HealthStream
Annual Report 2016

Plain-text annual report

HEALTHSTREAM INC FORM 10-K (Annual Report) Filed 02/27/17 for the Period Ending 12/31/16 Address Telephone CIK 209 10TH AVE SOUTH STE 450 NASHVILLE, TN 37203 6153013100 0001095565 Symbol HSTM SIC Code 7370 - Computer Programming, Data Processing, And Industry Healthcare Facilities & Services Sector Healthcare Fiscal Year 12/31 http://www.edgar-online.com © Copyright 2017, EDGAR Online, Inc. All Rights Reserved. Distribution and use of this document restricted under EDGAR Online, Inc. Terms of Use. Table of Contents UNITED STATESSECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549 FORM 10-K ☒ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934FOR THE FISCAL YEAR ENDED DECEMBER 31, 2016OR ☐TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934FOR THE TRANSITION PERIOD FROM TO Commission File Number 000-27701 HEALTHSTREAM, INC.(Exact name of registrant as specified in its charter) Tennessee 62-1443555(State or other jurisdiction ofincorporation or organization) (I.R.S. EmployerIdentification No.)209 10th Avenue South, Suite 450Nashville, Tennessee 37203(Address of principal executive offices) (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 Name of each Exchange on which registeredCommon Stock, No Par Value NASDAQ Global Select MarketSecurities 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 ☐ No ☒Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 of 15(d) of the Act. Yes ☐ No ☒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 thepreceding 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 thepast 90 days. Yes ☒ No ☐Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to besubmitted 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 submitand post such files). Yes ☒ No ☐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 ofregistrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form10-K. ☐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 thedefinitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. Large accelerated filer ☒ Accelerated filer ☐Non-accelerated filer ☐ Smaller reporting company ☐Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No ☒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 theCommon Stock on the NASDAQ Global Select Market on June 30, 2016 was approximately $674.6 million. All executive officers and directors of the registranthave been deemed, solely for the purpose of the foregoing calculation, to be “affiliates” of the registrant.As of February 24, 2017, there were 31,777,141 shares of the Registrant’s common stock outstanding.DOCUMENTS INCORPORATED BY REFERENCEPortions of the Registrant’s definitive Proxy Statement for its 2017 Annual Meeting of Shareholders are incorporated by reference into Part III hereof. Table of ContentsHEALTHSTREAM, INC.TABLE OF CONTENTSANNUAL REPORT ON FORM 10-K Page PART I Item 1. Business 1 Item 1A. Risk Factors 10 Item 1B. Unresolved Staff Comments 19 Item 2. Properties 19 Item 3. Legal Proceedings 19 Item 4. Mine Safety Disclosures 19 PART II Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities 20 Item 6. Selected Financial Data 22 Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations 22 Item 7A. Quantitative and Qualitative Disclosures About Market Risk 34 Item 8. Financial Statements and Supplementary Data 35 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 62 Item 9A. Controls and Procedures 62 Item 9B. Other Information 62 PART III Item 10. Directors, Executive Officers and Corporate Governance 63 Item 11. Executive Compensation 63 Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters 63 Item 13. Certain Relationships and Related Transactions, and Director Independence 63 Item 14. Principal Accounting Fees and Services 63 PART IV Item 15. Exhibits, Financial Statement Schedules 64 Signatures 65 Table of ContentsPART IThis Annual Report on Form 10-K contains forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934. Suchforward-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. Forward-looking statements involve known and unknown risks,uncertainties, and other factors that may cause our actual results, performance, or achievements to be materially different from future results, performance, orachievements expressed or implied by the forward-looking statements included herein. Factors that might cause or contribute to such differences include, but arenot 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, factorsthat we are not currently aware of could harm our future operating results. You should carefully review the risks described in other documents HealthStream filesfrom time to time with the Securities and Exchange Commission. You are cautioned not to place undue reliance on forward-looking statements, which speak onlyas 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 orreflect events or circumstances after the date of this document.Item 1. BusinessOVERVIEW AND HISTORYHealthStream, Inc. (HealthStream or the Company) provides workforce, patient experience, and provider solutions for healthcare organizations—all designed tosupport the people that deliver patient care which, in turn, supports the improvement of business and clinical outcomes. Delivered primarily as Software-as-a-Service (“SaaS”), our solutions focus on some of the most significant challenges facing the healthcare workforce and healthcare organizations today, including theneed to effectively manage, retain, engage, and develop healthcare workforce talent; meet rigorous compliance requirements; efficiently manage ongoing medicalstaff credentialing and privileging processes; and deliver optimal patient experiences of care in healthcare organizations.With 27 years of experience, HealthStream is recognized as a leading innovator and thought leader in the healthcare industry for its healthcare workforce solutions.Using technology to enhance learning and productivity, HealthStream pioneered the delivery of online learning for hospitals’ required regulatory training asInternet-based training was first introduced. Stemming from that early success, demand for expanded learning solutions led the Company to build what is now afull eco-system of diverse HR and clinical-focused applications, courseware, assessments, and talent management programs. At year-end 2016—with over4.5 million healthcare professionals subscribing to HealthStream’s platform through their respective organizations, HealthStream is a leading provider in workforcedevelopment in the healthcare industry.With its singular healthcare focus, HealthStream understands that healthcare organizations want to provide their patients with an engaged, confident, and competentworkforce that delivers optimal patient experiences. HealthStream’s solutions offer organizations a robust array of products and services that provide targetedinsights to take actions that produce sustainable performance improvements. Moreover, HealthStream’s vast database of healthcare workforce benchmarks offerorganizations a powerful tool to compare, assess, and fine-tune their strategies for managing initiatives to success.HealthStream believes that the key to quality patient care is—and always has been—a result of the people who deliver care. To that end, the Company’s solutionssupport the recruiting, retaining, engaging, assessing, and developing the healthcare workforce, including medical staff who provide patient care in our customers’organizations.Headquartered in Nashville, Tennessee, the Company was incorporated in 1990 and began providing its SaaS-based workforce solutions in 1999, its survey andresearch solutions in 2005, and its provider solutions in 2012. Including additional offices in Laurel, Maryland; Nashville, Tennessee; Jericho, New York;Brentwood, Tennessee; San Diego, California; Chicago, Illinois; Boulder, Colorado; and Pensacola, Florida, HealthStream had 1,010 full-time and 110 part-timeemployees as of December 31, 2016. Our business has evolved from an initial focus on technology-based training to a company providing workforce development,patient experience, and provider solutions to the nation’s healthcare providers.INDUSTRY BACKGROUNDAccording to the Centers for Medicare and Medicaid Services (CMS), spending in the healthcare industry reached approximately $3.2 trillion in 2015, or 17.8% ofthe U.S. gross domestic product. Hospital care expenditures accounted for approximately 32.3% of the $3.2 trillion industry. According to the Bureau of LaborStatistics, approximately 18.7 million professionals are employed in the healthcare segment of the domestic economy, with approximately 5.3 million employed inacute-care hospitals and approximately 3.3 million employed in post-acute-care organizations, our primary target markets for our products. As of December 31,2016, approximately 4.55 million healthcare professionals were subscribers to our SaaS-based solutions, which include 4.47 million subscribers alreadyimplemented and 86,000 subscribers in the process of implementation.All of the approximately 5.3 million hospital-based healthcare professionals that work in the nation’s approximately 5,000 acute-care hospitals are required byfederal and state mandates and accrediting bodies to complete training in a number of areas. This training includes safety training mandated by both theOccupational Safety and Health Administration (OSHA) and The Joint Commission (an independent, not-for-profit organization that accredits and certifieshealthcare organizations and programs in the United States), as well as training on patient information confidentiality required under the Health InsurancePortability and Accountability Act (HIPAA). 1Table of ContentsIn hospitals, staffing issues and personnel shortages have also contributed to the need for facility based workforce development as well as additional assessmentand competency based training. An ongoing nursing shortage, for example, is resulting in skill gaps and rising costs. The U.S. Bureau of Labor Statistics projectsthe need for 525,000 replacement nurses over the next several years, bringing the total number of openings for nurses due to growth and replacements to1.05 million by 2022. 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. Continuingeducation is required for nurses, emergency medical services personnel, first responder personnel, radiologic personnel, and physicians. Pharmaceutical andmedical device companies must also provide their medical industry sales representatives with training mandated for the healthcare industry and training for newproducts. 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 andengagement, to determine the status of physician relations, and to measure the perceptions about the hospitals in the communities they serve. Industry-wide interestis increasing in research due in part, to the CAHPS ® (Consumer Assessment of Healthcare Providers and Systems) Hospital Survey launched by CMS inpartnership with the Agency for Healthcare Research and Quality (AHRQ). Hospitals must submit data to CMS for required quality measures—which for inpatientsincludes the CAHPS ® Hospital Survey—in order to receive the full market basket increase to their reimbursement payment rates from CMS for the followingfederal fiscal year. We are designated as a certified vendor for and offer CAHPS ® Hospital Survey services.The healthcare education and training 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 informationavailable to satisfy continuing education needs, rapid advances in medical developments, and the time constraints that healthcare professionals face make it difficultto quickly and efficiently access the continuing education content most relevant to an individual’s practice or profession. Historically, healthcare professionals havereceived continuing education and training through offline publications, such as medical journals or by attending conferences and seminars. In addition, otherhealthcare workers and pharmaceutical and medical device manufacturers’ sales and internal regulatory personnel usually fulfill their training from externalvendors or internal training departments. While these approaches satisfy the ongoing education and training requirements, they are typically costly andinconvenient. In addition, live courses are often limited in the breadth of offerings and do not provide a method for tracking training completion. The results ofthese traditional methods, both from a business and compliance standpoint, are difficult to track and measure. While hospitals and health systems occasionallysurvey their patients, physicians, and employees using their own internal resources, the practice is limited since they do not typically possess the valuablecomparative benchmarking data that is available from independent survey research vendors.Provider data management has become more complex and arduous for healthcare organizations. Spurred by The Joint Commission Medical Staff standards andother regulatory requirements, credentialing and privileging has been transformed from a periodic review to continuous, evidence-driven analysis of professionalcompetency and provider performance. This transformation requires ongoing, automatic monitoring of licenses, sanctions, and exclusions, as well as expanding thescope of review at initial credentialing and re-credentialing. In addition, provider enrollment processes have compounded in difficulty. For example, a singleprovider may need to enroll annually with some 30-40 payers, with each payer application often taking two to four hours to complete.Finally, the hospital industry continues to operate under intense pressure to reduce costs as a result of reductions in government reimbursement rates and increasedfocus on cost containment consistent with participation of patients in managed care programs. In addition, hospitals, as well as pharmaceutical and medical devicecompanies, 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, enhancingreporting capabilities, and supporting customers’ business objectives.HEALTHSTREAM’S SOLUTIONSHealthStream’s products and services are organized into three segments—Workforce Solutions, Patient Experience Solutions, and Provider Solutions—thatcollectively help healthcare organizations meet their ongoing talent management, training, education, assessment, competency management, compliance, providercredentialing & privileging management, and provider enrollment needs. HealthStream’s solutions are provided to a wide range of customers within the healthcareindustry across the continuum of care.HealthStream Workforce Solutions — Our workforce development solutions, which are comprised primarily of SaaS, subscription-based products, are used byhealthcare organizations to meet a broad range of their talent management, training, certification, competency assessment, performance appraisal, and developmentneeds. Our numerous content libraries allow our customers to subscribe to a wide array of additional courseware, which includes content from leading healthcareand nursing associations, medical and healthcare publishers, and other content providers. Additionally, medical device companies and other industry partners offeronline training support through HealthStream’s platform for their products and they sponsor continuing education directly to healthcare workers. 2Table of ContentsAt December 31, 2016, HealthStream had approximately 4.55 million “total subscribers” to its subscription-based solutions. Each individual end-user who utilizesat least one HealthStream subscription-based solution is counted as one subscriber, regardless of the number of subscriptions contracted by or for that end-user. Oursubscription-based solutions include any one or a combination of our many platform applications, plus courseware, or content. For example, we deliver coursewareto our customers primarily through our learning application, the HealthStream Learning Center™ (HLC), while we deliver competency management andperformance appraisal tools through our applications known as the HealthStream Competency Center (HCC) and HealthStream Performance Center (HPC),respectively, which are all on our SaaS-based platform, along with a series of other applications.Pricing for the HLC, HCC, and HPC are subscription based, with fees based on the number of subscribers, courseware provided, and other factors. We offertraining, implementation, and account management services to facilitate adoption of our subscription-based solutions. Fees for training are based on the time andefforts 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 localimplementations of installed workforce development products. During 2016, 2015, and 2014, our subscription-based workforce solutions accounted forapproximately 71%, 74%, and 76% of consolidated revenues, respectively.Other Applications on our Platform —HealthStream offers an array of other applications on our platform, each serving a unique function for hospitals and healthsystems. Each application on our platform has its own value proposition and revenue stream. Examples of individual applications that are offered on our platforminclude applications for recruiting and applicant tracking; learning; performance appraisal; compensation management; succession planning; competencymanagement; credentialing and privileging; provider enrollment; disclosure management; clinical development; simulation-based education; and industry-sponsored training.HealthStream Patient Experience Solutions —Our patient experience solutions complement our workforce solutions’ product and service offerings by providingcustomers with Patient Insights™, Employee Insights™, Physician Insights™, and Community Insights™ surveys, data analyses of survey results, and otherresearch-based measurement tools. Our services are designed to provide thorough analyses with insightful recommendations for change; benchmarking capabilityusing our comprehensive databases; and consulting services to identify solutions for our customers based on their survey results. Clients are able to access andanalyze their survey results data through Insights Online™, our secure web-based reporting platform.As a CMS-approved vendor, HealthStream offers its customers full services to meet their Consumer Assessment of Healthcare Providers and Systems (CAHPS ® ),program requirements. Along with the Hospital CAHPS ® Survey, which is mandatory for hospitals the Company offers a range of solutions for other mandatedCAHPS ® reporting, including those for accountable care organizations participating in Medicare initiatives, certain medical groups, home health organizations,hospice, and in-center hemodialysis. Other CAHPS ® survey services are offered for fulfilling voluntary reporting needs for pediatrics, emergency departments, andoutpatient surgery.All of our survey and research solutions focus on providing statistically valid data to assist our customers with their decision making related to their organization’sperformance improvement objectives. In addition to collecting and reporting data, we provide analysis and consulting to help customers understand and improvetheir survey results and patient experiences and the underlying impact on their business. Pricing for these services is based on the survey type, delivery method, sizeof the survey instrument, sample size, frequency of survey cycles, and other factors. During 2016, 2015, and 2014, our Patient Insights™ survey product accountedfor approximately 12%, 13%, and 14% of consolidated revenues, respectively.HealthStream Provider Solutions – Our provider solutions are offered through our business segment that is branded in the marketplace as “Echo, a HealthStreamCompany.” Echo solutions enable healthcare organizations to launch paperless credentialing processes, reduce provider enrollment timelines, accelerate theprovider onboarding process, and drive improvement through validated provider profiles. More than 2,000 healthcare organizations in the U.S. use one or moreEcho products.EchoCredentialing™ is a comprehensive platform that manages medical staff credentialing and privileging processes. Healthcare organizations leverageEchoCredentialing to support enterprise-wide or regional Credentialing Verification Organizations (CVOs), unified privileging, peer review, one-click integrationwith CVO services, and the move to paperless processes. EchoOneApp™ is a provider enrollment platform, which includes automatic form population directlyfrom a continuously updated library of more than 3,500 preformatted payer form templates as well as online form integration with CAQH, CMS, the ProviderEnrollment, Chain and Ownership System (PECOS), and state-based payer enrollment sites. EchoAccess™ is our enterprise class platform to support hospital callcenters with physician referral, call triage, provider directories, class enrollment, and discharge planning functionalities. EchoAnalytics™ offers a wide array ofvalidation tools and EchoOnboarding™ consists of an onboarding dashboard with a workflow functionality, along with onboarding navigator tools to facilitatecoordination of the provider onboarding process. 3Table of ContentsBUSINESS COMBINATIONSWe acquired Health Care Compliance Strategies, Inc. (HCCS) in March 2014, acquired HealthLine Systems, LLC (HLS) in March 2015, acquired PerformanceManagement Services, Inc. in June 2016, acquired the remaining ownership interest in Nursing Registry Consultants Corporation in July 2016, and acquiredMorrisey Associates, Inc. (MAI) in August 2016. For additional information regarding acquisitions, please see Note 5 of the Consolidated Financial Statements andItem 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included elsewhere in this report.CUSTOMERSWe provide our solutions to customers across a broad range of entities within the healthcare industry, including private, not for profit, and government entities, aswell as pharmaceutical and medical device companies. We derive a substantial portion of our revenues from a relatively small number of customers, although nosingle customer represented more than 10 percent of our revenues during 2016, 2015, or 2014. Customers that have purchased or contracted for products andservices from HealthStream include: Ardent Health Services; Saint Luke’s Health System; HCA Holdings, Inc.; Community Health Systems, Inc.; McLaren HealthCare Corporation; Sutter Health; and Tenet Healthcare Corporation.SALES AND MARKETINGWe market our products and services primarily through our direct sales teams, which are based out of our corporate headquarters in Nashville, Tennessee and in ouradditional offices located in Laurel, Maryland; Jericho, New York; Brentwood, Tennessee; San Diego, California; Chicago, Illinois and Pensacola, Florida as wellas remote home office sales locations. As of December 31, 2016, our HealthStream Workforce Solutions sales personnel consisted of 119 employees who carriedsales quotas; our HealthStream Patient Experience Solutions sales personnel consisted of 16 employees who carried sales quotas; and our Provider Solutions salespersonnel consisted of 28 employees who carried sales quotas. We also have 13 employees who support our sales teams with sales force productivity andoptimization, onboarding, training, and administration services.We conduct a variety of marketing programs to promote our products and services, including product catalogs, user groups—including our customer Summit, tradeshows, internet promotion and demonstrations, telemarketing campaigns, public relations, distribution of product-specific literature, direct mail, and advertising.Over most of the last fifteen years, we have hosted a conference in Nashville, Tennessee known as the “Summit.” We have utilized this client conference to reachout 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 31,2016, our marketing personnel consisted of 34 employees.OPERATIONS AND TECHNOLOGYWe believe our ability to establish and maintain long-term customer relationships, adoption of our products and services, recurring sales, and development andmaintenance of new and existing products are dependent on the strength of our operations, customer service, product development and maintenance, training, andother support teams. As of December 31, 2016, our Workforce Solutions operations team consisted of 306 employees associated with customer support,implementation services, product development and quality assurance, training, and project management; our Patient Experience Solutions operations teamconsisted of 379 employees (of which 204 employees worked in our interviewing centers) 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; and our ProviderSolutions operations team consisted of 153 employees associated with implementation services, data integration, product development and quality assurance,credentials verification, consulting, and other functions.Our services are designed to be reliable, secure, and scalable. Our software is a combination of proprietary and commercially available software and operatingsystems. Our software solutions support hosting and management of content, publication of our websites, execution of courseware, registration and tracking ofusers, collection, sampling, and analysis of survey data, tracking and reporting of physician credentialing and provider enrollment information, and reporting ofinformation for both internal and external use. We designed the platforms that provide our services to allow each component to be independently scaled by addingcommercially available hardware and a combination of commercially available and proprietary software components.Our software applications, servers, and network infrastructure that deliver our services are hosted by a combination of third-party data center providers andHealthStream owned data centers. We maintain fully redundant disaster recovery data centers which are located in geographically separate locations. Ourtechnology equipment is maintained in secure, limited access environments, supported by redundant power, environmental conditioning, and network connectivity,and we follow industry best practices for backup and disaster recovery. Company personnel monitor all servers, networks, and systems on a continuous basis, andwe employ enterprise firewall systems and data abstraction to protect our databases, customer information, and courseware library from unauthorized access. 4Table of ContentsCOMPETITIONIn addition to the competing healthcare education delivery methods in the industry, we also have direct competitors. In our Workforce Solutions business segment,a number of companies offer competitive learning management products and talent management modules to the healthcare industry. We compete with companiessuch as Cornerstone OnDemand, Healthcare Source, Oracle, SABA, SAP, Workday, 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, Wolters Kluwer, and Relias Learning, which is owned by Bertelsmann. In our Patient Experience Solutions businesssegment, we face competition from large nationally recognized research firms such as Gallup, National Research Corporation, Press Ganey Associates, StuderGroup, Professional Research Consultants, Inc., and others. Our Patient Experience business also experiences direct competition from vendors who provideresearch services to other industries including Kenexa, which is now owned by IBM, and Foresight, which is now owned by TNS Global. In our Provider Solutionsbusiness segment, we see competition primarily from several large companies, such as MD-Staff and Cactus from symplr.We believe our Workforce Solutions, which include both products and services that facilitate training, assessment, and development for healthcare professionals, awide 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 theInternet, provide us with a competitive advantage. In our Patient Experience business segment, 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, andour ability to quickly deliver relevant online courseware targeted at addressing survey related findings provide us with a competitive advantage. In our ProviderSolutions business segment, we believe the scope and quality of our products, capability to connect medical staff credentialing with provider enrollment, andinnovative new predictive analytics provide us with a competitive advantage. We believe that the principal competitive factors affecting the marketing of ourWorkforce, Patient Experience, and Provider Solutions to the healthcare industry include: • features of our SaaS-based platform and applications, including reporting, management functionality, ability to manage a variety of events ormodalities, courseware assignment, curriculum management, documenting competency assessments and performance appraisals, scalability, and theability to track utilization and results; • scope and variety of Internet-based learning courseware available, including mandated content for OSHA, The Joint Commission, patient safety, andHIPAA requirements, ICD-10 training, competency-based content, courseware scenarios that drive simulators, courseware that provides CPRcertification, 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 technicalknowledge 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.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 INDUSTRYRegulation of the Internet and the Privacy and Security of Personal InformationThe laws and regulations that govern our business may change rapidly. The following are some of the evolving areas of law that are relevant to our business: • Privacy and Security Laws. Federal, state and foreign privacy and security regulations and other laws restricting the collection, use, security anddisclosure of personal information limit our ability to collect information or use and disclose the information in our databases or derived from othersources 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 theInternet. These include laws relating to obscenity, indecency, libel and defamation. We could be liable if content delivered by us violates theseregulations. 