cash equivalents at end of period | $ | 24,268 | $ | 14,221 | ||||
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See accompanying notes to the condensed consolidated financial statements.
5
1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“US GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, condensed consolidated financial statements do not include all of the information and footnotes required by US GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. All significant intercompany transactions have been eliminated in consolidation. Operating results for the three and nine months ended September 30, 2011March 31, 2012 are not necessarily indicative of the results that may be expected for the year ending December 31, 2011.
The balance sheet at December 31, 20102011 is consistent with the audited financial statements at that date but does not include all of the information and footnotes required by US GAAP for a complete set of financial statements. For further information, refer to the consolidated financial statements and footnotes thereto for the year ended December 31, 20102011 (included in the Company’s Annual Report on Form 10-K, filed with the Securities and Exchange Commission on March 23, 2011 and as amended on August 10, 2011)February 28, 2012).
2. 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.
During the ninethree months ended September 30,March 31, 2012 and 2011, and 2010, the Company recorded a provision for income taxes of $3.2 million$940,000 and $2.5$1.1 million, respectively. The Company’s effective tax rate for the ninethree months ended September 30,March 31, 2012 and 2011 was 39.8% and 2010 was 38.4% and 45.7%40.8%, respectively. The Company’s effective tax rate primarily reflects the statutory corporate income tax rate, the net effect of state taxes, and the effect of various immaterial permanent tax differences.
3. STOCK BASED COMPENSATION
The Company maintains two stock incentive plans. The Company accounts for its stock based compensation plans using the fair-value based method for costs related to share-based payments, including stock options.options and restricted share units. During the ninethree months ended September 30,March 31, 2012, the Company issued 69,950 restricted share units with a grant date fair value of $23.00 per share, measured based on the closing fair market value of the Company’s stock on the date of grant. During the three months ended March 31, 2011, the Company granted 362,750219,750 stock options with a weighted average grant date fair value of $4.67. During the nine months ended September 30, 2010, the Company granted 319,000 stock options with a weighted average grant date fair value of $2.07.$3.51. The fair value of stock based awardsoptions granted during the ninethree months ended September 30,March 31, 2011 and 2010 was estimated using the Black Scholes option pricing model, with the assumptions as follows:
Nine Months Ended | ||||||||
September 30, | ||||||||
2011 | 2010 | |||||||
Risk-free interest rate | 1.05 — 2.39 | % | 2.39 — 2.49 | % | ||||
Expected dividend yield | 0.0 | % | 0.0 | % | ||||
Expected life | 5 — 7 years | 5 — 7 years | ||||||
Expected forfeiture rate | 0–5 | % | 0–10 | % | ||||
Volatility | 50 | % | 55 | % |
Three Months Ended March 31, 2011 | ||||
Risk-free interest rate | 2.37 | % | ||
Expected dividend yield | 0.0 | % | ||
Expected life | 5 years | |||
Expected forfeiture rate | 5 | % | ||
Volatility | 50 | % |
Total stock based compensation expense recorded for the three and nine months ended September 30,March 31, 2012 and 2011, and 2010, which is recorded in the condensed consolidated statements of income, is as follows (in thousands):
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
Cost of revenues (excluding depreciation and amortization) | $ | 9 | $ | 9 | $ | 29 | $ | 28 | ||||||||
Product development | 34 | 32 | 110 | 96 | ||||||||||||
Sales and marketing | 35 | 40 | 117 | 126 | ||||||||||||
Other general and administrative | 145 | 85 | 341 | 248 | ||||||||||||
Total stock based compensation expense | $ | 223 | $ | 166 | $ | 597 | $ | 498 | ||||||||
6
Three Months Ended March 31, | ||||||||
2012 | 2011 | |||||||
Cost of revenues (excluding depreciation and amortization) | $ | 10 | $ | 11 | ||||
Product development | 34 | 40 | ||||||
Sales and marketing | 38 | 48 | ||||||
Other general and administrative | 160 | 91 | ||||||
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Total stock based compensation expense | $ | 242 | $ | 190 | ||||
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
4. NET INCOMEEARNINGS PER SHARE
Basic net incomeearnings 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 net incomeearnings 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, composed of incremental common shares issuable upon the exercise of stock options and warrants, escrowed or restricted shares, and sharesshare units subject to vesting are included in diluted net incomeearnings per share only to the extent these shares are dilutive. Common equivalent shares are dilutive when the average market price during the period exceeds the exercise price of the underlying shares. The total number of common equivalent shares excluded from the calculations of diluted net incomeearnings per share, due to their anti-dilutive effect, was approximately 0.10.2 million and 0.3 million for the three and nine months ended September 30,March 31, 2012 and 2011, respectively, and approximately 0.3 million and 0.5 million for the three and nine months ended September 30, 2010, respectively.
