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LETTER TO
SHAREHOLDERS
Michael Shmerling
Chairman
XMi Holdings, Inc.
Dale W. Polley
Past President and Vice Chairman
First American Corporation
C. Martin Harris, M.D.
Chief Information Officer, Chairman
Information Technology Division
Staff Physician, Internal Medicine
Cleveland Clinic
Deborah Taylor Tate, J.D.
Former Commissioner
Federal Communications Commission
Director
State of Tennessee / Administrative
Office of the Courts
Special Envoy to the
International Telecommunications Union
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Robert A. Frist, Jr.
Chief Executive Officer, President, and
Chairman of the Board of Directors
HealthStream, Inc.
Jeffrey L. McLaren
Chief Executive Officer
Medaxion, Inc.
Thompson S. Dent
Chairman and Chief Executive Officer
Urgent Team
William W. Stead, M.D.
Associate Vice Chancellor for Health Affairs /
Chief Strategy Officer
Vanderbilt University Medical Center
Linda E. Rebrovick
Past Chief Executive Officer and President
Consensus Point, Inc.
Frank E. Gordon
Managing Partner
Crofton Capital
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Robert A. Frist, Jr.
Chief Executive Officer, President, and
Chairman of the Board of Directors
J. Edward Pearson
Chief Operating Officer and Senior Vice President
Gerard M. Hayden, Jr.
Chief Financial Officer and Senior Vice President
Arthur E. Newman
Executive Vice President
Jeffrey S. Doster
Senior Vice President and Chief Technology Officer
Michael J. Sousa
Senior Vice President
Thomas B. Schultz
Senior Vice President
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Year Ended December 31,
(In thousands, except per share amounts)
Statement of Income Data:
Revenues
Operating costs and expenses
Income from operations
Other income, net
Income before income taxes
Income tax provision
Net income
Net income per share:
Basic
Diluted
Weighted average shares of common stock outstanding:
Basic
Diluted
Income before interest, taxes, share-based compensation,
depreciation, and amortization (“adjusted EBITDA”(1)):
Net income
Interest, income taxes, share-based compensation, depreciation, and amortization
Income before interest, income taxes, share-based compensation, depreciation,
2014
2013
$ 170,690
154,315
16,375
146
16,521
6,127
10,394
$
$
$
0.38
0.37
27,570
28,023
$ 132,274
117,608
14,666
176
14,842
6,424
8,418
$
$
$
0.31
0.30
26,853
27,663
$
10,394
18,474
$
8,418
15,522
and amortization
$
28,868
$ 23,940
(1)In order to better assess the Company’s financial results, management believes that income before interest, income taxes, share-based compensation,
depreciation, and amortization (“adjusted EBITDA”) is an appropriate measure for evaluating the operating performance of the Company at this stage
in its life cycle because adjusted EBITDA reflects net income adjusted for non-cash and non-operating items. Adjusted EBITDA is also used by many
investors to assess the Company’s results from current operations. Adjusted EBITDA is a non-GAAP financial measure and should not be considered
as a measure of financial performance under generally accepted accounting principles. Because adjusted EBITDA is not a measurement determined in
accordance with generally accepted accounting principles, it is susceptible to varying calculations. Accordingly, adjusted EBITDA, as presented, may not
be comparable to other similarly titled measures of other companies.
2014
2013
Year Ended December 31,
(In thousands)
Balance Sheet Data:
Cash and cash equivalents
Investments in marketable securities
Accounts receivable, net
Goodwill and intangible assets
Working capital
Total assets
Deferred revenue – current and noncurrent
Shareholders’ equity
$
81,995
38,973
33,167
56,709
97,352
257,262
57,373
167,859
$ 59,537
48,659
25,314
44,616
90,912
212,594
38,168
149,433
170.7
TOTAL REVENUES (in $ millions)
65.8
82.1
2010
2011
2012
2013
2014
103.7
132.3
0 10 20 30 40 50 60 70 80 90 100 110 120 130 140 150 160 170 180
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At HealthStream, we are inspired by the millions of
dedicated healthcare professionals who work every day
to improve the health and wellbeing of patients in their
care. To support this process, healthcare organizations
are increasingly adopting HealthStream’s solutions
to manage, develop, and maintain a knowledgeable,
highly skilled and competent workforce. In an era of
healthcare reform, dialogue has focused on a wide range
of well-intentioned proposals to improve the delivery of
healthcare—from new federal government policies to
new technologies. However, we believe that the actual
quality of care provided to patients is most dependent on
the competence, skills, and compassion of the healthcare
professionals responsible for delivering care. We are
passionate at HealthStream about supporting them—
as we believe every patient deserves the best developed
workforce.
Our 2014 financial performance was solid. Year-end results
for 2014 included annual revenues of $170.7 million, up
29 percent over 2013 revenues. Operating income for 2014
was $16.4 million, up 12 percent over 2013, while adjusted
EBITDA (earnings before interest, income taxes, share-
based compensation, depreciation, and amortization)
improved to $28.9 million, which is 21 percent higher
than 2013. We ended 2014 well capitalized with a cash
and marketable securities balance of $121.0 million and
full availability of our $50.0 million line of credit, which
positioned us well to complete the largest transaction in
our Company’s history during the first quarter of 2015.
target market
HealthStream’s
is a workforce of
approximately eight million healthcare professionals,
which includes five million employees working in the
nation’s acute-care hospitals and three million employees
in the post-acute care market. As the most recently added
sector to our target market, in 2014 we expanded our post-
acute sales efforts and increased our post-acute content
offerings, which includes topics such as preventing
patient falls, reducing re-admissions to hospitals, hospice
training, and treating patients with Alzheimer’s disease
and dementia.
By combining the capabilities of our enterprise talent
management platform with leading content and superior
data and analytics, HealthStream is delivering solutions
to healthcare organizations that help to meet compliance
requirements, improve resuscitation outcomes, develop
their clinical workforce, prepare for the transition to the
ICD-10 coding system, improve patients’ experience,
and better manage their workforce.
HealthStream’s enterprise talent management platform
offers several healthcare-specific applications, including the
HealthStream Learning Center™ (HLC), HealthStream
Competency Center™ (HCC), HealthStream Performance
Center™ (HPC), SimManager™, and Authoring Center™,
among others. In 2014, we added CE Center™ and
Checklist Management™ to our platform offerings
and, in the first quarter of 2015, we also launched the
HealthStream Recruiting Center™.
At year-end 2014, our solutions and platform applications
were contracted by healthcare organizations for,
collectively, their approximately 4.3 million healthcare
employees in the U.S. For full-year 2014, we added
approximately 570,000 newly contracted subscribers
to our platform and we implemented approximately
760,000 new subscribers, which increased our number
of implemented subscribers by 22 percent over the
prior year.
HealthStream’s ecosystem features approximately 130
healthcare industry partners, which includes highly
regarded professional medical and nursing associations
and other best-in-class providers that offer healthcare
organizations a broad and diverse array of content and
courseware to meet their regulatory, clinical, and business
learning needs. Our roster of distinguished partners
include, among others, Precyse, Wolters Kluwer Health,
Laerdal Medical, and the Association of periOperative
Registered Nurses, and the American Academy of
Pediatrics—with whom we signed a renewed, five-year
agreement in 2014, making HealthStream the industry’s
exclusive provider of the Neonatal Resuscitation Program
(NRP) exam. On average, our customers completed
approximately 130,000 online courses through our
platform each weekday in 2014.
Demand for many of HealthStream’s solutions is driven
by a range of government regulations. For example, our
solution—provided in conjunction with our partner,
Precyse—to help healthcare organizations achieve ICD-
10 readiness has been one of our fastest growing areas.
At year-end 2014, approximately 1.8 million healthcare
professionals, cumulatively, have contracted for our
ICD-10 readiness training solution through their
respective organizations.
This new government mandated transition to the
ICD-10 coding system has delivered a meaningful
opportunity for HealthStream, while also creating some
uncertainty in customer buying patterns due to several
changes in the government deadline for compliance.
While demand for our ICD-10 readiness training is
primarily deadline-driven, focused on the current
October 2015 transition date, we are working with our
partner, Precyse, to develop sustainable solutions for
healthcare organizations’ ongoing coding and revenue
cycle management needs. To that end, HealthStream
and Precyse announced the launch of Precyse University
DNA™ in February 2015, making it the first next-
generation talent management product that utilizes our
national benchmark data.
HealthStream’s research / patient experience solutions
complement our workforce development offerings
by providing healthcare organizations surveys, data
analyses of survey results, a powerful benchmarking
capability to analyze results more meaningfully, and
coaching options to improve patients’ experiences. For
full-year 2014, we completed 1.9 million total surveys
on behalf of our customers, which was 11 percent higher
than 2013. In the third quarter of 2014, HealthStream
announced the lease of office space for a new Patient
Interview Center in Nashville, which began actively
conducting surveys in the first quarter of 2015.
In March 2014, HealthStream acquired Health Care
Compliance Strategies, Inc., a Jericho, New York based
company focused on interactive and engaging online
compliance training
for healthcare organizations.
HealthStream gained a comprehensive curriculum
of premium compliance training programs and an
outstanding application for managing conflicts of
interest disclosures, along with a team of professionals
with extensive
thought
leadership in healthcare compliance. With its added
solution set and capabilities, HealthStream now has a
robust compliance solution—with a full continuum of
services and training programs that addresses the broad
range of compliance priorities.
industry experience and
completed
In March 2015, HealthStream
an
acquisition of San Diego-based HealthLine Systems,
a leading healthcare credentialing and privileging
company. HealthStream’s innovative approach to talent
management supports healthcare organizations’ need
to manage their workforce along multiple dimensions,
including management of their qualifications and
competencies. The acquisition of HealthLine Systems
enables HealthStream to provide an expanded solution
set for both of these needs. Over 1,000 healthcare
facilities have implemented and are currently using
HealthLine’s installed or SaaS-based credentialing and
privileging solution to manage, validate, and analyze
provider data.
Looking forward, we intend to continue growing
HealthStream organically by increasing our customer
base and expanding the scope and number of solutions
provided to existing accounts. We may also pursue
growth by utilizing a portion of our cash position
and/or common stock to acquire or invest in strategic
businesses, products, or technologies that are consistent
with our business principles. In particular, we expect
in 2015 to further invest in the integration and
enhancement of our new products and capabilities
gained through our recent acquisitions, as well as
any additional strategic investments to develop new
solutions, products, or services.
As we review our 2014 results and consider the year
ahead, I am grateful to our valued employees, whose
dedication and support have driven HealthStream’s
success. I also want to thank our customers, partners,
board of directors, and investors for their support—and
I look forward to keeping you apprised of our progress
throughout the coming year.
Sincerely,
Robert A. Frist, Jr.
Chairman and Chief Executive Officer
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Annual Meeting
The annual meeting of shareholders will be held on May 28, 2015,
at 2:00 p.m. (CDT) at HealthStream, Inc., 209 10th Avenue
South, Suite 450, Nashville, Tennessee 37203.
Corporate Stock
HealthStream, Inc.’s common stock is traded on the NASDAQ
Stock Market under the symbol HSTM. The following table
shows the quarterly range of high and low closing sales prices of
the common stock from 2012.
Independent Registered Public Accounting Firm
Ernst & Young LLP
Nashville, Tennessee
Transfer Agent
Computershare
211 Quality Circle, Suite 210
College Station, TX 77845
(800) 962-4284
Investor Centre™ portal: www.computershare/investor.com
Legal Counsel
Bass, Berry & Sims PLC
Nashville, Tennessee
Corporate Headquarters
HealthStream, Inc.
209 10th Avenue South, Suite 450
Nashville, Tennessee 37203
Form 10-K
A copy of the Company’s Annual Report on Form 10-K, as filed
with the Securities and Exchange Commission, is being mailed
with this letter. Additional copies of the Company’s Annual
Report on Form 10-K, as filed with the Securities and Exchange
Commission, are available without exhibits, free of charge, to its
shareholders. Requests should be addressed to Mollie Condra,
Investor Relations Department, HealthStream, Inc., 209 10th
Avenue South, Suite 450, Nashville, Tennessee 37203.
2012
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
2013
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
2014
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
HIGH
LOW
$ 24.05
26.22
30.47
30.53
$ 25.23
27.75
37.88
39.46
$ 34.43
27.10
27.14
31.95
$ 16.48
20.72
23.27
22.28
$ 20.59
20.04
26.03
30.21
$ 26.49
21.02
21.80
23.38
As of February 23, 2015, HealthStream, Inc. had approximately
5,607 shareholders, including 90 shareholders of record and 5,517
persons or entities holding common stock in nominee name.
The Company has never declared or paid any cash dividends on its
common stock and does not anticipate paying cash dividends in
the foreseeable future. HealthStream intends to retain earnings to
finance the expansion of its operations.
Cautionary Note Regarding Forward-Looking Statements
This report contains forward-looking statements (all statements other than those
made solely with respect to historical fact) within the meaning of Section 21E of
the Securities and Exchange Act of 1934 and Section 27A of the Securities Act
of 1933. These forward-looking statements are subject to known and unknown
risks and uncertainties (some of which are beyond the Company’s control) that
could cause actual results to differ materially and adversely from those anticipated
in the forward-looking statements. See the Company’s 10-K filing for more
detailed disclosure regarding forward-looking statements and associated risks
and uncertainties.
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(cid:95)
(cid:134)
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2014
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
OR
FOR THE TRANSITION PERIOD FROM TO
Commission File Number 000-27701
HEALTHSTREAM, INC.
(Exact name of registrant as specified in its charter)
Tennessee
(State or other jurisdiction of
incorporation or organization)
209 10th Avenue South, Suite 450
Nashville, Tennessee
(Address of principal executive offices)
62-1443555
(I.R.S. Employer Identification No.)
37203
(Zip Code)
(615) 301-3100
(Registrant's telephone number, including area code)
Securities Registered Pursuant To Section 12(b) Of The Act:
Title of each class
Common Stock, No Par Value
Name of each Exchange on which registered
NASDAQ Global Select Market
Securities Registered Pursuant To Section 12(g) Of The Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes (cid:134) No (cid:95)(cid:3)
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 of 15(d) of the Act. Yes (cid:134) No (cid:95)
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 (cid:95) No (cid:134)(cid:3)
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required
to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was
required to submit and post such files). Yes (cid:95) No (cid:134)
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K. (cid:95)(cid:3)
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer (cid:134)(cid:3)(cid:3)
Accelerated filer (cid:95)
Non-accelerated filer (cid:134)(cid:3)(cid:3)
Smaller reporting company (cid:134)
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes (cid:134) No (cid:95)
The aggregate market value of the Common Stock issued and outstanding and held by non-affiliates of the Registrant, based upon the closing sales price
for the Common Stock on the NASDAQ Global Select Market on June 30, 2014 was approximately $514.3 million. All executive officers and directors
of the registrant have been deemed, solely for the purpose of the foregoing calculation, to be “affiliates” of the registrant.
As of February 24, 2015, there were 27,683,412 shares of the Registrant's common stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's definitive Proxy Statement for its 2015 Annual Meeting of Shareholders are incorporated by reference into Part III hereof.
HEALTHSTREAM, INC.
TABLE OF CONTENTS
ANNUAL REPORT ON FORM 10-K
PART I
Item 1.
Item 1A.
Item 1B.
Item 2.
Item 3.
Item 4.
PART II
Item 5.
Item 6.
Item 7.
Item 7A.
Item 8.
Item 9.
Item 9A.
Item 9B.
PART III
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
PART IV
Item 15.
Business. .........................................................................................................................................................
Risk Factors ....................................................................................................................................................
Unresolved Staff Comments ..........................................................................................................................
Properties ........................................................................................................................................................
Legal Proceedings ..........................................................................................................................................
Mine Safety Disclosures ...............................................................................................................................
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases
of Equity Securities ....................................................................................................................................
Selected Financial Data. ................................................................................................................................
Management’s Discussion and Analysis of Financial Condition and Results of Operations ......................
Quantitative and Qualitative Disclosures About Market Risk. .....................................................................
Financial Statements and Supplementary Data. ............................................................................................
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure ......................
Controls and Procedures ................................................................................................................................
Other Information ..........................................................................................................................................
Directors, Executive Officers and Corporate Governance ............................................................................
Executive Compensation ...............................................................................................................................
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters ...
Certain Relationships and Related Transactions, and Director Independence .............................................
Principal Accounting Fees and Services .......................................................................................................
Exhibits, Financial Statement Schedules .......................................................................................................
Signatures .......................................................................................................................................................
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PART I
This Annual Report on Form 10-K contains forward-looking statements within the meaning of Section 21E of the Securities Exchange Act
of 1934. Such forward-looking statements include, among others, those statements including the words “expects,” “anticipates,” “intends,”
“believes,” “may,” “will,” “should,” “continue” and similar language or the negative of such terms or other comparable terminology.
Although we believe that the expectations reflected in the forward-looking statements are reasonable, HealthStream’s actual results may
differ significantly from those projected in the forward-looking statements. Factors that might cause or contribute to such differences
include, but are not limited to, those discussed in the section “Risk Factors” in Item 1A of this Annual Report on Form 10-K and elsewhere
in this document. In addition, factors that we are not currently aware of could harm our future operating results. You should carefully review
the risks described in other documents HealthStream files from time to time with the Securities and Exchange Commission. You are
cautioned not to place undue reliance on forward-looking statements, which speak only as of the date of this Annual Report on Form 10-K.
HealthStream undertakes no obligation to publicly release any revisions to the forward-looking statements or reflect events or circumstances
after the date of this document.
Item 1. Business
OVERVIEW AND HISTORY
HealthStream, Inc. (HealthStream or the Company) provides SaaS-based workforce development solutions and research/patient
experience solutions for healthcare organizations—all designed to assess and develop the people that deliver patient care which, in turn,
supports the improvement of business and clinical outcomes. Our workforce development products are used by healthcare organizations
to meet a broad range of their training, certification, competency assessment, performance appraisal, and development needs, while our
research/patient experience products provide our customers information about patients’ experiences and how to improve them,
workforce engagement, physician relations, and community perceptions of their services. HealthStream’s customers include healthcare
organizations, pharmaceutical and medical device companies, and other participants in the healthcare industry.
At December 31, 2014, HealthStream had approximately 4.28 million “total subscribers” to its subscription-based solutions. Each
individual end-user who utilizes at least one HealthStream subscription-based solution is counted as one subscriber, regardless of the
number of subscriptions contracted by or for that end-user. Of our 4.28 million total subscribers, 4.15 million were already implemented
as of December 31, 2014 and 126,000 were in the process of implementation. Our subscription-based solutions include any of our
platform applications, plus courseware or content. We deliver educational activities and training courseware to our customers through
our platform application, the HealthStream Learning Center™ (HLC), while we deliver competency management and performance
appraisal tools through our platform applications the HealthStream Competency Center (HCC) and HealthStream Performance Center
(HPC), respectively, all on our SaaS-based platform. Our research/patient experience products and service offerings include quality and
satisfaction surveys, data analyses of survey results, patient experience evaluation and improvement, and other research-based
measurement tools focused on patients, physicians, employees, and members of the community. Our core research/patient experience
product is the Patient Insights™ survey, which accounted for approximately 76 percent of our research/patient experience solutions
business, based on revenue, during 2014.
As we place greater emphasis on offering our customers new and innovative ways of assessing and developing their workforces,
simulation is becoming a growing part of our product portfolio. We have a collaborative arrangement with Laerdal Medical A/S (Laerdal
Medical), a leader in healthcare simulation, to provide a suite of products for distributing training simulations and scenarios directly
over the Internet and managing simulation centers worldwide. SimStore® allows simulation customers to sample, license, and download
scenarios directly to simulators over the Internet. SimManager is an application for managing simulation centers that shares the same
platform with our HLC, and was launched in early 2012. We have a long-term relationship with Laerdal Medical and have been a
distributor of its HeartCodeTM product line for the last eight years. HeartCodeTM uses task based manikins that assist healthcare
professionals in studying, training, and testing for what is commonly known as cardiopulmonary resuscitation (CPR) certification.
Headquartered in Nashville, Tennessee, the Company was incorporated in 1990 and began providing its SaaS-based solutions in 1999
and its survey and research solutions in 2005. Including additional offices in Laurel, Maryland; Nashville, Tennessee; Jericho, New
York; Brentwood, Tennessee; and Pensacola, Florida, HealthStream had 674 full-time and 113 part-time employees as of December
31, 2014. Our business has evolved from an initial focus on technology-based training to a company providing workforce development
and research/patient experience solutions to the nation’s healthcare providers.
INDUSTRY BACKGROUND
According to the deputy director of the National Health Statistics Group at the Centers for Medicare and Medicaid Services (CMS), spending
in the healthcare industry reached approximately $2.9 trillion in 2013, or 17.4% of the U.S. gross domestic product. Hospital care
expenditures accounted for approximately 32.3% of the $2.9 trillion industry. According to the Bureau of Labor Statistics, approximately
18.3 million professionals are employed in the healthcare segment of the domestic economy, with approximately 4.8 million employed in
acute-care hospitals and approximately 3.3 million employed in post-acute-care organizations, our primary target markets for our workforce
development and research/patient experience products. As of December 31, 2014, approximately 4.28 million healthcare professionals were
subscribers to our SaaS-based solutions, which include 4.15 million subscribers already implemented and 126,000 subscribers in the
process of implementation.
1
All of the 4.8 million hospital-based healthcare professionals that work in the nation’s approximately 5,000 acute-care hospitals are required
by federal mandates and accrediting bodies to complete training in a number of areas. This training includes safety training mandated by
both the Occupational Safety and Health Administration (OSHA) and The Joint Commission (an independent, not-for-profit organization
that accredits and certifies healthcare organizations and programs in the United States), as well as training on patient information
confidentiality required under the Health Insurance Portability and Accountability Act (HIPAA).
In hospitals, staffing issues and personnel shortages have also contributed to the need for facility based workforce development as well as
additional assessment and competency based training. For example, the American Hospital Association’s (AHA) report “Workforce 2015:
Strategy Trumps Shortage” (January 2010) estimates that the shortfall of physicians in 2020 will be approximately 109,000 and the shortage
of registered nurses in 2025 will be the equivalent of 260,000 full-time employees. We believe that offering training and education for
hospital personnel is increasingly being utilized as a retention and recruitment incentive.
Many healthcare professionals use continuing education to keep abreast of the latest developments and meet licensing and certification
requirements. Continuing education is required for nurses, emergency medical services personnel, first responder personnel, radiologic
personnel, and physicians. Pharmaceutical and medical device companies must also provide their medical industry sales representatives
with training mandated for the healthcare industry and training for new products. Such companies also provide support and content for
education and training of audiences that use their products in healthcare organizations.
A large portion of the nation’s hospitals utilize research and survey tools to gain insight about patients’ experiences, to assess workforce
competency and engagement, to determine the status of physician relations, and to measure the perceptions about the hospitals in the
communities they serve. Industry-wide interest is increasing in research due in part, to the CAHPS® (Consumer Assessment of Healthcare
Providers and Systems) Hospital Survey launched by CMS in partnership with the Agency for Healthcare Research and Quality (AHRQ).
Hospitals must submit data to CMS for certain required quality measures—which for inpatients includes the CAHPS® Hospital Survey—
in order to receive the full market basket increase to their reimbursement payment rates from CMS. Hospitals that fail to submit this survey
data will incur a reduction of two percentage points in the inpatient market basket update amount for the following federal fiscal year. We
are designated as a certified vendor for and offer CAHPS® Hospital Survey services.
The healthcare education industry is highly fragmented, varies significantly in delivery methods (i.e., online products, live events, written
materials, and manikins for simulation-based training), and is composed of a wide variety of entities competing for customers. The sheer
volume of healthcare information available to satisfy continuing education needs, rapid advances in medical developments, and the time
constraints that healthcare professionals face make it difficult to quickly and efficiently access the continuing education content most
relevant to an individual's practice or profession. Historically, healthcare professionals have received continuing education and training
through offline publications, such as medical journals or by attending conferences and seminars. In addition, other healthcare workers and
pharmaceutical and medical device manufacturers’ sales and internal regulatory personnel usually fulfill their training from external
vendors or internal training departments. While these approaches satisfy the ongoing education and training requirements, they are typically
costly and inconvenient. In addition, live courses are often limited in the breadth of offerings and do not provide a method for tracking
training completion. The results of these traditional methods, both from a business and compliance standpoint, are difficult to track and
measure. While hospitals and health systems occasionally survey their patients, physicians, and employees using their own internal
resources, the practice is limited since they do not typically possess the valuable comparative benchmarking data that is available from
independent survey research vendors.
Finally, the hospital industry continues to operate under intense pressure to reduce costs as a result of reductions in government
reimbursement rates and increased focus on cost containment consistent with participation of patients in managed care programs. In addition,
hospitals, as well as pharmaceutical and medical device companies, continue to experience rising operating costs, coupled with increased
pressure to measure and report on the outcomes of the dollars spent on training. Our products and services are designed to meet these needs
by reducing healthcare organizations’ costs of training while improving learning outcomes, enhancing reporting capabilities, and supporting
customers’ business objectives.
HEALTHSTREAM'S SOLUTIONS
HealthStream’s products and services are organized into two segments -- HealthStream Workforce Development Solutions and
HealthStream Research/Patient Experience Solutions -- that collectively help healthcare organizations meet their ongoing training,
education, assessment, competency management, and compliance needs. We provide our solutions to a wide range of customers within the
healthcare industry.
HealthStream Workforce Development Solutions— Within HealthStream Workforce Development Solutions, we bring training,
assessment, talent development, and talent management solutions together with administrative and management tools on our platform
through our HLC, HCC, and HPC. We also offer a more streamlined version of the HLC, HealthStream Express™, along with
HealthStream Connect, a content delivery platform that is designed for the singular purpose of allowing access to our extensive content
libraries. These content libraries allow our customers to subscribe to a wide array of additional courseware. Additionally, medical device
companies can offer online training support through our platform’s Inservice Center capability for their products and sponsor continuing
education directly to healthcare workers.
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Our workforce development solutions support healthcare administrators in configuring training to meet the specific needs of various groups
of employees, modifying training materials, documenting training completion, and facilitating competency assessments, and performance
appraisals. As of December 31, 2014, we had approximately 4.28 million total subscribers for our subscription-based solutions, which
included 4.15 million subscribers already implemented and 126,000 subscribers in the process of implementation. Our subscription-
based solutions include subscriptions to our platform applications, plus courseware and content subscriptions. Pricing for the HLC, HCC,
and HPC are subscription based, with fees based on the number of subscribers, courseware provided, and other factors. We offer training,
implementation, and account management services to facilitate adoption of our subscription-based solutions. Fees for training are based on
the time and efforts of the personnel involved. Implementation fees vary based on the size, scope, and complexity of the project. Our SaaS-
based platform and subscription-based solutions are hosted in a central data center that allows authorized subscribers Internet access to our
services, thereby eliminating the need for onsite local implementations of installed workforce development products. During 2014, 2013,
and 2012, our subscription-based solutions accounted for approximately 76%, 72%, and 70% of consolidated revenues, respectively.