5Table of Contents • Information Security Accountability Regulation. As a business associate of certain of our customers, we are required to report certain breaches ofprotected 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 informationare presumed to be breaches unless the covered entity or business associate establishes that there is a low probability the information has beencompromised. In addition, we are subject to certain state laws that relate to privacy or the reporting of security breaches. For example, California lawrequires notification of security breaches involving personal information and medical information. We may incur costs to comply with these privacyand security requirements. Because there is little guidance related to many of these laws, it is difficult to estimate the cost of our compliance with theselaws. Further, Congress has considered bills that would require companies to engage independent third parties to audit the companies’ computerinformation 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 ofsecurity by the Company, the Company’s business could be negatively impacted. • Sales and Use Tax. Through December 31, 2016, we collected sales, use or other taxes on taxable transactions in states in which we have employees orhave a significant level of sales activity. While HealthStream expects that this approach is appropriate, other states or foreign jurisdictions may seek toimpose tax collection obligations on companies like us that engage in online commerce. If they do, these obligations could limit the growth ofelectronic 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 arebecoming more prevalent. Congress continues considering laws regarding Internet taxation. The dynamic nature of this regulatory environment increases theuncertainty regarding the marketplace impact of such regulation. The enactment of any additional laws or regulations may increase our cost of conducting businessor otherwise harm our business, financial condition and operating results.Regulation of Education, Training and Other Services for Healthcare ProfessionalsOccupational Safety and Health Administration (OSHA). OSHA regulations require employers to provide training to employees to minimize the risk of injury fromvarious potential workplace hazards. Employers in the healthcare industry are required to provide training with respect to various topics, including blood bornepathogens 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 accreditation and certification standards require employers in the healthcare industry provide certain workplacesafety 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 TheJoint Commission. In addition, The Joint Commission imposes continuing education requirements on physicians that relate to each physician’s specific staffappointments.Health Insurance Portability and Accountability Act (HIPAA). HIPAA regulations require certain organizations (known as covered entities), including mosthealthcare providers and health plans, to adopt safeguards regarding the use and disclosure of health-related information. HIPAA regulations also require theseorganizations to provide reasonable and appropriate safeguards to protect the privacy, integrity and confidentiality of individually identifiable healthcareinformation. Covered entities are required to establish, maintain and provide training with regard to their policies and procedures for protecting the integrity andconfidentiality of individually identifiable healthcare information and must document training on these topics to support their compliance. Certain HIPAA privacyand security requirements apply to entities (known as business associates) that handle individually identifiable healthcare information on behalf of covered entitiesor other business associates. Covered entities, business associates and their subcontractors may be directly subject to criminal and civil sanctions for violations ofHIPAA privacy and security standards.The American Nurses Credentialing Center (ANCC). ANCC, a subsidiary of the American Nurses Association (ANA), provides individuals and organizationsthroughout the nursing profession with the resources they need to achieve practice excellence. ANCC’s internationally renowned credentialing programs certifynurses 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 currentlycertified by ANCC. The ANCC Magnet Recognition Program ® recognizes healthcare organizations that provide the very best in nursing care and professionalismin nursing practice. The program also provides a vehicle for disseminating best practices and strategies among nursing systems. The ANCC Magnet RecognitionProgram is a highly regarded standard for nursing excellence. The Pathway to Excellence ® Program recognizes the essential elements of a high standard nursingpractice environment. The designation is earned by healthcare organizations that create work environments where nurses can develop professionally. The awardsubstantiates the professional satisfaction of nurses and identifies best places to work. 6Table of ContentsContinuing Nursing Education (CNE). State nurse practice laws typically authorize the state’s board of nursing to establish CNE requirements for professionalnurses. The state board of nursing establishes the state’s CNE requirements for professional nurses. CNE credits are provided through accredited providers thathave been approved by the ANCC Commission on Accreditation and/or the state board of nursing. We are an accredited provider of CNE by the ANCC. CNErequirements vary widely from state to state. Thirty-four states require registered nurses to certify that they have accumulated a minimum number of CNE credits inorder 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 ofthis category of nurses. Required CNE ranges from 12 to 45 credits annually, with reporting generally on a bi-annual basis. Board certifications (e.g., CertifiedNurse Operating Room (CNOR) – certification of perioperative nursing) also require CNE credits, with certain percentages required in specific categories based onthe certification type.Continuing Medical Education (CME). State licensing boards, professional organizations and employers require physicians to certify that they have accumulated aminimum number of CME hours to maintain their licenses. Generally, each state’s medical practice laws authorize the state’s board of medicine to establish andtrack 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 practicespecialty 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/ormembership in a medical or practice specialty society. American Medical Association (AMA) classifies CME activities as either Category 1, which includes formalCME activities, or Category 2, which include self-designated credit for informal activities that meet certain requirements. CME providers that sponsor educationalactivities can only designate those activities for AMA PRA Category 1 Credit™ . Most agencies nationwide that require CME participation specify AMA PRACategory 1 Credit™ . Only institutions and organizations accredited to provide CME can designate an activity for AMA PRA Category 1 Credit™ . TheAccreditation Council for Continuing Medical Education (ACCME) is responsible for awarding accreditation status to state medical societies, medical schools, andother institutions and organizations that provide CME activities for a national audience of physicians. State medical societies, operating under the aegis of theACCME, accredit institutions and organizations that provide CME activities primarily for physicians within the state or bordering states. We are recognized inmany states as an accredited provider of CME by the ACCME.Centers for Medicare & Medicaid Services (CMS). CMS has articulated three broad aims of its quality strategy: Better Care. Healthier People, HealthierCommunities. Smarter Spending. 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 byrewarding providers for delivering high quality, efficient clinical care. Through a number of public reporting programs, demonstration projects, pilot programs, andother initiative, some voluntary efforts and some mandatory, CMS has launched VBP initiatives in hospitals, physician offices, nursing homes, home healthservices, and dialysis facilities.Consumer Assessment of Healthcare Providers and Systems (CAHPS). CMS has partnered with AHRQ to develop a standardized survey instrument and datacollection methodology for measuring patients’ perspectives on hospital care. The intent of the survey is to produce comparable data on the patients’ perspectivesto allow consumer-based comparisons between hospitals, align incentives to drive hospitals to improve their quality of care, and increase the transparency ofhospital reporting. Hospitals must submit data for certain required quality measures—which for inpatients includes the CAHPS ® Hospital Survey—in order toreceive the full market basket increase to their reimbursement payment rates from CMS. Hospitals that fail to submit this survey data are subject to a 25% reductionof the annual market basket update to impatient reimbursement rates. We have received certified vendor designation and will continue to offer CAHPS ® HospitalSurvey services. In addition, we are a certified vendor approved to offer CAHPS ® Home Health Care Survey which is used to measure the experiences of peoplereceiving home health care from Medicare-certified home health agencies. We also offer CAHPS ® Clinician and Group Survey which are used to measure patientexperiences 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 paymentsto eligible professionals, eligible hospitals and critical access hospitals (CAHs) as they adopt, implement, upgrade or demonstrate meaningful use of certified EHRtechnology. By putting into action and meaningfully using an EHR system, providers may 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 medicalservices 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 requirementsvary 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 SurgicalTechnologists, Inc. (AST) and the Accreditation Council for Pharmacy Education (ACPE), respectively. 7Table of ContentsRegulation of Educational Program Sponsorship and SupportThere are a variety of laws and regulations that affect the relationships between our medical device and pharmaceutical customers and the users of our products andservices, including the sponsorship and support of educational programs. For example, the Physician Payment Sunshine Act (“Sunshine Act”) requiresmanufacturers of drugs, biological devices and medical devices covered by Medicare, Medicaid, or the Children’s Health Insurance Program to report annually toCMS payments and other transfers of value, including educational programs, given by such manufacturers to physicians and teaching hospitals, with limitedexceptions. CMS regulations require manufacturers to report the physician’s name, business address and national provider identifier as well as other informationincluding the value, date, form and nature of what is offered. CMS publishes the information on its website. Manufacturers that do not meet the reportingobligations 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 MedicalEquipment, Prosthetics, Orthotics, and Supply Industry (collectively, the Guidelines). The Guidelines address compliance risks raised by the support of continuingeducational activities by pharmaceutical and medical device companies. The Guidelines have affected and may continue to affect the type and extent of commercialsupport 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, theAMA has established its own code of ethics regarding Gifts to Physicians from Industry to provide standards of conduct for the medical profession. The Companyfollows the rules and guidelines provided by ACCME, ANCC, and other continuing education accrediting bodies to ensure that its continuing educationprogramming 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 materialadverse 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 FDAand the FTC regulate the form, content and dissemination of labeling, advertising and promotional materials, including direct-to-consumer prescription drug andmedical device advertising, prepared by, or for, pharmaceutical, biotechnology or medical device companies. The FTC regulates over-the-counter drug advertisingand, in some cases, medical device advertising. Generally, regulated companies must limit their advertising and promotional materials to discussions of theFDA-approved indications and, in limited circumstances, to a limited number of indications not approved by the FDA. Therefore, any truthful or untruthfulinformation that promotes the use of pharmaceutical or medical device products that is presented with our services is subject to the FDA and FTC requirements andregulatory oversight including criminal, civil and administrative actions. We believe that banner advertisements, sponsorship links and any educational programsthat 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 theprincipal burden of compliance with advertising and promotional regulations on the advertiser, if the FDA or FTC finds that any regulated information presentedwith 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 FDAmay adopt new regulatory policies that more tightly regulate the format and content of promotional information on the Internet.INTELLECTUAL PROPERTY AND OTHER PROPRIETARY RIGHTSTo 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 controlaccess to our software, documentation and other proprietary information. We own federal trademark and service mark registrations for several marks, includingwithout limitation “EXCELLENCE THROUGH INSIGHT”, “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 currentlypending. 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 theircontent 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 allthird-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 tothe 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 intoroyalty or licensing agreements. In addition, we license technologies from third parties for incorporation into our services. Royalty and licensing agreements withthese 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 andproprietary rights, our efforts may not be adequate. Third parties may infringe or misappropriate our intellectual property, and such violations of our intellectualproperty are difficult to detect and police. Competitors may also independently develop technologies that are substantially equivalent or superior to the technologieswe employ in our products or services. If we fail to protect our proprietary rights adequately, our competitors could offer similar services, potentially significantlyharming our competitive position and decreasing our revenues. 8Table of ContentsAVAILABLE INFORMATIONThe 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 publicmay 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 obtaininformation 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 anInternet site at http://www.sec.gov that contains the reports, proxy and information statements, and other information filed electronically. Our website address iswww.healthstream.com. Please note that our website address is provided as an inactive textual reference only. We make available, free of charge through ourwebsite, 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 reasonablypracticable 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 istherefore not incorporated by reference unless such information is otherwise specifically referenced elsewhere in this report.OUR EMPLOYEESAs of December 31, 2016, we employed 1,010 full-time and 110 part-time persons. Our success will depend in large part upon our ability to attract and retainqualified employees. We face competition in this regard from other companies, but we believe that we maintain good relations with our employees. We are notsubject to any collective bargaining agreements.EXECUTIVE OFFICERS OF THE REGISTRANTThe 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 bythe 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 theCompany: Name Age PositionRobert A. Frist, Jr. 49 Chief Executive Officer, President and Chairman of the Board of DirectorsJeffrey S. Doster 52 Senior Vice President and Chief Technology OfficerGerard M. Hayden, Jr. 62 Senior Vice President and Chief Financial OfficerJ. Edward Pearson 54 Senior Vice President and Chief Operating OfficerThomas Schultz 50 Senior Vice President, SalesMichael Sousa 48 Senior Vice President and President, Echo, Inc.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 andMarketing 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 andBusiness 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 ofNotre Dame and a Master of Science from Northeastern 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 ofBusiness Administration in Accounting from Middle Tennessee State University.Thomas Schultz joined the Company in June 2014 as senior vice president of sales. He worked for Lawson Software, a subsidiary of Infor, Inc., in various salesleadership roles for sixteen years prior to joining the Company. 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 promotedto senior vice president of business development. In September 2015, he was named president of Echo, Inc., HealthStream’s Provider Solutions business segment,while continuing to serve as a senior vice president of the Company. He earned a Bachelor of Science degree from Boston College and a Master of BusinessAdministration from Boston University. 9Table of ContentsItem 1A. Risk FactorsWe 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 thisreport. In the future, we may become subject to additional risks that are not currently known to us. Our business, financial condition results of operations and/orprospects could be materially and adversely affected by the occurrence of any of the following risks and uncertainties. Additional risks or uncertainties notpresently known to us, or that we currently deem immaterial, also may adversely affect our business, financial condition, results of operations and prospects. Thetrading price of our common stock could also decline due to the occurrence of any of the following risks or any unknown risks.Risks Related to Our Business ModelWe 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 ofnew products and services, and maintaining strong relationships with our existing customers. Some of the risks that we may encounter in executing our growthstrategy include: • expenses, delays and difficulties of identifying and developing new products or services and integrating such new products or services into our existingorganization; • inability to leverage our operational and financial systems and processes sufficiently to support our growth; • inability to generate sufficient revenue from our products to offset investment costs; • inability to 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 or payments due to economic conditions; • reduced spending in our target markets; • failure of the market for our products and services to grow to a sufficient size or at a sufficient rate; and • inability to hire sufficient number of qualified employees to execute and support the growth of the Company.If any of these risks are realized, our business, and our competitive position in the industry, could suffer.We may be unable to effectively identify, complete or integrate the operations of acquisitions, joint ventures, collaborative arrangements or other strategicinvestments, which would inhibit our ability to execute upon our growth strategy.As part of our growth strategy, we actively review possible acquisitions, joint ventures, collaborative arrangements or strategic investments that complement orenhance our business. We may not be able to identify, complete or integrate the operations of such acquisitions, joint ventures, collaborative arrangements or otherstrategic investments. In addition, if we finance acquisitions, joint ventures, collaborative arrangements or other strategic initiatives by issuing equity securities, ourexisting 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 andinvestments, 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 strategicinvestments 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 tooffset our investment costs. 10Table of ContentsOur ability to accurately forecast revenue for certain products and services may be hindered by customer scheduling.While the revenue we receive from particular products and services in our subscription business may be predictable during the term of the applicable contract, theperformance of our subscription business may become more subject to fluctuations between quarterly periods as our solution offerings diversify and become moresophisticated. Our HealthStream Patient Experience Solutions products and services are typically contracted by healthcare organizations for multi-year terms, butthe frequency, sample size, and timing of survey cycles can vary from quarter to quarter and year to year. The contract structure for some Patient ExperienceSolutions products gives customers latitude about when to initiate a survey, which can affect quarterly or annual revenue forecasts. Also, other project-basedproducts, such as coaching, certain content development and professional services, are subject to the customers’ involvement in the provision of the product orservice. 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 mayaffect our ability to accurately forecast quarterly and annual financial performance. In addition, some products, including those in our Provider Solutions segment,can require significant implementation lead times and resources, which may also impact our ability to accurately forecast 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 caseshas extended much further. The range in the sales cycle can be impacted by multiple factors, including an increasing trend towards more formal request forproposal processes and more competition within our industry, as well as formal budget timelines which impact timing of purchases by target customers. Newproducts tend to have a longer and more unpredictable revenue ramp period because of varying customer adoption rates. As a result of these factors, we have onlylimited 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 otherresources than we do. We encounter direct competition from both large and small talent and human resource management companies and other companies focusedon workforce development in the healthcare industry. We also face competition from larger patient experience – focused companies, as well as companies that offerprovider solutions. Given the profile and growth of the healthcare industry and the ongoing need for training, simulation, research, credentialing, and otherinformation products and services, it is likely that additional competitors will emerge. We believe we maintain a competitive advantage against our competitors byoffering a comprehensive array of products and services; however, our lack of market diversification resulting from our concentration on the healthcare industrymay make us susceptible to losing market share to our competitors who also offer solutions, and in some cases a more robust suite of solutions, to a cross-section ofindustries. 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 agreementsmay 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 mayhave 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 productsand 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 serviceswhich may compete with our products and services. Moreover, under contracts with some of our strategic partners, we may be bound by provisions that restrict ourability to market and sell our products and services to certain potential customers. The success of these contractual arrangements will depend in part upon thestrategic partners’ own competitive, marketing, and strategic considerations, including the relative advantages for such strategic partners in using alternativeproducts 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 integratingsuch partners’ products and technology into our own, or that such relationships will be successful in generating additional revenue. If any of these strategic partnershave negative experiences with our products and services, or seek to amend or terminate the financial or other terms of the contracts or arrangements we have withthem, we may need to increase our organizational focus on the types of services and solutions they sell and alter our development, integration, and/or distributionstrategies, 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 withregard to these strategic partners. Even if these claims do not result in liability to us, investigating and defending these claims could be expensive, time-consumingand result in suspension of or interference with certain offerings to our clients and/or adverse publicity that could harm our business. 11Table of ContentsWe may not be able to retain distribution rights from our content partners, which could adversely affect our business and results of operations.Most of our agreements with content and technology providers are for initial terms of three or more years. These partners may choose not to renew their agreementswith us or may terminate the agreements early if we do not fulfill our contractual obligations. If a significant number of our partners terminate or fail to renew theiragreements with us on as favorable terms, such as a reduction in our revenue share arrangement, it could result in a reduction in the number of courses andsolutions we are able to distribute and decreased revenues. Most of our agreements with our content partners are non-exclusive, and our competitors offer, or couldoffer, content or solutions that are similar to or the same as ours. If our current partners offer or otherwise make available their products and services to users or ourcompetitors on more favorable terms than those offered to us, or increase our license fees, our competitive position, revenue, and our profit margins and prospectscould be harmed. In addition, the failure by our content partners to deliver high-quality content and technology, and to revise their content and technology inresponse to user demand and evolving healthcare advances and trends could result in customer dissatisfaction and inhibit our ability to attract and retainsubscribers.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 acceptanceof 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 subscriptionsand other products and services to existing customers. Our identification of additional features, content, products and services may not result in timely developmentof complementary products. In addition, the success of certain new products and services may be dependent on continued growth in our customer base.Furthermore, we are not able to accurately predict the volume or speed with which existing and new customers will adopt such new products and services. Becausehealthcare technology continues to change and evolve, we may be unable to accurately predict and develop new products, features, content and other products toaddress the needs of the healthcare industry. Further, the new products, services and enhancements we develop may introduce significant defects into or otherwisenegatively impact our core software platform. While all new products and services are subject to testing and quality control, all software and software-basedservices 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 orerrors in existing products, it could result in lost revenues and/or reduced ability to meet contractual obligations and would be detrimental to our business andreputation. 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 thisdevelopment and our financial performance will be harmed. Continued growth of our customer population is dependent on our ability to continue to providerelevant 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 asenhancing 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 inthis 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 uson 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 newproducts and services or could force us to discontinue offering portions of 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 torepair 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 ourcontrol. Accordingly, our revenue could decrease and our costs could increase in the event of any errors in this technology. Furthermore, we may become subject tolegal claims related to licensed technology based on product liability, infringement of intellectual property or other legal theories. Even if these claims do not resultin liability to us, investigating and defending these claims could be expensive and time-consuming, and could result in suspension of or interference with certainofferings to our clients and/or adverse publicity that could harm our business.Financial RisksA significant portion of our revenue is generated from a relatively small number of customers.We derive a substantial portion of our revenues from a relatively small number of customers. A termination or material modification of our agreements with any ofour significant customers or a failure of these customers to renew their contracts on favorable terms, or at all, could have an adverse effect on our business. 12Table of ContentsA 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, 2016, approximately 71% of our net revenue was derived from our workforce subscription-based solution products. Oursubscription-based customers have no obligation to renew their subscriptions for our products or services after the expiration of the subscription agreement, and infact, 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 oftheir 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 thatare up for renewal or maintain our pricing, our results of operations and financial condition could be adversely affected. For example, the requirement mandated byCMS for healthcare organizations to transition to the ICD-10 coding system, effective in October 2015, generated significant demand for our ICD-10 readinesstraining courseware from 2012 through 2015, when subscriptions for that product positively influenced the Company’s revenue and operating income. However,sales of that product have ceased and revenue and operating income from that product declined significantly during 2016 and are expected to continue todecline. HealthStream Patient Experience Solutions product and service contracts typically range from one to three years in length, and customers are not obligatedto 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, ourrevenue 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 orperformance 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 arerequired for us to implement customers on our subscription-based platform and certain platform applications. Accordingly, if customers do not provide us with thespecified 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 subscription-based platform and certain platform applications by our customers must be achieved and delivery ofservices is required in connection with subscription-based products for us to recognize revenue. Some products, including those in our Provider Solutions segment,can require significant implementation lead times and the rate at which customer orders move from backlog to revenue generation in connection with theseproducts may significantly affect the timing of revenue recognition. In our Patient Experience business we depend on receiving patient visit, discharge, and otherdata from our customers before we are able to complete surveys and tabulate responses.Because we recognize revenue from subscriptions for our products and services over the term of the subscription period, downturns or upturns in sales may notbe immediately reflected in our operating results.During the year ended December 31, 2016, we recognized approximately 71% of our revenue from customers monthly over the terms of their subscriptionagreements, 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 subscriptionagreements entered into during previous quarters. Consequently, a decline in new or renewed subscription agreements in any one quarter will not necessarily befully 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 toreflect this reduced revenue. Accordingly, the effect of significant downturns in sales and market acceptance of our products and services may not be fully reflectedin our results of operations until future periods. Additionally, our subscription model also makes it difficult for us to rapidly increase our revenue through additionalsales in any period, as revenue from new customers must be recognized over the applicable subscription term. Finally, the majority of costs associated with oursales cycles are incurred up front before revenue recognition commences, and therefore periods of strong sales performance may increase our costs in the near termnegatively 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 atall.We believe that our existing cash and cash equivalents, marketable securities, cash generated from operations, and available borrowings under our revolving creditfacility will be sufficient to meet anticipated working capital needs, new product development and capital expenditures for at least the next 12 months. However,we may need to raise additional funds in order to: • develop new, or enhance existing, services or products; • respond to competitive pressures; • finance working capital requirements; • acquire or invest in complementary businesses, technologies, content or products; or • otherwise effectively execute our growth strategy.At December 31, 2016, we had approximately $103.2 million in cash, cash equivalents, and marketable securities. We also have up to 13Table of Contents$50.0 million of availability under our Revolving Credit Facility, subject to certain covenants, which expires in November 2017. We expect to incur between $15.0and $17.0 million of capital expenditures, software development and content purchases during 2017. We actively review possible business acquisitions tocomplement or enhance our products and services. We may not have adequate cash and investments or availability under our Revolving Credit Facility toconsummate 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 orenhance services or products or otherwise respond to competitive pressures would be significantly limited. If we raise additional funds by issuing equity orconvertible 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 ourreported assets and earnings.As of December 31, 2016, our balance sheet included goodwill of $109.8 million and identifiable intangible assets of $78.4 million. There are inherentuncertainties 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 donot support the carrying value of goodwill and identifiable intangible assets. If the value of our goodwill and/or intangible assets is impaired, accounting rulesrequire us to reduce their carrying value and report an impairment charge, which would reduce our reported assets and earnings for the period in which animpairment is recognized.We may be affected by changes in the healthcare industry that impact our clients.Our clients are concentrated in the healthcare industry, which is subject to changing regulatory, economic, and political influences. The U.S. Congress and certainstate legislatures have passed or are considering laws and regulations intended to result in major changes to the U.S. healthcare system. The most prominent ofthese reform efforts, the Patient Protection and Affordable Care Act, as amended by the Healthcare and Education Reconciliation Act of 2010 (collectively,Affordable Care Act), was designed to increase access to affordable health insurance for U.S. citizens and improve quality of care, but it also has reducedgovernment program spending and imposed operating costs and changes on many of our clients. Some of these changes have driven consolidation in the healthcareindustry, particularly among health insurance providers.The 2016 federal elections cast uncertainty on the future of the Affordable Care Act and may result in the repeal or replacement of, or significant changes to, theAffordable Care Act. There is uncertainty regarding whether, when, or how the Affordable Care Act will be changed, whether, when or what alternative provisionswill be enacted, and the impact of repeal or changes to the Affordable Care Act or any alternative provisions. Any government efforts related to reforming thehealthcare industry may negatively impact our clients, which could have an 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 duringannual 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 ourinternal controls over financial reporting. The rules governing the standards to be met are complex and may require significant process review, documentation andtesting, as well as remediation efforts for any identified deficiencies. This process of review, documentation, testing and remediation may result in increasedexpenses and require significant attention from management and other internal and external resources. These requirements may also extend to acquired entities andour efforts to integrate those operations into our system of internal controls. Any material weaknesses identified during this process may preclude us from assertingthe 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 ofrevenue and/or incur and 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 interpretationsconcerning revenue and expense recognition could decrease our revenue or increase our expenses. Changes to regulations concerning revenue recognition couldrequire 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 currentperiod. Likewise, changes to regulations concerning expense recognition could require us to alter our current expense accounting practices and cause us to deferrecognition of expense into a future period, or to recognize increased expenses in a current period. Such changes could also cause us to alter the manner in whichwe contract for, sell, and incentivize sales of products and services. Changes to either revenue recognition or expense recognition accounting practices could affectour financial performance. In addition, we could incur significant during 2017 costs to comply with any changes in GAAP rules or requirements, such asAccounting Standards Update 2014-09, Revenue from Contracts with Customers (Topic 606), which is effective January 1, 2018, in addition to the financial impacton accounting for revenues or expenses.Risks Related to Sales, Marketing and CompetitionOur operating margins could be affected if our ongoing refinement to pricing models for our products and services is not accepted by our customers and themarket.We continue to make changes in the pricing of our product and service offerings so as to increase revenue and meet the needs of our customers. We cannot predictwhether the current pricing of our products and services, or any ongoing refinements we make will be accepted by our existing customer base or by prospectivecustomers. If our customers and potential customers decide not to accept our current or future pricing or product and service offerings, it could an adverse effect onour business and results of operations. 