The following table sets forth the computation of basic and diluted net incomeearnings per share for the three and nine months ended September 30,March 31, 2012 and 2011 and 2010 (in thousands, except per share data):
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
Numerator: | ||||||||||||||||
Net income | $ | 1,796 | $ | 796 | $ | 5,152 | $ | 2,950 | ||||||||
Denominator: | ||||||||||||||||
Weighted average shares outstanding: | ||||||||||||||||
Basic | 22,164 | 21,807 | 22,001 | 21,759 | ||||||||||||
Employee stock options | 1,332 | 704 | 1,271 | 599 | ||||||||||||
Diluted | 23,496 | 22,511 | 23,272 | 22,358 | ||||||||||||
Net income per share: | ||||||||||||||||
Basic | $ | 0.08 | $ | 0.04 | $ | 0.23 | $ | 0.14 | ||||||||
Diluted | $ | 0.08 | $ | 0.04 | $ | 0.22 | $ | 0.13 | ||||||||
Three Months Ended March 31, | ||||||||
2012 | 2011 | |||||||
Numerator: | ||||||||
Net income | $ | 1,420 | $ | 1,526 | ||||
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Denominator: | ||||||||
Weighted-average shares outstanding | 25,999 | 21,837 | ||||||
Effect of dilutive shares | 1,336 | 1,132 | ||||||
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Weighted-average diluted shares | 27,335 | 22,969 | ||||||
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Basic earnings per share | $ | 0.05 | $ | 0.07 | ||||
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Diluted earnings per share | $ | 0.05 | $ | 0.07 | ||||
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5. COLLABORATIVE ARRANGEMENT
At March 31, 2012 and Laerdal Medical Corporation (Laerdal Medical). 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. During the first quarter ofDecember 31, 2011, the Company acquired a fifty percent ownership interestfair value of marketable securities, which were all classified as available for sale, included the following (in thousands):
March 31, 2012 | ||||||||||||||||
Adjusted Cost | Unrealized Gains | Unrealized Losses | Fair Value | |||||||||||||
Level 1: | ||||||||||||||||
Mutual funds | $ | 5,011 | $ | 12 | $ | — | $ | 5,023 | ||||||||
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Level 2: | ||||||||||||||||
Corporate debt securities | 16,171 | — | (7 | ) | 16,164 | |||||||||||
U.S. government securities | 46,111 | 1 | (13 | ) | 46,099 | |||||||||||
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Subtotal | 62,282 | 1 | (20 | ) | 62,263 | |||||||||||
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Total | $ | 67,293 | $ | 13 | $ | (20 | ) | $ | 67,286 | |||||||
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December 31, 2011 | ||||||||||||||||
Adjusted Cost | Unrealized Gains | Unrealized Losses | Fair Value | |||||||||||||
Level 1: | ||||||||||||||||
Mutual funds | $ | 2,504 | $ | — | $ | — | $ | 2,504 | ||||||||
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Level 2: | ||||||||||||||||
Corporate debt securities | 2,038 | — | (1 | ) | 2,037 | |||||||||||
U.S. government securities | 8,013 | — | (6 | ) | 8,007 | |||||||||||
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Subtotal | 10,051 | — | (7 | ) | 10,044 | |||||||||||
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Total | $ | 12,555 | $ | — | $ | (7 | ) | $ | 12,548 | |||||||
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The carrying amounts reported in Laerdal Medical’s Advanced Video System (AVS) product for $3.5 million in cash. AVS is a product that enables users of advanced patient simulators to easily capture video, audio, data logs, and “patient” responses. The AVS product is now jointly owned through SimVentures. During the second quarter of 2011, SimVentures launched SimStore™, one of the components of SimCenter™ that offers healthcare providers an opportunity to sample and purchase simulation scenarios to use in their simulation training activities. During the nine months ended September 30, 2011, the Company recorded approximately $0.5 million of revenues and $0.9 million of expenses related to the collaborative arrangement. The expenses are primarily recorded in the product development, sales and marketing and depreciation and amortization categories within the condensed consolidated statements of income.balance sheet approximate the fair value based on quoted market prices or alternative pricing sources and models utilizing market observable inputs. The Company also recorded approximately $4.0 million of capitalized software development for SimVentures during 2011, comprisedmaturities of the $3.5 million paid forCompany’s long-term marketable securities are less than two years. As of March 31, 2012, the AVS product and $0.5 million associated with SimStoreTM.