Other Applications on our Platform—In addition to the HLC, we offer an array of other applications on our platform, each serving a unique
function for hospitals and health systems. Each application on our platform is SaaS-based and has its own value proposition and revenue
stream.
(cid:120) The Authoring Center is a platform application that provides healthcare organizations the capability to create Internet-based
courses by moving their existing course material online or self-authoring new material and electively sharing these materials with
our other customers through a courseware exchange. We also offer Authoring Pro, an upgraded product which includes a licensed
image library, as an additional subscription to this product. Team Author, a collaborative authoring application, was launched in
2012. Pricing for these products is subscription based, with fees based on the number of subscribers and level of penetration of
services within the customer organization.
(cid:120) The HealthStream Competency Center™ (HCC) is our SaaS-based platform application for competency management for
healthcare organizations, which provides customers tools to assess competency and appraise performance. Competency
assessment is a requirement of hospitals and healthcare organizations for maintaining accreditation based on requirements from
The Joint Commission to evaluate, document, and report performance competencies. We believe that the HCC offers an effective
means of determining which competencies are associated with each position and evaluating and documenting competency
assessments.
(cid:120) The HealthStream Performance Center™ (HPC) is our SaaS-based platform application for performance management for
healthcare organizations, which provides an automated, paperless performance appraisal process. The HPC was launch in March
of 2012. We believe the HPC offers an effective means of streamlining the performance appraisal process, which tends to increase
completion rates and consistency with all aspects of hospitals’ workforce appraisal processes.
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SimCenter®— is a suite of applications. We formed a collaborative arrangement, SimVentures, with Laerdal Medical in 2010 to
offer products and services aimed at accelerating the global adoption of simulation-based learning by healthcare providers with a
focus on improving clinical competencies and patient outcomes. The venture offers healthcare organizations and medical and
nursing schools worldwide a range of fully integrated SaaS applications that accelerate development and distribution of simulation
content; enable enterprise-wide management of simulation centers, simulators, and programs; and support assessment of the
effectiveness of simulation training as part of complete curricula. SimStore®, one segment of our collaborative arrangement with
Laerdal, began operations in the first quarter of 2011 and our simulation management platform, SimManager, was launched in
early 2012. SimView, our debriefing system for simulation-based training, also was launched in early 2012.
HealthStream Research/Patient Experience Solutions— HealthStream Research/Patient Experience Solutions complements
HealthStream Workforce Development Solutions product and service offerings by providing hospital-based customers with Patient
Insights™, Employee Insights™, Physician Insights™, and Community Insights™ surveys, data analyses of survey results, and other
research-based measurement tools. Our services are designed to provide thorough analyses with insightful recommendations for change;
benchmarking capability using our comprehensive databases; and consulting services to identify solutions for our customers based on their
survey results. Clients are able to access and analyze their survey results data through Insights Online™, our secure web-based reporting
platform. Our survey and research solutions focus on providing statistically valid data to assist our customers with their decision making
related to their organization’s performance improvement objectives. In addition to collecting and reporting data, we provide analysis and
consulting to help customers understand and improve their survey results and patient experiences and the underlying impact on their
business. It is with this insight that healthcare organizations are able to develop plans for enhanced performance that can be delivered
through our learning solutions. Pricing for these services is based on the survey type, delivery method, size of the survey instrument, sample
size, frequency of survey cycles, and other factors. During 2014, 2013, and 2012, our Patient Insights™ survey product accounted for
approximately 14%, 17%, and 19% of consolidated revenues, respectively.
BUSINESS COMBINATIONS
We acquired Decision Critical, Inc. (DCI) in June 2012, Sy.Med Development, Inc. (Sy.Med) in October 2012, substantially all of the
assets of Baptist Leadership Group (BLG) in September 2013, and Health Care Compliance Strategies, Inc. (HCCS) in March 2014. On
February 12, 2015, we entered into a definitive agreement to acquire HealthLine Systems, Inc., which is expected to close during the first
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quarter of 2015, subject to customary closing conditions. For additional information regarding the closed acquisitions, please see Note 5 of
the Consolidated Financial Statements and Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of
Operations” included elsewhere in this report.
CUSTOMERS
We provide our solutions to customers across a broad range of entities within the healthcare industry, including private, not for profit, and
government entities, as well as pharmaceutical and medical device companies. We derive a substantial portion of our revenues from a
relatively small number of customers, although no single customer represented more than 10 percent of our revenues during 2014, 2013,
or 2012. Examples of customers that have purchased or contracted for products and services from HealthStream include: HCA Holdings,
Inc.; Catholic Health Initiatives; Community Health Systems, Inc.; LifePoint Hospitals, Inc.; and Ardent Health Services, LLC.
SALES AND MARKETING
We market our products and services primarily through our direct sales teams, our consultants, and our account relationship managers, who
are based at our corporate headquarters in Nashville, Tennessee and in our additional offices located in Laurel, Maryland; Jericho, New
York; Brentwood, Tennessee; and Pensacola, Florida as well as remote home office sales locations. As of December 31, 2014, our
HealthStream Workforce Development Solutions sales and relationship management personnel consisted of 111 employees—of which 103
carried sales quotas—and our HealthStream Research/Patient Experience Solutions sales and relationship management personnel consisted
of 20 employees—of which 16 carried sales quotas. Our geographically dispersed field sales organization is divided into teams focused on
selling our workforce development products and a separate sales team focused on selling our research and patient experience improvement
products.
We conduct a variety of marketing programs to promote our products and services, including product catalogs, user groups—including our
annual customer Summit, trade shows, internet promotion and demonstrations, telemarketing campaigns, public relations, distribution of
product-specific literature, direct mail, and advertising.
Over most of the last thirteen years, we have hosted an annual conference in Nashville for our customers known as the “Summit.” We have
utilized this client conference to reach out to existing and potential customers and business partners, provide training and educational
services, and to demonstrate our new and existing product offerings. We have marketing teams that are responsible for these initiatives and
for working with and supporting our product management and sales teams. At December 31, 2014, our marketing personnel consisted of
21 employees.
OPERATIONS
We believe our ability to establish and maintain long-term customer relationships, adoption of our products and services, recurring sales,
and development and maintenance of new and existing products are dependent on the strength of our operations, customer service, product
development and maintenance, training, and other support teams. As of December 31, 2014, these personnel consisted of approximately
266 employees for our Workforce Development Solutions segment and approximately 310 employees for our Research/Patient Experience
Solutions segment, of which 175 employees worked in our interviewing center. Our Workforce Development Solutions operations team
consists of personnel associated with customer support, implementation services, product development and maintenance, training, and
project management. Our Research/Patient Experience Solutions operations team consists of personnel associated with phone interviewing,
distributing and processing paper-based survey instruments, patient experience coaching and consulting, data analysis and reporting of
survey results, and project management.
TECHNOLOGY MANAGEMENT
Our services are designed to be reliable, secure, and scalable. Our software is a combination of proprietary and commercially available
software and operating systems. Our software supports hosting and management of content, publication of our web sites, execution of
courseware, registration and tracking of users, collection, sampling, and analysis of survey data, and reporting of information for both
internal and external use. We designed the platforms that provide our services to allow each component to be independently scaled by
adding commercially available hardware and a combination of commercially available and proprietary software components.
Our software applications, servers, and network infrastructure that deliver the majority of our services are hosted by third-party data center
providers. Our primary data center is located at a tier-four rated hosting facility in Chicago, Illinois, and our disaster recovery data center
is hosted by a separate provider located in Franklin, Tennessee. Both of our providers maintain our equipment in secure, limited access
environments, supported by redundant power, environmental conditioning, and network connectivity. Our providers’ hosting centers are
connected to the Internet through multiple, redundant, high-speed fiber optic circuits. The transactional systems supporting the data
collection for our survey products are located in secure, limited access environments located at our Nashville, Tennessee and Laurel,
Maryland offices and feed our core business intelligence platforms supporting our survey products located at our primary hosting facility
in Chicago. Company personnel monitor all servers, networks, and systems on a continuous basis. Together with our providers, we employ
several levels of enterprise firewall systems and data abstraction to protect our databases, customer information, and courseware library
from unauthorized access. All of our production data located in our Chicago data center is backed up in real time to our disaster recovery
data center located in Franklin, Tennessee. Monthly snap-shots of our data are stored off-site with a third-party data storage provider.
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COMPETITION
In addition to the competing healthcare education delivery methods in the industry, we also have direct competitors. In the workforce
development business, a number of companies offer competitive learning management products and talent management modules to the
healthcare industry. We compete with companies such as Cornerstone OnDemand, Healthcare Source, Oracle, SABA, SAP, and SumTotal
Systems that provide their services to multiple industries, including healthcare. We also compete with large medical publishers that have
operating units that offer learning management systems that focus on healthcare, such as Reed Elsevier Group’s MC Strategies. In the
healthcare research business, we see competition from large nationally recognized research firms such as Avatar International, Gallup,
National Research Corporation, Press Ganey Associates, Studer Group, Professional Research Consultants, Inc., and others. Our research
business also experiences direct competition from vendors who provide research services to other industries including Kenexa, which is
now owned by IBM, and Foresight, which is now owned by TNS Global. Finally, in our simulation business, we compete with B-Line
Medical, CAE/Meti, and EMS.
We believe our workforce development solutions, which include both products and services that facilitate training, assessment and
development for healthcare professionals, a wide assortment of courseware, a mechanism for measuring satisfaction and/or other results,
and the ability to provide all our services on a single platform over the Internet, provide us with a competitive advantage. In our research
business, we believe our large proprietary database of survey results, technology infrastructure designed to automate the processing of
survey results, proprietary core survey instruments and action plan development methodology, and our ability to quickly deliver relevant
online courseware targeted at addressing survey related findings provide us with a competitive advantage. In our simulation business, our
SimCenterTM products enable simulation centers to purchase courseware online, manage students and resources, and provide a debriefing
capability in an integrated manner. Built on our SaaS-based platform and with our collaborative arrangement with Laerdal Medical, a world
leader in simulation equipment, we believe we have a competitive advantage in this area. We believe that the principal competitive factors
affecting the marketing of our workforce development and research solutions to the healthcare industry include:
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features of our SaaS-based platform and applications, including reporting, management functionality, ability to manage
a variety of events or modalities, courseware assignment, curriculum management, documenting competency
assessments and performance appraisals, scalability, and the ability to track utilization and results;
scope and variety of Internet-based learning courseware available, including mandated content for OSHA, The Joint
Commission, patient safety, and HIPAA requirements, ICD-10 training, competency-based content, courseware
scenarios that drive simulators, courseware that provides CPR certification, as well as the ability of our customers to
create and host their own web-enabled courseware;
our singular focus on the healthcare industry and our deep healthcare expertise;
scope and quality of professional services offered, including survey execution, implementation, benchmarking, training
and the expertise and technical knowledge of the customers’ employees;
competitive pricing, which supports a return on investment to customers when compared to other alternative delivery
methods;
customer service and support;
effectiveness of sales and marketing efforts; and
company reputation.
Collectively, we believe these capabilities provide us with the ability to improve the quality of healthcare by assessing and developing the
people who deliver care.
GOVERNMENT REGULATION OF THE INTERNET AND THE HEALTHCARE INDUSTRY
Regulation of the Internet and the Privacy and Security of Personal Information
The laws and regulations that govern our business change rapidly. The following are some of the evolving areas of law that are relevant to
our business:
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Privacy and Security Laws. Federal, state and foreign privacy and security regulations and other laws restricting the
collection, use, security and disclosure of personal information limit our ability to collect information or use and disclose
the information in our databases or derived from other sources to generate revenues. It may be costly to implement
security or other measures designed to comply with any new legislation.
Content Regulation. Both foreign and domestic governments have adopted and proposed laws governing the content of
material transmitted over the Internet. These include laws relating to obscenity, indecency, libel and defamation. We
could be liable if content delivered by us violates these regulations.
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Information Security Accountability Regulation. As a business associate of our customers, we are required to report
certain breaches of protected health information to our customers, which must in turn notify affected individuals, the
U.S. Department of Health and Human Services (HHS) and, in certain situations involving large breaches, the media.
All non-permitted uses or disclosures of unsecured, protected health information are presumed to be breaches unless
the covered entity or business associate establishes that there is a low probability the information has been compromised.
In addition, we are subject to certain state laws that relate to privacy or the reporting of security breaches. For example,
California law requires notification of security breaches involving personal information and medical information. We
may incur costs to comply with these privacy and security requirements. Because many of these laws are new and there
is little guidance related to many of these laws, it is difficult to estimate the cost of our compliance with these laws.
Further, Congress has considered bills that would require companies to engage independent third parties to audit the
companies’ computer information security. If the Company is required to report a breach of security or if one of the
Company’s customers is required to report a breach of security by the Company, the Company’s business could be
negatively impacted.
Sales and Use Tax. Through December 31, 2014, we collected sales, use or other taxes on taxable transactions in states
in which we have employees or have a significant level of sales activity. While HealthStream expects that this approach
is appropriate, other states or foreign jurisdictions may seek to impose tax collection obligations on companies like us
that engage in online commerce. If they do, these obligations could limit the growth of electronic commerce in general
and limit our ability to profit from the sale of our services over the Internet.
Laws and regulations directly applicable to content regulation, e-commerce, Internet communications, and the privacy and security of
personal information are becoming more prevalent. Congress continues considering laws regarding Internet taxation. The dynamic nature
of this regulatory environment increases the uncertainty regarding the marketplace impact of such regulation. The enactment of any
additional laws or regulations may increase our cost of conducting business or otherwise harm our business, financial condition and
operating results.
Regulation of Education, Training and Other Services for Healthcare Professionals
Occupational Safety and Health Administration (OSHA). OSHA regulations require employers to provide training to employees to
minimize the risk of injury from various potential workplace hazards. Employers in the healthcare industry are required to provide training
with respect to various topics, including blood borne pathogens exposure control, laboratory safety and tuberculosis infection control.
OSHA regulations require employers to keep records of their employees' completion of training with respect to these workplace hazards.
The Joint Commission. The Joint Commission mandates that employers in the healthcare industry provide certain workplace safety and
patient interaction training to employees. Training required by The Joint Commission may include programs on infection control, patient
bill of rights, radiation safety, and incident reporting. Healthcare organizations are required to provide and document training on these
topics to receive accreditation from The Joint Commission. In addition, The Joint Commission imposes continuing education requirements
on physicians that relate to each physician's specific staff appointments.
Health Insurance Portability and Accountability Act (HIPAA). HIPAA regulations require certain organizations (known as covered
entities), including most healthcare providers and health plans, to adopt safeguards regarding the use and disclosure of health-related
information. HIPAA regulations also require these organizations to provide reasonable and appropriate safeguards to protect the privacy,
integrity and confidentiality of individually identifiable healthcare information. Covered entities are required to establish, maintain and
provide training with regard to their policies and procedures for protecting the integrity and confidentiality of individually identifiable
healthcare information and must document training on these topics to support their compliance. Certain HIPAA privacy and security
requirements apply to (entities known as business associates that handle individually identifiable healthcare information on behalf of
covered entities) companies and business associates and their subcontractors may be directly subject to criminal and civil sanctions for
violations of HIPAA privacy and security standards.
The American Nurses Credentialing Center (ANCC). ANCC, a subsidiary of the American Nurses Association (ANA), provides
individuals and organizations throughout the nursing profession with the resources they need to achieve practice excellence. ANCC's
internationally renowned credentialing programs certify nurses in specialty practice areas; recognize healthcare organizations for promoting
safe, positive work environments through the Magnet Recognition Program® and the Pathway to Excellence® Program; and accredit
providers of continuing nursing education. In addition, ANCC’s Institute for Credentialing Innovation® offers an array of informational
and educational services and products to support its core credentialing programs. ANCC certification exams validate nurses’ skills,
knowledge, and abilities. More than a quarter million nurses have been certified by ANCC since 1990. More than 80,000 advanced practice
nurses are currently certified by ANCC. The ANCC Magnet Recognition Program® recognizes healthcare organizations that provide the
very best in nursing care and professionalism in nursing practice. The program also provides a vehicle for disseminating best practices and
strategies among nursing systems. The ANCC Magnet Recognition Program is the gold standard for nursing excellence. The Pathway to
Excellence® Program recognizes the essential elements of an optimal nursing practice environment. The designation is earned by healthcare
organizations that create work environments where nurses can flourish. The award substantiates the professional satisfaction of nurses and
identifies best places to work.
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Continuing Nursing Education (CNE). State nurse practice laws are usually the source of authority for establishing the state board of nursing
requirements. The state board of nursing establishes the state's CNE requirements for professional nurses. CNE credits are provided through
accredited providers that have been approved by the ANCC Commission on Accreditation and/or the state board of nursing. CNE
requirements vary widely from state to state. Thirty-four states require registered nurses to certify that they have accumulated a minimum
number of CNE credits in order to maintain their licenses. In some states, the CNE requirement only applies to re-licensure of advance
practice nurses, or additional CNEs may be required of this category of nurses. Required CNE ranges from 12 to 45 credits annually, with
reporting generally on a bi-annual basis. Board certifications (e.g., CNOR – certification of perioperative nursing) also require CNE credits,
with certain percentages required in specific categories based on the certification type. We are an accredited provider of CNE by the ANCC.
Continuing Medical Education (CME). State licensing boards, professional organizations and employers require physicians to certify that
they have accumulated a minimum number of continuing medical education hours to maintain their licenses. Generally, each state's medical
practice laws authorize the state's board of medicine to establish and track CME requirements. Forty-eight state medical licensing boards
currently have CME requirements, as well as Puerto Rico, Guam, and the U.S. Virgin Islands. The number of CME hours required by each
state ranges from 15 to 50 hours per year. Other sources of CME requirements are state medical societies and practice specialty boards.
The failure to obtain the requisite amount and type of CME could result in non-renewal of the physician's license to practice medicine
and/or membership in a medical or practice specialty society. American Medical Association (AMA) classifies continuing medical
education activities as either Category 1, which includes formal CME activities, or Category 2, which includes most informal activities.
Sponsors can only designate CME activities for AMA PRA Category 1 Credit™. Most agencies nationwide that require CME participation
specify AMA PRA Category 1 Credit™. Only institutions and organizations accredited to provide CME can designate an activity for AMA
PRA Category 1 Credit™. The Accreditation Council for Continuing Medical Education (ACCME) is responsible for awarding
accreditation status to state medical societies, medical schools, and other institutions and organizations that provide CME activities for a
national audience of physicians. Only institutions and organizations are accredited. State medical societies, operating under the aegis of the
ACCME, accredit institutions and organizations that provide CME activities primarily for physicians within the state or bordering states.
We are an accredited provider of CME by the ACCME.
Centers for Medicare & Medicaid Services (CMS). CMS has articulated a vision for health care quality—the right care for every person
every time. To achieve this vision, CMS is committed to care that is safe, effective, timely, patient-centered, efficient, and equitable.
Value-based purchasing (VBP), which links payment more directly to the quality of care provided, is a strategy that can help to transform
the current payment system by rewarding providers for delivering high quality, efficient clinical care. Through a number of public
reporting programs, demonstration projects, pilot programs, and voluntary efforts, CMS has launched VBP initiatives in hospitals,
physician offices, nursing homes, home health services, and dialysis facilities. Further, pursuant to the Patient Protection and Affordable
Care Act, as amended by the Healthcare and Education Reconciliation Act of 2010 (collectively, ACA), CMS is implementing a number
of initiatives designed to link payments to quality and efficiency, including a VBP program for inpatient hospital services.
Consumer Assessment of Healthcare Providers and Systems (CAHPS). CMS has partnered with AHRQ to develop a standardized survey
instrument and data collection methodology for measuring patients’ perspectives on hospital care. The intent of the survey is to produce
comparable data on the patients’ perspectives to allow consumer-based comparisons between hospitals, align incentives to drive hospitals
to improve their quality of care, and increase the transparency of hospital reporting. Hospitals must submit data for certain required quality
measures—which for inpatients includes the CAHPS® Hospital Survey—in order to receive the full market basket increase to their
reimbursement payment rates from CMS. While hospital participation is voluntary, hospitals that fail to submit this survey data will incur
a reduction of two percentage points in the inpatient market basket update amount for the following federal fiscal year. We have received
certified vendor designation and will continue to offer CAHPS® Hospital Survey services. In addition, we are a certified vendor approved
to offer CAHPS® Home Health Care Survey used to measure the experiences of people receiving home health care from Medicare-certified
home health agencies. We also offer CAHPS® Clinician and Group Survey used to measure patient experiences with health care providers
and staff in doctor’s offices.
Medicare and Medicaid Electronic Health Records (EHR) Incentive Programs. The Medicare and Medicaid EHR Incentive Programs
provide incentive payments to eligible professionals, eligible hospitals and critical access hospitals (CAHs) as they adopt, implement,
upgrade or demonstrate meaningful use of certified EHR technology. By putting into action and meaningfully using an EHR system,
providers will reap benefits beyond financial incentives–such as reduction in errors, availability of records and data, reminders and
alerts, clinical decision support, and e-prescribing/refill automation.
Allied Disciplines. Various allied health professionals are required to obtain continuing education to maintain their licenses. For example,
emergency medical services personnel may be required to acquire up to 20 continuing education hours per year, all or a portion of which
can be fulfilled online. These requirements vary by state and depend on the classification of the employee.
Other Continuing Education. We are also an accredited provider of continuing education and continuing pharmacy education by the
Association of Surgical Technologists, Inc. (AST) and the Accreditation Council for Pharmacy Education (ACPE), respectively.
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Regulation of Educational Program Sponsorship and Support
There are a variety of laws and regulations that affect the relationships between our medical device and pharmaceutical customers and
the users of our products and services, including the sponsorship and support of educational programs. For example, the Physician
Payment Sunshine Act (“Sunshine Act”) requires manufacturers of drugs, biological devices and medical devices covered by Medicare,
Medicaid, or the Children’s Health Insurance Program to report annually to CMS payments and other transfers of value, including
educational programs, given by such manufacturers to physicians and teaching hospitals, with limited exceptions. CMS has issued a
final rule implementing the Sunshine Act. Manufacturers are required to report the physician’s name, business address and national
provider identifier as well as other information including the value, date, form and nature of what is offered. CMS publishes the
information on its website. Manufacturers that do not meet the reporting obligations will be subject to significant monetary penalties.
Further, the Office of Inspector General (OIG) has issued Compliance Program Guidance for Pharmaceutical Manufacturers and for the
Durable Medical Equipment, Prosthetics, Orthotics, and Supply Industry (collectively, the Guidelines). The Guidelines address
compliance risks raised by the support of continuing educational activities by pharmaceutical and medical device companies. The
Guidelines have affected and may continue to affect the type and extent of commercial support we receive for our continuing education
activities. The trade associations for the pharmaceutical and medical device industries (PhRMA and AdvaMed, respectively) have also
promulgated their own codes of ethics that further restrict the interactions between industry and health care professionals. In addition,
the AMA has established its own code of ethics regarding Gifts to Physicians from Industry to provide standards of conduct for the
medical profession. The Company follows the rules and guidelines provided by ACCME, ANCC, and other continuing education
accrediting bodies to ensure that its continuing education programming is free from commercial bias and consistent with the Guidelines.
The U.S. Food and Drug Administration (FDA) and the Federal Trade Commission (FTC)
Current FDA and FTC rules and enforcement actions and regulatory policies or those that the FDA or the FTC may develop in the future
could have a material adverse effect on our ability to provide existing or future applications or services to our end users or obtain the
necessary corporate sponsorship to do so. The FDA and the FTC regulate the form, content and dissemination of labeling, advertising and
promotional materials, including direct-to-consumer prescription drug and medical device advertising, prepared by, or for, pharmaceutical,
biotechnology or medical device companies. The FTC regulates over-the-counter drug advertising and, in some cases, medical device
advertising. Generally, regulated companies must limit their advertising and promotional materials to discussions of the FDA-approved
claims and, in limited circumstances, to a limited number of claims not approved by the FDA. Therefore, any information that promotes
the use of pharmaceutical or medical device products that is presented with our services is subject to the full array of the FDA and FTC
requirements and enforcement actions. We believe that banner advertisements, sponsorship links and any educational programs that lack
independent editorial control that we may present with our services could be subject to FDA or FTC regulation. While the FDA and the
FTC place the principal burden of compliance with advertising and promotional regulations on the advertiser, if the FDA or FTC finds that
any regulated information presented with our services violates FDA or FTC regulations, they may take regulatory action against us or the
advertiser or sponsor of that information. In addition, the FDA may adopt new regulatory policies that more tightly regulate the format and
content of promotional information on the Internet.
INTELLECTUAL PROPERTY AND OTHER PROPRIETARY RIGHTS
To protect our proprietary rights, we rely generally on copyright, trademark and trade secret laws; confidentiality agreements and procedures
with employees, consultants and other third parties; contractual provisions in license agreements with consultants, vendors and customers;
and use measures designed to control access to our software, documentation and other proprietary information. We own federal trademark
limitation “EXCELLENCE THROUGH INSIGHT’,
including without
and service mark registrations for several marks,
“HEALTHSTREAM”, “HOSPITAL DIRECT”, “OR PROTOCOL”, “PATIENT INSIGHTS”, “PHYSICIAN INSIGHTS”, “INSIGHTS
ONLINE”, “INSIGHT INTO ACTION”, “QUALITY CHECK”, “SIMCENTER”, “SIMMANAGER”, and “SIMSTORE.” We also have
obtained registration of the “HEALTHSTREAM” mark in certain other countries. Applications for several trademarks are currently
pending. However, there can be no assurance that we will be successful in obtaining registration of other trademarks for which we have
applied.
The courseware that we license to our customers is developed through a combination of license agreements with publishers and authors,
assignments and work-for-hire arrangements with third parties, and development by employees. We require publishers, authors and other
third parties to represent and warrant that their content does not infringe on or misappropriate any third-party intellectual property rights
and that they have the right to provide their content and have obtained all third-party consents necessary to do so. Our publishers, authors
and other third parties also agree to indemnify us against certain liability we might sustain due to the content they provide.
If a third party asserts a claim that we have infringed its patents or other intellectual property right, we may be required to redesign our
products or enter into royalty or licensing agreements. In addition, we license technologies from third parties for incorporation into our
services. Royalty and licensing agreements with these third parties may not be available on terms acceptable to us, if at all. Additionally,
despite the steps we have taken to protect our intellectual property and proprietary rights, our efforts may not be adequate. Third parties
may infringe or misappropriate our intellectual property, and such violations of our intellectual property are difficult to detect and police.
Competitors may also independently develop technologies that are substantially equivalent or superior to the technologies we employ in
our products or services. If we fail to protect our proprietary rights adequately, our competitors could offer similar services, potentially
significantly harming our competitive position and decreasing our revenues.
