HealthStream Annual Report 2017

Plain-text annual report

Table of ContentsUNITED STATESSECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549FORM 10-K ☒ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934FOR THE FISCAL YEAR ENDED DECEMBER 31, 2017OR☐TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934FOR THE TRANSITION PERIOD FROM TOCommission File Number 000-27701HEALTHSTREAM, INC.(Exact name of registrant as specified in its charter) Tennessee 62-1443555(State or other jurisdiction of (I.R.S. Employer Identification No.)incorporation or organization) 209 10th Avenue South, Suite 450 37203Nashville, Tennessee (Zip Code)(Address of principal executive offices) (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: NoneIndicate 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 the preceding 12months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and postedpursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒ 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 of registrant’sknowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ☐Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company.See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.Large accelerated filer ☒ Accelerated filer ☐ Non-accelerated filer ☐ Smaller reporting company ☐Emerging growth company ☐If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financialaccounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the 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 the Common Stock on theNasdaq Global Select Market on June 30, 2017 was approximately $670.9 million. All executive officers and directors of the registrant have been deemed, solely for the purpose of theforegoing calculation, to be “affiliates” of the registrant.As of February 22, 2018, there were 32,040,067 shares of the Registrant’s common stock outstanding.DOCUMENTS INCORPORATED BY REFERENCEPortions of the Registrant’s definitive Proxy Statement for its 2018 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 Item 16. Form 10-K Summary 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 andunknown risks, uncertainties, and other factors that may cause our actual results, performance, or achievements to be materially different from future results,performance, or achievements expressed or implied by the forward-looking statements included herein. Factors that might cause or contribute to suchdifferences include, but are not limited to, those discussed in the section “Risk Factors” in Item 1A of this Annual Report on Form 10-K and elsewhere in thisdocument. In addition, factors that we are not currently aware of could harm our future operating results. You should carefully review the risks described inother documents HealthStream files from time to time with the Securities and Exchange Commission. You are cautioned not to place undue reliance onforward-looking statements, which speak only as of the date of this Annual Report on Form 10-K. HealthStream undertakes no obligation to publicly releaseany revisions to the forward-looking statements or reflect events or circumstances after the date of this document.Item 1. BusinessOVERVIEW AND HISTORYHealthStream, Inc. (HealthStream or the Company) provides workforce and provider solutions for healthcare organizations—all designed to support thepeople 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 the needto effectively manage, retain, engage, and develop healthcare workforce talent; meet rigorous compliance requirements; and efficiently manage ongoingmedical staff credentialing and privileging processes.On February 12, 2018, the Company divested its Patient Experience (PX) business to Press Ganey Associates (Press Ganey) for $65.5 million in cash (subjectto adjustment based on the working capital of the PX business at closing). This sale of the PX business resulted in the Company’s divestiture of theCompany’s patient experience solutions business segment.With 28 years of experience, HealthStream is recognized as a leading innovator and thought leader in the healthcare industry for its healthcare workforcesolutions. Using technology to enhance learning and productivity, HealthStream pioneered the delivery of online learning for hospitals’ required regulatorytraining as Internet-based training was first introduced. Stemming from that early success, demand for expanded learning solutions led the Company to buildwhat is now a full eco-system of diverse HR and clinical-focused applications, courseware, assessments, and talent management programs. At year-end 2017,with approximately 4.77 million healthcare professionals subscribing to HealthStream’s platform through their respective organizations, HealthStream is aleading provider in workforce development in the healthcare industry.With its singular healthcare focus, HealthStream understands that healthcare organizations want to provide their patients with an engaged, confident, andcompetent workforce that delivers optimal patient experiences. HealthStream’s solutions include a robust array of products and services that provide targetedinsights for organizations to take actions that produce sustainable performance improvements. Moreover, HealthStream’s vast database of healthcareworkforce benchmarks offer organizations a powerful tool to compare, assess, and fine-tune their strategies for managing initiatives for success.HealthStream believes that the key to quality patient care is—and always has been—the people who deliver care. To that end, the Company’s solutionssupport the recruiting, retaining, engaging, assessing, and developing of the healthcare workforce, including medical staff who provide patient care in ourcustomers’ organizations.Headquartered in Nashville, Tennessee, the Company was incorporated in 1990 and began providing its SaaS-based workforce solutions in 1999, its surveyand research solutions in 2005 (which business we divested in February 2018 as noted above), and its provider solutions in 2012. Including additionaloffices in Columbia, Maryland (prior to the divestment of our PX business); Nashville, Tennessee; Jericho, New York; Brentwood, Tennessee; San Diego,California; Chicago, Illinois; and Boulder, Colorado, HealthStream had 955 full-time and 72 part-time employees as of December 31, 2017 (prior to givingeffect to the divestment of our PX business). In addition, as of February 22, 2018, HealthStream had 719 full-time and 27 part-time employees. Our businesshas evolved from an initial focus on technology-based training to a company providing workforce development and provider solutions to the nation’shealthcare providers.INDUSTRY BACKGROUNDAccording to the Centers for Medicare & Medicaid Services (CMS), spending in the healthcare industry reached approximately $3.3 trillion in 2016, or17.9% of the U.S. gross domestic product. Hospital care expenditures accounted for approximately 32.4% of the $3.3 trillion industry. According to theBureau of Labor Statistics, approximately 19.6 million professionals are employed in the healthcare segment of the domestic economy, with approximately5.2 million employed in acute-care hospitals and approximately 3.3 million employed in post-acute-care organizations, our primary target markets for ourproducts. As of December 31, 2017, approximately 4.77 million healthcare professionals were subscribers to our SaaS-based solutions, which include4.65 million subscribers already implemented and 118,000 subscribers in the process of implementation. 1Table of ContentsAll of the approximately 5.2 million hospital-based healthcare professionals that work in the nation’s approximately 5,000 acute-care hospitals are requiredby federal 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).In hospitals, staffing issues and personnel shortages have also contributed to the need for facility-based workforce development as well as additionalassessment and competency-based training. An ongoing nursing shortage, for example, is resulting in skill gaps and rising costs. The U.S. Bureau of LaborStatistics projects the need for 525,000 replacement nurses over the next several years, bringing the total number of openings for nurses due to growth andreplacements to 1.05 million by 2022. We believe that offering training and education for hospital personnel is increasingly being utilized as a retention andrecruitment incentive.Many healthcare professionals use continuing education to keep abreast of the latest developments and meet licensing and certification requirements.Continuing education is required for nurses, emergency medical services personnel, first responder personnel, radiologic personnel, and physicians.Pharmaceutical and medical device companies must also provide their medical industry sales representatives with training mandated for the healthcareindustry and training for new products. Such companies also provide support and content for education and training of audiences that use their products inhealthcare organizations.The healthcare education and training industry is highly fragmented, varies significantly in delivery methods (i.e., online products, live events, writtenmaterials, and manikins for simulation-based training), and is composed of a wide variety of entities competing for customers. The sheer volume of healthcareinformation available to satisfy continuing education needs, rapid advances in medical developments, and the time constraints that healthcare professionalsface make it difficult to quickly and efficiently access the continuing education content most relevant to an individual’s practice or profession. Historically,healthcare professionals have received continuing education and training through offline publications, such as medical journals or by attending conferencesand seminars. In addition, other healthcare workers and pharmaceutical and medical device manufacturers’ sales and internal regulatory personnel usuallyfulfill their training from external vendors or internal training departments. While these approaches satisfy the ongoing education and training requirements,they are typically costly and inconvenient. In addition, live courses are often limited in the breadth of offerings and do not provide a method for trackingtraining completion. The results of these traditional methods, both from a business and compliance standpoint, are difficult to track and measure. Whilehospitals and health systems occasionally survey their patients, physicians, and employees using their own internal resources, the practice is limited sincethey do not typically possess the valuable comparative 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 standardsand other regulatory requirements, credentialing and privileging has been transformed from a periodic review to continuous, evidence-driven analysis ofprofessional competency and provider performance. This transformation requires ongoing, automatic monitoring of licenses, sanctions, and exclusions, aswell as expanding the scope of review at initial credentialing and re-credentialing. In addition, provider enrollment processes have compounded in difficulty.For example, a single provider may need to enroll annually with some 30 to 40 payers, with each payer application often taking two to four hours tocomplete.Finally, the hospital industry continues to operate under intense pressure to reduce costs as a result of reductions in government reimbursement rates andincreased focus on cost containment consistent with participation of patients in managed care programs. In addition, hospitals, as well as pharmaceutical andmedical device companies, continue to experience rising operating costs, coupled with increased pressure to measure and report on the outcomes of thedollars spent on training. Our products and services are designed to meet these needs by reducing healthcare organizations’ costs of training while improvinglearning outcomes, enhancing reporting capabilities, and supporting customers’ business objectives.HEALTHSTREAM’S SOLUTIONSDuring the year ended December 31, 2017, HealthStream’s products and services were organized into three segments—Workforce Solutions, PatientExperience Solutions, and Provider Solutions—that collectively help healthcare organizations meet their ongoing talent management, training, education,assessment, competency management, compliance, provider credentialing & privileging management, and provider enrollment needs. HealthStream’ssolutions are provided to a wide range of customers within the healthcare industry across the continuum of care. On February 12, 2018, the Companydivested its PX business to Press Ganey for $65.5 million in cash, subject to adjustment based on the working capital of such business as of the closing. Thissale of the PX business resulted in the Company’s complete divestiture of the Company’s patient experience solutions business segment.HealthStream Workforce Solutions— Our workforce development solutions, which are comprised primarily of SaaS, subscription-based products, are usedby healthcare organizations to meet a broad range of their talent management, training, certification, competency assessment, performance appraisal, anddevelopment needs. Our numerous content libraries allow our customers to subscribe to a wide array of additional courseware, which includes content fromleading healthcare and nursing associations, medical and healthcare publishers, and other content providers. Additionally, medical device companies andother industry partners offer online training support through HealthStream’s platform for their products and they sponsor continuing education directly tohealthcare workers. 2Table of ContentsAt December 31, 2017, HealthStream had approximately 4.77 million “total subscribers” to its subscription-based solutions. Each individual end-user whoutilizes at least one HealthStream subscription-based solution is counted as one subscriber, regardless of the number of subscriptions contracted by or for thatend-user. Our subscription-based solutions include any one or a combination of our many platform applications, plus courseware, or content. For example, wedeliver courseware to our customers primarily through our learning application, the HealthStream Learning Center™ (HLC), while we deliver competencymanagement and performance appraisal tools through our applications known as the HealthStream Competency Center (HCC) and HealthStream PerformanceCenter (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 timeand efforts of the personnel involved. Implementation fees vary based on the size, scope, and complexity of the project. Our SaaS-based platform andsubscription-based solutions are hosted in a central data center that allows authorized subscribers access to our services through the Internet, therebyeliminating the need for onsite local implementations of installed workforce development products. During 2017, 2016, and 2015 our subscription-basedworkforce solutions accounted for approximately 69%, 71%, and 74% 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 andhealth systems. Each application on our platform has its own value proposition and revenue stream. Examples of individual applications that are offered onour platform include applications for recruiting and applicant tracking; learning; performance appraisal; compensation management; succession planning;competency management; credentialing and privileging; provider enrollment; disclosure management; clinical development; simulation-based education;and industry-sponsored training.HealthStream Patient Experience Solutions — Prior to the disposition of our PX business in February 2018 as noted above, our patient experience solutionscomplemented our workforce solutions’ product and service offerings by providing customers with Patient Insights™, Employee Insights™, PhysicianInsights™, and Community Insights™ surveys, data analyses of survey results, and other research-based measurement tools. Our services were designed toprovide thorough analyses with insightful recommendations for change; benchmarking capability using our comprehensive databases; and consultingservices to identify solutions for our customers based on their survey results. Clients were able to access and analyze their survey results data through InsightsOnline™, our secure web-based reporting platform. During 2017, 2016, and 2015 our Patient Insights™ survey product accounted for approximately 11%,12%, and 13% of consolidated revenues, respectively.HealthStream Provider Solutions – Our provider solutions are offered through our business segment that is branded in the marketplace as “Verity, aHealthStream Company.” Verity, a HealthStream Company, delivers enterprise-class solutions to transform the healthcare provider experience for healthcareorganizations and providers. We currently serve over 2,400 hospitals and 1,000 medical groups in the United States. Verity, a HealthStream Company,resulted from the combination of Echo, Inc. and Morrisey Associates, Inc. (MAI), representing over 75 years of industry experience, to become the leadingcompany delivering solutions for credentialing, enrollment, privileging, onboarding, and performance evaluation for providers. Verity, a HealthStreamCompany, has over 200 employees spanning headquarters in Boulder, CO with satellite offices in San Diego, CA, Brentwood, TN, and Chicago, IL.Our legacy products include EchoCredentialing™ and MSOW™, comprehensive platforms that manage medical staff credentialing and privileging processesfor hospitals; EchoOneApp™, a provider enrollment platform for medical groups, which includes automatic form population directly from a continuouslyupdated library of more than 4,500 preformatted payer form templates as well as online form integration with Council for Affordable Quality Healthcare,CMS, the Provider Enrollment, Chain and Ownership System (PECOS); and EchoAccess™, our enterprise class platform to support hospital call centers withphysician referral, call triage, provider directories, class enrollment, and discharge planning functionalities.In January 2018, we announced the launch of our SaaS-based provider credentialing, privileging, and enrollment solution, Verity. Verity includes anintuitive, modern user experience; embedded, validated provider data; and evidence-based and best practice content. Further, Verity provides a singleinfrastructure supporting the entire provider lifecycle, from recruiting, application submission, validation tasks, privileging, appointments by credentialingcommittees, enrollment, contracting, onboarding, and performance management.BUSINESS ACQUISITIONSWe acquired HealthLine Systems, LLC (HLS) in March 2015, acquired Performance Management Services, Inc. in June 2016, acquired the remainingownership interest in Nursing Registry Consultants Corporation in July 2016, and acquired MAI in August 2016. For additional information regardingacquisitions, please see Note 5 of the Consolidated Financial Statements and Item 7, “Management’s Discussion and Analysis of Financial Condition andResults 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 governmententities, as well as pharmaceutical and medical device companies. We derive a substantial portion of our revenues from a relatively small number ofcustomers, although no single customer represented more than 10 percent of our revenues during 2017, 2016, or 2015. Customers that have purchased orcontracted for products and services from HealthStream include: Ardent Health 3Table of ContentsServices; Saint Luke’s Health System; HCA Holdings, Inc.; Community Health Systems, Inc.; McLaren Health Care Corporation; Sutter Health; and TenetHealthcare 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 andin our additional offices located in Jericho, New York; Brentwood, Tennessee; San Diego, California; and Chicago, Illinois, as well as remote home officesales locations. We also had an office in Columbia, Maryland prior to our disposition of the PX business. As of December 31, 2017, our HealthStreamWorkforce Solutions sales personnel consisted of 120 employees who carried sales quotas; our HealthStream Patient Experience Solutions sales personnelconsisted of 12 employees who carried sales quotas (such Patient Experience Solutions sales personnel are no longer employed by us following thedisposition of the PX business); and our Provider Solutions sales personnel consisted of 31 employees who carried sales quotas. As of December 31, 2017, wealso had 13 employees who support our sales teams with sales force productivity and optimization, onboarding, training, and administration services.We conduct a variety of marketing programs to promote our products and services, including product catalogs, user groups, trade shows, internet promotionand demonstrations, telemarketing campaigns, public relations, distribution of product-specific literature, direct mail, and advertising. We have marketingteams that are responsible for these initiatives and for working with and supporting our product management and sales teams. At December 31, 2017, ourmarketing personnel consisted of 40 employees.OPERATIONS AND TECHNOLOGYWe believe our ability to establish and maintain long-term customer relationships, obtain recurring sales, and develop and maintain new and existingproducts are dependent on the strength of our operations, customer service, product development and maintenance, training, and other support teams. As ofDecember 31, 2017, 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 team consisted of 253employees (of which 106 employees worked in our interviewing centers) associated with phone interviewing, distributing and processing paper-based surveyinstruments, patient experience coaching and consulting, data analysis and reporting of survey results, and project management (the Patient ExperienceSolutions operations team employees are no longer employed by us following the disposition of the PX business); and our Provider Solutions operationsteam consisted of 173 employees associated with implementation services, data integration, product development and quality assurance, credentialsverification, 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 trackingof users, collection, sampling, and analysis of survey data, tracking and reporting of physician credentialing and provider enrollment information, andreporting of information for both internal and external use. We designed the platforms that provide our services to allow each component to be independentlyscaled by adding commercially 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 networkconnectivity, and we follow industry best practices for backup and disaster recovery. Company personnel monitor all servers, networks, and systems on acontinuous basis, and we employ enterprise firewall systems and data abstraction to protect our databases, customer information, and courseware library fromunauthorized access.COMPETITIONIn addition to the competing healthcare education delivery methods in the industry, we also have direct competitors. In our Workforce Solutions businesssegment, a number of companies offer competitive learning management products and talent management modules to the healthcare industry. We competewith companies such as Cornerstone OnDemand, Healthcare Source, Oracle, SABA, SAP, Workday, and SumTotal Systems that provide their services tomultiple industries, including healthcare. We also compete with large medical publishers that have operating units that offer learning management systemsthat focus on healthcare, such as Reed Elsevier Group’s MC Strategies, Wolters Kluwer, and Relias Learning, which is owned by Bertelsmann. In our ProviderSolutions business 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 healthcareprofessionals, offer a wide assortment of courseware, include a mechanism for measuring satisfaction and/or other results, and provide all our services on asingle platform over the Internet, provide us with a competitive advantage. In our Provider Solutions business segment, we believe the scope and quality ofour products, capability to connect medical staff credentialing with provider enrollment, and innovative new predictive analytics provide us with acompetitive advantage. We believe that the principal competitive factors affecting the marketing of our Workforce and Provider Solutions to the healthcareindustry include: 4Table of Contents ● features of our SaaS-based platform and applications, including reporting, management functionality, ability to manage a variety ofevents or modalities, courseware assignment, curriculum management, documenting competency assessments and performanceappraisals, scalability, and the ability to track utilization and results; ● scope and variety of Internet-based learning courseware available, including mandated content for OSHA, The Joint Commission, patientsafety, and HIPAA requirements; competency-based content; courseware scenarios that drive simulators; courseware that provides CPRcertification; and 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 implementation, benchmarking, and training; ● 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 laws and regulations restricting the collection, use, security,and disclosure of personal information limit our ability to collect information or use and disclose the information in our databases orderived from other sources to generate revenues. It may be costly to implement security or other measures designed to comply with newlegislation or changes to existing laws. ● Content Regulation. Both foreign and domestic governments have adopted and proposed laws governing the content of materialtransmitted over the Internet. These include laws relating to obscenity, indecency, libel and defamation. We could be liable if contentcreated or delivered by us is determined to be in violation of these regulations. ● Information Security Accountability Regulation. As a business associate of certain of our customers, we are required to report certainbreaches of protected health information to our customers, which must in turn notify affected individuals, the U.S. Department of Healthand Human Services (HHS) and, in certain situations involving large breaches, the media. All non-permitted uses or disclosures ofunsecured, protected health information are presumed to be breaches unless the covered entity or business associate establishes that thereis a low probability the information has been compromised. In addition, we are subject to certain state laws that relate to privacy or thereporting of security breaches. For example, California law requires notification of security breaches involving personal information andmedical information. We may incur costs to comply with these privacy and security requirements. Because there is little guidance relatedto many of these laws, it is difficult to estimate the cost of our compliance with these laws. Further, Congress has considered bills thatwould require companies to engage independent third parties to audit the companies’ computer information security. If the Company isrequired to report a breach of security or if one of the Company’s customers is required to report a breach of security by the Company, theCompany’s business could be negatively impacted. ● Sales and Use Tax. Through December 31, 2017, we collected sales, use or other taxes on taxable transactions in states in which we haveemployees or have a significant level of sales activity. While HealthStream expects that this approach is appropriate, other states orforeign jurisdictions may seek to impose tax collection obligations on companies like us that engage in online commerce. If they do,these obligations could limit the growth of electronic commerce in general and limit our ability to realize profit from the sale of ourservices over the Internet.Laws and regulations directly applicable to content regulation, e-commerce, Internet communications, and the privacy and security of personal informationare becoming more prevalent. Congress continues considering laws regarding Internet taxation. The dynamic nature of this regulatory environment increasesthe uncertainty regarding the marketplace impact of such regulation. The enactment of any additional laws or regulations may increase our cost ofconducting business or otherwise harm our business, financial condition and operating results. 5Table of ContentsRegulation of Education, Training and Other Services for Healthcare ProfessionalsOccupational Safety and Health Administration. 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 bloodborne pathogens exposure control, laboratory safety and tuberculosis infection control. OSHA regulations require employers to keep records of theiremployees’ 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 to provide certainworkplace safety and patient interaction training to employees. Training required by The Joint Commission may include programs on infection control,patient bill of rights, radiation safety, and incident reporting. Healthcare organizations are required to provide and document training on these topics toreceive accreditation from The Joint Commission. In addition, The Joint Commission imposes continuing education requirements on physicians that relate toeach physician’s specific staff appointments.