HEALTHSTREAM, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
6. BUSINESS SEGMENTS
The Company primarily provides services to healthcare organizations and to a lesser extent, to pharmaceutical and medical device companies and other members within the healthcare industry. The Company’s services are primarily focused on the delivery of education and training products and services (HealthStream Learning), as well as survey and research services (HealthStream Research). The accounting policies of the segments are the same as those described in the summary of significant accounting policies in the Company’s Annual Report on Form 10-K, as amended, for the year ended December 31, 2010.
7
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
Revenues | 2011 | 2010 | 2011 | 2010 | ||||||||||||
HealthStream Learning | $ | 14,805 | $ | 11,527 | $ | 42,248 | $ | 33,070 | ||||||||
HealthStream Research | 5,813 | 5,089 | 17,927 | 15,044 | ||||||||||||
Total net revenue | $ | 20,618 | $ | 16,616 | $ | 60,175 | $ | 48,114 | ||||||||
Income from operations | ||||||||||||||||
HealthStream Learning | $ | 4,649 | $ | 3,686 | $ | 13,124 | $ | 11,033 | ||||||||
HealthStream Research | 504 | 39 | 1,977 | 665 | ||||||||||||
Unallocated | (2,459 | ) | (2,035 | ) | (6,744 | ) | (6,249 | ) | ||||||||
Total income from operations | $ | 2,694 | $ | 1,690 | $ | 8,357 | $ | 5,449 | ||||||||
Segment assets * | September 30, 2011 | December 31, 2010 | ||||||
HealthStream Learning | $ | 23,670 | $ | 18,731 | ||||
HealthStream Research | 25,256 | 26,702 | ||||||
Unallocated | 42,509 | 36,578 | ||||||
Total assets | $ | 91,435 | $ | 82,011 | ||||
Three Months Ended March 31, | ||||||||
2012 | 2011 | |||||||
Revenues | ||||||||
Learning | $ | 17,798 | $ | 12,987 | ||||
Research | 5,876 | 5,519 | ||||||
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Total net revenue | $ | 23,674 | $ | 18,506 | ||||
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Income from operations | ||||||||
Learning | $ | 4,757 | $ | 4,267 | ||||
Research | 279 | 327 | ||||||
Unallocated | (2,695 | ) | (2,037 | ) | ||||
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Total income from operations | $ | 2,341 | $ | 2,557 | ||||
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March 31, 2012 | December 31, 2011 | |||||||
Segment assets * | ||||||||
Learning | $ | 25,990 | $ | 27,322 | ||||
Research | 25,743 | 26,088 | ||||||
Unallocated | 102,618 | 100,827 | ||||||
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Total assets | $ | 154,351 | $ | 154,237 | ||||
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* | Segment assets include |
8
Special Cautionary Notice Regarding Forward-Looking Statements
You should read the following discussion and analysis in conjunction with our condensed consolidated financial statements and related notes included elsewhere in this report and our audited consolidated financial statements and the notes thereto for the year ended December 31, 2010,2011, appearing in our Annual Report on Form 10-K that was filed with the Securities and Exchange Commission (“SEC”) on March 23, 2011 as amended on August 10, 2011February 28, 2012, (the “2010“2011 Form 10-K”). Statements contained in this Quarterly Report on Form 10-Q that are not historical fact are forward-looking statements that the Company intends to be covered by the safe harbor provisions for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995. Statements that are predictive in nature, that depend on or refer to future events or conditions, or that include words such as “anticipates,” “believes,” “could,” “estimates,” “expects,” “intends,” “may,���” “plans,” “potential,” “predicts,” “ projects,” “should,” “will,” “would,” and similar expressions are forward-looking statements.
The Company cautions that forward-looking statements involve known and unknown risks, uncertainties, and other factors that may cause actual results, performance, or achievements to be materially different from any future results, performance, or achievements expressed or implied by the forward-looking statements. Forward-looking statements reflect our current views with respect to future events and are based on assumptions and subject to risks and uncertainties. Given these uncertainties, you should not place undue reliance on these forward-looking statements.
In evaluating any forward-looking statement, you should specifically consider the information regarding forward-looking statements and the information set forth under the caption “Item 1A. Risk Factors” in our 20102011 Form 10-K and the information regarding forward-looking statements in our earnings releases, as well as other cautionary statements contained elsewhere in this report, including the matters discussed in “Critical Accounting Policies and Estimates.” We undertake no obligation beyond that required by law to update publicly any forward-looking statements for any reason, even if new information becomes available or other events occur in the future. You should read this report and the documents that we reference in this report and have filed as exhibits to this report completely and with the understanding that our actual future results may be materially different from what we expect.
