UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
☒ | Quarterly Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the quarterly period ended September 30, 2020March 31, 2021
☐ | Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
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.) | |
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500 11thAvenue North, |
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Nashville, Tennessee | 37203 | |
(Address of principal executive offices) | (Zip Code) |
(615) 301-3100
(Registrant's telephone number, including area code)
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Title of each class | Trading Symbol(s) | Name of each exchange on which registered | |
Common Stock (Par Value $0.00) | HSTM | Nasdaq Global Select Market |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer | ☒ |
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| Accelerated filer | ☐ | |
Non-accelerated filer | ☐ |
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| Smaller reporting company | ☐ | |
Emerging growth company | ☐ |
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If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
As of October 23, 2020,April 28, 2021, there were 31,677,93931,552,579 shares of the registrant’s common stock outstanding.
Index to Form 10‑Q
HEALTHSTREAM, INC.
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Part I. |
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Item 1. |
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| Notes to Condensed Consolidated Financial Statements (Unaudited) |
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Item 2. |
| Management's Discussion and Analysis of Financial Condition and Results of Operations |
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Item 3. |
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Item 4. |
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Part II. |
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Item 1A. |
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Item 2. |
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Item 6. |
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PARTPART I. FINANCIAL INFORMATION
Item 1. Financial Statements
HEALTHSTREAM, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(In thousands)
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| September 30, |
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| December 31, |
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| March 31, |
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| December 31, |
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| 2020 |
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| 2019 |
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| 2021 |
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| 2020 |
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ASSETS |
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Current assets: |
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Cash and cash equivalents |
| $ | 107,007 |
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| $ | 131,538 |
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| $ | 45,348 |
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| $ | 36,566 |
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Marketable securities |
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| 42,666 |
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| 41,328 |
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| 10,622 |
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| 9,928 |
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Accounts receivable, net of allowance for doubtful accounts of $648 and $843 at September 30, 2020 and December 31, 2019, respectively |
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| 26,372 |
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| 27,650 |
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Accounts receivable, net of allowance for doubtful accounts of $519 and $549 at March 31, 2021 and December 31, 2020, respectively |
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| 33,195 |
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| 40,726 |
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Accounts receivable - unbilled |
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| 3,933 |
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| 2,726 |
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| 3,988 |
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| 5,374 |
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Prepaid royalties, net of amortization |
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| 10,504 |
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| 11,898 |
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| 11,786 |
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| 9,571 |
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Other prepaid expenses and other current assets |
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| 8,615 |
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| 9,432 |
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| 10,038 |
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| 12,560 |
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Total current assets |
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| 199,097 |
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| 224,572 |
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| 114,977 |
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| 114,725 |
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Property and equipment, net of accumulated depreciation of $24,524 and $19,291 at September 30, 2020 and December 31, 2019, respectively |
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| 21,793 |
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| 26,065 |
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Capitalized software development, net of accumulated amortization of $67,103 and $57,768 at September 30, 2020 and December 31, 2019, respectively |
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| 24,679 |
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| 21,445 |
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Property and equipment, net of accumulated depreciation of $20,968 and $19,237 at March 31, 2021 and December 31, 2020, respectively |
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| 20,653 |
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| 22,218 |
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Capitalized software development, net of accumulated amortization of $74,095 and $70,516 at March 31, 2021 and December 31, 2020, respectively |
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| 27,190 |
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| 26,631 |
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Operating lease right of use assets, net |
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| 27,707 |
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| 29,615 |
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| 27,276 |
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| 28,081 |
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Goodwill |
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| 123,285 |
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| 102,196 |
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| 181,161 |
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| 178,440 |
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Customer-related intangibles, net of accumulated amortization of $34,814 and $29,760 at September 30, 2020 and December 31, 2019, respectively |
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| 47,535 |
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| 52,554 |
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Other intangible assets, net of accumulated amortization of $15,118 and $12,735 at September 30, 2020 and December 31, 2019, respectively |
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| 6,953 |
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| 7,527 |
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Customer-related intangibles, net of accumulated amortization of $38,938 and $36,723 at March 31, 2021 and December 31, 2020, respectively |
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| 75,603 |
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| 76,927 |
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Other intangible assets, net of accumulated amortization of $12,371 and $10,748 at March 31, 2021 and December 31, 2020, respectively |
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| 22,683 |
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| 23,788 |
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Deferred tax assets |
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| 269 |
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| 269 |
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| 974 |
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| 974 |
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Deferred commissions |
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| 17,783 |
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| 17,645 |
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| 21,375 |
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| 19,907 |
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Non-marketable equity investments |
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| 6,889 |
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| 6,782 |
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| 7,791 |
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| 6,845 |
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Other assets |
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| 567 |
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| 874 |
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| 1,999 |
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| 1,777 |
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Total assets |
| $ | 476,557 |
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| $ | 489,544 |
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| $ | 501,682 |
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| $ | 500,313 |
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LIABILITIES AND SHAREHOLDERS’ EQUITY |
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Current liabilities: |
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Accounts payable and accrued expenses |
| $ | 22,141 |
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| $ | 22,938 |
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| $ | 20,012 |
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| $ | 29,457 |
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Accrued royalties |
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| 10,263 |
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| 16,736 |
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| 8,504 |
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| 8,809 |
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Deferred revenue |
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| 62,610 |
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| 65,511 |
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| 88,390 |
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| 81,176 |
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Total current liabilities |
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| 95,014 |
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| 105,185 |
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| 116,906 |
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| 119,442 |
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Deferred tax liabilities |
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| 13,394 |
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| 13,183 |
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| 16,560 |
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| 14,523 |
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Deferred revenue, noncurrent |
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| 1,751 |
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| 1,918 |
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| 1,518 |
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| 1,603 |
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Operating lease liability, noncurrent |
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| 28,665 |
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| 30,733 |
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| 27,675 |
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| 28,479 |
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Other long term liabilities |
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| 1,468 |
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| 357 |
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Other long-term liabilities |
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| 2,218 |
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| 2,204 |
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Commitments and contingencies |
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Shareholders’ equity: |
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Common stock, no par value, 75,000 shares authorized; 31,686 and 32,379 shares issued and outstanding at September 30, 2020 and December 31, 2019, respectively |
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| 274,905 |
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| 290,021 |
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Common stock, no par value, 75,000 shares authorized; 31,553 and 31,493 shares issued and outstanding at March 31, 2021 and December 31, 2020, respectively |
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| 272,001 |
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| 271,784 |
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Retained earnings |
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| 61,354 |
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| 48,143 |
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| 64,569 |
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| 62,277 |
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Accumulated other comprehensive income |
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| 6 |
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| 4 |
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| 235 |
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| 1 |
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Total shareholders’ equity |
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| 336,265 |
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| 338,168 |
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| 336,805 |
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| 334,062 |
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Total liabilities and shareholders’ equity |
| $ | 476,557 |
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| $ | 489,544 |
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| $ | 501,682 |
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| $ | 500,313 |
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See accompanying Notes to the unaudited Condensed Consolidated Financial Statements (unaudited).Statements.
HEALTHSTREAM, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(In thousands, except per share data)
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| Three Months Ended |
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| Nine Months Ended |
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| Three Months Ended |
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| September 30, 2020 |
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| September 30, 2019 |
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| September 30, 2020 |
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| September 30, 2019 |
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| March 31, 2021 |
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| March 31, 2020 |
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Revenues, net |
| $ | 60,883 |
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| $ | 62,450 |
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| $ | 183,008 |
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| $ | 191,417 |
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| $ | 63,468 |
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| $ | 61,572 |
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Operating costs and expenses: |
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Cost of revenues (excluding depreciation and amortization) |
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| 23,302 |
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| 25,348 |
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| 66,596 |
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| 79,015 |
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| 21,237 |
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| 20,359 |
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Product development |
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| 8,192 |
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| 7,195 |
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| 23,491 |
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| 21,763 |
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| 9,361 |
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| 7,468 |
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Sales and marketing |
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| 8,863 |
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| 9,003 |
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| 26,286 |
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| 28,343 |
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| 8,924 |
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| 9,188 |
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Other general and administrative expenses |
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| 9,986 |
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| 10,007 |
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| 29,949 |
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| 30,283 |
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| 11,493 |
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| 9,864 |
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Depreciation and amortization |
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| 7,406 |
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| 7,149 |
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| 22,005 |
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| 20,629 |
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| 9,153 |
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| 7,449 |
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Total operating costs and expenses |
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| 57,749 |
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| 58,702 |
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| 168,327 |
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| 180,033 |
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| 60,168 |
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| 54,328 |
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Operating income |
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| 3,134 |
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| 3,748 |
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| 14,681 |
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| 11,384 |
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| 3,300 |
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| 7,244 |
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Other income, net |
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| 100 |
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| 853 |
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| 2,006 |
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| 2,528 |
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Other (loss) income, net |
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| (87 | ) |
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| 1,706 |
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Income from continuing operations before income tax provision |
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| 3,234 |
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| 4,601 |
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| 16,687 |
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| 13,912 |
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Income before income tax provision |
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| 3,213 |
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| 8,950 |
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Income tax provision |
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| 600 |
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| 1,140 |
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| 3,519 |
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| 3,270 |
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| 922 |
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| 1,858 |
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Income from continuing operations |
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| 2,634 |
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| 3,461 |
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| 13,168 |
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| 10,642 |
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Discontinued operations: |
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Gain on sale of discontinued operations |
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| — |
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| 340 |
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| — |
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| 1,960 |
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Income tax provision |
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| — |
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| 89 |
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| — |
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| 515 |
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Income from discontinued operations |
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| — |
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| 251 |
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| — |
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| 1,445 |
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Net income |
| $ | 2,634 |
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| $ | 3,712 |
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| $ | 13,168 |
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| $ | 12,087 |
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| $ | 2,291 |
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| $ | 7,092 |
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Net income per share – basic: |
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Continuing operations |
| $ | 0.08 |
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| $ | 0.11 |
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| $ | 0.41 |
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| $ | 0.33 |
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Discontinued operations |
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| — |
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| — |
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| — |
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| 0.04 |
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Net income per share - basic |
| $ | 0.08 |
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| $ | 0.11 |
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| $ | 0.41 |
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| $ | 0.37 |
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Net income per share - diluted: |
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Continuing operations |
| $ | 0.08 |
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| $ | 0.11 |
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| $ | 0.41 |
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| $ | 0.33 |
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Discontinued operations |
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| — |
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| — |
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| — |
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| 0.04 |
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Net income per share - diluted |
| $ | 0.08 |
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| $ | 0.11 |
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| $ | 0.41 |
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| $ | 0.37 |
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Net income per share: |
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Basic |
| $ | 0.07 |
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| $ | 0.22 |
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Diluted |
| $ | 0.07 |
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| $ | 0.22 |
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Weighted average shares of common stock outstanding: |
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Basic |
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| 31,955 |
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| 32,376 |
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| 32,095 |
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| 32,369 |
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| 31,504 |
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| 32,334 |
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Diluted |
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| 31,981 |
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| 32,437 |
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| 32,121 |
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| 32,416 |
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| 31,526 |
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| 32,357 |
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See accompanying Notes to the unaudited Condensed Consolidated Financial Statements (unaudited).Statements.
HEALTHSTREAM, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
(In thousands)
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| Three Months Ended |
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| Nine Months Ended |
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| Three Months Ended |
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| September 30, 2020 |
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| September 30, 2019 |
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| September 30, 2020 |
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| September 30, 2019 |
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| March 31, 2021 |
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| March 31, 2020 |
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Net income |
| $ | 2,634 |
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| $ | 3,712 |
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| $ | 13,168 |
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| $ | 12,087 |
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| $ | 2,291 |
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| $ | 7,092 |
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Other comprehensive income, net of taxes: |
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Foreign currency translation adjustments |
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| 23 |
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| (3 | ) |
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| (4 | ) |
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| 1 |
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| 230 |
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| (44 | ) |
Unrealized (loss) gain on marketable securities |
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| (18 | ) |
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| (11 | ) |
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| 6 |
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| 31 |
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Unrealized gain (loss) on marketable securities |
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| 4 |
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| (101 | ) | ||||||||||||||||
Total other comprehensive income (loss) |
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| 5 |
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| (14 | ) |
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| 2 |
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| 32 |
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| 234 |
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| (145 | ) |
Comprehensive income |
| $ | 2,639 |
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| $ | 3,698 |
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| $ | 13,170 |
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| $ | 12,119 |
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| $ | 2,525 |
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| $ | 6,947 |
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See accompanying Notes to the unaudited Condensed Consolidated Financial Statements (unaudited).Statements.
HEALTHSTREAM, INC.
CONDENSED CONSOLIDATED STATEMENTsSTATEMENTS OF SHAREHOLDERS' EQUITY (UNAUDITED)
(In thousands)
|
| Nine Months Ended September 30, 2020 |
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| Three Months Ended March 31, 2021 |
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| Common Stock |
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| Retained |
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| Accumulated Other Comprehensive |
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| Total Shareholders’ |
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| Common Stock |
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| Retained |
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| Accumulated Other Comprehensive |
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| Total Shareholders’ |
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| Shares |
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| Amount |
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| Earnings |
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| Income (Loss) |
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| Equity |
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| Shares |
|
| Amount |
|
| Earnings |
|
| Income |
|
| Equity |
| ||||||||||
Balance at December 31, 2019 |
|
| 32,379 |
|
| $ | 290,021 |
|
| $ | 48,143 |
|
| $ | 4 |
|
| $ | 338,168 |
| ||||||||||||||||||||
Net income |
|
| — |
|
|
| — |
|
|
| 7,092 |
|
|
| — |
|
|
| 7,092 |
| ||||||||||||||||||||
Comprehensive loss |
|
| — |
|
|
| — |
|
|
| — |
|
|
| (145 | ) |
|
| (145 | ) | ||||||||||||||||||||
Stock based compensation |
|
| — |
|
|
| 550 |
|
|
| — |
|
|
| — |
|
|
| 550 |
| ||||||||||||||||||||
Common stock issued under stock plans, net of shares withheld for employee taxes |
|
| 62 |
|
|
| (373 | ) |
|
| — |
|
|
| — |
|
|
| (373 | ) | ||||||||||||||||||||
Repurchase of common stock |
|
| (438 | ) |
|
| (9,876 | ) |
|
| — |
|
|
| — |
|
|
| (9,876 | ) | ||||||||||||||||||||
Balance at March 31, 2020 |
|
| 32,003 |
|
| $ | 280,322 |
|
| $ | 55,235 |
|
| $ | (141 | ) |
| $ | 335,416 |
| ||||||||||||||||||||
Balance at December 31, 2020 |
|
| 31,493 |
|
| $ | 271,784 |
|
| $ | 62,277 |
|
| $ | 1 |
|
| $ | 334,062 |
| ||||||||||||||||||||
Net income |
|
| — |
|
|
| — |
|
|
| 3,442 |
|
|
| — |
|
|
| 3,442 |
|
|
| — |
|
|
| — |
|
|
| 2,291 |
|
|
| — |
|
|
| 2,291 |
|
Comprehensive income |
|
| — |
|
|
| — |
|
|
| — |
|
|
| 142 |
|
|
| 142 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 234 |
|
|
| 234 |
|
Stock based compensation |
|
| — |
|
|
| 557 |
|
|
| — |
|
|
| — |
|
|
| 557 |
|
|
| — |
|
|
| 616 |
|
|
| — |
|
|
| — |
|
|
| 616 |
|
Repurchase of common stock |
|
| (6 | ) |
|
| (133 | ) |
|
| — |
|
|
| — |
|
|
| (133 | ) | ||||||||||||||||||||
Balance at June 30, 2020 |
|
| 31,997 |
|
| $ | 280,746 |
|
| $ | 58,677 |
|
| $ | 1 |
|
| $ | 339,424 |
| ||||||||||||||||||||
Net income |
|
| — |
|
|
| — |
|
|
| 2,634 |
|
|
| — |
|
|
| 2,634 |
| ||||||||||||||||||||
Dividend forfeitures |
|
| — |
|
|
| — |
|
|
| 43 |
|
|
| — |
|
|
| 43 |
| ||||||||||||||||||||
Comprehensive income |
|
| — |
|
|
| — |
|
|
| — |
|
|
| 5 |
|
|
| 5 |
| ||||||||||||||||||||
Stock based compensation |
|
| — |
|
|
| 557 |
|
|
| — |
|
|
| — |
|
|
| 557 |
| ||||||||||||||||||||
Common stock issued under stock plans, net of shares withheld for employee taxes |
|
| 8 |
|
|
| (55 | ) |
|
| — |
|
|
| — |
|
|
| (55 | ) |
|
| 60 |
|
|
| (399 | ) |
|
| — |
|
|
| — |
|
|
| (399 | ) |
Repurchase of common stock |
|
| (319 | ) |
|
| (6,343 | ) |
|
| — |
|
|
| — |
|
|
| (6,343 | ) | ||||||||||||||||||||
Balance at September 30, 2020 |
|
| 31,686 |
|
| $ | 274,905 |
|
| $ | 61,354 |
|
| $ | 6 |
|
| $ | 336,265 |
| ||||||||||||||||||||
Balance at March 31, 2021 |
|
| 31,553 |
|
| $ | 272,001 |
|
| $ | 64,569 |
|
| $ | 235 |
|
| $ | 336,805 |
|
|
| Three Months Ended March 31, 2020 |
| |||||||||||||||||
|
| Common Stock |
|
| Retained |
|
| Accumulated Other Comprehensive |
|
| Total Shareholders’ |
| ||||||||
|
| Shares |
|
| Amount |
|
| Earnings |
|
| Income (Loss) |
|
| Equity |
| |||||
Balance at December 31, 2019 |
|
| 32,379 |
|
| $ | 290,021 |
|
| $ | 48,143 |
|
| $ | 4 |
|
| $ | 338,168 |
|
Net income |
|
| — |
|
|
| — |
|
|
| 7,092 |
|
|
| — |
|
|
| 7,092 |
|
Comprehensive loss |
|
| — |
|
|
| — |
|
|
| — |
|
|
| (145 | ) |
|
| (145 | ) |
Stock based compensation |
|
| — |
|
|
| 550 |
|
|
| — |
|
|
| — |
|
|
| 550 |
|
Common stock issued under stock plans, net of shares withheld for employee taxes |
|
| 62 |
|
|
| (373 | ) |
|
| — |
|
|
| — |
|
|
| (373 | ) |
Repurchase of common stock |
|
| (438 | ) |
|
| (9,876 | ) |
|
| — |
|
|
| — |
|
|
| (9,876 | ) |
Balance at March 31, 2020 |
|
| 32,003 |
|
| $ | 280,322 |
|
| $ | 55,235 |
|
| $ | (141 | ) |
| $ | 335,416 |
|
See accompanying Notes to the unaudited Condensed Consolidated Financial Statements (unaudited).