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 requirethese organizations to provide reasonable and appropriate safeguards to protect the privacy, integrity and confidentiality of individually identifiablehealthcare information. Covered entities are required to establish, maintain and provide training with regard to their policies and procedures for protectingthe integrity and confidentiality of individually identifiable healthcare information and must document training on these topics to support their compliance.Certain HIPAA privacy and security requirements apply to entities (known as business associates) that handle individually identifiable healthcareinformation on behalf of covered entities or other business associates. Covered entities, business associates and their subcontractors may be directly subjectto criminal and civil sanctions for violations of HIPAA privacy and security standards.The American Nurses Credentialing Center (ANCC). ANCC, a subsidiary of the American Nurses Association (ANA), provides individuals and organizationsthroughout the nursing profession with the resources they need to achieve practice excellence. ANCC’s internationally renowned credentialing programscertify nurses in specialty practice areas; recognize healthcare organizations for promoting safe, positive work environments through the MagnetRecognition Program® and the Pathway to Excellence® Program; and accredit providers of continuing nursing education. In addition, ANCC’s Institute forCredentialing Innovation® offers an array of informational and educational services and products to support its core credentialing programs. ANCCcertification exams validate nurses’ skills, knowledge, and abilities. More than a quarter million nurses have been certified by ANCC since 1990. More than80,000 advanced practice nurses are currently certified by ANCC. The ANCC Magnet Recognition Program® recognizes healthcare organizations thatprovide the very best in nursing care and professionalism in nursing practice. The program also provides a vehicle for disseminating best practices andstrategies among nursing systems. The ANCC Magnet Recognition Program is a highly regarded standard for nursing excellence. The Pathway toExcellence® Program recognizes the essential elements of a high standard nursing practice environment. The designation is earned by healthcareorganizations that create work environments where nurses can develop professionally. The award substantiates the professional satisfaction of nurses andidentifies best places to work.Continuing Nursing Education (CNE). State nurse practice laws typically authorize a 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 providersthat have been approved by the ANCC Commission on Accreditation and/or the state board of nursing. We are an accredited provider of CNE by theANCC.CNE requirements vary widely from state to state. Thirty-four states require registered nurses to certify that they have accumulated a minimum numberof CNE credits in order to maintain their licenses. In some states, the CNE requirement only applies to re-licensure of advance practice nurses, or additionalCNEs may be required of this category of nurses. Required CNE ranges from 12 to 45 credits annually, with reporting generally on a bi-annual basis. Boardcertifications (e.g., Certified Nurse Operating Room (CNOR) – certification of perioperative nursing) also require CNE credits, with certain percentagesrequired in specific categories based on the certification type.Continuing Medical Education (CME). State licensing boards, professional organizations and employers require physicians to certify that they haveaccumulated a minimum number of CME hours to maintain their licenses. Generally, each state’s medical practice laws authorize the state’s board ofmedicine to establish and track CME requirements. Forty-eight state medical licensing boards currently have CME requirements, as well as Puerto Rico,Guam, and the U.S. Virgin Islands. The number of CME hours required by each state ranges from 15 to 50 hours per year. Other sources of CME requirementsare state medical societies and practice specialty boards. The failure to obtain the requisite amount and type of CME could result in non-renewal of thephysician’s license to practice medicine and/or membership in a medical or practice specialty society. American Medical Association (AMA) classifies CMEactivities as either Category 1, which includes formal CME activities, or Category 2, which include self-designated credit for informal activities that meetcertain requirements. CME providers that sponsor educational activities can only designate those activities for AMA PRA Category 1 Credit™. Mostagencies nationwide that require CME participation specify AMA PRA Category 1 Credit™. Only institutions and organizations accredited to provide CMEcan designate an activity for AMA PRA Category 1 Credit™. The Accreditation Council for Continuing Medical Education (ACCME) is responsible forawarding accreditation status to state medical societies, medical schools, and other institutions and organizations that provide CME activities for a nationalaudience of physicians. State medical societies, operating under the aegis of the ACCME, accredit institutions and organizations that provide CME activitiesprimarily for physicians within the state or bordering states. We are recognized in many states as an accredited provider of CME by the ACCME. 6Table of ContentsCenters 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 paymentsystem by rewarding providers for delivering high quality, efficient clinical care. Through a number of public reporting programs, demonstration projects,pilot programs, and other initiatives, some voluntary and some mandatory, CMS has launched VBP initiatives in hospitals, physician offices, nursing homes,home health services, and dialysis facilities. In 2017, CMS launched a comprehensive deregulatory initiative, “Meaningful Measures,” which identifiespriorities for quality measurement and improvement. The framework is intended to improve patient outcomes while also reducing burdens on providers.Medicare and Medicaid Electronic Health Records (EHR) Incentive Programs. The Medicare and Medicaid EHR Incentive Programs encourage eligibleprofessionals, eligible hospitals, and critical access hospitals (CAHs) to adopt EHR technology. Eligible hospitals can receive Medicaid incentive paymentsif they adopt and demonstrate meaningful use of certified EHR technology; those that fail to demonstrate meaningful use are subject to reducedreimbursement from Medicare. By putting into action and meaningfully using an EHR system, providers may reap benefits beyond financial incentives–suchas 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, emergencymedical services personnel may be required to acquire up to 20 continuing education hours per year, all or a portion of which can be fulfilled online. Theserequirements vary by state and depend on the professional classification of the individual.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.Regulation 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 ourproducts and services, including the sponsorship and support of educational programs. For example, the Physician Payment Sunshine Act (“Sunshine Act”)requires manufacturers of drugs, biological devices and medical devices covered by Medicare, Medicaid, or the Children’s Health Insurance Program toreport annually to CMS payments and other transfers of value, including educational programs, given by such manufacturers to physicians and teachinghospitals, with limited exceptions. CMS regulations require manufacturers to report the physician’s name, business address and national provider identifier aswell as other information including the value, date, form and nature of what is offered. CMS publishes the information on its website. Manufacturers that donot meet the reporting obligations are 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 ofcontinuing educational activities by pharmaceutical and medical device companies. The Guidelines have affected and may continue to affect the type andextent of commercial support we receive for our continuing education activities. The trade associations for the pharmaceutical and medical device industries(PhRMA and AdvaMed, respectively) have also promulgated their own codes of ethics that further restrict the interactions between industry and health careprofessionals. In addition, the AMA has established its own code of ethics regarding Gifts to Physicians from Industry to provide standards of conduct for themedical profession. The Company follows the rules and guidelines provided by ACCME, ANCC, and other continuing education accrediting bodies toensure that its continuing education programming is free from commercial bias and consistent with the Guidelines.The U.S. Food and Drug Administration (FDA) and the Federal Trade Commission (FTC)Current FDA and FTC rules and enforcement actions and regulatory policies or those that the FDA or the FTC may develop in the future could have amaterial adverse effect on our ability to provide existing or future applications or services to our end users or obtain the necessary corporate sponsorship todo so. The FDA and the FTC regulate the form, content and dissemination of labeling, advertising and promotional materials, including direct-to-consumerprescription drug and medical device advertising, prepared by, or for, pharmaceutical, biotechnology or medical device companies. The FTC regulatesover-the-counter drug advertising and, in some cases, medical device advertising. Generally, regulated companies must limit their advertising andpromotional materials to discussions of the FDA-approved indications. Therefore, any truthful or untruthful information that promotes the use ofpharmaceutical or medical device products that is presented with our services is subject to the FDA and FTC requirements and regulatory oversight includingcriminal, civil and administrative actions. We believe that banner advertisements, sponsorship links and any educational programs that lack independenteditorial control that we may present with our services could be subject to FDA or FTC regulation. While the FDA and the FTC place the principal burden ofcompliance with advertising and promotional regulations on the advertiser, if the FDA or FTC finds that any regulated information presented with ourservices 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 7Table of Contentsand customers; and use measures designed to control access to our software, documentation and other proprietary information. We own federal trademark andservice mark registrations for several marks, including without limitation “EXCELLENCE THROUGH INSIGHT”, “HEALTHSTREAM”, “HOSPITALDIRECT”, “OR PROTOCOL”, “PATIENT INSIGHTS”, “PHYSICIAN INSIGHTS”, “INSIGHTS ONLINE”, “INSIGHT INTO ACTION”, “QUALITY CHECK”,“SIMCENTER”, “SIMMANAGER”, and “SIMSTORE.” We also have obtained registration of the “HEALTHSTREAM” mark in certain other countries.Applications for several trademarks are currently pending. However, there can be no assurance that we will be successful in obtaining registration of othertrademarks 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 andwork-for-hire arrangements with third parties, and development by employees. We require publishers, authors and other third parties to represent and warrantthat their content does not infringe on or misappropriate any third-party intellectual property rights and that they have the right to provide their content andhave obtained all third-party consents necessary to do so. Our publishers, authors and other third parties also agree to indemnify us against certain liabilitywe might sustain due to the content they provide.If a third party asserts a claim that we have infringed its patents or other intellectual property right, we may be required to redesign our products or enter intoroyalty or licensing agreements. In addition, we license technologies from third parties for incorporation into our services. Royalty and licensing agreementswith these third parties may not be available on terms acceptable to us, if at all. Additionally, despite the steps we have taken to protect our intellectualproperty and proprietary rights, our efforts may not be adequate. Third parties may infringe or misappropriate our intellectual property, and such violations ofour intellectual property are difficult to detect and police. Competitors may also independently develop technologies that are substantially equivalent orsuperior to the technologies we employ in our products or services. If we fail to protect our proprietary rights adequately, our competitors could offer similarservices, potentially significantly harming our competitive position and decreasing our revenues.We hold inbound licenses for certain intellectual property that is used internally, and in some cases, utilized in HealthStream’s products or services. While itmay be necessary in the future to seek or renew licenses relating to various aspects of our products and services, we believe, based upon past experience andindustry practice, such licenses generally can be obtained on commercially reasonable terms. We believe our operations and products and services are notmaterially dependent on any single license or other agreement with any third party.AVAILABLE 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. Thepublic may read and copy any materials we file with the SEC at the SEC’s Public Reference Room at 100 F Street, NE, Washington, DC 20549. The publicmay obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The Company is an electronic filer and theSEC maintains an Internet site at http://www.sec.gov that contains the reports, proxy and information statements, and other information filed electronically.Our website address is www.healthstream.com. Please note that our website address is provided as an inactive textual reference only. We make available, freeof charge through our website, our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and all amendments to thosereports as soon as reasonably practicable after such material is electronically filed with or furnished to the SEC. The information provided on our website isnot part of this report, and is therefore not incorporated by reference unless such information is otherwise specifically referenced elsewhere in this report. 8Table of ContentsOUR EMPLOYEESAs of December 31, 2017, we employed 955 full-time and 72 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 arenot subject 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 electedby the Board of Directors and serve at the pleasure of the Board of Directors. The following table sets forth certain information regarding the executiveofficers of the Company: Name Age PositionRobert A. Frist, Jr. 50 Chief Executive Officer, President and Chairman of the Board of DirectorsJeffrey S. Doster 53 Senior Vice President and Chief Information Officer*Gerard M. Hayden, Jr. 63 Senior Vice President and Chief Financial OfficerJ. Edward Pearson 55 Senior Vice President and Chief Operating OfficerJeffrey D. Cunningham 51 Senior Vice President and Chief Technology OfficerMichael Sousa 49 Senior Vice President and President, Verity, Inc., a HealthStream CompanyMichael M. Collier 42 Senior Vice President, Business Development and General Counsel* As previously announced on February 20, 2018, Mr. Doster has tendered his resignation as our Senior Vice President and Chief Information Officer, whichwill be effective as of March 30, 2018.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 since2001. Mr. Frist is the company’s chief operating decision maker. He graduated with a Bachelor of Science in Business with concentrations in Finance,Economics and Marketing from Trinity University.Jeffrey S. Doster joined the Company in May 2008 as senior vice president and chief technology officer and was promoted to chief information officer in July2017. He earned undergraduate degrees in both Economics and Business Administration from Towson University, as well as a Master of BusinessAdministration 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 Universityof Notre 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.Jeffrey D. Cunningham joined the Company in July 2017 as senior vice president and chief technology officer. Prior to joining the Company, he founded andserved as chief technology officer and chief strategy officer for Informatics Corporation of America for twelve years. He earned a Bachelor of Science inComputer Science from University of North Texas.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 waspromoted to senior vice president of business development. In September 2015, he was named president of Echo, Inc. (now known as Verity, Inc., aHealthStream Company), HealthStream’s Provider Solutions business segment, while continuing to serve as a senior vice president of the Company. Heearned a Bachelor of Science degree from Boston College and a Master of Business Administration from Boston University.Michael M. Collier joined the Company in August 2011 as vice president and general counsel, began serving as the vice president of business developmentand general counsel shortly thereafter, and was promoted to senior vice president of business development and general counsel in July 2017. Mr. Collier alsoserves as the Company’s Corporate Secretary. He graduated with bachelors and masters degrees in Philosophy and Religion from University of Tennessee-Knoxville and earned a Juris Doctorate (J.D.) from University of California, Berkeley – School of Law. 9Table of ContentsItem 1A. Risk FactorsWe believe that the risks and uncertainties described below are the principal material risks facing the Company as of the date of this report. In the future, wemay become subject to additional risks that are not currently known to us. Our business, financial condition, results of operations, and/or prospects could bematerially and adversely affected by the occurrence of any of the following risks and uncertainties. Additional risks or uncertainties not presently know to us,or that we currently deem immaterial, also may adversely affect our business, financial condition, results of operations, and prospects. The trading price of ourcommon 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, introductionsof new products and services, and maintaining strong relationships with our existing customers. Some of the risks that we may encounter in executing ourgrowth strategy include: • expenses, delays, and difficulties in 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 within 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 complementor enhance our business. We may not be able to identify, complete or integrate the operations of such acquisitions, joint ventures, collaborative arrangementsor other strategic investments. In addition, if we finance acquisitions, joint ventures, collaborative arrangements or other strategic initiatives by issuingequity securities, our existing shareholders may be diluted which could affect the market price of our stock. As a result, if we fail to properly evaluate andexecute acquisitions and investments, our business prospects may be seriously harmed. Some of the risks that we may encounter in implementing ouracquisition, 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 otherstrategic investments into our organization; • inability to retain personnel associated with acquisitions, joint ventures, collaborative arrangements or other strategic investments; • diversion of management’s attention from other initiatives and/or day-to-day operations to effectively execute our growth strategy; and • inability to generate sufficient revenue, profit, and cash flow from acquisitions, joint ventures, collaborative arrangements or other strategic investments tooffset our investment costs.Our 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 applicablecontract, the performance of our subscription business may become more subject to fluctuations between quarterly periods as our solution offerings diversifyand become more sophisticated. Certain project-based products, such as consulting, certain content development, and professional services, are subject to thecustomers’ involvement in the provision of the product or service. The timing and magnitude of these project-based product and service contracts may varywidely from quarter to quarter and year to year, and thus may affect our ability to accurately forecast quarterly and annual financial performance. In addition,some products, including those in our Workforce Development and Provider Solutions segments, can require significant implementation lead times 10Table of Contentsand resources, and may require a level of change management efforts from our clients, which may also impact our ability to accurately forecast financialperformance.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 somecases has extended much further. The range in the sales cycle can be impacted by multiple factors, including an increasing trend towards more formal requestfor proposal processes and more competition within our industry, as well as formal budget timelines which impact timing of purchases by target customers.New products, including those that may compete with or replace our former product offerings, tend to have a longer and more unpredictable revenue rampperiod because of varying customer adoption rates. As a result of these factors, we have only limited ability to forecast the timing and type of initial sales.This, in turn, makes it more difficult to forecast quarterly and annual financial performance.We may not be able to maintain our competitive position against current and potential competitors, especially those with significantly greater financial,technical, marketing, or other resources.Several of our competitors and many potential competitors have longer operating histories and significantly greater financial, technical, marketing, or otherresources than we do. We encounter direct competition from both large and small talent and human resource management companies and other companiesfocused on workforce development in the healthcare industry, as well as companies that offer provider solutions. Given the profile and growth of thehealthcare industry and the ongoing need for training, simulation, credentialing, and other information products and services, it is likely that additionalcompetitors will emerge. We believe we maintain a competitive advantage against our competitors by offering a comprehensive array of products andservices; however, our lack of market diversification resulting from our concentration on the healthcare industry may make us susceptible to losing marketshare to our competitors who also offer solutions, and in some cases a more robust suite of solutions, to a cross-section of industries. These companies may beable to respond more quickly than we can to new or changing opportunities, technologies, standards or customer requirements. Further, most of our customeragreements are for terms ranging from one to three years, with no obligation to renew. The terms of these agreements may enable customers to more easilyshift 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 themmay have an adverse impact on our ability to successfully market our products and services.We have entered into contracts with strategic partners, including content, technology, and retail channel vendors. Our ability to increase the sales of ourproducts and services depends in part upon maintaining and strengthening relationships with these current and future strategic partners. Most of thesecontracts are on a non-exclusive basis. Certain strategic partners may offer products and services from multiple distinct companies, including, in someinstances, products or services which may compete with our products and services. Moreover, under contracts with some of our strategic partners, we may bebound by provisions that restrict our ability to market and sell our products and services to certain potential customers. The success of these contractualarrangements will depend in part upon the strategic partners’ own competitive, marketing, and strategic considerations, including the relative advantages forsuch strategic partners in using alternative products being developed and marketed by them or our competitors, rather than our products and services.We cannot guarantee that we will be able to maintain and strengthen our relationships with strategic partners, that we will be successful in effectivelyintegrating such partners’ products and technology into our own, or that such relationships will be successful in generating additional revenue. If any of thesestrategic partners have negative experiences with our products and services, or seek to amend or terminate the financial or other terms of the contracts orarrangements we have with them, we may need to increase our organizational focus on the types of services and solutions they sell and alter our development,integration, and/or distribution strategies, which may divert our planned efforts and resources from other projects.Lastly, we could be subject to claims and liability, as a result of the activities, products, or services of these strategic partners, and/or our acts or omissionswith regard to these strategic partners. Even if these claims do not result in liability to us, investigating and defending these claims could be expensive, time-consuming and result in suspension of or interference with certain offerings to our clients and/or adverse publicity that could harm our business. We 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 theiragreements with us or may terminate the agreements early if we do not fulfill our contractual obligations. If a significant number of our partners terminate orfail to renew their agreements with us on as favorable terms, such as a reduction in our revenue share arrangement, it could result in a reduction in the numberof courses and solutions we are able to distribute and decreased revenues. Most of our agreements with our content partners are non-exclusive, and ourcompetitors offer, or could offer, content or solutions that are similar to or the same as ours. If our current partners offer or otherwise make available theirproducts and services to users or our competitors on more favorable terms than those offered to us, or increase our license fees, our competitive position,revenue, and our profit margins and prospects could be harmed. In addition, the failure by our partners to deliver high-quality content and technology, and torevise their content and technology, in response to user demand and evolving healthcare 11Table of Contentsadvances and trends could result in customer dissatisfaction and inhibit our ability to attract and retain subscribers.We may not be able to develop new products and services, or enhancements to our existing products and services, or be able to achieve widespreadacceptance of new products, services or features, or keep pace with technological developments.Our growth strategy depends in part on our ability to generate revenue growth through sales to new customers as well as increasing sales of additionalsubscriptions and other products and services to existing customers. Our identification of additional features, content, products and services may not result intimely development of complementary products. In addition, the success of certain new products and services may be dependent on continued growth in ourcustomer base. Furthermore, we are not able to accurately predict the volume or speed with which existing and new customers will adopt such new productsand services. Because healthcare technology continues to change and evolve, we may be unable to accurately predict and develop new products, features,content and other products to address the needs of the healthcare industry. Further, the new products, services and enhancements we develop may introducesignificant defects into or otherwise negatively impact our core software platform. While all new products and services are subject to testing and qualitycontrol, all software and software-based services are subject to errors and malfunctions. If we release new products, services and/or enhancements with bugs,defects or errors or that cause bugs, defects or errors in existing products, it could result in lost revenues and/or reduced ability to meet contractualobligations and would be detrimental to our business and reputation. If new products, features, or content are not accepted or integrated by new or existingcustomers, we may not be able to recover the cost of this development and our financial performance will be harmed. Continued growth of our customerpopulation is dependent on our ability to continue to provide relevant products and services in a timely manner. The success of our business will depend onour ability to continue providing our products and services as well as enhancing our content, product and service offerings that address the needs ofhealthcare 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 errorsin this software, which could increase our costs and decrease our revenue.We use technology components in some of our products that have been licensed from third parties. Future licenses to these technologies may not be availableto us on commercially reasonable terms, or at all. The loss of or inability to obtain or maintain any of these licenses could result in delays in the introductionof new products and services or could force us to discontinue offering portions of solutions until equivalent technology, if available, is identified, licensedand integrated. The operation of our products would be impaired if errors occur in third party technology or content that we incorporate, and we may incuradditional costs to repair or replace the defective technology or content. It may be difficult for us to correct any errors in third party products because theproducts are not within our control. Accordingly, our revenue could decrease and our costs could increase in the event of any errors in this technology.Furthermore, we may become subject to legal claims related to licensed technology based on product liability, infringement of intellectual property or otherlegal theories. Even if these claims do not result in liability to us, investigating and defending these claims could be expensive and time-consuming, andcould result in suspension of or interference with certain offerings 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 withany of our significant customers or a failure of these customers to renew their contracts on favorable terms, or at all, could have an adverse effect on ourbusiness.A significant portion of our business is subject to renewal each year. Therefore, renewals have a significant impact on our revenue and operating results.For the year ended December 31, 2017, approximately 69% 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 in fact, some customers have elected not to renew their subscription. In addition, our customers may renew at a lower pricing or activity level. Ourcustomers’ renewals may decline or fluctuate as a result of a number of factors, including but not limited to their dissatisfaction with our service, a dissipationor cessation of their need for one or more of our products or services, pricing, or competitive product offerings. If we are unable to renew a substantial portionof the contracts that are up for renewal or maintain our pricing, our results of operations and financial condition could be adversely affected. For example, therequirement mandated by CMS for healthcare organizations to transition to the ICD-10 coding system, effective in October 2015, generated significantdemand for our ICD-10 readiness training courseware from 2012 through 2015, when subscriptions for that product positively influenced the Company’srevenue and operating income. However, sales of that product have ceased and revenue and operating income from that product declined significantly during2016 and have ceased altogether as of December 31, 2017. HealthStream Provider Solutions product and service contracts typically range from one to threeyears in length, and customers are not obligated to renew their contract with us after their contract expires. If our customers do not renew their arrangementsfor our services, or if their activity levels decline, our revenue may decline and our business will suffer. 