14Table of ContentsRisks Related to OperationsWe 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 17 years and continue to expand our ability to provide our solutions on both a subscription andtransactional basis over the Internet or otherwise. Our future success will depend on our ability to effectively develop and maintain our infrastructure, includingprocurement of additional hardware and software, and to implement the services, including customer support, necessary to meet the demand for our products andservices. Our inability from time to time to successfully develop the necessary systems and implement the necessary services on a timely basis may result in ourcustomers experiencing delays, interruptions and/or errors in their service. Such delays or interruptions may cause customers to become dissatisfied with ourservice and move to competing providers of workforce development, patient experience, and provider solutions services. If this happens, our reputation results ofoperations and financial condition, could be adversely affected.Our business operations could be significantly disrupted if we lose members of, or fail to attract and integrate new members to, our management team.Our future performance is substantially dependent on the continued services of our management team and our ability to attract, retain and motivate them. The lossof the services of any of our officers or senior managers, or the inability to attract additional officers or senior managers as appropriate, could harm our business, aswe 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 attract, hire and retain a sufficient number of qualified employees and, as a result, we may not be able to effectively execute our growthstrategy 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,coaching, and survey personnel. Competition for certain personnel is intense, especially for software developers, web designers, user experience and interactiondesigners, and sales personnel, and we may be unable to successfully attract sufficiently qualified personnel. We have experienced in the past, and continue toexperience, difficulty hiring qualified personnel in a timely manner for these positions. The pool of qualified technical personnel, in particular, is limited inNashville, Tennessee, where our headquarters are located. In addition, we operate interviewing centers located in Laurel, Maryland, and Nashville, Tennessee. Wemay experience difficulty in maintaining and recruiting qualified individuals to perform interviewing services. We will also need to maintain or increase the size ofour staff to support our anticipated growth, without compromising the quality of our offerings or customer service. Our inability to locate, attract, hire, integrate andretain 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 ouroperational needs.We must continue to obtain reasonably priced, commercially available hardware and operating software as well as continue to enhance our software and systems toaccommodate the increased use of our platform, the increased courseware and content in our library, the expanding amount and type of data we store on behalf ofour customers, and the resulting increase in operational demands on our business. Decisions about hardware and software enhancements are based in part onestimated 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 ourservices is widespread and dynamic. If we are unable to increase the data storage and processing capacity of our systems at least as fast as the growth in demand,our customers may encounter delays or disruptions in their service. Unscheduled downtime, or reduced response time of our platforms could harm our business andalso 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 anadverse effect on our results of operations or financial condition. Further, as we develop our platforms and rely on every changing and improving technologies, wemay be impeded by our customers’ inability to adopt new technologies, such as web browsers, upon which new platform enhancements may be based.Our network infrastructure and computer systems and software may fail.An unexpected event (including but not limited to a cyber-security incident, telecommunications failure, fire, earthquake, or other catastrophic loss) at our Internetservice providers’ facilities or at our on-site data center facilities could cause the loss of critical data and prevent us from offering our products and services for anunknown period of time. System downtime could negatively affect our reputation and ability to sell our products and services and may expose us to significantthird-party claims. Our cyber liability and business interruption insurance may not adequately compensate us for losses that may occur. In addition, we rely on thirdparties to 15Table of Contentssecurely store our archived data, house our web server and network systems and connect us to the Internet. While our service providers have planned for certaincontingencies, the failure by any of these third parties to provide these services satisfactorily and our inability to find suitable replacements would impair our abilityto access archives and operate our systems and software, and our customers may encounter delays. Such disruptions could harm our reputation and cause customersto become dissatisfied and possibly take their business to a competing provider, which would adversely affect our revenues.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, weperform real-time credit card authorization and verification, as well as the encryption of other selected secure customer data. We cannot predict whether thesesecurity measures could be circumvented by new technological developments. Further, the audit processes and controls used within our production platforms maynot 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 problemscaused by any breaches. We cannot assure that we can prevent all security breaches.A data breach or security incident could result in a loss of confidential data, give rise to remediation and other expenses, expose us to liability under the HealthInsurance Portability and Accountability Act (HIPAA), the Health Information Technology for Economic and Clinical Health Act (HITECH), state privacylaws, consumer protection laws, common law theories or other laws, subject us to litigation and federal and state governmental inquiries, damage ourreputation, and otherwise be disruptive to our business.We collect and store sensitive information, including intellectual property individually identifiable health information, provider credentialing and privileging data,and other personally identifiable information, on our networks. The secure maintenance of this information is critical to our business operations. As a result, thecontinued development and enhancement of controls processes and practices designed to protect our information systems from attack, damage or unauthorizedaccess remain a priority for us. We have implemented multiple layers of security measures to protect confidential data through technology, processes, and ourpeople and our defenses are monitored and routinely tested internally and by external parties. Despite these efforts, a data breach or security incident could resultfrom a variety of circumstances and events, including third-party action, system errors, employee negligence or error, malfeasance, computer viruses, failuresduring the process of upgrading or replacing software, databases, or components thereof, power outages, hardware failures, telecommunication failures, user errors,catastrophic events, or threats from malicious persons and groups, new vulnerabilities, and advanced new attacks against information systems.There can be no assurance, we will not be subject to data incidents that bypass our security measures, result in loss of confidential information or disrupt ourinformation systems or business. Data incidents could result in interruptions, delays, the loss, access misappropriation, and disclosure or corruption of data andcould damage our reputation. In addition, data incidents could expose us and our customers to liability under privacy, security and consumer protection laws, suchas HIPAA, or litigation under these or other laws, including common law theories, and subject us to federal and state governmental inquiries or enforcement,especially if a large number of individuals are affected or if the compromised information is highly sensitive. Like many other organizations, we have experienceddata incidents from time to time in the course of our business and handled these incidents in accordance with our understanding of the applicable laws.As a result, cyber security and us. As cyber and other threats to confidential information continue to evolve, we may be required to expend significant additionalresources to continue to modify or enhance our protective measures or to investigate and remediate any security vulnerabilities. The occurrence of a data incidentand resulting potential costs and liabilities could have a material adverse effect on our financial position and results of operations and harm our business reputation. 16Table of ContentsWe may experience errors or omissions in our software products or processes, including those that deliver provider credentialing, privileging and payerenrollment services for our hospitals and medical practice customers, and those that and administer and report on hospital performance, and these errors couldresult 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 andauthorization to practice in a particular facility, and to maintain authorization to perform care covered by insurance providers. In some instances, we rely on sourcesoutside the Company for information that we use in our credentialing and privileging products. If errors or omissions occur that inaccurately validate or invalidatethe 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 inlitigation brought against us either by our customers, the provider, or other interested parties. For example, an important element in a malpractice case broughtagainst a hospital or other provider could be the validation of proper credentialing for the provider, and any errors or omissions in our products that provide theseservices could subject us to claims. Further, a list of providers’ privileges may be made available to the general public by hospitals and medical practices, and errorsin credentialing and privileging may result in damage to the hospital, medical practice, or provider.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 reducedreimbursements to our hospital customers if we are unable to correct these errors, and this could, in turn, result in litigation or claims against us. Further, this surveydata reported to CMS is then published by CMS to the general public, and any errors we experience that result in incorrect scoring of our hospital customer mayresult 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 and time consuming and could negatively affect ourbusiness.Risks Related to Government Regulation, Content and Intellectual PropertyGovernment regulation may subject us to investigation, litigation, or liability or require us to change the way we do business.The laws and regulations that govern our business change rapidly. 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 regulateactivities on the Internet. For example, we are directly subject to certain requirements of the HIPAA privacy and security regulations. In addition, we are requiredthrough contracts with our customers known as “business associate agreements” to protect the privacy and security of certain personal and health relatedinformation. Further government laws and regulations such as the Affordable Care Act, that directly affect our customers, can have an indirect impact on ourbusiness.The rapidly evolving and uncertain regulatory and technology environment could require us to change how we do business or incur additional costs. It may bedifficult to predict how changes to these laws and regulations might affect our business. Our current and past privacy and security practices, including any breachesof protected health information or other data, could be subject to review or other investigation by various state and federal regulatory authorities or could becomethe subject of future litigation.Failure to comply with applicable laws and regulations, including those governing privacy and security, could subject us to civil and criminal penalties, subject usto contractual penalties (including termination of our customer agreements), adversely affect our ability to retain clients and attract new clients, damage ourreputation or otherwise 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 CMSas a certified vendor to offer CAHPS ® Hospital Surveys and CAHPS ® data collection and submission services for hospitals, home health agencies, clinicians andgroups, in-center hemodialysis, emergency departments, hospice, outpatient surgery, pediatrics, and accountable care organizations. If we are unable to maintainthese certifications, or secure certifications for future CMS mandated surveys, we would not be able to administer these survey instruments for our customers andour business may suffer.Any reduction or change in the regulation of continuing education and training in the healthcare industry may adversely affect our business.A portion of our business model is dependent in part on required training and continuing education for healthcare professionals and other healthcare workersresulting from regulations of state and federal agencies, state licensing boards and professional organizations. Any change in these regulations that reduce therequirements for continuing education and training for the healthcare industry could harm our business. In addition, a portion of our business with pharmaceuticaland medical device manufacturers and hospitals is predicated on our ability to maintain accreditation status with organizations such as the ACCME, ANCC, andACPE. The failure to maintain status as an accredited provider could have a detrimental effect on our business. 17Table of ContentsWe 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, orother intellectual property rights, if our content partners violate their contractual obligations to others by providing content to our library, or if the content does notconform to accepted standards of care in the healthcare profession. Further, we may be liable to these content partners if we improperly release and lose control oftheir content stored on our platform either due to security issues or through improper release to customers who have not paid for access to this content. We attemptto minimize these types of liabilities by requiring representations and warranties relating to our content partners’ ownership of the rights to distribute as well as theaccuracy of their content. We also take necessary measures to review this content ourselves. Although our agreements with our content partners in most instancescontain provisions providing for indemnification by the content providers in the event of inaccurate content, our content partners may not have the financialresources to meet this obligation. Alleged liability could harm our business by damaging our reputation, requiring us to incur legal costs in defense, exposing us toawards 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 ourproducts and services.Despite our efforts to protect our intellectual property rights, a third party could, without authorization, copy or otherwise misappropriate our content, informationfrom our databases, or other intellectual property. Our agreements with employees, consultants and others who participate in development activities could bebreached and result in our trade secrets becoming known, or our trade secrets and other intellectual property could be independently developed by competitors. Wemay not have adequate remedies for such breaches or protections against such competitor developments. In addition, the laws of some foreign countries do notprotect our proprietary rights to the same extent as the laws of the United States, and effective intellectual property protection may not be available in thosejurisdictions. We currently own several applications and registrations for trademarks and domain names in the United States and other countries as well as certaincommon law trademarks and service marks. The current system for registering, allocating and managing domain names has been the subject of litigation andproposed regulatory reform. Additionally, legislative proposals have been made by the federal government that would afford broad protection to owners ofdatabases 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 orother information. Our efforts to protect our intellectual property through copyright, trademarks and other controls may not be adequate. For instance, we may notbe 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 andservices, and even if we are successful in obtaining patent and/or trademark registrations, these registrations may be opposed or invalidated by a third party.There has been substantial litigation in the computer and online industries regarding intellectual property assets, particularly patents. Third parties may claiminfringement by us with respect to current and future products, trademarks or other proprietary rights, and we may counterclaim against such third parties in suchactions. Any such claims or counterclaims could be time-consuming, result in costly litigation, divert management’s attention, cause product release delays, requireus 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 ofwhich could have an adverse effect upon our business, financial condition and operating results. Such royalty and licensing agreements may not be available onterms 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 rightswe hold. In the future, litigation may be necessary to enforce our intellectual property rights or to determine the validity and scope of the patents, intellectualproperty 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, couldbe expensive and divert our attention from operating our company and result in a temporary inability to use the intellectual property subject to such claim. Inaddition, 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 asubstantial damage award and develop comparable non-infringing intellectual property, to obtain a license, or to cease providing the content or services that containthe infringing intellectual property. We may be unable to develop non-infringing intellectual property or obtain a license on commercially reasonable terms, if atall. 18Table of ContentsItem 1B. Unresolved Staff CommentsNone.Item 2. PropertiesOur principal office is located in Nashville, Tennessee, which is primarily used to support our workforce solutions operations and corporate functions. Our lease forapproximately 73,000 square feet at this location expires in April 2019. We also lease other facilities in Laurel, Maryland; Nashville, Tennessee; Jericho, NewYork; Brentwood, Tennessee; San Diego, California; Chicago, Illinois; Boulder, Colorado; and Pensacola, Florida. The facilities in Laurel, Maryland andNashville, Tennessee are used to support our survey operations, while the other leased locations are principally satellite offices.Item 3. Legal ProceedingsNone.Item 4. Mine Safety DisclosuresNot applicable. 19Table of ContentsPART IIItem 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity SecuritiesOur common stock is traded on the NASDAQ Global Select Market under the symbol “HSTM”. Our common stock began trading on the NASDAQ NationalMarket 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 theNASDAQ Global Select Market: Common Stock Price 2016 2015 High Low High Low First Quarter $22.35 $18.20 $30.36 $24.63 Second Quarter 26.58 21.17 31.91 25.15 Third Quarter 27.65 23.73 32.14 21.60 Fourth Quarter 28.39 22.06 25.63 21.31 As of February 13, 2017, the Company had a total of 9,547 shareholders, including 593 registered holders and 8,954 beneficial holders.SHARE REPURCHASE PROGRAMIn February 2016, our Board of Directors authorized a share repurchase program for up to $25 million of our outstanding common stock. The share repurchaseprogram terminated on December 31, 2016 and no share repurchases were made under the program.DIVIDEND POLICYWe 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 toretain 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 2017 Proxy Statement, incorporated byreference in Part III, Item 12 of this Annual Report on Form 10-K. 20Table of ContentsSTOCK PERFORMANCE GRAPHThe graph below compares HealthStream, Inc.’s cumulative total shareholder return on common stock with the cumulative total returns of companies on theNASDAQ Composite Index and the NASDAQ Computer & Data Processing Index for each of the last five fiscal years ended December 31, 2016, assuming aninitial investment of $100. Data for the NASDAQ Composite Index and the NASDAQ Computer & Data Processing Index assume the reinvestment of dividends.The comparisons in the graph below are based on historical data and are not necessarily indicative of future performance of our common stock.COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN (1)Among HealthStream, Inc., The NASDAQ Composite IndexAnd The NASDAQ Computer & Data Processing Index (1)$100 invested on 12/31/11 in stock or index, including reinvestment of dividends. Fiscal year ending December 31.RECENT SALES OF UNREGISTERED SECURITIESNone.ISSUER PURCHASES OF EQUITY SECURITIESNone. 21Table of ContentsItem 6. Selected Financial DataThe selected statement of income and balance sheet data for the past five years are derived from our audited consolidated financial statements. You should read thefollowing selected financial data in conjunction with our consolidated financial statements and the notes to those statements and “Management’s Discussion andAnalysis of Financial Condition and Results of Operations” located elsewhere in this report.HealthStream acquired Decision Critical, Inc. on June 29, 2012, Sy.Med Development, Inc. on October 19, 2012, substantially all of the assets of BLG onSeptember 9, 2013, HCCS on March 3, 2014, HLS on March 16, 2015, Performance Management Services, Inc. on June 30, 2016, acquired the remainingownership interest in Nursing Registry Consultants Corporation on July 25, 2016, and MAI on August 8, 2016. The results of operations for these acquiredcompanies are included within our consolidated statement of income data effective from the respective date of acquisition. Revenues may be subject to fluctuationsas discussed further in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” located elsewhere in this report. As a result ofthese factors, the annual results presented below are not comparable. The operating results for any single year are not necessarily indicative of the results to beexpected in the future. Year Ended December 31, (in thousands, except per share data) 2016 2015 2014 2013 2012 STATEMENT OF INCOME DATA: Revenues, net $225,974 $209,002 $170,690 $132,274 $103,732 Total operating costs and expenses 220,407 195,445 154,315 117,608 90,273 Operating income 5,567 13,557 16,375 14,666 13,459 Net income $3,755 $8,621 $10,394 $8,418 $7,645 Net income per share – basic $0.12 $0.29 $0.38 $0.31 $0.29 Net income per share – diluted $0.12 $0.28 $0.37 $0.30 $0.28 Weighted average shares of common stock outstanding – basic 31,721 30,057 27,570 26,853 26,128 Weighted average shares of common stock outstanding – diluted 32,068 30,436 28,023 27,663 27,507 BALANCE SHEET DATA: Cash and cash equivalents $49,634 $82,010 $81,995 $59,537 $41,365 Marketable securities 53,540 66,976 38,973 48,659 51,952 Accounts receivable, net 44,805 36,348 33,167 25,314 15,348 Goodwill and intangible assets 188,129 139,039 56,709 44,616 38,104 Working capital 82,467 120,459 97,352 90,912 83,259 Total assets 396,000 379,569 257,262 212,594 174,528 Deferred revenue – current and noncurrent 76,401 69,448 57,373 38,168 23,146 Shareholders’ equity 286,108 280,320 167,859 149,433 132,196 Item 7. Management’s Discussion and Analysis of Financial Condition and Results of OperationsThe following discussion of the financial condition and results of operations of HealthStream should be read in conjunction with “Selected Financial Data” andHealthStream’s Consolidated Financial Statements and related notes thereto included elsewhere in this report. This discussion contains forward-looking statementsthat involve risks and uncertainties. HealthStream’s actual results may differ significantly from the results discussed and those anticipated in these forward-lookingstatements as a result of many factors, including but not limited to those described under “Risk Factors” and elsewhere in this report.OVERVIEWHealthStream provides workforce development, patient experience, and provider solutions for healthcare organizations—all designed to assess and develop thepeople that deliver patient care which, in turn, supports the improvement of business and clinical outcomes. Workforce Solutions products are used by healthcareorganizations to meet a broad range of their training, certification, competency assessment, performance appraisal, and development needs. Patient ExperienceSolutions products provide our customers information about patients’ experiences and how to improve them, workforce engagement, physician relations, andcommunity perceptions of their services. Provider Solutions products are used by healthcare organizations for provider credentialing, privileging, call center andenrollment needs. HealthStream’s customers include healthcare organizations, pharmaceutical and medical device companies, and other participants in thehealthcare industry. 22Table of ContentsRevenues for the year ended December 31, 2016 were approximately $226.0 million compared to $209.0 million for the year ended December 31, 2015, anincrease of 8%. Operating income decreased by 59% to $5.6 million for 2016, compared to $13.6 million for 2015. Net income decreased by 56% to $3.8 millionfor 2016, compared to $8.6 million for 2015. Earnings per share (EPS) were $0.12 per share (diluted) for 2016 compared to $0.28 per share (diluted) for 2015.Revenues from HealthStream Workforce Solutions grew by 4%, or $6.7 million; revenues from HealthStream Patient Experience Solutions declined by 1%, or $0.3million; and revenues from HealthStream Provider Solutions grew by 78%, or $10.6 million. As of December 31, 2016, the Company had approximately4.55 million total subscribers, of which approximately 4.47 million were fully implemented subscribers on its SaaS-based platform. Annualized revenue perimplemented subscriber increased to $37.28 per subscriber at the end of 2016, up from $36.96 per subscriber at the end of 2015, representing a 1% increase. As ofDecember 31, 2016 cash and investment balances approximated $103.2 million, and the Company maintained full availability under its $50.0 million revolvingcredit facility.CRITICAL ACCOUNTING POLICIES AND ESTIMATESRevenue RecognitionRevenues are recognized from subscription-based workforce development products and courseware subscriptions based on a per person subscription basis, and insome 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 theysubscribe. Subscription-based revenue is recognized ratably over the service period of the underlying contract. All other service revenues are recognized as therelated services are performed or products are delivered.Revenues from provider solutions products are predominantly related to software licensing and support/maintenance renewals. Revenues derived from the licenseof installed software products are recognized using the residual method upon delivery of the software when vendor specific objective evidence (VSOE) of fairvalue for the undelivered elements within the contract can be established. For installed software products, if the Company cannot objectively determine the fairvalue of each undelivered element based on the VSOE of fair value, the Company defers revenue recognition until all elements are delivered, all services have beenperformed, or until fair value can be objectively determined. Software support and maintenance revenues are recognized ratably over the term of the relatedagreement.Revenues from patient experience services are recognized when survey results are delivered to customers via either Internet-based reporting throughout the surveyperiod or by providing final survey results once all services are complete. A significant portion of revenues for survey and reporting services that are providedthrough the use of Internet-based reporting methodologies are recognized using the proportional performance method, reflecting recognition throughout the serviceperiod which corresponds with the survey cycle and reporting access by the customer, which typically ranges from one to five months. If survey results aredelivered to the customer after all services have been completed, then the corresponding revenues are recognized in full in the period such results are provided tothe customer. Coaching and consulting revenues are generally recognized using the proportional performance method as these services are performed throughoutthe contract term. All other revenues are recognized as the related services are performed or products are delivered to the customer. Revenues for these services canbe subject to seasonal factors based on customers’ requirements that can impact the timing, frequency, and volume of survey cycles.Revenues from professional services primarily include consulting and courseware development services. Fees are based on the time and efforts involved, andrevenue is recognized upon completion of performance milestones using the proportional performance method.The Company offers training services for clients to facilitate integration of its software solutions. Fees for training are based on the time and efforts of the personnelinvolved. Basic online training is generally included in the initial contract; however, incremental training is fee based and revenues are generally recognized uponcompletion of training services.Accounting for Income TaxesThe Company accounts for income taxes using the asset and liability method, whereby deferred tax assets and liabilities are determined based on the temporarydifferences 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 areexpected to affect taxable income. Management periodically assesses the realizability of its deferred tax assets, and to the extent that we believe a recovery is notlikely, we establish a valuation allowance to reduce the deferred tax asset to the amount we estimate will be recoverable. The Company maintains a valuationallowance of approximately $654,000 for the portion of its deferred tax assets that are not more likely than not expected to be realized.Software Development CostsCapitalized software development includes costs to develop and maintain our products and applications, including our SaaS-based workforce development platformproducts and our survey reporting applications, which are accounted for as internal use software. For internal use software development, once planning iscompleted and the software development process begins, internal costs and payments to third parties associated with the software development efforts arecapitalized when the life expectancy is greater than one year and the anticipated cash flows are expected to exceed the cost of the related asset. During 2016 and2015, we capitalized approximately $10.0 million and $7.3 million, respectively, for software development. Such amounts are included in the accompanyingconsolidated balance sheets under the caption “capitalized software development.” The Company amortizes capitalized software development costs over theirexpected life, which is generally three to five years. Capitalized software development costs are subject to a periodic impairment review in accordance with ourimpairment review policy. In connection with capitalized software development, significant estimates involve the assessment of the development period for newproducts and feature enhancements, as well as the expected useful life of underlying software, feature enhancements, or product created. Once capitalized, softwaredevelopment costs are subject to the policies and estimates described below regarding goodwill, intangibles and other long-lived assets. 