HEALTHSTREAM, INC.
CONDENSED CONSOLIDATED STATEMENTs OF SHAREHOLDERS' EQUITY (UNAUDITED)
(In thousands, except per share data)
|
| Nine Months Ended September 30, 2019 |
| |||||||||||||||||
|
| Common Stock |
|
| Retained |
|
| Accumulated Other Comprehensive |
|
| Total Shareholders’ |
| ||||||||
|
| Shares |
|
| Amount |
|
| Earnings |
|
| (Loss) Income |
|
| Equity |
| |||||
Balance at December 31, 2018 |
|
| 32,325 |
|
| $ | 286,597 |
|
| $ | 32,373 |
|
| $ | (23 | ) |
| $ | 318,947 |
|
Net income |
|
| — |
|
|
| — |
|
|
| 5,974 |
|
|
| — |
|
|
| 5,974 |
|
Comprehensive income |
|
| — |
|
|
| — |
|
|
| — |
|
|
| 32 |
|
|
| 32 |
|
Stock based compensation |
|
| — |
|
|
| 516 |
|
|
| — |
|
|
| — |
|
|
| 516 |
|
Common stock issued under stock plans, net of shares withheld for employee taxes |
|
| 63 |
|
|
| (328 | ) |
|
| — |
|
|
| — |
|
|
| (328 | ) |
Balance at March 31, 2019 |
|
| 32,388 |
|
| $ | 286,785 |
|
| $ | 38,347 |
|
| $ | 9 |
|
| $ | 325,141 |
|
Net income |
|
| — |
|
|
| — |
|
|
| 2,401 |
|
|
| — |
|
|
| 2,401 |
|
Comprehensive income |
|
| — |
|
|
| — |
|
|
| — |
|
|
| 14 |
|
|
| 14 |
|
Stock donated to Company (held in treasury) |
|
| (86 | ) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
Stock based compensation |
|
| — |
|
|
| 2,558 |
|
|
|
|
|
|
| — |
|
|
| 2,558 |
|
Common stock issued under stock plans, net of shares withheld for employee taxes |
|
| 72 |
|
|
| (443 | ) |
|
| — |
|
|
| — |
|
|
| (443 | ) |
Balance at June 30, 2019 |
|
| 32,374 |
|
| $ | 288,900 |
|
| $ | 40,748 |
|
| $ | 23 |
|
| $ | 329,671 |
|
Net income |
|
| — |
|
|
| — |
|
|
| 3,712 |
|
|
| — |
|
|
| 3,712 |
|
Comprehensive loss |
|
| — |
|
|
| — |
|
|
| — |
|
|
| (14 | ) |
|
| (14 | ) |
Stock based compensation |
|
| — |
|
|
| 569 |
|
|
| — |
|
|
| — |
|
|
| 569 |
|
Common stock issued under stock plans, net of shares withheld for employee taxes |
|
| 4 |
|
|
| (45 | ) |
|
| — |
|
|
| — |
|
|
| (45 | ) |
Balance at September 30, 2019 |
|
| 32,378 |
|
| $ | 289,424 |
|
| $ | 44,460 |
|
| $ | 9 |
|
| $ | 333,893 |
|
See accompanying Notes to the Condensed Consolidated Financial Statements (unaudited).
HEALTHSTREAM, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(In thousands)
|
| Nine Months Ended September 30, |
|
| Three Months Ended March 31, |
| ||||||||||
|
| 2020 |
|
| 2019 |
|
| 2021 |
|
| 2020 |
| ||||
OPERATING ACTIVITIES: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
| $ | 13,168 |
|
| $ | 12,087 |
|
| $ | 2,291 |
|
| $ | 7,092 |
|
Income from discontinued operations |
|
| — |
|
|
| (1,445 | ) | ||||||||
Adjustments to reconcile net income to net cash provided by operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
| 22,005 |
|
|
| 20,629 |
|
|
| 9,153 |
|
|
| 7,449 |
|
Stock based compensation |
|
| 1,665 |
|
|
| 3,643 |
|
|
| 616 |
|
|
| 550 |
|
Amortization of deferred commissions |
|
| 6,555 |
|
|
| 6,269 |
|
|
| 2,133 |
|
|
| 2,159 |
|
Provision for doubtful accounts |
|
| 160 |
|
|
| 99 |
|
|
| 142 |
|
|
| 288 |
|
Deferred income taxes |
|
| 2,330 |
|
|
| 1,803 |
|
|
| 486 |
|
|
| 500 |
|
Loss (gain) on non-marketable equity investments |
|
| 8 |
|
|
| (87 | ) | ||||||||
Loss on non-marketable equity investments |
|
| 54 |
|
|
| 11 |
| ||||||||
Non-cash paid time off expense |
|
| (1,011 | ) |
|
| — |
| ||||||||
Non-cash royalty expense |
|
| (3,440 | ) |
|
| — |
|
|
| — |
|
|
| (3,440 | ) |
Change in fair value of non-marketable equity investments |
|
| (1,181 | ) |
|
| — |
|
|
| — |
|
|
| (1,152 | ) |
Other |
|
| 321 |
|
|
| (101 | ) |
|
| 15 |
|
|
| 47 |
|
Changes in operating assets and liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts and unbilled receivables |
|
| (9 | ) |
|
| 13,624 |
|
|
| 7,379 |
|
|
| (4,573 | ) |
Prepaid royalties |
|
| 1,394 |
|
|
| 1,720 |
|
|
| (2,215 | ) |
|
| (3,202 | ) |
Other prepaid expenses and other current assets |
|
| 972 |
|
|
| 4,090 |
|
|
| 2,521 |
|
|
| 735 |
|
Deferred commissions |
|
| (6,693 | ) |
|
| (5,524 | ) |
|
| (3,602 | ) |
|
| (1,602 | ) |
Other assets |
|
| 308 |
|
|
| (178 | ) |
|
| (76 | ) |
|
| 134 |
|
Accounts payable and accrued expenses |
|
| (450 | ) |
|
| (1,077 | ) |
|
| (5,339 | ) |
|
| (5,775 | ) |
Accrued royalties |
|
| (3,218 | ) |
|
| (552 | ) |
|
| (305 | ) |
|
| 442 |
|
Deferred revenue |
|
| (3,142 | ) |
|
| (2,453 | ) |
|
| 6,862 |
|
|
| 6,453 |
|
Net cash provided by operating activities |
|
| 30,753 |
|
|
| 52,547 |
|
|
| 19,104 |
|
|
| 6,116 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INVESTING ACTIVITIES: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Business combinations, net of cash acquired |
|
| (21,449 | ) |
|
| (18,018 | ) |
|
| (731 | ) |
|
| (21,421 | ) |
Proceeds from sale of discontinued operations |
|
| — |
|
|
| 6,035 |
| ||||||||
Proceeds from maturities of marketable securities |
|
| 59,522 |
|
|
| 58,637 |
|
|
| 4,500 |
|
|
| 20,725 |
|
Purchases of marketable securities |
|
| (61,178 | ) |
|
| (62,742 | ) |
|
| (5,205 | ) |
|
| (14,130 | ) |
Proceeds from sale of property and equipment |
|
| — |
|
|
| 13 |
| ||||||||
Payments to acquire non-marketable equity investments |
|
| (1,257 | ) |
|
| (3,342 | ) |
|
| (1,000 | ) |
|
| — |
|
Payments associated with capitalized software development |
|
| (12,366 | ) |
|
| (11,179 | ) |
|
| (5,326 | ) |
|
| (4,068 | ) |
Purchases of property and equipment |
|
| (1,734 | ) |
|
| (21,451 | ) |
|
| (1,898 | ) |
|
| (1,010 | ) |
Net cash used in investing activities |
|
| (38,462 | ) |
|
| (52,047 | ) |
|
| (9,660 | ) |
|
| (19,904 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FINANCING ACTIVITIES: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from exercise of stock options |
|
| — |
|
|
| 214 |
| ||||||||
Taxes paid related to net settlement of equity awards |
|
| (429 | ) |
|
| (1,030 | ) |
|
| (399 | ) |
|
| (373 | ) |
Payments of earn-outs related to acquisitions |
|
| — |
|
|
| (38 | ) | ||||||||
Repurchases of common stock |
|
| (16,352 | ) |
|
| — |
| ||||||||
Repurchase of common stock |
|
| — |
|
|
| (9,876 | ) | ||||||||
Payment of cash dividends |
|
| (40 | ) |
|
| (53 | ) |
|
| (12 | ) |
|
| (30 | ) |
Net cash used in financing activities |
|
| (16,821 | ) |
|
| (907 | ) |
|
| (411 | ) |
|
| (10,279 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate changes on cash and cash equivalents |
|
| (1 | ) |
|
| — |
|
|
| (251 | ) |
|
| (46 | ) |
Net decrease in cash and cash equivalents |
|
| (24,531 | ) |
|
| (407 | ) | ||||||||
Net increase (decrease) in cash and cash equivalents |
|
| 8,782 |
|
|
| (24,113 | ) | ||||||||
Cash and cash equivalents at beginning of period |
|
| 131,538 |
|
|
| 134,321 |
|
|
| 36,566 |
|
|
| 131,538 |
|
Cash and cash equivalents at end of period |
| $ | 107,007 |
|
| $ | 133,914 |
|
| $ | 45,348 |
|
| $ | 107,425 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL CASH FLOW INFORMATION: |
|
|
|
|
|
|
|
| ||||||||
Non-cash additions to non-marketable equity investments |
| $ | 1,300 |
|
| $ | — |
|
See accompanying Notes to the unaudited Condensed Consolidated Financial Statements (unaudited).Statements.
5
HEALTHSTREAM, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying unaudited Condensed Consolidated Financial Statements (unaudited) 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 Statementscondensed 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 intercompany transactions have been eliminated in consolidation. Operating results for the three and nine months ended September 30, 2020March 31, 2021 are not necessarily indicative of the results that may be expected for the year ending December 31, 2020.
On February 12, 2018, the Company divested its Patient Experience (“PX”) business to Press Ganey Associates, Inc. (“Press Ganey”). The sale of the PX business resulted in the Company’s divestiture of the Company’s patient experience solutions business segment. The Company has classified the results of its previously owned PX segment as discontinued operations in its Condensed Consolidated Statement of Income for the three and nine months ended September 30, 2019. See Note 10 for additional information.2021.
The Condensed Consolidated Balance Sheet at December 31, 2019 has been2020 was derived from the audited Consolidated 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 footnotesNotes thereto for the year ended December 31, 20192020 (included in the Company's Annual Report on Form 10-K, filed with the Securities and Exchange Commission on February 26, 2020)25, 2021).
2. RECENT ACCOUNTING PRONOUNCEMENTS
Accounting Standards Recently Adopted
In June 2016, the FASB issued ASU 2016-03, Financial Instruments—Credit Losses (“ASC 326”): Measurement of Credit Losses on Financial Instruments, which amends guidance on reporting credit losses for assets held at amortized cost basis and available for sale debt securities. For assets held at amortized cost basis, ASC 326 eliminates the probable initial recognition threshold in prior GAAP and, instead, requires an entity to reflect its current estimate of all expected credit losses. The Company adopted this ASU on January 1, 2020, and the effect of adoption on the Company’s Consolidated Financial Statements and related disclosures was not material.
3. REVENUE RECOGNITION AND SALES COMMISSIONS
Revenue 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 to 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 |
The following table represents revenues disaggregated by revenue source for the three and nine months ended September 30, 2020 and 2019 (in thousands). Sales taxes are excluded from revenues.
|
| Three Months Ended September 30, 2020 |
|
| Nine Months Ended September 30, 2020 |
|
| Three Months Ended March 31, 2021 |
|
| Three Months Ended March 31, 2020 |
| ||||||||||||||||||||||||||||||||||||
Business Segments |
| Workforce Solutions |
|
| Provider Solutions |
|
| Consolidated |
|
| Workforce Solutions |
|
| Provider Solutions |
|
| Consolidated |
|
| Workforce Solutions |
|
| Provider Solutions |
|
| Consolidated |
|
| Workforce Solutions |
|
| Provider Solutions |
|
| Consolidated |
| ||||||||||||
Subscription services |
| $ | 48,246 |
|
| $ | 9,999 |
|
| $ | 58,245 |
|
| $ | 144,945 |
|
| $ | 29,580 |
|
| $ | 174,525 |
|
| $ | 49,770 |
|
| $ | 10,597 |
|
| $ | 60,367 |
|
| $ | 48,717 |
|
| $ | 9,984 |
|
| $ | 58,701 |
|
Professional services |
|
| 951 |
|
|
| 1,687 |
|
|
| 2,638 |
|
|
| 2,964 |
|
|
| 5,519 |
|
|
| 8,483 |
|
|
| 1,477 |
|
|
| 1,624 |
|
|
| 3,101 |
|
|
| 1,107 |
|
|
| 1,764 |
|
|
| 2,871 |
|
Total revenues, net |
| $ | 49,197 |
|
| $ | 11,686 |
|
| $ | 60,883 |
|
| $ | 147,909 |
|
| $ | 35,099 |
|
| $ | 183,008 |
|
| $ | 51,247 |
|
| $ | 12,221 |
|
| $ | 63,468 |
|
| $ | 49,824 |
|
| $ | 11,748 |
|
| $ | 61,572 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||||||||
|
| Three Months Ended September 30, 2019 |
|
| Nine Months Ended September 30, 2019 |
| ||||||||||||||||||||||||||||||||||||||||||
Business Segments |
| Workforce Solutions |
|
| Provider Solutions |
|
| Consolidated |
|
| Workforce Solutions |
|
| Provider Solutions |
|
| Consolidated |
| ||||||||||||||||||||||||||||||
Subscription services |
| $ | 49,339 |
|
| $ | 9,660 |
|
| $ | 58,999 |
|
| $ | 153,035 |
|
| $ | 28,241 |
|
| $ | 181,276 |
| ||||||||||||||||||||||||
Professional services |
|
| 1,684 |
|
|
| 1,767 |
|
|
| 3,451 |
|
|
| 4,704 |
|
|
| 5,437 |
|
|
| 10,141 |
| ||||||||||||||||||||||||
Total revenues, net |
| $ | 51,023 |
|
| $ | 11,427 |
|
| $ | 62,450 |
|
| $ | 157,739 |
|
| $ | 33,678 |
|
| $ | 191,417 |
|
For the three months ended September 30,March 31, 2021 and 2020, and 2019, the Companyrecognized a reduction of $0.2$0.1 million and a charge of $51,000$0.3 million, respectively, in impairment losses on receivables and contract assets arising from the Company’s contracts with customers, respectively. For the nine months ended September 30, 2020 and 2019, the Company recognized $0.2 million and $99,000 in impairment losses on receivables and contract assets arising from the Company’s contracts with customers, respectively.customers.
Deferred revenue represents contract liabilities that are recorded when cash payments are received or are due in advance of our satisfaction of performance obligations. During the three months ended September 30,March 31, 2021 and 2020, and 2019, we recognized $34.4revenues of approximately $33.6 million and $33.8$31.6 million, of revenuerespectively, from amounts included in deferred revenues at the beginning of the respective periods. During the nine months ended September 30, 2020 and 2019, we recognized $60.5 million and $61.3 million of revenue from amounts included in deferred revenues at the beginning of the respective periods. As of September 30, 2020, $408March 31, 2021, approximately $446 million of revenue is expected to be recognized from remaining performance obligations under contractcontracts with customers. We expect to recognize revenue with respectrelated to 45%approximately 46% of these remaining performance obligations over the next 12 months, with the remaining amounts recognized thereafter.
Sales Commissions
Sales commissions earned by our sales force are considered incremental and recoverable costs of obtaining a contract with a customer. The sales commission plan for 2020 typically includes two payments; the initial payment is due in the period a customer contract is entered into, and the final payment is due 60 days after the product implementation is completed. The sales commission plan for 2019 typically included an initial payment in the period a customer contract was entered into and subsequent payment either 15 or 27 months after the initial payment, depending on the contract term. Under ASC 606, costs to acquire contracts with customers, such as the initial sales commission payment and associated payroll taxes, are capitalized in the period a customer contract is entered into and are amortized consistent with the transfer of the goods or services to the customer over the expected period of benefit, whereas subsequent sales commission payments which require a substantive performance condition of the employee are expensed ratably through the payment date. Under the 2020 plan, both the initial payment and subsequent paymentCapitalized contract costs are capitalized in the period the contract is entered into, whereas under the 2019 plan only the initial payment was capitalized, and the subsequent payment was expensed ratably through the payment date. The timing of the second payment under the 2020 plan from an accounting perspective does not represent a substantive performance condition of the employee. The capitalized contract cost is included in deferred commissions in the accompanying Condensed Consolidated Balance Sheets. The expected period of benefit is the contract term, except when the capitalized commission is expected to provide economic
6
HEALTHSTREAM, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
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 contract term or technological obsolescence period of approximately three years.The Company recorded amortization of deferred commissions of $2.3approximately $2.1 million and $2.1$2.2 million for the three months ended September 30,March 31, 2021 and 2020, and 2019, and $6.6 million and $6.3 million for the nine months ended September 30, 2020 and 2019, respectively, which is included in sales and marketing expenses in the accompanying Condensed Consolidated Statements of Income.
4.3. 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.
The Company computes its interim period provision for income taxes by applying the estimated annual effective tax rate to year-to-date pretax income or loss and adjusts the provision for discrete tax items recorded in the period. During the three months ended September 30,March 31, 2021 and 2020 and 2019, the Company recorded a provision for income taxes from continuing operations of $0.6approximately $0.9 million and $1.1 million, respectively. During the nine months ended September 30, 2020 and 2019, the Company recorded a provision for income taxes from continuing operations of $3.5 million and $3.3$1.9 million, respectively. The Company’s effective tax rate for continuing operations for the ninethree months ended September 30,March 31, 2021 and 2020 was 29% and 2019 was 21% and 24%, respectively. The Company’s effective tax rate primarily reflects the statutory corporate income tax rate, the net effect of state taxes, foreign income taxes, and the effect of various permanent andtax differences. During the three months ended March 31, 2021, the Company recorded discrete tax differences. The decrease inexpense of $0.1 million related to various items, including recording a permanent difference related to purchase accounting adjustments and the effectiveimpact of a state tax rate change enacted during the period. During the three months ended March 31, 2020, the Company recorded a $1.2 million change in fair value of non-marketable equity investments as a result of the NurseGrid acquisition, which is primarily due to the recognitionnot a taxable transaction, resulting in a tax benefit of $0.3 million. The Company recognizes excess tax benefits resulting from higher research and development tax credits than previously estimated.deficiencies associated with stock based awards as a component of its provision for income taxes. The Company recorded additional income tax expense associated with tax deficiencies of $30,000approximately $17,000 and $26,000 during the ninethree months ended September 30,March 31, 2021 and 2020, and recorded a reduction to income tax expense for excess tax benefits of $0.1 million during the nine months ended September 30, 2019.respectively.