12Table of ContentsWe 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 are required for us to implement customers on our subscription-based platform and certain platform applications. Accordingly, if customers do notprovide us with the specified information in a timely manner, our ability to recognize revenue will be delayed, which could adversely impact our operatingresults. In addition, implementation completion and acceptance of our subscription-based platform and certain platform applications by our customers mustbe achieved and delivery of services is required in connection with subscription-based products for us to recognize revenue. Some products, including thosein our Provider Solutions segment, can require significant implementation lead times and the rate at which customer orders move from backlog to revenuegeneration in connection with these products may significantly affect the timing of revenue recognition.Because we recognize revenue from subscriptions for our products and services over the term of the subscription period, downturns or upturns in sales maynot be immediately reflected in our operating results.During the year ended December 31, 2017, we recognized approximately 69% 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 tosubscription agreements entered into during previous quarters. Consequently, a decline in new or renewed subscription agreements in any one quarter willnot necessarily be fully reflected in the revenue in that quarter and will negatively affect our revenue in future quarters. In addition, we may be unable toadjust our cost structure to reflect this reduced revenue. Accordingly, the effect of significant downturns in sales and market acceptance of our products andservices may not be fully reflected in our results of operations until future periods. Additionally, our subscription model also makes it difficult for us torapidly increase our revenue through additional sales in any period, as revenue from new customers must be recognized over the applicable subscription term.Finally, the majority of costs associated with our sales cycles are incurred up front before revenue recognition commences, and therefore periods of strongsales performance may increase our costs in the near term, negatively affecting our financial performance.We may not be able to meet our strategic business objectives unless we obtain additional financing, which may not be available to us on favorable terms,or at all.We believe that our existing cash and cash equivalents, marketable securities, cash generated from operations, and available borrowings under our revolvingcredit facility 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, 2017, we had approximately $131.1 million in cash, cash equivalents, and marketable securities. In addition, in connection with the sale ofour Patient Experience business for $65.5 million in cash, which was completed in February 2018, we anticipate recording a pre-tax book gain in the firstquarter of 2018 between $34.0 million and $38.0 million. Following this disposition, our Board of Directors declared a dividend of $1.00 per common share,or approximately $32.5 million, payable on April 3, 2018 to shareholders of record on March 6, 2018. We also have up to $50.0 million of availability underour Revolving Credit Facility, subject to certain covenants, which expires in November 2018. We expect to incur approximately $20.0 million of capitalexpenditures, software development and content purchases during 2018.We actively review possible business acquisitions to complement or enhance our products and services. We may not have adequate cash and investments oravailability under our Revolving Credit Facility to consummate one or more of these acquisitions. We cannot assure you that if we need additional financingthat 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 fundexpansion, take advantage of available opportunities, develop or enhance services or products, or otherwise respond to competitive pressures would besignificantly limited. If we raise additional funds by issuing equity or convertible debt securities, the percentage ownership of our existing shareholders maybe reduced.We have significant goodwill and identifiable intangible assets recorded on our balance sheet that may be subject to impairment losses that would reduceour reported assets and earnings.As of December 31, 2017, our balance sheet included goodwill of $110.3 million and net identifiable intangible assets of $68.8 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 values that donot support the carrying value of goodwill and identifiable 13Table of Contentsintangible assets. If the value of our goodwill and/or intangible assets is impaired, accounting rules require us to reduce their carrying value and report animpairment charge, which would reduce our reported assets and earnings for the period in which an impairment is recognized.We may be affected by healthcare reform efforts and other 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 conditions. In 2017, we observed anincrease in bankruptcies among healthcare providers. This decrease in creditworthiness among certain of our customers along with other economic challengesfacing the healthcare sector caused our bad debt expense to increase from $640,000 in 2016 to $1.8 million in 2017. Continuance or escalation of thisdevelopment could result in our inability to collect amounts owed from existing clients and decrease our ability to gain new clients, which could adverselyimpact our revenue, results of operations, and ability to execute on our growth strategy.The U.S. Congress and certain state legislatures have passed or are considering laws and regulations intended to result in major changes to the U.S. healthcaresystem. The most prominent of these reform efforts, the Patient Protection and Affordable Care Act, as amended by the Healthcare and EducationReconciliation Act of 2010 (collectively, Affordable Care Act), was designed to increase access to affordable health insurance for U.S. citizens and improvequality of care, but it also has reduced government program spending and imposed operating costs and changes on many of our clients.However, efforts by the presidential administration and certain members of Congress to repeal or make significant changes to the Affordable Care Act, itsimplementation and/or its interpretation have cast considerable uncertainty on the future of the law. For as part of tax reform legislation enacted in December2017, Congress eliminated the financial penalty associated with the individual mandate, effective January 2019, which may impact the number ofindividuals that elect to purchase health insurance. In addition, a presidential executive order has been signed that directs agencies to minimize “economicand regulatory burdens” of the Affordable Care Act. There is uncertainty regarding whether, when, and how the Affordable Care Act will be changed, whatalternative provisions, if any, will be enacted, the timing of enactment and implementation of alternative provisions, the impact of alternative provisions onproviders as well as other healthcare industry participants, and how the law will be interpreted and implemented. Changes by Congress or governmentagencies could eliminate or alter provisions beneficial to us while leaving in place provisions reducing our reimbursement. Some of the recent changes in thehealthcare industry have driven consolidation, particularly among health insurance providers. Other industry participants, such as large employer groups andtheir affiliates, may intensify competitive pressures. Efforts to repeal or change the Affordable Care Act or implement other initiatives intended to reformhealthcare delivery and financial systems may have an adverse effect on our clients. Any such regulatory developments, as well as other healthcare-related orother developments that adversely impact the business or financial condition of our clients, could reduce the amount of business we receive from such clientsand thus have an adverse effect on our results of operations.We may not be able to demonstrate compliance with Sarbanes-Oxley Section 404 in a timely manner, and the correction of any deficiencies identifiedduring annual audits may be costly and could harm our business.Sarbanes-Oxley Section 404 requires our management to report on, and requires our independent public accounting firm to attest to, the effectiveness of ourinternal controls over financial reporting. The rules governing the standards to be met are complex and may require significant process review,documentation and testing, as well as remediation efforts for any identified deficiencies. This process of review, documentation, testing and remediation mayresult in increased expenses and require significant attention from management and other internal and external resources. These requirements may alsoextend to acquired entities and our efforts to integrate those operations into our system of internal controls. Any material weaknesses identified during thisprocess may preclude us from asserting the effectiveness of our internal controls. This may negatively affect our stock price if we cannot effectively remediatethe issues identified in a timely manner.Changes in accounting standards issued by the Financial Accounting Standards Board, or FASB, including the new revenue recognition accountingstandard, could adversely effect on our balance sheet, revenue, and results of operations, and could require a significant expenditure of time, attention andresources, especially by senior management.Our accounting and financial reporting policies conform to GAAP, which are periodically revised and/or expanded. The application of accounting principlesis also subject to varying interpretations over time. Accordingly, we are required to adopt new or revised accounting standards or comply with revisedinterpretations that are issued from time to time by various parties, including accounting standard setters and those who interpret the standards, such as theFASB and the SEC and our independent registered public accounting firm. Changes to regulations concerning revenue recognition could require us to alterour current revenue accounting practices and cause us to either defer revenue into a future period, or to recognize lower revenue in a current period. Likewise,changes to regulations concerning expense recognition could require us to alter our current expense accounting practices and cause us to defer recognition ofexpense into a future period, or to recognize increased expenses in a current period. Such changes could also cause us to alter the manner in which wecontract for, sell, and incentivize sales of products and services. Changes to either revenue recognition or expense recognition accounting practices couldaffect our financial results.In May 2014, the Financial Accounting Standards Board issued Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers (Topic606) (“ASU 2014-09”), which supersedes nearly all existing revenue recognition guidance. We have adopted 14Table of Contentsthis standard utilizing the modified retrospective approach effective as of January 1, 2018. 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 beentitled in exchange for those goods or services. The guidance also provides for additional disclosures with respect to revenues and cash flows arising fromcontracts with customers. We will be finalizing our determination regarding the financial impact of the adoption of this accounting standard on our futurefinancial statements in the first quarter of 2018, but it is possible that the adoption of such standard could have an adverse impact on the timing of ourrevenue recognition and thus adversely impact the amount of our revenue in any particular period.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 andthe market.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 cannotpredict whether the current pricing of our products and services, or any ongoing refinements we make will be accepted by our existing customer base or byprospective customers. If our customers and potential customers decide not to accept our current or future pricing or product and service offerings, it couldhave an adverse effect on our business and results of operations.Risks 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 18 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,including procurement of additional hardware and software, and to implement the services, including customer support, necessary to meet the demand for ourproducts and services. Our inability from time to time to successfully develop the necessary systems and implement the necessary services on a timely basismay result in our customers experiencing delays, interruptions and/or errors in their service. Such delays or interruptions may cause customers to becomedissatisfied with our service and move to competing providers of workforce development and provider solutions services. If this happens, our reputation,results of operations, 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. Theloss of the services of any of our officers or senior managers, or the inability to attract additional officers or senior managers as appropriate, could harm ourbusiness, as we may not be able to find suitable replacements. We do not have employment agreements with any of our key personnel, other than our chiefexecutive 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 ourgrowth strategy or maintain the quality of our services.Our future success will depend on our ability to attract, train, motivate, and retain other highly skilled technical, managerial, marketing, sales, customersupport, coaching, and survey personnel. Competition for certain personnel is intense, especially for software developers, web designers, user experience andinteraction designers, and sales personnel, and we may be unable to successfully attract sufficiently qualified personnel. We have experienced in the past, andcontinue to experience, difficulty hiring qualified personnel in a timely manner for these positions. The pool of qualified technical personnel, in particular, islimited in Nashville, Tennessee, where our headquarters are located. Similar challenges exist within our Provider Solutions segment in our locations in SanDiego, California, and Boulder, Colorado. We will also need to maintain or increase the size of our staff to support our anticipated growth, withoutcompromising the quality of our offerings or customer service. Our inability to locate, attract, hire, integrate and retain qualified personnel in sufficientnumbers 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, operating software, and hosting services as well as continue to enhance oursoftware and systems to accommodate the increased use of our platform, the increased content in our library, the expanding amount and type of data we storeon behalf of our customers, and the resulting increase in operational demands on our business. Decisions about hardware and software enhancements arebased in part on estimated forecasts of the growth in demand for our services. This growth in demand for our services is difficult to forecast and the potentialaudience for our services is widespread and dynamic. If we are unable to increase the data storage and processing capacity of our systems at least as fast as thegrowth in demand, our customers may encounter delays or disruptions in their service. Unscheduled downtime or reduced response time of our platformscould harm our business and also could discourage current and potential customers from using or continuing to use our 15Table of Contentsservices and reduce future revenue. If we are unable to acquire, update, or enhance our technology infrastructure and systems quickly enough to effectivelymeet increased operational demands on our business, that may also have an adverse effect on our results of operations or financial condition. Further, as wedevelop our platforms and rely on ever changing and improving technologies, we may 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 ourInternet service providers’ facilities or at our on-site data center facilities could cause the loss of critical data and prevent us from offering our products andservices for an unknown period of time. System downtime could negatively affect our reputation and ability to sell our products and services and may exposeus to significant third-party claims. Our cyber liability and business interruption insurance may not adequately compensate us for losses that may occur. Inaddition, we rely on third parties to securely store our archived data, house our web server and network systems and connect us to the Internet. While ourservice providers have planned for certain contingencies, the failure by any of these third parties to provide these services satisfactorily and our inability tofind suitable replacements would impair our ability to access archives and operate our systems and software, and our customers may encounter delays. Suchdisruptions could harm our reputation and cause customers to become dissatisfied and possibly take their business to a competing provider, which wouldadversely 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 ourrevenue, tarnish our reputation, and subject us to significant liability. We rely on security and authentication technology licensed from third parties. Withthis technology, we perform real-time credit card authorization and verification, as well as the encryption of other selected secure customer data. We cannotpredict whether these security measures could be circumvented by new technological developments. Further, the audit processes, penetration andvulnerability testing, and controls used within our production platforms may not be sufficient to identify and prevent errors or deliberate misuse. In addition,our software, databases and servers may be vulnerable to computer viruses, physical or electronic attacks, and similar disruptions. We may need to spendsignificant resources to protect against security breaches or to alleviate problems caused by any breaches. We cannot assure that we can prevent all securitybreaches.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 underHIPAA, the Health Information Technology for Economic and Clinical Health Act (HITECH), state privacy laws, consumer protection laws, common lawtheories or other laws, subject us to litigation and federal and state governmental inquiries, damage our reputation, and otherwise be disruptive to ourbusiness.We collect and store sensitive information, including intellectual property, individually identifiable health information, provider credentialing andprivileging data, and other personally identifiable information, on our networks. The secure maintenance of this information is critical to our businessoperations. As a result, the continued development and enhancement of controls, processes, and practices designed to protect our information systems fromattack, damage, or unauthorized access remain a priority for us. We have implemented multiple layers of security measures to protect this confidential datathrough technology, processes, and our people, and our defenses are monitored and routinely tested internally and by external parties. Despite these efforts, adata breach or security incident could result from a variety of circumstances and events, including third-party action, system errors, employee negligence orerror, malfeasance, computer viruses, failures during 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, andadvanced new attacks against information systems. In addition, third party IT vendors may not provide us with fixes or updates to hardware or software in amanner as to avoid an unauthorized loss or disclosure or to address a known vulnerability, which may subject us to known threats or downtime as a result ofthose delays.There can be no assurance that we will not be subject to data incidents that bypass our security measures, result in loss of confidential information, or disruptour information systems or business. Data incidents could result in interruptions, delays, loss, access, misappropriation, and disclosure or corruption of dataand could damage our reputation. In addition, data incidents could expose us and our customers to liability under privacy, security, and consumer protectionlaws, such as HIPAA, or litigation under these or other laws, including common law theories, and subject us to federal and state governmental inquiries orenforcement, especially if a large number of individuals are affected or if the compromised information is highly sensitive. Like many other organizations, wehave experienced data incidents from time to time in the course of our business and handled these incidents in accordance with our internal policies andunderstanding of the applicable laws.As cyber and other threats to confidential information continue to evolve, we may be required to expend significant additional resources to continue tomodify or enhance our protective measures or to investigate and remediate any security vulnerabilities. The occurrence of a data incident and the resultingpotential costs and liabilities could have an adverse effect on our financial position and results of operations and harm our business reputation. 16Table 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 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 and authorization to practice in a particular facility, and to maintain authorization to perform care covered by insurance providers. In someinstances, we rely on sources outside the Company for information that we use in our credentialing and privileging products. If errors or omissions occur thatinaccurately validate or invalidate the credentials of a provider, or improperly deny or authorize a provider to practice in a hospital or medical practice, theseerrors or omissions could result in litigation brought against us either by our customers, the provider, or other interested parties. For example, an importantelement in a malpractice case brought against a hospital or other provider could be the validation of proper credentialing for the provider, and any errors oromissions in our products that provide these services could subject us to claims. Further, a list of providers’ privileges may be made available to the generalpublic by hospitals and medical practices, and errors in credentialing and privileging may result in damage to the hospital, medical practice, or provider.Certain survey data will continue to be reported by us in relation to the Shared Contracts (as defined and described below), such as the survey data includedas 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 datacollection, survey sampling, or statistical reporting could result in reduced reimbursements to our hospital customers if we are unable to correct these errors orensure that they are corrected, and this could, in turn, result in litigation or claims against us. Further, this survey data reported to CMS is then published byCMS to the general public, and any errors we experience that result in incorrect scoring of our hospital customer may result in damage to that hospital’sreputation, 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 negativelyaffect our business.The non-renewal of our existing agreements with Laerdal could adversely affect our business and future results of operations.As previously announced, Laerdal Medical A/S, a Norwegian company (“Laerdal”), provided notice that, upon the December 31, 2018 expiration of ourexisting agreements with Laerdal regarding the HeartCode and Resuscitation Quality Improvement (RQI) products, Laerdal does not intend to continue theseexisting agreements or enter into new agreements with HealthStream in relation to such products. Our Joint Marketing and Licensing Agreements withLaerdal for HeartCode and for RQI, respectively, will expire on December 31, 2018.Revenues associated with the sales of HeartCode and RQI products have been significant in recent years, although margins on such products have been lowerthan HealthStream’s average margin. While we are in active negotiations to deliver resuscitation programs to our customers following the expiration of ouragreements with Laerdal, there is no assurance that we will be successful in these efforts. To the extent we are not successful in these efforts and newresuscitation programs do not generate revenue and/or earnings in a manner that supplants the impact of these Laerdal agreements, our revenue and results ofoperations will be adversely affected.There are certain risks associated with the sale of our Patient Experience business which was completed in February 2018.In February 2018, we completed the sale of our PX business to Press Ganey. As a result of this transaction, we are now highly dependent on the success of ourtwo remaining business segments, our workforce solutions segment and provider solutions segment. In addition, in connection with the sale of our PXbusiness to Press Ganey, we agreed to indemnify Press Ganey with respect to certain matters, including the breach of our representations, warranties andcovenants contained in the agreements related to this transaction. A material breach or inaccuracy of these representations, warranties and covenants in any ofthe agreements related to those transactions could lead to a claim against us, which could require us to pay substantial sums and incur related costs andexpenses.In addition, many of the customer contracts associated with the PX business were shared contracts (“Shared Contracts”) under which we provide services inconnection with our existing businesses and under which we previously (prior to the closing of the sale of our Patient Experience business) provided servicesin connection with the Patient Experience business. Under the terms of our agreement with Press Ganey, these Shared Contracts will be retained by us;however, Press Ganey will provide services to our customers under these Shared Contracts to the extent related to the Patient Experience business (and will beentitled to receive the benefit of payments made by our customers in connection therewith) until such time that Press Ganey obtains a replacement contractand/or an assignment with respect to the portion of the Shared Contract that relates to the Patient Experience business. As a result, if Press Ganey is unable tosatisfy its obligations under the Shared Contracts or if other issues arise in connection this arrangement, we could incur operational or reputational losses thatmay adversely affect our results of operations or business. Moreover, under the terms of our transition services agreement with Press Ganey, we will providecertain technology, financial and operational transitional services for a period of time following the closing (not to exceed one year). In connectiontherewith, we have certain obligations (including indemnification obligations) in respect of which we may incur additional expense or liability. 17Table of ContentsRisks 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 arerequired through contracts with our customers known as “business associate agreements” to protect the privacy and security of certain personal and healthrelated information. Further, government laws and regulations, such as the Affordable Care Act, that directly affect our customers, can have an indirect impacton our business.The rapidly evolving and uncertain regulatory and technology environment could require us to change how we do business or incur additional costs. It maybe difficult to predict how changes to these laws and regulations might affect our business. Our current and past privacy and security practices, including anybreaches of protected health information or other data, could be subject to review or other investigation by various state and federal regulatory authorities orcould become the 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 us to contractual penalties (including termination of our customer agreements), adversely affect our ability to retain clients and attract new clients,damage our reputation, or otherwise have a detrimental impact on our business.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 withpharmaceutical and medical device manufacturers and hospitals is predicated on our ability to maintain accreditation status with organizations such as theACCME, ANCC, and ACPE. The failure to maintain status as an accredited provider could have a detrimental effect on our business.We may be liable to third parties for content that is available from our online library.We may be liable to third parties for the content in our online library if the text, graphics, software, or other content in our library violates copyright,trademark, or other intellectual property rights, if our content partners violate their contractual obligations to others by providing content to our library, or ifthe content is inaccurate, incomplete, or does not conform to accepted standards of care in the healthcare profession. Further, we may be liable to thesecontent partners if we improperly release and lose control of their content stored on our platform either due to security issues or through improper release tocustomers who have not paid for access to this content. We attempt to minimize these types of liabilities by requiring representations and warranties relatingto our content partners’ ownership of the rights to distribute as well as the accuracy of their content. We also take necessary measures to review this contentourselves. Although our agreements with our content partners in most instances contain provisions providing for indemnification by the content providers inthe event of inaccurate content, our content partners may not have the financial resources to meet these indemnification obligations. Alleged liability couldharm our business by damaging our reputation, requiring us to incur legal costs in defense, exposing us to awards of damages and costs, and divertingmanagement’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, as well as the intellectual property rights of our strategic partners, a third party could, withoutauthorization, copy or otherwise misappropriate our content, information from our databases, or other intellectual property, including that of our third partystrategic partners. Our agreements with employees, consultants and others who participate in development activities could be breached and result in our tradesecrets becoming known. Alternatively, competitors and other third parties may independently develop or create content or systems that do not infringe ourintellectual property rights. We may not have adequate remedies for such breaches or protections against such competitor developments. In addition, the lawsof some foreign countries do not protect our proprietary rights to the same extent as the laws of the United States, and effective intellectual propertyprotection may not be available in those jurisdictions.Our business could be harmed if unauthorized parties infringe upon or misappropriate our intellectual property, proprietary systems, content, platform,services or other information, or the intellectual property of our strategic partners. Our efforts to protect our intellectual property through copyright,trademarks, and other controls, as well as our efforts to protect the intellectual property of our strategic partners, may not be adequate. For instance, we maynot be able to secure trademark or service mark registrations for marks in the United States or in foreign countries, or to secure patents for our proprietaryproducts and services, and even if we are successful in obtaining patent and/or trademark registrations, these registrations may be opposed or invalidated by athird party. We also have certain contractual obligations to protect the intellectual property of our strategic partners, and could be required to indemnify suchstrategic partners if we do not adequately provide such protections. 