Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
☒
☐
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2019
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
Commission File Number 000-27701
HEALTHSTREAM, INC.
(Exact name of registrant as specified in its charter)
Tennessee
(State or other jurisdiction of
incorporation or organization)
500 11th Avenue North, Suite 1000
Nashville, Tennessee
(Address of principal executive offices)
62-1443555
(I.R.S. Employer Identification No.)
37203
(Zip Code)
(615) 301-3100
(Registrant’s telephone number, including area code)
Securities Registered Pursuant To Section 12(b) Of The Act:
Title of each class
Common Stock (Par Value $0.00)
Trading Symbol(s)
HSTM
Name of each exchange on which registered
Nasdaq Global Select Market
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐ No ☒
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 of 15(d) of the Act. Yes ☐ No ☒
Securities Registered Pursuant To Section 12(g) Of The Act: None
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
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 financial accounting
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 the
Nasdaq Global Select Market on June 30, 2019 was $671.1 million. All executive officers and directors of the registrant have been deemed, solely for the purpose of the foregoing
calculation, to be “affiliates” of the registrant.
As of February 24, 2020, there were 32,379,741 shares of the Registrant’s common stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant’s definitive Proxy Statement for its 2020 Annual Meeting of Shareholders are incorporated by reference into Part III hereof.
Table of Contents
PART I
Item 1.
Item 1A.
Item 1B.
Item 2.
Item 3.
Item 4.
PART II
Item 5.
Item 6.
Item 7.
Item 7A.
Item 8.
Item 9.
Item 9A.
Item 9B.
PART III
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
PART IV
Item 15.
Item 16.
HEALTHSTREAM, INC.
TABLE OF CONTENTS
ANNUAL REPORT ON FORM 10-K
Business.
Risk Factors
Unresolved Staff Comments
Properties
Legal Proceedings
Mine Safety Disclosures
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Selected Financial Data.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Quantitative and Qualitative Disclosures About Market Risk.
Financial Statements and Supplementary Data.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Controls and Procedures
Other Information
Directors, Executive Officers and Corporate Governance
Executive Compensation
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Certain Relationships and Related Transactions, and Director Independence
Principal Accounting Fees and Services
Exhibits, Financial Statement Schedules
Form 10-K Summary
Signatures
Page
1
10
22
22
22
22
23
25
26
36
37
66
66
66
67
67
67
67
67
68
69
70
Table of Contents
PART I
This Annual Report on Form 10-K contains forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934. Such forward-
looking statements include, among others, those statements including the words “expects,” “anticipates,” “intends,” “believes,” “may,” “will,” “should,” “continue,”
and similar language or the negative of such terms or other comparable terminology. Forward-looking statements involve known and unknown risks, uncertainties,
and other factors that may cause our actual results, performance, or achievements to be materially different from future results, performance, or achievements
expressed or implied by the forward-looking statements included herein. Factors that might cause or contribute to such differences include, but are not limited to,
those discussed in the section Risk Factors in Item 1A of this Annual Report on Form 10-K and elsewhere in this document. In addition, factors that we are not
currently aware of, or that we currently deem immaterial, could harm our future operating results. You should carefully review the risks described in other documents
HealthStream files from time to time with the Securities and Exchange Commission. You are cautioned not to place undue reliance on forward-looking statements,
which speak only as of the date of this Annual Report on Form 10-K. HealthStream undertakes no obligation to publicly release any revisions to the forward-looking
statements to reflect future events or circumstances after the date of this document.
Item 1. Business
OVERVIEW AND HISTORY
HealthStream, Inc. (HealthStream or the Company) provides workforce and provider solutions for healthcare organizations—all designed to support the people that
deliver patient care, which in turn, supports the improvement of business and clinical outcomes. Delivered primarily as Software-as-a-Service (SaaS), our solutions
focus on some of the most significant challenges facing the healthcare workforce and healthcare organizations today, including the need to effectively manage, retain,
engage, and develop healthcare workforce talent; meet rigorous compliance requirements; and efficiently manage ongoing medical staff credentialing and privileging
processes.
With approximately 30 years of experience, HealthStream is recognized as a leading innovator and thought leader in the healthcare industry for its healthcare
workforce solutions. Using technology to enhance learning and productivity, HealthStream pioneered the delivery of online learning for hospitals’ required regulatory
training as Internet-based training was first introduced. Stemming from that early success, demand for expanded learning solutions led the Company to build what is
now a full ecosystem of diverse workforce and clinical-focused applications, courseware, assessments, and talent management programs.
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 solutions support the
recruiting, retaining, engaging, assessing, developing, credentialing, and privileging of the healthcare workforce, including medical staff who provide patient care in
our customers’ organizations.
Headquartered in Nashville, Tennessee, the Company was incorporated in 1990 and began providing its SaaS-based workforce solutions in 1999 and its provider
solutions in 2012. Including additional offices in Nashville, Tennessee; Jericho, New York; San Diego, California; Chicago, Illinois; Denver, Colorado; and Boulder,
Colorado, HealthStream had 849 full-time and 27 part-time employees as of December 31, 2019.
INDUSTRY BACKGROUND
According to the Centers for Medicare & Medicaid Services (CMS), spending in the healthcare industry reached over $3.6 trillion in 2018, or 17.7% of the U.S. gross
domestic product. Hospital care expenditures in 2018 accounted for approximately 32.7% of the $3.6 trillion industry. According to the Bureau of Labor Statistics, as
of January 2020, approximately 20.1 million professionals are employed in the healthcare segment of the domestic economy, with approximately 5.2 million
employed in acute-care hospitals and, according to CMS, approximately 5.3 million employed in healthcare organizations throughout the continuum of care, the
primary target markets for our products. (Organizations in the continuum of care employ approximately 1.5 million employees in ambulatory centers, approximately
3.5 million employees in post-acute care facilities, and approximately 300,000 employees in health & human services facilities.)
All of the approximately 5.2 million hospital-based healthcare professionals that work in the nation’s approximately 4,700 acute-care, critical access, and children’s
hospitals that are registered with Medicare are required by federal and state mandates and accrediting bodies to complete training in a number of areas. This training
includes safety training mandated by both the Occupational Safety and Health Administration (OSHA) and The Joint Commission (an independent, not-for-profit
organization that accredits and certifies healthcare organizations and programs in the United States), as well as
1
Table of Contents
training on patient information confidentiality required under the Health Insurance Portability and Accountability Act (HIPAA).
In hospitals, staffing issues and personnel shortages have also contributed to the need for facility-based workforce development as well as additional assessment and
competency-based training. An ongoing nursing shortage, for example, is resulting in skill gaps and rising costs. By 2028, more than 371,000 new Registered Nurse
(RN) jobs are projected to be added to the workforce from 2018, surging from approximately 3.06 million jobs in 2018 to a projected 3.43 million jobs, according to
the U.S. Bureau of Labor Statistics. We believe that offering training and education for hospital personnel is increasingly being utilized as a retention and recruitment
incentive.
Many healthcare professionals use continuing education to keep abreast of the latest developments as well as meet licensing and certification requirements.
Continuing education is required for nurses, emergency medical services personnel, first responder personnel, radiologic personnel, and physicians. Pharmaceutical
and medical device companies must also provide their medical industry sales representatives with training mandated for the healthcare industry and training for new
products. Such companies also provide support and content for education and training of audiences that use their products in healthcare organizations.
The healthcare education and training industry is highly fragmented, varies significantly in delivery methods (i.e., online products, live events, written materials, and
technology-enabled manikins for simulation-based training), and is composed of a wide variety of entities competing for customers. The sheer volume of healthcare
information available to satisfy continuing education needs, rapid advances in medical developments, and the time constraints that healthcare professionals face can
make it difficult to quickly and efficiently access the continuing education content most relevant to an individual’s practice or profession. Historically, healthcare
professionals have received continuing education and training through offline publications, such as medical journals or by attending conferences and seminars. In
addition, other healthcare workers and pharmaceutical and medical device manufacturers’ sales and internal regulatory personnel usually fulfill their training from
external vendors or internal training departments. While these approaches satisfy the ongoing education and training requirements, they are typically costly and
inconvenient. In addition, live courses are often limited in the breadth of offerings and do not provide a method for tracking training completion. The results of these
traditional methods, both from a business and compliance standpoint, are difficult to track and measure.
Provider data management has become more complex and arduous for healthcare organizations. Spurred by The Joint Commission Medical Staff standards and other
regulatory requirements, credentialing and privileging has been transformed from a periodic review to continuous, evidence-driven analysis of professional
competency and provider performance. This transformation requires ongoing, automatic monitoring of licenses, sanctions, and exclusions, as well 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 to complete.
Finally, the hospital industry continues to operate under intense pressure to reduce costs as a result of potential reductions in government reimbursement rates and
increased focus on cost containment consistent with participation of patients in managed care programs, among other factors. In addition, many hospitals, as well as
pharmaceutical and medical device companies, may continue to experience rising operating costs, coupled with increased pressure to measure and report on the
outcomes of the dollars spent on training. Our products and services are designed to meet these needs by reducing healthcare organizations’ costs of training while
improving learning outcomes, enhancing reporting capabilities, and supporting customers’ business objectives.
HEALTHSTREAM’S SOLUTIONS
During the year ended December 31, 2019, HealthStream’s products, services, and operations were organized into two business segments—Workforce Solutions and
Provider Solutions—that collectively help healthcare organizations meet their ongoing clinical development, talent management, training, education, assessment,
competency management, compliance, provider credentialing & privileging management, and provider enrollment needs. HealthStream’s solutions are provided to a
wide range of customers within the healthcare industry across the continuum of care.
On February 12, 2018, the Company divested its Patient Experience (PX) business to Press Ganey for $65.2 million in cash (after giving effect to the post-closing
working capital adjustment). This sale of the PX business resulted in the divestiture of the Company’s patient experience solutions segment.
2
Table of Contents
HealthStream Workforce Solutions — Our workforce development solutions, which are comprised primarily of SaaS, subscription-based products, are used by
healthcare organizations to meet a broad range of their clinical development, talent management, training, certification, competency assessment, performance
appraisal, and additional needs. Our numerous content libraries allow customers to subscribe to a wide array of courseware, which includes content from leading
healthcare and nursing associations, medical and healthcare publishers, and other content providers. Additionally, medical device companies and other industry
partners offer online training support through HealthStream’s platform for their products.
HealthStream’s SaaS-based platform has long been one of the most widely adopted workforce development platforms in healthcare. To facilitate innovation and
growth of our ecosystem, HealthStream’s new platform technology, hStream™, was launched in 2018. hStream is the essential technology working behind the scenes
that powers activity in the HealthStream ecosystem. The Company’s existing and new customers are gradually upgrading to the hStream platform, which is, all
together, anticipated to be a multi-year transition for HealthStream. At December 31, 2019, HealthStream had contracts with customers for approximately 3.15 million
subscriptions to hStream, which included an addition of 1.64 million in 2019 alone. The transition to the hStream platform supports our strategic advancement toward
a Platform-as-a-Service (PaaS) approach.
Pricing for hStream and HealthStream’s workforce applications is primarily subscription-based, with fees based on the number of subscriptions, solutions provided,
and other factors. We offer training, implementation, and account management services to facilitate adoption of our subscription-based solutions. Fees for training are
based on the time and efforts of the personnel involved. Implementation fees vary based on the size, scope, and complexity of the project. Our platform and
subscription-based solutions are hosted on a combination of private-cloud infrastructure and public-cloud infrastructure, leveraging Amazon Web Services and Azure,
which allows authorized personnel access to our services through the Internet, thereby eliminating the need for onsite local implementations of installed workforce
development products.
Other Applications on our Platform — HealthStream offers an array of other applications on our platform, each serving a unique function for hospitals and health
systems. Each application on our platform has its own value. Examples of individual applications that are offered on our platform include applications for learning,
performance appraisal, compensation management, succession planning, competency management, disclosure management, clinical development, simulation-based
education, quality management, and industry training.
HealthStream Provider Solutions – Our provider solutions are offered through our business segment that is branded in the marketplace as VerityStream. VerityStream
delivers enterprise-class solutions to transform the healthcare provider experience for healthcare organizations and providers. We currently serve approximately 2,500
hospitals and 1,300 outpatient facilities, including ambulatory surgery centers, urgent care facilities, clinics, medical groups, and more. VerityStream resulted from the
combination of Sy.Med Development Inc. (acquired in October 2012), HealthLine Systems (acquired in February 2015), Morrisey Associates, Inc. (acquired in
August 2016), and CredentialMyDoc (acquired in December 2019). As of December 31, 2019, VerityStream had 256 employees with headquarters in Boulder,
Colorado and satellite offices in San Diego, California and Chicago, Illinois, as well as employees located in the Nashville, Tennessee corporate office.
Our legacy products include EchoCredentialing™ and MSOW™, comprehensive platforms that manage medical staff credentialing and privileging processes for
hospitals; EchoOneApp™, a provider enrollment platform for medical groups; CredentialMyDoc™, a SaaS solution to credential providers, enroll providers with
payers for reimbursement, and apply and maintain privileges, especially in ambulatory care settings; and EchoAccess™, our enterprise class platform to support
hospital call centers with physician referral and provider directories functionalities.
In January 2018, we announced the launch of our SaaS-based provider credentialing, privileging, and enrollment solution - Verity, which was rebranded in 2019 as
VerityStream. As a SaaS-solution, VerityStream includes an intuitive, modern user experience that delivers a continual stream of platform enhancements, evidence-
based content, and curated data. A subscription to this infrastructure provides healthcare organizations with tools to support the provider lifecycle from recruiting,
application submission, verification of licensure and other credentials, privileging, appointments by credentialing committees, enrollment, network management,
onboarding, and performance evaluation of providers. As of December 31, 2019, more than 200 healthcare organizations had contracted for the VerityStream SaaS
platform.
BUSINESS ACQUISITIONS
We acquired Providigm, LLC in January 2019, and we acquired substantially all the assets of CredentialMyDoc in December 2019. For additional information
regarding acquisitions, please see Note 8 of the Consolidated Financial Statements and Item 7, Management’s Discussion and Analysis of Financial Condition and
Results of Operations, included elsewhere in this report.
3
Table of Contents
CUSTOMERS
We provide our solutions to customers across a broad range of entities within the healthcare industry, including private, not-for-profit, and government entities, as well
as pharmaceutical and medical device companies. We derive a substantial portion of our revenues from a relatively small number of customers, although no single
customer represented more than 10 percent of our revenues during 2019, 2018, or 2017. Customers that have purchased or contracted for products and services from
HealthStream include CHRISTUS Health; HCA Holdings, Inc.; Community Health Systems, Inc.; McLaren Health Care Corporation; Infirmary Health, and Sutter
Health.
SALES AND MARKETING
We market our products and services primarily through our direct sales teams, which are based out of our various office locations as well as remote home office
locations. As of December 31, 2019, our Workforce Solutions sales personnel consisted of 143 employees who carried sales quotas, and our Provider Solutions sales
personnel consisted of 34 employees who carried sales quotas.
We conduct a variety of marketing programs to promote our products and services, including product catalogs, user groups, trade shows, internet promotion and
demonstrations, telemarketing campaigns, public relations, distribution of product-specific literature, direct mail, advertising, and in partnership with third parties. We
have marketing teams that are responsible for these initiatives and for working with and supporting our product management and sales teams. At December 31, 2019,
our marketing personnel consisted of 29 employees.