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AVAILABLE INFORMATION
The Company files reports with the SEC, including annual reports on Form 10-K, quarterly reports on Form 10-Q and other reports from
time to time. The public may read and copy any materials we file with the SEC at the SEC’s Public Reference Room at 100 F Street, NE,
Washington, DC 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-
SEC-0330. The Company is an electronic filer and the SEC maintains an Internet site at http://www.sec.gov that contains the reports, proxy
and information statements, and other information filed electronically. Our website address is www.healthstream.com. Please note that our
website address is provided as an inactive textual reference only. We make available free of charge through our website, our annual report
on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and all amendments to those reports as soon as reasonably
practicable after such material is electronically filed with or furnished to the SEC. The information provided on our website is not part of
this report, and is therefore not incorporated by reference unless such information is otherwise specifically referenced elsewhere in this
report.
OUR EMPLOYEES
As of December 31, 2014, we employed 674 full-time and 113 part-time persons, of which 175 persons are employed in our interviewing
center. Our success will depend in large part upon our ability to attract and retain qualified employees. We face competition in this regard
from other companies, but we believe that we maintain good relations with our employees. We are not subject to any collective bargaining
agreements.
EXECUTIVE OFFICERS OF THE REGISTRANT
The following is a brief summary of the business experience of each of the executive officers of the Company. Executive Officers of the
Company are elected by the Board of Directors and serve at the pleasure of the Board of Directors. The following table sets forth certain
information regarding the executive officers of the Company:
Name
Age
Robert A. Frist, Jr. ........................ 47
Jeffrey S. Doster ........................... 50
Gerard M. Hayden, Jr. .................. 60
Arthur E. Newman ....................... 66
J. Edward Pearson ........................ 52
Thomas Schultz ............................ 48
Michael Sousa .............................. 46
Position
Chief Executive Officer, President and Chairman of the Board of Directors
Senior Vice President and Chief Technology Officer
Senior Vice President and Chief Financial Officer
Executive Vice President
Senior Vice President and Chief Operating Officer
Senior Vice President
Senior Vice President
Robert A. Frist, Jr., one of our co-founders, has served as our chief executive officer and chairman of the board of directors since 1990 and
president since 2001. Mr. Frist is the company’s chief operating decision maker. He graduated with a Bachelor of Science in business with
concentrations in finance, economics and marketing from Trinity University.
Jeffrey S. Doster joined the Company in May 2008 as senior vice president and chief technology officer. He earned undergraduate degrees
in both Economics and Business Administration from Towson University, as well as a Master of Business Administration from Loyola
College, in Maryland.
Gerard M. Hayden, Jr. joined the Company as senior vice president and chief financial officer in May 2008. He earned a Bachelor of Arts
from the University of Notre Dame and a Master of Science from Northeastern University.
Arthur E. Newman joined the Company in January 2000, and is currently our Executive Vice President. Previously he served as our chief
financial officer and senior vice president from January 2000 to March 2006. He holds a Bachelor of Science in chemistry from the
University of Miami and a Master of Business Administration from Rutgers University.
J. Edward Pearson joined the Company in June 2006 as senior vice president and was promoted to Chief Operating Officer in 2011. He
earned a Bachelor of Business Administration in accounting from Middle Tennessee State University.
Thomas Schultz joined the Company in June 2014 as senior vice president of sales. For the past sixteen years, he worked for Lawson
Software, a subsidiary of Infor, Inc., in various sales leadership roles. He earned a Bachelor of Arts from St. Mary’s University of Minnesota.
Michael Sousa joined the Company in October 2004, and served as senior vice president of sales from January 2010 to June 2014. In June
2014, he was promoted to senior vice president of business development. He earned a Bachelor of Science degree from Boston College
and a Master of Business Administration from Boston University.
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Item 1A. Risk Factors
We believe that the risks and uncertainties described below and elsewhere in this document are the principal material risks facing the
Company as of the date of this report. In the future, we may become subject to additional risks that are not currently known to us. Our
business, financial condition or results of operations could be materially adversely affected by any of the following risks and by any
unknown risks. The trading price of our common stock could decline due to any of the following risks or any unknown risks.
Risks Related to Our Business Model
We may be unable to effectively execute our growth strategy which could have an adverse effect on our business and competitive
position in the industry.
Our business strategy includes increasing our market share and presence through sales to new customers, additional sales to existing
customers, introductions of new products and services, and maintaining strong relationships with our existing customers. Some of the
risks that we may encounter in executing our growth strategy include:
• expenses, delays and difficulties of identifying and developing new products or services and integrating such new products or services
into our existing organization;
• inability to leverage our operational and financial systems sufficiently to support our growth;
• inability to generate sufficient revenue from new products to offset investment costs;
• inability to effectively identify, manage and exploit existing and emerging market opportunities;
• inability to maintain our existing customer relationships;
• increased competition from new and existing competitors;
• lengthy sales cycles, or customers delaying purchasing decisions due to economic conditions;
• reduced spending within the training, information and education departments of hospitals within our target market; and
• failure of the market for training, information and education in the healthcare industry to grow to a sufficient size or at a sufficient
rate.
If any of these risks are realized, our business, and our competitive position in the industry, could suffer.
We may be unable to effectively identify, complete or integrate the operations of future acquisitions, joint ventures, collaborative
arrangements or other strategic investments.
As part of our growth strategy, we actively review possible acquisitions, joint ventures, collaborative arrangements or strategic
investments that complement or enhance our business. We may not be able to identify, complete or integrate the operations of future
acquisitions, joint ventures, collaborative arrangements or other strategic investments. In addition, if we finance acquisitions, joint
ventures, collaborative arrangements or other strategic initiatives by issuing equity securities, our existing shareholders may be diluted
which could affect the market price of our stock. As a result, if we fail to properly evaluate and execute acquisitions and investments,
our business prospects may be seriously harmed. Some of the risks that we may encounter in implementing our acquisition, joint venture,
collaborative arrangement or strategic investment strategies include:
• expenses, delays or difficulties in identifying and integrating acquired companies or joint venture operations, collaborative
arrangements or other strategic investments into our organization;
• inability to retain personnel associated with acquisitions, joint ventures, collaborative arrangements or other strategic investments;
• diversion of management’s attention from other initiatives and/or day-to-day operations to effectively execute our growth strategy;
and
• inability to generate sufficient revenue, profit, and cash flow from acquisitions, joint ventures, collaborative arrangements or
other strategic investments to offset our investment costs.
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Our ability to accurately forecast revenue for certain products and services may be hindered by customer scheduling.
As revenues from our subscription business continue to increase, a larger portion of our revenues will be predictable; however, quarterly
performance may be more subject to fluctuations. Our HealthStream Research/Patient Experience Solutions products and services are
typically contracted by healthcare organizations for multi-year terms, but the frequency, sample size, and timing of survey cycles can
vary from quarter to quarter and year to year. The contract structure for some Research/Patient Experience Solutions products gives
customers latitude about when to initiate a survey, which can affect quarterly or annual revenue forecasts. Also, other project-based
products, such as certain content development, and professional services, are subject to the customers’ involvement in the provision of
the product or service. The timing and magnitude of these project-based product and service contracts may vary widely from quarter to
quarter and year to year, and thus may affect our ability to accurately forecast quarterly and annual financial performance.
Our ability to accurately forecast revenue may be affected by lengthy and widely varying sales cycles.
The period from our initial contact with a potential customer and their first purchase of our solution typically ranges from three to nine
months, and in some cases has extended much further. The range in the sales cycle can be impacted by multiple factors, including an
increasing trend towards more formal request for proposal processes and more competition within our industry, as well as formal budget
timelines which impact timing of purchases by target customers. New products tend to have a longer and more unpredictable revenue
ramp period. As a result of these factors, we have only limited ability to forecast the timing and type of initial sales. This, in turn, makes
it more difficult to forecast quarterly and annual financial performance.
We may not be able to maintain our competitive position against current and potential competitors, especially those with significantly
greater financial, technical, marketing, or other resources.
Several of our competitors and many potential competitors have longer operating histories and significantly greater financial, technical,
marketing, or other resources than we do. We encounter direct competition from both large and small e-learning companies and other
companies focused on workforce development management in the healthcare industry. We also face competition from larger survey
and research companies. Given the profile and growth of the healthcare industry and the growing need for education, training,
simulation, research, and information, it is likely that additional competitors will emerge. We believe we maintain a competitive
advantage against our competitors by offering a comprehensive array of products and services; however, our lack of market
diversification resulting from our concentration on the healthcare industry may make us susceptible to losing market share to our
competitors who also offer a complete e-learning solution to a cross-section of industries. These companies may be able to respond
more quickly than we can to new or changing opportunities, technologies, standards or customer requirements. Further, most of our
customer agreements are for terms ranging from one to four or five years, with no obligation to renew. The short terms of these
agreements may enable customers to more easily shift to one of our competitors.
The failure to maintain and strengthen our relationships with strategic partners or significant changes in the terms of the agreements
we have with them may have an adverse impact on our ability to successfully market our products and services.
We have entered into contracts with strategic partners, including content, technology, and retail channel vendors. Our ability to increase
the sales of our products and services depends in part upon maintaining and strengthening relationships with these current and future
strategic partners. Most of these contracts are on a non-exclusive basis. Certain strategic partners may offer products and services from
multiple distinct companies, including, in some instances, products or services which may compete with our products and services.
Moreover, under contracts with some of our strategic partners, we may be bound by provisions that restrict our ability to market and
sell our products and services to certain potential customers. The success of these contractual arrangements will depend in part upon
the strategic partners’ own competitive, marketing, and strategic considerations, including the relative advantages for such strategic
partners in using alternative products being developed and marketed by them or our competitors, rather than our products and services.
We cannot guarantee that we will be able to maintain and strengthen our relationships with strategic partners, that we will be successful
in effectively integrating such partners’ products and technology into our own, or that such relationships will be successful in generating
additional revenue. If any of these strategic partners have negative experiences with our products and services, or seek to amend the
financial or other terms of the contracts we have with them, we may need to increase our organizational focus on the types of services
and solutions they sell and alter our development, integration, and/or distribution strategies, which may divert our planned efforts and
resources from other projects.
Lastly, we could be subject to claims and liability, as a result of the activities, products, or services of these strategic partners, and/or
our acts or omissions with regard to these strategic partners. Even if these claims do not result in liability to us, investigating and
defending these claims could be expensive, time-consuming and result in suspension of or interference with certain offerings to our
clients and/or adverse publicity that could harm our business.
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We may not be able to retain proper distribution rights from our content partners, and this could affect projected growth in
courseware subscription revenue.
Most of our agreements with content providers are for initial terms of two to three years. The content partners may choose not to renew
their agreements with us or may terminate the agreements early if we do not fulfill our contractual obligations. If a significant number
of our content providers terminate or fail to renew their agreements with us on acceptable terms, it could result in a reduction in the
number of courses we are able to distribute, causing decreased revenues. Most of our agreements with our content partners are non-
exclusive, and our competitors offer, or could offer, training and continuing education content that is similar to or the same as ours. If
publishers and authors, including our current content partners, offer information to users or our competitors on more favorable terms
than those offered to us, or increase our license fees, our competitive position and our profit margins and prospects could be harmed. In
addition, the failure by our content partners to deliver high-quality content and to revise their content in response to user demand and
evolving healthcare advances and trends could result in customer dissatisfaction and inhibit our ability to attract and retain subscribers
of our courseware offerings.
We may not be able to develop new products and services, or enhancements to our existing products and services, or be able to
achieve widespread acceptance of new products, services or features, or keep pace with technological developments.
Our growth strategy depends in part on our ability to generate revenue growth through sales to new customers as well as increasing
sales of additional courseware subscriptions and other products and services to existing customers. Our identification of additional
features, content, products and services may not result in timely development of complementary products. In addition, the success of
certain new products and services may be dependent on continued growth in our base of SaaS-based customers and we are not able to
accurately predict the volume or speed with which existing and new customers will adopt such new products and services. Because
healthcare training continues to change and evolve, we may be unable to accurately predict and develop new products, features, content
and other products to address the needs of the healthcare industry. Further, the new products, services and enhancements we develop
may introduce significant defects into or otherwise negatively impact our core software platform. While all new products and services
are subject to testing and quality control, all software and software-based services are subject to errors and malfunctions. If we release
new products, services and/or enhancements with bugs, defects or errors or that cause bugs, defects or errors in existing products, it
could result in lost revenues, reduced ability to meet contractual obligations and would be detrimental to our business and reputation.
If new products, features, or content are not accepted or integrated by new or existing customers, we may not be able to recover the cost
of this development and our financial performance will be harmed. Continued growth of our SaaS-based customer population is
dependent on our ability to continue to provide relevant products and services in a timely manner. The success of our business will
depend on our ability to continue providing our products and services as well as enhancing our courseware, product and service offerings
that address the needs of healthcare organizations.
We may be unable to continue to license our third party software, on which a portion of our product and service offerings rely, or
we may experience errors in this software, which could increase our costs and decrease our revenue.
We use technology components in some of our products that have been licensed from third parties. Future licenses to these technologies
may not be available to us on commercially reasonable terms, or at all. The loss of or inability to obtain or maintain any of these licenses
could result in delays in the introduction of new products and services or could force us to discontinue offering portions of our workforce
development or research/patient experience solutions until equivalent technology, if available, is identified, licensed and integrated.
The operation of our products would be impaired if errors occur in third party technology or content that we incorporate, and we may
incur additional costs to repair or replace the defective technology or content. It may be difficult for us to correct any errors in third
party products because the products are not within our control. Accordingly, our revenue could decrease and our costs could increase
in the event of any errors in this technology. Furthermore, we may become subject to legal claims related to licensed technology based
on product liability, infringement of intellectual property or other legal theories. Even if these claims do not result in liability to us,
investigating and defending these claims could be expensive, time-consuming and result in suspension of or interference with certain
offerings to our clients and/or adverse publicity that could harm our business.
Financial Risks
A significant portion of our revenue is generated from a relatively small number of customers.
We derive a substantial portion of our revenues from a relatively small number of customers. A termination of our agreements with any
of our significant customers or a failure of these customers to renew their contracts on favorable terms, or at all, could have a material
adverse effect on our business.
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A significant portion of our business is subject to renewal each year. Therefore, renewals have a significant impact on our revenue
and operating results.
For the year ended December 31, 2014, approximately 76% of our net revenue was derived from our subscription-based solution
products. Our subscription-based customers have no obligation to renew their subscriptions for our products or services after the
expiration of the subscription agreement, and in fact, some customers have elected not to renew their subscription. In addition, our
customers may renew at a lower pricing or activity level. Our customers’ renewals may decline or fluctuate as a result of a number of
factors, including but not limited to their dissatisfaction with our service, a dissipation or cessation of their need for one or more of our
products or services, pricing or competitive product offerings. If we are unable to renew a substantial portion of the contracts that are
up for renewal or maintain our pricing, our revenue could be adversely affected, which would have a material adverse effect on our
results of operations and financial position. For example, the requirement mandated by CMS for healthcare organizations to transition
to the ICD-10 coding system by October 2015 has generated significant demand for our ICD-10 training courseware over the past two
years. Subscriptions of ICD-10 training courseware positively influenced the Company’s revenue and operating income during 2013
and 2014, and are expected to do the same during 2015. As ICD-10 training subscriptions begin to expire during 2015 and 2016,
customers may choose not to renew their subscriptions on similar terms or at all, which could result in a revenue decline in 2015
compared to 2014. HealthStream Research/Patient Experience Solutions product and service contracts typically range from one to three
years in length, and customers are not obligated to renew their contract with us after their contract expires. If our customers do not
renew their arrangements for our services, or if their activity levels decline, our revenue may decline and our business will suffer.
We may be unable to accurately predict the timing of revenue recognition from sales activity as it is often dependent on achieving
certain events or performance milestones, and this inability could impact our operating results.
Our ability to recognize revenue is dependent upon several factors including the transfer of customer-specific information such as
unique subscriber IDs, which are required for us to implement customers on our SaaS-based platform and certain platform applications.
Accordingly, if customers do not provide us with the specified information in a timely manner, our ability to recognize revenue will be
delayed, which could adversely impact our operating results. In addition, implementation completion and acceptance of our SaaS-based
platform and certain platform applications by our customers must be achieved, survey responses must be received and tabulated, and
delivery of courseware is required in connection with subscription-based products for us to recognize revenue.
Because we recognize revenue from subscriptions for our products and services over the term of the subscription period, downturns
or upturns in sales may not be immediately reflected in our operating results.
We recognize approximately 76% of our revenue from customers monthly over the terms of their subscription agreements, which have
initial contract terms ranging from one to five years. As a result, much of the revenue we report in each quarter is related to subscription
agreements entered into during previous quarters. Consequently, a decline in new or renewed subscription agreements in any one quarter
will not necessarily be fully reflected in the revenue in that quarter and will negatively affect our revenue in future quarters. In addition,
we may be unable to adjust our cost structure to reflect this reduced revenue. Accordingly, the effect of significant downturns in sales
and market acceptance of our products and services may not be fully reflected in our results of operations until future periods.
Additionally, our subscription model also makes it difficult for us to rapidly increase our revenue through additional sales in any period,
as revenue from new customers must be recognized over the applicable subscription term. Finally, the majority of costs associated with
our sales cycles are incurred up front before revenue recognition commences, and therefore periods of strong sales performance may
increase our costs in the near term negatively affecting our financial performance.
We may not be able to meet our strategic business objectives unless we obtain additional financing, which may not be available to
us on favorable terms, or at all.
We expect our current cash and investment balances, revolving credit facility, and cash flows from operations to be sufficient to meet
our cash requirements through at least 2015. However, we may need to raise additional funds in order to:
• develop new, or enhance existing, services or products;
• respond to competitive pressures;
• finance working capital requirements;
• acquire complementary businesses, technology, content or products; or
• otherwise effectively execute our growth strategy.
At December 31, 2014, we had approximately $121.0 million in cash, cash equivalents, and marketable securities. We also have up to
$50.0 million of availability under a revolving credit facility, subject to certain covenants, which expires in November 2017. We expect
to incur between $11.0 and $14.0 million of capital expenditures, software development and content purchases during 2015. On
February 12, 2015, we entered into a definitive agreement to acquire all of the stock of HealthLine Systems, Inc. (HealthLine Systems)
13
for $88.0 million in cash, for which the closing is expected to occur during the first quarter of 2015. We expect to use both cash and
debt to fund the acquisition of HealthLine Systems. We actively review possible business acquisitions to complement or enhance our
products and services. We may not have adequate cash and investments or availability under our revolving credit facility to consummate
one or more of these acquisitions. We cannot assure you that if we need additional financing that it will be available on terms favorable
to us, or at all. If adequate funds are not available or are not available on acceptable terms, our ability to fund expansion, take advantage
of available opportunities, develop or enhance services or products or otherwise respond to competitive pressures would be significantly
limited. If we raise additional funds by issuing equity or convertible debt securities, the percentage ownership of our existing
shareholders may be reduced.
We have significant goodwill and identifiable intangible assets recorded on our balance sheet that may be subject to impairment
losses that would reduce our reported assets and earnings.
As of December 31, 2014, our balance sheet included goodwill of $41.9 million and identifiable intangible assets of $14.8 million.
There are inherent uncertainties in the estimates, judgments and assumptions used in assessing recoverability of goodwill and intangible
assets. Economic, legal, regulatory, competitive, reputational, contractual, and other factors could result in future declines in the
operating results of our business units or market value declines that do not support the carrying value of goodwill and identifiable
intangible assets. If the value of our goodwill and/or intangible assets is impaired, accounting rules require us to reduce their carrying
value and report an impairment charge, which would reduce our reported assets and earnings for the period in which an impairment is
recognized.
The current uncertain economic environment may have a negative impact on our customers and us which could have a significant
impact on our revenue, operating results and financial condition.
It is difficult to predict the full magnitude and duration of the current uncertain economic environment and its related impact on our
customers, suppliers and our company. For example, our customers may experience fluctuations or declines in their business and as a
consequence, some customers may choose to invest less in information technology assets for their business which, in turn, could have
an impact on us. The potential negative effects on us include, but are not limited to, reductions in our renewal and revenue growth rates,
shorter contract terms, pricing pressures, and delays in payments from customers that increase our accounts receivable resulting in a
deterioration of our cash flow and working capital position. We continue to monitor general economic conditions, however, and
depending on the severity and/or duration of any economic downturn, these circumstances could have a material adverse effect on our
revenue, results from operations and financial condition.
We may not be able to demonstrate compliance with Sarbanes-Oxley Section 404 in a timely manner, and the correction of any
deficiencies identified during upcoming annual audits may be costly and could harm our business.
Sarbanes-Oxley Section 404 requires our management to report on, and requires our independent public accounting firm to attest to,
the effectiveness of our internal controls over financial reporting. The rules governing the standards to be met are complex and will
require significant process review, documentation and testing, as well as possible remediation efforts for any identified deficiencies.
This process of review, documentation, testing and remediation will result in increased expenses and require significant attention from
management and other internal and external resources. Any material weaknesses identified during this process may preclude us from
asserting the effectiveness of our internal controls. This may negatively affect our stock price if we cannot effectively remediate the
issues identified in a timely manner.
Changes in generally accepted accounting principles (GAAP) and other accounting regulations and interpretations could require
us to delay recognition of revenue and/or accelerate the recognition of expenses, resulting in lower earnings.
While we believe we correctly account for and recognize revenue and expenses, any changes in GAAP or other accounting regulations
and interpretations concerning revenue and expense recognition could decrease our revenue or increase our expenses. Changes to
regulations concerning revenue recognition could require us to alter our current revenue accounting practices and cause us to either
defer revenue into a future period, or to recognize lower revenue in a current period. Likewise, changes to regulations concerning
expense recognition could require us to alter our current expense accounting practices and cause us to defer recognition of expense into
a future period, or to recognize increased expenses in a current period. Changes to either revenue recognition or expense recognition
accounting practices could affect our financial performance.
Risks Related to Sales, Marketing and Competition
Our operating margins could be affected if our ongoing refinement to pricing models for our products and services is not accepted
by our customers and the market.
We continue to make changes in our pricing and our product and service offerings to increase revenue and to meet the needs of our
customers. We cannot predict whether our current pricing and products and services, or any ongoing refinements we make will be
accepted by our existing customer base or by prospective customers. If our customers and potential customers decide not to accept our
current or future pricing or product and service offerings, it could have a material adverse effect on our business.
14
Risks Related to Operations
We may be unable to adequately develop our systems, processes and support in a manner that will enable us to meet the demand for
our services.
We have provided our online products and services for over 15 years and continue to develop our ability to provide our solutions on
both a subscription and transactional basis over the Internet. Our future success will depend on our ability to effectively develop and
maintain the infrastructure, including procurement of additional hardware and software, and implement the services, including customer
support, necessary to meet the demand for our products and services. Our inability from time to time to successfully develop the
necessary systems and implement the necessary services on a timely basis has resulted in our customers experiencing some delays,
interruptions and/or errors in their service. Such delays or interruptions may cause customers to become dissatisfied with our service
and move to competing providers of traditional and online training and education services. If this happens, our revenue and reputation
could be adversely affected, which would have a material adverse effect on our financial condition.
Our business operations could be significantly disrupted if we lose members of, or fail to integrate, our management team.
Our future performance is substantially dependent on the continued services of our management team and our ability to retain and
motivate them. The loss of the services of any of our officers or senior managers could harm our business, as we may not be able to
find suitable replacements. We do not have employment agreements with any of our key personnel, other than our chief executive
officer, and we do not maintain any “key person” life insurance policies.
We may not be able to hire and retain a sufficient number of qualified employees and, as a result, we may not be able to effectively
execute our growth strategy or maintain the quality of our services.
Our future success will depend on our ability to attract, train, motivate, and retain other highly skilled technical, managerial, marketing,
customer support, and survey personnel. Competition for certain personnel is intense, especially for developers, web designers and sales
personnel, and we may be unable to successfully attract sufficiently qualified personnel. We have in the past and continue to experience
difficulty hiring qualified personnel in a timely manner for these positions. The pool of qualified technical personnel, in particular, is
limited in Nashville, Tennessee, where our headquarters are located. We operate an interviewing center located in Laurel, Maryland,
and will be opening a second interviewing center in Nashville, Tennessee during 2015. We may experience difficulty in maintaining
and recruiting qualified individuals to perform interviewing services. We will also need to maintain or increase the size of our staff to
support our anticipated growth, without compromising the quality of our offerings or customer service. Our inability to locate, hire,
integrate and retain qualified personnel in sufficient numbers may reduce the quality of our services and impair our ability to grow.
We may not be able to upgrade our hardware and software technology infrastructure quickly enough to effectively meet demand for
our services or our operational needs.
We must continue to obtain reasonably priced, commercially available hardware and operating software as well as continue to enhance
our software and systems to accommodate the increased use of our platform, the increased courseware and content in our library, and
the resulting increase in operational demands on our business. Decisions about hardware and software enhancements are based in part
on estimated forecasts of the growth in demand for our services. This growth in demand for our services is difficult to forecast and the
potential audience for our services is widespread and dynamic. If we are unable to increase the data storage and processing capacity of
our systems at least as fast as the growth in demand, our customers may encounter delays or disruptions in their service. Unscheduled
downtime could harm our business and also could discourage current and potential customers from using or continuing to use our
services and reduce future revenue. If we are unable to acquire, update, or enhance our technology infrastructure and systems quickly
enough to effectively meet increased operational demands on our business, that may also have a material adverse effect on our financial
condition.
Our network infrastructure and computer systems and software may fail.
An unexpected event (including but not limited to a telecommunications failure, fire, earthquake, or other catastrophic loss) at our
Internet service providers’ facilities or at our on-site data facility could cause the loss of critical data and prevent us from offering our
products and services for an unknown period of time. System downtime could negatively affect our reputation and ability to sell our
products and services and may expose us to significant third-party claims. Our business interruption insurance may not adequately
compensate us for losses that may occur. In addition, we rely on third parties to securely store our archived data, house our web server
and network systems and connect us to the Internet. While our service providers have planned for certain contingencies, the failure by
any of these third parties to provide these services satisfactorily and our inability to find suitable replacements would impair our ability
to access archives and operate our systems and software, and our customers may encounter delays. Such disruptions could harm our
reputation and cause customers to become dissatisfied and possibly take their business to a competing provider, which would adversely
affect our revenues.
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We may lose users and lose revenue if our security measures fail.
If the security measures that we use to protect customer or personal information are ineffective, we may lose users of our services,
which could reduce our revenue, tarnish our reputation, and subject us to significant liability. We rely on security and authentication
technology licensed from third parties. With this technology, we perform real-time credit card authorization and verification, as well as
the encryption of other selected secure customer data. We cannot predict whether these security measures could be circumvented by
new technological developments. Further, the audit processes and controls used within our production platforms may not be sufficient
to identify and prevent errors or deliberate misuse. In addition, our software, databases and servers may be vulnerable to computer
viruses, physical or electronic attacks and similar disruptions. We may need to spend significant resources to protect against security
breaches or to alleviate problems caused by any breaches. We cannot assure that we can prevent all security breaches.