18Table of ContentsThere has been substantial litigation in the software services and technology industries regarding intellectual property assets, particularly patents. Thirdparties may claim infringement by us with respect to current and future products, trademarks or other proprietary rights, and we may counterclaim againstsuch third parties in such actions. Any such claims or counterclaims could be time-consuming, result in costly litigation, divert management’s attention,cause product release delays, require us to redesign our products, restrict our use of the intellectual property subject to such claim, or require us to enter intoroyalty or licensing agreements, any of which could have an adverse effect upon our business, financial condition, and operating results. Such royalty andlicensing agreements may not be available on terms acceptable to us, if at all.We may be liable for infringing the intellectual property rights of others.Our competitors may develop similar intellectual property, duplicate our products and/or services, or design around any patents or other intellectual propertyrights we hold. In the future, litigation may be necessary to enforce our intellectual property rights or to determine the validity and scope of the patents,intellectual property or other proprietary rights of third parties, which could be time consuming and costly and have an adverse effect on our business andfinancial condition. Intellectual property infringement claims could be made against us, especially as the number of our competitors grows. These claims,even if not meritorious, could be expensive and divert our attention from operating our company and result in a temporary inability to use the intellectualproperty subject to such claim. In addition, if we and/or our affiliates and customers become liable to third parties for infringing their intellectual propertyrights, we could be required to pay a substantial damage award and develop comparable non-infringing intellectual property, to obtain a license, or to ceaseproviding the content or services that contain the infringing intellectual property. We may be unable to develop non-infringing intellectual property orobtain a license on commercially reasonable terms, if at all.A variety of other state, national, foreign, and international laws and regulations apply to the collection, use, retention, protection, security, disclosure,transfer, and other processing of personal data. Many foreign data privacy regulations (including the General Data Protection Regulation (GDPR), whichbecomes effective in the European Union on May 25, 2018, and China’s new Cybersecurity Law) are more stringent than those in the United States. Theselaws and regulations are rapidly evolving and changing, and could have an adverse effect on our operations. Companies’ obligations and requirements underthese laws and regulations are subject to uncertainty in how they may be interpreted by government authorities and regulators. The costs of compliance with,and the other burdens imposed by, these and other laws or regulatory actions may increase our operational costs, prevent us from selling our products orservices, and/or affect our ability to invest in or jointly develop products. We may also face audits or investigations by one or more domestic or foreigngovernment agencies relating to our compliance with these regulations.The Tax Cuts and Jobs Act could significantly impact the Company.The Tax Cuts and Jobs Act of 2017 (“Tax Act”), which was signed into law on December 22, 2017, makes significant changes to the taxation of U.S. businessentities. These changes include a permanent reduction to the federal corporate income tax rate to 21 percent from 35 percent, among others. The Company iscurrently evaluating the Tax Act with its professional advisors; the full impact of the Tax Act on the Company in future periods cannot be determined at thistime and the Company provides no assurances in that regard.Item 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. Ourlease for approximately 73,000 square feet at this location expires in April 2019, at or near which time we expect to relocate our corporate headquarters tonearby space with approximately 66,000 square feet in Nashville, the lease for which we entered into in April 2017. As of December 31, 2017, we leased otherfacilities in Columbia, Maryland (such leased facility was included in the sale of our PX business); Nashville, Tennessee; Jericho, New York; Brentwood,Tennessee; San Diego, California; Chicago, Illinois; and Boulder, Colorado.Item 3. Legal ProceedingsNone.Item 4. Mine Safety DisclosuresNot applicable. 19Table 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 2017 2016 High Low High Low First Quarter $ 25.56 $ 21.45 $ 22.35 $ 18.20 Second Quarter 30.89 23.39 26.58 21.17 Third Quarter 26.39 22.50 27.65 23.73 Fourth Quarter 24.81 22.37 28.39 22.06 As of February 13, 2018, the Company had a total of 10,576 shareholders, including 547 registered holders and 10,029 beneficial holders.DIVIDEND POLICYWe declared a $1.00 per common share special cash dividend with the proceeds from the divestiture of the Patient Experience business segment payable onApril 3, 2018 to shareholders of record on March 6, 2018. We do not anticipate paying normal cash dividends in the future as we intend to retain earnings foruse in the operation of our business.See the table labeled “Securities Authorized for Issuance Under Equity Compensation Plans” to be contained in our 2018 Proxy Statement, incorporated byreference in Part III, Item 12 of this Annual Report on Form 10-K. 20Table 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, 2017, 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 12/31/12 in stock or index, including reinvestment of dividends. Fiscal year ending December 31.RECENT SALES OF UNREGISTERED SECURITIESNone.ISSUER PURCHASES OF EQUITY SECURITIESNone. 21Table of ContentsItem 6. Selected Financial DataThe selected statement of income and balance sheet data for the past five years is derived from our audited consolidated financial statements. You shouldread the following selected financial data in conjunction with our consolidated financial statements and the notes to those statements and “Management’sDiscussion and Analysis of Financial Condition and Results of Operations” located elsewhere in this report.In February 2018 HealthStream divested its PX business to Press Ganey. The results of operations for the PX business are included within the consolidatedstatement of income data set forth below.In addition, HealthStream acquired substantially all of the assets of Baptist Leadership Group on September 9, 2013, Health Care Compliance Strategies, Inc.on March 3, 2014, HealthLine Systems, Inc. on March 16, 2015, Performance Management Services, Inc. on June 30, 2016, Nursing Registry ConsultantsCorporation on July 25, 2016, and MAI on August 8, 2016. The results of operations for these acquired companies are included within our consolidatedstatement of income data effective from the respective date of acquisition. Revenues may be subject to fluctuations as discussed further in “Management’sDiscussion and Analysis of Financial Condition and Results of Operations” located elsewhere in this report. As a result of these factors, the annual resultspresented below are not comparable. The operating results for any single year are not necessarily indicative of the results to be expected in the future. Year Ended December 31, (in thousands, except per share data) 2017 2016 2015 2014 2013 STATEMENT OF INCOME DATA: Revenues, net $ 247,662 $ 225,974 $ 209,002 $ 170,690 $ 132,274 Total operating costs and expenses 237,862 220,407 195,445 154,315 117,608 Operating income 9,800 5,567 13,557 16,375 14,666 Net income $10,004 $3,755 $8,621 $10,394 $8,418 Net income per share – basic $0.31 $0.12 $0.29 $0.38 $0.31 Net income per share – diluted $0.31 $0.12 $0.28 $0.37 $0.30 Weighted average shares of common stock outstanding – basic 31,861 31,721 30,057 27,570 26,853 Weighted average shares of common stock outstanding – diluted 32,196 32,068 30,436 28,023 27,663 BALANCE SHEET DATA: Cash and cash equivalents $84,768 $49,634 $82,010 $81,995 $59,537 Marketable securities 46,350 53,540 66,976 38,973 48,659 Accounts receivable, net 40,849 44,805 36,348 33,167 25,314 Goodwill and intangible assets 179,114 188,129 139,039 56,709 44,616 Working capital 98,662 82,467 120,459 97,352 90,912 Total assets 411,074 396,000 379,569 257,262 212,594 Deferred revenue – current and noncurrent 75,256 76,401 69,448 57,373 38,168 Shareholders’ equity 300,170 286,108 280,320 167,859 149,433 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”and HealthStream’s Consolidated Financial Statements and related notes thereto included elsewhere in this report. This discussion contains forward-lookingstatements that involve risks and uncertainties. HealthStream’s actual results may differ significantly from the results discussed and those anticipated in theseforward-looking statements 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 and provider solutions for healthcare organizations—all designed to assess and develop the people thatdeliver 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. ProviderSolutions products are used by healthcare organizations for provider credentialing, privileging, call center, and enrollment needs. HealthStream’s customersinclude healthcare organizations, pharmaceutical and medical device companies, and other participants in the healthcare industry. 22Table of ContentsOn February 12, 2018, the Company divested its PX business to Press Ganey for $65.5 million in cash (subject to adjustment based on the working capital ofthe PX business at closing), of which $6.5 million will be held in escrow for a period of time following the disposition as a source of recovery forindemnification claims by Press Ganey. The sale of the PX business was effected by (i) the contribution by the Company of specified assets and certainliabilities used in the PX business to a newly-formed wholly-owned subsidiary of the Company, and (ii) immediately thereafter, the sale by the Company toPress Ganey of all of the outstanding equity interests such wholly-owned subsidiary. In connection with such contribution, the Company retained certainliabilities related to the PX business.Prior the disposition of the PX business, our Patient Experience Solutions products provided our customers information about patients’ experiences and howto improve them, workforce engagement, physician relations, and community perceptions of their services. Our results of operations for the years endedDecember 31, 2017, December 31, 2016 and December 31, 2015 presented in this Annual Report on Form 10-K include the results of the PX business.Beginning with the quarter ending March 31, 2018, the historical financial results of the PX business for periods prior to the closing of the disposition of thePX business will be reflected in the Company’s consolidated financial statements as discontinued operations. This sale of the PX business resulted in theCompany’s divestiture of the Company’s patient experience solutions business segment.HealthStream anticipates recording a pre-tax book gain in the first quarter of 2018 on the sale of its PX business between $34.0 million to $38.0 million. Withthe proceeds from this transaction, our Board of Directors declared a $1.00 per common share special cash dividend payable on April 3, 2018 to shareholdersof record on March 6, 2018. For additional information regarding the disposition of the PX business, including certain pro forma financial informationreflecting the disposition of the PX business, see our Current Report on Form 8-K filed on February 12, 2018.Revenues for the year ended December 31, 2017 were approximately $247.7 million compared to $226.0 million for the year ended December 31, 2016, anincrease of 10%. Operating income increased by 76% to $9.8 million for 2017, compared to $5.6 million for 2016. Net income increased by 166% to$10.0 million for 2017, compared to $3.8 million for 2016. Earnings per share (EPS) were $0.31 per share (diluted) for 2017 compared to $0.12 per share(diluted) for 2016. Revenues from HealthStream Workforce Solutions grew by 6%, or $10.0 million; revenues from HealthStream Patient ExperienceSolutions declined by 3%, or $1.1 million; and revenues from HealthStream Provider Solutions grew by 53%, or $12.8 million. As of December 31, 2017, theCompany had approximately 4.77 million total subscribers, of which approximately 4.65 million were fully implemented subscribers on its SaaS-basedplatform. As of December 31, 2017, cash and investment balances approximated $131.1 million, and the Company maintained full availability under its$50.0 million revolving credit facility.CRITICAL ACCOUNTING POLICIES AND ESTIMATESRevenue RecognitionRevenues are recognized from subscription-based workforce development products and content 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 whichthey subscribe. Subscription-based revenue is recognized ratably over the service period of the underlying contract. Implementation services revenue isdeferred until the subscription-based product is implemented, at which time revenues are recognized ratably over the subscription service period. All otherservice revenues are recognized as the related 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 thelicense of installed software products are recognized using the residual method upon delivery of the software when vendor specific objective evidence(VSOE) of fair value for the undelivered elements within the contract can be established. For installed software products, if the Company cannot objectivelydetermine the fair value of each undelivered element based on the VSOE of fair value, the Company defers revenue recognition until all elements aredelivered, all services have been performed, or until fair value can be objectively determined. Software support and maintenance revenues are recognizedratably over the term of the related agreement.Revenues from patient experience services are recognized when survey results are delivered to customers via either Internet-based reporting throughout thesurvey period or by providing final survey results once all services are complete. A significant portion of revenues for survey and reporting services that areprovided through the use of Internet-based reporting methodologies are recognized using the proportional performance method, reflecting recognitionthroughout the service period which corresponds with the survey cycle and reporting access by the customer, which typically ranges from one to five months.If survey results are delivered to the customer after all services have been completed, then the corresponding revenues are recognized in full in the periodsuch results are provided to the customer. Coaching and consulting revenues are generally recognized using the proportional performance method as theseservices are performed throughout the contract term. All other revenues are recognized as the related services are performed or products are delivered to thecustomer. Revenues for these services can be subject to seasonal factors based on customers’ requirements that can impact the timing, frequency, and volumeof survey cycles.Revenues from professional services primarily include consulting and content development services. Fees are based on the time and efforts involved, andrevenue is recognized upon completion of performance milestones using the proportional performance method. 23Table of ContentsThe Company offers training services for clients to facilitate integration of its software solutions. Fees for training are based on the time and efforts of thepersonnel involved. Training revenues are generally recognized upon completion of training services.In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606), which supersedes the revenue recognition requirementsin Topic 605, Revenue Recognition, and most industry-specific revenue recognition guidance throughout the Industry Topics of the Accounting StandardsCodification. The Company will adopt this standard using the modified retrospective approach effective January 1, 2018. For additional informationregarding the Company’s adoption of this standard and its potential impact on the Company, see “Recent Accounting Pronouncements” below under“Management’s Discussion and Analysis of Financial Condition and Results of Operations.”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 thetemporary differences between the financial statement and tax bases of assets and liabilities measured at tax rates that will be in effect for the year in whichthe differences are expected to affect taxable income. Management periodically assesses the realizability of its deferred tax assets, and to the extent that webelieve a recovery is not likely, we establish a valuation allowance to reduce the deferred tax asset to the amount we estimate will be recoverable. TheCompany maintains a valuation allowance of approximately $1.1 million for the portion of its deferred tax assets that are not more likely than not expectedto be realized.Software Development CostsCapitalized software development includes costs to develop and maintain our products and applications, including our SaaS-based workforce developmentplatform products and our survey reporting applications, which are accounted for as internal use software. For internal use software development, onceplanning is completed and the software development process begins, internal costs and payments to third parties associated with the software developmentefforts are capitalized 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 2017 and 2016, we capitalized approximately $12.5 million and $10.0 million, respectively, for software development. Such amounts are included inthe accompanying consolidated balance sheets under the caption “capitalized software development.” The Company amortizes capitalized softwaredevelopment costs over their expected life of three years using the straight-line method. Capitalized software development costs are subject to a periodicimpairment review in accordance with our impairment review policy. In connection with capitalized software development, significant estimates involve theassessment of the development period for new products and feature enhancements, as well as the expected useful life of underlying software, featureenhancements, or product created. Once capitalized, software development costs are subject to the policies and estimates described below regardinggoodwill, intangibles, and other long-lived assets.Goodwill, 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 reportingunit exceeds its carrying value. If this assessment concludes that is more likely than not that the fair value of a reporting unit exceeds its carrying value, thengoodwill is not considered impaired and no further impairment testing is required. Conversely, if the assessment concludes that it is more likely than not thatthe fair value of a reporting unit is less than its carrying value, a goodwill impairment test is performed to compare the fair value of the reporting unit to itscarrying value. The Company determines fair value of the reporting units using both income and market based models. Our models contain significantassumptions and accounting estimates about discount rates, future cash flows and terminal values that could materially affect our operating results orfinancial position if they were to change significantly in the future and could result in an impairment. We perform our goodwill impairment assessmentwhenever events or changes in facts or circumstances indicate that impairment may exist and also during the fourth quarter each year. Intangible assets andother long-lived assets are also reviewed for events or changes in facts and circumstances, both internally and externally, which may indicate an impairmentis present. We measure any impairment using observable market values or discounted future cash flows from the related long-lived assets. The cash flowestimates and discount rates incorporate management’s best estimates, using appropriate and customary assumptions and projections at the date ofevaluation.Allowance for Doubtful AccountsThe Company estimates the allowance for doubtful accounts using both a specific and non-specific identification method. Management’s evaluationincludes reviewing past due accounts on a case-by-case basis and determining whether an account should be reserved based on the facts and circumstancessurrounding each potentially uncollectible account. An allowance is also maintained for accounts not specifically identified that may become uncollectiblein the future. Uncollectible accounts are written-off in the period management believes it has exhausted every opportunity to collect payment from thecustomer. Bad debt expense is recorded when events or circumstances indicate an additional allowance is necessary based on our specific and non-specificidentification approach. Our allowance for doubtful accounts totaled approximately $2.2 million as of December 31, 2017.Stock Based CompensationThe Company recognizes compensation expense using a fair-value based method for costs related to share based payments including stock options andrestricted share units. Measurement of such compensation expense requires significant estimation and assumptions; however, we believe that the BlackScholes option pricing model used for calculating the fair value of our stock based compensation plans provides a reasonable measurement methodologyusing a framework that is widely adopted.As of December 31, 2017, the Company had three stock incentive plans under which awards were outstanding, which qualified as stock based compensationplans. During the years ended December 31, 2017, 2016, and 2015, approximately $1.9 million, $2.0 million, and 24Table of Contents$3.3 million of stock based compensation expense was recorded, respectively. The Company has historically granted equity based awards to both itsmanagement group and members of the Company’s board of directors on an annual basis under stockholder-approved plans, and expects to continueproviding equity awards to these groups for the foreseeable future. The Company also provides grants of equity based awards when new members of themanagement group begin their employment, or when new members join the Company’s board of directors. As of December 31, 2017, total futurecompensation cost related to non-vested awards not yet recognized was approximately $3.4 million net of estimated forfeitures, with a weighted averageexpense recognition period of 2.6 years. Future compensation expense recognition for new equity based award grants will vary depending on the timing andsize 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 varysignificantly from initial estimates.RESULTS 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 content subscriptions, competency and performance appraisal tools, implementationand consulting services, content development, online sales training courses, and a variety of other educational activities to serve professionals that workwithin healthcare organizations. Revenues for our HealthStream Patient Experience Solutions business segment (prior to our disposition of such business)consisted of quality and satisfaction surveys, data analyses of survey results, coaching/consulting services, and other research-based measurement toolsfocused on patients, employees, physicians, and other members of the community. Revenues for our HealthStream Provider Solutions business segmentconsist of proprietary software applications to help facilitate provider credentialing, privileging, call center, and enrollment administration for healthcareorganizations.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, andother direct expenses associated with revenues, as well as royalties paid by us to content providers based on a percentage of revenues. Personnel costs withincost of revenues are associated with individuals that facilitate product delivery; provide services; conduct, process, and manage customer surveys; handlecustomer support calls or inquiries; manage the technology infrastructure for our hosted applications; manage content and survey services; coordinatecontent 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 associatedwith the development of new software feature enhancements, new products, and costs associated with maintaining and developing our platform products.Personnel costs within product development include our systems, application development, quality assurance teams, product managers, and other personnelassociated with 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,Tennessee known as “Summit,” a significant portion of the costs of which are included in sales and marketing expenses. Personnel costs within sales andmarketing include our 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,and other operational expenses. Personnel costs within general and administrative expenses include individuals associated with normal corporate functions(accounting, legal, business development, human resources, administrative, internal information systems, and executive management).Depreciation and Amortization. Depreciation and amortization consist of fixed asset depreciation, amortization of intangibles considered to have definitelives, and amortization 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 investmentsin marketable securities. The primary component of other expense is interest expense related to our revolving credit facility. In addition, the income or lossattributed to equity method investments is included in this category. 25Table of Contents2017 Compared to 2016Revenues, net. Revenues increased approximately $21.7 million, or 10%, to $247.6 million for 2017 from $226.0 million for 2016. A comparison of revenuesby business segment is as follows (in thousands): Revenues by Business Segment: 2017 2016 PercentageChange Workforce Solutions $178,061 $168,040 6% Patient Experience Solutions 32,763 33,850 (3)% Provider Solutions 36,838 24,084 53% Total revenues, net $ 247,662 $ 225,974 10% % of Revenues Workforce Solutions 72% 74% Patient Experience Solutions 13% 15% Provider Solutions 15% 11% Revenues for HealthStream Workforce Solutions, which are primarily subscription-based, increased approximately $10.1 million, or 6%, to $178.1 millionfor 2017 from $168.0 million for 2016. Revenues in 2017 were positively influenced by growth in content subscriptions and our enterprise applications, butwere partially offset by an expected decline in ICD-10 readiness revenues. Revenues from ICD-10 readiness products declined by $7.6 million to $909,000 in2017 compared to $8.5 million in 2016. The requirement mandated by CMS for healthcare organizations to transition to the ICD-10 coding system waseffective in October 2015, and generated significant demand for our ICD-10 readiness training courseware from 2012 through 2015. However, as a result ofthe effectiveness of such mandate in October 2015, sales of that product have ceased and there will not be renewals of the specific ICD-10 readiness product.Implemented subscribers increased by 4% during 2017 to 4.65 million subscribers at the end of 2017 compared to 4.47 million subscribers at the end of2016. Additionally, total subscribers increased by 5%, with 4.77 million total subscribers at December 31, 2017 compared to 4.55 million total subscribers atDecember 31, 2016.Revenues for HealthStream Patient Experience Solutions decreased approximately $1.1 million, or 3%, to $32.8 million for 2017 from $33.9 million for2016. Revenues from Patient Insights™ surveys, our survey research product that generates recurring revenues, decreased by $386,000, or 1%, to$26.3 million for 2017 from $26.7 million for 2016. The decline in our patient survey revenues is partially due to changes in product mix, such as theadoption of our e-survey products, which have both lower revenue and cost per survey than our traditional phone survey products. Revenues from otherproducts, including surveys conducted on annual or bi-annual cycles and consulting/coaching services, collectively decreased by $701,000, or 10%,compared to 2016 due to fewer engagements compared to 2016.Revenues for HealthStream Provider Solutions increased approximately $12.8 million, or 53%, to $36.8 million for 2017 from $24.1 million for 2016.Revenues from the MAI acquisition, which was consummated in August 2016, accounted for $8.1 million of the increase in revenues during 2017. Revenuesfrom other provider solutions products accounted for the remaining $4.7 million increase in revenues in 2017.Cost of Revenues (excluding depreciation and amortization). Cost of revenues increased approximately $9.4 million, or 10%, to $106.0 million for 2017from $96.6 million for 2016. Cost of revenues as a percentage of revenues was approximately 43% of revenues for both 2017 and 2016.Cost of revenues for HealthStream Workforce Solutions increased approximately $7.9 million to $75.3 million and approximated 42% and 40% of revenuesfor HealthStream Workforce Solutions for 2017 and 2016, respectively. The increase in both amount and as a percentage of revenues is primarily associatedwith increased royalties paid by us resulting from growth in content subscription revenues and increased personnel costs. Cost of revenues for HealthStreamPatient Experience Solutions decreased approximately $2.9 million to $18.8 million and approximated 57% and 64% of revenues for HealthStream PatientExperience Solutions for 2017 and 2016, respectively. The decrease in both amount and as a percentage of revenue is primarily due to reductions inpersonnel costs and lower costs associated with declines in phone based survey volume compared to 2016. Cost of revenues for HealthStream ProviderSolutions increased approximately $4.3 million to $11.9 million and approximated 32% of HealthStream Provider Solutions revenues for both 2017 and2016. The increase in amount and as a percentage of revenue is primarily the result of the MAI acquisition and additions to personnel and increased hostingcosts.Product Development. Product development expenses decreased approximately $1.0 million, or 3%, to $27.9 million for 2017 from $28.9 million for 2016.Product development expenses as a percentage of revenues were approximately 11% and 13% of revenues for 2017 and 2016, respectively.Product development expenses for HealthStream Workforce Solutions decreased approximately $800,000 to $19.6 million and 26Table of