Overview
HealthStream provides servicesInternet-based learning and research solutions for healthcare organizations—all designed to assess and develop the people that deliver patient care which, in turn, supports the improvement of business and clinical outcomes. Our learning products are used by healthcare organizations to meet a broad range of their training, certification, and development needs, while our research products provide our customers information about patients’ experiences, workforce engagement, physician relations, and community perceptions of their services. HealthStream’s customers include healthcare organizations, pharmaceutical and medical device companies, and other participants withinin the healthcare industry. Our services are primarily focused on the delivery of education and training products and services (HealthStream Learning), as well as survey and research services (HealthStream Research). HealthStream Learning products and services include our Internet-based HealthStream Learning Center® (HLC), authoring tools, courseware subscriptions, implementation and consulting services, content development, online sales training courses (RepDirect™), HospitalDirect®, SimVentures, and other products focused on education and training to serve professionals that work within healthcare organizations. HealthStream Research provides a wide range of quality and satisfaction surveys, data analyses of survey results, and other research-based measurement tools focused on patients, employees, physicians, and members of the community. Our learning solutions help healthcare organizations improve their required regulatory training, while also offering an opportunity to train their employees in multiple clinical areas. Our research products provide customers valuable insight into measuring quality and satisfaction of patients, employees, physicians, and members of the community.
Key financial indicators for the thirdfirst quarter of 2012 include:
Revenues of $23.7 million in the first quarter of 2012, up 28% over the first quarter of 2011
Operating income of $2.3 million in the first quarter of 2012, compared to $2.6 million in the first quarter of 2011: annual customer Summit net costs of approximately $520,000 incurred in the first quarter of 2012 versus the second quarter of 2011
Net income of $1.4 million in the first quarter of 2012, compared to net income of $1.5 million in the first quarter of 2011, include:and earnings per share (EPS) of $0.05 per share in the first quarter of 2012, compared to EPS of $0.07 per share in the first quarter of 2011
• | Adjusted EBITDA(1) of | ||
(1) | - Adjusted EBITDA is a non-GAAP financial measure. A reconciliation of | ||
Critical Accounting Policies and Estimates
The Company’s condensed consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States (US GAAP). These accounting principles require us to make certain estimates, judgments and assumptions during the preparation of our financial statements. We believe the estimates, judgments and assumptions upon which we rely are reasonable based upon information available to us at the time they are made. These estimates, judgments and assumptions can affect the reported amounts of assets and liabilities as of the date of the financial statements, as well as the reported amounts of revenues and expenses during the periods presented. To the extent there are material differences between these estimates, judgments or assumptions and actual results, our financial statements will be affected.
9
Revenue recognition
Accounting for income taxes
Software development costs
Goodwill, intangibles, and other long-lived assets
Allowance for doubtful accounts
Accrual for service credits
Stock based compensation
In many cases, the accounting treatment of a particular transaction is specifically dictated by US GAAP and does not require management’s judgment in its application. There are also areas in which management’s judgment in selecting among available alternatives would not produce a materially different result. See Notes to Consolidated Financial Statements in our 20102011 Form 10-K, which contains additional information regarding our accounting policies and other disclosures required by US GAAP. There have been no changes in our critical accounting policies and estimates from those reported in our 20102011 Form 10-K.
10
Revenues, net.Revenues increased approximately $4.0$5.2 million, or 24.1%27.9%, to $20.6$23.7 million for the three months ended September 30, 2011March 31, 2012 from $16.6$18.5 million for the three months ended September 30, 2010.March 31, 2011. Revenues for 20112012 consisted of $14.8$17.8 million, or 72%75% of total revenue, for HealthStream Learning and $5.8$5.9 million, or 28%25% of total revenue, for HealthStream Research. In 2010,2011, revenues consisted of $11.5$13.0 million, or 69%70% of total revenue, for HealthStream Learning and $5.1$5.5 million, or 31%30% of total revenue, for HealthStream Research.
Revenues for HealthStream Learning increased $3.3$4.8 million, or 28.4%37.0%, over the thirdfirst quarter of 2010.2011. Revenues from our Internet-based subscription learning products increased by $3.2$3.5 million, or 28.1% over the prior year third quarter, and were comprised of revenue increases from the HLC of $1.1 million and from courseware subscriptions of $2.0 million. Revenues from our Internet-based subscription products increased 29.4% over the prior year thirdfirst quarter due to a higher number of subscribers and more courseware consumption by subscribers. Our HLC subscriber base increased to 2,536,0002,659,000 fully-implemented subscribers and 2,653,0002,790,000 contracted subscribers at September 30, 2011March 31, 2012 compared to 2,175,0002,400,000 fully-implemented subscribers and 2,365,0002,523,000 contracted subscribers at September 30, 2010.March 31, 2011. “Contracted subscribers” include both those already implemented (2,536,000(2,659,000 and 2,175,0002,400,000 at September 30,March 31, 2012 and 2011, and 2010, respectively) and those in the process of implementation (117,000(131,000 and 190,000123,000 at September 30,March 31, 2012 and 2011, and 2010, respectively). Revenues from SimVentures, our collaborative arrangement with Laerdal Medical, Corporation, were approximately $321,000$374,000 during the thirdfirst quarter of 2012 while there were no revenues during the first quarter of 2011. Revenues from project-based services declinedincreased by $251,000$595,000 compared to the prior year thirdfirst quarter.