A cyber security incident could result in a loss of confidential data, give rise to remediation and other expenses, expose us to liability
under HIPAA, consumer protection laws, or other common law theories, subject us to litigation and federal and state governmental
inquiries, damage our reputation, and otherwise be disruptive to our business.
We collect and store sensitive information, including intellectual property and personally identifiable information, on our networks.
The secure maintenance of this information is critical to our business operations. We have implemented multiple layers of security
measures to protect this confidential data through technology, processes, and our people; we utilize current security technologies; and
our defenses are monitored and routinely tested internally and by external parties. Despite these efforts, threats from malicious persons
and groups, new vulnerabilities, and advanced new attacks against information systems create risk of cyber security incidents. There
can be no assurance that we will not be subject to cyber security incidents that bypass our security measures, result in loss of personal
health information or other data subject to privacy laws or disrupt our information systems or business. As a result, cyber security and
the continued development and enhancement of our controls, processes and practices designed to protect our information systems from
attack, damage or unauthorized access remain a priority for us. As cyber threats continue to evolve, we may be required to expend
significant additional resources to continue to modify or enhance our protective measures or to investigate and remediate any cyber
security vulnerabilities. The occurrence of any of these events could result in interruptions, delays, the loss, access, misappropriation,
disclosure or corruption of data, liability under privacy, security and consumer protection laws or litigation under these or other laws,
including common law theories, and subject us to federal and state governmental inquiries, any of which could have a material adverse
effect on our financial position and results of operations and harm our business reputation.
We may experience errors or omissions in our software products that (i) deliver provider credentialing, privileging and payer
enrollment services for our hospitals and medical practice customers and (ii) administer and report on hospital performance, and
these errors could result in action taken against us that could harm our business.
Hospitals and medical practices use our credentialing, privileging, and payer enrollment software to manage, validate and maintain their
providers’ credentials and authorization to practice in a particular facility, and to maintain authorization to perform care covered by
insurance providers. If errors or omissions occur that inaccurately validate or invalidate the credentials of a provider, or improperly
deny or authorize a provider to practice in a hospital or medical practice, these errors or omissions could result in litigation brought
against us either by our hospital and medical practice customers, or by the provider. For example, an important element in a malpractice
case brought against a hospital or other provider would often be the validation of proper credentialing for the provider, and any errors
or omissions in our products that provide these services could subject us to claims. Further, a list of providers’ privileges are made
available to the general public by hospitals and medical practices, and errors in credentialing and privileging may result in damage to
that hospital’s or medical practice’s reputation.
Certain survey data collected and reported by us, such as the survey data included as part of our CAHPS® Hospital survey is used by
CMS to determine, in part, the amount of reimbursement payments to hospitals, and any errors in data collection, survey sampling, or
statistical reporting could result in reduced reimbursements to our hospital customers if we are unable to correct these errors, and this
could, in turn, result in litigation against us. Further, this survey data reported to CMS is then published by CMS to the general public,
and any errors we experience that result in incorrect scoring on our hospital customer may result in damage to that hospital’s reputation,
and the hospital may in turn bring litigation against us.
We may be required to indemnify against such claims, and defending against any such claims could be costly, time consuming and
could negatively affect our business.
16
Risks Related to Government Regulation, Content and Intellectual Property
Government regulation may subject us to liability or require us to change the way we do business.
The laws and regulations that govern our business change rapidly. Evolving areas of law that are relevant to our business include privacy
and security laws, proposed encryption laws, content regulation, information security accountability regulation, sales and use tax laws
and regulations and attempts to regulate activities on the Internet. In addition to being directly subject to certain requirements of the
HIPAA privacy and security regulations, we are required through contracts with our customers known as “business associate
agreements” to protect the privacy and security of certain personal and health related information. The rapidly evolving and uncertain
regulatory environment could require us to change how we do business or incur additional costs. Further, we cannot predict how
changes to these laws and regulations might affect our business. Failure to comply with applicable laws and regulations could subject
us to civil and criminal penalties, subject us to contractual penalties, including termination of our customer agreements, damage our
reputation and have a detrimental impact on our business.
We may not be able to maintain our certification to conduct CMS mandated surveys, and this could adversely affect our business.
Our survey product offerings include providing survey services to assist customers in their compliance with CMS regulations. We are
currently designated by CMS as a certified vendor to offer CAHPS® Hospital Surveys and CAHPS® Home Health Care Surveys,
including data collection and submission services. If we are unable to maintain these certifications, or secure certifications for future
CMS mandated surveys, we would not be able to administer these survey instruments for our customers and our business may suffer.
Any reduction or change in the regulation of continuing education and training in the healthcare industry may adversely affect our
business.
Our business model is dependent in part on required training and continuing education for healthcare professionals and other healthcare
workers resulting from regulations of state and federal agencies, state licensing boards and professional organizations. Any change in
these regulations that reduce the requirements for continuing education and training for the healthcare industry could harm our business.
In addition, a portion of our business with pharmaceutical and medical device manufacturers and hospitals is predicated on our ability
to maintain accreditation status with organizations such as the ACCME, ANCC, and ACPE. The failure to maintain status as an
accredited provider could have a detrimental effect on our business.
We may be liable to third parties for content that is available from our online library.
We may be liable to third parties for the content in our online library if the text, graphics, software or other content in our library violates
copyright, trademark, or other intellectual property rights, our content partners violate their contractual obligations to others by
providing content to our library, or the content does not conform to accepted standards of care in the healthcare profession. We attempt
to minimize these types of liabilities by requiring representations and warranties relating to our content partners’ ownership of the rights
to distribute as well as the accuracy of their content. We also take necessary measures to review this content ourselves. Although our
agreements with our content partners in most instances contain provisions providing for indemnification by the content providers in the
event of inaccurate content, our content partners may not have the financial resources to meet this obligation. Alleged liability could
harm our business by damaging our reputation, requiring us to incur legal costs in defense, exposing us to awards of damages and costs,
and diverting management’s attention away from our business.
Protection of certain intellectual property may be difficult and costly, and our inability to protect our intellectual property could
reduce the value of our products and services.
Despite our efforts to protect our intellectual proprietary rights, a third party could, without authorization, copy or otherwise
misappropriate our content, information from our databases, or other intellectual property. Our agreements with employees, consultants
and others who participate in development activities could be breached and result in our trade secrets becoming known, or our trade
secrets and other intellectual property could be independently developed by competitors. We may not have adequate remedies for such
breaches or protections against such competitor developments. In addition, the laws of some foreign countries do not protect our
proprietary rights to the same extent as the laws of the United States, and effective intellectual property protection may not be available
in those jurisdictions. We currently own several applications and registrations for trademarks and domain names in the United States
and other countries as well as certain common law trademarks and service marks. The current system for registering, allocating and
managing domain names has been the subject of litigation and proposed regulatory reform. Additionally, legislative proposals have
been made by the federal government that would afford broad protection to owners of databases of information, such as stock quotes.
This protection of databases already exists in the European Union.
Our business could be harmed if unauthorized parties infringe upon or misappropriate our intellectual property, proprietary systems,
content, platform, services or other information. Our efforts to protect our intellectual property through copyright, trademarks and other
controls may not be adequate. For instance, we may not be able to secure trademark or service mark registrations for marks in the United
States or in foreign countries, or to secure patents for our proprietary products and services, and even if we are successful in obtaining
patent and/or trademark registrations, these registrations may be opposed or invalidated by a third party.
17
There has been substantial litigation in the computer and online industries regarding intellectual property assets, particularly patents.
Third parties may claim infringement by us with respect to current and future products, trademarks or other proprietary rights, and we
may counterclaim against such third parties in such actions. Any such claims or counterclaims could be time-consuming, result in costly
litigation, divert management’s attention, cause product release delays, require us to redesign our products, restrict our use of the
intellectual property subject to such claim, or require us to enter into royalty or licensing agreements, any of which could have a material
adverse effect upon our business, financial condition and operating results. Such royalty and licensing agreements may not be available
on terms acceptable to us, if at all.
We may be liable for infringing the intellectual property rights of others.
Our competitors may develop similar intellectual property, duplicate our products and/or services, or design around any patents or other
intellectual property rights we hold. In the future, litigation may be necessary to enforce our intellectual property rights or to determine
the validity and scope of the patents, intellectual property or other proprietary rights of third parties, which could be time consuming
and costly and have an adverse effect on our business and financial condition. Intellectual property infringement claims could be made
against us, especially as the number of our competitors grows. These claims, even if not meritorious, could be expensive and divert our
attention from operating our company and result in a temporary inability to use the intellectual property subject to such claim. In
addition, if we and/or our affiliates and customers become liable to third parties for infringing their intellectual property rights, we could
be required to pay a substantial damage award and develop comparable non-infringing intellectual property, to obtain a license, or to
cease providing the content or services that contain the infringing intellectual property. We may be unable to develop non-infringing
intellectual property or obtain a license on commercially reasonable terms, if at all.
Item 1B. Unresolved Staff Comments
None.
Item 2. Properties
Our principal office is located in Nashville, Tennessee, which is primarily used to support our workforce development operations and
corporate functions. Our lease for approximately 73,000 square feet at this location expires in April 2017. The lease provides for a two-year
renewal option with rates increasing during the renewal period. We also lease other facilities in Laurel, Maryland; Nashville, Tennessee;
Jericho, New York; Brentwood, Tennessee; and Pensacola, Florida. The other facilities in Laurel, Maryland and Nashville, Tennessee are
used to support our survey operations, while the other leased locations are satellite offices for acquired businesses.
Item 3. Legal Proceedings
None.
Item 4. Mine Safety Disclosures
Not applicable.
PART II
Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Our common stock is traded on the NASDAQ Global Select Market under the symbol “HSTM”. Our common stock began trading on the
NASDAQ National Market on April 14, 2000.
The following table sets forth, for each quarter of the two most recent years, the high and low closing prices per share of our common stock
as reported on the NASDAQ Global Select Market:
First Quarter ......................................................................................................
Second Quarter .................................................................................................
Third Quarter ....................................................................................................
Fourth Quarter ..................................................................................................
Common Stock Price
2014
High
$ 34.43
27.10
27.14
31.95
Low
$ 26.49
21.02
21.80
23.38
2013
High
$ 25.23
27.75
37.88
39.46
Low
$ 20.59
20.04
26.03
30.21
As of February 23, 2015, there were 90 registered holders and 5,517beneficial holders of our common stock. Because many of such shares
are held by brokers and other institutions on behalf of shareholders, we are unable to estimate the total number of shareholders represented
by these record holders.
18
DIVIDEND POLICY
We have never declared or paid any cash dividends on our common stock, and we do not anticipate paying cash dividends in the foreseeable
future. We intend to retain earnings for use in the operation of our business.
See the table labeled “Securities Authorized for Issuance Under Equity Compensation Plans” to be contained in our 2015 Proxy Statement,
incorporated by reference in Part III, Item 12 of this Annual Report on Form 10-K.
STOCK PERFORMANCE GRAPH
The graph below compares the cumulative total shareholder return on our common stock since December 31, 2009, with the cumulative
total return of companies on the NASDAQ Composite Index and the NASDAQ Computer & Data Processing Index over the same period
(assuming the investment of $100 in our common stock, the NASDAQ Composite Index and the NASDAQ Computer & Data Processing
Index on December 31, 2009 (for our stock and the indices) and reinvestment of all dividends).
COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN (1)
Among HealthStream, Inc., The NASDAQ Composite Index
And The NASDAQ Computer & Data Processing Index
$1,000
$800
$600
$400
$200
$0
HealthStream,(cid:3)Inc.
NASDAQ(cid:3)Composite
NASDAQ(cid:3)Computer(cid:3)&(cid:3)Data
Processing
12/09
100.00
100.00
12/10
203.54
117.61
12/11
467.09
118.70
12/12
615.44
139.00
12/13
825.97
196.83
12/14
746.33
223.74
100.00
106.82
107.70
115.65
176.58
202.04
HealthStream,(cid:3)Inc.
NASDAQ(cid:3)Composite
NASDAQ(cid:3)Computer(cid:3)&(cid:3)Data(cid:3)Processing
(1) $100 invested on 12/31/2009 in stock or index-including reinvestment of dividends. Fiscal year ending December 31.
RECENT SALES OF UNREGISTERED SECURITIES
None.
ISSUER PURCHASES OF EQUITY SECURITIES
None.
19
Item 6. Selected Financial Data(cid:3)
The selected statement of income and balance sheet data for the past five years are derived from our audited consolidated financial
statements. You should read the following selected financial data in conjunction with our consolidated financial statements and the notes
to those statements and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” located elsewhere in
this report.
HealthStream acquired DCI on June 29, 2012, Sy.Med on October 19, 2012, BLG on September 9, 2013, and HCCS on March 3, 2014.
The results of operations for these acquired companies are included within our consolidated statement of income data effective from the
respective date of acquisition. Revenues may be subject to fluctuations as discussed further in “Management’s Discussion and Analysis of
Financial Condition and Results of Operations” located elsewhere in this report. As a result of these factors, the annual results presented
below are not comparable. The operating results for any single year are not necessarily indicative of the results to be expected in the future.
Year Ended December 31,
(in thousands, except per share data)
2012
2011
2013
2010
2014
STATEMENT OF INCOME DATA:
Revenues, net ................................................................................
Total operating costs and expenses ..........................................
Income from operations ............................................................
$ 170,690
154,315
16,375
$ 132,274
117,608
14,666
$ 103,732
90,273
13,459
$ 82,066
70,728
11,338
$ 65,754
58,695
7,059
Net income ................................................................................
$ 10,394
Net income per share – basic ...........................................
Net income per share – diluted .........................................
Weighted average shares of common stock outstanding – basic
Weighted average shares of common stock outstanding – diluted
$
$
0.38
0.37
27,570
28,023
$
$
$
8,418
0.31
0.30
26,853
27,663
$
$
$
7,645
0.29
0.28
26,128
27,507
$
$
$
6,944
0.31
0.29
22,445
23,748
$
$
$
4,154
0.19
0.18
21,767
22,488
BALANCE SHEET DATA:
Cash and cash equivalents ........................................................
Marketable securities – short and long term ............................
Accounts receivable, net ..........................................................
Goodwill and intangible assets ................................................
Working capital .......................................................................
Total assets ...............................................................................
Deferred revenue – current and noncurrent ............................
Shareholders’ equity ..............................................................
$ 81,995
38,973
33,167
56,709
97,352
257,262
57,373
167,859
$ 59,537
48,659
25,314
44,616
90,912
212,594
38,168
149,433
$ 41,365
51,952
15,348
38,104
83,259
174,528
23,146
132,196
$ 76,904
12,548
16,014
23,104
78,631
154,237
22,759
120,915
$ 17,868
5,703
11,069
23,991
19,524
82,011
16,740
56,791
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
The following discussion of the financial condition and results of operations of HealthStream should be read in conjunction with “Selected
Financial Data” and HealthStream’s Consolidated Financial Statements and related notes thereto included elsewhere in this report. This
discussion contains forward-looking statements that involve risks and uncertainties. HealthStream’s actual results may differ significantly
from the results discussed and those anticipated in these forward-looking statements as a result of many factors, including but not limited
to those described under “Risk Factors” and elsewhere in this report.
OVERVIEW
We provide subscription-based workforce development and research/patient experience solutions for healthcare organizations—all
designed to assess and develop the people that deliver patient care which, in turn, supports the improvement of business and clinical
outcomes. Our workforce development products are used by healthcare organizations to meet a broad range of their training, certification,
competency assessment, performance appraisal, and development needs, while our research/patient experience products provide our
customers information about patients’ experiences and how to improve them, workforce engagement, physician relations, and community
perceptions of their services. HealthStream’s customers include healthcare organizations, pharmaceutical and medical device companies,
and other participants in the healthcare industry.
20
Revenues for the year ended December 31, 2014 were approximately $170.7 million compared to $132.3 million for the year ended
December 31, 2013, an increase of 29.0%. Operating income increased by 11.7% to $16.4 million for 2014, compared to $14.7 million for
2013. Net income increased by 23.4% to $10.4 million for 2014, compared to $8.4 million for 2013. Earnings per share (EPS) were
$0.37 per share (diluted) for 2014 compared to $0.30 per share (diluted) for 2013. Revenues from HealthStream Workforce Development
Solutions grew by 33.7%, or $35.0 million, and revenues from HealthStream Research/Patient Experience Solutions grew by 12.1%, or
$3.4 million. We had approximately 4.28 million total subscribers, of which approximately 4.15 million were fully implemented subscribers
on our SaaS-based platform at December 31, 2014. Annualized revenue per implemented subscriber increased to $34.43 per subscriber at
the end of 2014, up from $32.41 per subscriber at the end of 2013, representing a 6.2% increase. As of December 31, 2014 our cash and
investment balances approximated $121.0 million, and we maintained full availability under our $50.0 million revolving credit facility.
RECENT DEVELOPMENTS
On February 12, 2015, the Company entered into a definitive agreement to acquire all of the stock of HealthLine Systems, Inc., a San
Diego, California based company that specializes in healthcare credentialing, privileging, and quality management software services.
The acquisition of HealthLine Systems will enable the Company to provide a comprehensive, SaaS-based solution set for healthcare
provider credentialing, privileging, and enrollment in support of HealthStream’s approach to talent management for healthcare
organizations. The consideration to be paid for HealthLine Systems consists of approximately $88.0 million in cash, subject to a post-
closing working capital adjustment. The closing of the transaction is anticipated to occur in the first quarter of 2015 and is subject to
customary closing conditions, including the expiration or early termination of the waiting period applicable to the transaction under the
Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended.
Following the closing of the transaction, the Company intends to combine HealthLine Systems with its Sy.Med business. Both
HealthLine Systems and Sy.Med will continue to operate at their current locations in San Diego, California and Brentwood, Tennessee,
respectively. In addition, Michael Sousa, senior vice president of business development, has been selected to serve as President for this
business unit following the closing of the acquisition.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Revenue Recognition
We recognize revenues from our subscription-based workforce development products and courseware subscriptions based on a per person
subscription basis, and in some cases on a per license basis. Fees are based on the size of the facilities’ or organizations’ employee user
population and the service offerings to which they subscribe. Subscription-based revenue is recognized ratably over the service period of
the underlying contract. All other service revenues are recognized as the related services are performed or products are delivered.
Revenues derived from the license of installed software products are recognized upon shipment or installation of the software when vendor
specific objective evidence (VSOE) of fair value for the software license can be established. Software support and maintenance revenues
are recognized ratably over the term of the related agreement.
Revenues from research/patient experience services are recognized when survey results are delivered to customers via either Internet-
based reporting throughout the survey period or by providing final survey results once all services are complete. A significant portion
of revenues for survey and reporting services that are provided through the use of Internet-based reporting methodologies are recognized
using the proportional performance method, reflecting recognition throughout the service period which corresponds with the survey
cycle and reporting access by the customer, which typically ranges from one to five months. If survey results are delivered to the
customer after all services have been completed, then the corresponding revenues are recognized in full in the period such results are
provided to the customer. Coaching and consulting revenues are generally recognized using the proportional performance method as
these services are performed throughout the contract term. All other revenues are recognized as the related services are performed or
products are delivered to the customer. Revenues for these services can be subject to seasonal factors based on customers’ requirements
that can impact the timing, frequency, and volume of survey cycles.
Revenues from professional services include content maintenance, consulting, and implementation services. Fees are based on the time and
efforts involved, and revenue is recognized upon completion of performance milestones using the proportional performance method.
We offer training services for clients to facilitate integration of our SaaS-based products. Fees for training are based on the time and efforts
of the personnel involved. Basic online training is generally included in the initial contract; however, incremental training is fee based and
revenues are generally recognized upon completion of training services.
Accounting for Income Taxes
The Company accounts for income taxes using the asset and liability method, whereby deferred tax assets and liabilities are determined
based on the temporary differences between the financial statement and tax bases of assets and liabilities measured at tax rates that will be
in effect for the year in which the differences are expected to affect taxable income. Management periodically assesses the realizability of
its deferred tax assets, and to the extent that we believe a recovery is not likely, we establish a valuation allowance to reduce the deferred
tax asset to the amount we estimate will be recoverable. The Company maintains a valuation allowance of approximately $0.4 million for
the portion of its deferred tax assets that are not more likely than not expected to be realized.
21
Software Development Costs
Software development includes our costs to develop and maintain our products and applications, including our SaaS-based workforce
development platform products and our survey reporting applications. Once planning is completed and development begins, we capitalize
internal costs and payments to third parties associated with the development efforts where the life expectancy is greater than one year and
the anticipated cash flows are expected to exceed the cost of the related asset. During 2014 and 2013, we capitalized approximately $5.7
million and $4.3 million, respectively, for software development. Such amounts are included in the accompanying consolidated balance
sheets under the caption “capitalized software development.” We amortize capitalized software development costs over their expected life,
which is generally three to five years. Capitalized software development costs are subject to a periodic impairment review in accordance
with our impairment review policy.
In connection with software development, our significant estimates involve the assessment of the development period for new products, as
well as the expected useful life of underlying software or product created. Once capitalized, software development costs are subject to the
policies and estimates described below regarding goodwill, intangibles and other long-lived assets.
Goodwill, Intangibles and Other Long-lived Assets
The Company evaluates goodwill for impairment at the reporting unit level by assessing whether it is more likely than not that the fair
value of a reporting unit exceeds its carrying value. If this assessment concludes that is more likely than not that the fair value of a reporting
unit exceeds its carrying value, then goodwill is not considered impaired and no further impairment testing is required. Conversely, if the
assessment concludes that it is more likely than not that the fair value of a reporting unit is less than its carrying value, a goodwill impairment
test is performed to compare the fair value of the reporting unit to its carrying value. The Company determines fair value of the reporting
units using both income and market based models. Our models contain significant assumptions and accounting estimates about discount
rates, future cash flows and terminal values that could materially affect our operating results or financial position if they were to change
significantly in the future and could result in an impairment. We perform our goodwill impairment assessment whenever events or changes
in facts or circumstances indicate that impairment may exist and also during the fourth quarter each year. Intangible assets and other long-
lived assets are also reviewed for events or changes in facts and circumstances, both internally and externally, which may indicate an
impairment is present. We measure any impairment using observable market values or discounted future cash flows from the related long-
lived assets. The cash flow estimates and discount rates incorporate management’s best estimates, using appropriate and customary
assumptions and projections at the date of evaluation.
Allowance for Doubtful Accounts
We estimate the allowance for doubtful accounts using both a specific and non-specific identification method. Management’s evaluation
includes reviewing past due accounts on a case-by-case basis, and determining whether an account should be reserved, based on the facts
and circumstances surrounding each potentially uncollectible account. An allowance is also maintained for accounts not specifically
identified that may become uncollectible in the future. Uncollectible accounts are written-off in the period management believes it has
exhausted every opportunity to collect payment from the customer. Bad debt expense is recorded when events or circumstances indicate
an additional allowance is necessary based on our specific and non-specific identification approach. Our allowance for doubtful accounts
totaled approximately $331,000 as of December 31, 2014.
Stock Based Compensation
We recognize compensation expense using a fair-value based method for costs related to share based payments including stock options and
restricted share units. Measurement of such compensation expense requires significant estimation and assumptions; however, we believe
that the Black Scholes option pricing model we use for calculating the fair value of our stock based compensation plans provides a
reasonable measurement methodology using a framework that is widely adopted.
As of December 31, 2014, we had two stock incentive plans which qualified as stock based compensation plans. During the years ended
December 31, 2014, 2013, and 2012, we recorded approximately $1.6 million, $1.5 million, and $1.1 million of stock based compensation
expense, respectively. We have historically granted stock options or restricted share units to our management group on an annual basis, or
when new members of the management group begin their employment. We have historically granted stock options or restricted share units
to non-employee members of our board of directors in conjunction with our annual shareholders meeting, or as new members are added on
a pro rata basis based on the time elapsed since our annual shareholders’ meeting. We expect to continue providing equity based awards to
our management group and our board of directors for the foreseeable future. As of December 31, 2014, total future compensation cost
related to non-vested awards not yet recognized was approximately $2.7 million net of estimated forfeitures, with a weighted average
expense recognition period of 2.4 years. Future compensation expense recognition for new equity based award grants will vary depending
on the timing and size of new awards granted, changes in the market price or volatility of our common stock, changes in risk-free interest
rates, or if actual forfeitures vary significantly from our estimates.
RESULTS OF OPERATIONS
Revenues and Expense Components
The following descriptions of the components of revenues and expenses apply to the comparison of results of operations.
Revenues, net. Revenues for our HealthStream Workforce Development Solutions business segment primarily consist of the following
products and services: provision of services through our SaaS-based platform, authoring tools, a variety of courseware subscriptions,
22
competency and performance appraisal tools, implementation and consulting services, content development, online sales training courses
(RepDirect™), HospitalDirect®, SimVentures, and a variety of other educational activities to serve professionals that work within
healthcare organizations. HealthStream Workforce Development Solutions revenues also include products from the recent acquisitions of
DCI, Sy.Med, and HCCS. Revenues for our HealthStream Research/Patient Experience Solutions business segment consist of quality and
satisfaction surveys, data analyses of survey results, coaching/consulting services, and other research-based measurement tools focused on
patients, employees, physicians, and other members of the community.
Cost of Revenues (excluding depreciation and amortization). Cost of revenues (excluding depreciation and amortization) consists primarily
of salaries and employee benefits, stock based compensation, employee travel and lodging, materials, outsourced phone survey support,
contract labor, hosting costs, and other direct expenses associated with revenues, as well as royalties paid by us to content providers based
on a percentage of revenues. Personnel costs within cost of revenues are associated with individuals that facilitate product delivery, provide
services, conduct, process and manage phone and paper-based surveys, handle customer support calls or inquiries, manage the technology
infrastructure for our hosted applications, manage content and survey services, coordinate content maintenance services, and provide
training or implementation services.
Product Development. Product development consists primarily of salaries and employee benefits, contract labor, stock based compensation,
costs associated with the development of new software feature enhancements, new products, and costs associated with maintaining,
developing and operating our training, delivery and administration platforms. Personnel costs within product development include our
systems, application development, and quality assurance teams, product managers, and other personnel associated with software and
product development.
Sales and Marketing. Sales and marketing consists primarily of salaries, commissions and employee benefits, stock based compensation,
employee travel and lodging, advertising, trade shows, promotions, and related marketing costs. We host a national customer conference
in Nashville known as “Summit,” a portion of the costs of which are included in sales and marketing expenses. Personnel costs within sales
and marketing include our sales teams, relationship managers, and marketing personnel.