Contentsapproximated 11% and 12% of revenues for HealthStream Workforce Solutions for 2017 and 2016, respectively. The decrease in amount and as a percentageof revenues is primarily due to lower outsourced labor expenses, but partially offset by an increase in personnel costs. Product development expenses forHealthStream Patient Experience Solutions decreased approximately $912,000 to $3.8 million and approximated 11% and 14% of revenues for HealthStreamPatient Experience Solutions for 2017 and 2016, respectively. The decrease in both amount and as a percentage of revenue is due to higher laborcapitalization for internal software development and lower outsourced labor costs, partially offset by an increase in personnel costs. Product developmentexpenses for HealthStream Provider Solutions increased approximately $714,000 to $4.5 million and approximated 12% and 16% of revenues forHealthStream Provider Solutions for 2017 and 2016, respectively. The increase in amount is primarily associated with the MAI acquisition and additions topersonnel over the year, but partially offset by higher labor capitalization for internal software development.Sales and Marketing. Sales and marketing expenses, including personnel costs, increased approximately $3.9 million, or 10%, to $42.9 million for 2017 from$39.0 million for 2016. Sales and marketing expenses were approximately 17% of revenues for both 2017 and 2016.Sales and marketing expenses for HealthStream Workforce Solutions increased approximately $2.9 million to $31.4 million and approximated 18% and 17%of revenues for HealthStream Workforce Solutions for 2017 and 2016, respectively. The increase in amount and as a percentage of revenues is primarily dueto additions to personnel and higher sales commissions compared to 2016. Sales and marketing expenses for HealthStream Patient Experience Solutionsincreased approximately $235,000 to $4.3 million and approximated 13% and 12% of revenues for HealthStream Patient Experience Solutions for 2017 and2016, respectively. The increase in both amount and as a percentage of revenues is primarily due to higher sales commissions compared to 2016. Sales andmarketing expenses for HealthStream Provider Solutions increased approximately $674,000 to $5.9 million and approximated 16% and 22% of revenues forHealthStream Provider Solutions for 2017 and 2016, respectively. The increase in amount is primarily the result of higher sales commissions resulting fromgrowth in sales. The unallocated corporate portion of sales and marketing expenses increased by $165,000 to $1.3 million over 2016 primarily due to higherpersonnel costs and increased marketing spending.Other General and Administrative Expenses. Other general and administrative expenses increased approximately $1.1 million, or 3%, to $34.8 million for2017 from $33.7 million for 2016. Other general and administrative expenses as a percentage of revenues were approximately 14% and 15% of revenues for2017 and 2016, respectively.Other general and administrative expenses for HealthStream Workforce Solutions increased approximately $2.1 million to $8.1 million and approximated 5%and 4% of revenues for HealthStream Workforce Solutions for 2017 and 2016, respectively. The increase in amount and as a percentage of revenues isprimarily due to higher facility costs and increases in technology infrastructure investments. Other general and administrative expenses for HealthStreamPatient Experience Solutions increased approximately $89,000 to $2.9 million and approximated 9% and 8% of revenues for HealthStream PatientExperience Solutions for 2017 and 2016, respectively. The increase in amount and as a percentage of revenues is due to an increase in general administrativeexpenses. Other general and administrative expenses for HealthStream Provider Solutions increased approximately $1.7 million to $5.5 million andapproximated 15% and 16% of revenues for HealthStream Provider Solutions for 2017 and 2016, respectively. The increase in amount is primarily associatedwith increased facility costs, contract labor, and higher bad debt expense. The unallocated corporate portion of other general and administrative expensesdecreased approximately $2.7 million to $18.2 million over 2016, primarily due to lower professional service expenses as a result of the implementation of anew financial systems platform and the MAI transaction during the prior year period, reductions to contract labor, and reductions of other generaladministrative expenses, but were partially offset by implementation costs for compliance with ASC 606.Depreciation and Amortization. Depreciation and amortization increased approximately $4.1 million, or 18%, to $26.3 million for 2017 from $22.2 millionfor 2016. The increase primarily resulted from amortization of capitalized software development, amortization of intangible assets from recent acquisitions,and depreciation expense associated with capital expenditures.Other Income (Expense), Net. Other income (expense), net was income of approximately $733,000 for 2017 compared to $581,000 for 2016. The increase isprimarily due to an increase in interest income from cash and investments in marketable securities.Income Tax Provision. The Company recorded a provision for income taxes of approximately $529,000 for 2017 compared to $2.4 million for 2016. TheCompany’s effective tax rate was approximately 5% for 2017 compared to approximately 39% for 2016. The decrease in income tax expense during 2017 isprimarily attributable to the enactment of the Tax Cuts and Jobs Act on December 22, 2017, which reduced the corporate federal income tax rate from 35% to21%. This change in tax law resulted in an income tax benefit of approximately $2.7 million during the fourth quarter of 2017 through the revaluation of ournet deferred tax liabilities.Net Income. Net income increased approximately $6.2 million, or 166%, to $10.0 million for 2017 compared to $3.8 million for 2016. The increase resultedfrom the factors mentioned above. Earnings per diluted share were $0.31 per share for 2017 compared to $0.12 per diluted share for 2016.Adjusted EBITDA (a non-GAAP financial measure which we define as net income before interest, income taxes, stock based compensation, and depreciationand amortization) increased approximately 27% to approximately $37.9 million for 2017 compared to $29.9 million for 2016. The increase resulted from thefactors mentioned above. See Reconciliation of Non-GAAP Financial Measures below for our reconciliation of this calculation to measures under US GAAP. 27Table of Contents2016 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 revenuesby business segment is as follows (in thousands): Revenues by Business Segment: 2016 2015 PercentageChange Workforce Solutions $168,040 $161,293 4% Patient Experience Solutions 33,850 34,189 (1)% Provider Solutions 24,084 13,520 78% Total revenues, net $ 225,974 $ 209,002 8% % of Revenues Workforce Solutions 74% 77% Patient Experience Solutions 15% 16% Provider Solutions 11% 7% Revenues for HealthStream Workforce Solutions, which are primarily subscription-based, increased approximately $6.7 million, or 4%, to $168.0 millioncompared to 2015. Revenues in 2016 were positively influenced by growth in courseware subscriptions and our enterprise applications, but were partiallyoffset by an expected decline in ICD-10 readiness revenues. Revenues from ICD-10 readiness products declined by $18.2 million to $8.5 million in 2016compared to $26.7 million in 2015. The requirement mandated by CMS for healthcare organizations to transition to the ICD-10 coding system was effectivein October 2015, and generated significant demand for our ICD-10 readiness training courseware from 2012 through 2015. However, as a result of theeffectiveness of such mandate in October 2015, sales of that product have ceased and there will not be renewals of the specific ICD-10 readiness product.Implemented subscribers decreased by less than 1% during 2016 to 4.47 million subscribers at the end of 2016 compared to 4.48 million subscribers at theend of 2015. Additionally, total subscribers decreased by less than 2%, with 4.55 million total subscribers at December 31, 2016 compared to 4.62 milliontotal subscribers at December 31, 2015.Revenues for HealthStream Patient Experience Solutions decreased approximately $343,000, or 1%, to $33.9 million compared to 2015. Revenues fromPatient Insights™ surveys, our survey research product that generates recurring revenues, decreased by $239,000, or 1% compared to 2015. The decline inour patient survey revenues is partially due to changes in product mix, such as the adoption of our e-survey products, which have both lower revenue andcost per survey than our traditional phone survey products. Revenues from other products, including surveys conducted on annual or bi-annual cycles andconsulting/coaching services, collectively decreased by $101,000, or 1%, compared to 2015.Revenues for HealthStream Provider Solutions increased approximately $10.6 million, or 78%, to $24.1 million compared to 2015. Revenues from both theHLS and MAI acquisitions, which were consummated in March 2015 and August 2016, respectively, accounted for the majority of the increase in revenuesduring 2016. Revenues from the MAI 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$89.4 million for 2015. Cost of revenues as a percentage of revenues was approximately 43% of revenues for both 2016 and 2015. Cost of revenues forHealthStream Workforce Solutions increased approximately $3.8 million to $67.4 million and approximated 40% and 39% of revenues for HealthStreamWorkforce Solutions for 2016 and 2015, respectively. The increase in both amount and as a percentage of revenues is primarily associated with increasedroyalties paid by us resulting from growth in courseware subscription revenues, increased personnel costs, and other support costs. The increase was partiallyoffset by a decrease in stock based compensation. Cost of revenues for HealthStream Patient Experience Solutions decreased approximately $697,000 to$21.7 million and approximated 64% and 65% of revenues for HealthStream Patient Experience Solutions for 2016 and 2015, respectively. The decrease inamount is primarily associated with lower personnel costs and stock based compensation. Cost of revenues for HealthStream Provider Solutions increasedapproximately $4.1 million to $7.6 million and approximated 32% and 26% of HealthStream Provider Solutions revenues for 2016 and 2015, respectively.The increase in amount and as a percentage of revenues is primarily the result of increased personnel and related costs, including additional personnel fromMAI.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 to $20.4 million and approximated 12% ofrevenues for HealthStream Workforce Solutions for both 2016 and 2015. The increase in amount is due to additional personnel expenses associated with newproduct development initiatives for our subscription-based products. This increase was partially offset by lower stock based compensation. Productdevelopment expenses for HealthStream Patient Experience Solutions 28Table of Contentsincreased approximately $2.3 million to $4.7 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 to $3.8 million andapproximated 16% and 18% of revenues for HealthStream Provider Solutions for 2016 and 2015, respectively. The increase in amount is primarily the resultof 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$35.6 million 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 to $28.6 million and approximated 17% ofrevenues for HealthStream Workforce 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 to$4.1 million and approximated 12% and 13% of revenues for HealthStream Patient Experience Solutions for 2016 and 2015, respectively. The decrease inboth amount and as a percentage of revenues is primarily due to reduced marketing personnel and related costs. Sales and marketing expenses forHealthStream Provider Solutions increased approximately $1.7 million to $5.2 million and approximated 22% and 26% of revenues for HealthStreamProvider Solutions for 2016 and 2015, respectively. The increase in amount is primarily the result of increased personnel costs, sales commissions, andmarketing spending. The unallocated corporate portion of sales and marketing expenses increased by $584,000 to $1.1 million primarily due to additionalmarketing personnel and related costs.Other General and Administrative Expenses. Other general and administrative expenses increased approximately $4.4 million, or 15%, to $33.7 million for2016 from $29.3 million for 2015. Other general and administrative expenses as a percentage of revenues were approximately 15% and 14% of revenues for2016 and 2015, respectively.Other general and administrative expenses for HealthStream Workforce Solutions increased approximately $1.4 million to $6.1 million over 2015 primarilyassociated with increased technology infrastructure investments. Other general and administrative expenses for HealthStream Patient Experience Solutionsincreased approximately $443,000 to $2.8 million over 2015 due to additional personnel and facility costs. Other general and administrative expenses forHealthStream Provider Solutions increased approximately $1.3 million to $3.8 million over 2015 primarily associated with increased personnel expenses andfacility costs, including costs associated with the MAI acquisition. The unallocated corporate portion of other general and administrative expenses increasedapproximately $1.3 million to $20.9 million over 2015, primarily associated with additional personnel and related costs, higher due diligence costs ofapproximately $260,000 to , and costs associated with the implementation of a new financial systems platform of approximately $600,000, which wassubstantially 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 millionfor 2015. The increase primarily resulted from amortization of capitalized software development, amortization of intangible assets from recent acquisitions(including amortization 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(see Note 5 in the Notes to Consolidated Financial Statements for further discussion), an increase in interest income from investments in marketablesecurities, and lower interest 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 resultedfrom the factors 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 depreciationand amortization) decreased approximately 12% to approximately $29.9 million for 2016 compared to $33.8 million for 2015. The decrease resulted from thefactors mentioned above. See Reconciliation of Non-GAAP Financial Measures below for our reconciliation of this calculation to measures under US GAAP. 29Table of ContentsOther DevelopmentsAs previously announced, Laerdal Medical A/S, a Norwegian company (“Laerdal”), provided notice that, upon the December 31, 2018 expiration of ourexisting agreements with Laerdal regarding the HeartCode and Resuscitation Quality Improvement (“RQI”) products, Laerdal does not intend to continuethese existing agreements or enter into new agreements with HealthStream in relation to such products. Our Joint Marketing and Licensing Agreements withLaerdal for HeartCode and for RQI, respectively, remain unaltered and continue in effect through December 31, 2018. Up to that expiration date, we retain theright to offer HeartCode and RQI licenses that extend through December 31, 2020. We retain exclusivity of RQI sales to our existing customer networkthrough the agreement expiration date of December 31, 2018 and are prohibited from selling substantially similar products to HeartCode and RQI during thattime.Revenues associated with the sales of HeartCode and RQI products have been significant in recent years, although margins on such products have been lowerthan HealthStream’s average margin. We are actively engaged in efforts to broaden the scope and utilization of our simulation-related offerings to include arange of clinical competencies that extend beyond resuscitation, and integrate with our platform in ways that HeartCode and RQI never have. We intend tobring to market a broadened scope of simulation-based offerings, including— following the December 31, 2018 expiration date of our agreements withLaerdal—resuscitation programs. We believe these efforts have the potential to give rise to additional and higher margin opportunities than currently existunder the Laerdal agreements for HeartCode and RQI, and will likely feature solutions with a lower price point than our current offerings. However, there isno assurance that we will be successful in these efforts, and to the extent that new simulation-based or other solutions do not generate revenue and/orearnings following the December 31, 2018 expiration date in a manner that supplants the impact of these agreements with Laerdal, our revenue and results ofoperations following this expiration date may be adversely affected.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 areused by management in analyzing the Company’s financial results and ongoing operational performance. These non-GAAP financial measures should not beconsidered as a substitute for, or superior to, measures of financial performance which are prepared in accordance with US GAAP and may be different fromnon-GAAP financial 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 operatingperformance of the Company because adjusted EBITDA reflects net income adjusted for certain non-cash and non-operating items. The Company believesthat adjusted EBITDA is also used by many investors and securities analysts to assess the Company’s results from current operations. Adjusted EBITDA is anon-GAAP financial measure and should not be considered as a measure of financial performance under US GAAP. Because adjusted EBITDA is not ameasurement determined in accordance with US GAAP, it is susceptible to varying calculations. Accordingly, adjusted EBITDA, as presented, may not becomparable to other similarly titled measures of other companies.The Company understands that, although adjusted EBITDA is frequently used by investors and securities analysts in their evaluation of companies, thismeasure has 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 reportedunder US GAAP.Management addresses these inherent limitations associated with using adjusted EBITDA through disclosure of such limitations, presentation of ourfinancial statements 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 2015 acquisition of HLS and the August 2016 acquisition of MAI, the Company has acquired businesses whose nettangible assets include deferred revenue. In accordance with GAAP reporting requirements, following the completion of any such acquisition, the Companymay record a write-down of deferred revenue to fair value as defined in GAAP. If the Company is required to record a write-down of deferred revenue, it mayresult 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 casereflects the corresponding GAAP figures adjusted to exclude the impact of the deferred revenue write-down associated with fair value accounting for acquiredbusinesses as referenced above. Management believes that the presentation of these non-GAAP financial measures assists investors in understanding theCompany’s performance between periods by excluding the impact of this deferred revenue write-down and provides a useful measure of the ongoingperformance of the Company. Both on a quarterly and year-to-date basis, the revenue for the acquired business is deferred and typically recognized over aone-to-two year period following the completion of any particular acquisition, so our GAAP revenues for this one-to-two year period will not reflect the fullamount of revenues that would have been reported if the acquired deferred revenue was not written down to fair value. A reconciliation of these non-GAAPfinancial measures to the corresponding GAAP measures is set forth below. 30Table of Contents 2017 2016 2015 GAAP net income $10,004 $3,755 $8,621 Interest income (870) (574) (401) Interest expense 131 102 188 Income tax provision 529 2,393 5,098 Stock based compensation expense 1,852 1,968 3,280 Depreciation and amortization 26,283 22,207 16,997 Adjusted EBITDA $ 37,929 $ 29,851 $ 33,783 GAAP operating income $9,800 $5,567 $13,557 Adjustment for deferred revenue write-down 1,621 3,838 6,822 Non-GAAP operating income $11,421 $9,405 $20,379 GAAP net income $10,004 $3,755 $8,621 Adjustment for deferred revenue write-down, net of tax 1,295 2,345 4,287 Non-GAAP net income $11,299 $6,100 $12,908 FINANCIAL OUTLOOK FOR 2018The Company provides projections and other forward-looking information in this “Financial Outlook for 2018” section within “Management’s Discussionand Analysis of Financial Condition and Results of Operations.” This section contains many forward-looking statements, particularly relating to theCompany’s future financial performance. These forward-looking statements are estimates based on information currently available to the Company, are madepursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 and are subject to the precautionary statements set forth in theintroduction in Part I of this Annual Report on Form 10-K and the risks and uncertainties described in Item 1A, Risk Factors and elsewhere in this document.Actual results are likely to differ, and in the past have differed, materially from those forecast by the Company, depending on the outcome of various factors,including, but not limited to, those set forth in Item 1A, Risk Factors.As noted above, the Company adopted the new revenue recognition standard (ASC 606), utilizing the modified retrospective approach effective January 1,2018, such that the Company will recognize revenue under this new standard for periods beginning on and after January 1, 2018, but will continue to reportresults for periods prior to January 1, 2018 under the old revenue recognition standard (ASC 605). To allow for comparability against 2017 results, thefinancial outlook below with respect to anticipated 2018 results does not include the impact of ASC 606 but instead has been determined utilizing the ASC605 revenue recognition standard.Beginning with our financial statements for the quarter ending March 31, 2018, the historical financial results of the PX business for periods prior to theclosing of this transaction will be reflected in the Company’s consolidated financial statements as discontinued operations. Accordingly, this financialoutlook does not include (a) the gain on the sale of our Patient Experience business, which we completed on February 12, 2018, or (b) the results of ourPatient Experience business during the period in 2018 prior to the sale of such business, or the results of our Patient Experience in 2017 for financial outlookcomparison purposes.For 2018 we anticipate that consolidated revenues will increase six to eight percent as compared to 2017. We anticipate that revenue growth in ourWorkforce Solutions segment will be in the four to six percent range and our Provider Solutions segment to grow 10 to 20 percent when compared to 2017.We anticipate operating income for 2018 to increase between 20 and 30 percent as compared to 2017.We anticipate that capital expenditures will be approximately $20 million during 2018. We expect the annual effective income tax rate to range between26 percent and 28 percent for 2018.This guidance does not include the impact of any acquisitions that we may complete during 2018. 31Table 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, 2017 and December 31,2016, 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 our opinion, includes all adjustments, consisting of only normal recurring adjustments, necessary for a fair presentation of the results of operations forthese periods. You should read this information in conjunction with HealthStream’s Consolidated Financial Statements and related notes thereto includedelsewhere 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. Patient experience revenues are impacted by seasonalfactors resulting from the volume, timing, and frequency of survey cycles. Quarter Ended March 31,2017 June 30,2017 September 30,2017 December 31,2017 (In thousands, except per share data) STATEMENT OF INCOME DATA: Revenues, net $59,870 $61,481 $63,553 $62,758 Total operating costs and expenses 58,037 58,626 59,571 61,629 Operating income 1,833 2,855 3,982 1,129 Net income $1,285 $2,266 $2,504 $3,948 Net income per share (1): Basic $0.04 $0.07 $0.08 $0.12 Diluted $0.04 $0.07 $0.08 $0.12 Weighted average shares of common stock outstanding: Basic 31,774 31,876 31,893 31,902 Diluted 32,104 32,229 32,217 32,236 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 Operating income (loss) 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 (1) – Due to the nature of interim earnings per share calculations, the sum of quarterly earnings per share amounts may not equal the reported earnings per share for the full year.Liquidity and Capital ResourcesNet cash provided by operating activities was approximately $46.7 million during 2017 compared to $24.2 million during 2016, an increase of 93%. Theprimary sources of cash were generated from receipts from the sales of our products and services. The number of days sales outstanding (DSO) was 63 days for2017 compared to 66 days for 2016. The Company calculates DSO by dividing the average accounts receivable balance (excluding unbilled and otherreceivables) by average daily revenues for the year. The Company’s primary sources of cash were receipts generated from the sales of our products andservices. The primary uses of cash to fund operations included personnel expenses, sales commissions, royalty payments, payments for contract labor andother direct expenses associated with delivery of our products and services, and general corporate expenses.Net cash used in investing activities was approximately $11.6 million during 2017 and $56.7 million during 2016. During 2017, the Company purchased$83.3 million of marketable securities, spent $11.9 million for capitalized software development, purchased $6.0 million of property and equipment, andinvested $500,000 in a cost method investee. These uses of cash were partially offset by maturities of marketable securities of $90.1 million. During 2016, theCompany utilized $55.3 million (net of cash acquired) for acquisitions, purchased $107.0 million of marketable securities, spent $9.7 million for capitalizedsoftware development, and purchased $5.1 million of property and equipment. These uses of cash were partially offset by maturities of marketable securitiesof $119.4 million and proceeds from the sale of long lived assets of $975,000. 32Table of ContentsCash provided by financing activities was approximately $1,000 during 2017 and $46,000 during 2016. During 2017, the primary source of cash fromfinancing activities resulted from $413,000 from the exercise of employee stock options. The primary use of cash during 2017 related to $412,000 forpayments of payroll taxes from stock based compensation arrangements. During 2016, the primary source of cash from financing activities resulted from$217,000 of excess tax benefits from equity awards and $145,000 from the exercise of employee stock options. The primary uses of cash during 2016 relatedto $316,000 for payments of payroll taxes from stock based compensation arrangements.Our balance sheet reflects positive working capital of $98.7 million at December 31, 2017 compared to $82.5 million at December 31, 2016. The increase inworking capital was primarily due to net cash provided by operating activities, partially offset by an increase in current liabilities. The Company’s primarysource of liquidity is $131.1 million of cash and cash equivalents and marketable securities. The Company also has a $50.0 million revolving credit facilityloan agreement, all of which was available at December 31, 2017.We believe that our existing cash and cash equivalents, marketable securities, cash generated from operations, and available borrowings under our revolvingcredit facility will be sufficient to meet anticipated working capital needs, new product development, and capital expenditures for at least the next 12months.The Company’s growth strategy includes acquiring businesses that provide complementary product and services. It is anticipated that future acquisitions, ifany, would be effected through cash consideration, stock consideration, or a combination of both. The issuance of our stock as consideration for anacquisition or to raise additional capital could have a dilutive effect on earnings per share and could adversely affect our stock price. The revolving creditfacility contains financial covenants and availability calculations designed to set a maximum leverage ratio of outstanding debt to consolidated EBITDA (asdefined in our credit facility) and an interest coverage ratio of consolidated EBITDA to interest expense. Therefore, the maximum borrowings against therevolving credit facility would be dependent on the covenant values at the time of borrowing. As of December 31, 2017, the Company was in materialcompliance with all covenants. There can be no assurance that amounts available for borrowing under our revolving credit facility will be sufficient toconsummate any possible acquisitions, and we cannot assure you that if we need additional financing that it will be available on terms favorable to us, or atall. Failure to generate sufficient cash flow from operations or raise additional capital when required in sufficient amounts and on terms acceptable to uscould 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 isdescribed further in Note 13 to the Company’s consolidated financial statements contained elsewhere in this report.The following table presents a summary of future anticipated payments due by the Company under contractual obligations with firm minimum commitmentsas of December 31, 2017, excluding amounts already recorded in the consolidated balance sheets (in thousands): Payments due by period Less than 1year 1-3 years 3-5 years More than 5years Total Operating leases $ 4,720 $ 7,415 $ 7,494 $ 20,361 $ 39,990 Purchase obligations 1,849 2,434 -- -- 4,283 Total $ 6,569 $ 9,849 $ 7,494 $ 20,361 $ 44,273 Recent Accounting PronouncementsIn May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606), which supersedes the revenue recognition requirementsin Topic 605, Revenue Recognition, and most industry-specific revenue recognition guidance throughout the Industry Topics of the Accounting StandardsCodification. The updated guidance states that an entity should recognize revenue to depict the transfer of promised goods or services to customers in anamount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The guidance also provides foradditional disclosures with respect to revenues and cash flows arising from contracts with customers. The standard will be effective for the first interim periodwithin annual reporting periods beginning after December 15, 2017, and the Company will adopt the standard using the modified retrospective approacheffective January 1, 2018. In preparation for adoption of the standard, the Company implemented internal controls and key system functionality to enable thepreparation of financial information and has reached conclusions on key accounting assessments related to the standard.The most significant impact of the standard relates to capitalizing costs to acquire contracts, which have historically been expensed as incurred. As ofDecember 31, 2017, the Company’s sales commission plans have included multiple payments, including initial payments in the period a customer contract isobtained and deferred payments either 15 or 27 months after the initial payment. Under the standard, only the initial payment is subject to capitalization asthe deferred payments require a substantive performance condition of the employee. These initial commission payments will be capitalized in the period acustomer contract is obtained and will be amortized consistent with the transfer of the goods or services to the customer over the expected period of benefit.The expected period of benefit is the contract term, except when the commission payment is expected to provide economic benefit to the Company for aperiod longer than the contract term, such as for new customer or incremental sales where renewals are expected and renewal commissions are notcommensurate with initial commissions. Such commissions will be amortized over the greater of contract term or technological obsolescence period when the 33Table of Contentsunderlying contracted products are technology-based, such as for the SaaS-based platforms, or the expected customer relationship period when theunderlying contracted products are not technology-based, such as for patient experience survey products.Additionally, the standard impacts several of the Company’s revenue streams. The primary streams affected are professional services and patient experiencesurveys. For professional services, the identification of performance obligations and the related timing of revenue recognition is changing such that revenueswill be recognized earlier, during the period of service delivery, rather than over the related product’s contractual term. For patient experience surveys,revenues will correlate to survey delivery, which approximates ratable recognition over the contractual term, rather than the current method of spreadingquarterly revenue over the five-month life cycle of the patient experience survey cycle.The Company will finalize its calculation of the financial impact of the adoption of this accounting standard on its future consolidated financial statementsin the first quarter of 2018. The Company anticipates adjustments to retained earnings of no more than $10 million and $16 million, net of related tax effects,upon adoption for revenue recognition and sales commissions, respectively. It is possible that the adoption of this standard could have an adverse impact onthe timing of our revenue recognition and thus adversely impact the amount of our revenue in a particular period.In January 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 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 fairvalue recognized in net income. The standard will be effective for the first interim period within annual reporting periods beginning after December 15, 2017,and early adoption is permitted for only limited aspects of such guidance. The Company plans to adopt this ASU on January 1, 2018, and is currentlyreviewing this standard to assess the impact on its future consolidated financial statements.In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), which requires lessees to recognize assets and liabilities for most leases. Therecognition, measurement and presentation of expenses and cash flows arising from a lease by a lessee is not expected to significantly change under suchguidance; however, the Company is currently reviewing this standard to assess the impact on its future consolidated financial statements. The standard willbe effective for the first interim period within annual reporting periods beginning after December 15, 2018, and early adoption is permitted. The Companyexpects to adopt this ASU on January 1, 2019, and is currently evaluating the impact that adoption of this ASU will have on its consolidated financialposition and results of operations.