23Table of ContentsGoodwill, Intangibles and Other Long-lived AssetsThe 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 unitexceeds 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 isnot 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 areporting 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. TheCompany determines fair value of the reporting units using both income and market based models. Our models contain significant assumptions and accountingestimates about discount rates, future cash flows and terminal values that could materially affect our operating results or financial position if they were to changesignificantly in the future and could result in an impairment. We perform our goodwill impairment assessment whenever events or changes in facts orcircumstances indicate that impairment may exist and also during the fourth quarter each year. Intangible assets and other long-lived assets are also reviewed forevents or changes in facts and circumstances, both internally and externally, which may indicate an impairment is present. We measure any impairment usingobservable market values or discounted future cash flows from the related long-lived assets. The cash flow estimates and discount rates incorporate management’sbest estimates, using appropriate and customary assumptions and projections at the date of evaluation.Allowance for Doubtful AccountsThe Company estimates the allowance for doubtful accounts using both a specific and non-specific identification method. Management’s evaluation includesreviewing past due accounts on a case-by-case basis, and determining whether an account should be reserved, based on the facts and circumstances surroundingeach 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 debtexpense is recorded when events or circumstances indicate an additional allowance is necessary based on our specific and non-specific identification approach. Ourallowance for doubtful accounts totaled approximately $863,000 as of December 31, 2016.Stock Based CompensationThe Company recognizes compensation expense using a fair-value based method for costs related to share based payments including stock options and restrictedshare units. Measurement of such compensation expense requires significant estimation and assumptions; however, we believe that the Black Scholes optionpricing model used for calculating the fair value of our stock based compensation plans provides a reasonable measurement methodology using a framework that iswidely adopted.As of December 31, 2016, the Company had three stock incentive plans under which awards were outstanding, which qualified as stock based compensation plans.During the years ended December 31, 2016, 2015, and 2014, approximately $2.0 million, $3.3 million, and $1.6 million of stock based compensation expense wasrecorded, respectively. The Company has historically granted equity based awards to both its management group and members of the Company’s board of directorson an annual basis under stockholder-approved plans, and expects to continue providing equity awards to these groups for the foreseeable future. The Companyalso provides grants of equity based awards when new members of the management group begin their employment, or when new members join the Company’sboard of directors. As of December 31, 2016, total future compensation cost related to non-vested awards not yet recognized was approximately $3.1 million net ofestimated forfeitures, with a weighted average expense recognition period of 2.4 years. Future compensation expense recognition for new equity based award grantswill vary depending on the timing and size of new awards granted, changes in the market price or volatility of our common stock, changes in risk-free interest rates,or if actual forfeitures vary significantly from initial estimates. 24Table of ContentsRESULTS OF OPERATIONSRevenues and Expense ComponentsThe following descriptions of the components of revenues and expenses apply to the comparison of results of operations.Revenues, net. Revenues for our HealthStream Workforce Solutions business segment primarily consist of the following products and services: provision ofservices through our SaaS-based platform, authoring tools, a variety of courseware subscriptions, competency and performance appraisal tools, implementation andconsulting services, content development, online sales training courses (RepDirect™), HospitalDirect ® , SimVentures, and a variety of other educational activitiesto serve professionals that work within healthcare organizations. Revenues for our HealthStream Patient Experience Solutions business segment consist of qualityand satisfaction surveys, data analyses of survey results, coaching/consulting services, and other research-based measurement tools focused on patients, employees,physicians, and other members of the community. Revenues for our HealthStream Provider Solutions business segment consist of proprietary software applicationsto help facilitate provider credentialing, privileging, call center and enrollment administration for healthcare organizations.Cost of Revenues (excluding depreciation and amortization). Cost of revenues (excluding depreciation and amortization) consists primarily of salaries andemployee benefits, stock based compensation, employee travel and lodging, materials, outsourced phone survey support, contract labor, hosting costs, and otherdirect expenses associated with revenues, as well as royalties paid by us to content providers based on a percentage of revenues. Personnel costs within cost ofrevenues are associated with individuals that facilitate product delivery, provide services, conduct, process and manage customer surveys, handle customer supportcalls 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 withthe development of new software feature enhancements, new products, and costs associated with maintaining and developing our platform products. Personnelcosts within product development include our systems, application development, and quality assurance teams, product managers, and other personnel associatedwith software and product development.Sales and Marketing. Sales and marketing consists primarily of salaries, commissions and employee benefits, stock based compensation, employee travel andlodging, advertising, trade shows, promotions, and related marketing costs. We have historically hosted a national customer conference in Nashville, Tennesseeknown as “Summit,” a significant portion of the costs of which are included in sales and marketing expenses. Personnel costs within sales and marketing includeour sales teams and marketing personnel.Other General and Administrative Expenses. Other general and administrative expenses consist primarily of salaries and employee benefits, stock basedcompensation, employee travel and lodging, facility costs, office expenses, fees for professional services, business development and acquisition related costs, andother 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).Depreciation and Amortization. Depreciation and amortization consist of fixed asset depreciation, amortization of intangibles considered to have definite lives, andamortization of capitalized software development.Other Income (Expense), Net. The primary component of other income is interest income related to interest earned on cash, cash equivalents and investments inmarketable securities. The primary component of other expense is interest expense related to our revolving credit facility. In addition, the income or loss attributedto equity method investments is included in this category.2016 Compared to 2015Revenues, net. Revenues increased approximately $16.9 million, or 8%, to $225.9 million for 2016 from $209.0 million for 2015. A comparison of revenues bybusiness segment is as follows (in thousands): Revenues by Business Segment: 2016 2015 PercentageChange Workforce $168,040 $161,293 4% Patient Experience 33,850 34,189 (1)% Provider 24,084 13,520 78% Total revenues, net $225,974 $209,002 8% % of Revenues Workforce 74% 77% Patient Experience 15% 16% Provider 11% 7% 25Table of ContentsRevenues for HealthStream Workforce Solutions, which are primarily subscription-based, increased approximately $6.7 million, or 4%, over 2015. Revenues in2016 were positively influenced by growth in courseware subscriptions and our enterprise applications, but were partially offset by an expected decline in ICD-10readiness revenues. Revenues from ICD-10 readiness products declined by $18.2 million to $8.5 million in 2016 compared to $26.7 million in 2015. Therequirement mandated by CMS for healthcare organizations to transition to the ICD-10 coding system was effective in October 2015, and generated significantdemand for our ICD-10 readiness training courseware from 2012 through 2015. However, as a result of the effectiveness of such mandate in October 2015, sales ofthat product have ceased and there will not be renewals of the specific ICD-10 readiness product. Our Workforce Solutions annualized revenue per implementedsubscriber increased by 1%, to $37.28 per subscriber at the end of 2016 compared to $36.96 per subscriber at the end of 2015. Implemented subscribers decreasedby less than 1% during 2016 to 4.47 million subscribers at the end of 2016 compared to 4.48 million subscribers at the end of 2015. Additionally, total subscribersdecreased by less than 2%, with 4.55 million total subscribers at December 31, 2016 compared to 4.62 million total subscribers at December 31, 2015.Revenues for HealthStream Patient Experience Solutions decreased approximately $343,000, or 1%, compared to 2015. Revenues from Patient Insights™ surveys,our survey research product that generates recurring revenues, decreased by $239,000, or 1% compared to 2015. The decline in our patient survey revenues ispartially due to changes in product mix, such as the adoption of our e-survey products, which have both lower revenue and cost per survey than our traditionalphone survey products. Revenues from other products, including surveys conducted on annual or bi-annual cycles and consulting/coaching services, collectivelydecreased by $101,000, or 1%, compared to 2015.Revenues for HealthStream Provider Solutions increased approximately $10.6 million, or 78%, over 2015. Revenues from both the HLS and MAI acquisitions,which were consummated in March 2015 and August 2016, respectively, accounted for the majority of the increase in revenues during 2016. Revenues from theMAI acquisition, which was consummated on August 8, 2016, were approximately $2.6 million during 2016.Cost of Revenues (excluding depreciation and amortization). Cost of revenues increased approximately $7.2 million, or 8%, to $96.6 million for 2016 from $89.4million for 2015. Cost of revenues as a percentage of revenues was approximately 43% of revenues for both 2016 and 2015. Cost of revenues for HealthStreamWorkforce Solutions increased approximately $3.8 million to $67.4 million and approximated 40% and 39% of revenues for HealthStream Workforce Solutions for2016 and 2015, respectively. The increase in both amount and as a percentage of revenues is primarily associated with increased royalties paid by us resulting fromgrowth in courseware subscription revenues, increased personnel costs, and other support costs. The increase was partially offset by a decrease in stock basedcompensation. Cost of revenues for HealthStream Patient Experience Solutions decreased approximately $697,000 to $21.7 million and approximated 64% and65% of revenues for HealthStream Patient Experience Solutions for 2016 and 2015, respectively. The decrease in amount is primarily associated with lowerpersonnel costs and stock based compensation. Cost of revenues for HealthStream Provider Solutions increased approximately $4.1 million to $7.6 million andapproximated 32% and 26% of HealthStream Provider Solutions revenues for 2016 and 2015, respectively. The increase in amount and as a percentage of revenuesis primarily the result of increased personnel and related costs, including additional personnel from MAI.Product Development. Product development expenses increased approximately $4.7 million, or 19%, to $28.9 million for 2016 from $24.2 million for 2015.Product development expenses as a percentage of revenues were approximately 13% and 12% of revenues for 2016 and 2015, respectively.Product development expenses for HealthStream Workforce Solutions increased approximately $1.0 million and approximated 12% of revenues for HealthStreamWorkforce Solutions for both 2016 and 2015. The increase in amount is due to additional personnel expenses associated with new product development initiativesfor our subscription-based products. This increase was partially offset by lower stock based compensation. Product development expenses for HealthStream PatientExperience Solutions increased approximately $2.3 million and approximated 14% and 7% of revenues for HealthStream Patient Experience Solutions for 2016and 2015, respectively. The increase in both amount and as a percentage of revenue is due to additional personnel expenses associated with new productdevelopment initiatives. Product development expenses for HealthStream Provider Solutions increased approximately $1.3 million and approximated 16% and 18%of revenues for HealthStream Provider Solutions for 2016 and 2015, respectively. The increase in amount is primarily the result of increased personnel costs,including additional personnel from MAI.Sales and Marketing. Sales and marketing expenses, including personnel costs, increased approximately $3.4 million, or 10%, to $39.0 million for 2016 from $35.6million for 2015. Sales and marketing expenses were approximately 17% of revenues for both 2016 and 2015.Sales and marketing expenses for HealthStream Workforce Solutions increased approximately $1.6 million and approximated 17% of revenues for HealthStreamWorkforce Solutions for both 2016 and 2015. The increase in amount is mainly due to additional personnel, sales commissions, and increased marketing spending.Sales and marketing expenses for HealthStream Patient Experience Solutions decreased approximately $446,000, and approximated 12% and 13% of revenues forHealthStream Patient Experience Solutions for 2016 and 2015, respectively. The decrease in both amount and as a percentage of revenues is primarily due toreduced marketing personnel and related costs. Sales and marketing expenses for HealthStream Provider Solutions increased approximately $1.7 million, andapproximated 22% and 26% of revenues for HealthStream Provider Solutions for 2016 and 2015, respectively. The increase in amount is primarily the result ofincreased personnel costs, sales commissions, and marketing spending. The unallocated corporate portion of sales and marketing expenses increased by $584,000primarily due to additional marketing personnel and related costs. 26Table of ContentsOther General and Administrative Expenses. Other general and administrative expenses increased approximately $4.4 million, or 15%, to $33.7 million for 2016from $29.3 million for 2015. Other general and administrative expenses as a percentage of revenues were approximately 15% and 14% of revenues for 2016 and2015, respectively.Other general and administrative expenses for HealthStream Workforce Solutions increased approximately $1.4 million over 2015 primarily associated withincreased technology infrastructure investments. Other general and administrative expenses for HealthStream Patient Experience Solutions increased approximately$443,000 over 2015 due to additional personnel and facility costs. Other general and administrative expenses for HealthStream Provider Solutions increasedapproximately $1.3 million over 2015 primarily associated with increased personnel expenses and facility costs, including costs associated with the MAIacquisition. The unallocated corporate portion of other general and administrative expenses increased approximately $1.3 million over 2015, primarily associatedwith additional personnel and related costs, higher due diligence costs of approximately $260,000, and costs associated with the implementation of a new financialsystems platform of approximately $600,000, which was substantially completed during the second quarter of 2016.Depreciation and Amortization. Depreciation and amortization increased approximately $5.2 million, or 31%, to $22.2 million for 2016 from $17.0 million for2015. The increase primarily resulted from amortization of capitalized software development, amortization of intangible assets from recent acquisitions (includingamortization of software acquired for resale), and depreciation expense associated with capital expenditures.Other Income (Expense), Net . Other income (expense), net was income of approximately $581,000 for 2016 compared to $162,000 for 2015. The increase isprimarily associated with a gain recorded in relation to the acquisition of all of the remaining outstanding stock of Nursing Registry Consultants Corporation (SeeNote 5 in the Notes to Consolidated Financial Statements for further discussion), an increase in interest income from investments in marketable securities and lowerinterest expense.Income Tax Provision. The Company recorded a provision for income taxes of approximately $2.4 million for 2016 compared to $5.1 million for 2015. TheCompany’s effective tax rate was approximately 39% for 2016 compared to approximately 37% for 2015. The decrease in income tax expense during 2016 isattributable to lower taxable income compared to the prior year period.Net Income. Net income decreased approximately $4.8 million, or 56%, to $3.8 million for 2016 compared to $8.6 million for 2015. The decrease resulted from thefactors mentioned above. Earnings per diluted share were $0.12 per share for 2016 compared to $0.28 per diluted share for 2015.Adjusted EBITDA (a non-GAAP financial measure which we define as net income before interest, income taxes, stock based compensation, and depreciation andamortization) decreased approximately 12% to approximately $29.9 million for 2016 compared to $33.8 million for 2015. The decrease resulted from the factorsmentioned above. See Reconciliation of Non-GAAP Financial Measures below for our reconciliation of this calculation to measures under US GAAP.2015 Compared to 2014Revenues, net. Revenues increased approximately $38.3 million, or 22%, to $209.0 million for 2015 from $170.7 million for 2014. A comparison of revenues bybusiness segment is as follows (in thousands): Revenues by Business Segment: 2015 2014 PercentageChange Workforce $161,289 $134,242 20% Patient Experience 34,193 31,901 7% Provider 13,520 4,547 197% Total revenues, net $209,002 $170,690 22% % of Revenues Workforce 77% 79% Patient Experience 16% 19% Provider 7% 2% Revenues for HealthStream Workforce Solutions increased approximately $27.0 million, or 20%, over 2014. Revenues from our subscription-based workforceproducts increased by $26.0 million, or 20% over 2014 due to a higher number of subscribers and more courseware consumption by subscribers. Annualizedrevenue per implemented subscriber increased by 7%, to $36.96 per subscriber at the end of 2015 compared to $34.43 per subscriber at the end of 2014.Implemented subscribers increased by 9% to 4.48 million subscribers at the end of 2015 compared to 4.15 million subscribers at the end of 2014. Additionally, totalsubscribers increased by 8%, with 4.62 million total subscribers at December 31, 2015 compared to 4.28 million total subscribers at December 31, 2014. 27Table of ContentsRevenues for HealthStream Patient Experience Solutions increased approximately $2.3 million, or 7%, over 2014. Revenues from Patient Insights™ surveys, oursurvey research product that generates recurring revenues, increased approximately $2.8 million, or 12%, over 2014, primarily due to growth in survey volumesover the prior year. Revenues from other products, including surveys conducted on annual or bi-annual cycles and consulting/coaching services, collectivelydecreased by $554,000 or 7%, compared to 2014 due to fewer engagements.Revenues for HealthStream Provider Solutions increased approximately $9.0 million, or 197%, over 2014. Revenues from the HLS acquisition, which wasconsummated on March 16, 2015, were approximately $8.5 million during 2015. Revenues from other products increased by approximately $431,000, or 9% over2014.Cost of Revenues (excluding depreciation and amortization). Cost of revenues increased approximately $15.3 million, or 21%, to $89.4 million for 2015 from $74.1million for 2014. Cost of revenues as a percentage of revenues was approximately 43% of revenues for both 2015 and 2014. Cost of revenues for HealthStreamWorkforce Solutions increased approximately $10.3 million to $63.5 million and approximated 39% and 40% of revenues for HealthStream Workforce Solutionsfor 2015 and 2014, respectively. The increase in both amount and as a percentage of revenues is primarily associated with increased royalties paid by us resultingfrom growth in courseware subscription revenues, as well as increases in personnel expenses, stock based compensation, and other support costs. Cost of revenuesfor HealthStream Patient Experience Solutions increased approximately $2.2 million to $22.4 million and approximated 65% and 63% of revenues forHealthStream Patient Experience Solutions for 2015 and 2014, respectively. The increase in both amount and as a percentage of revenues is primarily the result ofincreased personnel costs, including personnel to support the growth in patient survey volume over the prior year, and increased stock based compensation. Cost ofrevenues for HealthStream Provider Solutions increased approximately $2.8 million to $3.5 million, and approximated 26% and 16% of revenues for HealthStreamProvider Solutions for 2015 and 2014, respectively. The increase in both amount and as a percentage of revenue is primarily the result of the HLS acquisition.Product Development. Product development expenses increased approximately $7.8 million, or 47%, to $24.2 million for 2015 from $16.5 million for 2014.Product development expenses as a percentage of revenues were approximately 12% and 10% of revenues for 2015 and 2014, respectively.Product development expenses for HealthStream Workforce Solutions increased approximately $4.8 million and approximated 12% and 11% of revenues forHealthStream Workforce for 2015 and 2014, respectively. The increase in both amount and as a percentage of revenues is due to additional personnel expensesassociated with new product development initiatives for our subscription-based products, as well as increased stock based compensation. Product developmentexpenses for HealthStream Patient Experience Solutions increased approximately $1.0 million and approximated 7% and 4% of revenues for HealthStream PatientExperience Solutions in 2015 and 2014, respectively. The increase in both amount and as a percentage of revenues is due to additional personnel and relatedexpenses compared to the prior year period. Product development expenses for HealthStream Provider Solutions increased approximately $2.0 million andapproximated 18% and 11% of revenues for HealthStream Provider Solutions for 2015 and 2014, respectively. The increase in both amount and as a percentage ofrevenues is due primarily to the HLS acquisition.Sales and Marketing. Sales and marketing expenses, including personnel costs, increased approximately $5.7 million, or 19%, to $35.6 million for 2015 from $29.9million for 2014. Sales and marketing expenses as a percentage of revenues were approximately 17% and 18% of revenues for 2015 and 2014, respectively.Sales and marketing expenses for HealthStream Workforce Solutions increased approximately $5.1 million and approximated 17% and 16% of revenues forHealthStream Workforce Solutions for 2015 and 2014, respectively. The increase in both amount and as a percentage of revenues is primarily due to additionalpersonnel and related expenses, commissions, and expenses associated with our customer Summit, increased marketing spending, and increased stock basedcompensation. Sales and marketing expenses for HealthStream Patient Experience Solutions decreased approximately $1.7 million, and approximated 13% and19% of revenues for HealthStream Patient Experience Solutions for 2015 and 2014, respectively. The decrease in amount and as a percentage of revenues isprimarily due to fewer account management personnel compared to the prior year. Sales and marketing expenses for HealthStream Provider Solutions increasedapproximately $2.2 million and approximated 26% and 30% of revenues for HealthStream Provider Solutions for 2015 and 2014, respectively. The increase inamount is primarily due to the HLS acquisition.Other General and Administrative Expenses. Other general and administrative expenses increased approximately $6.4 million, or 28%, to $29.3 million for 2015from $22.9 million for 2014. Other general and administrative expenses as a percentage of revenues were approximately 14% and 13% of revenues for 2015 and2014, respectively. 28Table of ContentsOther general and administrative expenses for HealthStream Workforce Solutions increased approximately $253,000 over the prior year. The increase is primarilydue to the HCCS acquisition, additional personnel, and increased other support costs. Other general and administrative expenses for HealthStream PatientExperience Solutions increased approximately $305,000 compared to the prior year period primarily due to increased facilities costs for a new patient interviewcenter in Nashville, Tennessee. Other general and administrative expenses for HealthStream Provider Solutions increased approximately $2.1 million compared tothe prior year period primarily due to the HLS acquisition. 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, and other general expenses, aswell as higher acquisition costs during 2015 than in 2014. Acquisition costs during 2015 approximated $1.1 million, of which $965,000 were associated with theHLS acquisition. Acquisition costs during 2014 approximated $762,000, of which $329,000 were associated with the HLS acquisition and $365,000 wereassociated with the HCCS acquisition.Depreciation and Amortization. Depreciation and amortization increased approximately $6.1 million, or 55%, to $17.0 million for 2015 from $10.9 million for2014. The increase primarily resulted from amortization of capitalized software development, amortization of intangible assets in relation to the acquisition of HLS,and depreciation expense associated with capital expenditures.Other Income, Net . Other income, net was approximately $162,000 for 2015 compared to $146,000 for 2014. The increase is attributable to both interest incomefrom investments in marketable securities and a gain on disposal of long lived assets, but was partially offset by higher interest expense from borrowings under arevolving credit facility during 2015 and losses from equity method investments.Income Tax Provision. The Company recorded a provision for income taxes of approximately $5.1 million for 2015 compared to approximately $6.1 million for2014. The Company’s effective tax rate was approximately 37% for both 2015 and 2014. The decrease in income tax expense during 2015 is attributable to lowertaxable income compared to the prior year period.Net Income. Net income decreased approximately $1.8 million, or 17%, to $8.6 million for 2015 from $10.4 million for 2014. This decrease was driven by thefactors set forth above. Earnings per diluted share were $0.28 per share for 2015, compared to $0.37 per diluted share for 2014.Adjusted EBITDA (a non-GAAP financial measure which we define as net income before interest, income taxes, stock-based compensation, and depreciation andamortization) increased by 17% to approximately $33.8 million for 2015 compared to $28.9 million for 2014. This improvement was driven by the factorsmentioned above. See Reconciliation of Non-GAAP Financial Measures in Management’s Discussion and Analysis of Financial Condition and Results ofOperations for a reconciliation of this calculation to measures under US GAAP and disclosure regarding why we believe Adjusted EBITDA provides usefulinformation to investors.Reconciliation of Non-GAAP Financial MeasuresThis report contains certain non-GAAP financial measures, including non-GAAP net income, non-GAAP operating income, and adjusted EBITDA, which are usedby management in analyzing the Company’s financial results and ongoing operational performance. These non-GAAP financial measures should not be consideredas a substitute for, or superior to, measures of financial performance which are prepared in accordance with US GAAP and may be different from non-GAAPfinancial measures used by other companies.In order to better assess the Company’s financial results, management believes that adjusted EBITDA is a useful measure for evaluating the operating performanceof the Company because adjusted EBITDA reflects net income adjusted for certain non-cash and non-operating items. The Company believes that adjustedEBITDA is also used by many investors and securities analysts to assess the Company’s results from current operations. Adjusted EBITDA is a non-GAAPfinancial measure and should not be considered as a measure of financial performance under US GAAP. Because adjusted EBITDA is not a measurementdetermined in accordance with US GAAP, it is susceptible to varying calculations. Accordingly, adjusted EBITDA, as presented, may not be comparable to othersimilarly 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 measurehas limitations as an analytical tool, and should not be considered in isolation, or as a substitute for an analysis of the Company’s results as reported under USGAAP.Management addresses these inherent limitations associated with using adjusted EBITDA through disclosure of such limitations, presentation of our financialstatements in accordance with US GAAP, and reconciliation of adjusted EBITDA to net income, the most directly comparable US GAAP measure.In recent years, including the March 2014 acquisition of HCCS, the March 2015 acquisition of HLS, and the August 2016 acquisition of MAI, the Company hasacquired businesses whose net tangible assets include deferred revenue. In accordance with GAAP reporting requirements, following the completion of any suchacquisition, the Company may record a write-down of deferred revenue to fair value as defined in GAAP. If the Company is required to record a write-down ofdeferred revenue, it may result in lower recognized revenue, operating income and net income in subsequent periods.In connection therewith, this report presents below non-GAAP revenues, non-GAAP operating income and non-GAAP net income, which in each such case reflectsthe corresponding GAAP figures adjusted to exclude the impact of the deferred revenue write-down 29Table of Contentsassociated with fair value accounting for acquired businesses as referenced above. Management believes that the presentation of these non-GAAP financialmeasures assists investors in understanding the Company’s performance between periods by excluding the impact of this deferred revenue write-down and providesa useful measure of the ongoing performance of the Company. Both on a quarterly and year-to-date basis, the revenue for the acquired business is deferred andtypically recognized over a one-to-two year period following the completion of any particular acquisition, so our GAAP revenues for this one-to-two year periodwill not reflect the full amount of revenues that would have been reported if the acquired deferred revenue was not written down to fair value. A reconciliation ofthese non-GAAP financial measures to the corresponding GAAP measures is set forth below. 