OPERATIONS AND TECHNOLOGY
We believe our ability to establish and maintain long-term customer relationships, obtain recurring sales, and develop and maintain new and existing products are
dependent on the strength of our operations, customer service, product development and maintenance, training, and other support teams. As of December 31, 2019,
our Workforce Solutions operations team consisted of 367 employees associated with customer support, implementation services, training, product management,
software development and quality assurance, and project management; and our Provider Solutions operations team consisted of 214 employees associated with
implementation services, training, data integration, product management, software development and quality assurance, credentials verification, consulting, and other
functions.
Our services are designed to be reliable, secure, and scalable. Our software is a combination of proprietary and commercially available software and operating
systems. Our software solutions support hosting and management of content, publication of our websites, execution of courseware, registration and tracking of users,
tracking and reporting of physician credentialing and provider enrollment information, and reporting of information for both internal and external use. We designed
the platforms that provide our services to allow each component to be independently scaled by adding commercially available hardware and a combination of
commercially available and proprietary software components.
Our software applications, servers, and network infrastructure that deliver our services are hosted by a combination of third-party data center providers and cloud-
based infrastructure. We maintain fully redundant disaster recovery data centers which are located in geographically separate locations. Our technology equipment is
maintained in secure, limited access environments, supported by redundant power, environmental conditioning, and network connectivity, and we follow industry best
practices for backup and disaster recovery. Company personnel monitor all servers, networks, and systems on a continuous basis, and we employ enterprise firewall
systems and data abstraction to protect our databases, customer information, and courseware library from unauthorized access.
COMPETITION
In addition to the competing healthcare education delivery methods in the industry, we also have direct competitors. In our Workforce Solutions business segment, a
number of companies offer competitive learning management products and talent management modules to the healthcare industry. We compete with companies such
as Cornerstone OnDemand, Healthcare Source, SABA, Oracle, SAP, Infor, and Workday, who provide their services to multiple industries, including healthcare. We
also compete with large medical publishers that have operating units that focus on healthcare, such as Relias Learning, which is owned by Bertelsmann. In our
Provider Solutions business segment, we have competition primarily from several large companies, such as Symplr, Verisys, MD-Staff, AMN Healthcare, as well as
from a broadening array of smaller companies.
We believe our Workforce Solutions, which include both products and services that facilitate education, training, assessment, and development for healthcare
professionals, offer a wide assortment of content, functionality, and applications provided on a single platform over the Internet and provide us with a competitive
advantage. In our Provider Solutions business segment, we believe the scope and quality of our products, capability to connect medical staff credentialing with
4
Table of Contents
provider enrollment, and innovative new predictive analytics, provide us with a competitive advantage. We believe that the principal competitive factors affecting the
marketing of our Workforce and Provider Solutions to the healthcare industry include:
•
•
•
•
•
•
•
•
our technology platform, which combines SaaS-based capabilities and certain PaaS capabilities to capture, track, and report on activities, such as
learning, performance, credentialing, and privileging across various modalities, and provides interoperability with external systems such as HRIS
and other healthcare-related systems;
scope and variety of Internet-based workforce development and provider solutions available, including, without limitation, clinical, compliance,
resuscitation, revenue cycle, talent management, credentialing, and privileging solutions;
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 developing the people who deliver care.
GOVERNMENT REGULATION OF THE INTERNET AND THE HEALTHCARE INDUSTRY
Regulation of the Internet and the Privacy and Security of Personal Information
The laws and regulations that govern our business 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, retention, deletion,
security, and disclosure of personal information limit our ability to collect information or use and disclose the information in our databases or derive
from other sources to generate revenues. It may be costly to implement security or other measures designed to comply with new legislation or
changes to existing laws.
Content Regulation. Both foreign and domestic governments have adopted and proposed laws governing content and materials transmitted over the
Internet. These include laws relating to obscenity, indecency, libel, and defamation. We could be liable if content created, stored, 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 certain breaches of
protected health information to our customers, who must in turn notify affected individuals, the U.S. Department of Health and Human Services
(HHS) and/or other governmental agencies, and, in certain situations, the media. In addition, we are subject to certain state laws that relate to privacy
or the reporting of security breaches. For example, California law requires notification of security breaches involving personal information and
medical information. We may incur costs to comply with these privacy and security requirements. Because there is little guidance related to many of
these laws, it is difficult to estimate the cost of our compliance with these laws. Further, Congress has considered bills that would require companies
to engage independent third parties to audit the companies’ computer information security. If the Company experiences a breach of security or if one
of the Company’s customers is required to report a breach of security by the Company, the Company’s business could be negatively impacted.
Sales and Use Tax. Through December 31, 2019, we collected sales, use, or other taxes on taxable transactions in states in which we have employees
or have a significant level of sales activity. While HealthStream believes that this approach is appropriate, other states or foreign jurisdictions may
seek to impose tax collection obligations on companies like us that engage in online commerce. If they do, these obligations could limit the growth
of electronic commerce in general and adversely impact our business.
5
Table of Contents
Laws and regulations directly applicable to content regulation, e-commerce, Internet communications, and the privacy and security of personal information are
becoming more prevalent. Congress continues to consider laws regarding Internet taxation. The dynamic nature of this regulatory environment increases the
uncertainty regarding the marketplace impact of such regulation. The enactment of any additional laws or regulations may increase our cost of conducting business or
otherwise harm our business, financial condition, and operating results.
Regulation of Education, Training, and Other Services for Healthcare Professionals
Occupational Safety and Health Administration. OSHA regulations require employers to provide training to employees to minimize the risk of injury from various
potential workplace hazards. Employers in the healthcare industry are required to provide training with respect to various topics, including, but not limited to, blood
borne pathogens exposure control, laboratory safety, and tuberculosis infection control. OSHA regulations require employers to keep records of their employees’
completion of training with respect to these workplace hazards.
The Joint Commission. The Joint Commission accreditation and certification standards require employers in the healthcare industry to provide certain workplace
safety and patient interaction training to employees. Training required by The Joint Commission may include programs on infection control, patient bill of rights,
radiation safety, and incident reporting. Healthcare organizations are required to provide and document training on these topics to receive accreditation from The Joint
Commission. In addition, The Joint Commission imposes continuing education requirements on physicians that relate to each physician’s specific staff appointments.
Health Insurance Portability and Accountability Act. HIPAA regulations restrict how certain organizations (known as Covered Entities), including most healthcare
providers and health plans, use and disclose certain individually identifiable healthcare information. HIPAA regulations also require these organizations to provide
reasonable and appropriate safeguards to protect the privacy, integrity and confidentiality of individually identifiable healthcare information, whether in paper, oral, or
electronic form. Covered Entities are required to establish, maintain, and provide training with regard to their policies and procedures for protecting the integrity and
confidentiality of individually identifiable healthcare information and must document training on these topics to support their compliance. Certain HIPAA privacy and
security requirements apply to entities (known as Business Associates) that handle individually identifiable healthcare information on behalf of Covered Entities or
other Business Associates. Covered Entities, Business Associates, and their subcontractors may be directly subject to criminal and civil sanctions for violations of
HIPAA privacy and security standards.
The American Nurses Credentialing Center (ANCC). ANCC, a subsidiary of the American Nurses Association (ANA), provides individuals and organizations
throughout the nursing profession with the resources they need to achieve practice excellence. ANCC’s internationally renowned credentialing programs certify nurses
in specialty practice areas; recognize healthcare organizations for promoting safe, positive work environments through the Magnet Recognition Program® and the
Pathway to Excellence® Program; and accredit providers of continuing nursing education. In addition, ANCC’s Institute for Credentialing Innovation® offers an array
of informational and educational services and products to support its core credentialing programs. ANCC certification exams validate nurses’ skills, knowledge, and
abilities. More than a quarter million nurses have been certified by ANCC since 1990. More than 80,000 advanced practice nurses are currently certified by ANCC.
The ANCC Magnet Recognition Program recognizes healthcare organizations that provide the very best in nursing care and professionalism in nursing practice. The
program also provides a vehicle for disseminating best practices and strategies among nursing systems. The ANCC Magnet Recognition Program is a highly regarded
standard for nursing excellence. The Pathway to Excellence Program recognizes the essential elements of a high standard nursing practice environment. The
designation is earned by healthcare organizations that create work environments where nurses can develop professionally. The award substantiates the professional
satisfaction of nurses and identifies best places to work.
Continuing Nursing Education (CNE). State nurse practice laws authorize a state’s board of nursing to establish CNE requirements for professional nurses to maintain
valid licensure. CNE requirements vary widely from state to state, with reporting generally on a bi-annual basis. In some states, the CNE requirement only applies to
re-licensure of advance practice nurses, while in other states, additional CNEs may be required of this category of nurses. Board certifications (e.g., Certified Nurse
Operating Room (CNOR) – certification of perioperative nursing) also require CNE hours/credits, with certain percentages required in specific categories based on the
certification type. Failure to obtain the requisite and type of CNE could result in non-renewal of the license or certification. The ANCC Commission on Accreditation
is responsible for accrediting or approving organizations to award ANCC nursing continuing professional development (NCPD) credit (contract hours) to activities for
a national audience of nurses. State boards of nursing approve individual CNE activities or CE providers that offer CNE activities primarily for nurses within the state.
ANCC NCPD credit for online activities is accepted by all state boards of nursing. Our HealthStream CNE Provider Unit is accredited as a provider of NCPD by
ANCC. We are also approved by the California Board of Registered Nursing and the Florida Board of Nursing.
6
Table of Contents
Continuing Medical Education (CME). State licensing boards, professional organizations, and employers require physicians to certify that they have accumulated a
minimum number of CME hours to maintain their licenses. Generally, each state’s medical practice laws authorize the state’s board of medicine to establish and track
CME requirements. Forty-eight state medical licensing boards currently have CME requirements, as well as Puerto Rico, Guam, and the U.S. Virgin Islands. The
number of CME hours required by each state ranges from 15 to 50 hours per year. Other sources of CME requirements are state medical societies and practice
specialty boards. The failure to obtain the requisite amount and type of CME could result in non-renewal of the physician’s license to practice medicine and/or
membership in a medical or practice specialty society. The American Medical Association (AMA) classifies CME activities as either Category 1, which includes
formal CME activities, or Category 2, which includes self-designated credit for informal activities that meet certain requirements. CME providers that certify
educational activities can only designate those activities for AMA PRA Category 1 Credit™. Most boards of medical examiners nationwide that require CME
participation specify AMA PRA Category 1 Credit™. Only institutions and organizations accredited to provide CME can designate an activity for AMA PRA Category
1 Credit™. The Accreditation Council for Continuing Medical Education (ACCME) is responsible for awarding accreditation status to state medical societies,
medical schools, and other institutions and organizations that provide CME activities for a national audience of physicians. State medical societies, operating under
the aegis of the ACCME, accredit institutions and organizations that provide CME activities primarily for physicians within the state or bordering states. We are
recognized as an accredited provider of CME for physicians by the ACCME.
Centers for Medicare & Medicaid Services (CMS). CMS has summarized its quality strategy vision as “better, smarter, healthier.” The agency is focused on using
incentives to improve care, changing how care is delivered, including through improved coordination across healthcare settings and increased attention to population
health, and tying payment to value through new payment models. Value-based purchasing (VBP), which links payment more directly to the quality of care provided, is
a strategy that can help to transform the current payment system by rewarding providers for delivering high quality, efficient clinical care. Through a number of public
reporting programs, demonstration projects, pilot programs, and other initiatives, some voluntary and some mandatory, CMS has launched VBP initiatives in various
settings, including hospitals, physician offices, nursing homes, home health services, and dialysis facilities. Since 2017, CMS has focused on its comprehensive
deregulatory initiative, “Meaningful Measures,” which identifies priorities for quality measurement and improvement. The framework is intended to improve patient
outcomes while also reducing burdens on providers.
Promoting Interoperability Programs (formerly the Medicare and Medicaid Electronic Health Records (EHR) Incentive Programs). CMS renamed the Medicare and
Medicaid EHR Incentive Programs to the Promoting Interoperability Programs (The Interoperability Programs) to increase focus on the interoperability of and
improving patient access to health information. The Interoperability Programs continue to encourage eligible professionals, eligible hospitals, and critical access
hospitals (CAHs) to adopt EHR technology by imposing payment reductions for failure to demonstrate meaningful use of certified EHR technology. By putting into
action and meaningfully using an EHR system, providers may reap benefits beyond financial incentives–such as reduction in errors, availability of records and data,
reminders and alerts, clinical decision support, and e-prescribing/refill automation.
Allied Disciplines. Various allied health professionals are required to obtain continuing education to maintain their licenses. For example, emergency medical services
personnel may be required to attain up to 20 continuing education hours per year, all or a portion of which can be fulfilled online. These requirements vary by state
and depend on the professional classification of the individual.
Regulation of Educational Program Sponsorship and Support
There are a variety of laws and regulations that affect the relationships between our medical device and pharmaceutical customers and the users of our products and
services, including the sponsorship and support of educational programs. For example, the Physician Payment Sunshine Act (Sunshine Act) requires manufacturers of
drugs, biological devices, and medical devices covered by Medicare, Medicaid, or the Children’s Health Insurance Program to report annually to CMS payments and
other transfers of value, including educational programs, given by such manufacturers to physicians and teaching hospitals, with limited exceptions. CMS regulations
require manufacturers to report the physician’s name, business address, and national provider identifier as well as other information including the value, date, form,
and nature of what is offered. CMS publishes the information on its website. Manufacturers that do not meet the reporting obligations 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 Medical Equipment,
Prosthetics, Orthotics, and Supply Industry (collectively, the Guidelines). The Guidelines address compliance risks raised by the support of continuing educational
activities by pharmaceutical and medical device companies. The Guidelines have affected and may continue to affect the type and extent of commercial support we
receive for our continuing education activities. The trade associations for the pharmaceutical and medical device
7
Table of Contents
industries (PhRMA and AdvaMed, respectively) have also promulgated their own codes of ethics that further restrict the interactions between industry and health care
professionals. In addition, the AMA has established its own code of ethics regarding Gifts to Physicians from Industry to provide standards of conduct for the medical
profession. We follow the rules and guidelines provided by ACCME, ANCC, and other continuing education accrediting bodies to ensure that our continuing
education programming is free from commercial bias and consistent with the Guidelines.
The U.S. Food and Drug Administration (FDA) and the Federal Trade Commission (FTC)
Current FDA and FTC rules and enforcement actions and regulatory policies, or those that the FDA or the FTC may develop in the future, could have a material
adverse effect on our ability to provide existing or future applications or services to our end users or obtain the necessary corporate sponsorship to do so. The FDA
and the FTC regulate the form, content, and dissemination of labeling, advertising, and promotional materials, including direct-to-consumer prescription drug and
medical device advertising, prepared by, or for, pharmaceutical, biotechnology, or medical device companies. The FTC regulates over-the-counter drug advertising
and, in some cases, medical device advertising. Generally, regulated companies must limit their advertising and promotional materials to discussions of the FDA-
approved indications. Therefore, any truthful or untruthful information that promotes the use of pharmaceutical or medical device products that is presented with our
services is subject to the FDA and FTC requirements and regulatory oversight including criminal, civil and administrative actions. We believe that banner
advertisements, sponsorship links, and any educational programs that lack independent editorial control that we may present with our services could be subject to
FDA or FTC regulation. While the FDA and the FTC place the principal burden of compliance with advertising and promotional regulations on the advertiser, if the
FDA or FTC finds that any regulated information presented with our services violates FDA or FTC regulations, they may take regulatory action against us or the
advertiser or sponsor of that information. In addition, the FDA may adopt new regulatory policies that more tightly regulate the format and content of promotional
information on the Internet.