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, 2017, the Company had no outstanding debt. We may become subject to interest rate market risk associated with any future borrowings underour revolving credit facility. The interest rate under the revolving credit facility varies depending on the interest rate option selected by the Company plus amargin determined in accordance with a pricing grid. We are exposed to market risk with respect to our cash and investment balances, which approximated$131.1 million at December 31, 2017. Assuming a hypothetical 10% decrease in interest rates, interest income from cash and investments would decrease onan annualized basis by approximately $183,000.The Company’s investment policy and strategy is focused on investing in highly rated securities, with the objective of minimizing the potential risk ofprincipal loss. The Company’s policy limits the amount of credit exposure to any single issuer and sets limits on the average portfolio maturity.The above market risk discussion and the estimated amounts presented are forward-looking statements of market risk assuming the occurrence of certainadverse market conditions. Actual results in the future may differ materially from those projected as a result of actual developments in the market. 34Table 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 35Table of ContentsReport of Independent Registered Public Accounting FirmTo the Shareholders and the Board of Directors of HealthStream, Inc.Opinion on the Financial StatementsWe have audited the accompanying consolidated balance sheets of HealthStream, Inc. (the Company) as of December 31, 2017 and December 31, 2016, therelated consolidated statements of income, comprehensive income, shareholders’ equity, and cash flows for each of the three years in the period endedDecember 31, 2017, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financialstatements present fairly, in all material respects, the financial position of the Company at December 31, 2017 and 2016, and the results of its operations andits cash flows for each of the three years in the period ended December 31, 2017, in conformity with U.S. generally accepted accounting principles.We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’sinternal control over financial reporting as of December 31, 2017, based on criteria established in Internal Control-Integrated Framework issued by theCommittee of Sponsoring Organizations of the Treadway Commission (2013 framework) and our report dated February 26, 2018, expressed an unqualifiedopinion thereon.Basis for OpinionThese financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financialstatements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Companyin accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonableassurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing proceduresto assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks.Such procedures include examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also includedevaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financialstatements. We believe that our audits provide a reasonable basis for our opinion./s/ Ernst & Young LLP We have served as the Company’s auditor since 1998.Nashville, TennesseeFebruary 26, 2018 36Table of ContentsReport of Independent Registered Public Accounting FirmTo the Shareholders and the Board of Directors of HealthStream, Inc.Opinion on the Internal Control Over Financial ReportingWe have audited HealthStream, Inc.’s internal control over financial reporting as of December 31, 2017, 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). In ouropinion, HealthStream, Inc. (the Company) maintained, in all material respects, effective internal control over financial reporting as of December 31, 2017,based on the COSO criteria.We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidatedbalance sheets of HealthStream, Inc. as of December 31, 2017 and 2016, and the related consolidated statements of income, comprehensive income,shareholders’ equity, and cash flows for each of the three years in the period ended December 31, 2017, and the related notes and our report datedFebruary 26, 2018, expressed an unqualified opinion thereon.Basis for OpinionThe Company’s management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness ofinternal control over financial reporting included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Ourresponsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firmregistered with the PCAOB and are required to be independent with the respect to the Company in accordance with U.S. federal securities laws and theapplicable rules and regulations of the Securities and Exchange Commission and the PCAOB.We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonableassurance about whether effective internal control over financial reporting was maintained in all material respects.Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing andevaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considerednecessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.Definition and Limitations of Internal Control Over Financial ReportingA company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reportingand the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal controlover financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairlyreflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permitpreparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are beingmade 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 compliancewith the policies or procedures may deteriorate./s/ Ernst & Young LLPNashville, TennesseeFebruary 26, 2018 37Table of ContentsHEALTHSTREAM, INC.CONSOLIDATED BALANCE SHEETS(In thousands) December 31, December 31, 2017 2016 ASSETS Current assets: Cash and cash equivalents $84,768 $49,634 Marketable securities 46,350 53,540 Accounts receivable, net of allowance for doubtful accounts of $2,205 and $863 at December 31, 2017 and 2016, respectively 40,849 44,805 Accounts receivable - unbilled 2,602 2,581 Prepaid royalties, net of amortization 16,174 18,183 Other prepaid expenses and other current assets 8,985 8,694 Total current assets 199,728 177,437 Property and equipment, net of accumulated depreciation of $25,862 and $20,527 at December 31, 2017 and December 31, 2016,respectively 8,992 10,245 Capitalized software development, net of accumulated amortization of $41,884 and $31,787 at December 31, 2017 and 2016,respectively 18,697 16,310 Goodwill 110,298 109,765 Customer-related intangibles, net of accumulated amortization of $18,027 and $11,539 at December 31, 2017 and 2016, respectively 59,958 66,446 Other intangible assets, net of accumulated amortization of $7,966 and $4,906 at December 31, 2017 and 2016, respectively 8,858 11,918 Non-marketable equity investments 3,772 3,276 Other assets 771 603 Total assets $411,074 $396,000 LIABILITIES AND SHAREHOLDERS’ EQUITY Current liabilities: Accounts payable $4,836 $3,127 Accrued royalties 12,877 13,161 Accrued liabilities 11,062 8,146 Accrued compensation and related expenses 3,337 1,994 Deferred revenue 68,954 68,542 Total current liabilities 101,066 94,970 Deferred tax liabilities 1,926 5,968 Deferred revenue, noncurrent 6,302 7,859 Other long term liabilities 1,610 1,095 Commitments and contingencies - - Shareholders’ equity: Common stock, no par value, 75,000 shares authorized; 31,908 and 31,748 shares issued and outstanding at December 31, 2017and 2016, respectively 282,666 280,813 Retained earnings 17,542 5,346 Accumulated other comprehensive loss (38) (51) Total shareholders’ equity 300,170 286,108 Total liabilities and shareholders’ equity $411,074 $396,000 See accompanying notes to the consolidated financial statements. 38Table of ContentsHEALTHSTREAM, INC.CONSOLIDATED STATEMENTS OF INCOME(In thousands, except per share data) For the Year Ended December 31, 2017 2016 2015 Revenues, net $ 247,662 $ 225,974 $ 209,002 Operating costs and expenses: Cost of revenues (excluding depreciation and amortization) 106,000 96,634 89,386 Product development 27,899 28,897 24,214 Sales and marketing 42,915 39,004 35,589 Other general and administrative expenses 34,765 33,665 29,259 Depreciation and amortization 26,283 22,207 16,997 Total operating costs and expenses 237,862 220,407 195,445 Operating income 9,800 5,567 13,557 Other income, net 733 581 162 Income before income tax provision 10,533 6,148 13,719 Income tax provision 529 2,393 5,098 Net income $10,004 $3,755 $8,621 Net income per share: Basic $0.31 $0.12 $0.29 Diluted $0.31 $0.12 $0.28 Weighted average shares of common stock outstanding: Basic 31,861 31,721 30,057 Diluted 32,196 32,068 30,436 See accompanying notes to the consolidated financial statements. 39Table of ContentsHEALTHSTREAM, INC.CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME(In thousands) For the Year Ended December 31, 2017 2016 2015 Net income $10,004 $3,755 $8,621 Other comprehensive income, net of taxes: Unrealized gain (loss) on marketable securities 13 19 (33) Total other comprehensive income (loss) 13 19 (33) Comprehensive income $ 10,017 $ 3,774 $ 8,588 See accompanying notes to the consolidated financial statements. 40Table of ContentsHEALTHSTREAM, INC.CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY(In thousands) Retained Accumulated Earnings Other Total Common Stock (Accumulated Comprehensive Shareholders’ Shares Amount Deficit) Income (Loss) Equity 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) - - - - 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 for employee 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 - 1,968 - - 1,968 Tax benefits from equity awards - 217 - - 217 Common stock issued under stock plans, net of shares withheld for employeetaxes 101 (171) - - (171) Balance at December 31, 2016 31,748 280,813 5,346 (51) 286,108 Cumulative effect of accounting change - - 2,192 - 2,192 Net income - - 10,004 - 10,004 Comprehensive income - - - 13 13 Stock based compensation - 1,852 - - 1,852 Common stock issued under stock plans, net of shares withheld for employeetaxes 160 1 - - 1 Balance at December 31, 2017 31,908 $ 282,666 $ 17,542 $ (38) $ 300,170 See accompanying notes to the consolidated financial statements. 41Table of ContentsHEALTHSTREAM, INC.CONSOLIDATED STATEMENTS OF CASH FLOWS(In thousands) For the Year Ended December 31, 2017 2016 2015 OPERATING ACTIVITIES: Net income $10,004 $3,755 $8,621 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 26,283 22,207 16,997 Deferred income taxes (2,045) 1,786 392 Share based compensation expense 1,852 1,968 3,280 Excess tax benefits from equity awards - (217) (3,008) Provision for doubtful accounts 1,813 640 284 Loss (gain) on non-marketable equity investments 5 (121) 117 Gain on sale of long-lived assets - - (72) Loss on disposal of fixed assets 97 - - Other 408 1,026 1,401 Changes in assets and liabilities, net of business combinations: Accounts and unbilled receivables 1,125 (6,079) (736) Prepaid royalties 2,008 (4,008) (1,006) Other prepaid expenses and other current assets (225) (1,462) (1,372) Other assets (168) 305 1,110 Accounts payable 2,284 (1,319) (137) Accrued royalties (29) 3,691 (202) Accrued liabilities, accrued compensation and related expenses, and other long-term liabilities 4,106 (884) 3,075 Deferred revenue (806) 2,946 6,173 Net cash provided by operating activities 46,712 24,234 34,917 INVESTING ACTIVITIES: Business combinations, net of cash acquired - (55,255) (88,075) Proceeds from maturities of marketable securities 90,073 119,395 54,799 Purchases of marketable securities (83,279) (106,965) (84,228) Payments to acquire equity method investments - - (1,000) Payments to acquire cost method investments (500) - (1,000) Proceeds for sale of long-lived assets - 975 - Payments associated with capitalized software development (11,856) (9,721) (7,265) Purchases of property and equipment (6,017) (5,085) (8,094) Net cash used in investing activities (11,579) (56,656) (134,863) FINANCING ACTIVITIES: Proceeds from issuance of common stock - - 98,014 Proceeds from exercise of stock options 413 145 328 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 (412) (316) (756) Excess tax benefits from equity awards - 217 3,008 Payment of earn-outs related to business combinations - - (633) Net cash provided by financing activities 1 46 99,961 Net increase (decrease) in cash and cash equivalents 35,134 (32,376) 15 Cash and cash equivalents at beginning of year 49,634 82,010 81,995 Cash and cash equivalents at end of year $84,768 $49,634 $82,010 SUPPLEMENTAL CASH FLOW INFORMATION: Interest paid $101 $76 $190 Income taxes paid $638 $2,496 $2,648 NON-CASH INVESTING AND FINANCING ACTIVITIES: Receivable from sale of long-lived assets $- $- $975 See accompanying notes to the consolidated financial statements. 42Table 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. As of December 31,2017, the Company operated in three segments: HealthStream Workforce Solutions, HealthStream Patient Experience Solutions, and HealthStream ProviderSolutions. Workforce Solutions products consist of software-as-a-service (“SaaS”) based services and subscription-based solutions to meet the ongoingtraining, certification, assessment, and development needs of the healthcare community. These solutions provide, deliver, and track online education for ourcustomers in the United States through our SaaS model. Patient Experience products offer healthcare organizations a wide range of quality and satisfactionsurveys, consulting services, analyses of survey results, and other research-based services. Provider Solutions products offer healthcare organizations softwareapplications for administering and tracking provider credentialing, privileging, call center, and enrollment activities.Recently Adopted Accounting StandardsThe Company adopted the Financial Accounting Standards Board (“FASB”) Accounting Standards Update (“ASU”) 2016-09, Improvements to EmployeeShare-Based Payment Accounting, effective January 1, 2017. As a result of the adoption, the Company recorded an adjustment to retained earnings ofapproximately $2.2 million to recognize deferred tax assets associated with previous excess tax benefits on stock based compensation that had not beenpreviously recognized because the related tax deduction had not reduced income taxes payable. The Company elected to continue to estimate expectedforfeitures rather than account for them as they occur and to prospectively reflect the presentation of excess tax benefits on the statement of cash flows as anoperating activity. In addition, effective January 1, 2017, excess tax benefits or deficiencies from equity based awards is reflected in the statement of incomeas a component of the provision for income taxes.In January 2017, the FASB issued ASU 2017-04, Simplifying the Test for Goodwill Impairment, which simplifies the measurement of goodwill byeliminating Step 2 from the goodwill impairment test. With the elimination of Step 2, entities will measure goodwill for impairment by comparing the fairvalue of the reporting unit with its carrying amount. An impairment charge should be recognized for the amount by which the carrying amount exceeds thereporting unit’s fair value, only to the extent of the carrying value of goodwill allocated to that reporting unit. The Company elected to early adopt ASU2017-04 effective January 1, 2017 and is required to apply the new guidance on a prospective basis. The adoption is not expected to have a material effect onthe Company’s consolidated financial statements. The Company anticipates the new guidance will make the goodwill impairment evaluation process moreefficient and cost effective.Recognition of RevenueRevenues are derived from providing services through our SaaS-based workforce development platform products, courseware subscriptions, provision ofsurvey and research services, sales of software licensing arrangements, software maintenance and support, professional services, custom coursewaredevelopment, and other education and training services.The Company recognizes revenue when it is realized or realizable and earned. The Company considers revenue realized or realizable and earned whenpersuasive evidence of an arrangement exists, prices are fixed or determinable, services and products are provided to the customer and collectability isprobable or reasonably assured.Revenue recognized from software and other arrangements is allocated to each element of the arrangement based on the relative fair values of the elements.While elements include software products and post contract customer support, the fair value of each element is based on vendor specific objective evidence(“VSOE”). For installed software products, if fair value cannot be determined for each undelivered element of the arrangement, all revenue from thearrangement is deferred until fair value can be determined or until all elements of the arrangement are delivered and customer acceptance has occurred. Salesof the Company’s SaaS-based workforce development platform products include customer support, implementation services, and training; therefore allrevenues are deferred until the SaaS-based product is implemented, at which time revenues are recognized ratably over the subscription service period. In theevent that circumstances occur which give rise to uncertainty regarding the collectibility of contracted amounts, revenue recognition is suspended until suchuncertainty is resolved. Fees for these services are billed on either a monthly, quarterly, or annual basis.Revenues derived from the delivery of services through the Company’s SaaS-based workforce development platform products and courseware subscriptionsare recognized ratably over the term of the subscription service agreement or over the historical usage period, if usage typically differs from the subscriptionperiod. Training revenues are generally recognized upon the completion of training. 43Table of ContentsHEALTHSTREAM, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) Revenues derived from the license of installed software products are recognized using the residual method upon delivery of the software, when VSOE of fairvalue for the undelivered elements within the contract can be established. If the Company cannot objectively determine the fair value of each undeliveredelement based on the VSOE of fair value, the Company defers revenue recognition until all elements are delivered, all services have been performed, or untilfair value can be objectively determined. Software support and maintenance revenues are recognized ratably over the term of the related agreement.Revenues recognized from the Company’s survey and research services are determined using both the proportional performance method and the completedcontract method. Revenues are generally earned over the estimated survey cycle, which typically ranges from less than one month to up to five months. Thesurvey cycle is generally initiated based on the receipt of the first survey response and runs through provision of related survey reports to the customer. Ifsurvey results are not available to the customer during the survey fielding cycle, revenues are recognized at time of report delivery. Revenues for coachingand consulting engagements are recognized using the proportional performance method over the term of the underlying contract. Fees for survey services arebilled upon initiation of the survey cycle, with progress billings made throughout the survey cycle. Fees for coaching and consulting engagements are billedupon initiation of the engagement with progress billings throughout the term of the contract.Revenues from professional services and courseware development services are recognized upon the completion of performance milestones and deliverablesusing the proportional performance method. All other revenues are recognized as the related services are performed or products are delivered. Fees for theseservices are generally billed at project initiation and upon completion of various milestones.Principles of ConsolidationThe consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All intercompany accounts and transactionshave 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 coulddiffer from 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 otheraccumulated comprehensive income (loss) on the accompanying consolidated balance sheets. Realized gains and losses and declines in market value judgedto be other than temporary on investments in marketable securities are included in interest and other income on the accompanying consolidated statements ofincome. The cost of securities sold is based on the specific identification method. Interest and dividends on securities classified as available for sale areincluded in other income (expense) on the accompanying consolidated statements of income. Premiums and discounts are amortized over the life of therelated available for sale security as an adjustment to the 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 performancemethod for which invoices have not been generated or contractual billing dates have not been reached; and 2) the difference between billings for contractscontaining escalated pricing 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 inquarterly, bi-annual, or annual installments. Deferred revenue is reduced as services are provided and the revenue recognition criteria are met. 44Table of ContentsHEALTHSTREAM, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) Prepaid RoyaltiesPrepaid royalties represents advance payments associated with the sale of third party products, such as courseware subscriptions. Royalties are typically paidin advance at the commencement of the revenue cycle or periodically throughout the revenue cycle, such as quarterly, bi-annual, or annual installments.Royalty payments are amortized over the term of the underlying contracts, which generally range from 12 to 36 months, in order to match the direct royaltycosts to the same period the subscription revenue is recognized. Amortization of royalties is included under the caption “cost of revenues (excludingdepreciation and amortization)” in the accompanying consolidated statements of income.Allowance for Doubtful AccountsThe Company estimates its allowance for doubtful accounts using a specific identification method in which management considers the facts andcircumstances surrounding each potentially uncollectible receivable. An allowance is also maintained for accounts that are not specifically identified thatmay become uncollectible in the future. Uncollectible receivables are written-off in the period management believes it has exhausted every opportunity tocollect payment from the customer. Bad debt expense is recorded when events or circumstances indicate an additional allowance is required based on theCompany’s specific identification approach.Changes in the allowance for doubtful accounts and the amounts charged to bad debt expense for the years ended December 31 were as follows (inthousands): Allowance Balance atBeginning of Period Charged to Costs andExpenses Write-offs Allowance Balance atEnd of Period 2017 $ 863 $ 1,813 $ (471) $ 2,205 2016 $303 $640 $(80) $863 2015 $331 $284 $(312) $303 Capitalized Software DevelopmentCapitalized software development is stated on the basis of cost and is presented net of accumulated amortization. The Company capitalizes costs incurredduring the software development phase for projects when such costs are material. These assets are generally amortized using the straight-line method overthree years. The Company capitalized approximately $12.5 million and $10.0 million during 2017 and 2016, respectively. Amortization of capitalizedsoftware development was approximately $10.1 million, $7.7 million, and $6.2 million during 2017, 2016, and 2015, respectively. Maintenance andoperating costs are expensed as incurred. As of December 31, 2017 and 2016, there were no capitalized software development costs for external computersoftware 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 anorderly transaction between market participants at the measurement date. The fair value hierarchy prioritizes the inputs to valuation techniques used inmeasuring fair value. There are three levels to the fair value hierarchy based on the reliability of inputs, as follows:Level 1 – Observable inputs that reflect quoted prices (unadjusted) for identical assets or liabilities in active markets.Level 2 – Inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly.Level 3 – Unobservable inputs in which little or no market data exists, therefore requiring the Company to develop its own assumptions.The Company evaluates assets and liabilities subject to fair value measurements on a recurring basis to determine the appropriate level at which to classifythem for each reporting period. This determination requires significant judgments to be made by the Company. At December 31, 2017 and 2016, our assetsmeasured at fair value on a recurring basis consisted of marketable securities, which are classified as available for sale (see Note 4 – Marketable Securities).The Company did not have 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 estimateduseful lives, except for assets under capital leases and leasehold improvements, which are amortized over the shorter of the estimated useful life or theirrespective lease term. Years Furniture and fixtures 5 Equipment 3 45Table 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 ofour goodwill is evaluated for impairment at least annually during the fourth quarter and whenever events or changes in facts or circumstances indicate thatimpairment may exist. In accordance with ASC 350, Intangibles – Goodwill and Other, companies may opt to first assess qualitative factors to determinewhether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. A qualitative assessment includes factors such asfinancial performance, industry and market metrics, and other factors affecting the reporting unit. If this assessment concludes that it is more likely than notthat the fair value of a reporting unit exceeds its carrying value, then goodwill is not considered impaired and no further impairment testing is required.Conversely, if the qualitative assessment concludes that it is more likely than not that the fair value of a reporting unit is less than its carrying value, we mustthen compare the fair value of the reporting unit to its carrying value. The Company determines fair value of the reporting units using both income andmarket based models. These models require the use of various assumptions relating to cash flow projections, growth rates, discount rates and terminal valuecalculations. There were no goodwill impairments identified or recorded for the years ended December 31, 2017, 2016 or 2015.As of December 31, 2017, intangible assets include customer relationships, internally-developed technology and patents, non-competition agreements, andtrade names. These intangible assets are considered to have definite useful lives and are being amortized on a straight line basis over periods ranging betweenthree and thirteen years. The weighted average amortization period for definite lived intangible assets as of December 31, 2017 was 11.1 years. Intangibleassets are reviewed for impairment whenever events or changes in facts or circumstances indicate that the carrying amount of the assets may not berecoverable. There were no intangible asset impairments identified or recorded for the years ended December 31, 2017, 2016, or 2015.