Other General and Administrative Expenses. Other general and administrative expenses consist primarily of salaries and employee benefits,
stock based compensation, employee travel and lodging, facility costs, office expenses, fees for professional services, business development
and acquisition related costs, and other operational expenses. Personnel costs within general and administrative expenses include
individuals associated with normal corporate functions (accounting, legal, business development, human resources, administrative, internal
information systems, and executive management) as well as personnel who maintain our accreditation status with various organizations.
Depreciation and Amortization. Depreciation and amortization consist of fixed asset depreciation, amortization of intangibles considered
to have definite lives, amortization of capitalized software development, and amortization of content development fees.
Other Income (Expense), Net. The primary component of other income is interest income related to interest earned on cash, cash equivalents
and investments in marketable securities. The primary component of other expense is interest expense related to our revolving credit facility.
In addition, the income or loss attributed to equity method investments is included in this category.
2014 Compared to 2013
Revenues, net. Revenues increased approximately $38.4 million, or 29.0%, to $170.7 million for 2014 from $132.3 million for 2013.
Revenues for 2014 consisted of $138.8 million, or 81% of total revenue, for HealthStream Workforce Development Solutions and $31.9
million, or 19% of total revenue, for HealthStream Research/Patient Experience Solutions. In 2013, revenues consisted of $103.8 million,
or 78% of total revenue, for HealthStream Workforce Development Solutions and $28.5 million, or 22% of total revenue, for HealthStream
Research/Patient Experience Solutions.
Revenues for HealthStream Workforce Development Solutions increased approximately $35.0 million, or 33.7%, over 2013. Revenues
from our subscription-based workforce development products increased by $34.3 million, or 36.1% over 2013 due to a higher number of
subscribers and more courseware consumption by subscribers, as well as revenue associated with the HCCS acquisition. Annualized
revenue per implemented subscriber increased by 6.2%, to $34.43 per subscriber at the end of 2014 compared to $32.41 per subscriber at
the end of 2013. Our implemented subscribers increased by 22.4% during 2014 to 4.15 million subscribers at the end of 2014 compared to
3.39 million subscribers at the end of 2013. Additionally, we had a 15.4% increase in total subscribers, with 4.28 million total subscribers
at December 31, 2014 compared to 3.71 million total subscribers at December 31, 2013. Revenues in 2014 were positively influenced by
courseware subscriptions associated with, among other products, ICD-10 readiness training. Revenues from ICD-10 readiness training
were approximately $28.4 million in 2014, compared to $13.9 million in 2013. Revenues from the HCCS acquisition, consummated on
March 3, 2014, were approximately $4.8 million during 2014.
Revenues for HealthStream Research/Patient Experience Solutions increased approximately $3.4 million or 12.1%, over 2013. Revenues
from Patient Insights™ surveys, our survey research product that generates recurring revenues, increased by $1.8 million, or 8.2%, over
2013, primarily due to growth in survey volumes over the prior year. Revenues from other surveys, which are conducted on annual or bi-
23
annual cycles, declined by $72,000, or 1.5%, compared to 2013. Revenues from the BLG acquisition, consummated on September 9, 2013,
were $2.9 million in 2014 compared to $1.2 million in 2013.
Cost of Revenues (excluding depreciation and amortization). Cost of revenues increased approximately $18.5 million, or 33.3%, to $74.1
million for 2014 from $55.6 million for 2013. Cost of revenues as a percentage of revenues was 43.4% of revenues for 2014 compared to
42.0% of revenues for 2013. Cost of revenues for HealthStream Workforce Development Solutions increased approximately $14.5 million
to $53.9 million and approximated 38.9% and 38.0% of revenues for HealthStream Workforce Development Solutions for 2014 and 2013,
respectively. The increase in both amount and as a percentage of revenues is primarily associated with increased royalties paid by us
resulting from growth in courseware subscription revenues and increased personnel expenses. Cost of revenues for HealthStream
Research/Patient Experience Solutions increased approximately $4.0 million to $20.2 million and approximated 63.3% and 56.7% of
revenues for HealthStream Research/Patient Experience Solutions for 2014 and 2013, respectively. The increase in both amount and as a
percentage of revenues is primarily the result of increased personnel costs from the BLG acquisition as well as additional costs associated
with the growth in patient survey volume over the prior year.
Product Development. Product development expenses increased approximately $4.7 million, or 40.0%, to $16.5 million for 2014 from
$11.8 million for 2013. Product development expenses as a percentage of revenues were 9.6% and 8.9% of revenues for 2014 and 2013,
respectively.
Product development expenses for HealthStream Workforce Development Solutions increased approximately $4.8 million and
approximated 10.9% and 9.9% of revenues for HealthStream Workforce Development for 2014 and 2013, respectively. The increase in
both amount and as a percentage of revenues is due to additional personnel expenses associated with new product development initiatives
for our subscription-based products. Product development expenses for HealthStream Research/Patient Experience Solutions decreased
approximately $137,000 and approximated 4.3% and 5.3% of revenues for HealthStream Research/Patient Experience Solutions in 2014
and 2013, respectively. The decrease in both amount and as a percentage of revenues is due to lower personnel expenses.
Sales and Marketing. Sales and marketing expenses, including personnel costs, increased approximately $5.8 million, or 24.2%, to $29.9
million for 2014 from $24.1 million for 2013. Sales and marketing expenses as a percentage of revenues were 17.5% and 18.2% of revenues
for 2014 and 2013, respectively.
Sales and marketing expenses for HealthStream Workforce Development Solutions increased approximately $5.0 million and
approximated 16.7% and 17.6% of revenues for HealthStream Workforce Development Solutions for 2014 and 2013, respectively. The
expense increase is primarily due to additional personnel and related expenses, increased commissions associated with higher sales
performance compared to the prior year, and increased marketing spending. Sales and marketing expenses for HealthStream
Research/Patient Experience Solutions increased approximately $768,000, and approximated 19.4% and 19.0% of revenues for
HealthStream Research/Patient Experience Solutions for 2014 and 2013, respectively. The increase in amount and as a percentage of
revenues is primarily due to additional personnel associated with the BLG acquisition and increased commissions associated with higher
sales performance compared to the prior year.
Other General and Administrative Expenses. Other general and administrative expenses increased approximately $4.6 million, or 24.9%,
to $22.9 million for 2014 from $18.3 million for 2013. Other general and administrative expenses as a percentage of revenues were 13.4%
and 13.9% of revenues for 2014 and 2013, respectively.
Other general and administrative expenses for HealthStream Workforce Development Solutions increased approximately $1.1 million over
the prior year period primarily due to the HCCS acquisition, additional personnel, and other support costs, while other general and
administrative expenses for HealthStream Research/Patient Experience Solutions increased approximately $543,000 compared to the prior
year period primarily due to the BLG acquisition. The unallocated corporate portion of other general and administrative expenses increased
approximately $3.0 million over the prior year period, primarily associated with additional personnel, professional fees, rent, and other
general expenses, as well as one-time expenses associated with the acquisition of HCCS. During 2014, we incurred approximately $762,000
of costs associated with both the completed acquisition of HCCS and other costs for evaluating potential transactions as part of our business
development initiatives.
Depreciation and Amortization. Depreciation and amortization increased approximately $3.1 million, or 39.2%, to $10.9 million for 2014
from $7.8 million for 2013. The increase primarily resulted from amortization of capitalized software development, amortization of
intangible assets, and depreciation expense associated with capital expenditures, including leasehold improvements to our Nashville,
Tennessee office space.
Other Income, Net. Other income, net was approximately $146,000 for 2014 compared to $176,000 for 2013. The decrease is attributable
to losses from equity method investments.
Income Tax Provision. The Company recorded a provision for income taxes of $6.1 million for 2014 compared to $6.4 million for 2013.
The Company’s effective tax rate was 37.1% for 2014 compared to 43.3% for 2013. The decrease in the effective tax rate resulted primarily
from the recognition of approximately $1.2 million in tax benefits associated with research and development tax credits during 2014.
24
Net Income. Net income increased approximately $2.0 million, or 23.4%, to $10.4 million for 2014 from $8.4 million for 2013. Earnings
per diluted share were $0.37 per share for 2014, compared to $0.30 per diluted share for 2013.
Adjusted EBITDA (which we define as net income before interest, income taxes, stock-based compensation, and depreciation and
amortization) increased by 20.6% to approximately $28.9 million for 2014 compared to $23.9 million for 2013. This improvement is
consistent with the factors mentioned above. See Reconciliation of Non-GAAP Financial Measures in Management’s Discussion and
Analysis of Financial Condition and Results of Operations for our reconciliation of this calculation to measures under US GAAP.
2013 Compared to 2012
Revenues, net. Revenues increased approximately $28.5 million, or 27.5%, to $132.3 million for 2013 from $103.7 million for 2012.
Revenues for 2013 consisted of $103.8 million, or 78% of total revenue, for HealthStream Workforce Development Solutions and $28.5
million, or 22% of total revenue, for HealthStream Research/Patient Experience Solutions. In 2012, revenues consisted of $78.6 million,
or 76% of total revenue, for HealthStream Workforce Development Solutions and $25.2 million, or 24% of total revenue, for HealthStream
Research/Patient Experience Solutions.
Revenues for HealthStream Workforce Development Solutions increased $25.3 million, or 32.1%, over 2012. Revenues from our
subscription-based workforce development products increased by $22.5 million, or 31.0% over 2012 due to a higher number of subscribers
and more courseware consumption by subscribers. Annualized revenue per implemented subscriber increased by 19.9%, to $32.41 per
subscriber at the end of 2013 compared to $27.04 per subscriber at the end of 2012. Our implemented subscribers increased by 15.4%
during 2013 to 3.39 million subscribers at the end of 2013 compared to 2.94 million subscribers at the end of 2012. Additionally, we had a
19.6% increase in total subscribers, with 3.71 million total subscribers at December 31, 2013 compared to 3.1 million total subscribers at
December 31, 2012. Revenues in 2013 were positively influenced by courseware subscriptions associated with, among other products,
ICD-10 readiness training. Revenues from ICD-10 readiness training were approximately $13.9 million in 2013, an increase of $11.5
million over 2012. Revenues from our credentialing software product, an installed solution, contributed $3.9 million during 2013, up $3.4
million over 2012.
Revenues for HealthStream Research/Patient Experience Solutions increased $3.3 million or 13.1%, over 2012. Revenues from Patient
Insights™ surveys, our survey research product that generates recurring revenues, increased by $2.5 million, or 12.8%, over the prior year,
primarily due to growth in survey volumes over the prior year. Revenues from other surveys, which are conducted on annual or bi-annual
cycles, declined by $449,000, or 8.3%, compared to the prior year due to fewer survey engagements. The financial results for Baptist
Leadership Group (BLG) have been included in the Company’s financial statements from the date of acquisition (September 9, 2013) and
are included in the HealthStream Research/Patient Experience Solutions segment. BLG revenues were approximately $1.2 million during
2013, and contributed to the revenue increase over 2012.
Cost of Revenues (excluding depreciation and amortization). Cost of revenues increased approximately $13.9 million, or 33.5%, to $55.6
million for 2013 from $41.7 million for 2012. Cost of revenues as a percentage of revenues was 42.0% of revenues for 2013 compared to
40.2% of revenues for 2012. Cost of revenues for HealthStream Workforce Development Solutions increased approximately $11.1 million
to $39.5 million and approximated 38.0% and 36.1% of revenues for HealthStream Workforce Development Solutions for 2013 and 2012,
respectively. The increase is primarily associated with increased royalties paid by us resulting from growth in courseware subscription
revenues and increased personnel expenses. Cost of revenues for HealthStream Research/Patient Experience Solutions increased
approximately $2.9 million to $16.1 million and approximated 56.7% and 52.7% of revenues for HealthStream Research/Patient Experience
Solutions for 2013 and 2012, respectively. The increase is primarily the result of additional costs associated with the growth in patient
survey volume over the prior year and increased personnel expenses, including costs associated with the acquisition of BLG during
September 2013.
Product Development. Product development expenses increased approximately $3.2 million, or 36.6%, to $11.8 million for 2013 from $8.6
million for 2012. Product development expenses as a percentage of revenues were 8.9% and 8.3% of revenues for 2013 and 2012,
respectively.
Product development expenses for HealthStream Workforce Development Solutions increased approximately $3.2 million and
approximated 9.9% and 9.0% of revenues for HealthStream Workforce Development for 2013 and 2012, respectively. The increase over
the prior year is due to additional personnel expenses associated with new development initiatives related to our platform products. Product
development expenses for HealthStream Research/Patient Experience Solutions decreased approximately $75,000 and approximated 5.3%
and 6.2% of revenues for HealthStream Research/Patient Experience Solutions in 2013 and 2012, respectively.
Sales and Marketing. Sales and marketing expenses, including personnel costs, increased approximately $4.2 million, or 20.9%, to $24.1
million for 2013 from $19.9 million for 2012. Sales and marketing expenses as a percentage of revenues were 18.2% and 19.2% of revenues
for 2013 and 2012, respectively.
Sales and marketing expenses for HealthStream Workforce Development Solutions increased approximately $4.3 million and
approximated 17.6% and 17.9% of revenues for HealthStream Workforce Development Solutions for 2013 and 2012, respectively. This
25
expense amount increase is primarily due to additional personnel and related expenses, increased commissions associated with higher sales
performance compared to the prior year period, and increased travel expenses. Sales and marketing expenses for HealthStream
Research/Patient Experience Solutions decreased approximately $4,000, and approximated 19.0% and 21.5% of revenues for HealthStream
Research/Patient Experience Solutions for 2013 and 2012, respectively.
Other General and Administrative Expenses. Other general and administrative expenses increased approximately $4.9 million, or 36.4%,
to $18.3 million for 2013 from $13.5 million for 2012. Other general and administrative expenses as a percentage of revenues were 13.9%
and 13.0% of revenues for 2013 and 2012, respectively.
Other general and administrative expenses for HealthStream Workforce Development Solutions increased approximately $1.0 million over
the prior year period primarily due to additional personnel, rent, and other support costs, while other general and administrative expenses
for HealthStream Research/Patient Experience Solutions increased approximately $200,000 compared to the prior year period primarily
due to additional personnel. The unallocated corporate portion of other general and administrative expenses increased approximately $3.7
million over the prior year period, primarily associated with additional personnel, professional fees, stock based compensation expense,
rent, taxes, and other general expenses, as well as one-time expenses associated with the acquisition of BLG. During 2013, we incurred
approximately $405,000 of costs associated with both the completed acquisition of BLG and other costs for evaluating potential transactions
as part of our business development initiatives.
Depreciation and Amortization. Depreciation and amortization increased approximately $1.2 million, or 17.9%, to $7.9 million for 2013
from $6.7 million for 2012. The increase primarily resulted from amortization of capitalized software development assets and amortization
of intangibles assets, as well as depreciation expense associated with leasehold improvements to our Nashville, Tennessee office space.
Other Income (Expense), Net. Other income (expense), net was approximately $176,000 for 2013 compared to $118,000 for 2012. The
improvement over the prior year period was associated with higher interest income from investments in marketable securities.
Income Tax Provision. The Company recorded a provision for income taxes of $6.4 million for 2013 compared to $5.9 million for 2012.
The Company’s effective tax rate was 43.3% for 2013 compared to 43.7% for 2012.
Net Income. Net income increased approximately $773,000, or 10.1%, to $8.4 million for 2013 from $7.6 million for 2012. Earnings per
diluted share were $0.30 per share for 2013, compared to $0.28 per diluted share for 2012.
Adjusted EBITDA (which we define as net income before interest, income taxes, stock-based compensation, and depreciation and
amortization) increased by 12.7% to approximately $23.9 million for 2013 compared to $21.2 million for 2012. This improvement is
consistent with the factors mentioned above. See Reconciliation of Non-GAAP Financial Measures in Management’s Discussion and
Analysis of Financial Condition and Results of Operations for our reconciliation of this calculation to measures under US GAAP.
Reconciliation of Non-GAAP Financial Measures
This report contains certain non-GAAP financial measures, including, non-GAAP net income, non-GAAP operating income, non-
GAAP revenue and adjusted EBITDA, which are used by management in analyzing the Company’s financial results and ongoing
operational performance. These non-GAAP financial measures should not be considered as a substitute for, or superior to, measures of
financial performance which are prepared in accordance with US GAAP and may be different from non-GAAP financial measures used
by other companies.
In order to better assess the Company’s financial results, management believes that adjusted EBITDA is an appropriate measure for
evaluating the operating performance of the Company because adjusted EBITDA reflects net income adjusted for non-cash and non-
operating items. Adjusted EBITDA is also used by many investors and securities analysts to assess the Company’s results from current
operations. Adjusted EBITDA is a non-GAAP financial measure and should not be considered as a measure of financial performance
under US GAAP. Because adjusted EBITDA is not a measurement determined in accordance with US GAAP, it is susceptible to varying
calculations. Accordingly, adjusted EBITDA, as presented, may not be comparable to other similarly titled measures of other companies.
The Company understands that, although adjusted EBITDA is frequently used by investors and securities analysts in their evaluation
of companies, this measure has limitations as an analytical tool, and you should not consider it in isolation, or as a substitute for an
analysis of the Company’s results as reported under US GAAP. For example, adjusted EBITDA does not reflect cash expenditures, or
future requirements for capital expenditures or contractual commitments; it does not reflect non-cash components of employee
compensation; it does not reflect changes in, or cash requirements for, our working capital needs; and due to the Company’s utilization
of federal and state net operating loss carryforwards and other available tax deductions in 2012, 2013 and 2014, actual cash income tax
payments have been significantly less than the tax provision recorded in accordance with US GAAP, and income tax payments will
continue to be less than the income tax provision until our existing federal and state net operating loss carryforwards have been fully
utilized or have expired.
26
Management compensates for the inherent limitations associated with using adjusted EBITDA through disclosure of such limitations,
presentation of our financial statements in accordance with US GAAP, and reconciliation of adjusted EBITDA to net income, the most
directly comparable US GAAP measure.
As discussed elsewhere in this report, the Company completed the acquisitions of DCI during June 2012, Sy.Med in October 2012, BLG
in September 2013, and HCCS in March 2014. In accordance with US GAAP reporting requirements for fair value, we recorded a deferred
revenue write-down of $192,000 for DCI, $916,000 for Sy.Med, $254,000 for BLG, and $1.5 million for HCCS. These write-downs result
in lower revenues than would have otherwise been recognized for such services.
In order to provide more accurate trends and comparisons of the Company’s revenues, operating income, and net income, management
believes that adding back the deferred revenue write-down associated with fair value accounting for acquired businesses provides a better
indication of the ongoing performance of the Company. The revenue for the acquired contracts is deferred and typically recognized over a
one year period, so our US GAAP revenues for the one year period after the acquisition 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.
GAAP net income .............................................................................................................
Interest income ...................................................................................................................
Interest expense..................................................................................................................
Income tax provision .........................................................................................................
Stock based compensation expense ...................................................................................
Depreciation and amortization ..........................................................................................
Adjusted EBITDA ............................................................................................................
$
$
2014
10,394
(265)
56
6,127
1,625
10,931
28,868
2013
8,418
(263)
51
6,424
1,458
7,852
23,940
$
$
2012
$
7,645
(181)
48
5,932
1,136
6,661
$ 21,241
GAAP revenues .................................................................................................................
Adjustment for deferred revenue write-down ............................................................
Non-GAAP revenues ........................................................................................................
$ 170,690
1,465
$ 172,155
$ 132,274
839
$ 133,113
$ 103,732
490
$ 104,222
GAAP operating income ....................................................................................................
Adjustment for deferred revenue write-down ...........................................................
Non-GAAP operating income ...........................................................................................
GAAP net income ..............................................................................................................
Adjustment for deferred revenue write-down, net of tax ..........................................
Non-GAAP net income .....................................................................................................
$
$
$
$
16,375
1,465
17,840
10,394
921
11,315
$
$
$
$
14,666
839
15,505
$ 13,459
490
$ 13,949
8,418
476
8,894
$
$
7,645
276
7,921
FINANCIAL OUTLOOK FOR 2015
The Company provides projections and other forward-looking information in this “Financial Outlook for 2015” section within
“Management’s Discussion and Analysis of Financial Condition and Results of Operations.” This section contains many forward-looking
statements, particularly relating to the Company’s future financial performance. These forward-looking statements are estimates based on
information currently available to the Company, are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform
Act of 1995 and are subject to the precautionary statements set forth in the introduction in Part I of this Annual Report on Form 10-K and
the risks and uncertainties described in Item 1A, Risk Factors and elsewhere in this document. Actual results are likely to differ, and in the
past have differed, materially from those forecast by the Company, depending on the outcome of various factors, including, but not limited
to, those set forth in Item 1A, Risk Factors.
On February 12, 2015, the Company entered into a definitive agreement to acquire all of the stock of HealthLine Systems, Inc. for
approximately $88.0 million in cash, subject to customary closing conditions. The Company’s guidance for the full year of 2015, which is
set forth below, includes the estimated impact of the HealthLine Systems acquisition.
We anticipate that consolidated revenues will grow 18 to 21 percent as compared to 2014 and will be derived from the following three
areas. First, we anticipate that revenue growth in our Workforce Development Solutions segment will be in the 15 to 18 percent range.
Second, we expect our Research/Patient Experience Solutions segment's revenue to increase by approximately two to four percent. Third,
assuming a closing date of March 31, 2015—which implies nine months’ contribution to 2015 results, we anticipate HealthLine Systems’
revenues to be between $7 million and $9 million, which reflects the write-down of the acquired deferred revenue balance as required under
GAAP.
We anticipate that the Company's 2015 full-year operating income will decrease between 25 and 35 percent as compared to full-year 2014
results. This operating income range includes the following:
(cid:120) Between $5 million and $7 million of write-down to the deferred revenue balances of recently acquired HealthLine Systems
(cid:120) Approximately $1 million of transaction costs related to the HealthLine Systems acquisition
27
(cid:120) An increased rate of investment over full-year 2014 in HealthStream’s product development related to new products,
enhancements to existing products, and integration of acquired products—including an increase in investment in HealthLine
System’s products
(cid:120) An increase in sales and marketing investments, including the Company’s customer Summit, which will be held in Nashville
during the second quarter of 2015.
The Company anticipates funding the purchase price of HealthLine Systems with approximately $60 million of cash on hand and $28
million of borrowings under our Revolving Credit Agreement. Accordingly, we expect to incur between $650,000 and $700,000 in interest
expense beginning in the second quarter of 2015, which will be reported in other income (expense). We expect the effective interest rate
on these borrowings to be approximately three percent per annum.
We anticipate that our 2015 capital expenditures will be between $11 million and $14 million. We expect our effective tax rate to be
between 42 percent and 44 percent.
The aforementioned financial outlook for 2015 does not include the impact from any other acquisitions that we may complete during 2015.
SELECTED QUARTERLY OPERATING RESULTS
The following tables set forth selected statements of income data for each of the eight quarters in the period ended December 31, 2014. The
information for each quarter has been prepared on the same basis as the audited statements included in other parts of this report and, in our
opinion, includes all adjustments, consisting of only normal recurring adjustments, necessary for a fair presentation of the results of
operations for these periods. You should read this information in conjunction with HealthStream’s Consolidated Financial Statements and
related notes thereto included elsewhere in this report. The operating results for any quarter are not necessarily indicative of the results to
be expected in the future.
Factors Affecting Quarterly Operating Results
Revenues from our subscription-based products are recognized ratably over the subscription term. Survey and research revenues are
impacted by seasonal factors resulting from the volume, timing, and frequency of survey cycles.
STATEMENT OF INCOME DATA:
Revenues, net ......................................................................................
Total operating costs and expenses .....................................................
Income from operations ......................................................................
Net income ..........................................................................................
Net income per share (1):
Basic ...................................................................................................
Diluted ................................................................................................
Weighted average shares of common stock outstanding:
Basic ...................................................................................................
Diluted ................................................................................................
STATEMENT OF INCOME DATA:
Revenues, net ......................................................................................
Total operating costs and expenses .....................................................
Income from operations ......................................................................
Net income ..........................................................................................
Net income per share (1):
Basic ...................................................................................................
Diluted ................................................................................................
Weighted average shares of common stock outstanding:
Basic ...................................................................................................
Diluted ................................................................................................
Quarter Ended
March 31,
2014
June 30,
2014
September 30,
2014
December 31,
2014
(In thousands, except per share data)
$
$
$
$
$
38,350
35,052
3,298
$
42,476
38,366
4,110
44,525
39,784
4,741
$
45,339
41,113
4,226
1,947
$
2,364
$
3,436
$
2,647
0.07
0.07
$
$
0.09
0.08
$
$
0.12
0.12
$
$
0.10
0.09
27,453
27,906
27,567
28,044
27,605
28,047
27,655
28,095
Quarter Ended
March 31,
2013
June 30,
2013
September 30,
2013
December 31,
2013
(In thousands, except per share data)
$
$
$
$
$
29,646
26,473
3,173
$
31,919
27,813
4,106
33,659
29,780
3,879
$
37,050
33,541
3,509
1,941
$
2,422
$
2,296
$
1,760
0.07
0.07
$
$
0.09
0.09
$
$
0.08
0.08
$
$
0.06
0.06
26,340
27,409
26,722
27,649
27,085
27,735
27,264
27,858
(1) – Due to the nature of interim earnings per share calculations, the sum of quarterly earnings per share amounts may not equal the reported earnings per share for the full year.
28
Liquidity and Capital Resources
Net cash provided by operating activities increased by $7.2 million, or 26.6%, to $34.3 million during 2014 from $27.1 million during
2013. Our primary sources of cash were generated from receipts from the sales of our products and services. The number of days sales
outstanding (DSO) was 63 days for 2014 and 56 days for 2013. This increase resulted from an overall increase in our accounts receivable
balances compared to the prior year and slower payment patterns from certain customers. The Company calculates DSO by dividing the
average accounts receivable balance (excluding unbilled and other receivables) by average daily revenues for the year. The primary uses
of cash to fund our operations include personnel expenses, sales commissions, royalty payments, payments for contract labor and other
direct expenses associated with delivery of our products and services, and general corporate expenses.
Net cash used in investing activities was approximately $15.5 million during 2014 and $15.0 million during 2013. During 2014, the
Company purchased $44.3 million of marketable securities, utilized $12.3 million (net of cash acquired) for business combinations, spent
$5.7 million for capitalized software development, purchased $4.5 million of property and equipment, and made $1.3 million in non-
marketable equity investments. These uses of cash were partially offset by maturities of marketable securities of $52.6 million. During
2013, the Company purchased $86.1 million of marketable securities, utilized $7.6 million (net of cash acquired) for business combinations,
spent $4.3 million for capitalized software development, purchased $4.4 million of property and equipment, and made $0.3 million in non-
marketable equity investments. These uses of cash were partially offset by maturities and sales of marketable securities of $87.7 million.
