HealthStream (HSTM) 8-K Entry into a Material Definitive Agreement

EXHIBIT 99.1

HEALTHSTREAM, INC.

UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL INFORMATION

On February 12, 2018, HealthStream, Inc. (the “Company”), completed the sale of its Patient Experience business (the “PX Business”) to Press Ganey, Inc. (“Press Ganey”) in connection with the closing of the transactions contemplated by that certain membership interest purchase agreement dated as of February 12, 2018 (the Purchase Agreement”), by and between the Company and Press Ganey, pursuant to which the Company sold to Press Ganey all of the outstanding equity interests of Improve PX, LLC, a wholly-owned subsidiary of the Company. This sale of the PX Business resulted in the Company’s complete divestiture of the Company’s patient experience solutions business segment.

The following unaudited pro forma condensed consolidated financial information is based on the historical financial statements of the Company, with pro forma adjustments to reflect the disposition of the PX Business pursuant to the Purchase Agreement. Beginning with the quarter ending March 31, 2018, the historical financial results of the PX Business for periods prior to the closing of the transactions under the Purchase Agreement will be reflected in the Company’s consolidated financial statements as discontinued operations.

The unaudited pro forma condensed consolidated balance sheet of the Company as of September 30, 2017 is presented as if the disposition of the PX Business had occurred on September 30, 2017. The unaudited pro forma condensed consolidated statements of income for the nine months ended September 30, 2017 and the years ended December 31, 2016, 2015, and 2014, are presented as if the disposition of the PX Business had occurred on January 1, 2014, the beginning of the earliest period presented. The unaudited pro forma condensed consolidated financial information and the related notes should be read in conjunction with the Company’s audited financial statements and the notes thereto included in the Company’s Annual Report onForm 10-K for the year ended December 31, 2016, and the Company’s unaudited financial statements and the notes thereto included in the Company’s Quarterly Report onForm 10-Q for the three and nine months ended September 31, 2017.

The unaudited pro forma condensed consolidated financial information has been prepared in conformity with Article 11 of RegulationS-X. In addition, this unaudited pro forma condensed consolidated financial information is based on currently available information and assumptions that the Company believes are reasonable. This unaudited pro forma condensed consolidated financial information is presented for informational purposes only, and does not purport to represent what the Company’s results of operations or financial position would have been had the disposition of the PX Business occurred on the dates indicated, or to project the results of operations for any future periods.

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HEALTHSTREAM, INC.

UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET

SEPTEMBER 30, 2017

(in thousands)

				(A)
	As Reported			Pro Forma Adjustments			Pro Forma
ASSETS
Current assets:
Cash and cash equivalents	$	60,460		$	57,350		$	117,810
Marketable securities		62,943			—			62,943
Accounts receivable, net of allowance for doubtful accounts		38,379			(3,979	)		34,400
Accounts receivable – unbilled		1,746			(677	)		1,069
Prepaid royalties, net of amortization		17,221			(44	)		17,177
Other prepaid expenses and other current assets		8,526			(293	)		8,233
Total current assets		189,275			52,357			241,632
Property and equipment, net of accumulated depreciation		9,923			(1,215	)		8,708
Capitalized software development, net of accumulated amortization		18,685			(2,511	)		16,174
Goodwill		110,298			(24,154	)		86,144
Customer-related intangibles, net of accumulated amortization		61,580			(345	)		61,235
Other intangible assets, net of accumulated amortization		9,609			(57	)		9,552
Non-marketable equity investments		3,771			—			3,771
Other assets		699			6,532			7,231
Total assets	$	403,840		$	30,607		$	434,447
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Accounts payable and accrued expenses	$	15,235		$	11,417		$	26,652
Accrued royalties		12,997			(25	)		12,972
Deferred revenue		66,509			(3,257	)		63,252
Total current liabilities		94,741			8,135			102,876
Deferred tax liabilities		4,871			(2,311	)		2,560
Deferred revenue, noncurrent		7,074			(17	)		7,057
Other long term liabilities		1,497			(603	)		894
Commitments and contingencies		—			—			—
Total liabilities		108,183			5,204			113,387
Shareholders’ equity:
Common stock		282,083			—			282,083
Retained earnings		13,594			25,403			38,997
Accumulated other comprehensive loss		(20	)		—			(20	)
Total shareholders’ equity		295,657			25,403			321,060
Total liabilities and shareholders’ equity	$	403,840		$	30,607		$	434,447

See notes to the unaudited pro forma condensed consolidated financial information.

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HEALTHSTREAM, INC.

UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF INCOME

NINE MONTHS ENDED SEPTEMBER 30, 2017

(in thousands, except per share data)

			(B)
	As Reported		Pro Forma Adjustments			Pro Forma
Revenues, net	$	184,904	$	(25,274	)	$	159,630
Operating costs and expenses:
Cost of revenues (excluding depreciation and amortization)		79,382		(14,484	)		64,898
Product development		20,630		(2,701	)		17,929
Sales and marketing		31,111		(3,347	)		27,764
Other general and administrative expenses		25,622		(2,353	)		23,269
Depreciation and amortization		19,488		(1,615	)		17,873
Total operating costs and expenses		176,233		(24,500	)		151,733
Operating income		8,671		(774	)		7,897
Other income, net		468		12			480
Income from continuing operations before income tax provision		9,139		(762	)		8,377
Income tax provision		3,083		(305	)		2,778
Income from continuing operations	$	6,056	$	(457	)	$	5,599
Earnings per share:
Basic	$	0.19				$	0.18
Diluted	$	0.19				$	0.17
Weighted average shares of common stock outstanding:
Basic		31,848					31,848
Diluted		32,183					32,183

See notes to the unaudited pro forma condensed consolidated financial information

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HEALTHSTREAM, INC.

UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF INCOME

YEAR ENDED DECEMBER 31, 2016

(in thousands, except per share data)

			(B)
	As Reported		Pro Forma Adjustments			Pro Forma
Revenues, net	$	225,974	$	(33,850	)	$	192,124
Operating costs and expenses:
Cost of revenues (excluding depreciation and amortization)		96,634		(21,668	)		74,966
Product development		28,897		(4,664	)		24,233
Sales and marketing		39,004		(4,074	)		34,930
Other general and administrative expenses		33,665		(3,208	)		30,457
Depreciation and amortization		22,207		(1,840	)		20,367
Total operating costs and expenses		220,407		(35,454	)		184,953
Operating income		5,567		1,604			7,171
Other income, net		581		—			581
Income from continuing operations before income tax provision		6,148		1,604			7,752
Income tax provision		2,393		642			3,035
Income from continuing operations	$	3,755	$	962		$	4,717
Earnings per share:
Basic	$	0.12				$	0.15
Diluted	$	0.12				$	0.15
Weighted average shares of common stock outstanding:
Basic		31,721					31,721
Diluted		32,068					32,068

See notes to the unaudited pro forma condensed consolidated financial information

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HEALTHSTREAM, INC.

UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF INCOME

YEAR ENDED DECEMBER 31, 2015

(in thousands, except per share data)

			(B)
	As Reported		Pro Forma Adjustments			Pro Forma
Revenues, net	$	209,002	$	(34,193	)	$	174,809
Operating costs and expenses:
Cost of revenues (excluding depreciation and amortization)		89,386		(22,446	)		66,940
Product development		24,214		(2,520	)		21,694
Sales and marketing		35,589		(4,521	)		31,068
Other general and administrative expenses		29,259		(2,772	)		26,487
Depreciation and amortization		16,997		(1,545	)		15,452
Total operating costs and expenses		195,445		(33,804	)		161,641
Operating income		13,557		(389	)		13,168
Other income, net		162		6			168
Income from continuing operations before income tax provision		13,719		(383	)		13,336
Income tax provision		5,098		(153	)		4,945
Income from continuing operations	$	8,621	$	(230	)	$	8,391
Earnings per share:
Basic	$	0.29				$	0.28
Diluted	$	0.28				$	0.28
Weighted average shares of common stock outstanding:
Basic		30,057					30,057
Diluted		30,436					30,436

See notes to the unaudited pro forma condensed consolidated financial information

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HEALTHSTREAM, INC.

UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF INCOME

YEAR ENDED DECEMBER 31, 2014

(in thousands, except per share data)

			(B)
	As Reported		Pro Forma Adjustments			Pro Forma
Revenues, net	$	170,690	$	(31,901	)	$	138,789
Operating costs and expenses:
Cost of revenues (excluding depreciation and amortization)		74,145		(20,277	)		53,868
Product development		16,463		(1,544	)		14,919
Sales and marketing		29,867		(6,183	)		23,684
Other general and administrative expenses		22,909		(2,453	)		20,456
Depreciation and amortization		10,931		(1,474	)		9,457
Total operating costs and expenses		154,315		(31,931	)		122,384
Operating income		16,375		30			16,405
Other income, net		146		—			146
Income from continuing operations before income tax provision		16,521		30			16,551
Income tax provision		6,127		12			6,139
Income from continuing operations	$	10,394	$	18		$	10,412
Earnings per share:
Basic	$	0.38				$	0.38
Diluted	$	0.37				$	0.37
Weighted average shares of common stock outstanding:
Basic		27,570					27,570
Diluted		28,023					28,023

See notes to the unaudited pro forma condensed consolidated financial information.

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HEALTHSTREAM, INC.

NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL INFORMATION

1. BASIS OF PRESENTATION

The Company’s historical consolidated financial statements have been adjusted in the unaudited pro forma condensed consolidated financial information to present events that are (i) directly attributable to the PX Business, (ii) factually supportable and (iii) are expected to have a continuing impact on the Company’s consolidated results following the PX Business disposition. The pro forma condensed consolidated statements of income do not reflect the estimated gain on the sale of the PX Business.

2. PRO FORMA ADJUSTMENTS

The following pro forma adjustments are included in the Company’s unaudited pro forma condensed consolidated financial information:

(A) These adjustments reflect the disposition of the PX Business as of September 30, 2017, which was sold for approximately $65.5 million in cash (subject to adjustment based on the working capital of the PX Business as of the closing), less estimated transaction costs. Transaction costs are estimated to be approximately $1.6 million. Approximately $6.6 million of cash will be held in escrow for a period of time following the closing as a source of recovery for indemnification claims by Press Ganey. Retained earnings reflects the estimatedafter-tax gain from the transaction. Income taxes of approximately $14.0 million were estimated using statutory rates in effect as of the date of disposition.

(B) These adjustments reflect the elimination of revenue and expenses associated with the PX Business, including corporate support resources assigned to the business unit. The provision for income taxes adjustments were based on average entity level statutory tax rates in effect for the respective periods presented.

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