5.4. SHAREHOLDERS’ EQUITY
Stock Based Compensation
The Company has stock awards outstanding under its 2016 Omnibus Incentive Plan. The Company accounts for its stock based compensation plansplan using the fair-value based method for costs related to share based payments, including restricted share units (“RSUs”). During the ninethree months ended September 30, 2020,March 31, 2021, the Company issued 114,784121,551 RSUs, subject to service-based time vesting, with a weighted average grant date fair value of $22.94$23.16 per share, measured based on the closing fair market value of the Company’s stock on the date of grant. During the ninethree months ended September 30, 2019,March 31, 2020, the Company issued 96,828111,510 RSUs, subject to service-based time vesting, with a weighted average grant date fair value of $27.31$22.96 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 June 30, 2018, the Company issued 70,000 performance-based RSUs, the vesting of which occurs over a five-year period and is contingent upon continued service and achieving certain performance criteria established by the Compensation Committee on an annual basis in increments of 10%, 15%, 20%, 25%, and 30% based on performance in 2018, 2019, 2020, 2021, and 2022, respectively. The performance criteria for 17,500 of these performance-based RSUs, along with 7,000 performance-based catch-up RSUs which did not vest based on 2020 performance and remain eligible for vesting, will be based on 2021 performance. The measurement date for these 24,500 performance-based RSUs was established during the three months ended March 31, 2021 with a grant date fair value of $23.01 per share, measured based on the closing fair market value of the Company’s stock on the date the performance criteria was established. The performance criteria for the remaining 21,000 performance-based RSUs has not yet been determined and will be established in 2022 based on performance in 2022; therefore, the measurement date for these remaining 21,000 performance-based RSUs cannot be determined until the performance criteria have been established.
Total stock based compensation expense recorded for the three and nine months ended September 30, 2020 and 2019, which is recorded within continuing operationsrecognized in the Condensed Consolidated Statements of Income is as follows (in thousands):
|
| Three Months Ended March 31, |
| |||||
|
| 2021 |
|
| 2020 |
| ||
Cost of revenues (excluding depreciation and amortization) |
| $ | 20 |
|
| $ | 7 |
|
Product development |
|
| 102 |
|
|
| 81 |
|
Sales and marketing |
|
| 65 |
|
|
| 49 |
|
Other general and administrative |
|
| 429 |
|
|
| 413 |
|
Total stock based compensation expense |
| $ | 616 |
|
| $ | 550 |
|
7
|
| Three Months Ended September 30, |
|
| Nine Months Ended September 30, |
| ||||||||||
|
| 2020 |
|
| 2019 |
|
| 2020 |
|
| 2019 |
| ||||
Cost of revenues (excluding depreciation and amortization) |
| $ | 16 |
|
| $ | 13 |
|
| $ | 39 |
|
| $ | 684 |
|
Product development |
|
| 92 |
|
|
| 77 |
|
|
| 266 |
|
|
| 895 |
|
Sales and marketing |
|
| 60 |
|
|
| 57 |
|
|
| 170 |
|
|
| 575 |
|
Other general and administrative |
|
| 389 |
|
|
| 422 |
|
|
| 1,190 |
|
|
| 1,489 |
|
Total stock based compensation expense |
| $ | 557 |
|
| $ | 569 |
|
| $ | 1,665 |
|
| $ | 3,643 |
|
HEALTHSTREAM, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Share Repurchase Plan
On March 13, 2020, the Company’s Board of Directors authorized a share repurchase program to repurchase up to $30.0 million of outstanding shares of common stock. The share repurchase program will terminateexpired on the earlier of March 12, 2021 or when the maximum dollar amount has been expended. Pursuant to this authorization, repurchases have been made, and may continue to be made from time to time, in the open market through privately negotiated transactions or otherwise, including under a Rule 10b5-1 plan, which permits shares to be repurchased when the Company might otherwise be precluded from doing so under insider trading laws in accordance with specific prearranged terms related to timing, price, and volume (among others), without further direction from the Company. The share repurchase program does not require the Company to acquire any amount of shares and may be suspended or discontinued at any time.2021. Under this program, during the three months ended September 30, 2020, the Company repurchased 318,902a total of 957,367 shares in open market purchases at an aggregate fair value of $6.3$20.0 million, reflecting an average price per share of $19.87 (excluding the cost of dealer commissions). During the nine months ended September 30, 2020, the Company repurchased 762,843 shares at an aggregate fair value of $16.3 million, reflecting an average price per share of $21.42$20.89 (excluding the cost of broker commissions).
Stock Awards
During June 2019, the Company’s Chief Executive Officer, Robert A. Frist, Jr., contributed 78,520 of his personally owned shares of HealthStream, Inc. common stock (valued at $2.0 million) to the Company, without any consideration paid to him, for the benefit of the Company’s employees. In connection therewith, effective June 26, 2019 the Company approved the award of 78,520 fully vested shares of common stock to approximately 820 employees of the Company under the
HealthStream, Inc. 2016 Omnibus Incentive Plan. These shares were issued in July 2019. As required by ASC Topic 718, Compensation – Stock Compensation, the Company recognized $2.0 million of stock based compensation expense for these stock awards No repurchases occurred during the three months ended June 30, 2019 based on the closing fair market value of the Company’s stock on the date of the Company’s approval of these grants. Total payments related to the employees’ tax obligations to taxing authorities for these stock awards were $0.6 million and are reflected as a financing activity within the Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2019. In addition, the employer taxes and expenses associated with these grants were $0.2 million and were recorded as an expense during June 2019. Mr. Frist contributed an additional 7,852 of his personally owned shares to cover these costs. The receipt of shares from Mr. Frist and in connection with the withholding of shares as set forth above are presented on the Company’s Condensed Consolidated Statements of Shareholders’ Equity in a similar manner as a share repurchase (i.e., reduction of outstanding shares).March 31, 2021.
6.5. 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 available to common shareholders for the period by the weighted average number of potentially dilutive common and common equivalent shares outstanding during the period. Common equivalent shares are composed of incremental common shares issuable in connection withupon the exercise of stock options and RSUs subject to vesting. The dilutive effect of common equivalent shares is included in diluted earnings per share by application of the treasury stock method. The total number of common equivalent shares excluded from the calculations of diluted earnings per share, due to their anti-dilutive effect or contingent performance conditions, was 115,000approximately 148,000 and 54,000106,000 for the three months ended September 30,March 31, 2021 and 2020 and 2019, respectively, and 112,000 and 107,000 for the nine months ended September 30, 2020 and 2019, respectively.
The following table sets forth the computation of basic and diluted earnings per share for the three and nine months ended September 30, 2020 and 2019 (in thousands, except per share data):
|
| Three Months Ended September 30, |
|
| Nine Months Ended September 30, |
| ||||||||||
|
| 2020 |
|
| 2019 |
|
| 2020 |
|
| 2019 |
| ||||
Numerator: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations |
| $ | 2,634 |
|
| $ | 3,461 |
|
| $ | 13,168 |
|
| $ | 10,642 |
|
Income from discontinued operations |
|
| — |
|
|
| 251 |
|
|
| — |
|
|
| 1,445 |
|
Net income |
| $ | 2,634 |
|
| $ | 3,712 |
|
| $ | 13,168 |
|
| $ | 12,087 |
|
Denominator: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average shares outstanding |
|
| 31,955 |
|
|
| 32,376 |
|
|
| 32,095 |
|
|
| 32,369 |
|
Effect of dilutive shares |
|
| 26 |
|
|
| 61 |
|
|
| 26 |
|
|
| 47 |
|
Weighted-average diluted shares |
|
| 31,981 |
|
|
| 32,437 |
|
|
| 32,121 |
|
|
| 32,416 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per share - basic: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations |
| $ | 0.08 |
|
| $ | 0.11 |
|
| $ | 0.41 |
|
| $ | 0.33 |
|
Discontinued operations |
|
| — |
|
|
| — |
|
|
| — |
|
|
| 0.04 |
|
Net income per share - basic |
| $ | 0.08 |
|
| $ | 0.11 |
|
| $ | 0.41 |
|
| $ | 0.37 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per share - diluted: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations |
| $ | 0.08 |
|
| $ | 0.11 |
|
| $ | 0.41 |
|
| $ | 0.33 |
|
Discontinued operations |
|
| — |
|
|
| — |
|
|
| — |
|
|
| 0.04 |
|
Net income per share - diluted |
| $ | 0.08 |
|
| $ | 0.11 |
|
| $ | 0.41 |
|
| $ | 0.37 |
|
|
| Three Months Ended March 31, |
| |||||
|
| 2021 |
|
| 2020 |
| ||
Numerator: |
|
|
|
|
|
|
|
|
Net income |
| $ | 2,291 |
|
| $ | 7,092 |
|
Denominator: |
|
|
|
|
|
|
|
|
Weighted-average shares outstanding |
|
| 31,504 |
|
|
| 32,334 |
|
Effect of dilutive shares |
|
| 22 |
|
|
| 23 |
|
Weighted-average diluted shares |
|
| 31,526 |
|
|
| 32,357 |
|
|
|
|
|
|
|
|
|
|
Net income per share: |
|
|
|
|
|
|
|
|
Basic |
| $ | 0.07 |
|
| $ | 0.22 |
|
Diluted |
| $ | 0.07 |
|
| $ | 0.22 |
|
7.6. MARKETABLE SECURITIES
At September 30, 2020 and December 31, 2019, theThe fair value of marketable securities, which were all classified as available for sale and which the Company does not intend to sell nor will the Company be required to sell prior to recovery of their amortized cost basis, included the following (in thousands):
|
| March 31, 2021 |
| |||||||||||||||||||||
|
| Adjusted Cost |
|
| Unrealized Gains |
|
| Unrealized Losses |
|
| Fair Value |
|
| Cash and Cash Equivalents |
|
| Current Marketable Securities |
| ||||||
Cash |
| $ | 45,348 |
|
| $ | — |
|
| $ | — |
|
| $ | 45,348 |
|
| $ | 45,348 |
|
| $ | — |
|
Level 2: |
|
|
|
| �� |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Time deposits |
|
| 5,022 |
|
|
| — |
|
|
| — |
|
|
| 5,022 |
|
|
| — |
|
|
| 5,022 |
|
Corporate debt securities |
|
| 5,604 |
|
|
| — |
|
|
| (4 | ) |
|
| 5,600 |
|
|
| — |
|
|
| 5,600 |
|
Total |
| $ | 55,974 |
|
| $ | — |
|
| $ | (4 | ) |
| $ | 55,970 |
|
| $ | 45,348 |
|
| $ | 10,622 |
|
8
HEALTHSTREAM, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
|
| September 30, 2020 |
| |||||||||||||||||||||
|
| Adjusted Cost |
|
| Unrealized Gains |
|
| Unrealized Losses |
|
| Fair Value |
|
| Cash and Cash Equivalents |
|
| Current Marketable Securities |
| ||||||
Cash |
| $ | 102,007 |
|
| $ | — |
|
| $ | — |
|
| $ | 102,007 |
|
| $ | 102,007 |
|
| $ | — |
|
Level 2: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Time deposits |
|
| 15,000 |
|
|
| — |
|
|
| — |
|
|
| 15,000 |
|
|
| 5,000 |
|
|
| 10,000 |
|
Corporate debt securities |
|
| 32,657 |
|
|
| 14 |
|
|
| (5 | ) |
|
| 32,666 |
|
|
| — |
|
|
| 32,666 |
|
Total |
| $ | 149,664 |
|
| $ | 14 |
|
| $ | (5 | ) |
| $ | 149,673 |
|
| $ | 107,007 |
|
| $ | 42,666 |
|
|
| December 31, 2019 |
|
| December 31, 2020 |
| ||||||||||||||||||||||||||||||||||||||||||
|
| Adjusted Cost |
|
| Unrealized Gains |
|
| Unrealized Losses |
|
| Fair Value |
|
| Cash and Cash Equivalents |
|
| Current Marketable Securities |
|
| Adjusted Cost |
|
| Unrealized Gains |
|
| Unrealized Losses |
|
| Fair Value |
|
| Cash and Cash Equivalents |
|
| Current Marketable Securities |
| ||||||||||||
Cash |
| $ | 131,538 |
|
| $ | — |
|
| $ | — |
|
|
| 131,538 |
|
| $ | 131,538 |
|
| $ | — |
|
| $ | 31,558 |
|
| $ | — |
|
| $ | — |
|
| $ | 31,558 |
|
| $ | 31,558 |
|
| $ | — |
|
Level 2: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Time deposits |
|
| 10,021 |
|
|
| — |
|
|
| — |
|
|
| 10,021 |
|
|
| 5,008 |
|
|
| 5,013 |
| ||||||||||||||||||||||||
Corporate debt securities |
|
| 37,325 |
|
|
| 7 |
|
|
| (5 | ) |
|
| 37,327 |
|
|
| — |
|
|
| 37,327 |
|
|
| 4,923 |
|
|
| — |
|
|
| (8 | ) |
|
| 4,915 |
|
|
| — |
|
|
| 4,915 |
|
Government-sponsored enterprise debt securities |
|
| 4,001 |
|
|
| — |
|
|
| — |
|
|
| 4,001 |
|
|
| — |
|
|
| 4,001 |
| ||||||||||||||||||||||||
Total |
| $ | 172,864 |
|
| $ | 7 |
|
| $ | (5 | ) |
| $ | 172,866 |
|
| $ | 131,538 |
|
| $ | 41,328 |
|
| $ | 46,502 |
|
| $ | — |
|
| $ | (8 | ) |
| $ | 46,494 |
|
| $ | 36,566 |
|
| $ | 9,928 |
|
The carrying amounts reported in the Condensed Consolidated Balance Sheets approximate the fair value based on quoted market prices or alternative pricing sources and models utilizing market observable inputs. As of September 30, 2020,March 31, 2021, the Company did 0t recognize any allowance for credit impairments on its available for sale debt securities. All investments in marketable securities are classified as current assets on the Condensed Consolidated Balance Sheets because the underlying securities mature within one year from the balance sheet date.
8.7. BUSINESS COMBINATIONS
CredentialMyDoc
On December 16, 2019, the Company acquired substantially all the assets of Covenant Technology Group, LLC (“CredentialMyDoc”), a Savannah, Georgia-based company focusing on an intuitive, easy to use, and fast to implement provider credentialing and enrollment SaaS solution, primarily in ambulatory care settings. The consideration paid for CredentialMyDoc consisted of $9.0 million in cash, after giving effect to the post-closing working capital adjustment. Of the purchase price paid at closing, $1.1 million is being held in escrow for a period of time following the closing to serve as a source of recovery for certain potential indemnification claims by the Company. The results of operations for CredentialMyDoc have been included in the Provider Solutions segment of the Company’s Financial Statements from the date of acquisition.
A summary of the purchase price is as follows (in thousands):
Cash paid at closing |
| $ | 9,000 |
|
Working capital adjustment - post-closing |
|
| (5 | ) |
Total consideration paid |
| $ | 8,995 |
|
The following table summarizes the fair value of the assets acquired and liabilities assumed as of the date of acquisition (in thousands):
Accounts and unbilled receivable, net |
| $ | 204 |
|
Prepaid and other current assets |
|
| 3 |
|
Operating lease right-of-use assets |
|
| 30 |
|
Deferred tax assets |
|
| 70 |
|
Goodwill |
|
| 4,661 |
|
Intangible assets |
|
| 4,340 |
|
Accounts payable and accrued liabilities |
|
| (7 | ) |
Deferred revenue |
|
| (276 | ) |
Operating lease liabilities |
|
| (30 | ) |
Net assets acquired |
| $ | 8,995 |
|
The excess of purchase price over the fair values of net tangible and intangible assets is recorded as goodwill. The fair values of tangible and identifiable intangible assets and liabilities are based on management’s estimates and assumptions. The primary intangible assets acquired were customer relationships and developed technology. The fair value estimate for customer relationships intangible asset included significant assumptions in the prospective financial information, such as revenue growth, customer attrition, EBITDA margin, and the discount rate. The fair value estimate for developed technology intangible asset included significant assumptions, including the estimate of employee hours that would be needed to recreate the technology. Additionally, these assumptions are forward looking and could be affected by future economic and market conditions.The goodwill balance is primarily attributed to the assembled workforce, additional market opportunities from offering CredentialMyDoc products, and expected synergies from integrating CredentialMyDoc with other products or other combined functional areas within the Company. The goodwill balance 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 $587,000 to an estimated fair value of $276,000. The $311,000 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 |
| $ | 2,100 |
|
| 9 years |
Developed technology |
|
| 2,100 |
|
| 4 years |
Non-compete |
|
| 110 |
|
| 5 years |
Trade name |
|
| 30 |
|
| 3 years |
Total intangible assets |
| $ | 4,340 |
|
|
|
The following unaudited pro forma financial information summarizes the results of operations of the Company and CredentialMyDoc as though the companies were combined as of January 1, 2019 (in thousands, except per share data):
|
| Three Months Ended September 30, |
|
| Nine Months Ended September 30, |
| ||||||||||
|
| 2020 |
|
| 2019 |
|
| 2020 |
|
| 2019 |
| ||||
Total revenues |
| $ | 60,927 |
|
| $ | 62,956 |
|
| $ | 183,257 |
|
| $ | 192,845 |
|
Income from continuing operations |
| $ | 2,669 |
|
| $ | 3,378 |
|
| $ | 13,359 |
|
| $ | 10,386 |
|
Net income |
| $ | 2,669 |
|
| $ | 3,628 |
|
| $ | 13,359 |
|
| $ | 11,831 |
|
Net income per share - basic |
| $ | 0.08 |
|
| $ | 0.11 |
|
| $ | 0.42 |
|
| $ | 0.37 |
|
Net income per share - diluted |
| $ | 0.08 |
|
| $ | 0.11 |
|
| $ | 0.42 |
|
| $ | 0.36 |
|
These unaudited pro forma combined results of operations include certain adjustments arising from the acquisition, such as 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 earliest period presented or to project the Company’s results of operations in any future period.