Cash provided by financing activities was approximately $3.7 million during 2014 and $6.1 million during 2013. The primary source of
cash from financing activities for 2014 and 2013 resulted from proceeds from the exercise of employee stock options. The primary uses of
cash for 2014 and 2013 resulted from earn-out payments associated with prior business combinations, and the payment of payroll taxes
associated with the issuance of shares from the vesting of RSUs. In addition, the Company recognized excess tax benefits from equity
awards of $3.2 million and $3.7 million in 2014 and 2013, respectively.
Revenues increased and operating income improved over the prior year, and our balance sheet reflects positive working capital of $97.4
million at December 31, 2014 compared to $90.9 million at December 31, 2013. The increase in working capital primarily resulted from
increases in cash and investment balances and accounts receivable. At December 31, 2014, the Company’s primary source of liquidity was
$121.0 million of cash and cash equivalents and marketable securities. The Company also has a $50.0 million revolving credit facility loan
agreement, all of which was available at December 31, 2014. Taking into consideration the pending acquisition of HealthLine Systems for
$88.0 million in cash, which is expected to close in the first quarter of 2015, our working capital, cash, and investments balances will
decline significantly from balances reported as of December 31, 2014. We anticipate funding the acquisition with $60.0 million in cash and
borrowing $28.0 million under our revolving credit facility.
We believe that our existing cash and cash equivalents, marketable securities, cash generated from operations, and available borrowings
under our revolving credit facility will be sufficient to meet anticipated cash needs for the HealthLine Systems acquisition, working capital,
new product development and capital expenditures for at least the next 12 months. Over the past nine years, we have utilized our federal
and state net operating loss carryforwards to offset taxable income, therefore reducing our income tax liabilities. We anticipate our
remaining net operating loss carryforwards will become fully utilized during 2015. Our actual tax payments are expected to increase
significantly once the net operating loss carryforwards are fully utilized.
Our growth strategy includes acquiring businesses that provide complementary product and services. We anticipate that future acquisitions,
if any, would be effected through a combination of stock and cash consideration. 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, if we were to borrow against
our revolving credit facility, our debt capacity would be dependent on the covenant values at the time of borrowing. As of December 31,
2014, 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.
29
Off-Balance Sheet Arrangements and Contractual Obligations
The Company’s off-balance sheet arrangements primarily consist of operating leases, contractual obligations, and our revolving credit
facility, which is described further in Note 13 to the Company’s consolidated financial statements contained elsewhere in this report.
The following table presents a summary of future anticipated payments due by the Company under contractual obligations with firm
minimum commitments as of December 31, 2014, excluding amounts already recorded in the Consolidated Balance Sheets (in thousands):
Operating leases ...................................................... $
Purchase obligations ...............................................
Total ....................................................................... $
3,111
651
3,762
$
$
3,093
--
3,093
$
$
1,454
--
1,454
$
$
2,856
--
2,856
$
$
Less than 1
year
1-3 years
3-5 years
More than 5
years
Payments due by period
Total
10,514
651
11,165
Recent Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-09, Revenue
from Contracts with Customers (Topic 606), which supersedes the revenue recognition requirements in Topic 605, Revenue Recognition,
and most industry-specific revenue recognition guidance throughout the Industry Topics of the Accounting Standards Codification. The
updated guidance states that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an
amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The guidance
also provides for additional disclosures with respect to revenues and cash flows arising from contracts with customers. The standard
will be effective for the first interim period within annual reporting periods beginning after December 15, 2016, and early adoption is
not permitted. The Company is currently reviewing this standard to assess the impact on its future consolidated financial statements.
In August 2014, the FASB issued ASU 2014-15, Presentation of Financial Statements - Going Concern (Subtopic 205-40); Disclosure
of Uncertainties about an Entity's Ability to Continue as a Going Concern, which requires management of the Company to evaluate
whether there is substantial doubt about the Company's ability to continue as a going concern. The standard will be effective for the
annual reporting period ending after December 15, 2016, with early adoption permitted. The Company does not expect the adoption of
the standard to have a material impact on the Company’s consolidated financial statements.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
The Company is exposed to market risk from changes in interest rates. We do not have any foreign currency exchange rate risk or
commodity price risk. As of December 31, 2014, the Company had no outstanding debt. We may become subject to interest rate market
risk associated with any future borrowings under our revolving credit facility. The interest rate under the revolving credit facility varies
depending on the interest rate option selected by the Company plus a margin determined in accordance with a pricing grid. We are exposed
to market risk with respect to our cash and investment balances, which approximated $121.0 million at December 31, 2014. Assuming a
hypothetical 10% decrease in interest rates, interest income from cash and investments would decrease on an annualized basis by
approximately $60,000.
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.
The above market risk discussion and the estimated amounts presented are forward-looking statements of market risk assuming the
occurrence of certain adverse market conditions. Actual results in the future may differ materially from those projected as a result of actual
developments in the market.
30
Item 8. Financial Statements and Supplementary Data
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Reports of Independent Registered Public Accounting Firm .............................................................................................
Consolidated Balance Sheets ..............................................................................................................................................
Consolidated Statements of Income ...................................................................................................................................
Consolidated Statements of Comprehensive Income ........................................................................................................
Consolidated Statements of Shareholders’ Equity .............................................................................................................
Consolidated Statements of Cash Flows .............................................................................................................................
Notes to Consolidated Financial Statements ......................................................................................................................
Page
32
34
35
36
37
38
39
31
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Shareholders of
HealthStream, Inc.
We have audited the accompanying consolidated balance sheets of HealthStream, Inc. as of December 31, 2014 and 2013, and the related
consolidated statements of income, comprehensive income, shareholders’ equity, and cash flows for each of the three years in the period
ended December 31, 2014. These financial statements are the responsibility of the Company’s management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of
HealthStream, Inc. at December 31, 2014 and 2013, and the consolidated results of its operations and its cash flows for each of the three
years in the period ended December 31, 2014, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), HealthStream,
Inc.’s internal control over financial reporting as of December 31, 2014, based on criteria established in Internal Control – Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) and our report dated
February 27, 2015 expressed an unqualified opinion thereon.
/s/ Ernst & Young LLP
Nashville, Tennessee
February 27, 2015
32
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Shareholders of
HealthStream, Inc.
We have audited HealthStream, Inc.’s internal control over financial reporting as of December 31, 2014, based on criteria established
in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013
framework) (the COSO criteria). HealthStream, Inc.’s management is responsible for maintaining effective internal control over
financial reporting, and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying
Management’s Annual Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the
Company’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over
financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over
financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of
internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We
believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting
principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the
maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the
company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in
accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in
accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention
or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections
of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in
conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, HealthStream, Inc. maintained, in all material respects, effective internal control over financial reporting as of December
31, 2014, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the 2014
consolidated financial statements of HealthStream, Inc. and our report dated February 27, 2015 expressed an unqualified opinion
thereon.
/s/ Ernst & Young LLP
Nashville, Tennessee
February 27, 2015
33
HEALTHSTREAM, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands)
December 31,
2014
December 31,
2013
ASSETS
Current assets:
Cash and cash equivalents ...................................................................................................................
Marketable securities ..........................................................................................................................
Accounts receivable, net of allowance for doubtful accounts of $331 and $211
at December 31, 2014 and 2013, respectively .............................................................................
Accounts receivable - unbilled ............................................................................................................
Prepaid royalties, net of amortization ................................................................................................
Other prepaid expenses and other current assets ................................................................................
Total current assets ........................................................................................................................
Property and equipment:
Equipment ...........................................................................................................................................
Leasehold improvements ....................................................................................................................
Furniture and fixtures ..........................................................................................................................
Less accumulated depreciation and amortization .........................................................................
Capitalized software development, net of accumulated amortization of $18,114
and $13,910 at December 31, 2014 and 2013, respectively .........................................................
Goodwill ..................................................................................................................................................
Intangible assets, net of accumulated amortization of $13,834 and $11,389
at December 31, 2014 and 2013, respectively .............................................................................
Non-marketable equity investments .......................................................................................................
Other assets ..............................................................................................................................................
Total assets .............................................................................................................................
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Accounts payable ................................................................................................................................
Accrued royalties ...............................................................................................................................
Accrued liabilities ...............................................................................................................................
Accrued compensation and related expenses .....................................................................................
Deferred revenue ................................................................................................................................
Total current liabilities ...........................................................................................................
Deferred tax liabilities, noncurrent ..........................................................................................................
Deferred revenue, noncurrent .................................................................................................................
Other long term liabilities .......................................................................................................................
Commitments and contingencies .............................................................................................................
$
$
$
81,995
38,973
33,167
1,678
13,030
5,768
174,611
25,133
5,860
4,554
35,547
(26,105)
9,442
12,706
41,914
14,795
1,757
2,037
257,262
4,753
9,255
7,224
2,311
53,716
77,259
5,838
3,657
2,649
--
Shareholders’ equity:
Common stock, no par value, 75,000 shares authorized; 27,677 and 27,327
shares issued and outstanding at December 31, 2014 and 2013, respectively ............................
Accumulated deficit ...........................................................................................................................
Accumulated other comprehensive loss ............................................................................................
Total shareholders’ equity .....................................................................................................
Total liabilities and shareholders’ equity ..............................................................................
174,926
(7,030)
(37)
167,859
257,262
$
See accompanying notes to the consolidated financial statements.
$
$
$
$
59,537
48,659
25,314
1,392
8,857
3,365
147,124
21,631
5,521
3,854
31,006
(21,968)
9,038
11,077
35,746
8,870
497
242
212,594
2,311
8,435
5,684
1,614
38,168
56,212
6,173
--
776
--
166,888
(17,424)
(31)
149,433
212,594
34
HEALTHSTREAM, INC.
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data)
For the Year Ended December 31,
2013
2012
2014
$
170,690
$
132,274
$
103,732
55,605
11,757
24,052
18,342
7,852
117,608
14,666
176
14,842
6,424
8,418
0.31
0.30
26,853
27,663
$
$
$
41,658
8,610
19,892
13,452
6,661
90,273
13,459
118
13,577
5,932
7,645
0.29
0.28
26,128
27,507
Revenues, net ......................................................................................................................
Operating costs and expenses:
Cost of revenues (excluding depreciation and amortization) ......................................
Product development ...................................................................................................
Sales and marketing ......................................................................................................
Other general and administrative expenses ...................................................................
Depreciation and amortization .....................................................................................
Total operating costs and expenses ..................................................................
74,145
16,463
29,867
22,909
10,931
154,315
Income from operations ......................................................................................................
16,375
Other income, net ...............................................................................................................
Income before income tax provision .................................................................................
Income tax provision ....................................................................................................
Net income .........................................................................................................................
Net income per share:
Basic ..............................................................................................................................
Diluted ..........................................................................................................................
$
$
$
Weighted average shares of common stock outstanding:
Basic ..............................................................................................................................
Diluted ..........................................................................................................................
146
16,521
6,127
10,394
0.38
0.37
27,570
28,023
$
$
$
See accompanying notes to the consolidated financial statements.
35
HEALTHSTREAM, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)
For the Year Ended December 31,
2013
2012
2014
Net income ..........................................................................................................................
$
10,394
$
8,418
$
7,645
Other comprehensive income, net of taxes:
Unrealized gain (loss) on marketable securities ...........................................................
Total other comprehensive income (loss) .........................................................................
(6)
(6)
(49)
(49)
25
25
Comprehensive income .....................................................................................................
$
10,388
$
8,369
$
7,670
See accompanying notes to the consolidated financial statements.
36
HEALTHSTREAM, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(In thousands)
Balance at December 31, 2011 .................................
Net income ..........................................................
Comprehensive income ......................................
Issuance of common stock in acquisitions .........
Stock based compensation .................................
Tax benefits from equity awards ........................
Common stock issued under stock plans, net of
shares withheld for employee taxes ...................
Balance at December 31, 2012 ................................
Net income ..........................................................
Comprehensive loss ............................................
Issuance of common stock in acquisition ..........
Stock based compensation .................................
Tax benefits from equity awards ........................
Common stock issued under stock plans, net of
shares withheld for employee taxes ...................
Balance at December 31, 2013 ................................
Net income ..........................................................
Comprehensive loss ............................................
Issuance of common stock in acquisition ..........
Stock based compensation .................................
Tax benefits from equity awards ........................
Common stock issued under stock plans, net of
shares withheld for employee taxes ...................
Balance at December 31, 2014 .............................
Accumulated
Other
Accumulated Comprehensive
Income (Loss)
Deficit
Total
Shareholders’
Equity
Common Stock
$
Shares
25,896
--
--
56
--
--
281
26,233
--
--
15
--
--
1,079
27,327
--
--
82
--
--
Amount
154,409
--
--
1,541
1,136
111
823
158,020
--
--
534
1,458
3,722
3,154
166,888
--
--
2,246
1,625
3,234
$
$
(33,487)
7,645
--
--
--
--
--
(25,842)
8,418
--
--
--
--
--
(17,424)
10,394
--
--
--
--
268
27,677
$
933
174,926
$
--
(7,030)
$
(7)
--
25
--
--
--
--
18
--
(49)
--
--
--
--
(31)
--
(6)
--
--
--
--
(37)
$
$
120,915
7,645
25
1,541
1,136
111
823
132,196
8,418
(49)
534
1,458
3,722
3,154
149,433
10,394
(6)
2,246
1,625
3,234
933
167,859
See accompanying notes to the consolidated financial statements.
37
HEALTHSTREAM, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
OPERATING ACTIVITIES:
Net income .....................................................................................................................................
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization ...........................................................................................
Deferred income taxes ........................................................................................................
Stock based compensation expense ...................................................................................
Excess tax benefits from equity awards .............................................................................
Provision for doubtful accounts ..........................................................................................
Loss on non-marketable equity investments ......................................................................
Other ...................................................................................................................................
Changes in assets and liabilities, net of business combinations:
Accounts and unbilled receivables ..............................................................................
Prepaid royalties .........................................................................................................
Other prepaid expenses and other current assets .........................................................
Other assets ..................................................................................................................
Accounts payable .........................................................................................................
Accrued royalties .........................................................................................
Accrued liabilities, accrued compensation and related expenses,
and other long-term liabilities ...........................................................
Deferred revenue .........................................................................................................
Net cash provided by operating activities .................................................................
INVESTING ACTIVITIES:
Business combinations, net of cash acquired ...............................................................................
Proceeds from sales of marketable securities ................................................................................
Proceeds from maturities of marketable securities .......................................................................
Purchases of marketable securities ................................................................................................
Payments to acquire equity method investments .........................................................................
Payments to acquire cost method investments .............................................................................
Payments associated with capitalized software development ......................................................
Purchases of property and equipment ...........................................................................................
Net cash used in investing activities ..........................................................................
FINANCING ACTIVITIES:
Proceeds from exercise of stock options .......................................................................................
Taxes paid related to net settlement of equity awards .................................................................
Excess tax benefits from equity awards .......................................................................................
Payment of earn-outs related to business combinations ..............................................................
Net cash provided by financing activities .................................................................
Net increase (decrease) in cash and cash equivalents ...................................................................
Cash and cash equivalents at beginning of year ............................................................................
Cash and cash equivalents at end of year ......................................................................................
$
For the Year Ended December 31,
2014
2013
2012
$
10,394
$
8,418
$
7,645
10,931
1,324
1,625
(3,234)
237
65
1,394
(6,690)
(4,174)
(2,022)
(1,761)
2,442
820
5,434
17,471
34,256
(12,298)
--
52,625
(44,341)
(325)
(1,000)
(5,658)
(4,544)
(15,541)
1,094
(161)
3,234
(424)
3,743
22,458
59,537
81,995
7,852
2,506
1,458
(3,722)
115
37
1,660
(10,056)
(5,119)
(1,207)
105
1,254
3,399
5,593
14,761
27,054
(7,560)
5,062
82,661
(86,139)
(300)
--
(4,267)
(4,444)
(14,987)
3,318
(164)
3,722
(771)
6,105
6,661
5,601
1,136
(111)
120
16
722
1,227
(329)
(537)
(15)
(1,529)
1,579
542
(198)
22,530
(9,901)
--
78,075
(118,176)
(250)
--
(4,435)
(4,316)
(59,003)
823
--
111
--
934
18,172
41,365
59,537
$
(35,539)
76,904
41,365
51
371
534
--
$
$
$
$
61
427
1,541
500
$
$
$
$
$
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid................................................................................................................................
Income taxes paid .....................................................................................................................
NON-CASH INVESTING AND FINANCING ACTIVITIES:
Issuance of common stock in connection with business combinations ...................................
Acquisition of content rights in exchange for future services .................................................
$
$
$
$
56
1,641
2,246
--
See accompanying notes to the consolidated financial statements.
38
HEALTHSTREAM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Reporting Entity and Segments
HealthStream, Inc. (the “Company”) was incorporated in 1990 as a Tennessee corporation and is headquartered in Nashville, Tennessee.
We operate our business in two segments: HealthStream Workforce Development Solutions and HealthStream Research/Patient
Experience Solutions. Our Workforce Development products consist of SaaS-based services and subscription-based solutions to meet
the ongoing training, certification, assessment and development needs of the healthcare community. These solutions provide, deliver and
track computer based education for our customers in the United States through our software-as-a-service (SaaS) model. HealthStream
Research/Patient Experience products offer healthcare organizations a wide range of quality and satisfaction surveys, consulting services,
analyses of survey results, and other research-based services.
Recognition of Revenue
Revenues are derived from providing services through our SaaS-based workforce development platform products, courseware
subscriptions, provision of survey and research services, professional services, content maintenance, custom courseware development
and other education and training services.
The Company recognizes revenue when it is realized or realizable and earned. The Company considers revenue realized or realizable
and earned when persuasive evidence of an arrangement exists, prices are fixed or determinable, services and products are provided to
the customer and collectability is probable or reasonably assured.
Revenue recognized from software and other arrangements is allocated to each element of the arrangement based on the relative fair
values of the elements. While elements include software products and post contract customer support, the fair value of each element is
based on vendor specific objective evidence (VSOE). If fair value cannot be determined for each element of the arrangement, all revenue
from the arrangement is deferred until fair value can be determined or until all elements of the arrangement are delivered and customer
acceptance has occurred. Sales of the Company’s SaaS-based workforce development platform products include customer support,
implementation services, and training; therefore all revenues are deferred until the SaaS-based product is implemented, at which time
revenues are recognized ratably over the subscription service period. In the event that circumstances occur, which give rise to uncertainty
regarding the collectibility of contracted amounts, revenue recognition is suspended until such uncertainty is resolved. Fees for these
services are billed on either a monthly, quarterly, or annual basis.
Revenues derived from the delivery of services through the Company’s SaaS-based workforce development platform products and
courseware subscriptions are recognized ratably over the term of the subscription service agreement or over the historical usage period,
if usage typically differs from the subscription period. Other training revenues are generally recognized upon the completion of training.
Revenues derived from the license of installed software products are recognized upon shipment or installation of the software, when
VSOE of the fair value of the software license can be established. Software support and maintenance revenues are recognized ratably
over the term of the related agreement.
Revenues recognized from the Company’s survey and research services are determined using both the proportional performance method
and the completed contract method. Revenues are generally earned over the estimated survey cycle, which typically ranges from less
than one month to up to five months. The survey cycle is generally initiated based on the receipt of the first survey response and runs
through provision of related survey reports to the customer. If survey results are not available to the customer during the survey fielding
cycle, revenues are recognized at time of report delivery. Revenues for coaching and consulting engagements are recognized using the
proportional performance method over the term of the underlying contract. Fees for survey services are billed upon initiation of the
survey cycle, with progress billings made throughout the survey cycle. Fees for coaching and consulting engagements are billed upon
initiation of the engagement with progress billings throughout the term of the contract.
Revenues from professional services, content maintenance, and custom courseware development services are recognized using a
percentage of completion method based on labor hours, which correspond to the completion of performance milestones and deliverables.
All other revenues are recognized as the related services are performed or products are delivered. Fees for these services are generally
billed at project initiation and upon completion of various milestones.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and its subsidiaries, all of which are wholly-owned. All
inter-company accounts and transactions have been eliminated in consolidation.
39
HEALTHSTREAM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Use of Estimates
The preparation of the consolidated financial statements in conformity with accounting principles generally accepted in the United States
requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying
notes. Actual results could differ from those estimates and such differences could be material to the consolidated financial statements.
Cash Equivalents
The Company considers cash equivalents to be unrestricted, highly liquid investments with initial maturities of less than three months.
Marketable Securities
Marketable securities are classified as available for sale and are stated at fair market value, with the unrealized gains and losses, net of
tax, reported in other comprehensive income (loss) on the accompanying consolidated balance sheets. Realized gains and losses and
declines in market value judged to be other than temporary on investments in marketable securities are included in interest and other
income on the accompanying consolidated statements of income. The cost of securities sold is based on the specific identification method.
Interest and dividends on securities classified as available for sale are included in other income (expense) on the accompanying
consolidated statements of income. Premiums and discounts are amortized over the life of the related available for sale security as an
adjustment to yield using the effective interest method.
Accounts Receivable-Unbilled
Accounts receivable-unbilled represents the following: 1) revenue earned and recognized on contracts accounted for using the
proportional performance method for which invoices have not been generated or contractual billing dates have not been reached; and 2)
the difference between billings for contracts containing escalated pricing over the term of the agreement and the recognition of revenue
ratably over the subscription period.
Deferred Revenue
Deferred revenue represents amounts, which have been billed or collected in advance of revenue recognition, and is recognized as the
revenue recognition criteria are met. The Company typically invoices customers in quarterly, bi-annual, or annual installments, and
occasionally customers will pay for multi-year contracts in advance.
Prepaid Royalties
Prepaid royalties represents advance payments associated with the sale of third party products, such as courseware subscriptions.
Royalties are typically paid in advance at the commencement of the revenue cycle, or periodically throughout the revenue cycle, such as
quarterly, bi-annual, or annual installments. Royalty payments are amortized over the term of the underlying contracts, which generally
range from 12 to 36 months, in order to match the direct royalty costs to the same period the subscription revenue is recognized.
Amortization of royalties is included under the caption “cost of revenues (excluding depreciation and amortization)” in the accompanying
consolidated statements of income.
Allowance for Doubtful Accounts
The Company estimates its allowance for doubtful accounts using a specific identification method. Management determines the
allowance for doubtful accounts on a case-by-case basis, based on the facts and circumstances surrounding each potentially uncollectible
receivable. An allowance is also maintained for accounts that are not specifically identified that may become uncollectible in the future.
Uncollectible receivables are written-off in the period management believes it has exhausted every opportunity to collect payment from
the customer. Bad debt expense is recorded when events or circumstances indicate an additional allowance is required based on the
Company’s specific identification approach.
Changes in the allowance for doubtful accounts and the amounts charged to bad debt expense for the years ended December 31, were as
follows (in thousands):
2014 ................................................
2013 ................................................
2012 ................................................
Allowance Balance at
Beginning of Period
211
$
142
$
149
$
Charged to Costs and
Expenses
Write-offs
Allowance Balance at
End of Period
$
$
$
237
115
120
$
$
$
(117)
(46)
(127)
$
$
$
331
211
142
Capitalized Software Development
Capitalized software development is stated on the basis of cost, and is presented net of accumulated amortization. The Company
capitalizes costs incurred during the software development phase for projects when such costs are material. These assets are amortized
using the straight-line method, generally ranging between one to five years. The Company capitalized approximately $5.7 million and
$4.3 million during 2014 and 2013, respectively. Maintenance and operating costs are expensed as incurred. As of December 31, 2014
and 2013, there were no capitalized internal development costs for computer software developed for resale.
40
HEALTHSTREAM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Fair Value Measurements
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in the principal or most
advantageous market in an orderly transaction between market participants at the measurement date. The fair value hierarchy
prioritizes the inputs to valuation techniques used in measuring fair value. There are three levels to the fair value hierarchy based on
the reliability of inputs, as follows:
Level 1 – Observable inputs that reflect quoted prices (unadjusted) for identical assets or liabilities in active markets.
Level 2 – Inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly.
Level 3 – Unobservable inputs in which little or no market data exists, therefore requiring the Company to develop its own
assumptions.
The Company evaluates assets and liabilities subject to fair value measurements on a recurring basis to determine the appropriate
level at which to classify them for each reporting period. This determination requires significant judgments to be made by the
Company.
At December 31, 2014, the fair value measurement amounts for assets consisted of marketable securities which are classified as
available for sale. The carrying amounts reported in the consolidated balance sheets approximate the fair value of the Company’s
marketable securities based on quoted market prices or alternative pricing sources and models utilizing market observable inputs. At
December 31, 2014 and 2013, the Company did not have any financial liabilities that were subject to fair value measurements.
Property and Equipment
Property and equipment are stated on the basis of cost. Depreciation and amortization are provided on the straight-line method over the
following estimated useful lives, except for assets under capital leases and leasehold improvements, which are amortized over the shorter
of the estimated useful life or their respective lease term. Depreciation and amortization of property and equipment totaled $4.1 million
and $3.3 million for the years ended December 31, 2014 and 2013, respectively.
Furniture and fixtures ..........................................................................................................................................................
Equipment ...........................................................................................................................................................................
Years
5-10
3-5
Goodwill and Intangible Assets
Goodwill represents the excess of purchase price over fair value of net tangible assets acquired. The Company evaluates goodwill for
impairment at the reporting unit level by assessing whether it is more likely than not that the fair value of a reporting unit exceeds its
carrying value. If this assessment concludes that is more likely than not that the fair value of a reporting unit exceeds its carrying value,
then goodwill is not considered impaired and no further impairment testing is required. Conversely, if the assessment concludes that it
is more likely than not that the fair value of a reporting unit is less than its carrying value, a goodwill impairment test is performed to
compare the fair value of the reporting unit to its carrying value. The Company determines fair value of the reporting units using both
income and market based models. The Company will perform its goodwill impairment test whenever events or changes in facts or
circumstances indicate that impairment may exist, and at least annually during the fourth quarter.
As of December 31, 2014 intangible assets with remaining unamortized balances include contract rights and customer relationships,
internally-developed technology and patents, non-competition agreements, and trade names. These intangible assets are considered to
have definite useful lives and are being amortized on a straight line basis over periods typically ranging between five and ten years. The
weighted average amortization period for definite lived intangible assets as of December 31, 2014 was 8.7 years. Intangible assets are
reviewed for impairment whenever events or changes in facts or circumstances indicate that the carrying amount of the assets may not
be recoverable. There were no impairments identified or recorded for the years ended December 31, 2014, 2013, or 2012.
Long-Lived Assets
Long-lived assets to be held for use are reviewed for events or changes in facts and circumstances, both internally and externally, which
may indicate that an impairment of long-lived assets held for use is present. The Company measures any impairment using observable
market values or discounted future cash flows from the related long-lived assets. The cash flow estimates and discount rates incorporate
management’s best estimates, using appropriate and customary assumptions and projections at the date of evaluation. Management
periodically evaluates whether the carrying value of long-lived assets, including property and equipment, capitalized software
development, other assets and intangible assets will be recoverable. There were no impairments identified or recorded for the years ended
December 31, 2014, 2013, or 2012.