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 cashflows from the related long-lived assets. The cash flow estimates and discount rates incorporate management’s best estimates, using appropriate andcustomary assumptions and projections at the date of evaluation. Management periodically evaluates whether the carrying value of long-lived assets,including intangible assets, property and equipment, capitalized software development, and other assets will be recoverable. There were no long-lived assetimpairments identified or recorded for the years ended December 31, 2017, 2016, or 2015.Non-Marketable Equity InvestmentsNon-marketable equity investments are accounted for using the equity method when the Company can exercise significant influence over the investee.Investments for which the Company is not able to exercise significant influence over the investee are accounted for under the cost method. The proportionateshare of income or loss from equity method investments are recorded under the caption “other income, net” in the accompanying consolidated statements ofincome.Financial InstrumentsThe Company has various financial instruments, including cash and cash equivalents, accounts receivable, accounts receivable-unbilled, accounts payable,accrued liabilities, and deferred revenue. The carrying amounts of these financial instruments approximate fair value because of the short term maturity orshort term nature of such instruments. The Company also has marketable securities, which are recorded at approximate fair value based on quoted marketprices or alternative pricing sources (see Note 4 – Marketable Securities).AdvertisingThe Company expenses the costs of advertising as incurred. Advertising expense for the years ended December 31, 2017, 2016, and 2015 was approximately$1.0 million, $1.0 million, and $1.1 million, respectively.Shipping and Handling CostsShipping and handling costs that are associated with our products and services are included in cost of revenues. 46Table 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 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 thedifferences are expected to affect taxable income. Management evaluates all available evidence, both positive and negative, to determine whether, based onthe weight of that evidence, a valuation allowance is needed. Future realization of the tax benefit of an existing deductible temporary difference orcarryforward ultimately depends on the existence of sufficient taxable income of the appropriate character within the carryback or carryforward periodavailable under the tax law. There are four possible sources of taxable income that may be available under the tax law to realize a tax benefit for deductibletemporary differences and carryforwards: 1) future reversals of existing taxable temporary differences, 2) future taxable income exclusive of reversingtemporary differences and carryforwards, 3) taxable income in prior carryback year(s) if carryback is permitted under the tax law, and 4) tax-planningstrategies that would, if necessary, be implemented to realize deductible temporary differences or carryforwards prior to their expiration. Management reviewsthe realizability of its deferred tax assets each reporting period to identify whether any significant changes in circumstances or assumptions have occurredthat could materially affect the realizability of deferred tax assets. As of December 31, 2017, the Company had established a valuation allowance of$1.1 million for the portion of its net deferred tax assets that are not more likely than not expected to be realized.The Company accounts for income tax uncertainties using a more-likely-than-not recognition threshold based on the technical merits of the tax positiontaken. Tax positions that meet the more-likely-than-not recognition threshold are measured in order to determine the tax benefit to be recognized in thefinancial statements. The Company expenses any penalties or interest associated with tax obligations as general and administrative expenses and interestexpense, 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 ofcommon shares outstanding during the period. Diluted earnings per share is computed by dividing the net income for the period by the weighted averagenumber of common and common equivalent shares outstanding during the period. Common equivalent shares are composed of incremental common sharesissuable upon the exercise of stock options and restricted share units subject to vesting. The dilutive effect of common equivalent shares is included indiluted earnings per share by application of the treasury stock method. Common equivalent shares that have an anti-dilutive effect on diluted net income pershare have been excluded from the calculation of diluted weighted average shares outstanding for the years ended December 31, 2017, 2016, and 2015.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 temporaryexcess cash investments in high quality, short-term money market instruments. At times, such investments may be in excess of the FDIC insurance limits.Marketable securities consist 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. Credit evaluations of ourcustomers’ financial condition are performed on an ongoing basis, which generally require no collateral from customers. An allowance for doubtful accountsis maintained for potentially uncollectible accounts receivable. The Company did not have any single customer representing over 10% of net revenues oraccounts receivable during 2017, 2016, or 2015.Stock Based CompensationAs of December 31, 2017, the Company maintains three stock based compensation plans under which awards are outstanding, as 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 thedate of grant. Stock based compensation cost is measured at the grant date, based on the fair value of the award that is ultimately expected to vest, and isrecognized as an expense over the requisite service period. The Company recognizes tax benefits from stock based compensation if an excess tax benefit isrealized. Excess tax benefits are reflected in the statement of income as a component of the provision for income taxes when realized. 47Table of ContentsHEALTHSTREAM, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) Newly Issued Accounting StandardsIn May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606), which supersedes the revenue recognition requirementsin Topic 605, Revenue Recognition, and most industry-specific revenue recognition guidance throughout the Industry Topics of the Accounting StandardsCodification. The updated guidance states that an entity should recognize revenue to depict the transfer of promised goods or services to customers in anamount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The guidance also provides foradditional disclosures with respect to revenues and cash flows arising from contracts with customers. The standard will be effective for the first interim periodwithin annual reporting periods beginning after December 15, 2017, and the Company will adopt the standard using the modified retrospective approacheffective January 1, 2018. In preparation for adoption of the standard, the Company implemented internal controls and key system functionality to enable thepreparation of financial information and has reached conclusions on key accounting assessments related to the standard.The most significant impact of the standard relates to capitalizing costs to acquire contracts, which have historically been expensed as incurred. As ofDecember 31, 2017, the Company’s sales commission plans have included multiple payments, including initial payments in the period a customer contract isobtained and deferred payments either 15 or 27 months after the initial payment. Under the standard, only the initial payment is subject to capitalization asthe deferred payments require a substantive performance condition of the employee. These initial commission payments will be capitalized in the period acustomer contract is obtained and will be amortized consistent with the transfer of the goods or services to the customer over the expected period of benefit.The expected period of benefit is the contract term, except when the commission payment is expected to provide economic benefit to the Company for aperiod longer than the contract term, such as for new customer or incremental sales where renewals are expected and renewal commissions are notcommensurate with initial commissions. Such commissions will be amortized over the greater of contract term or technological obsolescence period when theunderlying contracted products are technology-based, such as for the SaaS-based platforms, or the expected customer relationship period when theunderlying contracted products are not technology-based, such as for patient experience survey products.Additionally, the standard impacts several of the Company’s revenue streams. The primary streams affected are professional services and patient experiencesurveys. For professional services, the identification of performance obligations and the related timing of revenue recognition is changing such that revenueswill be recognized earlier, during the period of service delivery, rather than over the related product’s contractual term. For patient experience surveys,revenues will correlate to survey delivery, which approximates ratable recognition over the contractual term, rather than the current method of spreadingquarterly revenue over the five-month life cycle of the patient experience survey cycle.The Company will finalize its calculation of the financial impact of the adoption of this accounting standard on its future consolidated financial statementsin the first quarter of 2018. The Company anticipates adjustments to retained earnings of no more than $10 million and $16 million, net of related tax effects,upon adoption for revenue recognition and sales commissions, respectively.In January 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 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 fairvalue recognized in net income. The standard will be effective for the first interim period within annual reporting periods beginning after December 15, 2017,and early adoption is permitted for only limited aspects of such guidance. The Company plans to adopt this ASU on January 1, 2018, and is currentlyreviewing this standard to assess the impact on its future consolidated financial statements.In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), which requires lessees to recognize assets and liabilities for most leases. Therecognition, measurement and presentation of expenses and cash flows arising from a lease by a lessee is not expected to significantly change under suchguidance; however, the Company is currently reviewing this standard to assess the impact on its future consolidated financial statements. The standard willbe effective for the first interim period within annual reporting periods beginning after December 15, 2018, and early adoption is permitted. The Companyexpects to adopt this ASU on January 1, 2019, and is currently evaluating the impact that adoption of this ASU will have on its consolidated financialposition and results of operations. 48Table of ContentsHEALTHSTREAM, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 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 31,2017 and 2016 was approximately 31.9 million and 31.7 million, respectively.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 vote or action of the shareholders.3. EARNINGS PER SHAREThe following table sets forth the computation of basic and diluted earnings per share for the three years ended December 31, 2017 (in thousands, except pershare amounts): 2017 2016 2015 Numerator: Net income $ 10,004 $ 3,755 $ 8,621 Denominator: Weighted-average shares outstanding 31,861 31,721 30,057 Effect of dilutive shares 335 347 379 Weighted-average diluted shares 32,196 32,068 30,436 Basic earnings per share $0.31 $0.12 $0.29 Diluted earnings per share $0.31 $0.12 $0.28 Potentially dilutive shares representing approximately 58,000, 38,000, and 16,000 shares of common stock for the years ended December 31, 2017, 2016,and 2015, respectively, were excluded from the calculation of diluted earnings per share because their effect would have been anti-dilutive.4. MARKETABLE SECURITIESAt December 31, 2017 and 2016, the fair value of marketable securities, which were all classified as available for sale, included the following (in thousands): December 31, 2017 Adjusted Cost UnrealizedGains UnrealizedLosses Fair Value Level 2: Corporate debt securities $41,900 $1 $(39) $41,862 Government-sponsored enterprise debt securities 4,488 1 (1) 4,488 Total $ 46,388 $ 2 $ (40) $ 46,350 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 The carrying amounts of the marketable securities reported in the consolidated balance sheets approximate fair value based on quoted market prices oralternative pricing sources and models utilizing market observable inputs. As of December 31, 2017, the Company does not consider any of its marketablesecurities to be other than temporarily impaired. During the years ended December 31, 2017 and 2016, the Company did not reclassify any items out ofaccumulated other comprehensive income to net income. All investments in marketable securities are classified as a current asset on the balance sheetbecause the underlying securities mature within one year from the balance sheet date. 49Table 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”), a Chicago, Illinois based company that provides credentialing and privileging software to healthcare organizations. The acquisition of MAI allowsthe Company to expand its credentialing and privileging product offerings and solutions to healthcare organizations. The consideration paid for MAIconsisted 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 orsimilar adjustment. The Company incurred approximately $953,000 in transaction costs, all of which were incurred during the year ended December 31,2016. The transaction costs were recorded in other general and administrative expenses in the consolidated statements of income. The results of operationsfor MAI have been included in the Company’s consolidated financial statements from the date of acquisition and are also included in the HealthStreamProvider 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 $2,406 Prepaid royalties and other prepaid assets 187 Property and equipment 75 Deferred tax assets 1,377 Goodwill 21,000 Intangible assets 27,400 Accounts payable and accrued liabilities (776) Deferred revenue (3,669) Net assets acquired $ 48,000 The excess purchase price over the fair values of net tangible and intangible assets was recorded as goodwill. The fair values of tangible and identifiableintangible assets, deferred revenue, and other liabilities assumed were based on management’s estimates and assumptions. The goodwill balance wasprimarily attributed to the assembled workforce, additional market opportunities from offering MAI’s products, and expected synergies from integrating MAIwith other products or other combined functional areas within the Company. During the three months ended September 30, 2017, the Company determinedthat a portion of the acquired accounts receivable required an adjustment to net realizable value and a portion of the assumed liabilities would not besatisfied and therefore recorded a measurement period adjustment, which on a net basis, increased goodwill by approximately $533,000. The measurementperiod adjustment has no effect on current period or prior period earnings. The goodwill balance, including the measurement period adjustment, is deductiblefor U.S. income tax purposes. The net tangible assets include deferred revenue, which was adjusted down from a book value at the acquisition date of$8.3 million to an estimated fair value of $3.7 million. The $4.6 million write-down of deferred revenue will result in lower revenues than would haveotherwise 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 50Table 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 to the 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, 2016 (in thousands, exceptper share data): Year EndedDecember 31, 2017 2016 Total revenues $ 248,942 $ 236,205 Net income $10,958 $6,610 Basic earnings per share $0.34 $0.21 Diluted earnings per share $0.34 $0.21 These unaudited pro forma combined results of operations include certain adjustments arising from the acquisition such as adjustment for amortization ofintangible assets, depreciation of property and equipment, and fair value adjustments of acquired deferred revenue balances. The unaudited pro formacombined results of operations is for informational purposes only and is not indicative of what the Company’s results of operations would have been had thetransaction occurred at the beginning 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, 2017 and 2016 combines the historical results of the Company and MAI forthe years ended December 31, 2017 and 2016 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 theCompany to provide a comprehensive solution set for healthcare provider credentialing, privileging, enrollment, referral, onboarding, and analytics insupport of HealthStream’s approach to talent management for healthcare organizations. The consideration paid for HLS consisted of approximately$90.5 million in cash (taking into account an estimated closing working capital adjustment and the payment of an incremental tax indemnification claim bythe Company as noted below). The Company incurred approximately $1.3 million in transaction costs associated with the acquisition, of which $965,000were incurred during the year ended December 31, 2015 and $329,000 were incurred during the year ended December 31, 2014. The transaction costs wererecorded in other general and administrative expenses in the consolidated statements of income for such periods. The results of operations for HLS have beenincluded in the Company’s consolidated financial statements from the date of acquisition, and are also included in the HealthStream Provider Solutionssegment.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 51Table 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 discussedbelow. 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 andidentifiable intangible assets, deferred tax assets, deferred revenue, and other liabilities are based on management’s estimates and assumptions. Included inthe assets and liabilities assumed is an estimated indemnification asset of $300,000 and a contingent liability of $700,000, both of which are associated withtax liabilities. The contingent liability is measured based on management’s estimate of a range of probable outcomes. The goodwill balance is primarilyattributed to the assembled workforce, additional market opportunities from offering HLS’s products, and expected synergies from integrating HLS with otherproducts or other combined functional areas within the Company. During the three months ended March 31, 2016, the Company received notice of anindemnification claim from the former owners of HLS pursuant to the terms of the membership interest purchase agreement. The terms of such agreementrequire the Company to indemnify such owners for incremental taxes incurred as the result of the structure of the acquisition, which had favorable tax aspectsto the Company. The Company recorded a measurement period adjustment in relation to the claim that increased goodwill by approximately $2.2 millionduring the three months ended March 31, 2016. The additional goodwill is deductible for U.S. income tax purposes. The goodwill balance excluding suchmeasurement period adjustment is also deductible for U.S. income tax purposes. During the three months ended September 30, 2016, the Company agreed tosettle this indemnification claim for approximately $2.4 million in respect of such tax indemnification provision in the membership interest purchaseagreement, a difference of approximately $200,000 from the $2.2 million measurement period adjustment. The Company surpassed the one year measurementperiod as of the period ended March 31, 2016; accordingly, in accordance with requisite accounting guidance, the $200,000 difference has been reflected asa charge against net income for the year ended December 31, 2016. The net tangible assets include deferred revenue, which was adjusted down from a bookvalue 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 lowerrevenues 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 loss of HLS included in the Company’s consolidated statement of income from the date of acquisition of March 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, exceptper share data): Year EndedDecember 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 ofintangible assets, depreciation of property and equipment, fair value adjustments of acquired deferred revenue balances, and interest expense associated withborrowings under a revolving credit facility by the Company to partially fund the acquisition. The unaudited pro forma combined results of operations is forinformational purposes only and is not indicative of what the Company’s results of operations would have been had the transaction occurred at the beginningof 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 HLS forthe years ended December 31, 2016 and 2015 and the pro forma adjustments listed above. 52Table of ContentsHEALTHSTREAM, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 5. BUSINESS COMBINATIONS (continued) Other Business CombinationsOn June 30, 2016, the Company acquired all of the stock of Performance Management Services, Inc. (“PMSI”), a Company based in Tustin, Californiafocused on competency-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 theacquisition as a business combination and has allocated the purchase consideration based on management’s estimates of fair value. The results of operationsfor PMSI are included in the Company’s consolidated financial statements from the date of acquisition and are included in the HealthStream WorkforceSolutions segment.On July 25, 2016, the Company purchased all of the outstanding stock of Nursing Registry Consultants Corporation (“Nurse Competency”) not previouslyheld by the Company for approximately $1.0 million in cash and up to an additional $75,000 in contingent consideration. Nurse Competency provides SaaS-based clinical assessment and testing products to the healthcare industry. The Company previously held a 32% minority equity interest in Nurse Competencyand had accounted for such interest as an equity method investment. The fair value of the minority equity interest as of the July 25, 2016 acquisition date wasapproximately $484,000 and was determined in accordance with the fair value of the controlling interest acquired with consideration given to acquisitionpremiums, where applicable. The Company recorded a gain of approximately $225,000 to account for the difference between the noted acquisition date fairvalue of the minority equity interest and the carrying value as of such date. The gain is included in other income (expense), net in the consolidated statementof income for the year ended December 31, 2016. The Company accounted for the acquisition as a business combination and has allocated the purchaseconsideration based on management’s estimates of fair value. The results of operations for Nurse Competency are included in the Company’s consolidatedfinancial statements from the date of acquisition and are included in the HealthStream Workforce Solutions segment.6. PROPERTY AND EQUIPMENTProperty and equipment consist of the following: December 31, 2017 2016 Equipment $25,396 $20,885 Leasehold improvements 5,291 5,025 Furniture and fixtures 4,167 4,862 Gross property and equipment 34,854 30,772 Accumulated depreciation and amortization (25,862) (20,527) Property and equipment, net $ 8,992 $ 10,245 Depreciation of property and equipment totaled approximately $6.6 million, $6.8 million, and $5.3 million for the years ended December 31, 2017, 2016,and 2015, respectively.7. GOODWILLThe changes in the carrying amount of goodwill for the years ended December 31, 2017 and 2016 are as follows (in thousands): Workforce PatientExperience Provider Total Balance at January 1, 2017 $16,381 $24,154 $69,230 $109,765 Acquisition of Morrisey Associates, Inc. - - 533 533 Balance at December 31, 2017 $16,381 $24,154 $69,763 $110,298 Workforce PatientExperience 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 During the three months ended September 30, 2017, the Company recorded approximately $533,000 of additional goodwill in relation to the August 2016acquisition of Morrisey Associates, Inc. Such amount relates to the measurement period adjustment previously mentioned in Note 5 under the caption“Morrisey Associates, Inc.” 53Table 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 include customer relationships and areamortized over their estimated useful lives ranging from five to thirteen years. Other intangible assets include non-competition agreements, technology andpatents, and trade names and are amortized over their estimated useful lives ranging from three to nine years. Amounts presented below as of December 31,2017 and December 31, 2016 are inclusive of identifiable intangible assets recorded in relation to our acquisitions of Morrisey Associates, Inc. andHealthLine Systems, LLC, as well as other business combinations (see Note 5 – Business Combinations). Amortization of intangible assets wasapproximately $9.5 million, $7.8 million, and $5.6 million for the years ended December 31, 2017, 2016, and 2015, respectively.Identifiable intangible assets are comprised of the following (in thousands): As of December 31, 2017 As of December 31, 2016 Gross Amount AccumulatedAmortization Net Gross Amount AccumulatedAmortization Net Customer related $77,985 $(18,027) $59,958 $77,985 $(11,539) $66,446 Other 16,824 (7,966) 8,858 16,824 (4,906) 11,918 Total $ 94,809 $ (25,993) $ 68,816 $ 94,809 $ (16,445) $ 78,364 The expected future annual amortization expense for the years ending December 31, is as follows (in thousands): 2018 $9,438 2019 8,792 2020 8,139 2021 7,356 2022 6,277 Thereafter 28,814 Total $ 68,816 9. BUSINESS SEGMENTSThe Company provides services to healthcare organizations and other members within the healthcare industry. The Company’s services are focused on thedelivery of workforce development products and services (“HealthStream Workforce Solutions”), survey and research services (“HealthStream PatientExperience 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 overheadexpenses, interest income, interest expense, gains and losses from equity investments, and depreciation. The Unallocated component below includescorporate functions, such as accounting, human resources, legal, investor relations, administrative and executive personnel, depreciation, a portion ofamortization, and certain other expenses, which are not currently allocated in measuring segment performance. The following is the Company’s businesssegment information as of and for the years ended December 31, 2017, 2016 and 2015 (in thousands). Revenues, net: 2017 2016 2015 Workforce Solutions $178,061 $168,040 $161,289 Patient Experience Solutions 32,763 33,850 34,193 Provider Solutions 36,838 24,084 13,520 Total revenues, net $ 247,662 $ 225,974 $ 209,002 Operating income: 2017 2016 2015 Workforce Solutions $33,579 $37,329 $39,986 Patient Experience Solutions 1,491 (522) 1,548 Provider Solutions 879 (2,443) (2,559) Unallocated (26,149) (28,797) (25,418) Total operating income $ 9,800 $ 5,567 $ 13,557 54Table of ContentsHEALTHSTREAM, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 9. BUSINESS SEGMENTS (continued) Assets * Purchases of long-lived assets Depreciation and amortization 2017 2016 2017 2016 2015 2017 2016 2015 Workforce Solutions $90,055 $96,323 $9,888 $9,266 $11,403 $9,982 $8,243 $6,693 Patient Experience Solutions 34,198 35,988 2,764 1,123 2,007 1,510 1,144 1,061 Provider Solutions 150,797 155,011 3,619 2,026 332 8,147 6,061 3,986 Unallocated 136,024 108,678 1,762 2,135 1,617 6,644 6,759 5,257 Total $411,074 $396,000 $ 18,033 $ 14,550 $ 15,359 $ 26,283 $ 22,207 $ 16,997 * 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. Cashand cash equivalents and marketable securities are not allocated to individual segments, and are included within Unallocated. A significant portion of property and equipment assets are included within Unallocated.10. INCOME TAXESThe provision (benefit) for income taxes is comprised of the following (in thousands): Year Ended December 31, 2017 2016 2015 Current federal $1,679 $(271) $3,608 Current state 895 877 1,098 Deferred federal (2,192) 1,489 501 Deferred state 147 298 (109) Provision for income taxes $ 529 $ 2,393 $ 5,098 A reconciliation of income taxes at the statutory federal income tax rate to the provision for income taxes included in the accompanying consolidatedstatements of income is as follows (in thousands): Year Ended December 31, 2017 2016 2015 Federal tax provision at the statutory rate $3,687 $2,152 $4,802 State income tax provision, net of federal benefit 424 539 673 Tax credits (583) (560) (425) Change in state valuation allowance 322 308 (8) Tax Act revaluation of deferred tax balances (2,685) - - Other (636) (46) 56 Provision for income taxes $ 529 $ 2,393 $ 5,098 Management periodically assesses the realizability of its deferred tax assets, and to the extent that a recovery is not likely, a valuation allowance isestablished to reduce the deferred tax asset to the amount estimated to be recoverable. At December 31, 2017, a valuation allowance of $1.1 million exists.As of December 31, 2017, the Company had state net operating loss carryforwards of $19.5 million. These loss carryforwards will expire in years 2018through 2027. The Company is subject to income taxation at the federal and various state levels. The Company is subject to U.S. federal tax examinations fortax years 2015 through 2017. Loss carryforwards and credit carryforwards generated or utilized in years earlier than 2015 are also subject to examination andadjustment. The Company has completed examinations with the Internal Revenue Service for tax years 2013 and 2014. The Company has research anddevelopment tax credit carryforwards of $2.3 million that expire in varying amounts through 2037. As of December 31, 2017, the Company had alternativeminimum tax credit carryforwards of $837,000 that are available to offset future regular tax liabilities and do not expire.On December 22, 2017, the President signed into law the Tax Cuts and Jobs Act (the “Tax Act”), reducing the U.S. corporate income tax rate to 21% effectiveJanuary 1, 2018. Under ASC 740, the effects of new legislation are recognized in the period that includes the date of enactment. The estimated impact as ofDecember 31, 2017 was to remeasure our deferred tax liability by $2.7 million, which has been reflected in our effective tax rate reconciliation. This impact isour most reasonable estimate at this time; however, we are still analyzing certain aspects of the Tax Act and refining our calculations, which could potentiallyimpact future taxable income. 