INTELLECTUAL PROPERTY AND OTHER PROPRIETARY RIGHTS
To protect our proprietary rights, we rely generally on copyright, trademark, and trade secret laws; confidentiality agreements, contracts, and procedures with
employees, consultants and other third parties; contractual provisions in license agreements with consultants, vendors, and customers; and use measures designed to
control access to our software, documentation, and other proprietary information. We own federal trademark and service mark registrations for several marks,
including, without limitation “HEALTHSTREAM”, “HEALTHSTREAM LEARNING CENTER”, “HEALTHSTREAM EPORTFOLIO”, “KNOWLEDGEQ”, and
“ONESOURCE.” 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 trademarks for which we have applied.
The courseware we license to our customers is developed through a combination of license agreements with publishers and authors, assignments and work-for-hire
arrangements with third parties, and development by employees. We require publishers, authors, and other third parties to represent and warrant that their content does
not infringe on or misappropriate any third-party intellectual property rights and that they have the right to provide their content and have obtained all third-party
consents necessary to do so. Our publishers, authors, and other third parties also agree to indemnify us against certain liability we might sustain due to the content they
provide.
If a third party asserts a claim that we or our third-party partners have infringed its patents or other intellectual property right, we may be required to redesign or
discontinue products that we currently offer or enter into royalty or licensing agreements. In addition, we license technologies from third parties for incorporation into
our services. Licensing agreements with these third parties may not be available on terms acceptable to us, if at all. Additionally, despite the steps we have taken to
protect our intellectual property and proprietary rights, our efforts may not be adequate. Third parties may infringe or misappropriate our intellectual property, and
such violations of our intellectual property are difficult to detect and police. Competitors may also independently develop technologies that are substantially
equivalent or superior to the technologies we employ in our products or services. If we are unable to safeguard our proprietary rights adequately, our competitors
could offer similar services, 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 it may 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 and industry practice,
such licenses generally can be obtained on commercially reasonable terms. We believe our operations and products and services are not materially dependent on any
single license or other agreement with any third party.
8
Table of Contents
AVAILABLE INFORMATION
The Company files reports with the SEC, including annual reports on Form 10-K, quarterly reports on Form 10-Q, and other reports from time to time. The SEC
maintains an Internet site at http://www.sec.gov that contains the reports, proxy, and other filings made by us electronically. Our website address is
www.healthstream.com. Please note that our website address is provided as an inactive textual reference only. We make available, free of charge through our website,
our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, all amendments to those reports, and other filings made by us with the
SEC, as soon as reasonably practicable after such material is electronically filed with or furnished to the SEC. The information provided on our website is not part of
this report and is not incorporated by reference herein.
OUR EMPLOYEES
As of December 31, 2019, we employed 849 full-time and 27 part-time persons. Our success will depend in large part upon our ability to attract and retain qualified
employees. We face competition in this regard from other companies, but we believe that we maintain good relations with our employees. We are not subject to any
collective bargaining agreements.
INFORMATION ABOUT OUR EXECUTIVE OFFICERS
The following is a brief summary of the business experience of each of the executive officers of the Company. Executive officers of the Company are elected by the
Board of Directors and serve at the pleasure of the Board of Directors. The following table sets forth certain information regarding the executive officers of the
Company:
Name
Robert A. Frist, Jr.
J. Edward Pearson
Michael Sousa
Scott A. Roberts
Jeffrey D. Cunningham
Michael M. Collier
Trisha L. Coady
M. Scott McQuigg
Age
52
57
51
43
53
44
44
52
Position
Chief Executive Officer and Chairman of the Board of Directors
President and Chief Operating Officer
Senior Vice President and President, VerityStream
Senior Vice President and Chief Financial Officer
Senior Vice President and Chief Technology Officer
Senior Vice President, Corporate Development and General Counsel
Senior Vice President and General Manager, Clinical Solutions
Senior Vice President, hStream Solutions
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 served as our president
since 2001. On May 15, 2018, following the appointment of Mr. Pearson as the president of the Company, Mr. Frist no longer served in such position. 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.
J. Edward Pearson joined the Company in June 2006 as senior vice president and was promoted to chief operating officer in 2011 and to president on May 15, 2018.
He earned a Bachelor of Business Administration in Accounting from Middle Tennessee State University.
Michael Sousa joined the Company in October 2004 and served as senior vice president of sales from January 2010 to June 2014. In June 2014, he was promoted to
senior vice president of business development. In February 2015, he was named president of Echo, Inc. (now known as VerityStream), HealthStream’s Provider
Solutions business segment, while continuing to serve as a senior vice president of the Company. He earned a Bachelor of Science degree from Boston College and a
Master of Business Administration from Boston University.
Scott A. Roberts joined the Company in January 2002 and served as vice president of accounting and finance beginning in January 2015, following service in multiple
positions to which he was promoted. Thereafter, Mr. Roberts was appointed as interim chief financial officer in February 2019 and was appointed as chief financial
officer and senior vice president of the Company in September 2019. He earned a Bachelor of Business Administration degree 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 and served
as chief technology officer and chief strategy officer for Informatics Corporation of America for twelve years. He earned a Bachelor of Science in Computer Science
from University of North Texas.
9
Table of Contents
Michael M. Collier joined the Company in August 2011 as vice president and general counsel, began serving as the vice president of business development and
general counsel shortly thereafter, and was promoted to senior vice president of corporate development and general counsel in July 2017. Mr. Collier also serves 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.
Trisha L. Coady joined the Company in January 2014 and served as associate vice president and subsequently vice president and general manager of clinical
development solutions from June 2015 to November 2018. In November 2018, she was promoted to senior vice president and general manager of clinical solutions.
She earned a Science in Nursing degree from Université de Moncton.
M. Scott McQuigg joined the Company in January 2019 as senior vice president of hStream solutions. Prior to joining the Company, he co-founded and served as
chief executive officer for GoNoodle for thirteen years. Before this role, he co-founded and served as chief executive officer of HealthLeaders.
Item 1A. Risk Factors
We believe that the risks and uncertainties described below are the significant risks facing the Company as of the date of this Annual Report on Form 10-K. Our
business, reputation, financial condition, results of operations, and/or prospects could be materially and adversely affected by the occurrence of any of the following
risks and uncertainties. Additional risks or uncertainties not presently known to us, or that we currently deem immaterial, also may adversely affect our business,
reputation, financial condition, results of operations, and prospects. Therefore, the risk factors below should not be considered a complete list of potential risks we
may face. The trading price of our common stock could also decline due to the occurrence of any of the following risks, as well as risks and uncertainties not presently
known to us, or that we currently deem immaterial.
Risks Related to Our Business Model
We may be unable to effectively execute our growth strategy which could have an adverse effect on our business and competitive position in the industry.
Our business strategy includes increasing our market share and presence through sales to new customers, additional sales to existing customers, introductions of new
products and services, participation in our ecosystem, interoperability and integration with our platform, and maintaining strong relationships with our existing
customers. Risks that we may encounter in executing our growth strategy include:
•
•
•
•
•
•
•
•
•
•
•
•
•
•
expenses, delays, and difficulties in identifying and developing new products or services and integrating such new products or services into our existing
organization;
inability to leverage or evolve our customer and partner facing technology platform;
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;
inability to identify, attract, and retain partners;
increased competition from new and existing competitors;
lengthy sales cycles, or customers delaying purchasing decisions or payments due to economic conditions;
reduced spending by customers within our target markets;
the loss of a significant customer, including through acquisitions or consolidations;
a negative change in the financial condition or creditworthiness of our customers;
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.
10
Table of Contents
If any of these risks are realized, our business, and our competitive position in the industry, could suffer.
Unfavorable conditions in our industry or the U.S. economy, or reductions in information technology spending, could limit our ability to grow our business and
negatively affect our operating results.
Our operating results may vary based on the impact of changes in our industry or the United States economy on us or our clients. The revenue growth and potential
profitability of our business depends on demand for workforce and provider solutions for healthcare providers. We sell our products and services to large, mid-sized
and small organizations whose businesses fluctuate based on general economic and business conditions. In addition, a portion of our revenue is attributable to the
number of users of our products at each of our clients, which in turn is influenced by the employment and hiring patterns of our clients and potential clients. To the
extent that economic uncertainty or weak economic conditions cause our clients and potential clients to freeze or reduce their headcount, demand for our products
may be negatively affected. Historically, economic downturns have resulted in overall reductions in spending by some healthcare providers as well as pressure from
clients and potential clients for extended billing terms. If economic conditions deteriorate, our clients and potential clients may elect to decrease their workforce
development and provider solutions budgets by deferring or reconsidering purchases, which would limit our ability to grow our business and negatively affect our
operating results. In addition, while we do not currently expect that our financial results will be significantly and adversely affected by the coronavirus that was first
detected in Wuhan, China in December 2019, there continue to be significant uncertainties associated with the coronavirus, including with respect to the ultimate
geographic spread of the virus, the severity of the disease, the duration of the outbreak, and actions that may be taken by Chinese or other governmental authorities to
contain the coronavirus or to treat its impact, and the extent to which the coronavirus outbreak may impact our financial results, including as the result of its possible
impact on the economy, including without limitation the healthcare sector, is not certain. There is also uncertainty surrounding U.S. presidential and congressional
elections in 2020 and the impact on existing and future healthcare legislation. While we cannot predict the outcome of the elections or any resulting legislative
changes, such changes could have a material impact on our business.
We may be unable to effectively identify, complete or integrate the operations of acquisitions, joint ventures, collaborative arrangements, or other strategic
investments, which would inhibit our ability to execute upon our growth strategy.
As part of our growth strategy, we actively review possible acquisitions, joint ventures, collaborative arrangements, or strategic investments that complement or
enhance our business. However, we may be unable to source or complete future acquisitions, joint ventures, collaborative arrangements, or other strategic investments
on acceptable terms, or at all. In addition, if we finance acquisitions, joint ventures, collaborative arrangements, or other strategic initiatives by issuing equity
securities, our existing shareholders may be diluted, which could affect the market price of our stock. As a result, if we fail to properly evaluate and execute
acquisitions, joint ventures, collaborative arrangements, or strategic investments, our performance or prospects may be seriously harmed. Risks that we may encounter
in implementing our acquisition, joint venture, collaborative arrangement, or strategic investment strategies include:
•
•
•
•
•
•
•
•
•
expenses, delays, or difficulties in identifying and integrating acquired companies or joint venture operations, collaborative arrangements, or other strategic
investments into our organization and to otherwise realize expected synergies;
the possibility that we may become responsible for substantial contingent or unanticipated liabilities as the result of an acquisition, joint venture, collaborative
arrangement, or other strategic investment;
inability to retain personnel associated with acquired companies, joint ventures, collaborative arrangements or other strategic investments;
loss of material customers and other key business relations associated with acquired companies, 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;
the incorporation of products associated with acquired companies, joint ventures, collaborative arrangements, or other strategic investments into our product
lines;
the increasing demands on our operational and informational technology systems which may arise from any such acquired companies or joint venture
operations, collaborative arrangements, or other strategic investments;
potentially insufficient internal controls over financial activities or financial reporting at any such acquired company that could impact us on a consolidated
basis;
the financial performance of acquired entities, joint ventures, collaborative arrangements, or other strategic investments may have a negative impact on our
financial performance; and
11
Table of Contents
•
an inability to generate sufficient revenue, profit, and cash flow from acquisitions, joint ventures, collaborative arrangements, or other strategic investments to
offset our investment costs.
Moreover, although we conduct what we believe to be a prudent level of investigation regarding the operating, financial, and information security conditions of
acquired companies, joint ventures, collaborative arrangements, or other strategic investments, an unavoidable level of risk remains regarding the operating
performance, financial condition, information security, and potential liabilities of these businesses, and we may not be able to fully assess these risks until a
transaction has been completed.
Our ability to accurately forecast our financial performance for certain products and services may be hindered by customer scheduling.
While the revenue we receive from particular products and services in our subscription business may be predictable during the term of the applicable contract, the
performance of our subscription business may become more subject to fluctuations between quarterly periods as our solution offerings diversify and become more
sophisticated. Certain project-based products, such as consulting, content development, and professional services, are subject to the customers’ involvement in the
provision of the product or service. The timing and magnitude of these project-based product and service contracts may vary widely from quarter to quarter and year
to year, and thus may affect our ability to accurately forecast our financial performance. In addition, some products can require significant implementation lead times
and resources and may require a level of change management efforts from our clients, which may also impact our ability to accurately forecast our financial
performance. Additionally, as we expand our revenue generating model such that third parties may pay network connection fees based on sales they make, our ability
to forecast revenue from such arrangements may not be predictable.
Our ability to accurately forecast our financial performance may be affected by lengthy and widely varying sales cycles.
The period from our initial contact with a potential customer and their first purchase of our solution typically ranges from three to nine months, and in some cases may
be significantly longer. The range in the sales cycle can be impacted by multiple factors, including an increasing trend towards more formal request for proposal
processes and more competition within our industry, as well as formal budget timelines which impact timing of purchases by target customers. New products,
including those that may compete with or replace our former product offerings, tend to have a longer and more unpredictable revenue ramp period because of varying
customer adoption rates. As a result of these factors, we have only limited ability to forecast the timing and type of initial sales. This, in turn, makes it more difficult
to forecast our financial performance. Additionally, as we expand our revenue generating model such that third parties may pay network connection fees based on
sales they make, our ability to forecast revenue from such arrangements may not be predictable.
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.
Many of our competitors and potential competitors have longer operating histories and significantly greater financial, technical, marketing, or other resources than we
do. We encounter direct competition from both large and small companies focused on providing workforce and provider solutions to the healthcare industry. Given the
profile and growth of the healthcare industry and the ongoing need for training, simulation, credentialing, and other information products and services, it is likely that
additional competitors will emerge. Additionally, mergers of or other strategic transactions by our competitors could weaken our competitive position. Moreover, our
lack of market diversification resulting from our concentration on the healthcare industry may make us susceptible to losing market share to our competitors who also
offer solutions, and in some cases a more robust suite of solutions, to a cross-section of industries. These companies may be able to respond more quickly than we can
to new or changing opportunities, technologies, standards or customer requirements. Further, most of our customer agreements are for terms ranging from one to five
years, with no obligation to renew. The terms of these agreements may enable customers to more easily shift to one of our competitors.
Expanding our business model such that third-parties may pay network connection fees in exchange for the ability to deliver their products through our
technology platform and have them featured as part of our ecosystem may result in unpredictability to and/or harm to the operational and financial performance
of our business.
Historically, the Company has marketed and sold products and services through our own sales team and for delivery through our technology platform. More recently,
the Company began offering third-parties the ability to utilize their sales teams to market and sell their third-party products and have such products delivered through
the Company’s technology platform, provided such third-parties pay a network connectivity fee when such products are sold to customers in our network. Given that
these third parties are responsible for their products and the marketing and selling thereof, the Company may not always be able to ensure the operational, financial, or
security-related performance or impact of products controlled by a third-party. While we have contractual protections with third-parties regarding their products,
including but not limited to service levels, information security, confidentiality, data rights, and indemnification against certain breaches, these may not be sufficient to
ensure the predictability or performance of such products, or potential negative impacts related thereto.