30Table of Contents 2016 2015 2014 GAAP net income $3,755 $8,621 $10,394 Interest income (574) (401) (265) Interest expense 102 188 56 Income tax provision 2,393 5,098 6,127 Stock based compensation expense 1,968 3,280 1,625 Depreciation and amortization 22,207 16,997 10,931 Adjusted EBITDA $29,851 $33,783 $28,868 GAAP operating income $5,567 $13,557 $16,375 Adjustment for deferred revenue write-down 3,838 6,822 1,465 Non-GAAP operating income $9,405 $20,379 $17,840 GAAP net income $3,755 $8,621 $10,394 Adjustment for deferred revenue write-down, net of tax 2,345 4,287 921 Non-GAAP net income $6,100 $12,908 $11,315 FINANCIAL OUTLOOK FOR 2017The Company provides projections and other forward-looking information in this “Financial Outlook for 2017” section within “Management’s Discussion andAnalysis of Financial Condition and Results of Operations.” This section contains many forward-looking statements, particularly relating to the Company’s futurefinancial performance. These forward-looking statements are estimates based on information currently available to the Company, are made pursuant to the safeharbor 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 ofthis 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 todiffer, 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.For 2017, we anticipate that consolidated revenues will grow 10 to 14 percent as compared to 2016. We anticipate that revenue growth in our Workforce Solutionssegment will be in the three to seven percent range and five to eight percent in our Patient Experience Solutions segment. We anticipate our Provider Solutionssegment’s revenue to grow 66 to 72 percent as compared to 2016.We anticipate operating income for 2017 to increase between 50 and 65 percent as compared to 2016.We anticipate that capital expenditures will be between $15 million and $17 million during 2017. We expect the annual effective income tax rate to range between39 percent and 41 percent for 2017.The aforementioned guidance does not include the impact from any acquisitions that we may complete during 2017. 31Table of ContentsSELECTED QUARTERLY OPERATING RESULTSThe following tables set forth selected statements of income data for each of the four quarters in the periods ended December 31, 2016 and December 31, 2015,respectively. The information for each quarter has been prepared on the same basis as the audited statements included in other parts of this report and, in ouropinion, includes all adjustments, consisting of only normal recurring adjustments, necessary for a fair presentation of the results of operations for these periods.You should read this information in conjunction with HealthStream’s Consolidated Financial Statements and related notes thereto included elsewhere in this report.The operating results for any quarter are not necessarily indicative of the results to be expected in the future.Revenues from our subscription-based products are recognized ratably over the subscription term. Survey and research revenues are impacted by seasonal factorsresulting from the volume, timing, and frequency of survey cycles. Quarter Ended March 31,2016 June 30, 2016 September 30,2016 December 31,2016 (In thousands, except per share data) STATEMENT OF INCOME DATA: Revenues, net $54,078 $54,793 $58,367 $58,737 Total operating costs and expenses 51,592 52,477 57,081 59,258 Income (loss) from operations 2,486 2,316 1,286 (521) Net income (loss) $1,501 $1,403 $1,162 $(311) Net income (loss) per share (1) : Basic $0.05 $0.04 $0.04 $(0.01) Diluted $0.05 $0.04 $0.04 $(0.01) Weighted average shares of common stock outstanding: Basic 31,666 31,736 31,739 31,743 Diluted 31,974 32,071 32,107 31,743 Quarter Ended March 31,2015 June 30, 2015 September 30,2015 December 31,2015 (In thousands, except per share data) STATEMENT OF INCOME DATA: Revenues, net $47,156 $52,145 $53,835 $55,866 Total operating costs and expenses 42,366 49,581 49,510 53,988 Income from operations 4,790 2,564 4,325 1,878 Net income $2,722 $1,473 $2,614 $1,811 Net income per share (1) : Basic $0.10 $0.05 $0.08 $0.06 Diluted $0.10 $0.05 $0.08 $0.06 Weighted average shares of common stock outstanding: Basic 27,703 29,234 31,643 31,646 Diluted 28,068 29,617 32,029 32,031 (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 sharefor the full year.Liquidity and Capital ResourcesNet cash provided by operating activities was approximately $24.2 million during 2016 and $34.9 million during 2015. The primary sources of cash were generatedfrom receipts from the sales of our products and services. The decrease in cash flows from operating activities was significantly impacted by increases in accountsreceivable, resulting from slower collections in our Provider Solutions segment, as well as reduced deferred revenue balances compared to the prior year. Thenumber of days sales outstanding (DSO) was 66 days for 2016 and 61 days for 2015. The Company calculates DSO by dividing the average accounts receivablebalance (excluding unbilled and other receivables) by average daily revenues for the year. The Company’s primary sources of cash were receipts generated fromthe sales of our products and services. The primary uses of cash to fund operations included personnel expenses, sales commissions, royalty payments, paymentsfor 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 $56.7 million during 2016 and $134.9 million during 2015. During 2016, the Company utilized $55.3million (net of cash acquired) for acquisitions, purchased $107.0 million of marketable securities, spent $9.7 million for capitalized software development, andpurchased $5.1 million of property and equipment. These uses of cash were partially offset by maturities of marketable securities of $119.4 million and proceedsfrom the sale of long lived assets of $975,000. During 2015, the Company utilized $88.1 million (net of cash acquired) for business combinations, purchased $84.2million of marketable securities, spent $7.3 million for capitalized software development, purchased $8.1 million of property and equipment, and made $2.0 millionin non-marketable equity investments. These uses of cash were partially offset by maturities of marketable securities of $54.8 million. 32Table of ContentsCash provided by financing activities was approximately $46,000 during 2016 and $100.0 million during 2015. During 2016, the primary source of cash fromfinancing activities resulted from $217,000 of excess tax benefits from equity awards and $145,000 from the exercise of employee stock options. The primary usesof cash during 2016 related to $316,000 for payments of payroll taxes from stock based compensation arrangements. During 2015, the primary sources of cashfrom financing activities resulted from $98.0 million in proceeds from the issuance of 3.9 million shares of our common stock in our underwritten public offeringthat was completed on May 28, 2015, $3.0 million of excess tax benefits from equity awards, and $328,000 of proceeds from the exercise of employee stockoptions. The primary uses of cash during 2015 related to payments of payroll taxes from stock based compensation arrangements of $756,000 and earn-outs forprior business combinations of $633,000.Our balance sheet reflects positive working capital of $82.5 million at December 31, 2016 compared to $120.4 million at December 31, 2015. The decrease inworking capital was primarily due to the use of cash to fund acquisitions of approximately $55.3 million and slower collections from customers resulting in higheraccounts receivable balances. The Company’s primary source of liquidity is $103.2 million of cash and cash equivalents and marketable securities. The Companyalso has a $50.0 million revolving credit facility loan agreement, all of which was available at December 31, 2016.We believe that our existing cash and cash equivalents, marketable securities, cash generated from operations, and available borrowings under our revolving creditfacility will be sufficient to meet anticipated working capital needs, new product development and capital expenditures for at least the next 12 months.The Company’s growth strategy includes acquiring businesses that provide complementary product and services. It is anticipated that future acquisitions, if any,would be effected through cash consideration, stock consideration, or a combination of both. The issuance of our stock as consideration for an acquisition or toraise additional capital could have a dilutive effect on earnings per share and could adversely affect our stock price. The revolving credit facility contains financialcovenants and availability calculations designed to set a maximum leverage ratio of outstanding debt to consolidated EBITDA (as defined in our credit facility) andan interest coverage ratio of consolidated EBITDA to interest expense. Therefore, the maximum borrowings against the revolving credit facility would bedependent on the covenant values at the time of borrowing. As of December 31, 2016, the Company was in material compliance with all covenants. There can beno assurance that amounts available for borrowing under our revolving credit facility will be sufficient to consummate any possible acquisitions, and we cannotassure 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 orraise additional capital when required in sufficient amounts and on terms acceptable to us could harm our business, financial condition and results of operations.Off-Balance Sheet Arrangements and Contractual ObligationsThe Company’s off-balance sheet arrangements primarily consist of operating leases, contractual obligations, and our revolving credit facility, which is describedfurther 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 ofDecember 31, 2016, excluding amounts already recorded in the consolidated balance sheets (in thousands): Payments due by period Less than1 year 1-3 years 3-5 years More than5 years Total Operating leases $5,044 $6,242 $1,853 $2,748 $15,887 Purchase obligations 416 61 — — 477 Total $5,460 $6,303 $1,853 $2,748 $16,364 Recent Accounting PronouncementsIn May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-09, Revenue from Contracts withCustomers (Topic 606) , which supersedes the revenue recognition requirements in Topic 605, Revenue Recognition , and most industry-specific revenuerecognition guidance throughout the Industry Topics of the Accounting Standards Codification. The updated guidance states that an entity should recognizerevenue 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 inexchange for those goods or services. The guidance also provides for additional disclosures with respect to revenues and cash flows arising from contracts withcustomers. The standard will be effective for the first interim period within annual reporting periods beginning after December 15, 2017, and the Companycurrently anticipates adopting the standard using the modified retrospective approach effective January 1, 2018. The Company is in the process of implementing thestandard, and has identified several key provisions that may result in changes to current accounting policies, systems and processes, and internal controls, includingbut not limited to the following: 1) Determining the relative selling price for software-as-a-service agreements, software licenses, software maintenance, andprofessional services in order to assign value to the separate performance obligations within a contract. Certain existing right to use arrangements are recognizedover time because VSOE cannot be established, but may result in earlier revenue recognition under the new standard. 2) Capitalizing costs to acquire contracts,such as sales 33Table of Contentscommissions, is not a current accounting policy; therefore we expect historical sales commissions, which have been expensed as incurred, will need to be evaluatedfor capitalization; 3) Ensuring the Company’s financial systems can record, calculate, summarize, and report the necessary information required by the standard,which will require additional investments in technology and resources. The Company is not currently able to quantify the financial impact of the Company’sadoption of this accounting standard on its future consolidated financial statements, but does anticipate adjustments to retained earnings upon adoption.In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), which requires lessees to recognize assets and liabilities for most leases. The recognition,measurement and presentation of expenses and cash flows arising from a lease by a lessee is not expected to significantly change under such guidance; however,the Company is currently reviewing this standard to determine the method of adoption and to assess the impact on its future consolidated financial statements. Thestandard will be effective for the first interim period within annual reporting periods beginning after December 15, 2018, and early adoption is permitted.In March 2016, the FASB issued ASU 2016-09, Compensation – Stock Compensation (Topic 718), which serves to simplify several aspects of the accounting forshare-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statementof cash flows. The standard will be effective for the first interim period within annual reporting periods beginning after December 15, 2016, and early adoption ispermitted in any interim or annual period. The Company does not expect the adoption will have a material effect on its future consolidated financial statements.In March 2016, the FASB issued ASU 2016-01, Financial Instruments – Overall (Sub Topic 825-10) , which addresses certain aspects of the recognition,measurement, presentation, and disclosure of financial instruments. The guidance will, among other things, require equity method investments (except thoseaccounted for under the equity method of accounting or those that result in consolidation of the investee) to be measured at fair value with changes in fair valuerecognized in net income. The standard will be effective for the first interim period within annual reporting periods beginning after December 15, 2017, and earlyadoption is permitted for only limited aspects of such guidance. The Company is currently reviewing this standard to determine the method of adoption and toassess the impact on its future consolidated financial statements.Item 7A. Quantitative and Qualitative Disclosures about Market RiskThe 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 ofDecember 31, 2016, the Company had no outstanding debt. We may become subject to interest rate market risk associated with any future borrowings under ourrevolving credit facility. The interest rate under the revolving credit facility varies depending on the interest rate option selected by the Company plus a margindetermined in accordance with a pricing grid. We are exposed to market risk with respect to our cash and investment balances, which approximated $103.2 millionat December 31, 2016. Assuming a hypothetical 10% decrease in interest rates, interest income from cash and investments would decrease on an annualized basisby approximately $80,000.The Company’s investment policy and strategy is focused on investing in highly rated securities, with the objective of minimizing the potential risk of principalloss. 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 adversemarket conditions. Actual results in the future may differ materially from those projected as a result of actual developments in the market. 34Table of ContentsItem 8. Financial Statements and Supplementary DataINDEX TO CONSOLIDATED FINANCIAL STATEMENTS PageReports of Independent Registered Public Accounting Firm 36Consolidated Balance Sheets 38Consolidated Statements of Income 39Consolidated Statements of Comprehensive Income 40Consolidated Statements of Shareholders’ Equity 41Consolidated Statements of Cash Flows 42Notes to Consolidated Financial Statements 43 35Table of ContentsREPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMThe Board of Directors and Shareholders ofHealthStream, Inc.We have audited the accompanying consolidated balance sheets of HealthStream, Inc. as of December 31, 2016 and 2015, and the related consolidated statementsof income, comprehensive income, shareholders’ equity, and cash flows for each of the three years in the period ended December 31, 2016. These financialstatements 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 weplan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, ona test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used andsignificant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basisfor our opinion.In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of HealthStream, Inc. atDecember 31, 2016 and 2015, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2016, inconformity 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 controlover financial reporting as of December 31, 2016, based on criteria established in Internal Control – Integrated Framework issued by the Committee of SponsoringOrganizations of the Treadway Commission (2013 framework) and our report dated February 27, 2017 expressed an unqualified opinion thereon./s/ Ernst & Young LLPNashville, TennesseeFebruary 27, 2017 36Table of ContentsREPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMThe Board of Directors and Shareholders ofHealthStream, Inc.We have audited HealthStream, Inc.’s internal control over financial reporting as of December 31, 2016, 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 controlover financial reporting included in the accompanying Management’s Annual Report on Internal Control over Financial Reporting. Our responsibility is to expressan 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 planand perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Ouraudit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating thedesign and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in thecircumstances. 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 thepreparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financialreporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactionsand dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financialstatements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance withauthorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorizedacquisition, 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 ofeffectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance withthe 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, 2016, based on theCOSO criteria.We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the 2016 consolidated financialstatements of HealthStream, Inc. and our report dated February 27, 2017 expressed an unqualified opinion thereon./s/ Ernst & Young LLPNashville, TennesseeFebruary 27, 2017 37Table of ContentsHEALTHSTREAM, INC.CONSOLIDATED BALANCE SHEETS(In thousands) December 31,2016 December 31,2015 ASSETS Current assets: Cash and cash equivalents $49,634 $82,010 Marketable securities 53,540 66,976 Accounts receivable, net of allowance for doubtful accounts of $863 and $303 at December 31, 2016 and 2015,respectively 44,805 36,348 Accounts receivable - unbilled 2,581 1,998 Prepaid royalties, net of amortization 18,183 14,036 Other prepaid expenses and other current assets 8,694 8,169 Total current assets 177,437 209,537 Property and equipment, net 10,245 12,471 Capitalized software development, net of accumulated amortization of $31,787 and $24,130 at December 31, 2016 and 2015,respectively 16,310 13,955 Goodwill 109,765 83,073 Intangible assets, net of accumulated amortization of $16,445 and $8,685 at December 31, 2016 and 2015, respectively 78,364 55,966 Non-marketable equity investments 3,276 3,640 Other assets 603 927 Total assets $396,000 $379,569 LIABILITIES AND SHAREHOLDERS’ EQUITY Current liabilities: Accounts payable $3,127 $4,616 Accrued royalties 13,161 9,053 Accrued liabilities 8,146 7,003 Accrued compensation and related expenses 1,994 3,308 Deferred revenue 68,542 65,098 Total current liabilities 94,970 89,078 Deferred tax liabilities 5,968 4,763 Deferred revenue, noncurrent 7,859 4,350 Other long term liabilities 1,095 1,058 Commitments and contingencies — — Shareholders’ equity: Common stock, no par value, 75,000 shares authorized; 31,748 and 31,647 shares issued and outstanding atDecember 31, 2016 and 2015, respectively 280,813 278,799 Retained earnings 5,346 1,591 Accumulated other comprehensive loss (51) (70) Total shareholders’ equity 286,108 280,320 Total liabilities and shareholders’ equity $396,000 $379,569 See accompanying notes to the consolidated financial statements. 38Table of ContentsHEALTHSTREAM, INC.CONSOLIDATED STATEMENTS OF INCOME(In thousands, except per share data) For the Year Ended December 31, 2016 2015 2014 Revenues, net $225,974 $209,002 $170,690 Operating costs and expenses: Cost of revenues (excluding depreciation and amortization) 96,634 89,386 74,145 Product development 28,897 24,214 16,463 Sales and marketing 39,004 35,589 29,867 Other general and administrative expenses 33,665 29,259 22,909 Depreciation and amortization 22,207 16,997 10,931 Total operating costs and expenses 220,407 195,445 154,315 Operating income 5,567 13,557 16,375 Other income, net 581 162 146 Income before income tax provision 6,148 13,719 16,521 Income tax provision 2,393 5,098 6,127 Net income $3,755 $8,621 $10,394 Net income per share: Basic $0.12 $0.29 $0.38 Diluted $0.12 $0.28 $0.37 Weighted average shares of common stock outstanding: Basic 31,721 30,057 27,570 Diluted 32,068 30,436 28,023 See accompanying notes to the consolidated financial statements. 39Table of ContentsHEALTHSTREAM, INC.CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME(In thousands) For the Year Ended December 31, 2016 2015 2014 Net income $3,755 $8,621 $10,394 Other comprehensive income, net of taxes: Unrealized gain (loss) on marketable securities 19 (33) (6) Total other comprehensive income (loss) 19 (33) (6) Comprehensive income $3,774 $8,588 $10,388 See accompanying notes to the consolidated financial statements. 40Table of ContentsHEALTHSTREAM, INC.CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY(In thousands) Retained Earnings Accumulated Other Total Common Stock (Accumulated Comprehensive Shareholders’ Shares Amount Deficit) Income (Loss) Equity Balance at December 31, 2013 27,327 $166,888 $(17,424) $(31) $149,433 Net income — — 10,394 — 10,394 Comprehensive loss — — — (6) (6) Issuance of common stock in acquisition 82 2,246 — — 2,246 Stock based compensation — 1,625 — — 1,625 Tax benefits from equity awards — 3,234 — — 3,234 Common stock issued under stock plans, net of shares withheld foremployee taxes 268 933 — — 933 Balance at December 31, 2014 27,677 174,926 (7,030) (37) 167,859 Net income — — 8,621 — 8,621 Comprehensive loss — — — (33) (33) Issuance of common stock 3,870 98,014 — — 98,014 Stock donated to Company (54) — — — 0 Stock based compensation — 3,280 — — 3,280 Tax benefits from equity awards — 3,008 — — 3,008 Common stock issued under stock plans, net of shares withheld foremployee taxes 154 (429) — — (429) Balance at December 31, 2015 31,647 278,799 1,591 (70) 280,320 Net income — — 3,755 — 3,755 Comprehensive income — — — 19 19 Stock based compensation 101 1,968 — — 1,968 Tax benefits from equity awards — 217 — — 217 Common stock issued under stock plans, net of shares withheld foremployee taxes — (171) — — (171) Balance at December 31, 2016 31,748 $280,813 $5,346 $(51) $286,108 See accompanying notes to the consolidated financial statements. 41Table of ContentsHEALTHSTREAM, INC.CONSOLIDATED STATEMENTS OF CASH FLOWS(In thousands) For the Year Ended December 31, 2016 2015 2014 OPERATING ACTIVITIES: Net income $3,755 $8,621 $10,394 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 22,207 16,997 10,931 Deferred income taxes 1,786 392 1,324 Share based compensation expense 1,968 3,280 1,625 Excess tax benefits from equity awards (217) (3,008) (3,234) Provision for doubtful accounts 640 284 237 (Gain) loss on non-marketable equity investments (121) 117 65 Gain on sale of long-lived assets — (72) — Other 1,026 1,401 1,394 Changes in assets and liabilities, net of business combinations: Accounts and unbilled receivables (6,079) (736) (6,690) Prepaid royalties (4,008) (1,006) (4,174) Other prepaid expenses and other current assets (1,462) (1,372) (2,022) Other assets 305 1,110 (1,761) Accounts payable (1,319) (137) 2,442 Accrued royalties 3,691 (202) 820 Accrued liabilities, accrued compensation and related expenses, and other long-term liabilities (884) 3,075 5,434 Deferred revenue 2,946 6,173 17,471 Net cash provided by operating activities 24,234 34,917 34,256 INVESTING ACTIVITIES: Business combinations, net of cash acquired (55,255) (88,075) (12,298) Proceeds from maturities of marketable securities 119,395 54,799 52,625 Purchases of marketable securities (106,965) (84,228) (44,341) Payments to acquire equity method investments — (1,000) (325) Payments to acquire cost method investments — (1,000) (1,000) Proceeds for sale of long lived assets 975 — — Payments associated with capitalized software development (9,721) (7,265) (5,658) Purchases of property and equipment (5,085) (8,094) (4,544) Net cash used in investing activities (56,656) (134,863) (15,541) FINANCING ACTIVITIES: Proceeds from issuance of common stock — 98,014 — Proceeds from exercise of stock options 145 328 1,094 Proceeds from borrowings under revolving line of credit facility — 28,000 — Repayments under revolving line of credit facility — (28,000) — Taxes paid related to net settlement of equity awards (316) (756) (161) Excess tax benefits from equity awards 217 3,008 3,234 Payment of earn-outs related to business combinations — (633) (424) Net cash provided by financing activities 46 99,961 3,743 Net increase (decrease) in cash and cash equivalents (32,376) 15 22,458 Cash and cash equivalents at beginning of year 82,010 81,995 59,537 Cash and cash equivalents at end of year $49,634 $82,010 $81,995 SUPPLEMENTAL CASH FLOW INFORMATION: Interest paid $76 $190 $56 Income taxes paid $2,496 $2,648 $1,641 NON-CASH INVESTING AND FINANCING ACTIVITIES: Receivable from sale of long-lived assets $— $975 0 Issuance of common stock in connection with business combinations $— $— $2,246 See accompanying notes to the consolidated financial statements. 42Table of ContentsHEALTHSTREAM, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIESReporting Entity and SegmentsHealthStream, Inc. (the “Company”) was incorporated in 1990 as a Tennessee corporation and is headquartered in Nashville, Tennessee. The Company operates inthree segments: HealthStream Workforce Solutions, HealthStream Patient Experience Solutions, and HealthStream Provider Solutions. Workforce Solutionsproducts consist of SaaS-based services and subscription-based solutions to meet the ongoing training, certification, assessment and development needs of thehealthcare 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. Patient Experience products offer healthcare organizations a wide range of quality and satisfaction surveys, consulting services, analyses ofsurvey results, and other research-based services. Provider Solutions products offer healthcare organizations software applications for administering and trackingprovider credentialing, privileging, call center and enrollment.Recently Adopted Accounting StandardsThe Company adopted Accounting Standards Update (“ASU”) 2015-16, Business Combinations (Topic 805) in January 2016. Under the provisions of the revisedguidance, acquirers in a business combination must recognize adjustments to provisional amounts that are identified during the measurement period in the reportingperiod in which the adjustment amounts are determined. The acquirer must record, in the same period’s financial statements, the effect on earnings of changes indepreciation, amortization, or other income effects, if any, as a result of the change to the provisional amounts, calculated as if the accounting had been completedat the acquisition date. The Company recorded a measurement period adjustment during the period ended March 31, 2016. See Note 5 Business Combinations forfurther discussion.Recognition of RevenueRevenues are derived from providing services through our SaaS-based workforce development platform products, courseware subscriptions, provision of surveyand research services, sales of software licensing arrangements, software maintenance and support, professional services, custom courseware development andother 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 persuasiveevidence of an arrangement exists, prices are fixed or determinable, services and products are provided to the customer and collectability is probable or reasonablyassured.Revenue recognized from software and other arrangements is allocated to each element of the arrangement based on the relative fair values of the elements. Whileelements include software products and post contract customer support, the fair value of each element is based on vendor specific objective evidence (VSOE). Forinstalled software products, if fair value cannot be determined for each undelivered element of the arrangement, all revenue from the arrangement is deferred untilfair value can be determined or until all elements of the arrangement are delivered and customer acceptance has occurred. Sales of the Company’s SaaS-basedworkforce development platform products include customer support, implementation services, and training; therefore all revenues are deferred until the SaaS-basedproduct is implemented, at which time revenues are recognized ratably over the subscription service period. In the event that circumstances occur, which give riseto uncertainty regarding the collectibility of contracted amounts, revenue recognition is suspended until such uncertainty is resolved. Fees for these services arebilled 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 arerecognized 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 using the residual method upon delivery of the software, when VSOE of fair valuefor the undelivered elements within the contract can be established. If the Company cannot objectively determine the fair value of each undelivered element basedon the VSOE of fair value, the Company defers revenue recognition until all elements are delivered, all services have been performed, or until fair value can beobjectively determined. Software support and maintenance revenues are recognized ratably over the term of the related agreement. 43Table of ContentsHEALTHSTREAM, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) Revenues recognized from the Company’s survey and research services are determined using both the proportional performance method and the completed contractmethod. 