NurseGrid
On March 9, 2020, the Company acquired all of the outstanding stock of HcT2 Co. dba NurseGrid (“NurseGrid”), a Portland, Oregon-based healthcare technology company offering NurseGrid Mobile and its corollary application for nurse managers, NurseGrid Enterprise for net cash consideration of approximately $21.5 million, after giving effect to the post-closing working capital adjustment. The Company accounted for this transaction as a business combination achieved in stages which required the Company to remeasure its previously existing minority ownership interest, which was accounted for as a non-marketable equity investment measured using the fair value alternative, to fair value at the acquisition date based on the total enterprise value, adjusting for a control premium. The fair value of the Company’s interest in NurseGrid was $3.6 million at closing, resulting in a gain of $1.2 million, recorded as a change in fair value of non-marketable equity investments in the Company’s Condensed Consolidated StatementsStatement of Income.Income during the three months ended March 31, 2020. Additionally, the Company’s previously recorded non-marketable equity investment in NurseGrid was de-recognized from the Company’s Condensed Consolidated Balance Sheet. Sheet during the same period. Acquisition-related transaction costs were $0.2 million. The financial results of NurseGrid have been included in the Workforce Solutions segment from March 9, 2020.2020.
A summary of the purchase price is as follows (in thousands):
Cash paid at closing |
| $ | 25,485 |
|
| $ | 25,485 |
|
Post-closing adjustment, net of cash received |
|
| 33 |
|
|
| 33 |
|
Cash acquired |
|
| (4,064 | ) |
|
| (4,064 | ) |
Net consideration paid |
|
| 21,454 |
|
|
| 21,454 |
|
Fair value of existing equity interest in NurseGrid |
|
| 3,623 |
|
|
| 3,623 |
|
Net consideration paid |
| $ | 25,077 |
| ||||
Total purchase price |
| $ | 25,077 |
|
The following table summarizes the preliminary fair value of the assets acquired and liabilities assumed as of the date of acquisition (in thousands):
Accounts and unbilled receivable, net |
| $ | 92 |
|
Prepaid and other current assets |
|
| 155 |
|
Operating lease right-of-use assets |
|
| 50 |
|
Deferred tax assets |
|
| 2,121 |
|
Goodwill |
|
| 21,085 |
|
Intangible assets |
|
| 1,845 |
|
Accounts payable and accrued liabilities |
|
| (143 | ) |
Deferred revenue |
|
| (78 | ) |
Operating lease liabilities |
|
| (50 | ) |
Net assets acquired |
| $ | 25,077 |
|
The excess of preliminary purchase price over the preliminary fair values of net tangible and intangible assets is recorded as goodwill. The preliminary fair values of tangible and identifiable intangible assets and liabilities are based on management’s estimates and assumptions. The primary intangible assets acquired were developed technology and trade name. The fair value estimate for developed technology intangible asset included significant assumptions, including the estimate of employee hours that would be needed to recreate the technology. The fair value estimate for trade name intangible asset included significant assumptions in the prospective financial information, such as projected revenues, royalty rate, and the discount rate. Additionally, these assumptions are forward looking and could be affected by future
9
HEALTHSTREAM, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
economic and market conditions. The preliminary fair values of assets acquired and liabilities assumed continue to be subject to change during the measurement period (up to one year from the acquisition date) as the Company finalizes the valuation of these items. The primary areas of the preliminary purchase price allocation that are not finalized include the composition and valuation of income tax attributes. The goodwill balance is primarily attributed to the assembled workforce, future market opportunities to engage and support the NurseGrid Mobile user community, and expected synergies from integrating NurseGrid with other combined functional areas within the Company. The goodwill balance is not 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 $157,000 to an estimated fair value of $78,000. The $79,000 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 preliminary components of identifiable intangible assets and their estimated useful lives as of the acquisition date (in thousands):
|
| Preliminary Fair value |
|
| Useful life | |
Customer relationships |
| $ | 35 |
|
| 8 years |
Developed technology |
|
| 1,110 |
|
| 5 years |
Trade name |
|
| 700 |
|
| Indefinite |
Total intangible assets |
| $ | 1,845 |
|
|
|
The amounts of revenue and operating loss of NurseGrid included in the Company’s Consolidated Statement of Income since the date of acquisition of March 9, 2020 for the three and nine months ended September 30, 2020 are as follows (in thousands):
|
| Three Months Ended September 30, 2020 |
|
| Nine Months Ended September 30, 2020 |
| ||
Total revenues |
| $ | 59 |
|
| $ | 156 |
|
Operating loss |
| $ | (811 | ) |
| $ | (1,834 | ) |
|
| Fair value |
|
| Useful life | |
Customer relationships |
| $ | 35 |
|
| 8 years |
Developed technology |
|
| 1,110 |
|
| 5 years |
Trade name |
|
| 700 |
|
| Indefinite |
Total intangible assets |
| $ | 1,845 |
|
|
|
The following unaudited pro forma financial information summarizes the results of operations of the Company and NurseGrid as though the companies were combined as of January 1, 2019 (in thousands, except per share data):
|
| Three Months Ended September 30, |
|
| Nine Months Ended September 30, |
|
| Three Months Ended March 31, |
| |||||||||||||||
|
| 2020 |
|
| 2019 |
|
| 2020 |
|
| 2019 |
|
| 2021 |
|
| 2020 |
| ||||||
Total revenues |
| $ | 60,900 |
|
| $ | 63,239 |
|
| $ | 183,133 |
|
| $ | 192,750 |
|
| $ | 63,472 |
|
| $ | 61,644 |
|
Income from continuing operations |
| $ | 2,648 |
|
| $ | 3,176 |
|
| $ | 12,632 |
|
| $ | 8,653 |
| ||||||||
Net income |
| $ | 2,648 |
|
| $ | 3,427 |
|
| $ | 12,632 |
|
| $ | 10,098 |
|
| $ | 2,295 |
|
| $ | 6,525 |
|
Net income per share - basic |
| $ | 0.08 |
|
| $ | 0.11 |
|
| $ | 0.39 |
|
| $ | 0.31 |
|
| $ | 0.07 |
|
| $ | 0.20 |
|
Net income per share - diluted |
| $ | 0.08 |
|
| $ | 0.11 |
|
| $ | 0.39 |
|
| $ | 0.31 |
|
| $ | 0.07 |
|
| $ | 0.20 |
|
These unaudited pro forma combined results of operations include certain adjustments arising from the acquisition, such as amortization of intangible assets, depreciation of property and equipment, interest expense related to NurseGrid’s previously outstanding debt, 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 earliest period presented or to project the Company’s results of operations in any future period.
ShiftWizard
On October 12, 2020, the Company acquired all of the outstanding stock of ShiftWizard, Inc., a Raleigh, North Carolina-based healthcare technology company offering a SaaS-based solution that integrates key workforce management capabilities, including scheduling, productivity, and forecasting. The consideration paid for ShiftWizard consisted of $30.5 million in cash after giving effect to the post-closing working capital adjustment.Acquisition-related transaction costs were $0.3 million. The financial results of ShiftWizard have been included in the Workforce Solutions segment from October 12, 2020.
The following table summarizes the preliminary fair value of the assets acquired and liabilities assumed as of the date of acquisition (in thousands):
Cash |
| $ | 1,091 |
|
Accounts and unbilled receivable, net |
|
| 1,038 |
|
Prepaid assets |
|
| 106 |
|
Operating lease right-of-use assets |
|
| 183 |
|
Property and equipment |
|
| 50 |
|
Indemnification assets |
|
| 464 |
|
Goodwill |
|
| 19,307 |
|
Intangible asset |
|
| 12,660 |
|
Accounts payable and accrued liabilities |
|
| (600 | ) |
Deferred revenue |
|
| (1,601 | ) |
Deferred tax liability |
|
| (1,559 | ) |
Operating lease liabilities |
|
| (183 | ) |
Indemnification liability |
|
| (464 | ) |
Net assets acquired |
| $ | 30,492 |
|
The excess of purchase price over the fair values of net tangible and intangible assets is recorded as goodwill. The fair values of tangible and identifiable intangible assets and liabilities are based on management’s estimates and assumptions. The preliminary fair values of assets acquired and liabilities assumed continue to be subject to change during the measurement period (up to one year from the
10
HEALTHSTREAM, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
acquisition date) as the Company finalizes the valuation of these items. The primary areas of the preliminary purchase price allocation that are not finalized include the composition and valuation of income tax attributes. Included in the assets and liabilities is an indemnification asset and liability of $0.5 million associated with a Paycheck Protection Program loan pending forgiveness as of the acquisition date that was subsequently forgiven. The primary intangible assets acquired were customer relationships and developed technology. The fair value estimate for customer relationships intangible asset included significant assumptions in the prospective financial information, such as revenue growth, customer attrition, EBITDA margin, and the discount rate. The fair value estimate for developed technology intangible asset included significant assumptions, including the estimate of employee hours that would be needed to recreate the technology. Additionally, these assumptions are forward looking and could be affected by future economic and market conditions. The goodwill balance is primarily attributed to the assembled workforce, additional market opportunities from offering ShiftWizard products, and expected synergies from integrating ShiftWizard with other products or other combined functional areas within the Company. The goodwill balance is not 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 $2.7 million to an estimated fair value of $1.6 million. The $1.1 million write-down of deferred revenue will result in lower revenues than would have otherwise been recognized for such services.
9.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 |
| $ | 7,800 |
|
| 18 years |
Developed technology |
|
| 4,050 |
|
| 5 years |
Non-compete |
|
| 580 |
|
| 1 - 5 years |
Trade name |
|
| 230 |
|
| 5 years |
Total intangible assets |
| $ | 12,660 |
|
|
|
The following unaudited pro forma financial information summarizes the results of operations of the Company and ShiftWizard as though the companies were combined as of January 1, 2019 (in thousands, except per share data):
|
| Three Months Ended March 31, |
| |||||
|
| 2021 |
|
| 2020 |
| ||
Total revenues |
| $ | 63,719 |
|
| $ | 62,576 |
|
Net income |
| $ | 2,493 |
|
| $ | 6,740 |
|
Net income per share - basic |
| $ | 0.08 |
|
| $ | 0.21 |
|
Net income per share - diluted |
| $ | 0.08 |
|
| $ | 0.21 |
|
These unaudited pro forma combined results of operations include certain adjustments arising from the acquisition, such as 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 earliest period presented or to project the Company’s results of operations in any future period.
ANSOSTM Staff Scheduling application
On December 2, 2020, the Company acquired all of the equity interests of Change Healthcare’s staff scheduling business, consisting of the ANSOSTM Staff Scheduling application and related products (ANSOS). The consideration paid for ANSOS was $66.4 million in cash, after giving effect to the post-closing working capital adjustment.Acquisition-related transaction costs were $1.1 million. The financial results of ANSOS have been included in the Workforce Solutions segment from December 2, 2020.
11
HEALTHSTREAM, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
The following table summarizes the preliminary fair value of the assets acquired and liabilities assumed as of the date of acquisition (in thousands):
Cash |
| $ | 1,599 |
|
Accounts and unbilled receivable, net |
|
| 10,053 |
|
Prepaid assets |
|
| 233 |
|
Operating lease right-of-use assets |
|
| 888 |
|
Property and equipment |
|
| 66 |
|
Deferred tax assets |
|
| 2,936 |
|
Indemnification asset |
|
| 708 |
|
Goodwill |
|
| 36,963 |
|
Intangible assets |
|
| 32,440 |
|
Accounts payable and accrued liabilities |
|
| (1,693 | ) |
Deferred revenue |
|
| (14,537 | ) |
Operating lease liabilities |
|
| (888 | ) |
Deferred tax liability |
|
| (1,612 | ) |
Uncertain tax position liability |
|
| (708 | ) |
Net assets acquired |
| $ | 66,448 |
|
The excess of purchase price over the preliminary fair values of net tangible and intangible assets is recorded as goodwill. The fair values of tangible and identifiable intangible assets and liabilities are based on management’s estimates and assumptions. The preliminary fair values of assets acquired and liabilities assumed continue to be subject to change during the measurement period (up to one year from the acquisition date) as the Company finalizes the valuation of these items. During the three months ended March 31, 2021, the Company determined that a portion of the acquired accounts receivable balance required an adjustment to net realizable value. Additionally, the Company recorded opening balance sheet deferred tax liabilities related to the allocation of intangible assets to the foreign entities. As a result of these two items coupled with the post-closing working capital adjustment, the Company recorded a measurement period adjustment which increased goodwill by $1.7 million. The measurement period adjustment had no effect on current or prior period earnings. The primary areas of the preliminary purchase price allocation that are not finalized include the composition and valuation of income tax attributes and working capital accounts. Included in the preliminary assets and liabilities acquired is an indemnification asset and an uncertain tax position liability of $0.7 million determined based on management’s estimate of the most likely value related to income tax attributes. The primary intangible assets acquired were customer relationships and developed technology. The fair value estimate for customer relationships intangible asset included significant assumptions regarding prospective financial information with respect to the acquisition, including with respect to revenue growth, customer attrition, EBITDA margin, and the discount rate. The fair value estimate for developed technology intangible asset included significant assumptions, including the estimate of employee hours that would be needed to recreate the technology. Additionally, these assumptions are forward looking and could be affected by future economic and market conditions. The goodwill balance is primarily attributed to the assembled workforce, additional market opportunities from offering ANSOS products, and expected synergies from integrating ANSOS with other products or other combined functional areas within the Company.
The portion of goodwill allocated to the U.S. entity is deductible for U.S. income tax purposes (representing 95%). The net tangible assets include deferred revenue, which was adjusted down from a book value at the acquisition date of $17.8 million to an estimated fair value of $14.5 million. The $3.3 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 | $ | 21,100 | 11 - 14 years | |||
Developed technology | 9,800 | 5 years | ||||
Trade name | 1,540 | 10 years | ||||
Total intangible assets | $ | 32,440 |
12
HEALTHSTREAM, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
The following unaudited pro forma financial information summarizes the results of operations of the Company and ANSOS as though the companies were combined as of January 1, 2019 (in thousands, except per share data):
|
| Three Months Ended March 31, |
| |||||
|
| 2021 |
|
| 2020 |
| ||
Total revenues |
| $ | 64,567 |
|
| $ | 68,437 |
|
Net income |
| $ | 3,124 |
|
| $ | 8,262 |
|
Net income per share - basic |
| $ | 0.10 |
|
| $ | 0.26 |
|
Net income per share - diluted |
| $ | 0.10 |
|
| $ | 0.26 |
|
These unaudited pro forma combined results of operations include certain adjustments arising from the acquisition, such as 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 earliest period presented or to project the Company’s results of operations in any future period.
Other Business Combinations
On December 10, 2020, the Company acquired substantially all of the assets of myClinicalExchange, LLC, a Denver, Colorado-based information technologies company offering a SaaS-based solution that allows healthcare organizations to track, manage, and report the intern and clinical rotation educational requirements of medical, nursing, and allied healthcare students as well as host required documentation for medical residents. The consideration paid for myClinicalExchange consisted of $4.4 million in cash.Acquisition-related transaction costs were $0.1 million. The acquisition 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. The results of operations for myClinicalExchange are included in the Company’s Condensed Consolidated Financial Statements from the date of acquisition and are included in the Workforce Solutions segment.
On January 19, 2021, the Company acquired the issued and outstanding equity of ProcessDATA, Ltd. (d/b/a ComplyALIGN and HospitalPORTAL) (“ComplyALIGN”), a Chicago, Illinois-based healthcare technology company offering a SaaS-based policy management system for healthcare organizations, for $2.0 million in cash. The acquisition 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. Acquisition-related transaction costs were $0.1 million. The results of operations for ComplyALIGN are included in the Company’s Condensed Consolidated Financial Statements from the date of acquisition and are included in the Workforce Solutions segment.
During the three months ended March 31, 2021, the carrying amount of goodwill increased by $2.7 million, consisting of a $1.7 million of measurement period adjustment related to ANSOS, $0.6 million of acquired goodwill related to ComplyALIGN, and $0.4 million for the effect of currency translation adjustments.
8. 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 training, certification, assessment, development, and scheduling products and services (Workforce Solutions) and provider credentialing, privileging, call center, and enrollment products and services (Provider Solutions).
13
HEALTHSTREAM, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
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, information systems, 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 for the three and nine months ended September 30, 2020 and 2019 and as of September 30, 2020 and December 31, 2019 (in thousands).
|
| Three Months Ended March 31, |
| |||||
Revenues, net: |
| 2021 |
|
| 2020 |
| ||
Workforce Solutions |
| $ | 51,247 |
|
| $ | 49,824 |
|
Provider Solutions |
|
| 12,221 |
|
|
| 11,748 |
|
Total revenues, net |
| $ | 63,468 |
|
| $ | 61,572 |
|
Operating income: |
|
|
|
|
|
|
|
|
Workforce Solutions |
| $ | 9,027 |
|
| $ | 13,370 |
|
Provider Solutions |
|
| 2,055 |
|
|
| 1,197 |
|
Unallocated |
|
| (7,782 | ) |
|
| (7,323 | ) |
Total operating income |
| $ | 3,300 |
|
| $ | 7,244 |
|
|
| Three Months Ended September 30, |
|
| Nine Months Ended September 30, |
| ||||||||||
Revenues, net: |
| 2020 |
|
| 2019 |
|
| 2020 |
|
| 2019 |
| ||||
Workforce Solutions |
| $ | 49,197 |
|
| $ | 51,023 |
|
| $ | 147,909 |
|
| $ | 157,739 |
|
Provider Solutions |
|
| 11,686 |
|
|
| 11,427 |
|
|
| 35,099 |
|
|
| 33,678 |
|
Total revenues, net |
| $ | 60,883 |
|
| $ | 62,450 |
|
| $ | 183,008 |
|
| $ | 191,417 |
|
Operating income from continuing operations: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Workforce Solutions |
| $ | 9,758 |
|
| $ | 10,274 |
|
| $ | 33,575 |
|
| $ | 30,694 |
|
Provider Solutions |
|
| 913 |
|
|
| 1,385 |
|
|
| 3,382 |
|
|
| 4,206 |
|
Unallocated |
|
| (7,537 | ) |
|
| (7,911 | ) |
|
| (22,276 | ) |
|
| (23,516 | ) |
Total operating income from continuing operations |
| $ | 3,134 |
|
| $ | 3,748 |
|
| $ | 14,681 |
|
| $ | 11,384 |
|
Segment assets * |
| September 30, 2020 |
|
| December 31, 2019 |
|
| March 31, 2021 |
|
| December 31, 2020 |
| ||||
Workforce Solutions |
| $ | 139,602 |
|
| $ | 118,382 |
|
| $ | 267,993 |
|
| $ | 270,924 |
|
Provider Solutions |
|
| 140,655 |
|
|
| 148,398 |
|
|
| 136,926 |
|
|
| 140,490 |
|
Unallocated |
|
| 196,300 |
|
|
| 222,764 |
|
|
| 96,763 |
|
|
| 88,899 |
|
Total assets |
| $ | 476,557 |
|
| $ | 489,544 |
|
| $ | 501,682 |
|
| $ | 500,313 |
|
* | Segment assets include accounts and unbilled receivables, prepaid royalties, prepaid and other current assets, other assets, capitalized software development, deferred commissions, certain property and equipment, goodwill, and intangible assets. Cash and cash equivalents, |
10. DISCONTINUED OPERATIONS
Patient Experience
On February 12, 2018, the Company divested its PX business to Press Ganey for $65.2 million in cash (after giving effect to the post-closing working capital adjustment), resulting in a gain, net of tax, of $20.5 million, of which $19.0 million was recorded during the year ended December 31, 2018 and $1.5 million was recorded during the year ended December 31, 2019. This sale of the PX business resulted in the Company’s divestiture of the Company’s patient experience solutions business segment. The Company has classified this gain on the sale of the PX business as discontinued operations in its Condensed Consolidated Statement of Income for the three and nine months ended September 30, 2019. Our results for the three and nine months ended September 30, 2020 do not include any discontinued operations.