12
Table of Contents
The failure to maintain and strengthen our relationships with ecosystem partners or significant changes in the terms of the agreements we have with them may
have an adverse impact on our ability to successfully market, sell, and deliver certain product and service offerings.
We have entered into contracts with ecosystem partners, including content, application, infrastructure, technology, and retail channel vendors. Our ability to increase
the sales of our products and services depends in part upon maintaining and strengthening relationships with these current and future ecosystem partners. Most of
these contracts are on a non-exclusive basis. Certain ecosystem partners may offer multiple products and services, including, in some instances, products or services
which may compete with other products and services we offer. Moreover, under contracts with some of our ecosystem partners, we may be bound by provisions that
restrict our ability to market and sell our products and services to certain potential customers. The success of these contractual arrangements will depend in part upon
the ecosystem partners’ own competitive, marketing, and strategic considerations, including the relative advantages for such ecosystem 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 ecosystem partners, that we will be successful in effectively integrating
such partners’ products and technology, including without limitation through our emerging PaaS strategy, with, into, or through our own, or that such relationships
will be successful in generating additional revenue. If any of these ecosystem partners have negative experiences with our products and services, or seek to amend or
terminate the financial or other terms of the contracts or arrangements we have 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.
We could also be subject to claims and liability as a result of the activities, products, or services of these ecosystem partners and/or our acts or omissions with regard
to these ecosystem partners. Even if these claims do not result in liability to us, investigating and defending these claims could be expensive, time-consuming, divert
our attention, 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 ecosystem partners, which could adversely affect our business and results of operations.
Most of our agreements with ecosystem partners are for initial terms of three or more years. These partners may choose not to renew their agreements with us or may
terminate their agreements early if we do not fulfill our contractual obligations. If our partners terminate or fail 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 number of courses and solutions we are able to distribute, declines in
the number of subscribers to our platforms, and decreased revenues. Most of our agreements with our ecosystem partners are non-exclusive, and our competitors offer,
or could offer, solutions that are similar to or the same as those we offer. If our current partners offer or otherwise make available their products 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.
We may not be able to develop new products and services, or enhancements to our existing products and services, or be able to achieve widespread acceptance of
new products, services or features, or keep pace with technological developments.
Our growth strategy depends in part on our ability to generate revenue growth through sales to new customers as well as increasing sales of additional subscriptions
and other products and services to existing customers. Our identification of additional features, content, products, and services may not result in timely development
of complementary products. In addition, the success of certain new products and services may be dependent on continued growth in our customer base. Furthermore,
we are not able to accurately predict the volume or speed with which existing and new customers may adopt such new products and 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 introduce significant defects into or otherwise negatively
impact our technology platform. While all new products and services are subject to testing and quality control, all software and software-based services are subject to
errors and malfunctions. If we release new products, services, and/or enhancements with bugs, defects, or errors or that cause bugs, defects, or errors in existing
products, it could result in lost revenues and/or reduced ability to meet contractual obligations and would be detrimental to our business and reputation. If new
products, features, or content are not accepted or integrated by new or existing customers, we may not be able to recover the cost of this development, and our
financial performance will be harmed. Continued growth of our customer population is dependent on our ability to continue to provide relevant products and services
in a timely manner. The success of our business will depend on our ability to continue providing our products and services as well as enhancing our content, product,
and service offerings that address the needs of healthcare organizations.
13
Table of Contents
We may be unable to continue to license our third-party software, on which a portion of our product and service offerings rely, or we may experience errors in this
software, which could increase our costs and decrease our revenue.
We use technology components in some of our products that have been licensed from third parties. Future licenses to these technologies may not be available to us on
commercially reasonable terms, or at all. The loss of or inability to obtain or maintain any of these licenses could result in delays in the introduction of new products
and services or could force us to discontinue offering portions of solutions until equivalent technology, if available, is identified, licensed, and integrated. The
operation of our products would be impaired if errors occur in third party technology or content that we incorporate, and we may incur additional costs to repair or
replace the defective technology or content. It may be difficult for us to correct any errors in third party products because the products are not within our control.
Accordingly, our revenue could decrease, and our costs could increase in the event of any errors in this technology. Furthermore, we may become subject to legal
claims related to licensed technology based on product liability, infringement of intellectual property, or other legal theories. Even if these claims do not result in
liability to us, investigating and defending these claims could be expensive and time-consuming, and could result in suspension of or interference with certain
offerings to our clients and/or adverse publicity that could harm our business.
Financial Risks
A significant portion of our revenue is generated from a relatively small number of customers.
We derive a substantial portion of our revenues from a relatively small number of customers. A termination or material modification of our agreements with any of
our significant customers or a failure of these customers to renew their contracts on favorable terms, or at all, could have an adverse effect on our business.
A significant portion of our business is subject to renewal. Therefore, renewals have a significant impact on our revenue and operating results.
For the year ended December 31, 2019, approximately 95% of our net revenue was derived from SaaS-based subscriptions and software licensing agreements. Our
product and service contracts typically range from one to five years in length, and customers are not obligated to renew their contract with us after their contract term
expires; in fact, some customers have elected not to renew their contract. In addition, our customers may renew at a lower pricing or activity level. Our customers’
renewals may decline or fluctuate as a result of a number of factors, including but not limited to, their dissatisfaction with our service, a dissipation or cessation of
their need for one or more of our products or services, pricing, or competitive product offerings. If we are unable to renew a substantial portion of the contracts that
are up for renewal or maintain our pricing, our results of operations and financial condition could be adversely affected.
Failure to adequately expand and optimize our direct sales infrastructure will impede our growth.
We will need to continue to expand and optimize our sales infrastructure in order to grow our customer base and our business. Identifying and recruiting qualified
personnel and training them in our sales methodology, our sales systems, and the use of our software requires significant time, expense, and attention. It can take
significant time before our sales representatives are fully trained and productive. Our business may be adversely affected if our efforts to expand and train our direct
sales teams do not generate a corresponding increase in revenues. In particular, if we are unable to hire, develop, and retain talented sales personnel or if new direct
sales personnel are unable to achieve desired productivity levels in a reasonable period of time, we may not be able to realize the expected benefits of this investment
or increase our revenues.
We may be unable to accurately predict the timing of revenue recognition from sales activity as it is often dependent on achieving certain events or performance
milestones, and this inability could impact our operating results.
Our ability to recognize revenue is dependent upon several factors in order for us to implement customers on our subscription-based platform and platform
applications. If customers do not provide us with the information required to complete implementations in a timely manner, our ability to recognize revenue may be
delayed, which could adversely impact our operating results. Some products, including several in our Provider Solutions segment, can require significant
implementation lead times and the rate at which customer orders move from backlog to revenue generation in connection with these products may significantly affect
the timing of revenue recognition.
14
Table of Contents
Because we recognize revenue from subscriptions for our products and services over the term of the subscription period, downturns or upturns in sales may not
be immediately reflected in our operating results.
During the year ended December 31, 2019, we recognized approximately 95% of our revenue from customers monthly over the terms of their subscription or
licensing agreements, which generally have contract terms ranging from one to five years. As a result, much of the revenue we report in each quarter is related to
subscription or licensing agreements entered into during previous quarters. Consequently, a decline in new or renewed subscription or licensing agreements in any one
quarter will not necessarily be fully reflected in the revenue in that quarter and will negatively affect our revenue in future quarters. In addition, we may be unable to
adjust our cost structure to reflect this reduced revenue. Accordingly, the effect of significant downturns in sales and market acceptance of our products and services
may not be fully reflected in our results of operations until future periods. Additionally, our subscription model also makes it difficult for us to rapidly increase our
revenue through additional sales in any period, as revenue from new customers must be recognized over the applicable subscription term.
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 may need to raise additional funds for various purposes, including to:
•
•
•
•
•
develop new, or enhance existing, products, services, and technology;
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, 2019, we had approximately $172.9 million in cash, cash equivalents, and marketable securities. We also have up to $50.0 million of availability
under our Revolving Credit Facility, subject to certain covenants, which expires in November 2020.
We actively review possible business acquisitions to complement or enhance our products, services, and technology platforms. We may not have adequate cash and
investments or availability under our Revolving Credit Facility to consummate one or more of these acquisitions. We cannot assure you that if we need additional
financing, it will be available on terms favorable to us, or at all. If adequate funds are not available or are not available on acceptable terms, our ability to fund
expansion, take advantage of available opportunities, develop or enhance services or products, or otherwise respond to competitive pressures would be significantly
limited. If we raise additional funds by issuing equity or convertible debt securities, the percentage ownership of our existing shareholders may be reduced.
Goodwill, identifiable intangible assets, and long-lived assets recorded on our balance sheet may be subject to impairment losses that could reduce our reported
assets and earnings.
There are inherent uncertainties in the estimates, judgments, and assumptions used in assessing recoverability of goodwill, intangible assets, and long-lived 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 do not support the carrying value of goodwill, identifiable intangible assets, and long-lived assets. If the value of our goodwill, intangible assets, or
long-lived assets is impaired, accounting principles require us to reduce their carrying value and report an impairment charge, which would reduce our reported assets
and earnings for the period in which an impairment is recognized.
We may be affected by healthcare reform efforts and other changes in the healthcare industry that impact us and our clients.
Our clients are concentrated in the healthcare industry, which is subject to changing regulatory, economic, and political conditions. In the past several years, we have
experienced an increase in bankruptcies among our customers. This decrease in creditworthiness among certain of our customers along with other economic
challenges facing the healthcare sector caused us to record bad debt expense of $0.2 million, $1.0 million and $1.6 million in 2019, 2018, and 2017, respectively. Any
continuation or escalation of this development could result in our inability to collect amounts owed from existing clients and decrease our ability to gain new clients,
which could adversely impact our revenue, results of operations, and ability to execute on our growth strategy.
15
Table of Contents
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. healthcare system.
The most prominent of these reform efforts, the Patient Protection and Affordable Care Act, as amended by the Healthcare and Education Reconciliation Act of 2010
(collectively, Affordable Care Act), was designed to increase access to affordable health insurance for U.S. citizens and improve quality of care, but it also has
reduced government program spending and imposed operating costs and changes on many of our clients.
Efforts by the presidential administration and certain members of Congress to repeal or make significant changes to the Affordable Care Act, its implementation,
and/or its interpretation have cast considerable uncertainty on the future of the law. For example, final rules issued in 2018 expand the availability of association
health plans and allow the sale of short-term, limited-duration health plans, neither of which are required to cover all the essential health benefits mandated by the
Affordable Care Act. Effective January 1, 2019, the financial penalty associated with the individual mandate was eliminated as part of the tax reform legislation which
was enacted in December 2017. These changes may impact the number of individuals that elect to purchase health insurance or the scope of such coverage, if
purchased. Because the penalty associated with the individual mandate was eliminated, a federal judge in Texas ruled in December 2018 that the mandate was
unconstitutional and determined that the rest of the Affordable Care Act was therefore invalid. In December 2019, the Fifth Circuit Court of Appeals upheld this
decision with respect to the individual mandate but remanded for further consideration the issue of how this affects the rest of the law. Pending this appeals process,
the law remains in place pending appeal. There is uncertainty regarding whether, when, and how the Affordable Care Act will be further changed, the ultimate impact
of court challenges, how the law will be interpreted and implemented, and the impact of other initiatives intended to reform healthcare delivery, coverage, and/or
financial systems. For example, some members of Congress have proposed significantly expanding the coverage of government-funded programs. Any such legal or
regulatory developments, as well as other healthcare-related or other developments that adversely impact the business or financial condition of our clients, could
reduce the amount of business we receive from such clients and thus have an adverse effect on our results of operations.
Some of the recent changes in the healthcare industry have driven consolidation, particularly among health insurance providers. Other industry participants, such as
large employer groups and their affiliates, may also introduce financial or delivery system reforms or otherwise intensify competitive pressures. These developments
could adversely affect us or our customers and therefore have an adverse effect on our results of operations.
We may discover weaknesses in our internal controls over financial reporting, which may adversely affect investor confidence in the accuracy and completeness
of our financial reports and consequently the market price of our securities.
Section 404 of the Sarbanes-Oxley Act of 2002 requires our management to report on and requires our independent public accounting firm to attest to, the
effectiveness of our internal controls over financial reporting. The rules governing the standards to be met are complex and 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 may result in
increased expenses and require significant attention from management and other internal and external resources. These requirements may also extend to acquired
entities and our efforts to integrate those operations into our system of internal controls. Any material weaknesses identified during this process may preclude us from
asserting the effectiveness of our internal controls. This may negatively affect our stock price if we cannot effectively remediate the issues identified in a timely
manner.
Changes in accounting standards issued by the Financial Accounting Standards Board, or FASB, could adversely effect our balance sheet, revenue, and results
of operations, and could require a significant expenditure of time, attention and resources, especially by senior management.
Our accounting and financial reporting policies conform to GAAP, which are periodically revised and/or expanded. The application of accounting principles is also
subject to varying interpretations over time. Accordingly, we are required to adopt new or revised accounting standards or comply with revised interpretations that are
issued from time to time by various parties, including accounting standard setters and those who interpret the standards, such as the FASB and the SEC and our
independent registered public accounting firm. Changes to regulations concerning revenue recognition could require us to alter our current revenue accounting
practices and cause us to either defer revenue into a future period or to recognize lower revenue in a current period. Likewise, changes to regulations concerning
expense recognition could require us to alter our current expense accounting practices and cause us to defer recognition of expense into a future period or to recognize
increased expenses in a current period. Such changes could also cause us to alter the manner in which we contract for, sell, and incentivize sales of products and
services. Changes to either revenue recognition or expense recognition accounting practices could affect our financial results.
16
Table of Contents
Risks Related to Operations
Our operating margins could be affected if our ongoing refinement to pricing models for our products and services is not accepted by our customers and the
market.
We continue to make changes in the pricing of our product and service offerings so as to increase revenue and meet the needs of our customers. We cannot predict
whether the current pricing of our products and services, or any ongoing refinements we make, will be accepted by our existing customer base or by prospective
customers. If our customers and potential customers decide not to accept our current or future pricing or product and service offerings, it could have an adverse effect
on our business and results of operations. Additionally, ecosystem partners establish the price for some of the products we market and sell, and we do not have control
over such price setting or customer acceptance thereof or reaction thereto.
We may be unable to adequately develop our systems, processes, and support in a manner that will enable us to meet the demand for our services.
We have provided our online products and services for a significant period of time and continue to expand our ability to provide our solutions on both a subscription
and transactional 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, integrate and interoperate with third party systems, and to implement the services, including customer support,
necessary to meet the demand for our products and services. Our inability from time to time to successfully develop the necessary systems and implement the
necessary services on a timely basis may result in our customers experiencing delays, interruptions, and/or errors in their service. Such delays or interruptions may
cause customers to become dissatisfied with our service and move to competing providers of 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. The loss 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 our business, as we
may not be able to find suitable replacements. We do not have employment agreements with any of our key personnel, other than our chief executive officer, and we
do not maintain any “key person” life insurance policies.
We may not be able to attract, hire, and retain a sufficient number of qualified employees and, as a result, we may not be able to effectively execute our growth
strategy or maintain the quality of our services.