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 isgenerally 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 notavailable to the customer during the survey fielding cycle, revenues are recognized at time of report delivery. Revenues for coaching and consulting engagementsare recognized using the proportional performance method over the term of the underlying contract. Fees for survey services are billed upon initiation of the surveycycle, with progress billings made throughout the survey cycle. Fees for coaching and consulting engagements are billed upon initiation of the engagement withprogress billings throughout the term of the contract.Revenues from professional services and courseware development services are recognized upon the completion of performance milestones and deliverables usingthe proportional performance method. All other revenues are recognized as the related services are performed or products are delivered. Fees for these services aregenerally billed at project initiation and upon completion of various milestones.Principles of ConsolidationThe consolidated financial statements include the accounts of the Company and its subsidiaries, all of which are wholly-owned. All inter-company accounts andtransactions have been eliminated in consolidation.Use of EstimatesThe consolidated financial statements are prepared in accordance with U.S. generally accepted accounting principles. These accounting principles requiremanagement to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differfrom those estimates and such differences could be material to the consolidated financial statements.Cash EquivalentsThe Company considers cash equivalents to be unrestricted, highly liquid investments with initial maturities of less than three months.Marketable SecuritiesMarketable 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 othercomprehensive income (loss) on the accompanying consolidated balance sheets. Realized gains and losses and declines in market value judged to be other thantemporary on investments in marketable securities are included in interest and other income on the accompanying consolidated statements of income. The cost ofsecurities 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 asan adjustment to yield using the effective interest method.Accounts Receivable-UnbilledAccounts receivable-unbilled represents the following: 1) revenue earned and recognized on contracts accounted for using the proportional performance method forwhich invoices have not been generated or contractual billing dates have not been reached; and 2) the difference between billings for contracts containing escalatedpricing over the term of the agreement and the recognition of revenue ratably over the subscription period.Deferred RevenueDeferred revenue represents amounts that have been billed or collected in advance of revenue recognition. The Company typically invoices customers in quarterly,bi-annual, or annual installments, and occasionally customers will pay for multi-year contracts in advance. Deferred revenue is reduced as the revenue recognitioncriteria are met.Prepaid RoyaltiesPrepaid royalties represents advance payments associated with the sale of third party products, such as courseware subscriptions. Royalties are typically paid inadvance at the commencement of the revenue cycle, or periodically throughout the revenue cycle, such as quarterly, bi-annual, or annual installments. Royaltypayments 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 thesame period the subscription revenue is recognized. Amortization of royalties is included under the caption “cost of revenues (excluding depreciation andamortization)” in the accompanying consolidated statements of income. 44Table of ContentsHEALTHSTREAM, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) Allowance for Doubtful AccountsThe Company estimates its allowance for doubtful accounts using a specific identification method in which management considers the facts and circumstancessurrounding each potentially uncollectible receivable. An allowance is also maintained for accounts that are not specifically identified that may becomeuncollectible in the future. Uncollectible receivables are written-off in the period management believes it has exhausted every opportunity to collect payment fromthe customer. Bad debt expense is recorded when events or circumstances indicate an additional allowance is required based on the Company’s specificidentification 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): AllowanceBalance atBeginningof Period Charged to Costs and Expenses Write-offs AllowanceBalance at End of Period 2016 $303 $640 $(80) $863 2015 $331 $284 $(312) $303 2014 $211 $237 $(117) $331 Capitalized Software DevelopmentCapitalized software development is stated on the basis of cost, and is presented net of accumulated amortization. The Company capitalizes costs incurred duringthe software development phase for projects when such costs are material. These assets are amortized using the straight-line method, generally ranging betweenthree to five years. The Company capitalized approximately $10.0 million and $7.3 million during 2016 and 2015, respectively. Amortization of capitalizedsoftware development was approximately $7.7 million and $6.2 million during 2016 and 2015, respectively. Maintenance and operating costs are expensed asincurred. As of December 31, 2016 and 2015, there were no capitalized software development costs for computer software developed for resale.Fair Value MeasurementsFair 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 orderlytransaction between market participants at the measurement date. The fair value hierarchy prioritizes the inputs to valuation techniques used in measuring fairvalue. 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 foreach reporting period. This determination requires significant judgments to be made by the Company. At December 31, 2016 and 2015, our assets measured at fairvalue on a recurring basis consisted of marketable securities, which are classified as available for sale (see Note 4 – Marketable Securities). The Company did nothave any financial liabilities that were subject to fair value measurements as of such dates.Property and EquipmentProperty and equipment are stated on the basis of cost. Depreciation and amortization are provided on the straight-line method over the following estimated usefullives, except for assets under capital leases and leasehold improvements, which are amortized over the shorter of the estimated useful life or their respective leaseterm. Years Furniture and fixtures 5-10 Equipment 3-5 45Table of ContentsHEALTHSTREAM, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) Goodwill and Intangible AssetsGoodwill represents the excess of purchase price in a business combination over the fair value of the net identifiable assets acquired. The carrying amount of ourgoodwill is evaluated for impairment at least annually during the fourth quarter and whenever events or changes in facts or circumstances indicate that impairmentmay exist. In accordance with ASC 350, Intangibles – Goodwill and Other , companies may opt to first assess qualitative factors to determine whether it is morelikely than not that the fair value of a reporting unit is less than its carrying amount. A qualitative assessment includes factors such as financial performance,industry and market metrics, and other factors affecting the reporting unit. If this assessment concludes that is more likely than not that the fair value of a reportingunit exceeds its carrying value, then goodwill is not considered impaired and no further impairment testing is required. Conversely, if the qualitative assessmentconcludes that it is more likely than not that the fair value of a reporting unit is less than its carrying value, we must then compare the fair value of the reportingunit to its carrying value. The Company determines fair value of the reporting units using both income and market based models. These models require the use ofvarious assumptions relating to cash flow projections, growth rates, discount rates and terminal value calculations. The Company did not recognize any impairmentcharges for the years ended December 31, 2016, 2015 or 2014.As of December 31, 2016, intangible assets with remaining unamortized balances include contract rights and customer relationships, internally-developedtechnology and patents, non-competition agreements, and trade names. These intangible assets are considered to have definite useful lives and are being amortizedon a straight line basis over periods typically ranging between three and fifteen years. The weighted average amortization period for definite lived intangible assetsas of December 31, 2016 was 11.1 years. Intangible assets are reviewed for impairment whenever events or changes in facts or circumstances indicate that thecarrying amount of the assets may not be recoverable. There were no impairments identified or recorded for the years ended December 31, 2016, 2015, or 2014.Long-Lived AssetsLong-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 animpairment of long-lived assets held for use is present. The Company measures any impairment using observable market values or discounted future cash flowsfrom the related long-lived assets. The cash flow estimates and discount rates incorporate management’s best estimates, using appropriate and customaryassumptions and projections at the date of evaluation. Management periodically evaluates whether the carrying value of long-lived assets, including intangibleassets, property and equipment, capitalized software development, and other assets will be recoverable. There were no impairments identified or recorded for theyears ended December 31, 2016, 2015, or 2014.Non-Marketable Equity InvestmentsNon-marketable equity investments are accounted for using the equity method when the Company can exercise significant influence over the investee. Investmentsfor 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 orloss from equity method investments are recorded under the caption “other income, net” in the accompanying consolidated statements of income.Financial InstrumentsThe Company has various financial instruments, including cash and cash equivalents, accounts receivable, accounts receivable-unbilled, accounts payable, accruedliabilities, and deferred revenue. The carrying amounts of these financial instruments approximate fair value because of the short term maturity or short term natureof such instruments. The Company also has marketable securities, which are recorded at approximate fair value based on quoted market prices or alternative pricingsources (see Note 4 – Marketable Securities).AdvertisingThe Company expenses the costs of advertising as incurred. Advertising expense for the years ended December 31, 2016, 2015, and 2014 was approximately $1.0million, $1.1 million, and $0.7 million, respectively.Shipping and Handling CostsShipping and handling costs that are associated with our products and services are included in cost of revenues. 46Table of ContentsHEALTHSTREAM, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) Income TaxesIncome taxes are accounted for using the asset and liability method, whereby deferred tax assets and liabilities are determined based on the temporary differencesbetween 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 toaffect taxable income. Management evaluates all available evidence, both positive and negative, to determine whether, based on the weight of that evidence, avaluation allowance is needed. Future realization of the tax benefit of an existing deductible temporary difference or carryforward ultimately depends on theexistence of sufficient taxable income of the appropriate character within the carryback or carryforward period available under the tax law. There are four possiblesources of taxable income that may be available under the tax law to realize a tax benefit for deductible temporary differences and carryforwards: 1) futurereversals of existing taxable temporary differences, 2) future taxable income exclusive of reversing temporary differences and carryforwards, 3) taxable income inprior carryback year(s) if carryback is permitted under the tax law, and 4) tax-planning strategies that would, if necessary, be implemented to realize deductibletemporary differences or carryforwards prior to their expiration. Management reviews the realizability of its deferred tax assets each reporting period to identifywhether any significant changes in circumstances or assumptions have occurred that could materially affect the realizability of deferred tax assets. As ofDecember 31, 2016, the Company had established a valuation allowance of $654,000 for the portion of its net deferred tax assets that are not more likely than notexpected 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. Taxpositions 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.Earnings Per ShareBasic earnings per share is computed by dividing the net income available to common shareholders for the period by the weighted average number of commonshares outstanding during the period. Diluted earnings per share is computed by dividing the net income for the period by the weighted average number of commonand common equivalent shares outstanding during the period. Common equivalent shares are composed of incremental common shares issuable upon the exerciseof stock options and restricted share units subject to vesting. The dilutive effect of common equivalent shares is included in diluted earnings per share byapplication of the treasury stock method. Common equivalent shares that have an anti-dilutive effect on diluted net income per share have been excluded from thecalculation of diluted weighted average shares outstanding for the years ended December 31, 2016, 2015, and 2014.Concentrations of Credit Risk and Significant CustomersThe Company’s credit risks relate primarily to cash and cash equivalents, marketable securities and accounts receivable. The Company places its temporary excesscash investments in high quality, short-term money market instruments. At times, such investments may be in excess of the FDIC insurance limits. Marketablesecurities consists primarily of investment grade corporate debt securities and certificates of deposit.The Company sells its products and services to various companies in the healthcare industry that are located in the United States. We perform ongoing creditevaluations of our customers’ financial condition and generally require no collateral from customers. An allowance for doubtful accounts is maintained forpotentially uncollectible accounts receivable. The Company did not have any single customer representing over 10% of net revenues or accounts receivable during2016, 2015, or 2014.Stock Based CompensationAs of December 31, 2016, the Company maintains three stock based compensation plans under which awards are outstanding, which are described in Note 11. TheCompany accounts for stock based compensation using the fair-value based method for costs related to share-based payments, including stock options andrestricted share units. The Company uses the Black Scholes option pricing model for calculating the fair value of option awards issued under its stock basedcompensation plan. The Company measures compensation cost of restricted share units based on the closing fair market value of the Company’s stock on the dateof 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 asan expense over the requisite service period. The Company recognizes tax benefits from stock based compensation if an excess tax benefit is realized. Excess taxbenefits are recorded as an increase to common stock when realized. 47Table of ContentsHEALTHSTREAM, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) Newly Issued Accounting StandardsIn May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-09, Revenue from Contracts withCustomers (Topic 606) , which supersedes the revenue recognition requirements in Topic 605, Revenue Recognition , and most industry-specific revenuerecognition guidance throughout the Industry Topics of the Accounting Standards Codification. The updated guidance states that an entity should recognizerevenue 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 inexchange for those goods or services. The guidance also provides for additional disclosures with respect to revenues and cash flows arising from contracts withcustomers. The standard will be effective for the first interim period within annual reporting periods beginning after December 15, 2017, and the Companycurrently anticipates adopting the standard using the modified retrospective approach effective January 1, 2018. The Company is in the process of implementing thestandard, and has identified several key provisions that may result in changes to current accounting policies, systems and processes, and internal controls, includingbut not limited to the following: 1) Determining the relative selling price for software-as-a-service agreements, software licenses, software maintenance, andprofessional services in order to assign value to the separate performance obligations within a contract. Certain existing right to use arrangements are recognizedover time because VSOE cannot be established, but may result in earlier revenue recognition under the new standard. 2) Capitalizing costs to acquire contracts,such as sales commissions, is not a current accounting policy, therefore we expect historical sales commissions, which have been expensed as incurred, will need tobe evaluated for capitalization; 3) Ensuring the Company’s financial systems can record, calculate, summarize, and report the necessary information required by thestandard, which will require additional investments in technology and resources. The Company is not currently able to quantify the financial impact of theCompany’s adoption of this accounting standard on its future consolidated financial statements, but does anticipate adjustments to retained earnings upon adoption.In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), which requires lessees to recognize assets and liabilities for most leases. The recognition,measurement and presentation of expenses and cash flows arising from a lease by a lessee is not expected to significantly change under such guidance; however,the Company is currently reviewing this standard to determine the method of adoption and to assess the impact on its future consolidated financial statements. Thestandard will be effective for the first interim period within annual reporting periods beginning after December 15, 2018, and early adoption is permitted.In March 2016, the FASB issued ASU 2016-09, Compensation – Stock Compensation (Topic 718), which serves to simplify several aspects of the accounting forshare-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statementof cash flows. The standard will be effective for the first interim period within annual reporting periods beginning after December 15, 2016, and early adoption ispermitted in any interim or annual period. The Company does not expect the adoption will have a material effect on its future consolidated financial statements.In March 2016, the FASB issued ASU 2016-01, Financial Instruments – Overall (Sub Topic 825-10) , which addresses certain aspects of the recognition,measurement, presentation, and disclosure of financial instruments. The guidance will, among other things, require equity method investments (except thoseaccounted for under the equity method of accounting or those that result in consolidation of the investee) to be measured at fair value with changes in fair valuerecognized in net income. The standard will be effective for the first interim period within annual reporting periods beginning after December 15, 2017, and earlyadoption is permitted for only limited aspects of such guidance. The Company is currently reviewing this standard to determine the method of adoption and toassess the impact on its future consolidated financial statements.2. SHAREHOLDERS’ EQUITYCommon StockThe 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, 2016 and2015 was approximately 31.7 million and 31.6 million, respectively. The Company issued approximately 3.9 million shares of common stock in connection with anunderwritten public offering, which was completed in May 2015, raising approximately $98.0 million of cash.Preferred StockThe 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 voteor action of the shareholders. 48Table of ContentsHEALTHSTREAM, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 3. EARNINGS PER SHAREThe following table sets forth the computation of basic and diluted earnings per share for the three years ended December 31, 2016 (in thousands, except per shareamounts): 2016 2015 2014 Numerator: Net income $3,755 $8,621 $10,394 Denominator: Weighted-average shares outstanding 31,721 30,057 27,570 Effect of dilutive shares 347 379 453 Weighted-average diluted shares 32,068 30,436 28,023 Basic earnings per share $0.12 $0.29 $0.38 Diluted earnings per share $0.12 $0.28 $0.37 Potentially dilutive shares representing approximately 38,000, 16,000, and 70,000 shares of common stock for 2016, 2015, and 2014, respectively, were excludedfrom the calculation of diluted earnings per share because their effect would have been anti-dilutive.4. MARKETABLE SECURITIESAt December 31, 2016 and 2015, the fair value of marketable securities, which were all classified as available for sale, included the following (in thousands): December 31, 2016 Adjusted Cost UnrealizedGains UnrealizedLosses Fair Value Level 2: Corporate debt securities $44,486 $— $(50) $44,436 Government-sponsored enterprise debt securities 9,105 1 (2) 9,104 Total $53,591 $1 $(52) $53,540 December 31, 2015 Adjusted Cost UnrealizedGains UnrealizedLosses Fair Value Level 2: Certificates of deposit $1,000 $0 $0 $1,000 Corporate debt securities 66,046 0 (70) 65,976 Total $67,046 $0 $(70) $66,976 The carrying amounts of the marketable securities reported in the consolidated balance sheets approximate fair value based on quoted market prices or alternativepricing sources and models utilizing market observable inputs. As of December 31, 2016, the Company does not consider any of its marketable securities to beother than temporarily impaired. During the years ended December 31, 2016 and 2015, the Company did not reclassify any items out of accumulated othercomprehensive income to net income. All investments in marketable securities are classified as a current asset on the balance sheet because the underlyingsecurities mature within one year from the balance sheet date. 49Table of ContentsHEALTHSTREAM, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 5. BUSINESS COMBINATIONSMorrisey Associates, Inc.On August 8, 2016, Echo, Inc. (“Echo”), a wholly owned subsidiary of the Company, acquired all of the outstanding stock of Morrisey Associates, Inc. (“MAI”), aChicago, Illinois based company that provides credentialing and privileging software to healthcare organizations. The acquisition of MAI allows the Company toexpand its credentialing and privileging product offerings and solutions to healthcare organizations. The consideration paid for MAI consisted of approximately$48.0 million in cash, which the Company funded with cash on hand, and was not subject to any post-closing working capital or similar adjustment. The Companyincurred approximately $953,000 in transaction costs, all of which were incurred during the year ended December 31, 2016. The transaction costs were recorded inother general and administrative expenses in the consolidated statements of income. The results of operations for MAI have been included in the Company’sconsolidated financial statements from the date of acquisition, and are also included in the HealthStream Provider Solutions segment.A summary of the purchase price is as follows (in thousands): Cash paid at closing $44,120 Cash held in escrow 3,880 Total consideration paid $48,000 The following table summarizes the fair value of the assets acquired and liabilities assumed as of the date of acquisition (in thousands): Accounts receivable, net 3,402 Prepaid royalties and other prepaid assets 187 Property and equipment 75 Deferred tax assets 1,507 Goodwill 20,467 Intangible assets 27,400 Accounts payable and accrued liabilities (1,031) Deferred revenue (4,007) Net assets acquired $48,000 The excess purchase price over the fair values of net tangible and intangible assets has been recorded as goodwill. The fair values of tangible and identifiableintangible assets and deferred revenue are based on management’s estimates and assumptions. The fair values of assets acquired and liabilities assumed are basedon based on management’s estimates and assumptions. The goodwill balance is primarily attributed to the assembled workforce, additional market opportunitiesfrom offering MAI’s products, and expected synergies from integrating MAI with other products or other combined functional areas within the Company. Thegoodwill 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 theacquisition date of $8.8 million to an estimated fair value of $4.0 million. The $4.8 million write-down of deferred revenue will result in lower revenues than wouldhave otherwise been recognized for such services.The following table sets forth the components of identifiable intangible assets and their estimated useful lives as of the acquisition date (in thousands): Fair value Useful life Customer relationships $21,400 13 years Developed technology 5,400 5 years Trade name 600 6 years Total intangible assets subject to amortization $27,400 50Table of ContentsHEALTHSTREAM, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)5. BUSINESS COMBINATIONS (continued) The amounts of revenue and operating loss of MAI included in the Company’s consolidated statement of income from the date of acquisition of August 8, 2016 tothe period ending December 31, 2016 are as follows (in thousands): Total revenues $2,581 Operating loss $(2,358) The following unaudited pro forma financial information summarizes the combined results of operations of the Company and MAI, which was significant forpurposes of the unaudited pro forma financial information disclosure, as though the companies were combined as of January 1, 2015 (in thousands, except per sharedata): Year Ended December 31, 2016 2015 Total revenues $236,205 $218,042 Net income $6,610 $7,533 Basic earnings per share $0.21 $0.25 Diluted earnings per share $0.21 $0.25 These unaudited pro forma combined results of operations include certain adjustments arising from the acquisition such as adjustment for amortization of intangibleassets, depreciation of property and equipment, and fair value adjustments of acquired deferred revenue balances. The unaudited pro forma combined results ofoperations is for informational purposes only and is not indicative of what the Company’s results of operations would have been had the transaction occurred at thebeginning of the period presented or to project the Company’s results of operations in any future period.The unaudited pro forma financial information for the years ended December 31, 2016 and 2015 combines the historical results of the Company and MAI for theyears ended December 31, 2016 and 2015 and the pro forma adjustments listed above.HealthLine SystemsOn March 16, 2015, the Company acquired all of the membership interests of HealthLine Systems, LLC (“HLS”), a San Diego, California based company thatspecializes in credentialing, privileging, call center, and quality management solutions for the healthcare industry. The acquisition of HLS enabled the Company toprovide a comprehensive solution set for healthcare provider credentialing, privileging, enrollment, referral, onboarding, and analytics in support of HealthStream’sapproach to talent management for healthcare organizations. The consideration paid for HLS consisted of approximately $90.5 million in cash (taking into accountan estimated closing working capital adjustment and the payment of an incremental tax indemnification claim by the Company as noted below). The Companyincurred approximately $1.3 million in transaction costs associated with the acquisition, of which $965,000 were incurred during the year ended December 31,2015 and $329,000 were incurred during the year ended December 31, 2014. The transaction costs were recorded in other general and administrative expenses inthe consolidated statements of income for such periods. The results of operations for HLS have been included in the Company’s consolidated financial statementsfrom the date of acquisition, and are also included in the HealthStream Provider Solutions segment.A summary of the purchase price is as follows (in thousands): Cash paid $89,850 Cash held in escrow 679 Total consideration paid $90,529 The following table summarizes the fair value of the assets acquired and liabilities assumed as of the date of acquisition (in thousands): Cash $54 Accounts receivable, net 3,052 Prepaid assets 546 Property and equipment 200 Deferred tax assets 2,523 Goodwill 43,798 Intangible assets 47,200 Accounts payable and accrued liabilities (1,085) Deferred revenue (5,979) Net assets acquired $90,309 51Table of ContentsHEALTHSTREAM, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)5. BUSINESS COMBINATIONS (continued) The total consideration paid does not equal the fair value of assets acquired and liabilities assumed due to the post measurement period adjustment discussed below.The excess of purchase price over the fair values of net tangible and intangible assets has been recorded as goodwill. The fair values of tangible and identifiableintangible assets, deferred tax assets, deferred revenue, and other liabilities are based on management’s estimates and assumptions. Included in the assets andliabilities assumed is an estimated indemnification asset of $300,000 and a contingent liability of $700,000, both of which are associated with tax liabilities. Thecontingent liability is measured based on management’s estimate of a range of probable outcomes. The goodwill balance is primarily attributed to the assembledworkforce, additional market opportunities from offering HLS’s products, and expected synergies from integrating HLS with other products or other combinedfunctional areas within the Company. During the three months ended March 31, 2016, the Company received notice of an indemnification claim from the formerowners of HLS pursuant to the terms of the membership interest purchase agreement. The terms of such agreement require the Company to indemnify such ownersfor incremental taxes incurred as the result of the structure of the acquisition, which had favorable tax aspects to the Company. The Company recorded ameasurement period adjustment in relation to the claim that increased goodwill by approximately $2.2 million during the three months ended March 31, 2016. Theadditional goodwill is deductible for U.S. income tax purposes. The goodwill balance excluding such measurement period adjustment is also deductible for U.S.income tax purposes. During the three months ended September 30, 2016, the Company agreed to settle this indemnification claim for approximately $2.4 millionin respect of such tax indemnification provision in the membership interest purchase agreement, a difference of approximately $200,000 from the $2.2 millionmeasurement period adjustment. The Company surpassed the one year measurement period as of the period ended March 31, 2016; accordingly, in accordance withrequisite accounting guidance, the $200,000 difference has been reflected as a charge against net income for the year ended December 31, 2016. The net tangibleassets include deferred revenue, which was adjusted down from a book value at the acquisition date of $15.0 million to an estimated fair value of $6.0 million. The$9.0 million write-down of deferred revenue will result in lower revenues than would have otherwise been recognized for such services.The following table sets forth the components of identifiable intangible assets and their estimated useful lives as of the acquisition date (in thousands): Fair value Useful life Customer relationships $42,600 13 years Developed technology 3,700 5 years Trade names 900 6 years Total intangible assets subject to amortization $47,200 The amounts of revenue and operating income (loss) of HLS included in the Company’s consolidated statement of income from the date of acquisition ofMarch 16, 2015 to the period ending December 31, 2015 are as follows (in thousands): Total revenues $8,543 Operating loss $(2,541) The following unaudited pro forma financial information summarizes the combined results of operations of the Company and HLS, which was significant forpurposes of the unaudited pro forma financial information disclosure, as though the companies were combined as of January 1, 2015 (in thousands, except per sharedata): Year Ended December 31, 2016 2015 Total revenues $227,834 $219,108 Net income $4,924 $13,551 Basic earnings per share $0.16 $0.45 Diluted earnings per share $0.15 $0.44 These unaudited pro forma combined results of operations include certain adjustments arising from the acquisition such as adjustment for amortization of intangibleassets, depreciation of property and equipment, fair value adjustments of acquired deferred revenue balances, and interest expense associated with borrowingsunder a revolving credit facility by the Company to partially fund the acquisition. The unaudited pro forma combined results of operations is for informationalpurposes only and is not indicative of what the Company’s results of operations would have been had the transaction occurred at the beginning of the periodpresented or to project the Company’s results of operations in any future period.The unaudited pro forma financial information for the years ended December 31, 2016 and 2015 combines the historical results of the Company and HLS for theyears ended December 31, 2016 and 2015 and the pro forma adjustments listed above. 