11.9. DEBT
Revolving Credit Facility
On December 31, 2018,October 28, 2020, the Company entered into a SecondThird Amendment to its Revolving Credit Agreement (Revolving Credit Facility), amending the Revolving Credit Facility dated as of November 24, 2014 (as amended, the “Revolving Credit Facility”), with Truist Bank, successor by merger to SunTrust Bank (“SunTrust”)(Truist), which extendedextending the maturity date to November 24, 2020.October 28, 2023. Under the Revolving Credit Facility, the Company may borrow up to $50.0$65.0 million, which includes a $5.0 million swing line sub-facility and a $5.0 million letter of credit sub-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 obligations under the Revolving Credit Facility are guaranteed by each of the Company’s subsidiaries.
At the Company’s election, the borrowings under the Revolving Credit Facility bear interest at either (1) a rate per annum equal to the highest of SunTrust’sTruist’s prime rate or 0.5% in excess of the Federal Funds Rate or 1.0% in excess of one-month LIBOR (the “Base Rate”)Base Rate), plus an applicable margin, or (2) the one, two, three, or six monthsix-month per annum LIBOR for deposits in the applicable currency (the “Eurocurrency Rate”)Eurocurrency Rate), as selected by the Company, plus an applicable margin. The applicable margin for Eurocurrency Rate loans depends on the Company’s funded debt leverage ratio and varies from 1.50% to 2.00%1.75%. The applicable margin for Base Rate loans depends on the Company’s funded debt leverage ratio and varies from 0.50% to 1.50%0.75%. Commitment fees and letter of credit fees are also payable under the Revolving Credit Facility. Principal is payable in full at maturity on November 24, 2020,October 28, 2023, and there are 0 scheduled principal payments prior to maturity. The Company is required to pay a commitment fee ranging between 20 and 30 basis points per annum of the average daily unused portion of the Revolving Credit Facility, depending on the Company’s funded debt leverage ratio. The obligations under the Revolving Credit Facility are guaranteed by each of the Company’s subsidiaries.
The purpose of the Revolving Credit Facility is for general working capital needs, permitted acquisitions (as defined in the Revolving Credit Facility), and for stock repurchase and/or redemption transactions that the Company may authorize.
The Revolving Credit Facility contains certain 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.
14
HEALTHSTREAM, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
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 September 30, 2020,March 31, 2021, the Company was in compliance with all covenants. There were 0 balances outstanding on the Revolving Credit Facility as of or during the three and nine months ended September 30, 2020.March 31, 2021.
12.10. NON-MARKETABLE EQUITY INVESTMENTS
Non-marketableThe aggregate carrying amount of non-marketable equity investments of preferred stock in corporations that do not result in a controlling financial interest are accounted for using the measurement alternative for equity investments that do not have readily determinable fair values. ASU 2016-01,values was Financial Instruments – Overall (Subtopic 825-10)$3.9 requires 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 aggregate carrying amount of all non-marketable equity investments accounted for using the measurement alternative was $3.9 million and $5.9 million as of September 30, 2020March 31, 2021 and December 31, 2019, respectively,2020, which carrying value we evaluate for impairment at each reporting period.During the nine months ended September 30, 2020, the Company recorded a $1.2 million upward adjustment to the carrying value of our non-marketable equity investment in NurseGrid due to a change in fair value based on the consideration paid upon the Company’s acquisition of NurseGrid on March 9, 2020 (see Note 8). Cumulatively, the Company has recorded $0.1 million in downward adjustments to the carrying value of non-marketable equity investments. Such is the combination of cumulative downward adjustments of $1.3 million offset by cumulative upward adjustments of $1.2 million. These adjustments are the result of changes in fair value based on observable prices from orderly transactions for similar investments made in investees. 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.
13. CONTRACTUAL ADJUSTMENT
In June 2018, a contract with one of our royalty partners expired and was not renewed. However, the contract required continued royalty payments for any subscriptions that extended beyond the contract termination date. Following the contract termination, there was a mutual disagreement related to various elements of this past partnership, and the Company accrued but did not pay royalties to the partner following the contract expiration. During the first quarter of 2020, the Company received a release of liability from the partner associated with this contract, resulting in no royalties to be paid to the partner. The de-recognition of this royalty liability and related expense was recorded as a $3.4 million reduction to cost of revenues in the first quarter of 2020.
14. SUBSEQUENT EVENTS
On October 12, 2020, the Company acquired all of the equity of ShiftWizard, Inc., a Raleigh, North Carolina-based company focused on providing a SaaS-based solution that integrates key workforce management capabilities, including scheduling, productivity, and forecasting, for $32.0 million in cash, subject to working capital and other purchase price adjustments. The acquisition will be accounted for using the acquisition method of business combination under ASC 805, Business Combinations. The initial accounting for the business combination is incomplete due to the timing of the acquisition. Therefore, we are unable disclose certain information required by ASC 805. We will provide preliminary purchase price allocation information in our Annual Report on Form 10-K for the year ending December 31, 2020.
On October 28, 2020, the Company entered into a Third Amendment to its Revolving Credit Agreement, dated as of November 24, 2014 (as amended, the “Revolving Credit Facility”), with Truist Bank (“Truist”), which increased the capacity under the Revolving Credit Facility to $65.0 million and extended the maturity date to October 28, 2023.
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
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 notesNotes included elsewhere in this report and our audited Consolidated Financial Statements and the notesNotes thereto for the year ended December 31, 2019,2020, appearing in our Annual Report on Form 10-K that was filed with the Securities and Exchange Commission (“SEC”) on February 26, 202025, 2021 (the “2019“2020 Form 10-K”). Statements contained in this Quarterly Report on Form 10-Q that are not historical facts 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,“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 set forth above and the informationrisks set forth under the caption Part II, Item 1A. Risk Factors in this Quarterly Report and under the caption Part I, Item 1A. Risk Factors in our 20192020 Form 10-K and the information regarding forward-looking statements and other disclosures in our 20192020 Form 10-K, earnings releases and other filings with the SEC from time to time, as well as other cautionary statements contained elsewhere in this report, including the mattersour critical accounting policies and estimates as discussed in “Critical Accounting Policiesthis report and Estimates.”our 2020 Form 10-K. We undertake no obligation beyond that required by law to update publiclyor revise any forward-looking statements for any reason, even if new information becomes available or other events occur in the future.statements. 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 currently expect.
Business Overview
HealthStream provides workforce and provider solutions for healthcare organizations—all designed to assess and developsupport the people that deliver patient care, which, in turn, supports the improvement of business and clinical outcomes. Workforce Solutions products are used byDelivered primarily as Software-as-a-Service (SaaS), our solutions focus on some of the most significant challenges facing the healthcare workforce and healthcare organizations today, including the need to effectively manage, retain, engage, schedule, and develop healthcare workforce talent; meet a broad range of their clinical development, talent management, training, certification, competency assessment,rigorous compliance requirements; and performance appraisal needs. Provider Solutions products are used by healthcare organizations for providerefficiently manage ongoing medical staff credentialing and privileging and enrollment needs.processes. HealthStream’s customers include healthcare organizations, pharmaceutical and medical device companies, and other participants in the healthcare industry. At September 30, 2020,March 31, 2021, we had approximately 3.824.34 million contracted subscriptions to hStreamTM, our Platform-as-a-Service technology. hStream technology enables healthcare organizations and their respective workforces to easily connect to and gain value from the growing HealthStream ecosystem of applications, tools, and content.
On February 12, 2018, the Company divested its Patient Experience (“PX”) business to Press Ganey for $65.2 million in cash (after giving effect to the post-closing adjustment). Prior to 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. The gain on sale of the PX business recorded in prior periods are reflected in the Company’s Consolidated Financial Statements as discontinued operations for the three and nine months ended September 30, 2019. Our results for the three and nine months ended September 30, 2020 do not include any discontinued operations. Except where otherwise noted herein, our results are presented on a continuing operations basis. This sale of the PX business resulted in the Company’s divestiture of the patient experience solutions business segment.
Significant financial metrics for the thirdfirst quarter of 20202021 are set forth in the bullets below.
• | Revenues of |
• | Operating income of |
• |
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• | Earnings per share |
• | Adjusted EBITDA1 |
(1) | Adjusted EBITDA |
On March 9, 2020,January 19, 2021, the Company acquired all of the outstanding stock of HcT2 Co. dba NurseGridProcessDATA, Ltd. (d/b/a ComplyALIGN and HospitalPORTAL) (“NurseGrid”ComplyALIGN”), a Portland, Oregon-basedChicago, Illinois-based healthcare technology company offering NurseGrid Mobile and its corollary applicationa SaaS-based policy management system for nurse managers, NurseGrid Enterprise,healthcare organizations, for net cash consideration ofapproximately $21.5$2.0 million after giving effect to the post-closing working capital adjustment.in cash. The financial results of NurseGrid have beenoperations for ComplyALIGN are included in the Company’s Condensed Consolidated Financial Statements from the date of acquisition and are included in the HealthStream Workforce Solutions segment from March 9, 2020.segment.
Impact of and Response to COVID-19 Pandemic
The COVID-19 pandemic, which spread throughout the world and the United States during 2020, has resulted in authorities throughout the United States and the world implementing widespread measures attempting to contain the spread and impact of COVID-19, such as travel bans and restrictions, quarantines, shelter-in-place orders, the promotion of social distancing, and limitations on business activity. These measures and the pandemic have caused a significant economic downturndownturn. As vaccines have become more available, the number of COVID-19 cases has declined in the United States and globally, resulted in increased unemploymentvarious other countries, and underemployment levels,economic conditions have improved. However, uncertainty remains regarding the extent, timing, and have adversely impacted consumer confidenceduration of the pandemic, including the extent to which the availability of these vaccines will positively impact public health conditions and spending. Moreover, differing approaches among governmental authorities in the United States regarding whether and how to begin lifting shelter-in-place and business restriction orders have caused additional uncertainty. Additionally, some governmental authorities have reinstated previously relaxed restrictions due to a recent rise in diagnosed casesnew, potentially more contagious and/or virulent strains of COVID-19 in many regions ofmay pose additional public health risks. The pandemic continues to cause uncertainty and potential economic volatility, including with regard to the United States. This pandemic has also led to disruptionpandemic’s various and volatility in financialunpredictable impacts on our healthcare customers and capital markets.our business.
Our business is focused on providing workforce and provider solutions to healthcare organizations, and as such, the pandemic’s adverse impact on healthcare organizations has resulted in an adverse impact on our Company. Although we believe that COVID-19 did not have a significant negative impact on our revenues or net income during 2020, we believe that it began to have a negative impact on our revenues during the first ninethree months of 2020,ended March 31, 2021. Additionally, certain developments related to COVID-19 have negatively impacted, and are expected to continue to negatively impact, our business this yearduring the remainder of 2021 and potentially longer,thereafter, as described below. In particular, sales cycles have been delayed or postponed such that declines in sales bookings by customers during 2020 and the three months ended March 31, 2021 will result in a negative impact to revenue and earnings during the remainder of 2021 and potentially thereafter.
Our operating income for the nine months ended September 30, 2020results have benefited from a temporary reduction of operating expenses related to COVID-19 conditions, but the operating expense reduction itself—despite its positive impact on operating income—income and adjusted EBITDA—is indicative of the negative impact the pandemic is havinghas had, and may continue to have on new bookings and renewals. We have experienced, and expect to continue to experience, delayed and reduced bookings and renewals due to the pandemic. Given that we sell multiple year subscriptions to our solutions, the revenue impact of lost or delayed sales in a given period generally does not manifest until future periods, just as the revenue we recognize in a given period is generally the result of sales from a prior period. Since mid-March 2020, our sales teamorganization has been unable to travel and conduct onsite sales meetings with existing or prospective customers, and we have also cancelled tradeshows.tradeshows, which typically provide future sales opportunities. As a result, operating income and adjusted EBITDA benefitted from a $2.2$1.2 million reduction in operating expense related to the discontinuance of travel and a $0.2 million reduction in operating expenses related to the cancellation of tradeshowsrestrictions during the first nine monthsquarter of 20202021 compared to the same period last year.
The extent, timing, and durationfirst quarter of the impacts of the COVID-19 pandemic on our business remain uncertain, and will depend upon, among other things, the length and severity of the pandemic, particularly with respect to the pandemic’s ongoing impact on healthcare organizations.2020.
We continue to closely monitor developments related to COVID-19 that may have an adverse impact on our operational and financial performance. We also continue to take actions focused on the safety and well-being of our employees, assisting our customers in this time of need, and mitigating operational and financial impacts to our business. We intend to continue serving our customers both in their battle to defeat the coronavirus and across the continuum of their other workforce and provider solution needs.
In February of this year, our customers began using our proprietary technology platform to author and deliver COVID-19 training and education courses to their staff as they began to prepare for caring for COVID-19 patients. In March, we made available to all caregivers, free of charge, a curated library of proprietary content and to our customers, a bundle of cross-training courses to further their staff’s preparation to deliver safe and effective care to COVID-19 patients. This has resulted in approximately 3.0 million course completions related to COVID-19 through September 30, 2020, including courses self-authored by customers and proprietary courses, over our technology platform. Additionally, as previously announced, HealthStream, in partnership with the State of Tennessee Office of the Governor, is providing its COVID-19 Rapid Response Program, which includes training bundles and its workforce platform, along with other workforce resources to support the state’s efforts to rapidly train new, returning, and current caregivers who are volunteering to work in Alternate Healthcare Facilities being set-up across the state. This COVID-19 Rapid Response Program continues to be provided free of charge.
Additionally, to promote the safety and well-being of our employees, we required our entire workforce to begin working remotely from home beginning March 16, 2020, and the entire workforce continues to work remotely to date. We have not established a date to return to non-remote working conditions.
Many healthcare organizations have been, and will likelymay continue to be, substantially adversely impacted by the COVID-19 pandemic. The period of time over which this adverse impact continues, the extent to which certain healthcare organizations continue to receive and/or are eligible to utilize governmental funds as the result of federal stimulus and relief measures, and whetherongoing public health conditions related to the pandemic continue to deteriorate are important factors that may impact our business. The pandemic has resulted in a significant reduction of revenue generating services for many healthcare organizations, such as elective surgeries and other elective procedures, while, in some cases, their cost of providing emergency care as the result of treating COVID-19 patients has increased. Adverse COVID-19 impacts such as these have resulted, and may continue to result, in significant adverse impacts to many healthcare organizations.
In light of adverse developments with respect to healthcare organizations as noted above, we are continuing to monitor the ability or willingness of our customers to:
| • | pay for our solutions in a timely manner, in full, or at all; |
| • | implement solutions they have purchased from us; and |
| • | renew existing or purchase new products or services from us. |
We monitor our cash position and credit exposure by evaluating, among other things, weekly cash receipts, days sales outstanding (“DSO”)(DSO), customer requests to modify payment or contract terms, and bankruptcy notices. We experienced a decreasemodest increases in cash receipts from customers inDSO during the first nine monthsquarter of 20202021 compared to the same periodfirst quarter of 2020, which increase was partially due to the previous year and an increase in DSOaccounts receivable balances from 40 daysacquisitions completed in the third quarter of 2019 to 43 days for the thirdfourth quarter of 2020. While our cash balances increased by $5.2 million during the quarter, our cash flowsAdditionally, while we have not experienced any adverse impacts to customer defaults resulting from operations were $30.8 million this year compared to $52.5 million in the prior year, which was due primarily to the decline in legacy resuscitation sales and the impact of COVID-19. WeCOVID-19, we are unable to know whether or to what extent suchfuture negative trends arising fromrelated to the pandemic may continue or increase over time.arise in the future. Any continued deterioration in the collectability (or the timing of payments) of our accounts receivable will adversely impact our financial results.
The timing of implementation of our services is also relevant to our business because our software solutions do not result in revenue recognition until they are implemented.made available for use. To the extent our customers delay or fail to implement products they have previously purchased, our financial results will be adversely impacted. While we have experienced a negative impact
from certain implementation delays related to COVID-19, these delays have not been consistent across products or across customers. Our Provider Solutions business segment has, in some instances, been more sensitive to implementation delays than our Workforce Solutions segment as the result of complexities associated with implementing certain of the solutions offered through that business segment.
Conditions related to the pandemic mayhave also adversely impactimpacted the ability or willingness of oursome customers to renew their contracts with us, or to renew contracts on comparable terms, or to expandat the quantity and type of solutions they purchase from us, particularly to the extent such customers have reduced their staff numbers or scope of operations due to COVID-19.same levels. Pandemic-related conditions have also been delayingdelayed or otherwise adversely impactingimpacted our ability to enter into contracts with new potential customers, as some potential customers have been focused on dealing with the impact and demands that COVID-19 is having on their businesses. In addition, many of ourexisting or potential customers are not currently allowing vendors, including representatives of the Company, on their premises, which has been reducingreduced, and may continue to reduce, the ability of our sales team to make sales they otherwise would likely make but for the impact of COVID-19. In addition,Also, our customer’scustomers’ uncertainties due to COVID-19, combined with the inability to travel and conduct tradeshows, has had, and is likely tomay continue to have, a negative impact on our sales volumes. We continueAs the pandemic has persisted, we have, however, continued to pursue newevolve our sales strategies, including thoseapproach such that our sales representatives are in frequent contact with customers via video conference and other remote means that do not require in-person meetings, tradeshows,physical travel or travel.onsite visits to our customers’ facilities. While COVID-19 has had a negative impact on sales volumes, sales have continued throughout the pandemic albeit at a reduced bookings volume.