41
HEALTHSTREAM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Non-Marketable Equity Investments
Non-marketable equity investments are accounted for using the equity method when the Company can exercise significant influence
over the investee. Investments for which the Company is not able to exercise significant influence over the investee are accounted for
under the cost method. The proportionate share of income or loss from equity method investments are recorded under the caption “other
income, net” in the accompanying consolidated statements of income.
Financial Instruments
The Company has financial instruments, including cash and cash equivalents, accounts receivable, accounts receivable-unbilled,
accounts payable, accrued liabilities, and deferred revenue. The carrying amounts of these financial instruments approximate fair value
because of the short term maturity or short term nature of such instruments. Marketable securities approximate fair value based on quoted
market prices, see Note 4.
Income Taxes
Income taxes are accounted for using the asset and liability method, whereby deferred tax assets and liabilities are determined based on
the temporary differences between the financial statement and tax bases of assets and liabilities measured at tax rates that will be in effect
for the year in which the differences are expected to affect taxable income. Management evaluates all available evidence, both positive
and negative, to determine whether, based on the weight of that evidence, a valuation allowance is needed. Future realization of the tax
benefit of an existing deductible temporary difference or carryforward ultimately depends on the existence of sufficient taxable income
of the appropriate character within the carryback or carryforward period available under the tax law. There are four possible sources of
taxable income that may be available under the tax law to realize a tax benefit for deductible temporary differences and carryforwards:
1) future reversals of existing taxable temporary differences, 2) future taxable income exclusive of reversing temporary differences and
carryforwards, 3) taxable income in prior carryback year(s) if carryback is permitted under the tax law, and 4) tax-planning strategies
that would, if necessary, be implemented to realize deductible temporary differences or carryforwards prior to their expiration.
Management reviews the realizability of its deferred tax assets each reporting period to identify whether any significant changes in
circumstances or assumptions have occurred that could materially affect the realizability of deferred tax assets. As of December 31,
2014, the Company had established a valuation allowance of $0.4 million for the portion of its net deferred tax assets that are not more
likely than not expected to be realized.
The Company accounts for income tax uncertainties using a more-likely-than-not recognition threshold based on the technical merits
of the tax position taken. Tax positions that meet the more-likely-than-not recognition threshold are measured in order to determine the
tax benefit to be recognized in the financial statements. The Company expenses any penalties or interest associated with tax obligations
as general and administrative expenses and interest expense, respectively.
Advertising
The Company expenses the costs of advertising as incurred. Advertising expense for the years ended December 31, 2014, 2013, and
2012 was approximately $663,000, $408,000, and $349,000, respectively.
Shipping and Handling Costs
Shipping and handling costs that are associated with our products and services are included in cost of revenues.
Earnings Per Share
Basic earnings per share is computed by dividing the net income available to common shareholders for the period by the weighted
average number of common shares outstanding during the period. Diluted earnings per share is computed by dividing the net income for
the period by the weighted average number of common and common equivalent shares outstanding during the period. Common
equivalent shares, composed of incremental common shares issuable upon the exercise of stock options, are included in diluted net
income per share to the extent these shares are dilutive. Common equivalent shares that have an anti-dilutive effect on diluted net income
per share have been excluded from the calculation of diluted weighted average shares outstanding for the years ended December 31,
2014, 2013, and 2012.
42
HEALTHSTREAM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Concentrations of Credit Risk and Significant Customers
The Company places its temporary excess cash investments in high quality, short-term money market instruments. At times, such
investments may be in excess of the FDIC insurance limits.
The Company sells its products and services to various companies in the healthcare industry that are located in the United States. We
perform ongoing credit evaluations of our customers’ financial condition and generally require no collateral from customers. The
Company did not have any single customer representing over 10% of net revenues during 2014, 2013, or 2012.
Stock Based Compensation
As of December 31, 2014, the Company maintains two stock based compensation plans, which are described in Note 10. The Company
accounts for stock based compensation using the fair-value based method for costs related to share-based payments, including stock
options and restricted share units. The Company uses the Black Scholes option pricing model for calculating the fair value of option
awards issued under its stock based compensation plan. The Company measures compensation cost of restricted share units based on the
closing fair market value of the Company’s stock on the date of grant. Stock based compensation cost is measured at the grant date,
based on the fair value of the award that is ultimately expected to vest, and is recognized as an expense over the requisite service period.
The Company recognizes tax benefits from stock based compensation if an excess tax benefit is realized. Excess tax benefits are recorded
as an increase to common stock when realized.
Newly Issued Accounting Standards
In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-09, Revenue
from Contracts with Customers (Topic 606), which supersedes the revenue recognition requirements in Topic 605, Revenue
Recognition, and most industry-specific revenue recognition guidance throughout the Industry Topics of the Accounting Standards
Codification. The updated guidance states that an entity should recognize revenue to depict the transfer of promised goods or services
to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or
services. The guidance also provides for additional disclosures with respect to revenues and cash flows arising from contracts with
customers. The standard will be effective for the first interim period within annual reporting periods beginning after December 15,
2016, and early adoption is not permitted. The Company is currently reviewing this standard to assess the impact on its future
consolidated financial statements.
In August 2014, the FASB issued ASU 2014-15, Presentation of Financial Statements - Going Concern (Subtopic 205-40);
Disclosure of Uncertainties about an Entity's Ability to Continue as a Going Concern, which requires management of the Company
to evaluate whether there is substantial doubt about the Company's ability to continue as a going concern. The standard will be
effective for the annual reporting period ending after December 15, 2016, with early adoption permitted. The Company does not
expect the adoption of the standard to have a material impact on the Company’s consolidated financial statements.
2. SHAREHOLDERS' EQUITY
Common Stock
The Company is authorized to issue up to 75 million shares of common stock. The number of common shares issued and outstanding as
of December 31, 2014 and 2013 was approximately 27.7 million and 27.3 million, respectively.
Preferred Stock
The Company is authorized to issue up to 10 million shares of preferred stock in one or more series, having the relative voting powers,
designations, preferences, rights and qualifications, limitations or restrictions, and other terms as the Board of Directors may fix in
providing for the issuance of such series, without any vote or action of the shareholders.
43
HEALTHSTREAM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
3. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings per share for the three years ended December 31, 2014 (in
thousands, except per share amounts):
2014
2013
2012
Numerator:
Net income .......................................................................................
$
10,394
$
8,418
$
Denominator:
Weighted-average shares outstanding ..........................................
Effect of dilutive shares ..............................................................
Weighted-average diluted shares .................................................
27,570
453
28,023
26,853
810
27,663
Basic earnings per share ...................................................................
Diluted earnings per share ................................................................
$
$
0.38
0.37
$
$
0.31
0.30
$
$
7,645
26,128
1,379
27,507
0.29
0.28
Potentially dilutive shares representing approximately 70,000, 70,000, and 105,000 shares of common stock for 2014, 2013, and 2012,
respectively, were excluded from the calculation of diluted earnings per share because their effect would have been anti-dilutive.
4. MARKETABLE SECURITIES
At December 31, 2014 and 2013, the fair value of marketable securities, which were all classified as available for sale, included the
following (in thousands):
Level 2:
Certificates of deposit ............................................................
Corporate debt securities ........................................................
Subtotal
Total
Level 2:
Certificates of deposit ............................................................
Corporate debt securities ........................................................
Subtotal
Total
Adjusted Cost
$
$
6,278
32,732
39,010
39,010
Adjusted Cost
$
$
2,260
46,430
48,690
48,690
$
$
$
$
December 31, 2014
Unrealized
Gains
Unrealized
Losses
--
--
--
--
$
$
--
(37)
(37)
(37)
December 31, 2013
Unrealized
Gains
Unrealized
Losses
--
--
--
--
$
$
--
(31)
(31)
(31)
Fair Value
6,278
32,695
38,973
38,973
Fair Value
2,260
46,399
48,659
48,659
$
$
$
$
The carrying amounts reported in the consolidated balance sheet approximate fair value based on quoted market prices or alternative
pricing sources and models utilizing market observable inputs. As of December 31, 2014, the Company does not consider any of its
marketable securities to be other than temporarily impaired. During 2013, the Company recorded realized gains of approximately
$5,000 from sales of marketable securities. All investments in marketable securities are classified as a current asset on the balance
sheet because the underlying securities mature within one year from the balance sheet date.
44
HEALTHSTREAM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
5. BUSINESS COMBINATIONS
On June 29, 2012, the Company acquired all of the stock of Decision Critical, Inc., (DCI) an Austin, Texas based company that
specializes in learning and competency management products for acute-care hospitals. The Company acquired DCI to further advance
its suite of workforce development solutions. The consideration paid for DCI consisted of approximately $3.4 million in cash and
22,124 shares of our common stock. Also, the Company may make additional payments of up to $300,000, contingent upon
achievement of certain financial targets and business outcomes within a three year period after the closing date. As of December 31,
2014, approximately $188,000 of these contingent payments have been paid to the former DCI shareholders. The Company incurred
approximately $203,000 in transaction costs associated with the DCI acquisition, which are included on the accompanying
consolidated statements of income under the caption “other general and administrative.” In allocating the purchase price, the Company
recorded approximately $2.9 million of goodwill, $1.5 million of identifiable intangible assets, $291,000 of net tangible assets and
$456,000 of deferred tax liabilities. The goodwill balance is primarily attributed to assembled workforce, expanded market
opportunities from DCI’s workforce development products, and expected synergies from integrating DCI’s products into our
platform. The goodwill balance is not deductible for U.S. income tax purposes. The net tangible assets include deferred revenue,
which in accordance with US GAAP, was adjusted down from a book value of $548,000 to an estimated fair value of $356,000. The
deferred revenue recorded represents the estimated fair value of the contractual obligation assumed as of the acquisition date. The
$192,000 write-down of deferred revenue resulted in lower revenues than would have otherwise been recognized for such services.
The results of operations for DCI have been included in the Company’s consolidated financial statements from the date of acquisition,
and are included in the HealthStream Workforce Development Solutions segment.
On October 19, 2012, the Company acquired all of the stock of Sy.Med Development, Inc. (Sy.Med), a Brentwood, Tennessee based
company that specializes in credentialing related software products for healthcare providers. The Company acquired Sy.Med to further
advance its suite of workforce development solutions. The consideration paid for Sy.Med consisted of approximately $7.4 million in
cash and 34,060 shares of our common stock. The Company also made approximately $1.25 million of earn-out payments for
achievement of certain financial targets and business outcomes. The Company incurred approximately $165,000 in transaction costs
associated with the Sy.Med acquisition, which are included on the accompanying consolidated statements of income under the caption
“other general and administrative.” In allocating the purchase price, the Company recorded approximately $5.4 million of goodwill,
$6.5 million of identifiable intangible assets, $294,000 of net tangible assets and $2.8 million of deferred tax liabilities. The goodwill
balance is primarily attributed to assembled workforce, additional market opportunities of Sy.Med’s credentialing software, and
expected synergies from integrating Sy.Med’s products into our platform. 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 of $1.1 million to an
estimated fair value of $229,000. The $916,000 write-down of deferred revenue resulted in lower revenues than would have otherwise
been recognized for such services. The results of operations for Sy.Med have been included in the Company’s consolidated financial
statements from the date of acquisition, and are included in the HealthStream Workforce Development Solutions segment.
On September 9, 2013, the Company acquired substantially all of the assets of Baptist Leadership Group (BLG), a Pensacola, Florida
based company that provides consulting services focused on patient-centered performance excellence in healthcare. The Company
acquired BLG to strengthen its Research/Patient Experience Solutions. The consideration paid for BLG consisted of approximately
$7.4 million in cash (taking into account the working capital adjustment) and 15,230 shares of our common stock. The Company
incurred approximately $145,000 in transaction costs associated with the acquisition, which are included on the accompanying
consolidated statements of income under the caption “other general and administrative.” In allocating the purchase price, the Company
recorded approximately $6.3 million of goodwill, $1.6 million of identifiable intangible assets, and $28,000 of net tangible assets.
The goodwill balance is primarily attributed to the assembled workforce, additional market opportunities from BLG’s consulting
services, and expected synergies from integrating BLG into the operations of the HealthStream Research/Patient Experience Solutions
segment. 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 of $508,000 to an estimated fair value of $254,000. The $254,000 write-down of deferred
revenue resulted in lower revenues than would have otherwise been recognized for such services. The results of operations for BLG
have been included in the Company’s consolidated financial statements from the date of acquisition, and are included in the
HealthStream Research/Patient Experience Solutions segment.
45
HEALTHSTREAM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
5. BUSINESS COMBINATIONS (continued)
On March 3, 2014, the Company acquired all of the stock of Health Care Compliance Strategies, Inc. (HCCS), a Jericho, New York
based company that specializes in healthcare compliance solutions and services. The Company acquired HCCS to further advance its
suite of workforce development solutions, including its offering of compliance solutions. The consideration paid for HCCS consisted
of approximately $12.8 million in cash (taking into account a working capital adjustment) and 81,614 shares of our common stock.
The Company may make additional payments of up to $750,000, contingent upon the achievement of certain performance milestones
within one year post-closing. The Company incurred approximately $515,000 in transaction costs associated with the acquisition, of
which $365,000 were incurred during the nine months ended September 30, 2014 and $150,000 were incurred during the year ended
December 31, 2013. The transaction costs were recorded in other general and administrative expenses in the consolidated statements
of income. In allocating the purchase price, the Company recorded approximately $6.2 million of goodwill, $8.4 million of
identifiable intangible assets, $2.6 million of tangible assets, $625,000 of deferred tax assets, and $2.7 million of liabilities. Included
in the recorded liabilities is an accrual for contingent consideration of approximately $600,000. The goodwill balance is primarily
attributed to assembled workforce, additional market opportunities of HCCS’s compliance solutions, and expected synergies from
integrating HCCS’s products into our platform. 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 $3.2 million to an estimated
fair value of $1.7 million. The $1.5 million write-down of deferred revenue will result in lower revenues than would have otherwise
been recognized for such services. The results of operations for HCCS have been included in the Company’s consolidated financial
statements from the date of acquisition, and are also included in the HealthStream Workforce Development Solutions segment.
During the second quarter of 2014, the Company determined the presentation of contingent consideration payments, or earn-outs, in
connection with business combinations should be classified as a financing activity within the Consolidated Statement of Cash Flows.
The Company previously classified such payments as an operating activity within the Consolidated Statement of Cash Flows. The
Company has adjusted the Consolidated Statement of Cash Flows for the year ended December 31, 2013 and all prior interim periods
affected. The Company considers the adjustments to all periods listed below to be an immaterial correction of an error.
The effect of the immaterial adjustments on the Consolidated Statement of Cash Flows for the respective periods listed below is as
follows (in thousands):
Previously
Reported
Adjustments
Adjusted
Consolidated Statement of Cash Flows
Net cash provided by operating activities, three months ended March 31, 2013 .......................
Net cash provided by financing activities, three months ended March 31, 2013 .......................
Net cash provided by operating activities, six months ended June 30, 2013 ..............................
Net cash provided by financing activities, six months ended June 30, 2013 ..............................
Net cash provided by operating activities, nine months ended September 30, 2013 ..................
Net cash provided by financing activities, nine months ended September 30, 2013 ..................
Net cash provided by operating activities, year ended December 31, 2013 ...............................
Net cash provided by financing activities, year ended December 31, 2013 ...............................
Net cash provided by operating activities, three months ended March 31, 2014 .......................
Net cash provided by financing activities, three months ended March 31, 2014 .......................
$
$
3,855
742
11,041
1,524
22,854
2,827
26,283
6,876
9,189
297
45
(45)
318
(318)
357
(357)
771
(771)
5
(5)
$
3,900
697
11,359
1,206
23,211
2,470
27,054
6,105
9,194
292
46
HEALTHSTREAM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
6. GOODWILL
Goodwill is evaluated for impairment at least annually to determine whether it is more likely than not that the fair value of the
reporting units exceed their carrying value. If this assessment concludes that is more likely than not that the fair value of a reporting
unit exceeds its carrying value, then goodwill is not considered impaired and no further impairment testing is required. Qualitative
factors are considered for this assessment, such as, financial performance, industry and market comparables, and other factors
affecting the reporting unit. If the assessment concludes that it is more likely than not that the fair value of a reporting unit is less
than its carrying value, a goodwill impairment test is performed to compare the fair value of the reporting unit to its carrying value.
The Company determines fair value of the reporting units using both income and market based models. Under these methods, the
technique used to determine fair value is sensitive to estimates and assumptions associated with cash flow from operations and its
growth, discount rates, and reporting unit terminal values. The Company performs its annual impairment evaluation of goodwill
during the fourth quarter of each year and as changes in facts and circumstances indicate impairment exists. During the annual
impairment evaluation in the fourth quarter of 2014 and 2013, the results of our assessment indicated goodwill was not impaired.
During 2014, the Company acquired Health Care Compliance Strategies, Inc., and during 2013, the Company acquired Baptist
Leadership Group. The changes in the carrying amount of goodwill for the years ended December 31, 2014 and 2013 are as follows (in
thousands):
Balance at January 1, 2014 ..................................................
Acquisition of Health Care Compliance Strategies, Inc. ...
Balance at December 31, 2014 ............................................
Balance at January 1, 2013 ..................................................
Acquisition of Sy.Med Development, Inc. .........................
Acquisition of Baptist Leadership Group ...........................
Balance at December 31, 2013 ............................................
7. INTANGIBLE ASSETS
Workforce
Development
11,592
6,168
17,760
Workforce
Development
11,459
133
--
11,592
$
$
$
$
Research/Patient
Experience
$
$
24,154
--
24,154
Research/Patient
Experience
$
$
17,840
--
6,314
24,154
Total
35,746
6,168
41,914
Total
29,299
133
6,314
35,746
$
$
$
$
All intangible assets are considered to have finite useful lives. Customer related intangibles are amortized over their estimated useful
lives ranging from eight to ten years. Other intangible assets include non-competition agreements, technology and patents, and trade
names, and are being amortized over periods ranging from five to nine years. Amortization of intangible assets was approximately $2.4
million, $1.5 million, and $1.1 million, for the years ended December 31, 2014, 2013 and 2012, respectively.
Identifiable intangible assets are comprised of the following (in thousands):
As of December 31, 2014
As of December 31, 2013
Customer related ...............
Other..................................
Total
Gross Amount
23,329
$
5,300
28,629
$
Accumulated
Amortization
$
$
$
(11,880)
(1,954)
(13,834) $
Net
11,449
3,346
14,795
Gross Amount
16,889
$
3,370
20,259
$
Accumulated
Amortization
(10,145)
(1,244)
(11,389)
$
$
Net
6,744
2,126
8,870
$
$
The expected future annual amortization expense for the years ending December 31, is as follows (in thousands):
2015 ........................................................................................................................................................................................................
2016 ........................................................................................................................................................................................................
2017 ........................................................................................................................................................................................................
2018 ........................................................................................................................................................................................................
2019 .......................................................................................................................................................................................................
Thereafter ..............................................................................................................................................................................................
Total ..................................................................................................................................................................................................
$
$
2,263
2,174
2,097
1,986
1,616
4,659
14,795
47
HEALTHSTREAM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
8. BUSINESS SEGMENTS
The Company provides services to healthcare organizations and other members within the healthcare industry. These services are
primarily focused on the delivery of workforce development products and services (HealthStream Workforce Development Solutions),
as well as survey and research services (HealthStream Research/Patient Experience Solutions).
The Company measures segment performance based on operating income before income taxes and prior to the allocation of certain
corporate overhead expenses, interest income, interest expense, gains and losses from equity investments, and depreciation. The
Unallocated component below includes corporate functions, such as accounting, human resources, legal, investor relations,
administrative, and executive personnel, depreciation, a portion of amortization, and certain other expenses, which are not currently
allocated in measuring segment performance. The following is the Company’s business segment information as of and for the years
ended December 31, 2014, 2013 and 2012 (in thousands).
Revenues, net:
Workforce Development ............................................................................
Research/Patient Experience ......................................................................
Total revenues, net ............................................................................................
Income from operations:
Workforce Development ............................................................................
Research/Patient Experience ......................................................................
Unallocated .................................................................................................
Total income from operations ..........................................................................
2014
$ 138,789
31,901
$ 170,690
2014
36,200
810
(20,635)
16,375
$
$
2013
$ 103,820
28,454
$ 132,274
2013
28,480
2,819
(16,633)
14,666
$
$
2012
$
78,566
25,166
$ 103,732
2012
23,418
2,399
(12,358)
13,459
$
$
Workforce Development ...
Research/Patient Experience
Unallocated ........................
Total ...................................
2014
$ 92,092
34,536
130,634
$ 257,262
Assets *
2013
$ 60,013
34,727
117,814
$ 212,594
2012
$ 46,693
23,978
103,857
$ 174,528
Purchases of long-lived assets
2012
2013
2014
Depreciation and amortization
2012
2013
2014
$
7,379
1,277
1,546
$ 10,202
$
$
6,310
726
1,675
8,711
$
$
5,264
1,019
2,468
8,751
$
5,496
1,272
4,163
$ 10,931
$
$
3,512
1,068
3,272
7,852
$
$
2,877
1,179
2,605
6,661
* Segment assets include accounts and unbilled receivables, prepaid royalties, prepaid and other current assets, other assets, capitalized software development, certain property and
equipment, and intangible assets. Cash and cash equivalents and marketable securities are not allocated to individual segments, and are included within Unallocated. A significant
portion of property and equipment assets are included within Unallocated.
9. INCOME TAXES
The provision for income taxes is comprised of the following (in thousands):
Current federal .........................................................................................................
Current state .............................................................................................................
Deferred federal .......................................................................................................
Deferred state ...........................................................................................................
Provision for income taxes ..................................................................................
$
$
3,198
1,605
1,092
232
6,127
$
$
2,474
1,444
2,315
191
6,424
$
$
58
273
4,804
797
5,932
2014
Year Ended December 31,
2013
2012
A reconciliation of income taxes at the statutory federal income tax rate to the provision for income taxes included in the
accompanying consolidated statements of income is as follows (in thousands):
2014
Year Ended December 31,
2013
2012
Federal tax provision at the statutory rate ................................................................
State income tax provision, net of federal benefit ....................................................
Tax credits ................................................................................................................
Change in state valuation allowance .......................................................................
Other..........................................................................................................................
Provision for income taxes ...................................................................................
$
$
5,782
1,350
(1,160)
37
118
6,127
$
$
5,194
898
(54)
231
155
6,424
$
$
4,751
974
--
--
207
5,932
Management periodically assesses the realizability of its deferred tax assets, and to the extent that a recovery is not likely, a valuation
allowance is established to reduce the deferred tax asset to the amount estimated to be recoverable. At December 31, 2014, a valuation
allowance of $0.4 million exists.
48
HEALTHSTREAM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
9. INCOME TAXES (continued)
As of December 31, 2014, the Company had federal and state net operating loss carryforwards of $7.8 million and $11.2 million,
respectively. These loss carryforwards will expire in years 2015 through 2024. The Company is subject to income taxation at the federal
and various state levels. The Company is subject to U.S. federal tax examinations for tax years 2011 through 2014. Loss carryforwards
and credit carryforwards generated or utilized in years earlier than 2011 are also subject to examination and adjustment. The Company
has no income tax examinations in process. The Company has research and development tax credit carryforwards of $2.0 million that
expire in varying amounts through 2033. As of December 31, 2014, the Company had alternative minimum tax credit carryforwards
of $791,000 that are available to offset future regular tax liabilities and they do not expire.
A reconciliation of the beginning and ending liability for gross unrecognized tax benefits at December 31, 2014 and 2013, are as
follows (in thousands):
December 31,
2014
2013
Balance at beginning of year ................................................................................................................................
Additions for tax positions in the current year .....................................................................................................
Reductions for tax positions of prior years
Balance at end of year ...........................................................................................................................................
$
$
167
2,168
(167)
2,168
$
$
--
167
--
167
The Company recognized approximately $125,000 and $2,000 for interest and penalties related to unrecognized tax benefits within
the provision for income taxes during the years ended December 31, 2014 and 2013, respectively.
If recognized, approximately $278,000 of the unrecognized tax benefits at December 31, 2014, would reduce the Company’s effective
tax rate. The Company estimates that it is reasonably possible the liability for unrecognized tax benefits could decrease up to $1.7 million
within the next 12 months, as it expects to file a change in tax accounting method with the IRS for tangible property and deferred revenue.
Deferred federal and state income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and
liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of deferred tax assets
and deferred tax liabilities are as follows (in thousands):
Deferred tax assets:
Allowance for doubtful accounts ......................................................................................................................
Accrued liabilities .............................................................................................................................................
Tax credits .........................................................................................................................................................
Stock based compensation ...............................................................................................................................
Deferred revenue ..............................................................................................................................................
Depreciation .....................................................................................................................................................
Net operating loss carryforwards ......................................................................................................................
$
Total deferred tax assets
Less: Valuation allowance ................................................................................................................................
Deferred tax assets, net of valuation allowance ..................................................................................................
Deferred tax liabilities:
Deductible goodwill ..............................................................................................................................................
Nondeductible intangible assets ...........................................................................................................................
Prepaid assets ........................................................................................................................................................
Capitalized software development .......................................................................................................................
Depreciation ..........................................................................................................................................................
Basis difference on investments ...........................................................................................................................
Total deferred tax liabilities ......................................................................................................................................
December 31,
2014
2013
$
134
1,565
791
1,015
616
715
355
5,191
(355)
4,836
2,369
2,171
1,602
3,836
--
343
10,321
84
1,225
702
966
--
--
1,256
4,233
(1,325)
2,908
2,020
2,677
781
2,910
341
533
9,262
Net deferred tax liabilities .........................................................................................................................................
$
(5,485)
$
(6,354)
49
HEALTHSTREAM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
10. STOCK BASED COMPENSATION
Stock Incentive Plans
The Company’s 2010 Stock Incentive Plan (2010 Plan) and 2000 Stock Incentive Plan (2000 Plan; collectively, the 2010 Plan and the
2000 Plan referred to as the Plan) authorize the grant of options, restricted share units (RSU), or other forms of stock based compensation
to employees, officers, directors and others, and such grants must be approved by the Compensation Committee of the Board of Directors.
Options granted under the Plan have terms of no more than ten years, with certain restrictions. The Plan allows the Compensation
Committee of the Board of Directors to determine the vesting period and parameters of each grant. The vesting period of the options and
RSUs granted has historically ranged from immediate vesting to annual vesting up to four years, beginning one year after the grant date.
As of December 31, 2014, approximately 723,000 shares of unissued common stock remained reserved for future stock incentive grants
under the Plan. The Company issues new shares of common stock when options are exercised or when RSUs become vested.
Stock Option Activity
A summary of activity and various other information relative to stock options for the year ended December 31, 2014 is presented in the
tables below (in thousands, except exercise price).
Outstanding at beginning of period ............................................................
Granted ........................................................................................................