52Table of ContentsHEALTHSTREAM, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)5. BUSINESS COMBINATIONS (continued) Health Care Compliance StrategiesOn March 3, 2014, the Company acquired all of the stock of Health Care Compliance Strategies, Inc. (HCCS), a Jericho, New York based company that specializesin healthcare compliance solutions and services. The Company acquired HCCS to further advance its suite of workforce development solutions, including itsoffering of compliance solutions. The consideration paid for HCCS consisted of approximately $12.8 million in cash (taking into account a post-closing workingcapital adjustment) and 81,614 shares of our common stock. The Company made an additional payment of $750,000 during the second quarter of 2015, upon theachievement of certain performance milestones within one year post-closing. The Company incurred approximately $515,000 in transaction costs associated withthe acquisition, of which $365,000 were incurred during the year ended December 31, 2014 and $150,000 were incurred during the year ended December 31, 2013.The transaction costs were recorded under the caption “other general and administrative” 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 deferredtax assets, and $2.7 million of liabilities. Included in the recorded liabilities was an accrual for contingent consideration of approximately $600,000. The goodwillbalance is primarily attributed to assembled workforce, additional market opportunities of HCCS’s compliance solutions, and expected synergies from integratingHCCS’s products into our platform. The goodwill balance is deductible for U.S. income tax purposes. The net tangible assets include deferred revenue, which wasadjusted 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 revenueresulted in lower revenues than would have otherwise been recognized for such services. The results of operations for HCCS have been included in the Company’sconsolidated financial statements from the date of acquisition, and are also included in the HealthStream Workforce Development Solutions segment.Other Business CombinationsOn June 30, 2016, the Company acquired all of the stock of Performance Management Services, Inc. (“PMSI”), a Company based in Tustin, California focused oncompetency-based performance development for nurses, for $4.0 million in cash and up to an additional $500,000 of contingent consideration. The acquisition,including associated transaction costs, is not considered material to the Company’s financial statements. The Company accounted for the acquisition as a businesscombination and has allocated the purchase consideration based on management’s estimates of fair value. The results of operations for PMSI are included in theCompany’s consolidated financial statements from the date of acquisition and are included in the HealthStream Workforce Solutions segment.On July 25, 2016, the Company purchased all of the outstanding stock of Nursing Registry Consultants Corporation (“Nurse Competency”) not previously held bythe Company for approximately $1.0 million in cash and up to an additional $75,000 in contingent consideration. Nurse Competency provides SaaS-based clinicalassessment and testing products to the healthcare industry. The Company previously held a 32% minority equity interest in Nurse Competency and had accountedfor such interest as an equity method investment. The fair value of the minority equity interest as of the July 25, 2016 acquisition date was approximately $484,000and was determined in accordance with the fair value of the controlling interest acquired with consideration given to acquisition premiums, where applicable. TheCompany recorded a gain of approximately $225,000 to account for the difference between the noted acquisition date fair value of the minority equity interest andthe carrying value as of such date. The gain is included in other income (expense), net in the consolidated statement of income for the year ended December 31,2016. The Company accounted for the acquisition as a business combination and has allocated the purchase consideration based on management’s estimates of fairvalue. The results of operations for Nurse Competency are included in the Company’s consolidated financial statements from the date of acquisition and areincluded in the HealthStream Workforce Solutions segment. 53Table of ContentsHEALTHSTREAM, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 6. PROPERTY AND EQUIPMENTProperty and equipment consist of the following: December 31, 2016 2015 Equipment $20,885 $23,057 Leasehold improvements 5,025 4,435 Furniture and fixtures 4,862 4,338 Gross property and equipment 30,772 31,830 Accumulated depreciation and amortization (20,527) (19,359) Property and equipment, net $10,245 $12,471 Depreciation of property and equipment totaled approximately $6.8 million and $5.3 million for the years ended December 31, 2016 and 2015, respectively.7. GOODWILLThe changes in the carrying amount of goodwill for the years ended December 31, 2016 and 2015 are as follows (in thousands): Workforce Patient Experience Provider Total Balance at January 1, 2016 $12,336 $24,154 $46,583 $83,073 Acquisition of HealthLine Systems, LLC. — — 2,180 2,180 Acquisition of Morrisey Associates, Inc. — — 20,467 20,467 Other business combinations 4,045 — — 4,045 Balance at December 31, 2016 $16,381 $24,154 $69,230 $109,765 Workforce Patient Experience Provider Total Balance at January 1, 2015 $12,336 $24,154 $5,424 $41,914 Acquisition of HealthLine Systems, LLC — — 41,618 41,618 Disposal of long lived assets — — (459) (459) Balance at December 31, 2015 $12,336 $24,154 $46,583 $83,073 During the three months ended March 31, 2016, the Company recorded approximately $2.2 million of additional goodwill in relation to the March 2015 acquisitionof HealthLine Systems, LLC. Such amount relates to the measurement period adjustment previously mentioned in Note 5 under the caption “ HealthLine Systems. ”During the quarter ended December 31, 2015, the Company disposed of certain long lived assets meeting the definition of a business. Accordingly, we haveallocated approximately $459,000 of reporting unit goodwill to this disposition of assets pursuant to ASC 350, Intangibles – Goodwill and other . 54Table of ContentsHEALTHSTREAM, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 8. INTANGIBLE ASSETSIntangible assets other than goodwill are considered to have finite useful lives. Customer related intangibles are amortized over their estimated useful lives rangingfrom five to thirteen years. Other intangible assets include non-competition agreements, technology and patents, and trade names, and are being amortized overperiods ranging from three to nine years. During the quarter ended December 31, 2015, the Company retired approximately $10.7 million of fully amortizedidentifiable intangible assets. Gross amounts and related accumulated amortization presented below as of December 31, 2015 are reflective of such retirements.Additionally, amounts presented below as of December 31, 2016 and December 31, 2015 are inclusive of identifiable intangible assets recorded in relation to ouracquisitions of Morrisey Associates, Inc. and HealthLine Systems, LLC, as well as other business combinations (see Note 5 – Business Combinations).Amortization of intangible assets was approximately $7.8 million and $5.6 million for the years ended December 31, 2016 and 2015, respectively.Identifiable intangible assets are comprised of the following (in thousands): As of December 31, 2016 As of December 31, 2015 Gross Amount AccumulatedAmortization Net Gross Amount AccumulatedAmortization Net Customer related $77,985 $(11,539) $66,446 $55,571 $(6,068) $49,503 Other 16,824 (4,906) 11,918 9,080 (2,617) 6,463 Total $94,809 $(16,445) $78,364 $64,651 $(8,685) $55,966 The expected future annual amortization expense for the years ending December 31, is as follows (in thousands): 2017 $9,549 2018 9,437 2019 8,792 2020 8,139 2021 7,356 Thereafter 35,091 Total $78,364 9. BUSINESS SEGMENTSThe Company provides services to healthcare organizations and other members within the healthcare industry. The Company’s services are focused on the deliveryof workforce development products and services (HealthStream Workforce Solutions), survey and research services (HealthStream Patient Experience Solutions),and provider credentialing, privileging, call center and enrollment products and services (HealthStream Provider Solutions).The Company measures segment performance based on operating income before income taxes and prior to the allocation of certain corporate overhead expenses,interest income, interest expense, gains and losses from equity investments, and depreciation. The Unallocated component below includes corporate functions, suchas accounting, human resources, legal, investor relations, administrative and executive personnel, depreciation, a portion of amortization, and certain otherexpenses, which are not currently allocated in measuring segment performance. The following is the Company’s business segment information as of and for theyears ended December 31, 2016, 2015 and 2014 (in thousands). 55Table of ContentsHEALTHSTREAM, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)9. BUSINESS SEGMENTS (continued) Revenues, net: 2016 2015 2014 Workforce $168,040 $161,289 $134,242 Patient Experience 33,850 34,193 31,901 Provider 24,084 13,520 4,547 Total revenues, net $225,974 $209,002 $170,690 Operating income: 2016 2015 2014 Workforce $37,329 $39,986 $35,374 Patient Experience (522) 1,548 810 Provider (2,443) (2,559) 826 Unallocated (28,797) (25,418) (20,635) Total operating income $5,567 $13,557 $16,375 Assets * Purchases of long-lived assets Depreciation and amortization 2016 2015 2014 2016 2015 2014 2016 2015 2014 Workforce $96,323 $82,375 $81,116 $9,266 $11,403 $7,179 $8,243 $6,693 $4,813 Patient Experience 35,988 34,902 34,536 1,123 2,007 1,277 1,144 1,061 1,272 Provider 155,011 100,948 10,976 2,026 332 200 6,061 3,986 683 Unallocated 108,678 161,344 130,634 2,135 1,617 1,546 6,759 5,257 4,163 Total $396,000 $379,569 $257,262 $14,550 $15,359 $10,202 $22,207 $16,997 $10,931 *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 areincluded within Unallocated. A significant portion of property and equipment assets are included within Unallocated.10. INCOME TAXESThe provision (benefit) for income taxes is comprised of the following (in thousands): Year Ended December 31, 2016 2015 2014 Current federal $(271) $3,608 $3,198 Current state 877 1,098 1,605 Deferred federal 1,489 501 1,092 Deferred state 298 (109) 232 Provision for income taxes $2,393 $5,098 $6,127 A reconciliation of income taxes at the statutory federal income tax rate to the provision for income taxes included in the accompanying consolidated statements ofincome is as follows (in thousands): Year Ended December 31, 2016 2015 2014 Federal tax provision at the statutory rate $2,152 $4,802 $5,782 State income tax provision, net of federal benefit 539 673 1,350 Tax credits (560) (425) (1,160) Change in state valuation allowance 308 (8) 37 Other (46) 56 118 Provision for income taxes $2,393 $5,098 $6,127 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 toreduce the deferred tax asset to the amount estimated to be recoverable. At December 31, 2016, a valuation allowance of $654,000 exists. 56Table of ContentsHEALTHSTREAM, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)10. INCOME TAXES (continued) As of December 31, 2016, the Company had federal and state net operating loss carryforwards of $478,000 and $17.6 million, respectively. These losscarryforwards will expire in years 2017 through 2026. The Company is subject to income taxation at the federal and various state levels. The Company is subject toU.S. federal tax examinations for tax years 2015 through 2016. Loss carryforwards and credit carryforwards generated or utilized in years earlier than 2015 are alsosubject to examination and adjustment. The Company has completed examinations with the Internal Revenue Service for tax years 2013 and 2014. The Companyhas research and development tax credit carryforwards of $2.7 million that expire in varying amounts through 2036. As of December 31, 2016, the Company hadalternative minimum tax credit carryforwards of $837,000 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, 2016 and 2015, are as follows (in thousands): December 31, 2016 2015 Balance at beginning of year $658 $2,168 Additions for tax positions in the current year 64 351 Reductions for tax positions of prior years (325) (1,861) Balance at end of year $397 $658 The Company recognized approximately $18,000 and $14,000 for interest and penalties related to unrecognized tax benefits within the provision for income taxesduring the years ended December 31, 2016 and 2015, respectively. Unrecognized tax benefits included tax positions of approximately $350,000 and $308,000 atDecember 31, 2016 and 2015, respectively, that if recognized would impact the Company’s effective tax rate. The reduction for tax positions of prior yearsreflected in the table above as of December 31, 2016 relates to an amended return filed with the IRS. The Company estimates that it is reasonably possible theliability for unrecognized tax benefits could decrease up to $46,000 within the next 12 months.Deferred federal and state income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financialreporting purposes and the amounts used for income tax purposes. Significant components of deferred tax assets and deferred tax liabilities are as follows (inthousands): December 31, 2016 2015 Deferred tax assets: Allowance for doubtful accounts $332 $122 Accrued liabilities 1,275 2,062 Tax credits 1,397 816 Stock based compensation 1,171 1,107 Deferred revenue 1,818 1,563 Depreciation 1,119 348 Basis difference on investments 316 80 Net operating loss carryforwards 743 407 Total deferred tax assets 8,171 6,505 Less: Valuation allowance (654) (346) Deferred tax assets, net of valuation allowance 7,517 6,159 Deferred tax liabilities: Deductible goodwill 3,267 2,646 Nondeductible intangible assets 2,523 1,806 Prepaid assets 1,894 1,911 Capitalized software development 5,801 4,559 Total deferred tax liabilities 13,485 10,922 Net deferred tax liabilities $(5,968) $(4,763) 57Table of ContentsHEALTHSTREAM, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 11. STOCK BASED COMPENSATIONStock Incentive PlansThe Company’s 2016 Omnibus Incentive Plan (2016 Plan), 2010 Stock Incentive Plan (2010 Plan) and 2000 Stock Incentive Plan (2000 Plan; collectively, the2016 Plan, 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 basedcompensation to employees, officers, directors and others, and such grants must be approved by the Compensation Committee of the Board of Directors. Optionsgranted 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 todetermine the vesting period and parameters of each grant. The vesting period of the options and RSUs granted has historically ranged from immediate vesting toannual vesting up to four years, generally beginning one year after the grant date. As of December 31, 2016, approximately 1.5 million shares of unissued commonstock remained reserved for future stock incentive grants under the 2016 Plan. The Company issues new shares of common stock when options are exercised orwhen RSUs become vested.Stock Option ActivityA summary of activity and various other information relative to stock options for the year ended December 31, 2016 is presented in the tables below (in thousands,except exercise price). CommonShares Weighted-Average Exercise Price AggregateIntrinsic Value Outstanding at beginning of period 520 $6.41 Granted — — Exercised (44) 3.33 Expired — — Forfeited — — Outstanding at end of period 476 $6.74 $8,716 Exercisable at end of period. 476 $6.74 $8,716 The aggregate intrinsic value for stock options in the table above represents the total difference between the Company’s closing stock price on December 30, 2016(the last trading day of the year) of $25.05 per share and the option exercise price, multiplied by the number of in-the-money options as of December 31, 2016. Theweighted average remaining contractual term of options outstanding at December 31, 2016 was 1.6 years. Options exercisable at December 31, 2016 have aweighted average remaining contractual term of 1.6 years.Other information relative to option activity during the three years ended December 31, 2016 is as follows (in thousands): 2016 2015 2014 Total grant date fair value of stock options vested $— $232 $630 Total intrinsic value of stock options exercised $820 $1,662 $5,912 Cash proceeds from exercise of stock options $146 $328 $1,094 Restricted Share Unit ActivityA summary of activity relative to RSUs for the year ended December 31, 2016 is as follows (in thousands, except weighted average grant date fair value): Number ofRSU’s Weighted-Average Grant Date Fair Value AggregateIntrinsic Value Outstanding at beginning of period 218 $25.21 Granted 116 20.72 Vested (74) 24.54 Forfeited (7) 24.50 Outstanding at end of period 253 $23.36 $6,331 58Table of ContentsHEALTHSTREAM, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)11. STOCK BASED COMPENSATION (continued) The aggregate fair value of RSU awards that vested in 2016 and 2015, as of the respective vesting dates, was approximately $1.5 million and $1.4 million,respectively. A portion of RSUs that vested in 2016 and 2015 were net-share settled such that the Company withheld shares with value equivalent to theemployees’ minimum statutory obligation for the applicable income and other employment taxes, and remitted the cash to the appropriate taxing authorities. Thetotal shares withheld for RSUs during 2016 and 2015 were 15,373 and 8,922, respectively, and were based on the value of the RSUs on their respective settlementdates as determined by the Company’s closing stock price. Total payments related to RSUs for the employees’ tax obligations to taxing authorities wereapproximately $316,000 in 2016 and $230,000 in 2015, and are reflected as a financing activity within the consolidated statements of cash flows. These net-sharesettlements 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 resultof the vesting and did not represent an expense to the Company.Stock Based CompensationTotal stock based compensation expense, which is recorded in our consolidated statements of income, recorded for the years ended December 31, is as follows (inthousands): Years Ended December 31, 2016 2015 2014 Cost of revenues (excluding depreciation and amortization) $144 $824 $86 Product development 178 569 201 Sales and marketing 239 547 224 Other general and administrative 1,407 1,340 1,114 Total stock based compensation expense $1,968 $3,280 $1,625 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, whichgenerally is the vesting period. As of December 31, 2016, total unrecognized compensation expense related to non-vested stock options and RSUs wasapproximately $3.1 million, net of estimated forfeitures, with a weighted average expense recognition period remaining of 2.4 years. The Company realizedapproximately $217,000 of excess tax benefits related to stock based awards during the year ended December 31, 2016, which was recorded as an increase tocommon 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 basedcompensation 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 grantany stock options during 2016, 2015, or 2014.Stock AwardsDuring June 2015, the Company’s Chief Executive Officer (“CEO”), Robert A. Frist, Jr., entered into an agreement with the Company pursuant to which hecontributed 54,241 of his personally owned shares of HealthStream, Inc. common stock to the Company, without any consideration paid to him. In connection withthis contribution, the Company approved the grant of 49,310 shares of HealthStream, Inc. common stock to over 600 employees who were not otherwise eligible toreceive equity awards and had at least one year of service with the Company. The Company recognized approximately $1.5 million of stock based compensationexpense for these stock awards during the three months ended June 30, 2015 based on the closing fair market value of the Company’s stock on the date of theCompany’s approval of these grants. In connection with these equity awards, effective in the second quarter of 2015, the Company withheld shares with valueequivalent to the employees’ minimum statutory obligation for the applicable income and other employment taxes, and remitted the cash to the appropriate taxingauthorities. The total shares withheld were 17,279, and were based on the value of the stock awards on the date of the Company’s approval of these grants, asdetermined by the Company’s closing stock price on that date. Total payments related to the employees’ tax obligations to taxing authorities for these stock awardswere approximately $526,000, and are reflected as a financing activity within the consolidated statements of cash flows for the year ended December 31, 2015.These share withholdings had the effect of share repurchases by the Company as they reduced and retired the number of shares otherwise issuable as a result of thestock awards and did not represent an expense to the Company. 59Table of ContentsHEALTHSTREAM, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 12. EMPLOYEE BENEFIT PLAN401(k) PlanThe Company has a defined-contribution employee benefit plan (401(k) Plan) incorporating provisions of Section 401(k) of the Internal Revenue Code. Employeesmust 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, aplan member may make contributions, on a tax-deferred basis, subject to IRS limitations. The Company elected to provide eligible employees with matchingcontributions totaling approximately $391,000 and $645,000 for the years ended December 31, 2016 and 2015, respectively.13. DEBTAt December 31, 2016 and 2015, the Company had no debt outstanding.Revolving Credit FacilityThe 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 swingline subfacility and a $5.0 million letter of credit subfacility, as well as an accordion feature that allows the Company to increase the Revolving Credit Facility by atotal of up to $25.0 million, subject to securing additional commitments from existing lenders or new lending institutions. The obligations under the RevolvingCredit Facility are guaranteed by each of the Company’s subsidiaries. At the Company’s election, the borrowings under the Revolving Credit Facility bear interestat 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 “EurocurrencyRate”), as selected by the Company, plus an applicable margin. The applicable margin for Eurocurrency Rate loans depends on the Company’s funded debtleverage 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 from0.50% 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 onNovember 24, 2017, and there are no scheduled principal payments prior to maturity. The Company is required to pay a commitment fee ranging between 20 and30 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 stockrepurchase 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 thecharacter of the Company’s business, acquisitions, asset dispositions, mergers and consolidations, sale or discount of receivables, creation or acquisitions ofadditional subsidiaries, and other matters customarily restricted in such agreements.In addition, the Revolving Credit Facility requires the Company to meet certain financial tests, including, without limitation: • a funded debt leverage ratio (consolidated debt/consolidated EBITDA) of not greater than 3.0 to 1.0; and • an interest coverage ratio (consolidated EBITDA/consolidated interest expense) of not less than 3.0 to 1.0.As of December 31, 2016, the Company was in material compliance with all covenants. There were no balances outstanding on the Revolving Credit Facility as ofDecember 31, 2016 and there were no borrowings under the Revolving Credit Facility during the year ended December 31, 2016. During the three months endedMarch 31, 2015, the Company borrowed approximately $28.0 million under the Revolving Credit Facility. During the three months ended June 30, 2015, theCompany repaid approximately $28.0 million of balances previously outstanding under the Revolving Credit Facility from proceeds received in the Company’spublic offering of 3,869,750 shares which closed on May 28, 2015. 60Table of ContentsHEALTHSTREAM, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 14. LEASESThe Company has non-cancellable operating leases primarily for office space, hosting facilities, and office equipment. Some lease agreements contain provisionsfor 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 andadjusting the deferred rent expense liability for the difference between the straight-line rent expense and the amount of rent paid. The terms of the lease agreementsgenerally provide the Company the option to renew. The Company also leases certain office equipment under operating leases. Total rent expense under alloperating leases was approximately $5.6 million, $4.3 million, and $3.1 million, for the years ended December 31, 2016, 2015, and 2014, respectively.Future rental payment commitments at December 31, 2016 under non-cancelable operating leases, with initial terms of one year or more, are as follows (inthousands): 2017 $5,044 2018 4,034 2019 2,208 2020 1,027 2021 826 Thereafter 2,748 Total minimum lease payments $15,887 The Company subleases certain of its office space included above under non-cancellable leases and is due to receive future minimum rental payments ofapproximately $157,000 and $148,000 for the years ended December 31, 2017 and December 31, 2018, respectively.15. COLLABORATIVE ARRANGEMENTThe Company participates in a collaborative arrangement, SimVentures TM , with Laerdal Medical A/S (Laerdal Medical). The Company receives 50 percent of theprofits or losses generated from this collaborative arrangement. The parties did not form a separate legal entity as part of the collaborative arrangement; therefore,the Company accounts for SimVentures as a collaborative arrangement in accordance with applicable accounting guidance. For the year ended December 31, 2016,the Company recorded approximately $2.7 million of revenues and $1.4 million of expenses related to the collaborative arrangement. For the year endedDecember 31, 2015, the Company recorded approximately $2.2 million of revenues and $1.8 million of expenses related to the collaborative arrangement.16. LITIGATIONIn connection with its business, the Company is from time to time involved in various legal actions. The litigation process is inherently uncertain and it is possiblethat 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 theopinion of the Company’s management, matters currently pending or threatened against the Company are not expected to have a material adverse effect on thefinancial position or results of operations of the Company.17. RELATED PARTY TRANSACTIONSDuring the three months ended June 30, 2015, the Company’s CEO, Robert A. Frist, Jr., entered into an agreement with the Company pursuant to which hecontributed 54,241 of his personally owned shares of HealthStream, Inc. common stock to the Company, without any consideration paid to him. In connection withthis contribution, the Company approved the grant of 49,310 shares of common stock to over 600 employees, with a fair market value of approximately $1.5million. Mr. Frist contributed 4,931 of the contributed shares noted above to take into account the estimated Company costs, such as administrative expenses andemployer payroll taxes associated with the grants (See Note 11). 61Table of ContentsItem 9. Changes in and Disagreements with Accountants on Accounting and Financial DisclosureNone.Item 9A. Controls and ProceduresEvaluation of Disclosure Controls and ProceduresHealthStream’s chief executive officer and principal financial officer have reviewed and evaluated the effectiveness of the Company’s disclosure controls andprocedures (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, 2016.Based on that evaluation, the chief executive officer and principal financial officer have concluded that HealthStream’s disclosure controls and procedures wereeffective 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 requiredto be disclosed in the reports the Company files or submits under the Exchange Act was accumulated and communicated to the Company’s management, includingits principal executive and principal financial officer, or persons performing similar functions, as appropriate to allow timely decisions regarding requireddisclosure.Management’s Annual Report On Internal Control Over Financial ReportingOur 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 isdesigned to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes inaccordance with GAAP. The Company’s internal control over financial reporting includes those policies and procedures that: (1) pertain to the maintenance ofrecords that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company; (2) provide reasonable assurance thattransactions are recorded as necessary to permit preparation of financial statements in accordance with GAAP, and that receipts and expenditures of the Companyare being made only in accordance with authorizations of management and directors of the Company; and (3) provide reasonable assurance regarding prevention ortimely 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 ofeffectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance withthe policies or procedures may deteriorate.Management assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2016. 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 operationaleffectiveness of our internal control over financial reporting. Management believes that, as of December 31, 2016, the Company’s internal control over financialreporting was effective based on those criteria. The Company’s independent registered public accounting firm, Ernst & Young LLP, has issued an audit report onthe 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 ReportingThere were no changes in HealthStream’s internal control over financial reporting that occurred during the fourth quarter of 2016 that have materially affected, orthat are reasonably likely to materially affect, HealthStream’s internal control over financial reporting.Item 9B. Other InformationNone. 62Table of ContentsPART IIIItem 10. Directors, Executive Officers and Corporate GovernanceInformation as to directors of the Company and corporate governance is incorporated by reference from the information to be contained in our proxy statement forthe 2017 Annual Meeting of Shareholders (2017 Proxy Statement) that we will file with the Securities and Exchange Commission within 120 days of the end of thefiscal year to which this report relates. Pursuant to General Instruction G(3), certain information concerning executive officers of the Company is included in Part Iof this Form 10-K, under the caption “Executive Officers of the Registrant.”Item 11. Executive CompensationIncorporated by reference from the information to be contained in the Company’s 2017 Proxy Statement.Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder MattersIncorporated by reference from the information to be contained in the Company’s 2017 Proxy Statement.Item 13. Certain Relationships and Related Transactions, and Director IndependenceIncorporated by reference from the information to be contained in the Company’s 2017 Proxy Statement.Item 14. Principal Accounting Fees and ServicesIncorporated by reference from the information to be contained in the Company’s 2017 Proxy Statement. 63Table of ContentsPART IVItem 15. Exhibits, Financial Statement Schedules(a)(1) Financial StatementsReference is made to the financial statements included in Item 8 to this Report on Form 10-K.(a)(2) Financial Statement SchedulesAll 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) Membership Interest Purchase Agreement, dated as of February 12, 2015, between HealthStream, Inc., Littrell Holdings, Inc., HealthLineSystems, Inc., the Shareholders of HealthLine Systems, Inc., and Dan Littrell in his individual capacity and as the Shareholders Representative. 