Revenues for HealthStream Research increased $724,000,$357,000, or 14.2%6.5%, over the thirdfirst quarter of 2010.2011. Revenues from Patient Insights™ surveys, our survey research product that generates recurring revenues, increased by $949,000,$556,000, or 26.4%13.1%, over the prior year thirdfirst quarter. Revenues from other surveys, which are conducted on annual or bi-annual cycles, declined by $225,000,$199,000, or 15.1%15.8%, compared to the prior year thirdfirst quarter due to fewer survey engagements.
Cost of Revenues (excluding depreciation and amortization).Cost of revenues increased approximately $1.6$2.5 million, or 26.1%35.4%, to $7.9$9.6 million for the three months ended September 30, 2011March 31, 2012 from $6.3$7.1 million for the three months ended September 30, 2010.March 31, 2011. Cost of revenues as a percentage of revenues was 38.4%40.4% of revenues for the three months ended September 30, 2011March 31, 2012 compared to 37.8%38.2% of revenues for the three months ended September 30, 2010.March 31, 2011. Cost of revenues for HealthStream Learning increased approximately $1.3$2.2 million to $4.8$6.4 million and approximated 32.5%35.7% and 30.2%32.0% of revenues for HealthStream Learning for the three months ended September 30,March 31, 2012 and 2011, and 2010, respectively. The increase is primarily associated with increased royalties paid by us resulting from growth in courseware subscription revenues.revenues and increased costs associated with project-based services. Cost of revenues for HealthStream Research increased approximately $318,000$310,000 to $3.1$3.2 million and approximated 53.5%54.8% and 54.9%52.8% of revenues for HealthStream Research for the three months ended September 30,March 31, 2012 and 2011, and 2010, respectively. The increase in amount is primarily the result of additional costs associated with the growth in patient survey volume over the prior year thirdfirst quarter.
Product Development.Product development expenses increased approximately $196,000,$82,000, or 11.2%4.6%, to $1.9 million for the three months ended September 30, 2011March 31, 2012 from $1.7$1.8 million for the three months ended September 30, 2010.March 31, 2011. Product development expenses as a percentage of revenues were 9.4%7.9% and 10.5%9.7% of revenues for the three months ended September 30,March 31, 2012 and 2011, and 2010, respectively.
Product development expenses for HealthStream Learning increased approximately $158,000$62,000 and approximated 10.3%8.3% and 11.8%10.9% of revenues for HealthStream Learning for the three months ended September 30,March 31, 2012 and 2011, and 2010, respectively. The decrease as a percentage of revenue is the result of the growth in revenues over the prior year thirdfirst quarter, while the increase in amount is due to additional personnel expenses associated with the maintenance of our platform, maintenance andas well as working on new product development initiatives, including the Company’s share of SimVentures expenses.initiatives. Product development expenses for HealthStream Research increased approximately $38,000$20,000 and approximated 7.3%6.7% and 7.6%6.8% of revenues for HealthStream Research for the three months ended September 30,March 31, 2012 and 2011, and 2010, respectively.
Sales and Marketing.Sales and marketing expenses, including personnel costs, increased approximately $452,000,$2.0 million, or 13.5%57.8%, to $3.8$5.5 million for the three months ended September 30, 2011March 31, 2012 from $3.4$3.5 million for the three months ended September 30, 2010.March 31, 2011. Approximately $870,000 of the increase resulted from our customer Summit, which occurred during the first quarter of 2012, but was held during the second quarter of 2011. Sales and marketing expenses approximated 18.5%23.4% and 20.2%19.0% of revenues for the three months ended September 30,March 31, 2012 and 2011, and 2010, respectively.