Exercised .....................................................................................................
Expired ........................................................................................................
Forfeited ......................................................................................................
Outstanding at end of period .......................................................................
Exercisable at end of period. .......................................................................
Common
Shares
837
--
(238)
--
(3)
596
532
$
Weighted-
Average
Exercise Price
5.73
--
4.59
--
7.66
6.18
5.97
$
$
Aggregate
Intrinsic Value
$
$
13,894
12,495
The aggregate intrinsic value for stock options in the table above represents the total difference between the Company’s closing stock
price on December 31, 2014 (the last trading day of the year) of $29.48 and the option exercise price, multiplied by the number of in-
the-money options as of December 31, 2014. The weighted average remaining contractual term of options outstanding at December 31,
2014 was 3.2 years. Options exercisable at December 31, 2014 have a weighted average remaining contractual term of 3.1 years.
Other information relative to option activity during the three years ended December 31, 2014 is as follows (in thousands):
Total grant date fair value of stock options vested .................................................
Total intrinsic value of stock options exercised .....................................................
Cash proceeds from exercise of stock options ........................................................
$
$
$
630
5,912
1,094
$
$
$
723
25,846
3,318
$
$
$
878
4,992
823
2014
2013
2012
Restricted Share Unit Activity
A summary of activity relative to RSUs for the year ended December 31, 2014 is follows (in thousands, except weighted average grant
date fair value):
Outstanding at beginning of period ............................................................
Granted ........................................................................................................
Vested .........................................................................................................
Forfeited ......................................................................................................
Outstanding at end of period ....................................................................
137
71
(35)
(9)
164
$
$
22.53
28.64
22.57
24.85
25.04
$
4,839
Number of
RSU’s
Weighted-
Average
Grant Date Fair Value
Aggregate
Intrinsic Value
50
HEALTHSTREAM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
10. STOCK BASED COMPENSATION (continued)
The aggregate fair value of RSU awards that vested in 2014, as of the respective vesting dates, was approximately $1.1 million. A portion
of RSUs that vested in 2014 and 2013 were net-share settled such that the Company withheld shares with value equivalent to the
employees’ minimum statutory obligation for the applicable income and other employment taxes, and remitted the cash to the appropriate
taxing authorities. The total shares withheld for RSUs during 2014 and 2013 were 5,327 and 2,210, respectively, and were based on the
value of the RSUs on their respective vesting dates as determined by the Company’s closing stock price. One stock option exercise was
net-share settled during 2013, resulting in 7,606 shares withheld for settlement of employee tax obligations. Total payments related to
RSUs and stock options for the employees’ tax obligations to taxing authorities were approximately $161,000 in 2014 and $164,000 in
2013, and are reflected as a financing activity within the Consolidated Statements of Cash Flows. These net-share settlements had the
effect of share repurchases by the Company as they reduced and retired the number of shares that would have otherwise been issued as
a result of the vesting and did not represent an expense to the Company.
Stock Based Compensation
Total stock based compensation expense recorded for the three years ended December 31, 2014, which is recorded in our Consolidated
Statements of Income, is as follows (in thousands):
Cost of revenues (excluding depreciation and amortization) .......................
Product development ....................................................................................
Sales and marketing .....................................................................................
Other general and administrative .................................................................
Total stock based compensation expense ............................................
$
$
Years Ended December 31,
2014
86
201
224
1,114
1,625
$
$
2013
81
144
175
1,058
1,458
$
$
2012
45
133
151
807
1,136
The Company amortizes the fair value of all stock based awards, net of estimated forfeitures, on a straight-line basis over the requisite
service period, which generally is the vesting period. As of December 31, 2014, total unrecognized compensation expense related to
non-vested stock options and RSUs was approximately $2.7 million, net of estimated forfeitures, with a weighted average expense
recognition period remaining of 2.4 years. The Company realized approximately $3.2 million of excess tax benefits during the year
ended December 31, 2014, which was recorded as an increase to common stock.
Stock based compensation cost for RSUs is measured based on the closing fair market value of the Company’s stock on the date of grant.
Stock based compensation cost for stock options is estimated at the grant date based on the fair value calculated using the Black-Scholes
method. The Company did not grant any stock options during 2014, 2013 or 2012.
11. EMPLOYEE BENEFIT PLAN
401(k) Plan
The Company has a defined-contribution employee benefit plan (401(k) Plan) incorporating provisions of Section 401(k) of the Internal
Revenue Code. Employees must have attained the age of 21 and have completed thirty days of service to be eligible to participate in the
401(k) Plan. Under the provisions of the 401(k) Plan, a plan member may make contributions, on a tax-deferred basis, subject to IRS
limitations. The Company elected to provide eligible employees with matching contributions totaling approximately $274,000 for the
year ended December 31, 2014.
51
HEALTHSTREAM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
12. DEBT
At December 31, 2014 and 2013, the Company had no debt outstanding.
Revolving Credit Facility
The Company maintains a Loan Agreement (the “Revolving Credit Facility”) with SunTrust Bank (“SunTrust”) in the aggregate
principal amount of $50.0 million, which matures on November 24, 2017. Under the Revolving Credit Facility, the Company may
borrow up to $50.0 million, which includes a $5.0 million swing line subfacility, as well as an accordion feature that allows the Company
to increase the Revolving Credit Facility by a total of up to $25.0 million, subject to securing additional commitments from existing
lenders or new lending institutions. The Revolving Credit Facility includes a $5.0 million letter of credit subfacility. 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’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”), plus an applicable margin, or (2) the one,
two, three, or six-month per annum LIBOR for deposits in the applicable currency (the “Eurocurrency Rate”), as selected by the
Company, plus an applicable margin. The applicable margin for Eurocurrency Rate loans depends on the Company’s funded debt
leverage ratio and varies from 1.50% to 2.00%. The applicable margin for Base Rate loans depends on the Company’s funded debt
leverage ratio and varies from 0.50% to 1.50%. Commitment fees and letter of credit fees are also payable under the Revolving Credit
Facility. Principal is payable in full at maturity on November 24, 2017, and there are no 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 purpose of the Revolving Credit Facility is for general working capital needs, permitted acquisitions (as defined in the Loan
Agreement), 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.
In addition, the Revolving Credit Facility requires the Company to meet certain financial tests, including, without limitation:
(cid:120) a funded debt leverage ratio (consolidated debt/consolidated EBITDA) of not greater than 3.0 to 1.0; and
(cid:120) an interest coverage ratio (consolidated EBITDA/consolidated interest expense) of not less than 3.0 to 1.0.
As of December 31, 2014, the Company was in compliance with all covenants. There were no balances outstanding on the revolving
credit facility as of December 31, 2014.
13. LEASES
The Company has non-cancellable operating leases primarily for office space and office equipment. Some lease agreements contain
provisions for escalating rent payments over the initial terms of the lease. The Company accounts for these leases by recognizing rent
expense on a straight-line basis and adjusting the deferred rent expense liability for the difference between the straight-line rent expense
and the amount of rent paid. The Company also leases certain office equipment under operating leases. Total rent expense under all
operating leases was approximately $3.1 million, $2.4 million, and $2.2 million, for the years ended December 31, 2014, 2013, and 2012,
respectively.
Future rental payment commitments at December 31, 2014 under non-cancelable operating leases, with initial terms of one year or more,
are as follows (in thousands):
2015 ......................................................................................................................................................
2016 ......................................................................................................................................................
2017 .......................................................................................................................................................
2018 .......................................................................................................................................................
2019 ......................................................................................................................................................
Thereafter ..............................................................................................................................................
Total minimum lease payments ............................................................................................................
$
$
3,111
1,973
1,120
747
707
2,856
10,514
52
HEALTHSTREAM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
14. LITIGATION
In the ordinary course of business, the Company is from time to time involved in various legal actions. The litigation process is
inherently uncertain and it is possible that the resolution of such matters might have a material adverse effect upon the financial
condition and/or results of operations of the Company. However, in the opinion of the Company’s management, matters currently
pending or threatened against the Company are not expected to have a material adverse effect on the financial position or results of
operations of the Company.
15. SUBSEQUENT EVENT
On February 12, 2015, the Company entered into a definitive agreement to acquire all of the stock of HealthLine Systems, Inc.
(HealthLine Systems) a San Diego, California based company that specializes in healthcare credentialing, privileging, and quality
management software services. The acquisition of HealthLine Systems will enable the Company to provide a comprehensive, SaaS-
based solution set for healthcare provider credentialing, privileging, and enrollment in support of HealthStream’s approach to talent
management for healthcare organizations. The consideration to be paid for HealthLine Systems consists of approximately $88.0
million in cash, subject to a post-closing working capital adjustment. The closing of the transaction is anticipated to occur in the first
quarter of 2015 and is subject to customary closing conditions, including the expiration or early termination of the waiting period
applicable to the transaction under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended.
Following the closing of the transaction, the Company intends to combine HealthLine Systems with its Sy.Med business. Both
HealthLine Systems and Sy.Med will continue to operate at their current locations in San Diego, California and Brentwood,
Tennessee, respectively. In addition, Michael Sousa, senior vice president of business development, has been selected to serve as
President for this business unit following the closing of the acquisition.
53
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Item 9A. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
HealthStream’s chief executive officer and principal financial officer have reviewed and evaluated the effectiveness of the Company’s
disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) promulgated under the Securities Exchange Act of
1934 (the “Exchange Act”)) as of December 31, 2014. Based on that evaluation, the chief executive officer and principal financial
officer have concluded that HealthStream’s disclosure controls and procedures were effective to ensure that the information required
to be disclosed by the Company in the reports the Company files or submits under the Exchange Act is recorded, processed,
summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and the
information required to be disclosed in the reports the Company files or submits under the Exchange Act was accumulated and
communicated to the Company’s management, including its principal executive and principal financial officer, or persons performing
similar functions, as appropriate to allow timely decisions regarding required disclosure.
Management’s Annual Report On Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in
Rules 13a-15(f) and 15d-15(f) under the Exchange Act, and for assessing the effectiveness of internal control over financial reporting.
The Company’s internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external purposes in accordance with GAAP. The Company’s
internal control over financial reporting includes those policies and procedures that: (1) pertain to the maintenance of records that, in
reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company; (2) provide reasonable
assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with GAAP, and
that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors
of the Company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or
disposition of the Company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections
of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes
in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Management assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2014. In
making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway
Commission in Internal Control-Integrated Framework (2013 Framework). Management’s assessment included an evaluation of the
design of our internal control over financial reporting and testing of the operational effectiveness of our internal control over financial
reporting. Management believes that, as of December 31, 2014, the Company’s internal control over financial reporting was effective
based on those criteria. The Company’s independent registered public accounting firm, Ernst & Young LLP, has issued an audit
report on the Company’s internal control over financial reporting, which appears in Item 8 of this Annual Report on Form 10-K.
Changes in Internal Control Over Financial Reporting
There were no changes in HealthStream’s internal control over financial reporting that occurred during the fourth quarter of 2014
that have materially affected, or that are reasonably likely to materially affect, HealthStream’s internal control over financial
reporting.
Item 9B. Other Information
None.
54
Item 10. Directors, Executive Officers and Corporate Governance
PART III
Information as to directors of the Company and corporate governance is incorporated by reference from the information contained in our
2015 proxy statement for the 2015 Annual Meeting of Shareholders (2015 Proxy Statement) that we will file with the Securities and
Exchange Commission within 120 days of the end of the fiscal year to which this report relates. Pursuant to General Instruction G(3),
certain information concerning executive officers of the Company is included in Part I of this Form 10-K, under the caption “Executive
Officers of the Registrant.”
Item 11. Executive Compensation
Incorporated by reference from the information contained in the Company’s 2015 Proxy Statement.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Incorporated by reference from the information contained in the Company’s 2015 Proxy Statement.
Item 13. Certain Relationships and Related Transactions, and Director Independence
Incorporated by reference from the information contained in the Company’s 2015 Proxy Statement.
Item 14. Principal Accounting Fees and Services
Incorporated by reference from the information contained in the Company’s 2015 Proxy Statement.
55
Item 15. Exhibits, Financial Statement Schedules
(a)(1) Financial Statements
PART IV
Reference is made to the financial statements included in Item 8 to this Report on Form 10-K.
(a)(2) Financial Statement Schedules
All schedules are omitted because they are not applicable or the required information is shown in the Consolidated Financial
Statements or the notes thereto.
(a)(3) Exhibits
Number
Description
2.1 (1)
2.2 (2)
2.3 (3)
3.1*
3.2*
4.1*
4.2*
10.1^*
10.2^ (7)
10.3^*
10.4^ (4)
10.5^ (5)
10.6^ (5)
10.7^ (5)
10.8^ (6)
10.9^ (6)
10.10 (8)
Stock Purchase Agreement, dated as of March 28, 2005, by and among HealthStream, Inc., Mel B. Thompson and Data Management &
Research, Inc.
Stock Purchase Agreement, dated as of March 12, 2007, by and among HealthStream, Inc., The Jackson Organization, Research
Consultants, Inc., David Jackson and the Jackson Charitable Remainder Trust
Membership Interest Purchase Agreement, dated as of February 12, 2015, between HealthStream, Inc., Littrell Holdings, Inc., HealthLine
Systems, Inc., the Shareholders of HealthLine Systems, Inc., and Dan Littrell in his individual capacity and as the Shareholders
Representative.
Form of Fourth Amended and Restated Charter of HealthStream, Inc.
Form of Amended and Restated Bylaws of HealthStream, Inc.
Form of certificate representing the common stock, no par value per share, of HealthStream, Inc.
Reference is made to Exhibits 3.1 and 3.2.
2000 Stock Incentive Plan, effective as of April 10, 2000
2010 Stock Incentive Plan, effective as of May 27, 2010
Form of Indemnification Agreement
Executive Employment Agreement, dated July 21, 2005, between HealthStream, Inc. and Robert A. Frist, Jr.
Form of HealthStream, Inc. Non-Qualified Stock Option Agreement (Employees)
Form of HealthStream, Inc. Incentive Stock Option Agreement (Employees)
Form of HealthStream, Inc. Non-Qualified Stock Option Agreement (Directors)
Form of HealthStream, Inc. Restricted Share Unit Agreement (Officers)
Form of HealthStream, Inc. Restricted Share Unit Agreement (Non-Employee Director)
Revolving Credit Agreement, dated November 24, 2014, by and among HealthStream, Inc., the several banks and other financial institutions
and lenders from time to time party thereto and SunTrust Bank, as administrative agent, issuing bank, and swingline lender
Summary of Director and Executive Officer Compensation
Subsidiaries of HealthStream, Inc.
Consent of Independent Registered Public Accounting Firm
Certification of the Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
Certification of the Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
XBRL Instance Document
XBRL Taxonomy Extension Schema
10.11^
21.1
23.1
31.1
31.2
32.1
32.2
101.1 INS
101.1 SCH
101.1 CAL XBRL Taxonomy Extension Calculation Linkbase
101.1 DEF XBRL Taxonomy Extension Definition Linkbase
101.1 LAB XBRL Taxonomy Extension Label Linkbase
101.1 PRE XBRL Taxonomy Extension Presentation Linkbase
*
^
(1)
(2)
(3)
(4)
(5)
(6)
(7)
(8)
Incorporated by reference to Registrant's Registration Statement on Form S-1, as amended (Reg. No. 333-88939).
Management contract or compensatory plan or arrangement
Incorporated by reference from exhibit filed on our Current Report on Form 8-K, dated March 29, 2005.
Incorporated by reference from exhibit filed on our Current Report on Form 8-K, dated March 12, 2007.
Incorporated by reference from exhibit filed on our Current Report on Form 8-K, dated February 13, 2015.
Incorporated by reference from exhibit filed on our Current Report on Form 8-K, dated July 25, 2005.
Incorporated by reference from exhibit filed on our Current Report on Form 8-K, dated June 1, 2010.
Incorporated by reference from exhibit filed on our Quarterly Report on Form 10-Q, dated March 31, 2012.
Incorporated by reference to Appendix B of the Company’s Definitive Proxy Statement filed with the SEC on April 29, 2010.
Incorporated by reference from exhibit field on our Current Report on Form 8-K, dated November 25, 2014.
56
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized on this 27th day of February, 2015.
SIGNATURES
HEALTHSTREAM, INC.
By:/s/ ROBERT A. FRIST, JR.
Robert A. Frist, Jr.
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the
registrant and in the capacities and on the dates indicated:
Signature
Title(s)
Date
/s/ ROBERT A. FRIST, JR.
Robert A. Frist, Jr.
/s/ GERARD M. HAYDEN, JR.
Gerard M. Hayden, Jr.
/s/ THOMPSON DENT
Thompson Dent
/s/ FRANK GORDON
Frank Gordon
/s/ C. MARTIN HARRIS
C. Martin Harris
/s/ JEFFREY L. MCLAREN
Jeffrey L. McLaren
/s/ DALE POLLEY
Dale Polley
/s/ LINDA REBROVICK
Linda Rebrovick
/s/ MICHAEL SHMERLING
Michael Shmerling
/s/ WILLIAM STEAD
William Stead
/s/ DEBORAH TAYLOR TATE
Deborah Taylor Tate
February 27, 2015
February 27, 2015
February 27, 2015
February 27, 2015
February 27, 2015
February 27, 2015
February 27, 2015
February 27, 2015
February 27, 2015
February 27, 2015
February 27, 2015
President, Chief Executive Officer and
Chairman (Principal Executive Officer)
Chief Financial Officer and Senior Vice President
(Principal Financial and Accounting Officer)
Director
Director
Director
Director
Director
Director
Director
Director
Director
57
INDEX TO EXHIBITS
Description
Exhibit
Number
2.1 (1)
2.2 (2)
2.3 (3)
3.1*
3.2*
4.1*
4.2*
10.1^*
10.2^ (7)
10.3^*
10.4^ (4)
10.5^ (5)
10.6^ (5)
10.7^ (5)
10.8^ (6)
10.9^ (6)
10.10 (8)
Stock Purchase Agreement, dated as of March 28, 2005, by and among HealthStream, Inc., Mel B. Thompson and Data Management &
Research, Inc.
Stock Purchase Agreement, dated as of March 12, 2007, by and among HealthStream, Inc., The Jackson Organization, Research
Consultants, Inc., David Jackson and the Jackson Charitable Remainder Trust
Membership Interest Purchase Agreement, dated as of February 12, 2015, between HealthStream, Inc., Littrell Holdings, Inc., HealthLine
Systems, Inc., the Shareholders of HealthLine Systems, Inc., and Dan Littrell in his individual capacity and as the Shareholders
Representative
Form of Fourth Amended and Restated Charter of HealthStream, Inc.
Form of Amended and Restated Bylaws of HealthStream, Inc.
Form of certificate representing the common stock, no par value per share, of HealthStream, Inc.
Reference is made to Exhibits 3.1 and 3.2.
2000 Stock Incentive Plan, effective as of April 10, 2000
2010 Stock Incentive Plan, effective as of May 27, 2010
Form of Indemnification Agreement
Executive Employment Agreement, dated July 21, 2005, between HealthStream, Inc. and Robert A. Frist, Jr.
Form of HealthStream, Inc. Non-Qualified Stock Option Agreement (Employees)
Form of HealthStream, Inc. Incentive Stock Option Agreement (Employees)
Form of HealthStream, Inc. Non-Qualified Stock Option Agreement (Directors)
Form of HealthStream, Inc. Restricted Share Unit Agreement (Officers)
Form of HealthStream, Inc. Restricted Share Unit Agreement (Non-Employee Director)
Revolving Credit Agreement, dated November 24, 2014, by and among HealthStream, Inc., the several banks and other financial
institutions and lenders from time to time party thereto and SunTrust Bank, as administrative agent, issuing bank, and swingline lender
Summary of Director and Executive Officer Compensation
Subsidiaries of HealthStream, Inc.
Consent of Independent Registered Public Accounting Firm
Certification of the Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
Certification of the Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
XBRL Instance Document
XBRL Taxonomy Extension Schema
10.11^
21.1
23.1
31.1
31.2
32.1
32.2
101.1 INS
101.1 SCH
101.1 CAL XBRL Taxonomy Extension Calculation Linkbase
101.1 DEF XBRL Taxonomy Extension Definition Linkbase
101.1 LAB XBRL Taxonomy Extension Label Linkbase
101.1 PRE XBRL Taxonomy Extension Presentation Linkbase
*
^
(1)
(2)
(3)
(4)
(5)
(6)
(7)
(8)
Incorporated by reference to Registrant's Registration Statement on Form S-1, as amended (Reg. No. 333-88939).
Management contract or compensatory plan or arrangement
Incorporated by reference from exhibit filed on our Current Report on Form 8-K, dated March 29, 2005.
Incorporated by reference from exhibit filed on our Current Report on Form 8-K, dated March 12, 2007.
Incorporated by reference from exhibit filed on our Current Report on Form 8-K, dated February 13, 2015.
Incorporated by reference from exhibit filed on our Current Report on Form 8-K, dated July 25, 2005.
Incorporated by reference from exhibit filed on our Current Report on Form 8-K, dated June 1, 2010.
Incorporated by reference from exhibit filed on our Quarterly Report on Form 10-Q, dated March 31, 2012.
Incorporated by reference to Appendix B of the Company’s Definitive Proxy Statement filed with the SEC on April 29, 2010.
Incorporated by reference from exhibit field on our Current Report on Form 8-K, dated November 25, 2014.
HealthStream, Inc. (the “Company”)
Summary of Director and Executive Officer Compensation
EXHIBIT 10.11
I. Director Compensation. Directors who are employees of the Company do not receive additional compensation for serving as
directors of the Company. The following table sets forth current rates of cash compensation for the Company’s non-employee
directors.
Retainers and Fees
Annual Retainer fee
Board meeting fee
Committee chair meeting fee
Committee member meeting fee
2015
$4,000
$1,000
$1,000
$500
In addition to the cash compensation set forth above, each non-employee director is eligible to receive a nondiscretionary
annual grant of restricted share units for conversion to shares of the Company’s common stock. The restricted share units are granted
annually and vest ratably over a three year period.
II. Executive Officer Compensation. The following table sets forth the current base salaries and fiscal 2014 performance bonuses
provided to our executive officers, including the individuals who the Company expects to be its Named Executive Officers for 2015.
Executive Officer
Robert A. Frist, Jr.
J. Edward Pearson
Arthur E. Newman
Gerard M. Hayden, Jr.
Jeffrey S. Doster
Michael Sousa
Thomas Schultz
Current Base Salary
$ 283,343
$ 267,729
$ 253,071
$ 248,745
$ 248,745
$ 260,000
$ 200,000
Fiscal 2014 Bonus Amount
$ 85,001
$ 80,317
$ 75,920
$ 74,622
$ 74,622
$ 35,341
$ -0-
III. Additional Information. The foregoing information is summary in nature. Additional information regarding Director and Named
Executive Officer compensation will be contained in the Company’s 2015 Proxy Statement.
SUBSIDIARIES OF HEALTHSTREAM, INC.
Names Under Which We Do Business
Data Management & Research, Inc.
The Jackson Organization, Research Consultants, Inc.
Decision Critical, Inc.
Sy.Med Development, Inc.
Health Care Compliance Strategies, Inc.
HealthStream Acquisition I, Inc.
HealthStream Acquisition II, Inc.
EXHIBIT 21.1
State or Other Jurisdiction of
Incorporation or
Organization
Tennessee
Maryland
Texas
Tennessee
New York
Tennessee
Tennessee
EXHIBIT 23.1
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We consent to the incorporation by reference in the following Registration Statements:
(1) Registration Statement (Form S-8 No. 333-167241) pertaining to the 2010 Stock Incentive Plan of HealthStream, Inc.,
(2) Registration Statement (Form S-8 No. 333-37440) pertaining to the 1994 Employee Stock Option Plan, 2000 Stock
Incentive Plan and Employee Stock Purchase Plan of HealthStream, Inc., and
(3) Registration Statement (Form S-3 No. 333-198059) of HealthStream, Inc.
of our reports dated February 27, 2015, with respect to the consolidated financial statements of HealthStream, Inc., and the
effectiveness of internal control over financial reporting of HealthStream, Inc., included in this Annual Report (Form 10-K) of
HealthStream, Inc. for the year ended December 31, 2014.
/s/ Ernst & Young LLP
Nashville, Tennessee
February 27, 2015
EXHIBIT 31.1
CERTIFICATION
I, Robert A. Frist, Jr., certify that:
1. I have reviewed this annual report on Form 10-K of HealthStream, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to
the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all
material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented
in this report;
4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures
(as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange
Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under
our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made
known to us by others within those entities, particularly during the period in which this report is being prepared;
b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be
designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this
report based on such evaluation; and(cid:3)
d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the
registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially
affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and
5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial
reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the
equivalent functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting
which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial
information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the
registrant's internal control over financial reporting.
Date: February 27, 2015
/s/ ROBERT A. FRIST, JR.
Robert A. Frist, Jr.
Chief Executive Officer
EXHIBIT 31.2
CERTIFICATION
I, Gerard M. Hayden, Jr., certify that:
1. I have reviewed this annual report on Form 10-K of HealthStream, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to
the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all
material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented
in this report;
4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures
(as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange
Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under
our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made
known to us by others within those entities, particularly during the period in which this report is being prepared;
b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be
designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this
report based on such evaluation; and(cid:3)
d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the
registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially
affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and
5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial
reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the
equivalent functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting
which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial
information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the
registrant's internal control over financial reporting.
Date: February 27, 2015
/s/ GERARD M. HAYDEN, JR.
Gerard M. Hayden, Jr.
Chief Financial Officer
EXHIBIT 32.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of HealthStream, Inc. (the “Company”) on Form 10-K for the year ending December 31, 2014,
as filed with the Securities and Exchange Commission on the date hereof (the “Report”), Robert A. Frist, Jr., Chief Executive Officer
of the Company certifies, pursuant to 18 U.S.C. §1350, as adopted pursuant to §906 of the Sarbanes-Oxley Act of 2002, that:
(1)
(2)
The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of
1934; and
The information contained in the Report fairly presents, in all material respects, the financial condition and
results of operations of the Company.
/s/ ROBERT A. FRIST, JR.
Robert A. Frist, Jr.
Chief Executive Officer
February 27, 2015
EXHIBIT 32.2
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of HealthStream, Inc. (the “Company”) on Form 10-K for the year ending December 31, 2014,
as filed with the Securities and Exchange Commission on the date hereof (the “Report”), Gerard M. Hayden, Jr., Chief Financial
Officer of the Company certifies, pursuant to 18 U.S.C. § 1350, as adopted pursuant to §906 of the Sarbanes-Oxley Act of 2002, that:
(1)
(2)
The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of
1934; and
The information contained in the Report fairly presents, in all material respects, the financial condition and
results of operations of the Company.
/s/ GERARD M. HAYDEN, JR.
Gerard M. Hayden, Jr.
Chief Financial Officer
February 27, 2015