Our business also relies on a network of partners whose solutions we resell or whose solutions are sold and delivered over our platform. At least one of our partners has declared bankruptcy since the pandemic began, though such partner continues operations. To the extent that COVID-19 results in ongoing or increased business disruption or adverse impacts to our partners, such disruptions and adverse impacts could adversely impact our business.
Given the uncertainty surrounding the adverse impactimpacts that COVID-19 maycould have on our business, we have takentook certain expense management measures whichin 2020 as previously disclosed. We have included:
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Thesegenerally discontinued these expense management measures contributedtaking into account the improved economic environment and current conditions related to the decreasepandemic, provided that certain expenses such as those associated with travel and tradeshows remain significantly lower than pre-pandemic levels due to an ongoing lack of opportunity to engage in our operating expenses, which compared to the prior year period declined by approximately $1.7 million and $3.4 million during the three and nine months ended September 30, 2020, respectively. Additionally,such activities. However, we are continuing to monitor developments regardingrelated to the COVID-19 pandemic and may reinstate previous expense management measures or undertake further expense management initiatives later in 2021 if we deem necessary.
The Company’s financial performance during the pandemic has remained solid, partly due to the above expense control measures. While we believe these expense control measures are prudent in light of current conditions, we also intend to strike a balance to ensure that our operations are financially stable for the future and that we continue to achieve our growth objectives. Our employees are vitally important to our success, and they have made numerous contributions during these unprecedented times. Although we have forgone salary increases for 2020 and previously limited the 401k match to one percent as noted above, during the third quarter we elected to provide our employees, excluding executive officers, with a supplemental payroll payment and an increase of the 401k match from one percent to two percent for all employees. The supplemental payroll payment approximates the dollar amount of salary increases that were foregone in 2020 as noted above. The impact of these two items reduced operating income by approximately $1.9 million during the third quarter.
Key Business Metrics
Our management utilizes the following financial and non-financial metrics in connection with managing our business. These performance indicators include measurements of gross margin, adjusted EBITDA, and hStream subscriptions.
| • | Revenues, net. Revenues, net reflect income generated by the sales of goods and services related to our operations and reflects deferred revenue write-downs associated with fair value accounting for acquired businesses. Revenues, net were $63.5 million for the three months ended March 31, 2021 compared to $61.6 million for the three months ended March 31, 2020. Management utilizes revenue in connection with managing our business and believes that this metric provides useful information to investors as a key indicator of growth and success of our products. |
• | Operating Income. Operating income represents the amount of profit realized from our operations and is calculated as the difference between revenues, net and operating costs and expenses. Operating income was |
| • | 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 non-cash and non-operating |
| • | hStream Subscriptions. hStream subscriptions are determined as the number of subscriptions under contract for hStream, our Platform-as-a-Service technology that enables healthcare organizations and their respective workforces to easily connect to and gain value from the growing HealthStream ecosystem of applications, tools, and content. Our management utilizes hStream subscriptions in connection with managing our business and believes that this metric provides useful information to |
Critical Accounting Policies and Estimates
The Company’s Condensed Consolidated Financial Statements are prepared in accordance with 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.
The accounting policies and estimates that we believe are the most critical in fully understanding and evaluating our reported financial results include the following:
| • | Revenue recognition |
| • | Accounting for income taxes |
| • | Software development costs |
| • | Goodwill, intangibles, and other long-lived assets |
| • | Allowance for doubtful accounts |
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 where management’s judgment in selecting among available alternatives would not produce a materially different result. See Notes to the Consolidated Financial Statements in our 20192020 Form 10-K and the Notes to the Condensed Consolidated Financial Statements herein which contain additional information regarding our accounting policies and other disclosures required by US GAAP. There have been no material changes in our critical accounting policies and estimates from those reported in our 20192020 Form 10-K.
Impact on Comparability of Operating Results
Three Months Ended September 30, 2020 Compared to Three Months Ended September 30, 2019
Revenues, net. Revenues decreased $1.6 million, or 3%, to $60.9 millionThe comparability of our operating results for the three months ended September 30,March 31, 2021 to the same period for 2020 from $62.5 million forare impacted by several factors, including acquisitions, the reduction of revenues associated with legacy resuscitation products, and other non-cash items.
Between March 9, 2020 and January 19, 2021, we completed five acquisitions, which resulted in additional revenues and higher operating expenses during the three months ended September 30, 2019.
A comparison of revenues by business segment is as follows (in thousands):
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Revenues by Business Segment: |
| 2020 |
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| 2019 |
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| Percentage Change |
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Workforce Solutions |
| $ | 49,197 |
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| $ | 51,023 |
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| -4 | % |
Provider Solutions |
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| 11,686 |
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| 11,427 |
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| 2 | % |
Total revenues, net |
| $ | 60,883 |
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| $ | 62,450 |
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% of Revenues |
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Workforce Solutions |
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| 81 | % |
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| 82 | % |
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Provider Solutions |
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| 19 | % |
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| 18 | % |
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Revenues for Workforce Solutions decreased $1.8 million, or 4%,March 31, 2021 compared to $49.2 million for the three months ended September 30, 2020 from $51.0 millionMarch 31, 2020.
Our legacy agreements with Laerdal (Legacy Agreements) for the three months ended September 30, 2019.HeartCode and Resuscitation Quality Improvement (RQI) products expired pursuant to their terms on December 31, 2018. Revenues from legacy resuscitationassociated with sales of HeartCode and RQI products decreasedpursuant to the Legacy Agreements were significant in past years, although margins on such products were lower than HealthStream’s average margin. Revenue generated by $3.7 millionHeartCode and were $9.7RQI products pursuant to the Legacy Agreements was $11.2 million in the thirdfirst quarter of 2020 compared to $13.4$1.8 million in the third quarter of 2019. Other workforce revenues increased by $1.9 million, or 5%, and included growth in platform and content subscriptions of $2.6 million, or 7%, partially offset by a decline in professional services revenues of $0.7 million, or 43%, due to fewer projects than the prior year.
Revenues for Provider Solutions increased $0.3 million, or 2%, to $11.7 million for the three months ended September 30, 2020 from $11.4 million for the three months ended September 30, 2019. Revenue growth of $0.3 million was primarily attributable to $0.4 million in revenues from the CredentialMyDoc acquisition, which was completed in December 2019, partially offset by a decline in professional services $0.1 million.
Cost of Revenues (excluding depreciation and amortization). Cost of revenues decreased $2.0 million, or 8%, to $23.3 million for the three months ended September 30, 2020 from $25.3 million for the three months ended September 30, 2019. Cost of revenues as a percentage of revenues was 38% and 41% for the three months ended September 30, 2020 and 2019, respectively.
Cost of revenues for Workforce Solutions decreased $2.2 million to $19.3 million and approximated 39% and 42% of revenues for Workforce Solutions for the three months ended September 30, 2020 and 2019, respectively. The decrease is primarily associated with decreased royalties paid by us resulting from a decline in revenues and lower travel expense. Cost of revenues for Provider Solutions increased $0.2 million to $4.0 million and approximated 34% and 33% of Provider Solutions revenues for the three months ended September 30, 2020 and 2019, respectively. The increase is primarily associated with the supplemental payroll payment recorded during the three months ended September 30, 2020 as noted above.
Product Development. Product development expenses increased $1.0 million, or 14%, to $8.2 million for the three months ended September 30, 2020 from $7.2 million for the three months ended September 30, 2019. Product development expenses as a percentage of revenues were 13% and 12% for the three months ended September 30, 2020 and 2019, respectively.
Product development expenses for Workforce Solutions increased $0.6 million to $6.5 million and approximated 13% and 11% of revenues for Workforce Solutions for the three months ended September 30, 2020 and 2019, respectively. The increase in amount is primarily due to additions to personnel resulting from the NurseGrid acquisition and the supplemental payroll payment to employees as noted above. Product development expenses for Provider Solutions increased $0.4 million to $1.7 million and approximated 15% and 12% of revenues for Provider Solutions for the three months ended September 30, 2020 and 2019, respectively. The increase is primarily due to an increase in contract labor and additions to personnel resulting from the CredentialMyDoc acquisition.
Sales and Marketing. Sales and marketing expenses, including personnel costs, decreased $0.1 million, or 2%, to $8.9 million for the three months ended September 30, 2020 from $9.0 million for the three months ended September 30, 2019. Sales and marketing expenses were 15% and 14% of revenues for the three months ended September 30, 2020 and 2019, respectively.
Sales and marketing expenses for Workforce Solutions decreased $0.2 million to $7.0 million and approximated 14% of revenues for Workforce Solutions for both the three months ended September 30, 2020 and 2019. The decrease is primarily due to lower travel and entertainment expenses as a result of COVID-19 and lower sales commissions consistent with the decreases in revenues. Sales and marketing expenses for Provider Solutions increased $0.1 million to $1.6 million and approximated 14% and 13% of revenues for Provider Solutions for the three months ended September 30, 2020 and 2019, respectively. The increase is primarily due to additions to personnel resulting from the CredentialMyDoc acquisition and the supplemental payroll payment to employees as noted above. The unallocated portion of sales and marketing expenses decreased $26,000 to $0.3 million compared to the prior year period.
Other General and Administrative Expenses. Other general and administrative expenses approximated $10.0 million for both the three months ended September 30, 2020 and 2019. Other general and administrative expenses as a percentage of revenues were 16% of revenues for both the three months ended September 30, 2020 and 2019.
Other general and administrative expenses for Workforce Solutions increased $71,000 to $3.4 million and approximated 7% of Workforce Solutions revenues for both the three months ended September 30, 2020 and 2019. Other general and administrative expenses for Provider Solutions decreased $95,000 to $0.9 million and approximated 7% and 8% of Provider Solutions revenues for the three months ended September 30, 2020 and 2019, respectively. The unallocated corporate portion of other general and administrative expenses approximated $5.7 million for both the current and prior year period. Higher expenses associated with due diligence costs, including costs related to our acquisition of ShiftWizard which was completed in October 2020, incurred in the quarter were mostly offset by reductions in other expense categories.
Depreciation and Amortization. Depreciation and amortization increased $0.3 million, or 4%, to $7.4 million for the three months ended September 30, 2020 from $7.1 million for the three months ended September 30, 2019. The increase resulted from an increase in amortization of capitalized software and intangible assets.
Other Income, Net. Other income, net was $0.1 million for the three months ended September 30, 2020 compared to $0.9 million for the three months ended September 30, 2019. The decrease is a result of lower interest income from cash and investments in marketable securities due to reductions in bond yields and bank deposit interest rates.
Income Tax Provision. The Company recorded a provision for income taxes of $0.6 million for the three months ended September 30, 2020 compared to $1.1 million for the three months ended September 30, 2019. The Company’s effective tax rate was 19% and 25% for the three months ended September 30, 2020 and 2019, respectively. The decrease in the effective tax rate is primarily due to the recognition of tax benefits resulting from higher research and development tax credits than previously estimated.
Income from Continuing Operations. Income from continuing operations was $2.6 million in the third quarter of 2020, down 24% from $3.5 million in the third quarter of 2019, which decrease was driven by the $1.5 million expense, net of tax, associated with the supplemental payroll payment to employees and the additional 401k match as noted above. Earnings per diluted share from continuing operations were $0.08 and $0.11 for the three months ended September 30, 2020 and 2019, respectively.
Income from Discontinued Operations. Income from discontinued operations was zero for the three months ended September 30, 2020 compared to $0.3 million for the three months ended September 30, 2019.
Net Income. Net income was $2.6 million in the third quarter of 2020 compared to $3.7 million in the third quarter of 2019. Earnings per diluted share were $0.08 and $0.11 for the three months ended September 30, 2020 and 2019, respectively.
Adjusted EBITDA (a non-GAAP financial measure which we define as net income before interest, income taxes, stock based compensation, depreciation and amortization, changes in fair value of non-marketable equity investments, and the de-recognition of non-cash royalty expense resulting from our resolution of a mutual disagreement related to various elements of a past partnership which resulted in a reduction to costs of revenues in the first quarter of 2020) from continuing operations decreased 3% to $11.1 million for2021. For additional information, see below under “Other Developments.”
During the three months ended September 30, 2020 comparedMarch 31, 2021, the Company recorded a $1.0 million non-recurring, non-cash reduction to $11.5 million forpaid time off (PTO) expense as a result of modifications to the Company’s PTO policy. During the three months ended September 30, 2019.
Adjusted EBITDA decreased to $11.1March 31, 2020, the Company recorded a $3.4 million for the three months ended September 30, 2020 compared to $11.8 million for the three months ended September 30, 2019. See “Reconciliation of Non-GAAP Financial Measures” below for our reconciliation of Adjusted EBITDA from continuing operations and Adjusted EBITDA to the most directly comparable measures under US GAAP.
Nine Months Ended September 30, 2020 Compared to Nine Months Ended September 30, 2019
Revenues, net. Revenues decreased $8.4 million, or 4%, to $183.0 million for the nine months ended September 30, 2020 from $191.4 million for the nine months ended September 30, 2019.
A comparison of revenues by business segment is as follows (in thousands):
|
| Nine Months Ended September 30, |
| |||||||||
Revenues by Business Segment: |
| 2020 |
|
| 2019 |
|
| Percentage Change |
| |||
Workforce Solutions |
| $ | 147,909 |
|
| $ | 157,739 |
|
|
| -6 | % |
Provider Solutions |
|
| 35,099 |
|
|
| 33,678 |
|
|
| 4 | % |
Total revenues, net |
| $ | 183,008 |
|
| $ | 191,417 |
|
|
| -4 | % |
|
|
|
|
|
|
|
|
|
|
|
|
|
% of Revenues |
|
|
|
|
|
|
|
|
|
|
|
|
Workforce Solutions |
|
| 81 | % |
|
| 82 | % |
|
|
|
|
Provider Solutions |
|
| 19 | % |
|
| 18 | % |
|
|
|
|
Revenues for Workforce Solutions decreased $9.8 million, or 6%, over the first nine months of 2019. Revenue from our legacy resuscitation products declined by $14.7 million and were $31.6 million in the first nine months of 2020 down from $46.3 million in the first nine months of 2019. Other workforce revenues increased by $4.9 million, representing an increase in platform and content subscriptions of $6.2 million, or 6%, partially offset by a decline in professional services revenues of $1.3 million, or 30%.
Revenues for Provider Solutions increased $1.4 million, or 4%, over the first nine months of 2019. Revenue growth was primarily attributable to the CredentialMyDoc acquisition, which was completed in December 2019, contributing $1.2 million in revenues, along with new VerityStream platform subscriptions and professional services for implementation of new customers.
Cost of Revenues (excluding depreciation and amortization). Cost of revenues decreased $12.4 million, or 16%, to $66.6 million for the nine months ended September 30, 2020 from $79.0 million for the nine months ended September 30, 2019. Cost of revenues as a percentage of revenues was 36% and 41% for the nine months ended September 30, 2020 and 2019, respectively.
Cost of revenues for Workforce Solutions decreased $12.8 million to $54.8 million and approximated 37% and 43% of revenues for Workforce Solutions for the nine months ended September 30, 2020 and 2019, respectively. The decrease is primarily associated with the lower royalty expense associated with the decline in the legacy resuscitation revenues along with the favorable $3.4 millionnon-cash contractual adjustment that resulted in a decrease to royalty expense upon the resolution of a mutual disagreement relating to various elements of a past partnershippartnership.
Three Months Ended March 31, 2021 Compared to Three Months Ended March 31, 2020
Revenues, net. Revenues increased approximately $1.9 million, or 3%, to $63.5 million for the three months ended March 31, 2021 from $61.6 million for the three months ended March 31, 2020.
A comparison of revenues by business segment is as follows (in thousands):
|
| Three Months Ended March 31, |
| |||||||||
Revenues by Business Segment: |
| 2021 |
|
| 2020 |
|
| Percentage Change |
| |||
Workforce Solutions |
| $ | 51,247 |
|
| $ | 49,824 |
|
|
| 3 | % |
Provider Solutions |
|
| 12,221 |
|
|
| 11,748 |
|
|
| 4 | % |
Total revenues, net |
| $ | 63,468 |
|
| $ | 61,572 |
|
|
| 3 | % |
|
|
|
|
|
|
|
|
|
|
|
|
|
% of Revenues |
|
|
|
|
|
|
|
|
|
|
|
|
Workforce Solutions |
|
| 81 | % |
|
| 81 | % |
|
|
|
|
Provider Solutions |
|
| 19 | % |
|
| 19 | % |
|
|
|
|
Revenues for Workforce Solutions increased $1.4 million, or 3%, to $51.2 million for the three months ended March 31, 2021 from $49.8 million for the three months ended March 31, 2020. Contributions from recent acquisitions and growth in other workforce solutions more than offset the expected decline in revenues from legacy resuscitation products. While revenues from legacy resuscitation products effectively ceased at the end of 2020, revenues for the three months ended March 31, 2021 included $1.8 million as we extended, with support from Laerdal, utilization of these products into 2021 for a small group of customers. Workforce revenues also benefited from a $0.4 million increase in professional services revenues, primarily associated with recently acquired businesses.
Revenues for Provider Solutions increased $0.5 million, or 4%, to $12.2 million for the three months ended March 31, 2021 from $11.7 million for the three months ended March 31, 2020. Revenue growth was attributable to new VerityStream subscriptions and professional services for client implementations.
Cost of Revenues (excluding Depreciation and Amortization). Cost of revenues increased $0.8 million, or 4%, to $21.2 million for the three months ended March 31, 2021 from $20.4 million for the three months ended March 31, 2020. Cost of revenues as a percentage of revenues was 33% for both the three months ended March 31, 2021 and 2020. Cost of revenues were favorably impacted by $0.2 million during the three months ended March 31, 2021, resulting from the non-cash reduction to PTO expense, and were favorably impacted in the amount of $3.4 million during the three months ended March 31, 2020 from the one-time non-cash contractual adjustment to royalty expense.