Our future success will depend on our ability to attract, train, motivate, and retain other highly skilled technical, managerial, marketing, sales, and customer support
personnel. Competition for certain personnel is intense, especially for software developers, web designers, user experience and interaction designers, and sales
personnel, and we may be unable to successfully attract sufficiently qualified personnel. We have experienced in the past, and continue to experience, difficulty hiring
qualified personnel in a timely manner for these positions, and we may not be able to fill positions in desired geographic areas or at all. The pool of qualified technical
personnel, in particular, is limited in Nashville, Tennessee, where our headquarters are located. Similar challenges exist within our Provider Solutions segment in our
locations in San Diego, California, and Boulder, Colorado. Many of the companies with which we compete for experienced personnel have greater resources than we
have and some of these companies may offer more lucrative compensation packages. We anticipate needing to continue to maintain or increase the size of our staff to
support our anticipated growth, without compromising the quality of our offerings or customer service. Our inability to locate, attract, hire, integrate and retain
qualified personnel in sufficient numbers may reduce the quality of our services and impair our ability to grow and adversely impact our financial performance.
We may not be able to upgrade our hardware and software technology infrastructure quickly enough to effectively meet demand for our services or our
operational needs.
We must continue to obtain reasonably priced, commercially available hardware, operating software, and hosting services, as well as continue to enhance our software
and systems to accommodate the increased use of our platform, the increased content in our library, the expanding amount and type of data we store on behalf of our
customers, and the resulting increase in operational demands on our business. Decisions about hardware and software enhancements are based in part on estimated
forecasts of the growth in demand for our services. This growth in demand for our services is difficult to forecast and the potential audience for our services is
widespread and dynamic. If we are unable to increase the data storage and processing capacity of our systems at least as fast as the growth in demand, our customers
may encounter delays or disruptions in their service. Unscheduled downtime or reduced response time of our platforms could harm our business and
17
Table of Contents
could discourage current and potential customers from using or continuing to use our services and reduce future revenue. If we are unable to acquire, update, or
enhance our technology infrastructure and systems quickly enough to effectively meet increased operational demands on our business, that may also have an adverse
effect on our results of operations or financial condition. Further, our applications necessarily must integrate with a variety of systems and technologies. As we
develop our platforms and rely on ever changing and improving technologies, we may be impeded by our customers’ and ecosystem partners’ inability to adopt new
technologies and technology standards upon which new platform enhancements may be based.
Our network infrastructure and computer systems and software may fail.
An unexpected event (including but not limited to a cyber-security incident, telecommunications failure, fire, earthquake, or other catastrophic loss) at our Internet
service providers’ facilities, at our on-site data center facilities, or our public-cloud infrastructure providers, could cause the loss of critical data and prevent us from
offering our products and services for an unknown period of time. System downtime could negatively affect our reputation and ability to sell our products and services
and may expose us to significant third-party claims. Our cyber liability and business interruption insurance may not adequately compensate us for losses that may
occur. In addition, we rely on third parties to securely store our archived data, house our infrastructure and network systems, and connect us to the Internet. While our
service providers have planned for certain contingencies, the failure by any of these third parties to provide these services satisfactorily and our inability to find
suitable replacements would impair our ability to access archives and operate our systems and software, and our customers may encounter delays. Such disruptions
could harm our reputation and cause customers to become dissatisfied and possibly take their business to a competing provider, which would adversely affect our
financial performance.
A data breach or security incident could result in a loss of confidential data, give rise to remediation and other expenses, expose us to liability under HIPAA, the
Health Information Technology for Economic and Clinical Health Act (HITECH), foreign data privacy regulations, federal and state privacy laws, consumer
protection laws, common law theories or other laws, subject us to litigation and federal and state governmental inquiries, damage our reputation, and otherwise
could adversely impact our business.
There are a variety of other state, national, foreign, and international laws and regulations that apply to the collection, use, retention, protection, security, disclosure,
transfer, and other processing of personal data. California has passed the California Consumer Privacy Act of 2018 (CCPA), which took effect January 1, 2020. The
CCPA applies broadly to information that identifies or is associated with any California household or individual, and compliance with the CCPA requires that we
implement several operational changes, including processes to respond to individuals’ data access and deletion requests. In addition, many foreign data privacy
regulations (including the General Data Protection Regulation (GDPR), which became effective in the European Union on May 25, 2018, and China’s Cybersecurity
Law which became effective in 2017) can be more stringent than those in the United States. These laws and regulations are rapidly evolving and changing and could
have an adverse effect on our operations. Companies’ obligations and requirements under these 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, affect our customers’ willingness to permit us to use and store personal data, prevent us from selling our products or services, 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 foreign government agencies relating
to our compliance with these regulations.
We collect and store sensitive information, including intellectual property, individually identifiable health information, provider credentialing and privileging data, and
other personally identifiable information, on our networks. The secure maintenance of this information is critical to our business operations. As a result, the continued
development and enhancement of controls, processes, and practices designed to protect our information systems from attack, damage, or unauthorized access remain a
priority for us. If the security measures that we use to protect customer or personal information are ineffective, we may lose users of our services, which could reduce
our revenue, tarnish our reputation, and subject us to significant liability. In addition, if our subcontractors or subprocessors fail to use adequate security or data
protection processes or use personal date in an unpermitted or improper manner, we may be liable for certain losses and may damage our reputation.
We have implemented multiple layers of security measures to protect confidential data that we collect and store through technology, processes, and our people, and
our defenses are monitored and routinely tested internally and by external parties. We rely, in part, on security and authentication technology licensed from third
parties. With this technology, we perform real-time credit card authorization and verification, as well as the encryption of other selected secure customer data. We
cannot predict whether these security measures could be circumvented by new technological developments. Further, the audit processes, penetration and vulnerability
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 be at increased risk because we
outsource certain services or functions to, or have systems that interface with, third parties. For example, third party IT vendors may not provide us with fixes or
updates to hardware or software in a manner as to avoid an unauthorized loss or
18
Table of Contents
disclosure or to address a known vulnerability, which may subject us to known threats or downtime as a result of those delays. Third party vendors that store or have
access to our data may not have effective controls, processes, or practices to protect our information from attack, damage, or unauthorized access. A breach or attack
affecting any of these third parties could harm our business. We cannot assure that we can prevent all security breaches.
Despite these efforts, a data breach or security incident could result from a variety of circumstances and events, including third-party action, system errors or
downtime, employee negligence or error, malfeasance, 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, and
advanced new attacks against information systems. Data incidents could result in interruptions, delays, loss, access, misappropriation, and disclosure or corruption of
data which could damage our reputation and could otherwise adversely impact our business. 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 dispute our information systems or business. In addition, data incidents could expose us
and our customers to liability under privacy, security, and consumer protection laws, such as HIPAA, CCPA and foreign data privacy regulations, or litigation under
these or other laws, including common law theories, and subject us to federal and state governmental inquiries or enforcement, especially if a large number of
individuals are affected or if the compromised information is highly sensitive. Like many other organizations, we have experienced data incidents from time to time in
the course of our business and handled these incidents in accordance with our internal policies and understanding of the applicable laws. We may need to spend
significant resources to protect against security breaches or to alleviate problems caused by any breaches.
Furthermore, we have acquired a number of companies, products, services, and technologies over the years. Although we devote significant resources to address any
security issues with respect to such acquisitions, we still may inherit additional risks when we integrate those companies within HealthStream. Moreover, if a high-
profile security breach occurs with respect to an industry peer, our customers and potential customers may lose trust in the security of our solutions in general.
As threats to confidential information continue to evolve, we may be required to expend significant additional resources to continue to modify or enhance our internal
processes, governance, protective measures, or to investigate and remediate any security vulnerabilities. The occurrence of a data incident and the resulting potential
costs and liabilities could have an adverse effect on our financial position and results of operations and harm our business reputation.
We may experience errors or omissions in our software products or processes, including those that deliver provider credentialing, privileging, and payer
enrollment services for our hospitals and medical practice customers and those that administer and report on hospital performance, and these errors could result
in action taken against us that could harm our business.
Hospitals and medical practices use our credentialing, privileging, and payer enrollment software to manage, validate, and maintain their providers’ credentials and
authorization to practice in a particular facility and to maintain authorization to perform care covered by insurance providers. In some instances, we rely on sources
outside the Company for information that we use in our credentialing and privileging products. If errors or omissions occur that inaccurately validate or invalidate the
credentials of a provider, or improperly deny or authorize a provider to practice in a hospital or medical practice, these errors or omissions could result in litigation
brought against us either by our customers, the provider, or other interested parties. For example, an important element in a malpractice case brought against a hospital
or other provider could be the validation of proper credentialing for the provider, and any errors or omissions in our products that provide these services could subject
us to claims. Further, a list of providers’ privileges may be made available to the general public by hospitals and medical practices, and errors in credentialing and
privileging may result in damage to the hospital, medical practice, or provider.
We may be required to indemnify against such claims, and defending against any such claims could be costly and time-consuming and could negatively affect our
business.
The expiration of our legacy agreements with Laerdal could adversely affect our business and future results of operations.
Our legacy agreements with Laerdal (Legacy Agreements) for the HeartCode and Resuscitation Quality Improvement (RQI) products expired pursuant to their terms
on December 31, 2018 and were not renewed. Revenues associated with sales of HeartCode and RQI products pursuant to the Legacy Agreements have been
significant in recent years, although margins on such products have been lower than HealthStream’s average margin. Revenues from these products were $58.9
million in 2019 and are expected to decline to approximately $36.0 million in 2020 (with sequential declines anticipated in each quarter
19
Table of Contents
of 2020) as we conclude the fulfillment of HeartCode and RQI purchases made prior to December 31, 2018 and will be approximately zero beginning with the first
quarter of 2021.
While we have entered into agreements to market, sell, and deliver new resuscitation programs to our customers (i.e., other than HeartCode and RQI), including
through our collaboration with the American Red Cross which was announced in January 2019, there is no assurance that we will be successful in efforts to market,
sell, or deliver such products. To the extent we are not successful in these efforts and new resuscitation programs do not generate revenue and/or earnings in a manner
that supplants the impact of the Legacy Agreements, our revenue and results of operations will be adversely affected.
Risks Related to Government Regulation, Content and Intellectual Property
Government 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 regulate activities on the
Internet. For example, we are directly subject to certain requirements of the HIPAA privacy and security regulations. In addition, we are required through contracts
with our customers known as “business associate agreements” to protect the privacy and security of certain personal and health related information. Further,
government laws and regulations, such as the Affordable Care Act, that directly affect our customers, can have an indirect impact on our business.
We may lose sales from existing or potential customers, or incur significant expenses, if states are successful in imposing states sales and use taxes on our services to a
greater degree than is currently the case or we inherit potential states and use tax compliance issues in connection with acquisitions we may make from time to time. A
successful assertion by one or more states that we should collect sales or uses taxes on the sale of our services to a greater degree than is our current practice could
result in substantial tax liabilities for past sales, decrease our ability to compete on pricing with other vendors, and otherwise harm our business. Each state has
different rules and regulations governing sales and use taxes, and these rules and regulations are subject to varying interpretations that may change over time. We
cannot assure you that we will not be subject to sales and use taxes or related penalties for past sales in states where we believe no compliance is necessary.
The rapidly evolving and uncertain regulatory and technology environment could require us to change how we do business or incur additional costs. It may be
difficult to predict how changes to these laws and regulations might affect our business. Our current and past privacy and security practices, including any breaches of
protected health information or other data, could be subject to review or other investigation by various state and federal regulatory authorities or could 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 workers resulting
from regulations of state and federal agencies, state licensing boards, and professional organizations. Any change in these regulations that reduce the requirements for
continuing education and training for the healthcare industry could harm our business. In addition, a portion of our business with pharmaceutical and medical device
manufacturers and hospitals is predicated on our ability to maintain accreditation status with organizations such as the ACCME and ANCC. 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 sold or made available by us.
We may be liable to third parties for the content sold or made available by us if the text, graphics, software, or other content therein violates copyright, trademark, or
other intellectual property rights, if our ecosystem partners violate their contractual obligations to others by providing content that we sell or make available, or if the
content is inaccurate, incomplete, or does not conform to accepted standards of care in the healthcare profession. Further, we may be liable to these ecosystem partners
20
Table of Contents
if we allow access or release and lose control of their intellectual property stored on our platform either due to security issues or through improper release to
customers who have not paid for access to such intellectual property. We attempt to minimize these types of liabilities by requiring representations and warranties
relating to our intellectual property partners’ ownership of the rights to distribute as well as the accuracy of their intellectual property. We also take necessary
measures to review this intellectual property ourselves. Although our agreements with our ecosystem partners in most instances contain provisions providing for
indemnification by the ecosystem partners in the event of inaccurate intellectual property, our ecosystem partners may not have the financial resources to meet these
indemnification obligations. Alleged liability could harm our business by damaging our reputation, requiring us to incur legal costs in defense, exposing us to awards
of damages and costs, and diverting management’s attention away from our business.
Protection of certain intellectual property may be difficult and costly, and our inability to protect our intellectual property could reduce the value of our products
and services.
Despite our efforts to protect our intellectual property rights, as well as the intellectual property rights of our ecosystem partners, a third party could, without
authorization, copy or otherwise misappropriate our content, information from our databases, or other intellectual property, including that of our third-party ecosystem
partners. Our agreements with employees, consultants, and others who participate in development activities could be breached and result in our trade secrets becoming
known. Alternatively, competitors and other third parties may independently develop or create content or systems that do not infringe our intellectual property rights.
We may not have adequate remedies for such breaches or protections against such competitor developments. In addition, the laws of some foreign countries do not
protect our proprietary rights to the same extent as the laws of the United States, and effective intellectual property protection may not be available in those
jurisdictions.
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 ecosystem 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 ecosystem partners, may not be adequate. For instance, we may not be able to secure
trademark or service mark registrations for marks in the United States or in foreign countries, or to secure patents for our proprietary products and services, and even
if we are successful in obtaining patent and/or trademark registrations, these registrations may be opposed or invalidated by a third party. We also have certain
contractual obligations to protect the intellectual property of our ecosystem partners and could be required to indemnify such ecosystem partners if we do not
adequately provide such protections.
There has been substantial litigation in the software services and healthcare technology industries regarding intellectual property assets, particularly patents. Third
parties may claim infringement by us with respect to current and future products, trademarks, or other proprietary rights, and we may counterclaim against such third
parties in such actions. Any such claims or counterclaims could be time-consuming, result in costly litigation, divert management’s attention, cause product release
delays, require us to redesign our products, restrict our use of the intellectual property subject to such claim, or require us to enter into royalty or licensing agreements,
any of which could have an adverse effect upon our business, financial condition, and operating results. Such royalty and licensing agreements may not be available
on terms acceptable to us, if at all.
We may be liable for infringing the intellectual property rights of others.
Our competitors may develop similar intellectual property, duplicate our products and/or services, or design around any patents or other intellectual property rights we
hold. Litigation may be necessary to enforce our intellectual property rights or to determine the validity and scope of the patents, intellectual property, or other
proprietary rights of third parties, which could be time consuming and costly and have an adverse effect on our business and financial condition. Intellectual property
infringement claims could be made against us and our ecosystem partners, especially as the number of our competitors grows. These claims, even if not meritorious,
could be expensive and divert our attention from operating our company and result in a temporary inability to use the intellectual property subject to such claim. In
addition, if we, our ecosystem partners, and/or customers become liable to third parties for infringing their intellectual property rights, we could be required to pay a
substantial damage award and develop comparable non-infringing intellectual property, to obtain a license, or to cease providing the content or services that contain
the infringing intellectual property. We may be unable to develop non-infringing intellectual property or obtain a license on commercially reasonable terms, if at all.
21
Table of Contents
We use open source software in our products, which could subject us to litigation or other actions.