Sales and marketing expenses for HealthStream Learning increased $550,000$1.8 million and approximated 18.0%22.9% and 18.3%17.3% of revenues for HealthStream Learning for the three months ended September 30,March 31, 2012 and 2011, and 2010, respectively. This expense increase is primarily due to the costs associated with our customer Summit, as well as, additional personnel and related expenses, increased marketing spending, and increased commissions associated with better sales performance compared to the prior year. Sales and marketing expenses for HealthStream Research decreasedincreased approximately $83,000,$181,000, and approximated 18.2%23.0% and 22.4%21.2% of revenues for HealthStream Research for the three months ended September 30,March 31, 2012 and 2011, and 2010, respectively. The expense decrease isincrease was primarily a result of lower commissions.
11
Other general and administrative expenses for HealthStream Learning increased $48,000$41,000 over the prior year thirdfirst quarter due to employee recruiting costs, while other general and administrative expenses for HealthStream Research increased slightlydecreased $91,000 compared to the prior year third quarter.first quarter due to lower personnel costs. The unallocated corporate portion of other general and administrative expenses increased $328,000$327,000 over the prior year thirdfirst quarter, primarily associated with software maintenance renewal fees, personnel expenses, professional fees, and stock based compensation expense.
Depreciation and Amortization.Depreciation and amortization increased approximately $328,000,$491,000, or 28.7%47.1%, to $1.5 million for the three months ended September 30, 2011March 31, 2012 from $1.1$1.0 million for the three months ended September 30, 2010.March 31, 2011. The increase primarily resulted from amortization of capitalized software development assets within HealthStream Learning and depreciation expense associated with leasehold improvements to our Nashville, Tennessee office space.
Other Income (Expense), netNet. Other expense, net was approximately $8,000$19,000 for three months ended September 30, 2011March 31, 2012 compared to $6,000$20,000 for the three months ended September 30, 2010.
Provision for Income Taxes.Tax Provision.The Company recorded a provision for income taxes of $890,000$940,000 for the three months ended September 30, 2011March 31, 2012 compared to $889,000$1.1 million for the three months ended September 30, 2010.March 31, 2011. The Company’s effective tax rate was 33.1%39.8% for the thirdfirst quarter of 20112012 compared to 52.8%40.8% for the thirdfirst quarter of 2010. We expect the full year 2011 effective tax rate to range between 38 and 39 percent, compared to the full year 2010 effective tax rate of 41%.2011. Actual tax payments will be substantially less than our income tax provision until we utilize our federal and state net operating loss carry-forwards of approximately $18.0$14.5 million and $14.0$12.6 million, respectively, at September 30,December 31, 2011, to offset taxable income.
Net Income.Net income increaseddecreased approximately $1.0 million,$106,000, or 125.7%6.9%, to $1.8$1.4 million for the three months ended September 30, 2011March 31, 2012 from $796,000$1.5 million for the three months ended September 30, 2010. Net incomeMarch 31, 2011. Earnings per diluted share was $0.08$0.05 per share for the three months ended September 30, 2011,March 31, 2012, compared to $0.04$0.07 per diluted share for the three months ended September 30, 2010.
Adjusted EBITDA (which we define as net income before interest, income taxes, stock-based compensation, and depreciation and amortization) improvedincreased by 46.3%8.4% to approximately $4.4$4.1 million for the three months ended September 30, 2011March 31, 2012 compared to $3.0$3.8 million for the three months ended September 30, 2010.March 31, 2011. This improvement is consistent with the factors mentioned in management’s discussion and analysis of financial condition and results of operations herewith.
Reconciliation of Non-GAAP Financial Measures
In order to better assess the Company’s financial results, management believes that adjusted EBITDA is an appropriate measure for evaluating the operating performance of the Company at this stage in its life cycle because adjusted EBITDA reflects net income adjusted for non-cash and non-operating items. Adjusted EBITDA is also used by many investors and securities analysts to assess the Company’s results from current operations. Adjusted EBITDA is a non-GAAP financial measure 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 you should not consider it in isolation, or as a substitute for an analysis of the Company’s results as reported under US GAAP. For example, adjusted EBITDA does not reflect cash expenditures, or future requirements for capital expenditures or contractual commitments; it does not reflect non-cash components of employee compensation; it does not reflect changes in, or cash requirements for, our working capital needs; and due to the Company’s utilization of federal and state net operating loss carryforwards in 20102011 and 2011,2012, actual cash income tax payments have been significantly less than the tax provision recorded in accordance with US GAAP, and income tax payments will continue to be less than the income tax provision until our existing federal and state net operating loss carryforwards have been fully utilized or have expired.
Management compensates for the inherent limitations associated with using adjusted EBITDA through disclosure of such limitations, presentation of our financial statements in accordance with US GAAP, and reconciliation of adjusted EBITDA to net income, the most directly comparable US GAAP measure.