2.2 (2) Stock Purchase Agreement, by and between Echo, Inc. and Morrisey Holdings, Inc., dated August 8, 2016. 3.1* Form of Fourth Amended and Restated Charter of HealthStream, Inc. 3.2 (8) * Form of Second Amended and Restated Bylaws of HealthStream, Inc. 4.1* Form of certificate representing the common stock, no par value per share, of HealthStream, Inc. 4.2* Reference is made to Exhibits 3.1 and 3.2. 10.1^* 2000 Stock Incentive Plan, effective as of April 10, 2000 10.2^ (6) 2010 Stock Incentive Plan, effective as of May 27, 2010 10.3^* Form of Indemnification Agreement 10.4^ (3) Executive Employment Agreement, dated July 21, 2005, between HealthStream, Inc. and Robert A. Frist, Jr. 10.5^ (4) Form of HealthStream, Inc. Non-Qualified Stock Option Agreement (Employees) under 2010 Stock Incentive Plan 10.6^ (4) Form of HealthStream, Inc. Incentive Stock Option Agreement (Employees) under 2010 Stock Incentive Plan 10.7^ (4) Form of HealthStream, Inc. Non-Qualified Stock Option Agreement (Directors) under 2010 Stock Incentive Plan 10.8^ (5) Form of HealthStream, Inc. Restricted Share Unit Agreement (Officers) under 2010 Stock Incentive Plan 10.9^ (5) Form of HealthStream, Inc. Restricted Share Unit Agreement (Non-Employee Director) under 2010 Stock Incentive Plan 10.10 (7) Revolving Credit Agreement, dated November 24, 2014, by and among HealthStream, Inc., the several banks and other financial institutions andlenders from time to time party thereto and SunTrust Bank, as administrative agent, issuing bank, and swingline lender 10.11^ Summary of Director and Executive Officer Compensation 10.12^ (9) HealthStream, Inc. 2015 Cash Incentive Bonus Plan 10.13 (9) Contribution Agreement, dated as of June 30, 2015, between HealthStream, Inc. and Robert A. Frist, Jr. 10.14^ (10) Letter Agreement, dated as of September 24, 2015, between HealthStream, Inc. and Michael Sousa. 10.15^ (10) Form of HealthStream, Inc. Restricted Share Unit Agreement (Performance) under 2010 Stock Incentive Plan between HealthStream, Inc. andMichael Sousa. 10.16^ (10) Form of HealthStream, Inc. Restricted Share Unit Agreement (Cumulative) under 2010 Stock Incentive Plan between HealthStream, Inc. andMichael Sousa. 10.17^ (10) 2015 Provider Solutions Cash Incentive Bonus Plan. 10.18^ (11) 2016 Omnibus Plan. 10.19^ Form of HealthStream, Inc. Restricted Share Unit Agreement (Cumulative) under 2016 Omnibus Plan between HealthStream, Inc. and MichaelSousa. 21.1 Subsidiaries of HealthStream, Inc. 23.1 Consent of Independent Registered Public Accounting Firm 31.1 Certification of the Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 31.2 Certification of the Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 32.1 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 32.2 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002101.1 INS XBRL Instance Document101.1 SCH XBRL Taxonomy Extension Schema101.1 CAL XBRL Taxonomy Extension Calculation Linkbase101.1 DEF XBRL Taxonomy Extension Definition Linkbase101.1 LAB XBRL Taxonomy Extension Label Linkbase101.1 PRE XBRL Taxonomy Extension Presentation Linkbase *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(1)Incorporated by reference from exhibit filed on our Current Report on Form 8-K, dated February 13, 2015.(2)Incorporated by reference from exhibit filed on our Current Report on Form 8-K, dated August 8, 2016.(3)Incorporated by reference from exhibit filed on our Current Report on Form 8-K, dated July 25, 2005.(4)Incorporated by reference from exhibit filed on our Current Report on Form 8-K, dated June 1, 2010.(5)Incorporated by reference from exhibit filed on our Quarterly Report on Form 10-Q, for the quarterly period ended March 31, 2012 filed with the SEC onApril 30, 2012.(6)Incorporated by reference to Appendix B of the Company’s Definitive Proxy Statement filed with the SEC on April 29, 2010.(7)Incorporated by reference from exhibit filed on our Current Report on Form 8-K, dated November 25, 2014.(8)Incorporated by reference from exhibit filed on our Current Report on Form 8-K, dated October 23, 2015.(9)Incorporated by reference from exhibit filed on our Quarterly Report on Form 10-Q, for the quarterly period ended June 30, 2015, filed with the SEC onJuly 31, 2015.(10)Incorporated by reference from exhibit filed on our Quarterly Report on Form 10-Q, for the quarterly period ended September 30, 2015, filed with the SECon October 30, 2015.(11)Incorporated by reference from exhibit filed on our Current Report on Form 8-K, dated May 26, 2016. 64Table of ContentsSIGNATURESPursuant 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 bythe undersigned, thereunto duly authorized on this 27 th day of February, 2017. HEALTHSTREAM, INC.By: /s/ R OBERT A. F RIST , J R .Robert A. Frist, Jr.Chief Executive OfficerPursuant 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 thecapacities and on the dates indicated: Signature Title(s) Date/s/ R OBERT A. F RIST , J R .Robert A. Frist, Jr. President, Chief Executive Officer andChairman (Principal Executive Officer) February 27, 2017/s/ G ERARD M. H AYDEN , J R .Gerard M. Hayden, Jr. Chief Financial Officer and Senior Vice President(Principal Financial and Accounting Officer) February 27, 2017/s/ T HOMPSON D ENTThompson Dent Director February 27, 2017/s/ F RANK G ORDONFrank Gordon Director February 27, 2017/s/ C. M ARTIN H ARRISC. Martin Harris Director February 27, 2017/s/ J EFFREY L. M C L ARENJeffrey L. McLaren Director February 27, 2017/s/ D ALE P OLLEYDale Polley Director February 27, 2017/s/ L INDA R EBROVICKLinda Rebrovick Director February 27, 2017/s/ M ICHAEL S HMERLINGMichael Shmerling Director February 27, 2017/s/ W ILLIAM S TEADWilliam Stead Director February 27, 2017/s/ D EBORAH T AYLOR T ATEDeborah Taylor Tate Director February 27, 2017 65Table of ContentsINDEX TO EXHIBITS Exhibit Number Description 2.1 (1) Membership Interest Purchase Agreement, dated as of February 12, 2015, between HealthStream, Inc., Littrell Holdings, Inc., HealthLineSystems, Inc., the Shareholders of HealthLine Systems, Inc., and Dan Littrell in his individual capacity and as the Shareholders Representative. 2.2 (2) Stock Purchase Agreement, by and between Echo, Inc. and Morrisey Holdings, Inc., dated August 8, 2016. 3.1* Form of Fourth Amended and Restated Charter of HealthStream, Inc. 3.2 (8) * Form of Second Amended and Restated Bylaws of HealthStream, Inc. 4.1* Form of certificate representing the common stock, no par value per share, of HealthStream, Inc. 4.2* Reference is made to Exhibits 3.1 and 3.2. 10.1^* 2000 Stock Incentive Plan, effective as of April 10, 2000 10.2^ (6) 2010 Stock Incentive Plan, effective as of May 27, 2010 10.3^* Form of Indemnification Agreement 10.4^ (3) Executive Employment Agreement, dated July 21, 2005, between HealthStream, Inc. and Robert A. Frist, Jr. 10.5^ (4) Form of HealthStream, Inc. Non-Qualified Stock Option Agreement (Employees) under 2010 Stock Incentive Plan 10.6^ (4) Form of HealthStream, Inc. Incentive Stock Option Agreement (Employees) under 2010 Stock Incentive Plan 10.7^ (4) Form of HealthStream, Inc. Non-Qualified Stock Option Agreement (Directors) under 2010 Stock Incentive Plan 10.8^ (5) Form of HealthStream, Inc. Restricted Share Unit Agreement (Officers) under 2010 Stock Incentive Plan 10.9^ (5) Form of HealthStream, Inc. Restricted Share Unit Agreement (Non-Employee Director) under 2010 Stock Incentive Plan 10.10 (7) Revolving Credit Agreement, dated November 24, 2014, by and among HealthStream, Inc., the several banks and other financial institutions andlenders from time to time party thereto and SunTrust Bank, as administrative agent, issuing bank, and swingline lender 10.11^ Summary of Director and Executive Officer Compensation 10.12^ (9) HealthStream, Inc. 2015 Cash Incentive Bonus Plan 10.13 (9) Contribution Agreement, dated as of June 30, 2015, between HealthStream, Inc. and Robert A. Frist, Jr. 10.14^ (10) Letter Agreement, dated as of September 24, 2015, between HealthStream, Inc. and Michael Sousa. 10.15^ (10) Form of HealthStream, Inc. Restricted Share Unit Agreement (Performance) under 2010 Stock Incentive Plan between HealthStream, Inc. andMichael Sousa. 10.16^ (10) Form of HealthStream, Inc. Restricted Share Unit Agreement (Cumulative) under 2010 Stock Incentive Plan between HealthStream, Inc. andMichael Sousa. 10.17^ (10) 2015 Provider Solutions Cash Incentive Bonus Plan. 10.18^ (11) 2016 Omnibus Plan. 10.19^ Form of HealthStream, Inc. Restricted Share Unit Agreement (Cumulative) under 2016 Omnibus Plan between HealthStream, Inc. and MichaelSousa. 21.1 Subsidiaries of HealthStream, Inc. 23.1 Consent of Independent Registered Public Accounting Firm 31.1 Certification of the Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 31.2 Certification of the Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 32.1 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 32.2 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002101.1 INS XBRL Instance Document101.1 SCH XBRL Taxonomy Extension Schema101.1 CAL XBRL Taxonomy Extension Calculation Linkbase101.2 DEF XBRL Taxonomy Extension Definition Linkbase101.1 LAB XBRL Taxonomy Extension Label Linkbase101.1 PRE XBRL Taxonomy Extension Presentation Linkbase *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(1)Incorporated by reference from exhibit filed on our Current Report on Form 8-K, dated February 13, 2015.(2)Incorporated by reference from exhibit filed on our Current Report on Form 8-K, dated August 8, 2016.(3)Incorporated by reference from exhibit filed on our Current Report on Form 8-K, dated July 25, 2005.(4)Incorporated by reference from exhibit filed on our Current Report on Form 8-K, dated June 1, 2010.(5)Incorporated by reference from exhibit filed on our Quarterly Report on Form 10-Q, for the quarterly period ended March 31, 2012 filed with the SEC onApril 30, 2012.(6)Incorporated by reference to Appendix B of the Company’s Definitive Proxy Statement filed with the SEC on April 29, 2010.(7)Incorporated by reference from exhibit filed on our Current Report on Form 8-K, dated November 25, 2014.(8)Incorporated by reference from exhibit filed on our Current Report on Form 8-K, dated October 23, 2015.(9)Incorporated by reference from exhibit filed on our Quarterly Report on Form 10-Q, for the quarterly period ended June 30, 2015, filed with the SEC onJuly 31, 2015.(10)Incorporated by reference from exhibit filed on our Quarterly Report on Form 10-Q, for the quarterly period ended September 30, 2015, filed with the SECon October 30, 2015.(11)Incorporated by reference from exhibit filed on our Current Report on Form 8-K, dated May 26, 2016.EXHIBIT 10.11HealthStream, Inc. (the “Company”)Summary of Director and Executive Officer CompensationI. Director Compensation . Directors who are employees of the Company do not receive additional compensation for serving as directors of the Company. Thefollowing table sets forth current rates of cash compensation for the Company’s non-employee directors. For fiscal year 2017, each director will receive an annualretainer of $5,000, except for the Audit Committee Chair and Nominating and Corporate Governance Chair, who will receive an additional annual retainer of$7,500, and the Compensation Committee Chair, who will receive an additional annual retainer of $2,000. Non-employee directors will also receive a $15,000 flat-fee for board and committee meeting attendance and participation in lieu of per meeting fees.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. Therestricted 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 2016 performance bonuses provided to our executiveofficers, including the individuals who the Company expects to be its Named Executive Officers for 2016. Executive Officer Current Base Salary Fiscal 2016 Bonus AmountRobert A. Frist, Jr. $310,000 $ —J. Edward Pearson $293,000 $ —Michael Sousa $283,000 $ —Gerard M. Hayden, Jr. $268,000 $ —Jeffrey S. Doster $265,000 $ —Thomas Schultz $214,000 N/ABase salary adjustments for 2017, bonus targets for 2017 cash bonuses, and 2017 equity grants for executive officers have not yet been determined by theCompensation Committee.III. Additional Information . The foregoing information is summary in nature. Additional information regarding Director and Named Executive Officercompensation will be contained in the Company’s 2017 Proxy Statement.EXHIBIT 10.19HEALTHSTREAM, INC.RESTRICTED SHARE UNIT AGREEMENTThis RESTRICTED SHARE UNIT AGREEMENT (this “ Agreement ”) is made and entered into as of the [●] day of December, 2016 (the “Grant Date”),between HealthStream, Inc., a Tennessee corporation (together with its Subsidiaries and Affiliates, the “Company”), and Michael Sousa (the “ Grantee ”).Capitalized terms not otherwise defined herein shall have the meaning ascribed to such terms in the HealthStream, Inc. 2016 Omnibus Incentive Plan (the “ Plan ”).WHEREAS, the Company has adopted the Plan, which permits the issuance of Restricted Share Units; andWHEREAS, the Compensation Committee of the Board of Directors of the Company (the “ Committee ” ) is responsible for administering the Plan and hasdetermined that it would be to the advantage and best interest of the Company and its shareholders to grant an award of the RSUs (as defined below) as a“Restricted Share Unit Award” as defined by and pursuant to the terms of the Plan, and pursuant to the terms set forth herein;NOW, THEREFORE, the parties hereto agree as follows:1. Grant of Restricted Share Unit Award.1.1 The Company hereby grants to the Grantee an award (“ Award ”) of 4,250 Restricted Share Units (“ RSUs ”) on the terms and conditions set forth inthis Agreement and as otherwise provided in the Plan. Each RSU shall have a value equal to the Fair Market Value of one Share. A bookkeeping account will bemaintained by the Company to keep track of the RSUs.1.2 The Grantee’s rights with respect to any unvested portion of the Award shall remain forfeitable at all times prior to the dates on which the RSUs shallvest in accordance with Section 2 hereof. This Award may not be assigned, alienated, pledged, attached, sold or otherwise transferred or encumbered by Granteeother than by will or the laws of descent and distribution.2. Vesting and Payment.Vesting . Up to 4,250 of the RSUs subject to this Award shall vest on March 15, 2020 (the “ Vesting Date ”), as follows, subject to the time-based vestingcondition set forth in the last sentence of this Section 2.1 , and based on the extent of the satisfaction of the Performance Criteria (as defined on Exhibit A ) for theperiod beginning on January 1, 2017 and ending December 31, 2019, as referenced on Exhibit A . Notwithstanding the foregoing or anything contained herein tothe contrary (but subject to Section 2.2 below), this Award shall not become vested as to any RSUs that have not vested as of the time of the Grantee’s terminationof employment with the Company for any reason and Grantee shall forfeit any unvested RSUs as of the date of such termination of employment.2.1 Change in Control . Notwithstanding the foregoing, except as may otherwise be determined by the Committee, upon the occurrence of a Change inControl (as defined in the Plan), this Award shall become vested immediately prior to a Change in Control as to 100% of the RSUs for which the Vesting Date hasnot yet occurred (it being understood that, in such circumstance, Grantee will not be entitled to any RSUs that have not vested in respect of any Vesting Datespreceding the occurrence of the Change of Control).2.2 Settlement . The Grantee shall be entitled to settlement of the RSUs subject to this Award at the time that such RSUs vest pursuant to Section 2.1 orSection 2.2 , as applicable. Such settlement shall be made as promptly as practicable thereafter (but in no event after the fifteenth day following the applicablevesting date, or in the case of a Change in Control, the date of the occurrence of the Change in Control) through the issuance of Shares to the number of such vestedRSUs. Any settlement of RSUs granted pursuant to this Award shall be made in Shares as evidenced by a “book entry” (i.e., a computerized or manual entry) in therecords of the Company or its designated agent in the name of the Grantee who has become vested in such Shares (or, if requested by the Grantee, a stockcertificate evidencing such Shares). Notwithstanding the foregoing, if this Award vests in connection with a Change in Control and the Shares issuable inconnection with such vesting subsequently have been converted into or have other been transferred in exchange for other consideration in connection with suchChange in Control, Grantee will be entitled to receive such other consideration in lieu of the converted or transferred Shares. The Grantee will not be entitled to anydividend equivalent or voting rights with regard to the RSUs.2.3 Withholding Obligations . Prior to the settlement of any RSUs subject to this Award, Grantee shall provide (i) full payment (in cash or by check or bya combination thereof) to satisfy the minimum Withholding Tax Obligation (as defined below) with respect to which the Award or portion thereof shall settle or(ii) subject to compliance with applicable Legal Requirements, indication that the Grantee elects to tender to the Company Shares owned by the Grantee (or by theGrantee and his or her spouse jointly) and purchased and held for the requisite period of time as may be required to avoid the Company’s incurring an adverseaccounting charge, based on the Fair Market Value of such Shares on the payment date necessary to satisfy the minimum Withholding Tax Obligation that wouldotherwise be required to be paid by the Grantee to the Company pursuant to clause (i) of this Section 2.4 , or (iii) notwithstanding the foregoing and unless noticeto the contrary is given to the Grantee by the Company, the number of Shares that would otherwise be issued to the Grantee upon settlement of the Award (orportion thereof) reduced by a number of Shares having an aggregate Fair Market Value, on the date of such issuance, equal to the payment to satisfy the minimumWithholding Tax Obligation that would otherwise be required to be made by the Grantee to the Company pursuant to clause (i) of this Section 2.4 . Any socialsecurity calculation or other adjustments discovered after the net Share payment described in clause (iii) of this Section 2.4 hereof will be settled in cash, not inShares. For the avoidance of doubt, the Company may satisfy the Grantee’s withholding obligation from the Grantee’s other compensation which may be payableby the Company, including any withholding obligation which may not be satisfied though the procedures identified in this Section 2.4 . For purposes hereof, the“Withholding Tax Obligation” means the minimum amount necessary to satisfy Federal, state, local or foreign withholding tax requirements, if any, in connectionwith vesting of the Award; provided, however, that, in the discretion of the Company, the Company may allow the Grantee to withhold an additional amount oradditional number of Shares to satisfy an additional amount of withholding taxes up to the maximum individual statutory tax rate in the applicable jurisdiction, butonly if such additional withholding, or the discretion to elect such additional withholding, does not result in adverse accounting treatment of this Award to theCompany. Vesting of the Award (or portion thereof) will result in taxable compensation reportable on the Grantee’s W-2 in year of vesting.3. No Right to Continued Service . Nothing in this Agreement or the Plan shall be interpreted or construed to confer upon the Grantee any right to continueservice as an officer or employee of the Company.4. Adjustments . The provisions of Section 4.2 and Section 14.3 of the Plan are hereby incorporated by reference, and the RSUs are subject to suchprovisions. Any determination made by the Committee pursuant to such provisions shall be made in accordance with the provisions of the Plan and shall be finaland binding for all purposes of the Plan and this Agreement.5. Administration Subject to the Plan . The Grantee hereby acknowledges receipt of a copy of (or an electric link to) the Plan and agrees to be bound by allthe terms and provisions thereof. The terms of this Agreement are governed by the terms of the Plan, and in the case of any inconsistency between the terms of thisAgreement and the terms of the Plan, the terms of the Plan shall govern. The Committee shall have the power to interpret the Plan and this Agreement and to adoptsuch rules for the administration, interpretation and application of the Plan as are consistent therewith and to interpret or revoke any such rules. All actions takenand all interpretations and determinations made by the Committee shall be final and binding upon the Grantee, the Company and all other interested persons. Nomember of the Committee shall be personally liable for any action, determination or interpretation made in good faith with respect to the Plan or this Award.6. Modification of Agreement . Subject to the restrictions contained in the Plan and applicable law (including compliance with Section 409A of the Code),the Committee may waive any conditions or rights under, amend any terms of, or alter, suspend, discontinue, cancel or terminate, the RSU, prospectively orretroactively.7. Section 409A . Notwithstanding anything herein to the contrary, to the maximum extent permitted by applicable law, the settlement of the RSUs to bemade to the Grantee pursuant to this Agreement is intended to qualify as a “short-term deferral” pursuant to Section 1.409A-1(b)(4) of the Regulations and thisAgreement shall be interpreted consistently therewith. However, in any circumstances where the settlement of the RSUs may not so qualify, the Committee shalladminister the grant and settlement of such RSUs in strict compliance with Section 409A of the Code. Further, notwithstanding anything herein to the contrary, tothe extent that this Award constitutes deferred compensation for purposes of Section 409A of the Code (i) no RSU payable upon the Grantee’s termination ofservice shall be issued, unless Grantee’s termination of service constitutes a “separation from service” within the meaning of Section 1.409A-1(h) of the TreasuryRegulations and (ii) if at the time of a Grantee’s termination of employment with the Company and all “service recipients” (as defined in the applicable provisionof the Treasury Regulations), the Grantee is a “specified employee” as defined in Section 409A of the Code, and the deferral of the commencement of anypayments or benefits otherwise payable hereunder as a result of such termination of service is necessary in order to prevent the imposition of any accelerated oradditional tax under Section 409A of the Code, then the Company will defer the commencement of the payment of any such payments or benefits hereunder(without any reduction in such payments or benefits ultimately paid or provided to the Grantee) to the minimum extent necessary to satisfy Section 409A of theCode until the date that is six months and one day following the Participant’s termination of employment with the Company (or the earliest date as is permittedunder Section 409A of the Code), if such payment or benefit is payable upon a termination of employment. Each payment of RSUs constitutes a “separatepayment” for purposes of Section 409A of the Code. Notwithstanding any other provision of this Agreement or the Plan to the contrary, to the extent that this RSUAgreement constitutes deferred compensation for purposes of Section 409A of the Code, a “Change in Control” for purposes of this Agreement shall be defined asset forth in Section 1.409A-3(i)(5) of the Treasury Regulations. Notwithstanding the foregoing, Company does not warrant that this RSU will qualify for favorabletax treatment under Section 409A of the Code or any other provision of federal, state, local or foreign law. The Company shall not be liable to Grantee for any tax,interest, or penalties that the Grantee might owe as a result of the grant, holding, vesting, exercise, or payment of the RSUs. 28. No Right to Continued Employment . The grant of the RSU shall not be construed as giving the Grantee the right to be retained in the service of theCompany, and the Company may at any time dismiss the Grantee from service, free from any liability or any claim under the Plan.9. Severability . If any provision of this Agreement is, or becomes, or is deemed to be invalid, illegal, or unenforceable in any jurisdiction or as to anyPerson or the Award, or would disqualify the Plan or Award under any laws deemed applicable by the Committee, such provision shall be construed or deemedamended to conform to the applicable laws, or if it cannot be construed or deemed amended without, in the determination of the Committee, materially altering theintent of the Plan or the Award, such provision shall be stricken as to such jurisdiction, Person or Award, and the remainder of the Plan and Award shall remain infull force and effect.10. Governing Law . The validity, interpretation, construction and performance of this Agreement shall be governed by the laws of the State of Tennesseewithout giving effect to the conflicts of law principles thereof, except to the extent that such laws are preempted by Federal law.11. Successors in Interest . This Agreement shall inure to the benefit of and be binding upon any successor to the Company. This Agreement shall inure tothe benefit of the Grantee’s legal representatives. All obligations imposed upon the Grantee and all rights granted to the Company under this Agreement shall bebinding upon the Grantee’s heirs, executors, administrators and successors.12. Resolution of Disputes . Any dispute or disagreement which may arise under, or as a result of, or in any way related to, the interpretation, constructionor application of this Agreement shall be determined by the Committee. Any determination made hereunder shall be final, binding and conclusive on the Granteeand the Company for all purposes.13. Rights as a Shareholder . Grantee shall not have voting or any other rights as a shareholder of the Company with respect to the RSUs. Grantee willobtain voting and other rights as a shareholder of the Company upon any settlement of the RSUs in Shares.14. Notices . All notices required to be given under this Agreement shall be deemed to be received if delivered or mailed as provided for herein to theparties at the following addresses, or to such other address as either party may provide in writing from time to time. To the Company :HealthStream, Inc.Cummins Station, Suite 450209 10th Avenue SouthNashville TN 37203 To the Grantee :The address then maintained with respect to the Grantee in the Company’s records. 3[signature page to Restricted Share Unit Award Agreement]IN WITNESS WHEREOF, the parties have caused this Agreement to be duly executed effective as of the day and year first above written. HEALTHSTREAM, INC.:By: Robert A. Frist, Jr.Chief Executive OfficerGRANTEE : Michael Sousa 4Exhibit APerformance CriteriaFor purposes of this Award, performance will be measured for the period beginning on January 1, 2017 and ending on December 31, 2019 (the “Performance Period ”). The performance criteria (the “ Performance Criteria ”) for the Performance Period shall be determined by the Committee andcommunicated to Grantee and shall be based on certain financial performance targets of the business unit over which Grantee is President being achieved duringthe Performance Period. 5EXHIBIT 21.1SUBSIDIARIES OF HEALTHSTREAM, INC. Names Under Which We Do Business State or Other Jurisdiction of Incorporation or OrganizationData Management & Research, Inc. TennesseeThe Jackson Organization, Research Consultants, Inc. MarylandDecision Critical, Inc. TexasEcho, Inc. TennesseeMorrisey Associates, Inc. IllinoisPerformance Management Services, Inc. CaliforniaNursing Registry Consultants Corporation DelawareHealth Care Compliance Strategies, Inc. New YorkHealthStream Acquisition I, Inc. TennesseeHealthStream Acquisition II, Inc. TennesseeEXHIBIT 23.1CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMWe consent to the incorporation by reference in the following Registration Statements: (1)Registration Statement (Form S-8 No. 333-211725) pertaining to the 2016 Omnibus Incentive Plan of HealthStream, Inc., (2)Registration Statement (Form S-8 No. 333-167241) pertaining to the 2010 Stock Incentive Plan of HealthStream, Inc., (3)Registration Statement (Form S-8 No. 333-37440) pertaining to the 1994 Employee Stock Option Plan, 2000 Stock Incentive Plan and EmployeeStock Purchase Plan of HealthStream, Inc., and (4)Registration Statement (Form S-3 No. 333-206897) of HealthStream, Inc., as amended by that Post-Effective Amendment No. 1 to RegistrationStatement (Form POS AM No. 333-206897).of our reports dated February 27, 2017, with respect to the consolidated financial statements of HealthStream, Inc., and the effectiveness of internal control overfinancial reporting of HealthStream, Inc., included in this Annual Report (Form 10-K) of HealthStream, Inc. for the year ended December 31, 2016./s/ Ernst & Young LLPNashville, TennesseeFebruary 27, 2017EXHIBIT 31.1CERTIFICATIONI, 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 statementsmade, 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 financialcondition, 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 ActRules 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 registrantand have:a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure thatmaterial information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly duringthe 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, toprovide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordancewith 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 thedisclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; andd) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscalquarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, theregistrant’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 theregistrant’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 toadversely affect the registrant’s ability to record, process, summarize and report financial information; andb) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control overfinancial reporting. Date : February 27, 2017 /s/ R OBERT A. F RIST , J R . Robert A. Frist, Jr. Chief Executive OfficerEXHIBIT 31.2CERTIFICATIONI, 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 statementsmade, 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 financialcondition, 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 ActRules 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 registrantand have:a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure thatmaterial information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly duringthe 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, toprovide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordancewith 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 thedisclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; andd) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscalquarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, theregistrant’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 theregistrant’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 toadversely affect the registrant’s ability to record, process, summarize and report financial information; andb) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control overfinancial reporting. Date : February 27, 2017 /s/ G ERARD M. H AYDEN , J R . Gerard M. Hayden, Jr. Chief Financial OfficerEXHIBIT 32.1CERTIFICATION PURSUANT TO18 U.S.C. SECTION 1350,AS ADOPTED PURSUANT TOSECTION 906 OF THE SARBANES-OXLEY ACT OF 2002In connection with the Annual Report of HealthStream, Inc. (the “Company”) on Form 10-K for the year ending December 31, 2016, as filed with the Securitiesand 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)The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2)The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. /s/ R OBERT A. F RIST , J R .Robert A. Frist, Jr.Chief Executive OfficerFebruary 27, 2017EXHIBIT 32.2CERTIFICATION PURSUANT TO18 U.S.C. SECTION 1350,AS ADOPTED PURSUANT TOSECTION 906 OF THE SARBANES-OXLEY ACT OF 2002In connection with the Annual Report of HealthStream, Inc. (the “Company”) on Form 10-K for the year ending December 31, 2016, as filed with the Securitiesand 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)The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2)The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. /s/ G ERARD M. H AYDEN , J R .Gerard M. Hayden, Jr.Chief Financial OfficerFebruary 27, 2017

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