We use open source software in our products and may use more open source software in the future. From time to time, there have been claims challenging the
ownership of open source software against companies that incorporate open source software into their products. As a result, we could be subject to suits by parties
claiming ownership of what we believe to be open source software. Litigation could be costly for us to defend, have a negative effect on our operating results and
financial condition or require us to devote additional research and development resources to change our products. In addition, if we were to combine our proprietary
software products with open source software in a certain manner, we could, under certain of the open source licenses, be required to release the source code of our
proprietary software products. If we inappropriately use open source software, we may be required to re-engineer our products, discontinue the sale of our products, or
take other remedial actions.
Other Risks
It may be difficult for a third party to acquire our company, and this could depress our stock price.
Tennessee corporate law and our charter and bylaws contain provisions that could delay, defer, or prevent a change in control of our company or our management.
These provisions could also discourage proxy contests and make it more difficult for you and other shareholders to elect directors and take other corporate actions.
These provisions:
•
•
•
•
authorize us to issue "blank check" preferred stock, which is preferred stock that can be created and issued by the board of directors, without prior
shareholder approval, with rights senior to those of common stock;
provide for a staggered board of directors comprised of three classes such that it would take three successive annual meetings to replace all directors;
prohibit shareholder action by written consent; and
establish advance notice requirements for submitting nominations for election to the board of directors and for proposing matters that can be acted upon
by shareholders at a meeting.
These provisions, either alone or in combination with each other, give our current directors a substantial ability to influence the outcome of a proposed acquisition of
the Company. These provisions would apply even if an acquisition or other significant corporate transaction was considered beneficial by some of our
shareholders. If a change in control or change in management is delayed or prevented by these provisions, the market price of our securities could decline. As a result,
these provisions could limit the price that investors are willing to pay in the future for shares of our common stock.
Item 1B. Unresolved Staff Comments
None.
Item 2. Properties
Our principal office is located in Nashville, Tennessee, which is primarily used to support our workforce solutions operations and corporate functions. Our lease for
approximately 92,000 square feet at this location will end in October 2031. As of December 31, 2019, we leased other facilities in Nashville, Tennessee; Jericho, New
York; San Diego, California; Chicago, Illinois; Denver, Colorado; and Boulder, Colorado.
Item 3. Legal Proceedings
None.
Item 4. Mine Safety Disclosures
Not applicable.
22
Table of Contents
PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Our common stock is traded on the Nasdaq Global Select Market under the symbol “HSTM”. Our common stock began trading on the Nasdaq National Market on
April 14, 2000.
As of February 21, 2020, the Company had a total of 8,698 shareholders, including 1,018 registered holders and 7,680 beneficial holders.
DIVIDEND POLICY
In our history, we have only declared and paid a dividend one time. In connection with the proceeds from divestiture of the Patient Experience business unit in 2018,
we declared a $1.00 per common share special cash dividend, which was paid on April 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 for use in the operation of our business.
See the table labeled Securities Authorized for Issuance Under Equity Compensation Plans to be contained in our 2020 Proxy Statement, incorporated by reference in
Part III, Item 12 of this Annual Report on Form 10-K.
23
Table of Contents
STOCK PERFORMANCE GRAPH
The graph below matches HealthStream, Inc.'s cumulative five-year total shareholder return on common stock with the cumulative total returns of the NASDAQ
Composite index and the NASDAQ Computer & Data Processing index. The graph tracks the performance of a $100 investment in our common stock and in each
index (with the reinvestment of all dividends) from 12/31/2014 to 12/31/2019.
The comparisons in the graph below are based on historical data and are not necessarily indicative of future performance of our common stock.
12/14
12/15
12/16
12/17
12/18
12/19
HealthStream, Inc.
NASDAQ Composite
NASDAQ Computer & Data Processing
100.00
100.00
100.00
74.63
106.96
123.21
84.97
116.45
132.37
78.56
150.96
185.07
85.31
146.67
187.89
96.08
200.49
262.83
The stock price performance included in this graph is not necessarily indicative of future stock price performance.
24
Table of Contents
RECENT SALES OF UNREGISTERED SECURITIES
None.
ISSUER PURCHASES OF EQUITY SECURITIES
None.
Item 6. Selected Financial Data
The selected statement of income and balance sheet data for the five years prior to December 31, 2019 is derived from our audited Consolidated Financial Statements.
You should read the following selected financial data in conjunction with our Consolidated Financial Statements and the notes to those statements and Management’s
Discussion and Analysis of Financial Condition and Results of Operations included elsewhere in this report.
In February 2018, HealthStream divested its PX business to Press Ganey. The results of operations for the PX are presented as discontinued operations within the
Consolidated Statement of Income data set forth below. Additionally, on January 1, 2018, HealthStream adopted Accounting Standards Update (ASU) 2014-09,
Revenue from Contracts with Customers (Topic 606) and all the related amendments and guidance (collectively, ASC 606), using the modified retrospective method
with the cumulative effect of initially applying the guidance recognized upon adoption. On January 1, 2019, HealthStream adopted ASC 842, Leases using the
modified retrospective method. The financial information below for the periods prior to adoption of these standards has not been restated and continues to be reported
under the revenue recognition and leases standards which were in effect for those periods (ASC 605 and ASC 840, respectively). See Note 1 of the Notes to the
Consolidated Financial Statements, included elsewhere in this report, for further information.
In addition, HealthStream completed several acquisitions during the five years prior to December 31, 2019, including the acquisitions of HealthLine Systems, Inc. on
March 16, 2015, Performance Management Services, Inc. on June 30, 2016, Nursing Registry Consultants Corporation on July 25, 2016, Morrisey Associates, Inc. on
August 8, 2016, Providigm, LLC on January 10, 2019, and CredentialMyDoc on December 16, 2019. The results of operations for these acquired companies are
included within our Consolidated Statement of Income data effective from the respective dates of acquisition. As a result of these factors, the annual results presented
below are not comparable. The operating results for any single year are not necessarily indicative of the results to be expected in the future.
25
Table of Contents
STATEMENT OF INCOME DATA:
Revenues, net
Total operating costs and expenses
Operating income
Income from continuing operations
Income from discontinued operations
Net income
PER SHARE DATA (DILUTED):
Net income from continuing operations
Net income (loss) from discontinued operations
Net income
Weighted average shares of common stock outstanding
Dividends declared
BALANCE SHEET DATA:
Cash and cash equivalents
Marketable securities
Accounts receivable, net
Goodwill and intangible assets
Working capital
Total assets
Deferred revenue – current and noncurrent
Operating lease liability, non-current
Shareholders’ equity
$
$
$
$
$
$
2019
254,112
239,392
14,720
14,196
1,574
15,770
0.44
0.05
0.49
32,428
—
131,538
41,328
27,650
162,277
119,387
489,544
67,429
30,733
338,168
Year Ended December 31,
(in thousands, except per share data)
2016
2017
2018
$
$
$
231,616
216,125
15,491
13,251
18,966
32,217
0.41
0.59
1.00
32,335
1.00
134,321
34,497
38,124
145,522
134,581
441,948
68,929
—
318,947
$
$
$
214,899
205,492
9,407
8,838
1,166
10,004
0.27
0.04
0.31
32,196
—
84,768
46,350
36,691
154,641
98,662
411,119
71,225
—
300,170
$
192,124
184,953
7,171
4,791
(1,036)
3,755
0.15
$
(0.03)
0.12
32,068
—
$
49,634
53,540
40,340
163,321
82,467
396,000
72,115
—
286,108
2015
174,809
161,641
13,168
8,273
348
8,621
0.27
0.01
0.28
30,436
—
82,010
66,976
29,654
113,895
120,459
379,569
63,034
—
280,320
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion of the financial condition and results of operations of HealthStream should be read in conjunction with Selected Financial Data and
HealthStream’s Consolidated Financial Statements and related notes thereto included elsewhere in this report. This discussion contains forward-looking statements
that involve risks and uncertainties. HealthStream’s actual results may differ significantly from the results discussed and those anticipated in these forward-looking
statements as a result of many factors, including but not limited to the risks described under Risk Factors and elsewhere in this report, as well as additional risks or
uncertainties not presently known to us or that we currently deem immaterial.
The following discussion addresses our 2019 and 2018 results and year-to-year comparisons between 2019 and 2018. A discussion of 2017 results and year-to-year
comparisons between 2018 and 2017 can be found in our Annual Report on Form 10-K for the fiscal year ended December 31, 2018, filed with the SEC on February
25, 2019, under Part II, Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations.
OVERVIEW
HealthStream provides workforce development and provider solutions for healthcare organizations—all designed to support the people that deliver patient care, which
in turn, supports the improvement of business and clinical outcomes. Workforce Solutions products are used by healthcare organizations to meet a broad range of their
clinical development, talent management, training, certification, competency assessment, and performance appraisal needs. Provider Solutions products are used by
healthcare organizations for provider credentialing, privileging, and enrollment needs. HealthStream’s customers include healthcare organizations, pharmaceutical and
medical device companies, and other participants in the healthcare industry.
On February 12, 2018, the Company divested its PX business to Press Ganey for $65.2 million in cash (after giving effect to the post-closing working capital
adjustment). Prior to the disposition of the PX business, our patient experience solutions products provided our customers information about patients’ experiences and
how to improve them, workforce engagement, physician relations, and community perceptions of their services. The historical financial results of the PX business for
26
Table of Contents
periods prior to the closing of the disposition of the PX business on February 12, 2018 are reflected in the Company’s Consolidated Financial Statements as
discontinued operations. This sale of the PX business resulted in the Company’s divestiture of the patient experience solutions business segment.
Revenues for the year ended December 31, 2019 were $254.1 million, compared to $231.6 million for the year ended December 31, 2018, an increase of 10%.
Operating income decreased by 5% to $14.7 million for 2019, compared to $15.5 million for 2018, and was negatively impacted by the approximately $2.2 million
expense associated with the June 2019 stock grant to employees in connection with the contribution of stock by our CEO to the Company to enable such stock grants.
Income from continuing operations increased by 7% to $14.2 million for 2019, compared to $13.3 million for 2018. Earnings per share (EPS) from continuing
operations were $0.44 per share (diluted) for 2019, compared to $0.41 per share (diluted) for 2018. Net income decreased to $15.8 million for 2019, compared to
$32.2 million for 2018, which decrease was primarily driven by the $19.0 million gain, net of tax, recorded on the sale of the PX business in 2018. Earnings per share
were $0.49 per share (diluted) for 2019, compared to $1.00 per share (diluted) for 2018. Revenues from Workforce Solutions grew by 10%, or $18.5 million, and
revenues from Provider Solutions grew by 10%, or $4.0 million. As of December 31, 2019, the Company had approximately 3.15 million contracted subscriptions to
hStreamTM, our Platform-as-a-Service technology. As of December 31, 2019, cash and investment balances approximated $172.9 million, and the Company
maintained full availability under its $50.0 million revolving credit facility.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Revenue Recognition
Revenues are recognized when control of the promised goods or services is transferred to the customer in an amount that reflects the consideration the Company
expects to be entitled in exchange for transferring those goods or services.
Revenue is recognized based on the following five step model:
•
•
•
•
•
Identification of the contract with a customer
Identification of the performance obligations in the contract
Determination of the transaction price
Allocation of the transaction price to the performance obligations in the contract
Recognition of revenue when, or as, the Company satisfies a performance obligation
Subscription services revenues primarily consist of fees in consideration of providing customers access to one or more of our SaaS-based solutions and/or courseware
subscriptions, as well as fees related to licensing agreements, all of which include routine customer support and technology enhancements. Revenue is generally
recognized over time during the contract term beginning when the service is made available to the customer. Subscription contracts are generally non-cancelable, one
to five years in length, and billed annually, semi-annually, quarterly, or monthly in advance.
Professional services revenues primarily consist of fees for implementation services, consulting, custom courseware development, and training. The majority of our
professional services contracts are billed in advance based on a fixed price basis, and revenue is recognized over time as the services are performed. For both
subscription services and professional services, the time between billing the customer and when performance obligations are satisfied is generally not significant.
Our contracts with customers often contain promises for multiple goods and services. For these contracts, the Company accounts for the promised goods and services
in its contracts as separate performance obligations if they are distinct. The contract price, which represents transaction price, is allocated to the separate performance
obligations on a relative standalone selling price basis. We generally determine standalone selling prices based on the standard list price for each product, taking into
consideration certain factors, including contract length and the number of subscriptions within the contract.
We receive payments from customers based on billing schedules established in our contracts. Accounts receivable - unbilled represent contract assets related to our
conditional right to consideration where performance has occurred under the contract. Accounts receivable are primarily comprised of trade receivables that are
recorded at the invoice amount, net of an allowance for doubtful accounts, when the right to consideration becomes unconditional.
Deferred revenue represents contract liabilities that are recorded when cash payments are received or are due in advance of our satisfaction of performance
obligations.
27
Table of Contents
Accounting for Income Taxes
The Company accounts for income taxes using the asset and liability method, whereby deferred tax assets and liabilities are determined based on the temporary
differences between the financial statement and tax bases of assets and liabilities measured at tax rates that will be in effect for the year in which the differences are
expected to affect taxable income. Management evaluates all available evidence, both positive and negative, to determine whether, based on the weight of that
evidence, a valuation allowance is needed. We assess the realizability of our deferred tax assets, and to the extent that we believe a recovery is not likely, we establish
a valuation allowance to reduce the deferred tax asset to the amount we estimate will be recoverable. As of December 31, 2019, the Company established a valuation
allowance of $64,000 for the portion of its deferred tax assets that are not more likely than not expected to be realized.
Software Development Costs
Capitalized software development includes costs to develop, acquire, and maintain our products and applications, including our SaaS-based workforce development
and provider solutions platform products, which are accounted for as internal use software. For internal use software development, once planning is completed and the
software development process begins, internal costs and payments to third parties associated with the software development efforts 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 2019 and 2018, we capitalized
$14.1 million and $11.9 million, respectively, for software development and content. Such amounts are included in the accompanying Consolidated Balance Sheets
under the caption capitalized software development. The Company amortizes capitalized software development costs over their expected life of generally three years
using the straight-line method. Capitalized software development costs are subject to a periodic impairment review in accordance with our impairment review policy.
Goodwill, Intangibles, and Other Long-lived Assets
Goodwill represents the excess of purchase price in a business combination over the fair value of the net identifiable assets acquired. We evaluate goodwill for
impairment at the reporting unit level by assessing whether it is more likely than not that the fair value of a reporting unit exceeds its carrying value. If this assessment
concludes that it is more likely than not that the fair value of a reporting unit exceeds its carrying value, then goodwill is not considered impaired and no further
impairment testing is required. Conversely, if the assessment concludes that it is more likely than not that the fair value of a reporting unit is less than its carrying
value, a goodwill impairment test is performed to compare the fair value of the reporting unit to its carrying value. The Company determines fair value of the
reporting units using both income and market-based models. Our models contain significant assumptions and accounting estimates about discount rates, future cash
flows, and terminal values that could materially affect our operating results or financial position if they were to change significantly in the future and could result in an
impairment. We perform our goodwill impairment assessment whenever events or changes in facts or circumstances indicate that impairment may exist and during the
fourth quarter each year. Intangible assets and other long-lived assets are also reviewed for events or changes in facts and circumstances, both internally and
externally, which may indicate an impairment is present. We measure any impairment using observable market values or discounted future cash flows from the related
long-lived assets. The cash flow estimates and discount rates incorporate management’s best estimates, using appropriate and customary assumptions and projections
at the date of evaluation.