Cost of revenues for Workforce Solutions increased $0.9 million to $17.4 million for the three months ended March 31, 2021 compared to the prior year period and approximated 34% and 33% of revenues for Workforce Solutions for the three months ended March 31, 2021 and 2020, respectively. The increase is primarily associated with the one-time contractual adjustment to cost of revenues in the amount of $3.4 million recorded induring the first quarter of 2020.2020, coupled with increased expenses related to recent acquisitions, offset by a decline in royalties related to legacy resuscitation products. Cost of revenues for Provider Solutions increased $0.4decreased $0.1 million to $11.8$3.8 million for the three months ended March 31, 2021 compared to the prior year
period and approximated 34%31% and 33% of Provider Solutions revenues for both the ninethree months ended September 30,March 31, 2021 and 2020, and 2019.respectively. The increase in amountdecrease is primarily due to increased personnelassociated with decreases in travel expenses over the prior year period including the additionas a result of personnel from the CredentialMyDoc acquisition, and the supplemental payroll payment to employees as noted above.COVID-19 pandemic.
Product Development. Product development expenses increased $1.7$1.9 million, or 8%25%, to $23.5$9.4 million for the ninethree months ended September 30, 2020March 31, 2021 from $21.8$7.5 million for the ninethree months ended September 30, 2019.March 31, 2020. Product development expenses as a percentage of revenues were 13%15% and 11%12% for the ninethree months ended September 30,March 31, 2021 and 2020, and 2019, respectively. Product development expenses were favorably impacted in the amount of $0.4 million during the three months ended March 31, 2021 from the non-cash reduction to PTO expense.
Product development expenses for Workforce Solutions increased $0.5$2.1 million to $18.5$8.0 million for the three months ended March 31, 2021 compared to the prior year period and approximated 13%16% and 11%12% of revenues for Workforce Solutions for the ninethree months ended September 30,March 31, 2021 and 2020, and 2019, respectively. The increase is primarily due toassociated with recent acquisitions and increased personnel as a result of the NurseGrid acquisition in March 2020.product development efforts across other workforce solutions. Product development expenses for Provider Solutions increased $1.2decreased $0.2 million to $5.0$1.4 million for the three months ended March 31, 2021 compared to the prior year period and approximated 14%11% and 11%14% of revenues for HealthStreamProvider Solutions for the ninethree months ended September 30,March 31, 2021 and 2020, and 2019, respectively. The increasedecrease in product development expenses is primarily due to increased contractan increase in labor and increased personnel overcapitalized for internally developed software related to additional product investments across the prior year period as a result of the CredentialMyDoc acquisition.VerityStream product suite.
Sales and Marketing. Sales and marketing expenses, including personnel costs, decreased $2.1$0.3 million, or 7%3%, to $26.3$8.9 million for the ninethree months ended September 30, 2020March 31, 2021 from $28.3$9.2 million for the ninethree months ended September 30, 2019.March 31, 2020. Sales and marketing expenses were 14% and 15% of revenues for the ninethree months ended September 30,March 31, 2021 and 2020, respectively. Sales and 2019, respectively.marketing expenses were favorably impacted by $0.2 million during the three months ended March 31, 2021 resulting from the non-cash reduction to PTO expense.
Sales and marketing expenses for Workforce Solutions decreased $2.4$0.3 million to $20.8$7.1 million for the three months ended March 31, 2021 compared to the prior year period and approximated 14% and 15% of revenues for Workforce Solutions for the ninethree months ended September 30,March 31, 2021 and 2020, and 2019, respectively. The decrease in amount is primarily due to lower sales commissions consistentassociated with the decreasesdecline in legacy resuscitation revenues decreases in travel and entertainment
expenses as well as tradeshowdecreases in travel expenses as a result of the COVID-19 conditions as set forth above, and declines in general marketing expenses. pandemic. Sales and marketing expenses for Provider Solutions increased $0.3decreased $40,000 to $1.5 million for the three months ended March 31, 2021 compared to $4.7 millionthe prior year period and approximated 13% of revenues for Provider Solutions for both the ninethree months ended September 30, 2020March 31, 2021 and 2019.2020. The increase in amount is primarily due to higher sales commissions, consistent with the increases in revenues. The unallocated corporate portion of sales and marketing expenses approximated $0.8increased $34,000 to $0.3 million for both the current andthree months ended March 31, 2021 compared to the prior year period.
Other General and Administrative Expenses. Other general and administrative expenses decreased $0.3increased $1.6 million, or 1%17%, to $29.9$11.5 million for the ninethree months ended September 30, 2020March 31, 2021, from $30.3$9.9 million for the ninethree months ended September 30, 2019.March 31, 2020. Other general and administrative expenses as a percentage of revenues were 18% and 16% of revenues for both the ninethree months ended September 30,March 31, 2021 and 2020, respectively. Other general and 2019.administrative expenses were favorably impacted by $0.2 million during the three months ended March 31, 2021 resulting from the non-cash reduction to PTO expense.
Other general and administrative expenses for Workforce Solutions increased $1.0$0.9 million to $11.3$4.8 million for the three months ended March 31, 2021 compared to the prior year period and approximated 9% and 8% and 6% of Workforce Solutions revenues for Workforce Solutions for the ninethree months ended September 30,March 31, 2021 and 2020, and 2019, respectively. The increase is primarily due to increases in infrastructure expenses and the acquisition of NurseGrid. associated with recent acquisitions. Other general and administrative expenses for Provider Solutions decreased $0.2increased $0.1 million to $2.4$0.9 million and approximated 7% and 8% of revenues for Provider Solutions for the ninethree months ended September 30, 2020 and 2019, respectively. The decrease is primarily associated with lower professional services expensesMarch 31, 2021 compared to the prior year period.period and approximated 7% of Provider Solutions revenues for both the three months ended March 31, 2021 and 2020. The unallocated corporate portion of other general and administrative expenses decreased $1.1increased $0.6 million to $16.2$5.8 million for the three months ended March 31, 2021 compared to the first nine months of 2019 primarily due to decreases in contract labor over the prior year period primarily due to increases personnel costs and lower stock based compensation resulting from the impact of the stock awards granted the Company’s chief executive officer to employees during the three months ended June 30, 2019, but was partially offset by increased due diligence costs.professional services expenses.
Depreciation and Amortization. Depreciation and amortization increased $1.4expense was $9.2 million or 7%, to $22.0and $7.4 million for the ninethree months ended September 30,March 31, 2021 and 2020, from $20.6 million for the nine months ended September 30, 2019. Therespectively. This increase resulted from an increase inis primarily a result of increases to amortization ofassociated with capitalized software and intangible assets.recent acquisitions.
Other (Loss) Income, Net. Other (loss) income, net was $2.0a loss of $87,000 for the three months ended March 31, 2021 compared to income of $1.7 million for the ninethree months ended September 30, 2020 compared to $2.5 million for the nine months ended September 30, 2019. ThisMarch 31, 2020. The decrease is related to theresulted primarily from a one-time $1.2 million gain associated with the change in fair value of the non-marketable equity investment in NurseGrid prior to the acquisition of NurseGrid on March 9, 2020 offset bycoupled with lower interest income due to reductions in bondcash and investment balances and lower interest rate yields and bank deposit interest rates.during the three months ended March 31, 2021 compared to the prior year period.
Income Tax Provision. The Company recorded a provision for income taxes of $3.5 million and $3.3$0.9 million for the ninethree months ended September 30, 2020 and 2019, respectively.March 31, 2021 compared to $1.9 million for the three months ended March 31, 2020. The Company’s effective tax rate was 29% for the three months ended March 31, 2021 compared to 21% for the ninethree months ended September 30, 2020 compared to 24% forMarch 31, 2020. The Company’s effective tax rate primarily reflects the ninestatutory corporate income tax rate, the net effect of state taxes, foreign income taxes, and the effect
of various permanent tax differences. During the three months ended September 30, 2019.March 31, 2021, the Company recorded discrete tax expense of $0.1 million related to various items, including recording a permanent difference related to purchase accounting adjustments and the impact of a state tax rate change enacted during the period. During the three months ended March 31, 2020, the Company recorded a $1.2 million change in fair value of non-marketable equity investments as a result of the NurseGrid acquisition, which is not a taxable transaction, resulting in a tax benefit of $0.3 million. The Company recorded additionalan increase to the provision for income tax expensetaxes associated with tax deficiencies resulting from stock based awards of $30,000$17,000 and $26,000 during the ninethree months ended September 30,March 31, 2021 and 2020, and recorded a reduction to income tax expense for excess tax benefits of $0.1 million during the nine months ended September 30, 2019.respectively.
Income from Continuing Operations.Net Income. Income from continuing operationsNet income was $13.2approximately $2.3 million and $7.1 million for the ninethree months ended September 30,March 31, 2021 and 2020, up 24% from $10.6respectively. Earnings per share (EPS) was $0.07 per share (diluted) and $0.22 per share (diluted) for the three months ended March 31, 2021 and 2020. The one-time contractual adjustment discussed above positively impacted net income in the amount of $2.6 million, or $0.08 per diluted share, for the three months ended March 31, 2020.
Adjusted EBITDA was $13.6 million for the ninethree months ended September 30, 2019. Earnings per diluted share from continuing operations were $0.41 and $0.33 for the nine months ended September 30, 2020 and 2019, respectively.
Income from Discontinued Operations. Income from discontinued operations was zero for the nine months ended September 30, 2020March 31, 2021 compared to $1.4$11.9 million for the ninethree months ended September 30, 2019. The $1.4 million gain, net of tax, recorded during the nine months ended September 30, 2019 was the result of a release of escrow funds to us in connection with the PX disposition. Refer to Note 10 in the Notes to the Condensed Consolidated Financial Statements for further information.
Net Income. Net income was $13.2 million for the nine months ended September 30, 2020 compared to $12.1 million for the nine months ended September 30, 2019. Earnings per diluted share were $0.41 and $0.37 for the nine months ended September 30, 2020 and 2019, respectively.
Adjusted EBITDA from continuing operations decreased 2% to $34.9 million for the nine months ended September 30, 2020 compared to $35.7 million for the nine months ended September 30, 2019.
Adjusted EBITDA (from continuing and discontinued operations) decreased $2.8 million to $34.9 million for the nine months ended September 30, 2020 compared to $37.7 million for the nine months ended September 30, 2019. This decrease resulted from the factors mentioned above.March 31, 2020. See “Reconciliation of Non-GAAP Financial Measures” below for our reconciliation of Adjustedadjusted EBITDA and Adjusted EBITDA from continuing operations to the most directly comparable measures under US GAAP.
Discontinued Operations
On February 12, 2018, the Company divested its PX businessGAAP and disclosure regarding why we believe these non-GAAP financial measures provide useful information to Press Ganey for $65.2 million in cash (after giving effect to the post-closing working capital adjustment). This sale of the PX business resulted in the divestiture of our patient experience solutions business segment. We recorded a gain on sale, net of tax, of $20.5 million, of which $19.0 million was recorded during the year ended December 31, 2018 and $1.5 million was recorded during the year ended December 31, 2019. With the proceeds
of this sale, our Board of Directors declared a $1.00 per common share special cash dividend, which was paid on April 3, 2018 to shareholders of record on March 6, 2018.
We have classified the gain on sale of our PX business segment as discontinued operations in our Condensed Consolidated Statements of Income for all applicable periods. See Note 10 to our Condensed Consolidated Financial Statements included in this report for additional information.investors.
Other Developments
Our legacy agreements with Laerdal (the “Legacy Agreements”)(Legacy Agreements) for the HeartCode and Resuscitation Quality Improvement (“RQI”)(RQI) products expired pursuant to their terms on December 31, 2018. Revenues associated with sales of HeartCode and RQI products pursuant to the Legacy Agreements have been significant in recent years, although margins on such products have been lower than HealthStream’s average margin. Revenue generated by HeartCode and RQI products pursuant to the Legacy Agreements was $38.4 million and $58.9 million in 2020 and $54.6 million in 2019, and 2018, respectively. DuringWhile revenues from legacy resuscitation products effectively ceased at the nine months ended September 30,end of 2020, as noted above, we recorded revenue of $31.6 million related to HeartCode and RQI products under the Legacy Agreements compared to $46.3 million for the nine months ended September 30, 2019. During the three months ended September 30, 2020, we recorded revenue of $9.7 million related to HeartCode and RQI products under the Legacy Agreements compared to $13.4 millionrevenues for the three months ended September 30, 2019. March 31, 2021 included $1.8 million as we extended, with Laerdal’s support, utilization of these products for a small group of customers. We expect legacy product revenues in the second quarter of 2021 to be approximately $700,000 and expect revenue from theselegacy products generated pursuant to the Legacy Agreements to approximate $6.0 million in the fourth quarter of 2020 and to be zero inde minimis for the first quartersecond half of 2021.
On December 6, 2018, we announced a new agreement with RQI Partners, a joint venture between Laerdal and the American Heart Association. This agreement with RQI Partners was not an extension or renewal of the expired Legacy Agreements with Laerdal and should not be construed as such. Under our agreement with RQI Partners, HealthStream will neither market nor sell HeartCode or RQI. Our RQI Partners agreement provides for continuity of service for customers that desire to purchase HeartCode or RQI from RQI Partners after December 31, 2018 and receive it via the HealthStream Learning Center. RQI Partners will remit a fee to us when new sales of HeartCode and RQI are delivered via the HealthStream Learning Center. This feeThese fees will not be sufficient to supplant the revenue runout associated with the Legacy Agreements, and no material revenues have been recognized under this agreement through September 30, 2020.Agreements.
We remain 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 we intend to bring to market a broadened scope of simulation-based offerings, including resuscitation programs. On January 17, 2019, as part of a seven-year collaboration agreement with the American Red Cross which spans to 2026, we announced the launch of the American Red Cross Resuscitation Suite. We are actively engaged in efforts to market, sell, and deliver our new resuscitation offering, which includes the American Red Cross Resuscitation Suite and validation of skills through a technology enabled Innosonian manikin. A growing number of customers have been implemented on our new resuscitation offering and we believe that the solution is gaining acceptance in the market. We believe our efforts to market, sell, and deliver the American Red Cross Resuscitation Suite, along with efforts to bring additional simulation-related offerings to market, have the potential to giveare giving rise to additional and higher margin opportunities than those that existed under the Legacy Agreements. 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 in a manner that supplants the impact of the Legacy Agreements, our revenue and results of operations may be adversely affected.
Reconciliation of Non-GAAP Financial Measures
This report presents adjusted EBITDA, from continuing operations and adjusted EBITDA, both of which areis a non-GAAP financial measuresmeasure used by management in analyzing our financial results and ongoing operational performance.
In order to better assess the Company’s financial results, management believes that 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 based compensation, depreciation and amortization, changes in fair value of non-marketable equity investments, and the de-recognition of non-cash royalty expense resulting from ourthe paid time off expense reduction in the first quarter of 2021 and the resolution of a mutual disagreement related to various elements of a past partnership which resulted in a reduction to costscost of revenuessales in the first quarter of 2020 (“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 non-operating items. Managementitems which may not, in any such case, fully reflect the underlying operating performance of our business. We also believesbelieve that adjusted EBITDA from continuing operations is a useful measure for evaluating the operating performance of the Company because such measure excludes the gain on sale in connection with the sale of the PX business in February 2018 and thus reflectsto many investors to assess the Company’s ongoing businessoperating performance and to compare the
Company’s operating performance between periods. Additionally, beginning in 2021, executive bonuses are based on the achievement of adjusted EBITDA targets.
The Company has revised its definition of adjusted EBITDA to adjust for the derecognition of non-cash expense resulting from the paid time off policy modification in the first quarter of 2021 as the result of the fact that management believes that such non-cash expense is outside of the ordinary course of the Company’s operations and assistsis not reflective of the Company’s underlying operating performance.
As noted above, the definition of adjusted EBITDA also adjusts for the impact of the deferred revenue write-downs associated with fair value accounting for acquired businesses. Following the completion of any acquisition by the Company, the Company must record the acquired deferred revenue at fair value as defined in GAAP, which may result in a write-down of deferred revenue. If the Company is required to record a write-down of deferred revenue, it may result in lower recognized revenue, operating income, and net income in subsequent periods. Revenue for any such acquired business is deferred and is typically recognized over a one-to-two year period following the completion of any particular acquisition, so our GAAP revenues for this one-to-two year period will not reflect the full amount of revenues that would have been reported if the acquired deferred revenue was not written down to fair value. Management believes that including an adjustment in the definition of adjusted EBITDA for the impact of the deferred write-downs associated with fair value accounting for acquired businesses 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 financial results during such periods to not fully reflect our underlying operating performance and thus adjusting for this amount may assist in comparing the Company’s results of operations between periods. We also believe that adjusted EBITDA and adjusted EBITDA from continuing operations are useful to many investors to assess the Company’s ongoing results from current operations.
Adjusted EBITDA and adjusted EBITDA from continuing operations areis a non-GAAP financial measuresmeasure and should not be considered as measuresa measure of financial performance under GAAP. Because adjusted EBITDA and adjusted EBITDA from continuing operations areis not measurementsa measurement determined in accordance with GAAP, such non-GAAP
financial measures areadjusted EBITDA is susceptible to varying calculations. Accordingly, adjusted EBITDA, and adjusted EBITDA from continuing operations, as presented, may not be comparable to other similarly titled measures of other companies.
These non-GAAP financial measurescompanies and have limitations as analytical tools. In addition, adjusted EBITDA 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 from non-GAAP financial measures used by other companies and have limitations as analytical tools.GAAP.