12
13
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
Net income | $ | 1,796 | $ | 796 | $ | 5,152 | $ | 2,950 | ||||||||
Interest income | (5 | ) | (4 | ) | (36 | ) | (11 | ) | ||||||||
Interest expense | 13 | 10 | 35 | 31 | ||||||||||||
Income tax provision | 890 | 889 | 3,213 | 2,481 | ||||||||||||
Stock based compensation expense | 223 | 166 | 597 | 498 | ||||||||||||
Depreciation and amortization | 1,471 | 1,143 | 3,868 | 3,769 | ||||||||||||
Adjusted EBITDA | $ | 4,388 | $ | 3.000 | $ | 12,829 | $ | 9,718 | ||||||||
Three Months Ended March 31, | ||||||||
2012 | 2011 | |||||||
Net income | $ | 1,420 | $ | 1,526 | ||||
Interest income | (31 | ) | (22 | ) | ||||
Interest expense | 12 | 9 | ||||||
Income tax provision | 940 | 1,051 | ||||||
Stock based compensation expense | 242 | 190 | ||||||
Depreciation and amortization | 1,534 | 1,043 | ||||||
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Adjusted EBITDA | $ | 4,117 | $ | 3,797 | ||||
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Liquidity and Capital Resources
Net cash provided by operating activities was approximately $14.5$3.4 million and $11.8$3.5 million during the ninethree months ended September 30,March 31, 2012 and 2011, and 2010, respectively. The Company’s primary sources of cash were receipts generated from the sales of our products and services. Days sales outstanding (“DSO”) which is calculated by dividing the accounts receivable balance, excluding unbilled and other receivables, by average daily revenues for the quarter, approximated 5963 days for both the thirdfirst quarter of 2011 compared to 61 days for the third quarter of 2010.2012 and 2011. 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, and general corporate expenses.
Net cash used in investing activities was approximately $3.1$56.6 million and $2.4$7.4 million for the ninethree months ended September 30,March 31, 2012 and 2011, and 2010, respectively. During 2011,2012, the Company purchased $4.7$58.4 million of investments in marketable securities, spent $5.2$1.0 million for capitalized software development, and purchased $3.6$0.8 million of property and equipment. Approximately $1.8 million of the property and equipment purchases during 2011 were associated with the expansion of our Nashville, Tennessee office space, while the remainder is associated with hardware and software to support our business operations. Approximately $3.5 million of the capitalized software development spending related to the acquisition of a 50 percent ownership stake in Laerdal Medical’s AVS product. These uses of cash were partially offset by maturities and sales of investments in marketable securities of $10.4$3.5 million. During 2010,2011, the Company purchased $4.7 million of marketable securities, spent $1.6$4.1 million for capitalized software development, and purchased $850,000$0.7 million of property and equipment.
Cash provided by financing activities was approximately $1.0$0.6 million and $0.2 million for the ninethree months ended September 30,March 31, 2012 and 2011, while $225,000 was used by financing activities during the nine months ended September 30, 2010.respectively. The primary source of cash from financing activities for
14
Revenues increased and operating income improved over the prior year period, and our balance sheet reflects positive working capital of $24.3$80.7 million at September 30, 2011March 31, 2012 compared to $19.5$78.6 million at December 31, 2010.2011. The increase in working capital was primarily due to the cash generated from operations. The Company’s primary source of liquidity is $30.3$91.6 million of cash and cash equivalents and restricted cash.marketable securities. The Company also has a $20.0 million revolving credit facility loan agreement, all of which was available at September 30, 2011.
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 cash needs for working capital, new product development and capital expenditures for at least the next 12 months. Additionally,Over the past seven years, we have utilized our shelf registration statement on Form S-3, which was declared effective on August 12, 2011, provides us withfederal and state net operating loss carryforwards to offset taxable income. We anticipate our remaining net operating loss carryforwards could become fully utilized within the ability to raise additional capital of up to $75 million throughnext 24 months. Our actual tax payments may increase significantly once the issuance of shares of common stock, subject to market conditions.net operating loss carryforwards are fully utilized. As part of our growth strategy, we review possible acquisitions that complement our products and services. We anticipate that future acquisitions, if any, would be effected through a combination of stock and cash consideration. We may need to raise additional capital through the issuance of equity or debt securities and/or borrowings under our revolving credit facility, or another facility, to finance any future acquisitions. The issuance of our stock as consideration for an acquisition could have a dilutive effect on earnings per share and could adversely affect our stock price. Because we have no material debt or outstanding borrowings under our revolving credit facility, our balance sheet is unleveraged. Our revolving credit facility contains financial covenants and availability calculations designed to set a maximum leverage ratio of outstanding debt to equity. Therefore, if we were to borrow against our revolving credit facility, our debt capacity would be dependent on the covenant values at the time of borrowing. As of March 31, 2012, we believe we were in compliance with all covenants. The credit markets have been experiencing extreme volatility and disruption, and we cannot assure youprovide assurances 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.