Allowance for Doubtful Accounts
The Company estimates its allowance for doubtful accounts to include accounts that may become uncollectible in the future, along with using a specific identification
method in which management considers the facts and circumstances surrounding each potentially uncollectible receivable. Uncollectible receivables are written-off in
the period management believes it has exhausted its ability to collect payment from the customer. Bad debt expense is recorded when events or circumstances indicate
an additional allowance is required. Our allowance for doubtful accounts totaled $0.8 million and $1.2 million as of December 31, 2019 and 2018, respectively.
RESULTS OF OPERATIONS
Revenues and Expense Components
The following descriptions of the components of revenues and expenses apply to the comparison of results of operations.
Revenues, net. Revenues for our Workforce Solutions business segment primarily consist of the following products and services: provision of services through our
SaaS-based platform, authoring tools, a variety of content subscriptions, competency and performance appraisal tools, implementation and consulting services,
content development, training, and a variety of other educational activities to serve professionals that work within healthcare organizations. Revenues for our Provider
Solutions business segment are generated from our proprietary software and SaaS-based applications to help facilitate provider credentialing, privileging, call center,
and enrollment administration for healthcare organizations.
28
Table of Contents
Cost of Revenues (excluding depreciation and amortization). Cost of revenues (excluding depreciation and amortization) consists primarily of salaries and employee
benefits, stock based compensation, employee travel and lodging, materials, contract labor, hosting costs, and other direct expenses associated with revenues, as well
as royalties paid by us to content providers based on a percentage of revenues. Personnel costs within cost of revenues are associated with individuals that facilitate
product delivery, provide services, handle customer support calls or inquiries, manage the technology infrastructure for our applications, manage content, and provide
training or implementation services.
Product Development. Product development consists primarily of salaries and employee benefits, contract labor, stock based compensation, costs associated with the
development of new software feature enhancements, new products, and costs associated with maintaining and developing our products. Personnel costs within product
development include our systems teams, application development, quality assurance teams, product managers, and other personnel associated with software and
product development.
Sales and Marketing. Sales and marketing consist primarily of salaries and employee benefits, commissions, stock based compensation, employee travel and lodging,
advertising, trade shows, customer conferences, promotions, and related marketing costs. Personnel costs within sales and marketing 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 based
compensation, employee travel and lodging, facility expenses, office expenses, fees for professional services, business development and acquisition related costs, third
party software licensing for internal use, 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 definite lives, 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 investments in
marketable securities. The primary component of other expense is interest expense related to our revolving credit facility. In addition, the income or loss attributed to
equity method investments and fair value adjustments related to non-marketable equity investments is included in this category.
2019 Compared to 2018
Revenues, net. Revenues increased approximately $22.5 million, or 10%, to $254.1 million for 2019 from $231.6 million for 2018. A comparison of revenues by
business segment is as follows (in thousands):
Revenues by Business Segment:
Workforce Solutions
Provider Solutions
Total revenues, net
% of Revenues
Workforce Solutions
Provider Solutions
Year Ended December 31,
$
$
2019
2018
208,599
45,513
254,112
$
$
190,139
41,477
231,616
Percentage
Change
10%
10%
10%
82%
18%
82%
18%
Revenues for Workforce Solutions, which are primarily subscription-based, increased $18.5 million, or 10%, to $208.6 million for 2019 from $190.1 million for 2018.
Revenues in 2019 were positively impacted by higher revenues from our legacy resuscitation products, which were $58.9 million for 2019 compared to $54.6 million
for 2018, and growth in platform and content subscriptions. The acquisition of Providigm, LLC in January 2019 also added $6.9 million of revenue to 2019. At
December 31, 2019, the Company had 3.15 million contracted subscriptions to hStreamTM, our Platform-as-a-Service technology as compared to 1.51 million
contracted subscriptions at December 31, 2018.
Revenues for Provider Solutions increased $4.0 million, or 10%, to $45.5 million for 2019 from $41.5 million for 2018. Revenue growth in 2019 was primarily a
result of new VerityStream subscriptions and professional services for client implementations.
29
Table of Contents
Cost of Revenues (excluding depreciation and amortization). Cost of revenues increased $7.9 million, or 8%, to $103.9 million for 2019 from $96.0 million for 2018.
Cost of revenues as a percentage of revenues was 41% of revenues for both 2019 and 2018.
Cost of revenues for Workforce Solutions increased $6.2 million to $88.6 million and approximated 42% and 43% of revenues for Workforce Solutions for 2019 and
2018, respectively. The increase in expense primarily resulted from increased royalties paid by us resulting from growth in content subscription revenues, additions to
personnel during 2019, operating expenses associated with the Providigm business acquired in January 2019, and stock based compensation related to the stock
awards granted during the three months ended June 30, 2019 in connection with the contribution of stock by our chief executive officer to enable such grants. Cost of
revenues for Provider Solutions increased $1.7 million to $15.3 million and approximated 34% and 33% of Provider Solutions revenues for 2019 and 2018,
respectively. The increase is primarily associated with additions to personnel and increased hosting costs.
Product Development. Product development expenses increased $3.4 million, or 13%, to $29.1 million for 2019 from $25.7 million for 2018. Product development
expenses as a percentage of revenues were 11% of revenues for both 2019 and 2018.
Product development expenses for Workforce Solutions increased $3.0 million to $23.9 million and approximated 11% of revenues for Workforce Solutions for both
2019 and 2018. The increase is primarily due to additions to personnel during 2019, the Providigm acquisition, and stock based compensation related to the stock
awards granted during the three months ended June 30, 2019 as noted above. Product development expenses for Provider Solutions increased $0.4 million to
$5.2 million and approximated 11% and 12% of revenues for Provider Solutions for 2019 and 2018, respectively. The increase is primarily due to additions to
personnel during 2019 as well as stock based compensation related to the stock awards granted during the three months ended June 30, 2019 as noted above.
Sales and Marketing. Sales and marketing expenses, including personnel costs, increased $2.2 million, or 6%, to $37.9 million for 2019 from $35.7 million for 2018.
Sales and marketing expenses were 15% of revenues for both 2019 and 2018.
Sales and marketing expenses for Workforce Solutions increased $2.2 million to $30.6 million and approximated 15% of revenues for Workforce Solutions for both
2019 and 2018. The increase is primarily due to higher sales commissions consistent with the increase in revenues, stock based compensation related to the stock
awards granted during the three months ended June 30, 2019 as noted above, and sales and marketing expense associated with the Providigm business acquired in
January 2019. Sales and marketing expenses for Provider Solutions increased $0.1 million to $6.2 million and approximated 14% and 15% of revenues for Provider
Solutions for 2019 and 2018, respectively. The increase in expense is primarily due to higher marketing expenses. The unallocated corporate portion of sales and
marketing expenses decreased by $48,000 to $1.1 million for 2019.
Other General and Administrative Expenses. Other general and administrative expenses increased $6.2 million, or 18%, to $40.6 million for 2019 from $34.4 million
for 2018. Other general and administrative expenses as a percentage of revenues were 16% and 15% of revenues for 2019 and 2018, respectively.
Other general and administrative expenses for Workforce Solutions increased $4.7 million to $14.4 million and approximated 7% and 5% of revenues for Workforce
Solutions for 2019 and 2018, respectively. The increase is primarily due to higher personnel costs, increased software expenses, higher facilities expense, and the
Providigm acquisition. Other general and administrative expenses for Provider Solutions decreased $1.0 million to $3.6 million and approximated 8% and 11% of
revenues for Provider Solutions for 2019 and 2018, respectively. The decrease is primarily due to a reduction in contract labor and a reduction in facilities expense.
The unallocated corporate portion of other general and administrative expenses increased approximately $2.5 million to $22.6 million over 2018, primarily due to
increases to personnel, software expense, other administrative costs, and stock based compensation related to the stock awards granted during the three months ended
June 30, 2019 as noted above.
Depreciation and Amortization. Depreciation and amortization increased $3.7 million, or 15%, to $27.9 million for 2019 from $24.2 million for 2018. The increase
resulted from higher depreciation of property and equipment related to the relocation to our new corporate headquarters, higher amortization of capitalized software
development, and amortization of intangibles following our acquisitions of Providigm and CredentialMyDoc in January 2019 and December 2019, respectively.
30
Table of Contents
Other Income, Net. Other income, net was $3.2 million for 2019 compared to $1.1 million for 2018. The increase is due to the $1.3 million decline in the carrying
value of non-marketable equity investments recorded in 2018 coupled with higher interest income from cash and investments in marketable securities.
Income Tax Provision. The Company recorded a provision for income taxes of $3.7 million for 2019 compared to $3.3 million for 2018. The Company’s effective tax
rate was 21% for 2019 compared to 20% for 2018. The increase in income tax expense during 2019 is primarily attributable to the increase in pre-tax income in 2019.
Income from Continuing Operations. Income from continuing operations was $14.2 million for 2019 compared to $13.3 million for 2018. Earnings per diluted share
from continuing operations were $0.44 and $0.41 per share for 2019 and 2018, respectively.
Income from Discontinued Operations. On February 12, 2018, the Company divested its PX business to Press Ganey for $65.2 million in cash (after giving effect to
the post-closing working capital adjustment), resulting in a gain, net of tax, of $1.6 million in 2019 and $19.0 million in 2018.
Net Income. Net income decreased approximately $16.4 million, or 51%, to $15.8 million for 2019 compared to $32.2 million for 2018. The decrease resulted
primarily from the gain on the sale of the PX business in 2018 as noted above. Earnings per diluted share were $0.49 per share for 2019, compared to $1.00 per share
for 2018.
Adjusted EBITDA (a non-GAAP financial measure which we define as net income before interest, income taxes, stock based compensation, depreciation and
amortization, and changes in fair value of non-marketable equity investments) from continuing operations increased 13% to $46.9 million for 2019 compared to $41.5
million for 2018.
Adjusted EBITDA decreased 31% to $48.9 million for 2019 compared to $71.1 million for 2018. The decrease resulted primarily from the gain on the sale of the PX
business in 2018 as noted above. See Reconciliation of Non-GAAP Financial Measures below for our reconciliation of this calculation to measures under US GAAP.
Other Developments
Our legacy agreements with Laerdal (the “Legacy Agreements”) for the HeartCode and Resuscitation Quality Improvement (“RQI”) products expired pursuant to
their terms on December 31, 2018. Revenues associated with sales of HeartCode and RQI products pursuant to the Legacy Agreements have been significant in recent
years, although margins on such products have been lower than HealthStream’s average margin. Revenue generated by HeartCode and RQI products pursuant to the
Legacy Agreements was $58.9 million and $54.6 million in 2019 and 2018, respectively. In 2020, we expect the revenue from these products generated pursuant to
the Legacy Agreements to be approximately $36 million, with quarterly revenues in 2020 anticipated to be as follows: approximately $11.0 million in the first quarter,
approximately $10.5 million in the second quarter, approximately $8.5 million in the third quarter, and approximately $6.0 million in the fourth quarter. We also
continue to expect revenue from HeartCode and RQI products sold pursuant to the Legacy Agreements to be approximately zero in the first quarter of 2021.
On December 6, 2018, we announced a new agreement with RQI Partners, a joint venture between Laerdal and the American Heart Association. This agreement with
RQI Partners was not an extension or renewal of the expired Legacy Agreements with Laerdal and should not be construed as such. Under our agreement with RQI
Partners, HealthStream will neither market nor sell HeartCode or RQI. Our RQI Partners agreement provides for continuity of service for customers that desire to
purchase HeartCode or RQI from RQI Partners after December 31, 2018 and receive it via the HealthStream Learning Center. RQI Partners will remit a fee to us
when new sales of HeartCode and RQI are delivered via the HealthStream Learning Center. This fee will not be sufficient to supplant the revenue runout associated
with the Legacy Agreements, and no material revenues have been recognized under this agreement through December 31, 2019.
We remain actively engaged in efforts to broaden the scope and utilization of our simulation-related offerings to include a range of clinical competencies that extend
beyond resuscitation, and we intend to bring to market a broadened scope of simulation-based offerings, including resuscitation programs. On January 17, 2019, as
part of a seven-year collaboration agreement with the American Red Cross which spans to 2026, we announced the launch of the American Red Cross Resuscitation
Suite. We are actively engaged in efforts to market, sell, and deliver our new resuscitation offering, which includes the American Red Cross Resuscitation Suite and
validation of skills through a technology enabled Innosonian manikin. A growing number of customers have been implemented on our new resuscitation offering and
the solution is gaining acceptance in the market. We believe our efforts to market, sell, and deliver the American Red Cross Resuscitation Suite, along with efforts to
bring additional simulation-related offerings to market, have the potential to give rise to
31
Table of Contents
additional and higher margin opportunities than those that existed under the Legacy Agreements. However, there is no 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/or earnings in a manner that supplants the impact of the Legacy
Agreements, our revenue and results of operations may be adversely affected.
Reconciliation of Non-GAAP Financial Measures
This report contains certain non-GAAP financial measures, including non-GAAP net income, non-GAAP operating income, adjusted EBITDA from continuing
operations, and adjusted EBITDA, which are used by management in analyzing our financial results and ongoing operational performance.
In order to better assess the Company’s financial results, management believes that net income before interest, income taxes, stock based compensation, depreciation
and amortization, and changes in fair value of non-marketable equity investments (“adjusted EBITDA”) is a useful measure for evaluating the operating performance
of the Company because adjusted EBITDA reflects net income adjusted for certain non-cash and/or non-operating items. Management also believes that adjusted
EBITDA from continuing operations is a useful measure for evaluating the operating performance of the Company because such measure excludes the results of
operations of the PX business that we no longer own and the gain on sale in connection with the sale of such business in February 2018 and thus reflects the
Company’s ongoing business operations and assists in comparing the Company’s results of operations between periods. We also believe that adjusted EBITDA and
adjusted EBITDA from continuing operations are useful to many investors to assess the Company’s ongoing results from current operations. Adjusted EBITDA and
adjusted EBITDA from continuing operations are non-GAAP financial measures and should not be considered as measures of financial performance under GAAP.
Because adjusted EBITDA and adjusted EBITDA from continuing operations are not measurements determined in accordance with GAAP, such non-GAAP financial
measures are susceptible to varying calculations. Accordingly, adjusted EBITDA and adjusted EBITDA from continuing operations, as presented, may not be
comparable to other similarly titled measures of other companies.
These non-GAAP financial measures should not be considered as a substitute for, or superior to, measures of financial performance which are prepared in accordance
with US GAAP and may be different from non-GAAP financial measures used by other companies and have limitations as analytical tools.
A reconciliation of adjusted EBITDA and adjusted EBITDA from continuing operations to the most directly comparable GAAP measures is set forth below (in
thousands).
