HealthStream, Inc.

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
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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