The Company is exposed to market risk from changes in interest rates. The Company doesWe do not have any foreign currency exchange rate risk or commodity price risk. As of September 30, 2011,March 31, 2012, the Company had no outstanding indebtedness.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 is based on 30 Day LIBOR plus a margin of either 175 or 200 basis points determined in accordance with a pricing grid. We are also exposed to market risk with respect to our cash and investment balances. At September 30, 2011, the Company had cash and cash equivalents and restricted cash totaling approximately $30.3 million. Our current investment rates of return approximate 0.08%.balances, which approximated $91.6 million at March 31, 2012. Assuming a 0.08% rate of return on $30.3 million, a hypothetical 10% decrease in interest rates, would decrease interest income from cash and investments would decrease net income on an annualized basis by approximately $2,400.
The Company manages itsCompany’s investment risk bypolicy and strategy is focused on investing in corporate debt securities, foreign corporate debt, secured corporate debt, and municipal debthighly rated securities, with minimum acceptablethe objective of minimizing the potential risk of principal loss. The Company’s policy limits the amount of credit ratings. For certificates of depositexposure to any single issuer and corporate obligations, ratings must be A1/A, BBB, FDIC insured or better; A1/P1 or better for commercial paper, and MIG 1/S, P/1 or better for municipal debt securities. The Company also requires that all securities must mature within 24 months from the original settlement date,sets limits on the average portfolio shall not exceed 18 months, and the greater of 10% or $5.0 million shall mature within 90 days. Further, the Company’s investment policy also limits concentration exposure and other potential risk areas.
The above market risk discussion and the estimated amounts presented are forward-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.
15
Evaluation of 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 Rules 13a-15(e) and 15d-15(e) promulgated under the Securities Exchange Act of 1934 (the “Exchange Act”)) as of the end of the period covered by this Quarterly Report. 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 chief executive and principal financial officer, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.
Changes in Internal Control Over Financial Reporting
There was no change in HealthStream’s internal control over financial reporting that occurred during the period covered by this Quarterly Report that has materially affected, or that is reasonably likely to materially affect, HealthStream’s internal control over financial reporting.
16
(a) | Exhibits |
10.14^ - Form of HealthStream Inc. Restricted Share Unit Agreement (Officer)
10.15^ - Form of HealthStream Inc. Restricted Share Unit Agreement (Non-Employee Director)
31.1 – Certification of the Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2 – Certification of the Principal Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1 – Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002
32.2 – Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002
101.1 INS* – XBRL Instance Document
101.1 SCH* – XBRL Taxonomy Extension Schema
101.1 CAL* – XBRL Taxonomy Extension Calculation Linkbase
101.1 DEF* – XBRL Taxonomy Extension Definition Linkbase
101.1 LAB* – XBRL Taxonomy Extension Label Linkbase
101.1 PRE* – XBRL Taxonomy Extension Presentation Linkbase
^ - |
* - | The XBRL-related information in Exhibit No. 101 to this Quarterly Report on Form 10-Q is furnished and not filed for purposes of Sections 11 and 12 of the |
17
HEALTHSTREAM, INC. : | |||||||
April 30, 2012 | |||||||
By: | /s/ GERARD M. HAYDEN, JR. | ||||||
Gerard M. Hayden, Jr. | |||||||
Chief Financial Officer |
18
HEALTHSTREAM, INC.
EXHIBIT INDEX
10.14^ | Form of HealthStream, Inc. Restricted Share Unit Agreement (Officer) | |
10.15^ | Form of HealthStream, Inc. Restricted Share Unit Agreement (Non-Employee Director) |
31.1 | Certification of the Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
31.2 | Certification of the Principal Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
32.1 | Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | |
32.2 | Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | |
101.1 INS* | XBRL Instance Document | |
101.1 SCH* | XBRL Taxonomy Extension Schema | |
101.1 CAL* | XBRL Taxonomy Extension Calculation Linkbase | |
101.1 DEF* | XBRL Taxonomy Extension Definition Linkbase | |
101.1 LAB* | XBRL Taxonomy Extension Label Linkbase | |
101.1 PRE* | XBRL Taxonomy Extension Presentation Linkbase |
19
^ - | Management contract or compensatory plan or arrangement |
* - | The XBRL-related information in Exhibit No. 101 to this Quarterly Report on Form 10-Q is furnished and not filed for purposes of Sections 11 and 12 of the Securities Act of 1933 and Section 18 of the Securities Exchange Act of 1934. |