55Table of ContentsHEALTHSTREAM, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 10. INCOME TAXES (continued) A reconciliation of the beginning and ending liability for gross unrecognized tax benefits at December 31, 2017 and 2016, are as follows (in thousands): December 31, 2017 2016 Balance at beginning of year $397 $658 Additions for tax positions in the current year 10 64 Reductions for tax positions of prior years (47) (325) Balance at end of year $ 360 $ 397 The Company recognized approximately $3,000 and $18,000 for interest and penalties related to unrecognized tax benefits within the provision for incometaxes during the years ended December 31, 2017 and 2016, respectively. Unrecognized tax benefits included tax positions of approximately $337,000 and$350,000 at December 31, 2017 and 2016, respectively, that if recognized would impact the Company’s effective tax rate. The reduction for tax positions ofprior years reflected in the table above as of December 31, 2017, relates to (a) an item considered to be effectively settled with the IRS, and (b) amendedreturns filed with the state of Wisconsin. The Company estimates that it is reasonably possible the liability for unrecognized tax benefits could decrease up to$23,000 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, 2017 2016 Deferred tax assets: Allowance for doubtful accounts $548 $332 Accrued liabilities 1,981 1,275 Tax credits 3,115 1,397 Stock based compensation 841 1,171 Deferred revenue 1,467 1,818 Depreciation 617 1,119 Basis difference on investments 327 316 Net operating loss carryforwards 1,015 743 Total deferred tax assets 9,911 8,171 Less: Valuation allowance (1,110) (654) Deferred tax assets, net of valuation allowance 8,801 7,517 Deferred tax liabilities: Deductible goodwill 2,917 3,267 Nondeductible intangible assets 1,330 2,523 Prepaid assets 1,881 1,894 Capitalized software development 4,599 5,801 Total deferred tax liabilities 10,727 13,485 Net deferred tax liabilities $(1,926) $(5,968) 56Table 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, the 2016 Plan, the 2010 Plan, and the 2000 Plan, referred to as the “Plan”) authorize the grant of options, restricted share units (“RSUs”), or otherforms of stock based compensation to employees, officers, directors, and others, and such grants must be approved by the Compensation Committee of theBoard of Directors. Options granted under the Plan have terms of no more than ten years, with certain restrictions. The Plan allows the CompensationCommittee of the Board of Directors to determine the vesting period and parameters of each grant. The vesting period of the options and RSUs granted hashistorically ranged from immediate vesting to annual vesting up to four years, generally beginning one year after the grant date. As of December 31, 2017,approximately 1.3 million shares of unissued common stock remained reserved for future stock incentive grants under the 2016 Plan. The Company issuesnew shares of common stock when options are exercised or when RSUs become vested.Stock Option ActivityA summary of activity and various other information relative to stock options for the year ended December 31, 2017 is presented in the tables below (inthousands, except exercise price). Weighted- Common Average Aggregate Shares Exercise Price Intrinsic Value Outstanding at beginning of period 476 $6.74 Granted - - Exercised (100) 4.13 Expired - - Forfeited - - Outstanding at end of period 376 $7.44 $5,912 Exercisable at end of period 376 $ 7.44 $ 5,912 The aggregate intrinsic value for stock options in the table above represents the total difference between the Company’s closing stock price on December 29,2017 (the last trading day of the year) of $23.16 per share and the option exercise price, multiplied by the number of in-the-money options as ofDecember 31, 2017. The weighted average remaining contractual term of options outstanding at December 31, 2017 was 0.9 years. Options exercisable atDecember 31, 2017 have a weighted average remaining contractual term of 0.9 years.Other information relative to option activity during the three years ended December 31, 2017 is as follows (in thousands): 2017 2016 2015 Total grant date fair value of stock options vested $- $- $232 Total intrinsic value of stock options exercised $1,973 $820 $1,662 Cash proceeds from exercise of stock options $ 413 $ 145 $ 328 Restricted Share Unit ActivityA summary of activity relative to RSUs for the year ended December 31, 2017 is as follows (in thousands, except weighted average grant date fair value): Weighted- Number of Average Aggregate RSU’s Grant Date Fair Value Intrinsic ValueOutstanding at beginning of period 253 $23.36 Granted 111 23.43 Vested (77) 24.21 Forfeited (28) 23.39 Outstanding at end of period 259 $ 23.13 $ 6,002 57Table of ContentsHEALTHSTREAM, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 11. STOCK BASED COMPENSATION (continued) The aggregate fair value of RSUs that vested during the year ended December 31, 2017 and 2016, as of the respective vesting dates, was approximately$1.9 million and $1.5 million, respectively. A portion of RSUs that vested in 2017 and 2016 were net-share settled such that the Company withheld shareswith value equivalent to the employees’ minimum statutory obligation for the applicable income and other employment taxes, and remitted the cash to theappropriate taxing authorities. The total shares withheld for RSUs during 2017 and 2016 were 17,122 and 15,373, respectively, and were based on the valueof the RSUs on their respective settlement dates as determined by the Company’s closing stock price. Total payments related to RSUs for the employees’ taxobligations to taxing authorities were approximately $412,000 in 2017, $316,000 in 2016, and $230,000 in 2015, and are reflected as a financing activitywithin the consolidated statements of cash flows. These net-share settlements had the effect of share repurchases by the Company as they reduced and retiredthe number of shares that would have otherwise been issued as a result of the vesting and did not represent an expense to the Company.Stock Based CompensationTotal stock based compensation expense, which is recorded in our consolidated statements of income, recorded for the years ended December 31, is asfollows (in thousands): Years Ended December 31, 2017 2016 2015 Cost of revenues (excluding depreciation and amortization) $76 $144 $824 Product development 258 178 569 Sales and marketing 240 239 547 Other general and administrative 1,278 1,407 1,340 Total stock based compensation expense $ 1,852 $ 1,968 $ 3,280 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, 2017, total unrecognized compensation expense related to non-vested stock options and RSUs wasapproximately $3.4 million, net of estimated forfeitures, with a weighted average expense recognition period remaining of 2.56 years. The Company realizedapproximately $426,000 of excess tax benefits related to stock based awards during the year ended December 31, 2017, which was reflected in the statementof income as a component of the provision for income taxes.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 notgrant any stock options during 2017, 2016, or 2015.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. Inconnection with this contribution, the Company approved the grant of 49,310 shares of HealthStream, Inc. common stock to over 600 employees who werenot otherwise eligible to receive equity awards and had at least one year of service with the Company. The Company recognized approximately $1.5 millionof stock based compensation expense for these stock awards during the three months ended June 30, 2015 based on the closing fair market value of theCompany’s stock on the date of the Company’s approval of these grants. In connection with these equity awards, effective in the second quarter of 2015, theCompany withheld shares with value equivalent to the employees’ minimum statutory obligation for the applicable income and other employment taxes, andremitted the cash to the appropriate taxing authorities. The total shares withheld were 17,279, and were based on the value of the stock awards on the date ofthe Company’s approval of these grants, as determined by the Company’s closing stock price on that date. Total payments related to the employees’ taxobligations to taxing authorities for these stock awards were approximately $526,000, and are reflected as a financing activity within the consolidatedstatements of cash flows for the year ended December 31, 2015. These share withholdings had the effect of share repurchases by the Company as they reducedand retired the number of shares otherwise issuable as a result of the stock awards and did not represent an expense to the Company. 58Table 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.Employees must have attained the age of 21 and have completed thirty days of service to be eligible to participate in the 401(k) Plan. Under the provisions ofthe 401(k) Plan, a plan member may make contributions, on a tax-deferred basis, subject to IRS limitations. The Company elected to provide eligibleemployees with matching contributions totaling approximately $909,000, $391,000, and $645,000 for the years ended December 31, 2017, 2016, and 2015,respectively.13. DEBTAt December 31, 2017 and 2016, the Company had no debt outstanding.Revolving Credit FacilityThe Company entered into a First Amendment to Revolving Credit Agreement (“Revolving Credit Facility”), amending the Revolving Credit Facility, datedas of November 24, 2014 with SunTrust Bank (“SunTrust”), extending the maturity date to November 24, 2018. Under the Revolving Credit Facility, theCompany may borrow up to $50.0 million, which includes a $5.0 million swing line sub-facility and a $5.0 million letter of credit sub-facility, as well as anaccordion feature that allows the Company to increase the Revolving Credit Facility by a total of up to $25.0 million, subject to securing additionalcommitments from existing lenders or new lending institutions. The obligations under the Revolving Credit Facility are guaranteed by each of theCompany’s subsidiaries. At the Company’s election, the borrowings under the Revolving Credit Facility bear interest at either (1) a rate per annum equal tothe 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 applicablemargin, or (2) the one, two, three, or six-month per annum LIBOR for deposits in the applicable currency (the “Eurocurrency Rate”), as selected by theCompany, plus an applicable margin. The applicable margin for Eurocurrency Rate loans depends on the Company’s funded debt leverage ratio and variesfrom 1.50% to 2.00%. The applicable margin for Base Rate loans depends on the Company’s funded debt leverage ratio and varies from 0.50% to 1.50%.Commitment fees and letter of credit fees are also payable under the Revolving Credit Facility. Principal is payable in full at maturity on November 24, 2018,and there are no scheduled principal payments prior to maturity. The Company is required to pay a commitment fee ranging between 20 and 30 basis pointsper 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, 2017, the Company was in material compliance with all covenants. There were no balances outstanding on the Revolving Credit Facilityas of December 31, 2017 and there were no borrowings under the Revolving Credit Facility during the year ended December 31, 2017.14. LEASESThe Company has non-cancellable operating leases primarily for office space and hosting facilities. Some lease agreements contain provisions for escalatingrent payments over the initial terms of the lease. The Company accounts for these leases by recognizing rent expense on a straight-line basis and adjustingthe 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. Total rent expense under all operating leases was approximately $7.6 million, $5.6 million, and$4.3 million, for the years ended December 31, 2017, 2016, and 2015, respectively. 59Table of ContentsHEALTHSTREAM, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 14. LEASES (continued) Future rental payment commitments at December 31, 2017 under non-cancelable operating leases, with initial terms of one year or more, are as follows (inthousands): 2018 $4,720 2019 3,495 2020 3,920 2021 3,750 2022 3,744 Thereafter 20,361 Total minimum lease payments $ 39,990 The Company subleases certain of its office space included above under non-cancellable leases and is due to receive future minimum rental payments ofapproximately $148,000 for the year ended December 31, 2018.15. COLLABORATIVE ARRANGEMENTThe Company participates in a collaborative arrangement, SimVenturesTM, with Laerdal Medical A/S (“Laerdal Medical”), which is ending effectiveMarch 1, 2018. The Company receives 50 percent of the profits or losses generated from this collaborative arrangement. The parties did not form a separatelegal entity as part of the collaborative arrangement; therefore, the Company accounts for SimVentures as a collaborative arrangement in accordance withapplicable accounting guidance. For the year ended December 31, 2017, the Company recorded approximately $2.2 million of revenues and $1.2 million ofexpenses related to the collaborative arrangement. For the year ended December 31, 2016, the Company recorded approximately $2.7 million of revenuesand $1.4 million of expenses related to the collaborative arrangement. For the year ended December 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 ispossible that the resolution of such matters might have a material adverse effect upon the financial condition and/or results of operations of the Company.However, in the opinion of the Company’s management, matters currently pending or threatened against the Company are not expected to have a materialadverse effect on the financial position or results of operations of the Company. 60Table of ContentsHEALTHSTREAM, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 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. Inconnection with this contribution, the Company approved the grant of 49,310 shares of common stock to over 600 employees, with a fair market value ofapproximately $1.5 million. Mr. Frist contributed 4,931 of the contributed shares noted above to take into account the estimated Company costs, such asadministrative expenses and employer payroll taxes associated with the grants (See Note 11).18. SUBSEQUENT EVENTSOn February 12, 2018, the Company divested its Patient Experience (“PX”) business to Press Ganey Associates (“Press Ganey”) for $65.5 million in cash(subject to adjustment based on the working capital of the PX business at closing), of which $6.5 million will be held in escrow for a period of time followingthe sale as a source of recovery for indemnification claims by Press Ganey. The sale of the PX business was effected by (i) the contribution by the Company ofspecified assets and certain liabilities used in the PX business to a newly-formed wholly-owned subsidiary of the Company, and (ii) immediately thereafter,the sale by the Company to Press Ganey of all of the outstanding equity interests such wholly-owned subsidiary. In connection with such contribution, theCompany retained certain liabilities related to the PX business.HealthStream anticipates recording a pre-tax book gain in the first quarter of 2018 on the sale of its PX business between $34.0 million to $38.0 million. Thissale of the PX business resulted in the Company’s complete divestiture of the Company’s patient experience solutions business segment. With the proceedsfrom this transaction, the Board of Directors declared a $1.00 per common share special cash dividend payable on April 3, 2018 to shareholders of record onMarch 6, 2018. 61Table 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 31,2017. Based on that evaluation, the chief executive officer and principal financial officer have concluded that HealthStream’s disclosure controls andprocedures were effective to ensure that the information required to be disclosed by the Company in the reports the Company files or submits under theExchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules andforms, and the information required to be disclosed in the reports the Company files or submits under the Exchange Act was accumulated and communicatedto the Company’s management, including its principal executive and principal financial officer, or persons performing similar functions, as appropriate toallow timely decisions regarding required disclosure.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) and15d-15(f) under the Exchange Act, and for assessing the effectiveness of internal control over financial reporting. The Company’s internal control overfinancial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements forexternal purposes in accordance with GAAP. The Company’s internal control over financial reporting includes those policies and procedures that: (1) pertainto the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company;(2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with GAAP, and thatreceipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and(3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the Company’s assets that couldhave 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 compliancewith the policies or procedures may deteriorate.Management assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2017. 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 theoperational effectiveness of our internal control over financial reporting. Management believes that, as of December 31, 2017, the Company’s internalcontrol over financial reporting was effective based on those criteria. The Company’s independent registered public accounting firm, Ernst & Young LLP, hasissued an audit report on the Company’s internal control over financial reporting, which appears in Item 8 of this Annual Report on Form 10-K.Changes in Internal Control over Financial ReportingThere were no changes in HealthStream’s internal control over financial reporting that occurred during the fourth quarter of 2017 that have materiallyaffected, or that are reasonably likely to materially affect, HealthStream’s internal control over financial reporting.Item 9B. Other InformationNone. 62Table 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 proxystatement for the 2018 Annual Meeting of Shareholders (2018 Proxy Statement) that we will file with the Securities and Exchange Commission within 120days of the end of the fiscal year to which this report relates. Pursuant to General Instruction G(3), certain information concerning executive officers of theCompany is included in Part I of 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 2018 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 2018 Proxy Statement.Item 13. Certain Relationships and Related Transactions, and Director IndependenceIncorporated by reference from the information to be contained in the Company’s 2018 Proxy Statement.Item 14. Principal Accounting Fees and ServicesIncorporated by reference from the information to be contained in the Company’s 2018 Proxy Statement. 63Table 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 thenotes thereto.(a)(3) Exhibits Number Description2.1 (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 ShareholdersRepresentative.2.2 (2) Stock Purchase Agreement, by and between Echo, Inc. and Morrisey Holdings, Inc., dated August 8, 2016.2.3 (16) Membership Interest Purchase Agreement, by and between HealthStream, Inc. and Press Ganey Associates, Inc., dated February 12, 2018.3.1* 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, 200010.2^ (6) 2010 Stock Incentive Plan, effective as of May 27, 201010.3^* Form of Indemnification Agreement10.4^ (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 Plan10.6^ (4) Form of HealthStream, Inc. Incentive Stock Option Agreement (Employees) under 2010 Stock Incentive Plan10.7^ (4) Form of HealthStream, Inc. Non-Qualified Stock Option Agreement (Directors) under 2010 Stock Incentive Plan10.8^ (5) Form of HealthStream, Inc. Restricted Share Unit Agreement (Officers) under 2010 Stock Incentive Plan10.9^ (5) Form of HealthStream, Inc. Restricted Share Unit Agreement (Non-Employee Director) under 2010 Stock Incentive Plan10.10 (7) Revolving Credit Agreement, dated November 24, 2014, by and among HealthStream, Inc., the several banks and other financialinstitutions and lenders from time to time party thereto and SunTrust Bank, as administrative agent, issuing bank, and swingline lender10.11^ Summary of Director and Executive Officer Compensation10.12^ (9) HealthStream, Inc. 2015 Cash Incentive Bonus Plan10.13 (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 Incentive Plan.10.19^ (12) Form of HealthStream, Inc. Restricted Share Unit Agreement (Cumulative) under 2016 Omnibus Plan between HealthStream, Inc. andMichael Sousa.10.20^ (13) Form of HealthStream, Inc. Restricted Share Unit Agreement (Officers) under 2016 Omnibus Incentive Plan.10.21^ (13) Form of HealthStream, Inc. Restricted Share Unit Agreement (Non-Employee Director) under 2016 Omnibus Incentive Plan.10.22 (14) Lease Agreement, dated April 3, 2017, by and between HealthStream, Inc. and Capitol View Joint Venture.10.23 (15) First Amendment to Revolving Credit Agreement, dated November 13, 2017, by and between HealthStream, Inc. and SunTrust Bank.21.1 Subsidiaries of HealthStream, Inc.23.1 Consent of Independent Registered Public Accounting Firm31.1 Certification of the Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 200231.2 Certification of the Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 200232.1 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 200232.2 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 Linkbase101.1 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 filedwith the SEC on April 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 withthe SEC on July 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, filedwith the SEC on October 30, 2015.(11) Incorporated by reference from exhibit filed on our Current Report on Form 8-K, dated May 26, 2016.(12) Incorporated by reference from exhibit filed on our Annual Report on Form 10-K, for the fiscal year ended December 31, 2016, filed with theSEC on February 27, 2017.(13) Incorporated by reference from exhibit filed on our Quarterly Report on Form 10-Q, for the quarterly period ended March 31, 2017, filedwith the SEC on May 1, 2017.(14) Incorporated by reference from exhibit filed on our Quarterly Report on Form 10-Q, for the quarterly period ended June 30, 2017, filed withthe SEC on July 31, 2017.(15) Incorporated by reference from exhibit filed on our Current Report on Form 8-K, dated November 14, 2017.(16) Incorporated by reference from exhibit filed on our Current Report on Form 8-K, dated February 12, 2018.Item 16. Form 10-K SummaryNone. 64Table 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 itsbehalf by the undersigned, thereunto duly authorized on this 26th day of February, 2018. HEALTHSTREAM, INC. By: /s/ ROBERT A. FRIST, JR. 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 inthe capacities and on the dates indicated: Signature Title(s) Date/s/ ROBERT A. FRIST, JR. President, Chief Executive Officer and February 26, 2018Robert A. Frist, Jr. Chairman (Principal Executive Officer) /s/ GERARD M. HAYDEN, JR. Chief Financial Officer and Senior Vice President February 26, 2018Gerard M. Hayden, Jr. (Principal Financial and Accounting Officer) /s/ THOMPSON DENT Director February 26, 2018Thompson Dent /s/ FRANK GORDON Director February 26, 2018Frank Gordon /s/ C. MARTIN HARRIS Director February 26, 2018C. Martin Harris /s/ JEFFREY L. MCLAREN Director February 26, 2018Jeffrey L. McLaren /s/ DALE POLLEY Director February 26, 2018Dale Polley /s/ LINDA REBROVICK Director February 26, 2018Linda Rebrovick /s/ MICHAEL SHMERLING Director February 26, 2018Michael Shmerling /s/ WILLIAM STEAD Director February 26, 2018William Stead /s/ DEBORAH TAYLOR TATE Director February 26, 2018Deborah Taylor Tate 65EXHIBIT 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.The following table sets forth current rates of cash compensation for the Company’s non-employee directors. For fiscal year 2018, each director will receivean annual retainer of $5,000, except for the Audit Committee Chair and Nominating and Corporate Governance Chair, who will receive an additional annualretainer of $7,500, and the Compensation Committee Chair, who will receive an additional annual retainer of $2,000. Non-employee directors will alsoreceive a $20,000 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 shareunits. The restricted share units are granted annually and vest ratably over a three year period.II. Executive Officer Compensation. The following table sets forth the current base salaries and fiscal 2017 performance bonuses provided to our executiveofficers, including the individuals who the Company expects to be its Named Executive Officers for 2017. Executive Officer Current Base Salary Fiscal 2017 Bonus Amount Robert A. Frist, Jr. $324,000 $97,000 J. Edward Pearson $306,000 $92,000 Michael Sousa $296,000 $- Gerard M. Hayden, Jr. $277,000 $83,000 Jeffrey S. Doster $274,000 $82,000 Jeffrey D. Cunningham $275,000 $38,000 Michael M. Collier $250,000 $49,000 Base salary adjustments for 2018, bonus targets for 2018 cash bonuses, and 2018 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 2018 Proxy Statement. EXHIBIT 21.1SUBSIDIARIES OF HEALTHSTREAM, INC. Names Under Which We Do Business State or Other Jurisdiction ofIncorporation orOrganizationData Management & Research, Inc.(1) TennesseeThe Jackson Organization, Research Consultants, Inc.(1) MarylandDecision Critical, Inc. TexasVerity, Inc., a HealthStream Company (f/k/a Echo, 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 (1)Data Management & Research, Inc. and The Jackson Organization, Research Consultants, Inc. were dissolved on February 8, 2018 andFebruary 9, 2018, respectively. 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 andEmployee Stock 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 26, 2018, with respect to the consolidated financial statements of HealthStream, Inc. and the effectiveness of internal controlover financial reporting of HealthStream, Inc., included in this Annual Report (Form 10-K) of HealthStream, Inc. for the year ended December 31, 2017. /s/ Ernst & Young LLPNashville, TennesseeFebruary 26, 2018 EXHIBIT 31.1CERTIFICATION I,Robert A. Frist, Jr., certify that: 1.I have reviewed this annual report on Form 10-K of HealthStream, Inc.; 2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make thestatements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects thefinancial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4.The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in ExchangeAct Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for theregistrant and have:a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, toensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within thoseentities, particularly during the period in which this report is being prepared;b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under oursupervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for externalpurposes in accordance with generally accepted accounting principles;c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about theeffectiveness of the disclosure 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 recentfiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materiallyaffect, the registrant’s internal control over financial reporting; and 5.The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to 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 reasonablylikely to adversely 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 controlover financial reporting. Date: February 26, 2018 /s/ ROBERT A. FRIST, JR. Robert A. Frist, Jr. Chief Executive Officer EXHIBIT 31.2CERTIFICATION I,Gerard M. Hayden, Jr., certify that: 1.I have reviewed this annual report on Form 10-K of HealthStream, Inc.; 2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make thestatements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects thefinancial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4.The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in ExchangeAct Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for theregistrant and have:a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, toensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within thoseentities, particularly during the period in which this report is being prepared;b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under oursupervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for externalpurposes in accordance with generally accepted accounting principles;c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about theeffectiveness of the disclosure 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 recentfiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materiallyaffect, the registrant’s internal control over financial reporting; and 5.The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to 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 reasonablylikely to adversely 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 controlover financial reporting. Date: February 26, 2018 /s/ GERARD M. HAYDEN, JR. 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, 2017, as filed with theSecurities and Exchange Commission on the date hereof (the “Report”), Robert A. Frist, Jr., Chief Executive Officer of the Company certifies, pursuant to 18U.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 theCompany. /s/ ROBERT A. FRIST, JR. Robert A. Frist, Jr.Chief Executive OfficerFebruary 26, 2018 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, 2017, as filed with theSecurities and Exchange Commission on the date hereof (the “Report”), Gerard M. Hayden, Jr., Chief Financial Officer of the Company certifies, pursuant to18 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 theCompany. /s/ GERARD M. HAYDEN, JR. Gerard M. Hayden, Jr.Chief Financial OfficerFebruary 26, 2018

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