A reconciliation of adjusted EBITDA and adjusted EBITDA from continuing operations to the most directly comparable GAAP measuresmeasure is set forth below (in thousands).
|
| Three Months Ended September 30, |
|
| Nine Months Ended September 30, |
|
| Three Months Ended March 31, |
| |||||||||||||||
|
| 2020 |
|
| 2019 |
|
| 2020 |
|
| 2019 |
|
| 2021 |
|
| 2020 |
| ||||||
GAAP income from continuing operations |
| $ | 2,634 |
|
| $ | 3,461 |
|
| $ | 13,168 |
|
| $ | 10,642 |
| ||||||||
GAAP net income |
| $ | 2,291 |
|
| $ | 7,092 |
| ||||||||||||||||
Deferred revenue write-down |
|
| 1,622 |
|
|
| 144 |
| ||||||||||||||||
Interest income |
|
| (88 | ) |
|
| (864 | ) |
|
| (919 | ) |
|
| (2,538 | ) |
|
| (18 | ) |
|
| (594 | ) |
Interest expense |
|
| 26 |
|
|
| 26 |
|
|
| 76 |
|
|
| 77 |
|
|
| 32 |
|
|
| 25 |
|
Income tax provision |
|
| 600 |
|
|
| 1,140 |
|
|
| 3,519 |
|
|
| 3,270 |
|
|
| 922 |
|
|
| 1,858 |
|
Stock based compensation expense |
|
| 557 |
|
|
| 569 |
|
|
| 1,665 |
|
|
| 3,643 |
|
|
| 616 |
|
|
| 550 |
|
Depreciation and amortization |
|
| 7,406 |
|
|
| 7,149 |
|
|
| 22,005 |
|
|
| 20,629 |
|
|
| 9,153 |
|
|
| 7,449 |
|
Change in fair value of non-marketable equity investments |
|
| — |
|
|
| — |
|
|
| (1,181 | ) |
|
| — |
| ||||||||
Non-cash royalty expense |
|
| — |
|
|
| — |
|
|
| (3,440 | ) |
|
| — |
| ||||||||
Adjusted EBITDA from continuing operations |
| $ | 11,135 |
|
| $ | 11,481 |
|
| $ | 34,893 |
|
| $ | 35,723 |
| ||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
GAAP net income |
| $ | 2,634 |
|
| $ | 3,712 |
|
| $ | 13,168 |
|
| $ | 12,087 |
| ||||||||
Interest income |
|
| (88 | ) |
|
| (864 | ) |
|
| (919 | ) |
|
| (2,538 | ) | ||||||||
Interest expense |
|
| 26 |
|
|
| 26 |
|
|
| 76 |
|
|
| 77 |
| ||||||||
Income tax provision |
|
| 600 |
|
|
| 1,229 |
|
|
| 3,519 |
|
|
| 3,785 |
| ||||||||
Stock based compensation expense |
|
| 557 |
|
|
| 569 |
|
|
| 1,665 |
|
|
| 3,643 |
| ||||||||
Depreciation and amortization |
|
| 7,406 |
|
|
| 7,149 |
|
|
| 22,005 |
|
|
| 20,629 |
| ||||||||
Non-cash paid time off expense |
|
| (1,011 | ) |
|
| — |
| ||||||||||||||||
Change in fair value of non-marketable equity investments |
|
| — |
|
|
| — |
|
|
| (1,181 | ) |
|
| — |
|
|
| — |
|
|
| (1,152 | ) |
Non-cash royalty expense |
|
| — |
|
|
| — |
|
|
| (3,440 | ) |
|
| — |
|
|
| — |
|
|
| (3,440 | ) |
Adjusted EBITDA |
| $ | 11,135 |
|
| $ | 11,821 |
|
| $ | 34,893 |
|
| $ | 37,683 |
|
| $ | 13,607 |
|
| $ | 11,932 |
|
Liquidity and Capital Resources
Net cash provided by operating activities decreasedincreased by $21.8$13.0 million to $30.8$19.1 million during the ninethree months ended September 30, 2020March 31, 2021 from $52.5$6.1 million during the ninethree months ended September 30, 2019.March 31, 2020. Such decreaseincrease was largelyprimarily driven by a decline inhigher cash receipts primarily resultingcollections. Our DSO was 52 days for the first quarter of 2021 compared to 44 days for the first quarter of 2020, which increase resulted from the decline in legacy resuscitation sales noted above and lower new sales relativehigher average receivable balances compared to the prior year period. Our DSO was 43 days for the third quarter of 2020, compared to 47 days for the second quarter of 2020 and 40 days for the third quarter of 2019.year. The Company calculates DSO by dividing the average accounts receivable balance for the quarter by average daily revenues for the quarter. We believe that developments related to the COVID-19 pandemic have contributed to higher DSO during 2020 compared to the prior year, the reduction in cash receipts, and lower bookings of new contracts and renewal of existing contracts in the first nine months of 2020 compared to the same period in 2019, and this trend may continue if negative economic conditions arising from the pandemic persist or continue to deteriorate. 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, and general corporate expenses.
Net cash used in investing activities was $38.5approximately $9.7 million for the ninethree months ended September 30, 2020March 31, 2021 compared to $52.0$19.9 million for the ninethree months ended September 30, 2019.March 31, 2020. During the ninethree months ended September 30, 2020, March 31, 2021, the Company spent $21.4$2.0 million to acquire ComplyALIGN and on a net basis received $1.3 million of proceeds upon settling post-closing adjustments related to the ANSOS and ShiftWizard acquisitions for a net cash outflow of $0.7 million for business combinations, primarily the acquisition of NurseGrid, invested in marketable securities of $61.2$5.2 million, made payments for capitalized software development of $12.4$5.3 million, purchased property
and equipment of $1.7$2.0 million, and invested $1.3 million in made non-marketable equity investments.payments of $1.0 million. These uses of cash were partially offset by $59.5$4.5 million in maturities of marketable securities. During the ninethree months ended September 30, 2019,March 31, 2020 the Company acquired Providigm for $18.0paid $21.4 million in cash to acquire NurseGrid, invested in marketable securities of $58.6 million, purchased property and equipment of $21.5$14.1 million, made payments for capitalized software development of $11.2$4.1 million, and invested $3.3 million in non-marketable equity investments.purchased property and equipment of $1.0 million. These uses of cash were partially offset by $58.6$20.7 million in maturities of marketable securities and $6.0 million in proceeds from the sale of its PX business segment.securities.
Net cash used in financing activities from continuing operations was $16.8approximately $0.4 million for the ninethree months ended September 30, 2020March 31, 2021 compared to $0.9$10.3 million for the ninethree months ended September 30, 2019. March 31, 2020. The uses of cash for the ninethree months ended September 30, 2020March 31, 2021 primarily included $16.4 million for common stock repurchases, $0.4 million for the payment of employee payroll taxes
in relation to the vesting of restricted share units, and $40,000 of cash dividend payments. The uses of cash for the nine months ended September 30, 2019 included $1.0 million for the payment of employee payroll taxes in relation to the vesting of restricted share units, $53,000and $12,000 of cash dividends payments, and $38,000 of earn-out payments related to prior acquisitions.dividend payments. The sourceuses of cash from financing activities for the ninethree months ended September 30, 2019 was $0.2March 31, 2020 primarily included $9.9 million fromfor common stock repurchases, $0.4 million for the exercisepayment of stock options.employee payroll taxes in relation to the vesting of restricted share units, and $30,000 of cash dividend payments.
Our balance sheet reflects positivenegative working capital of $104.1$1.9 million at September 30, 2020March 31, 2021 compared to $119.4negative working capital of $4.7 million at December 31, 2019.2020. The decreaseimprovement in working capital is primarily a result of the reduction instrong cash to fund the acquisition of NurseGrid and share repurchases.collections. The Company’s primary source of liquidity as of September 30, 2020March 31, 2021 was $107.0$45.3 million of cash and cash equivalents and $42.7$10.6 million of marketable securities comprised of corporate debt securities and time deposits. As of September 30, 2020, thesecurities. The Company also hadhas a $50.0$65.0 million revolving credit facility, all of which was available for additional borrowing on such date. On October 28, 2020, the Company entered into an amendment to thisat March 31, 2021. The revolving credit facility which increased the capacity under this facility to $65.0 million and extended the maturity date toexpires on October 28, 2023.2023, unless earlier renewed or amended.
On March 13, 2020, we announced a share repurchase program authorized by our Board of Directors under which we maycould purchase up to $30.0 million of our common stock. Pursuant to this authorization, repurchases have been made, and may continue to be made from time to time, in the open market through privately negotiated transactions or otherwise, including under a Rule 10b5-1 plan, which permits shares to be repurchased when the Company might otherwise be precluded from doing so under insider trading laws in accordance with specific prearranged terms related to timing, price, and volume (among others), without further direction from the Company. Under this program, during the first nine monthsCompany repurchased a total of 2020, we repurchased 762,843957,367 shares in open market purchases at an aggregate fair value of $16.3$20.0 million, reflecting an average price per share of $21.42$20.89 (excluding the cost of broker commissions). The program expired on March 12, 2021, and no repurchases occurred during the three months ended March 31, 2021. We may continueelect in the future to make repurchases under thisadopt a new share repurchase program based onand/or otherwise repurchase our common stock, including through privately negotiated transactions. Any such equity repurchases would depend upon prevailing market conditions, contractual restrictions, liquidity and cash flow considerations, applicable securities laws requirements, (including under Rule 10b-18 and Rule 10b5-1 of the Securities Exchange Act of 1934, as applicable), and other factors. The share repurchase program will terminate on the earlier of March 12, 2021 or when the maximum dollar amount has been expended.
We believe that our existing cash and cash equivalents, marketable securities, (including time deposits and corporate bond 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, any additional repurchases under our share repurchase program, and capital expenditures for at least the next 12 months. If the impact of COVID-19 persists longer than expected or causes economic conditions to further deteriorate, we are prepared to curtail or discontinue new product development and/or repurchases under the share repurchase authorization as we deem in the best interest of shareholders and the Company.
In addition, the Company’s growth strategy includes acquiring businesses or making strategic investments in businesses that complement or enhance our business. It is anticipated that future acquisitions or strategic investments, 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. Our revolving credit facility contains financial covenants and availability calculations designed to set a maximum leverage ratio of outstanding debt to adjusted EBITDA and an interest coverage ratio of adjusted EBITDA to interest expense. Therefore, the maximum borrowings against our revolving credit facility would be dependent on the covenant calculations at the time of borrowing. As of September 30, 2020March 31, 2021, we were in 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 you 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. Moreover, the COVID-19 pandemic has resulted in, and may continue to result in, disruptions of financial and capital markets, which could impair our ability to access additional capital if needed.
Item 3. 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 material foreign currency exchange rate risk or commodity price risk.
Interest Rate Risk
As of September 30, 2020March 31, 2021 and during the ninethree months then ended, 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 also exposed to market risk with respect to our cash and investment balances, which approximated $149.7$56.0 million at September 30, 2020.March 31, 2021. Assuming a hypothetical 10% decrease in interest rates for invested balances, interest income from cash and investments would decrease on an annualized basis by $41,000.approximately $8,000.
Foreign Currency Risk
We have foreign currency risks related to our revenue and operating expenses denominated in currencies other than the US 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 US 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 are forward‑lookingforward-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.
Item 4. Controls and Procedures
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 SEC’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 officer 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 thirdfirst quarter of 20202021 that has materially affected, or that is reasonably likely to materially affect, HealthStream’s internal control over financial reporting.
PART II ‑ OTHER INFORMATION
Item 1A. Risk Factors
The following risk factor updates the risk factor included in Part II, Item 1A. Risk Factors in the Company’s Quarterly Report on Form 10-Q for the six months ended June 30, 2020 filed by the Company on July 30, 2020. Except as set forth below, thereThere have been no material changes with regard to the risk factors previously disclosed in the 20192020 Form 10-K.
The coronavirus pandemic has adversely impacted our business, and may have material adverse impacts on our business, financial condition, results of operations, and/or cash flows.
The COVID-19 pandemic has resulted in authorities throughout the United States and the world implementing widespread measures attempting to contain the spread and impact of COVID-19, such as travel bans and restrictions, quarantines, shelter-in-place orders, the promotion of social distancing, and limitations on business activity. These measures and the pandemic have caused a significant economic downturn in the United States and globally, resulted in increased unemployment and underemployment levels, and adversely impacted consumer confidence and spending. This pandemic has also led to disruption and volatility in financial and capital markets. Amid these efforts and occurrences, diagnosed cases of COVID-19 have continued to grow, particularly in the United States, which has caused some governmental authorities to reinstate previously relaxed restrictions on business and other activities.
Our business is focused on providing workforce and provider solutions to healthcare organizations. Many healthcare organizations have been, and will likely continue to be, substantially adversely impacted by the COVID-19 pandemic, which has resulted in a substantial reduction in the number of elective surgeries, physician office visits, and other healthcare procedures due to restrictive measures, including quarantines and shelter-in-place orders, as well as general concerns related to the risk of contracting COVID-19 from interacting with the healthcare system. Moreover, some healthcare organizations, such as ambulatory surgery centers, have been forced to reduce or temporarily close their operations due to the impact of the pandemic. Additionally, adverse conditions related to the pandemic have caused, and could continue to cause, certain of our customers to be unable to pay for our products and services in a timely and fulsome manner, or unable to pay at all, which has had, and will likely continue to have, an adverse impact on our financial results. To the extent these trends continue, or our customers are unable to pay due to the deterioration of their businesses as the result of COVID-19, our bad debt may continue to increase and future revenue generating opportunities with those customers may be limited.
Conditions related to the pandemic may also adversely impact the ability or willingness of our customers to renew their contracts with us (or to renew contracts on comparable terms) and have adversely impacted the willingness of some customers to expand the quantity and type of solutions they purchase from us. For example, renewing customers that have reduced or expect to reduce the number of their staff due to COVID-19 may not have a need to renew their contracts for as many user subscriptions as purchased under their previous contracts. The COVID-19 pandemic has adversely impacted, and will likely continue to adversely impact, our ability to enter into contracts with new potential customers. Customers may also be unwilling or unable to pay the same prices for our products and solutions than they have paid in the past, which could negatively impact our results and growth. Many of our customers are not currently allowing vendors, including ourselves, on their premises, which has reduced, and will likely continue to reduce, the ability of our sales team to make sales they otherwise would likely make but for the impact of COVID-19. Our sales opportunities generated from in-person marketing initiatives, such as tradeshows, have also been negatively impacted due to the cancellation of such in-person events, and this has led to, and will likely continue to lead to, lost or delayed sales opportunities. Additionally, we do not recognize revenue until a software product is implemented and “live” for a customer to use. In this regard, to the extent our customers delay or fail to implement products they have previously purchased, as we have experienced with certain customers in recent months, or to the extent we are unable to fulfill our own implementation backlogs due to COVID-19, our financial results will likely suffer, as may our future prospects.
Our business also relies on a network of partners whose solutions we resell or whose solutions are sold and delivered over our platform. At least one of our partners has declared bankruptcy since the pandemic began, though such partner continues operations. To the extent COVID-19 results in business disruption or adverse impacts to our partners, such disruptions and adverse impacts could adversely impact our business as well.
Due to COVID-19, our entire workforce is continuing to work remotely from home, even if and to the extent that phased re-opening orders provided by local and state governments would allow for a limited return to office work. While we have not observed a negative disruption to productivity to date, operating on a prolonged basis as a remote workforce could result in decreases in productivity, increased security risks, impair our ability to manage our business, and harm our ability to attract, retain, and onboard employees.
There continue to be significant uncertainties associated with the COVID-19 pandemic, including with respect to the severity and duration of the pandemic, the timing and availability of medical treatments and vaccines with respect to COVID-19, actions that may be taken by governmental authorities and private businesses to mitigate against the impact of the pandemic,
and the ongoing impact of COVID-19 on economic activity and unemployment and underemployment levels. Moreover, COVID-19 developments continue to evolve quickly, and additional developments may occur which we are unable to predict.
Developments related to COVID-19 have adversely impacted our business, andcould have a material adverse effect on our business, financial condition, results of operations, and/or cash flows, particularly if negative conditions impacting healthcare organizations persist for a significant period of time or continue to deteriorate. In addition, the impact of COVID-19 may exacerbate other risks discussed in Part I, Item 1A. Risk Factors in our Annual Report on Form 10-K, any of which could have a material effect on us.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
On March 13, 2020, the Company announced a share repurchase program authorized by the Company’s Board of Directors under which the Company maycould purchase up to $30.0 million of its common stock. Pursuant to this authorization, repurchases have been made, and may continue to be made from time to time, in the open market through privately negotiated transactions or otherwise, including under a Rule 105b-1 plan, which permits shares to be repurchased when the Company might otherwise be precluded from doing so under insider trading laws in accordance with specific prearranged terms related to timing, price, and volume (among others), without further direction from the Company. Under this program, during the first nine months of 2020 the Company repurchased 762,843a total of 957,367 shares in open market purchases at an aggregate fair value of $16.3$20.0 million, reflecting an average price per share of $21.42$20.89 (excluding the cost of broker commissions). In addition, any future repurchases under the authorization will be subject to prevailing market conditions, liquidity and cash flow considerations, applicable securities laws requirements (including under Rule 10b-18 and Rule 10b5-1 of the Securities Exchange Act of 1934, as applicable), and other factors. The share repurchase program will terminateexpired on the earlier of March 12, 2021 or when the maximum dollar amount has been expended. The table below sets forth activity under the stock repurchase plan for the three months ended September 30, 2020.
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 (July 1 - July 31) |
|
| — |
|
| $ | — |
|
|
| — |
|
| $ | — |
|
Month #2 (August 1 - August 31) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
Month #3 (September 1 - September 30) |
|
| 318,902 |
|
|
| 19.87 |
|
|
| 318,902 |
|
|
| 13,663,393 |
|
Total |
|
| 318,902 |
|
| $ | 19.87 |
|
|
| 318,902 |
|
| $ | 13,663,393 |
|
(1) The weighted average price paid per share of common stock does not include the cost of broker commissions. |
|
2021.
Period |
| (a) Total number of shares (or units) purchased |
|
| (b) Average price paid per share (or unit) |
|
| (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 (January 1 - January 31) |
|
| — |
|
| $ | — |
|
|
| — |
|
| $ | 10,000,029 |
|
Month #2 (February 1 - February 29) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| 10,000,029 |
|
Month #3 (March 1 - March 31) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
Total |
|
| — |
|
| $ | — |
|
| $ | — |
|
| $ | — |
|
|
|
Item 6. Exhibits
| (a) | Exhibits |
10.18^ | HealthStream, Inc. 2021 Executive and Corporate Management Cash Incentive Bonus Plan | |
10.19^ | HealthStream, Inc. 2021 Provider Solutions Cash Incentive Bonus Plan | |
10.20^ | ||
31.1 |
| |
|
|
|
31.2 |
| |
|
|
|
32.1 |
| |
|
|
|
32.2 |
| |
|
|
|
101.1 INS |
| Inline XBRL Instance Document – The |
|
|
|
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 |
| The cover page from the Company’s Quarterly Report on Form 10-Q for the quarter ended |
^ | Management contract or compensatory plan or arrangement | |
|
|
|
SIGNATURE
Pursuant to the requirements 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.
| HEALTHSTREAM, INC. | ||
|
|
|
|
| By: |
| /s/ Scott A. Roberts |
|
|
| Scott A. Roberts |
|
|
| Chief Financial Officer |
3227