GAAP income from continuing operations
Interest income
Interest expense
Income tax provision
Stock based compensation expense
Depreciation and amortization
Change in fair value of non-marketable equity investments
Adjusted EBITDA from continuing operations
GAAP net income
Interest income
Interest expense
Income tax provision
Stock based compensation expense
Depreciation and amortization
Change in fair value of non-marketable equity investments
Adjusted EBITDA
2019
2018
2017
$
$
$
$
14,196 $
(3,272)
102
3,733
4,244
27,869
—
46,872 $
15,770 $
(3,272)
102
4,212
4,244
27,869
—
48,925 $
13,251 $
(2,444)
130
3,324
1,777
24,231
1,271
41,540 $
32,217 $
(2,444)
130
13,783
1,686
24,412
1,271
71,055 $
8,838
(870)
132
1,302
1,736
24,047
—
35,185
10,004
(870)
131
529
1,852
26,283
—
37,929
32
Table of Contents
FINANCIAL OUTLOOK FOR 2020
The Company provides projections and other forward-looking information in this Financial Outlook for 2020 section within Management’s Discussion and Analysis
of Financial Condition and Results of Operations. This section contains many forward-looking statements, particularly relating to the Company’s future financial
performance. These forward-looking statements are estimates based on information currently available to the Company, are made pursuant to the safe harbor
provisions of the Private Securities Litigation Reform Act of 1995, and are subject to the precautionary statements set forth in the introduction in Part I of this Annual
Report on Form 10-K and the risks and uncertainties described in Item 1A, Risk Factors and elsewhere in this report, as well as additional risks or uncertainties not
presently known by us, or that we currently deem immaterial. 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.
We are providing 2020 financial guidance as set forth below:
Revenue
Workforce Solutions
Provider Solutions
Consolidated
Operating Income
Capital Expenditures
Annual Effective Income Tax Rate
$
$
$
$
Full-Year 2020 Guidance
197.0
50.5
247.5
12.0
24.0
23
$
$
$
$
-
-
-
-
-
-
203.0 million
52.5 million
255.5 million
14.5 million
26.0 million
25 percent
Our 2020 Workforce Solutions revenue guidance includes anticipated revenues of approximately $36.0 million from our legacy resuscitation products, representing a
decline of $23.0 million from 2019. We expect the quarterly revenues from the legacy products to be as follows: approximately $11.0 million in first quarter,
approximately $10.5 million in second quarter, approximately $8.5 million in third quarter, approximately $6.0 million in fourth quarter, and approximately zero
thereafter. Our Provider Solutions revenue guidance includes approximately $1.5 million from the recently acquired CredentialMyDoc business.
Our operating income guidance of $12.0 million to $14.5 million is impacted by the anticipated reduction in legacy resuscitation revenues noted above coupled with
an anticipated operating loss of $1.0 million related to the CredentialMyDoc acquisition. Also included in operating income guidance is a one-time favorable
contractual adjustment of $3.4 million to royalties expense resulting from our resolution of a mutual disagreement relating to various elements of a past partnership,
which adjustment will be recorded in the first quarter of 2020.
33
Table of Contents
SELECTED QUARTERLY OPERATING RESULTS
The following tables set forth selected statements of income data for each of the four quarters in the periods ended December 31, 2019 and December 31, 2018,
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 for these periods. You should
read this information in conjunction with HealthStream’s Consolidated Financial Statements and related notes thereto included elsewhere in this report. The operating
results for any quarter are not necessarily indicative of the results to be expected in the future. Revenues from our subscription-based products are recognized ratably
over the subscription term.
STATEMENT OF INCOME DATA:
Revenues, net
Total operating costs and expenses
Operating income
Income from continuing operations
Income from discontinued operations
Net income
Net income per share - diluted (1):
Continuing operations
Discontinued operations
Net income per share - diluted
Weighted average shares of common stock outstanding - diluted
STATEMENT OF INCOME DATA:
Revenues, net
Total operating costs and expenses
Operating income
Income from continuing operations
Income (loss) from discontinued operations
Net income
Net income per share - diluted (1):
Continuing operations
Discontinued operations
Net income per share - diluted
Quarter Ended
March 31,
2019
June 30,
2019
September 30, December 31,
2019
2019
(In thousands, except per share data)
65,187 $
59,818
5,369
4,780
1,194
5,974 $
0.15 $
0.03
0.18 $
63,781 $
61,513
2,268
2,401
—
2,401 $
0.07 $
—
0.07 $
62,450 $
58,702
3,748
3,461
251
3,712 $
0.11 $
—
0.11 $
62,695
59,358
3,337
3,554
129
3,683
0.11
—
0.11
32,377
32,434
32,437
32,465
Quarter Ended
March 31,
2018
June 30,
2018
September 30, December 31,
2018
2018
(In thousands, except per share data)
54,858 $
51,128
3,730
3,629
20,217
23,846 $
0.11 $
0.63
0.74 $
57,008 $
52,744
4,264
3,656
(1,111)
2,545 $
0.11 $
(0.03)
0.08 $
59,925 $
55,264
4,661
3,036
—
3,036 $
0.09 $
—
0.09 $
59,825
56,988
2,837
2,931
(141)
2,790
0.09
—
0.09
$
$
$
$
$
$
$
$
Weighted average shares of common stock outstanding - diluted
32,132
32,378
32,415
32,416
(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 Resources
Net cash provided by operating activities from continuing operations was $65.7 million during 2019 compared to $44.3 million during 2018, an increase of 48%. The
number of days sales outstanding (DSO) was 47 days for 2019 compared to 59 days for 2018. The Company calculates DSO by dividing the average accounts
receivable balance (excluding unbilled and other receivables) by average daily revenues for the year. The improvement in DSO resulted from improved collections
during the year. The Company’s primary sources of cash were receipts generated from the sales of our products and services. The primary uses of cash to fund
operations included personnel expenses, sales commissions, royalty payments, payments for contract labor and other direct expenses associated with delivery of our
products and services, and general corporate expenses.
Net cash used in investing activities was approximately $67.5 million during 2019, while $36.7 million of cash was provided by investing activities during 2018.
During 2019, the Company acquired two businesses, Providigm and CredentialMyDoc,
34
Table of Contents
for a combined $27.0 million, invested in marketable securities of $87.3 million, purchased property and equipment of $22.0 million, made payments for capitalized
software development of $14.5 million, and invested $3.3 million in non-marketable equity investments. These uses of cash were partially offset by $80.6 million in
maturities of marketable securities and $6.1 million in proceeds from the sale of its PX business segment. During 2018, the Company received net proceeds from the
sale of the PX business of $44.0 million and had maturities of marketable securities of $69.0 million. These sources of cash were partially offset by $57.1 million in
purchases of marketable securities, $11.3 million spent for capitalized software development, $7.2 million for purchases of property and equipment, and $0.8 million
in non-marketable equity investments.
Cash used in financing activities was $0.9 million during 2019 compared to $30.3 million during 2018. The primary uses of cash during 2019 were $1.0 million for
payments of payroll taxes from stock based compensation, $58,000 for payments of cash dividends, and $38,000 for payment of an earn-out related to a prior
acquisition. During 2019, the primary source of cash from financing activities resulted from $0.2 million from the exercise of employee stock options. During 2018,
the primary uses of cash were $32.4 million for payments of cash dividends, $0.3 million for payments of payroll taxes from stock based compensation, $100,000 for
payment of debt issue costs, and $38,000 for payment of an earn-out related to a prior acquisition. During 2018, the primary source of cash from financing activities
resulted from $2.6 million from the exercise of employee stock options.
Our balance sheet reflects positive working capital of $119.4 million at December 31, 2019 compared to $134.6 million at December 31, 2018. The decrease in
working capital was primarily due to a reduction in accounts receivable from the prior year. The Company’s primary source of liquidity is $172.9 million of cash and
cash equivalents and marketable securities. The Company also has a $50.0 million revolving credit facility loan agreement, all of which was available at
December 31, 2019. For additional information regarding our revolving credit facility, see Note 14 to the Company’s Consolidated Financial Statements included
elsewhere in this report.
We believe that our existing cash and cash equivalents, marketable securities, cash generated from operations, and available borrowings under our revolving credit
facility will be sufficient to meet anticipated working capital needs, new product development, and capital expenditures for at least the next 12 months.
The Company’s growth strategy includes acquiring businesses that provide complementary products and services. It is anticipated that future acquisitions, if any,
would be effected through cash consideration, stock consideration, or a combination of both. The issuance of our stock as consideration for an acquisition or to raise
additional capital could have a dilutive effect on earnings per share and could adversely affect our stock price. The revolving credit facility contains financial
covenants and availability calculations designed to set a maximum leverage ratio of outstanding debt to consolidated EBITDA (as defined in our credit facility) and an
interest coverage ratio of consolidated EBITDA to interest expense. Therefore, the maximum borrowings against the revolving credit facility would be dependent on
the covenant values at the time of borrowing. As of December 31, 2019, the Company was in compliance with all covenants. There can be no assurance that amounts
available for borrowing under our revolving credit facility will be sufficient to consummate any possible acquisitions, and we cannot assure you that if we need
additional financing that it will be available on terms favorable to us, or at all. Failure to generate sufficient cash flow from operations or raise additional capital when
required in sufficient amounts and on terms acceptable to us could harm our business, financial condition, and results of operations.
Contractual Obligations
The following table presents a summary of future anticipated payments due by the Company under contractual obligations with firm minimum commitments as of
December 31, 2019 (in thousands):
Operating leases
Purchase obligations
Total
Payments due by period
Less than 1
year
1-3 years
3-5 years
More than 5
years
Total
$
$
4,749 $
4,061
8,810 $
8,715 $
3,919
12,634 $
8,041 $
—
8,041 $
24,593 $
—
24,593 $
46,098
7,980
54,078
(a)
(b)
Refer to Note 15 to the Company’s Consolidated Financial Statements included elsewhere in this report for additional information regarding operating leases.
Represents non-cancelable contractual obligations primarily related to information technology assets and our revolving credit facility, which is described further in Note 14 to the Company’s
Consolidated Financial Statements included elsewhere in this report. The amounts included above represent the non-cancelable portion of agreements or the minimum cancellation fee.
Recent Accounting Pronouncements
In June 2016, the FASB issued ASU 2016-03, Financial Instruments—Credit Losses (ASC 326): Measurement of Credit Losses on Financial Instruments, which
amends guidance on reporting credit losses for assets held at amortized cost basis
35
Table of Contents
and available for sale debt securities. For assets held at amortized cost basis, ASC 326 eliminates the probable initial recognition threshold in current GAAP and,
instead, requires an entity to reflect its current estimate of all expected credit losses. The Company adopted this ASU on January 1, 2020, and the effect of adoption on
the Company’s consolidated financial statements and related disclosures is not expected to be material.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
The Company is exposed to market risk from changes in interest rates. We do not have any material foreign currency exchange rate risk or commodity price risk. As
of December 31, 2019, the Company had no outstanding debt. We may become subject to interest rate market risk associated with any future borrowings under our
revolving credit facility. The interest rate under the revolving credit facility varies depending on the interest rate option selected by the Company plus a margin
determined in accordance with a pricing grid. We are exposed to market risk with respect to our cash and investment balances, which approximated $172.9 million at
December 31, 2019. Assuming a hypothetical 10% decrease in interest rates, interest income from cash and investments would decrease on an annualized basis by
approximately $310,000.
The Company’s investment policy and strategy is focused on investing in highly rated securities, with the objective of minimizing the potential risk of principal loss.
The Company’s policy limits the amount of credit exposure to any single issuer and sets limits on the average portfolio maturity.
The above market risk discussion and the estimated amounts presented are forward-looking statements of market risk assuming the occurrence of certain adverse
market conditions. Actual results in the future may differ materially from those projected as a result of actual developments in the market.
36
Table of Contents
Item 8. Financial Statements and Supplementary Data
HEALTHSTREAM, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Reports of Independent Registered Public Accounting Firm
Consolidated Balance Sheets
Consolidated Statements of Income
Consolidated Statements of Comprehensive Income
Consolidated Statements of Shareholders’ Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
The supplementary financial information required by this Item 8 is included in Item 7 under the caption Selected Quarterly Operating Results.
37
Page
38
41
42
43
44
45
46
Table of Contents
Report of Independent Registered Public Accounting Firm
To the Shareholders and the Board of Directors of HealthStream, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of HealthStream, Inc. (the Company) as of December 31, 2019 and December 31, 2018, 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, 2019,
and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all
material respects, the financial position of the Company at December 31, 2019 and 2018, and the results of its operations and its cash flows for each of the three years
in the period ended December 31, 2019, 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's internal control
over financial reporting as of December 31, 2019, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (2013 framework) and our report dated February 26, 2020, expressed an unqualified opinion thereon.
Adoption of New Accounting Standard
As discussed in Note 1 to the consolidated financial statements, the Company changed its method for recognizing revenue in 2018 due to the adoption of Accounting
Standards Update No. 2014-09, Revenue from Contracts with Customers, as amended.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements
based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in 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 reasonable assurance
about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to 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 included evaluating the accounting principles
used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a
reasonable basis for our opinion.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be
communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially
challenging, subjective or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial
statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the
accounts or disclosures to which they relate.
Revenue Recognition
Description of the Matter
As described in Note 1 of the consolidated financial statements, the Company recognizes revenue when control of the promised goods
or services is transferred to the customer in an amount that reflects the consideration the Company expects to be entitled in exchange
for transferring those goods or services. The Company’s contracts with customers often contain promises for multiple goods and
services. The Company accounts for the promised goods and services in its contracts as separate performance obligations if they are
distinct. The transaction price is then allocated to the separate performance obligations on a relative standalone selling price basis.
Auditing the Company’s accounting for revenue recognition was challenging due to the judgment and effort required to analyze the
Company’s contracts to determine whether promised goods and services are distinct performance obligations and to determine
standalone selling prices used to allocate the transaction price to those performance obligations.
38
Table of Contents
How We Addressed the
Matter in Our Audit
We obtained an understanding, evaluated the design and tested the operating effectiveness of controls over the Company's process to
identify and evaluate performance obligations and determine the standalone selling prices used to allocate the transaction price to those
performance obligations.
Among other procedures to evaluate management’s identification and determination of the distinct performance obligations, we
obtained an understanding of the Company’s various product and service offerings and tested the application of the revenue
recognition accounting requirements to determine which performance obligations were distinct. To test management’s determination of
relative standalone selling price for each performance obligation, we performed audit procedures that included, among others,
assessing the methodology applied and testing the data underlying the Company’s calculations. We inspected a sample of customer
contracts to assess management’s treatment of significant terms and tested the amounts recognized as revenue or recorded in deferred
revenue.
Valuation – Business Combinations
Description of the Matter
During 2019, the Company completed its acquisitions of Providigm, LLC (Providigm) for consideration of $18.0 million and
CredentialMyDoc for consideration of $9.0 million, as disclosed in Note 8 to the consolidated financial statements. Both transactions
were accounted for as business combinations. The Company recorded definite-lived intangible assets of $6.0 million for Providigm
and $4.3 million for CredentialMyDoc, primarily consisting of customer relationships and developed technology.
Auditing the Company's accounting for its acquisitions of Providigm and CredentialMyDoc was challenging due to the estimation
uncertainty in the Company’s determination of the fair value of the customer relationships and developed technology. The estimation
uncertainty was primarily due to the sensitivity of the respective fair values to the underlying significant assumptions. The fair value
estimate of the customer relationships intangible assets included significant assumptions in the prospective financial information
(including revenue growth, customer attrition and EBITDA margin) and the discount rates. The fair value estimate of the developed
technology intangible assets included significant assumptions such as the estimate of employee hours that would be needed to recreate
the software. These significant assumptions are forward looking and could be affected by future economic and market conditions.
How We Addressed the
Matter in Our Audit
We tested the Company's controls over its accounting for the acquisitions. Our tests included controls over the estimation process
supporting the fair value estimates of the customer relationships and developed technology intangible assets, including management’s
review of the significant assumptions discussed above.
To test the estimated fair values of the customer relationships and developed technology intangible assets, we performed audit
procedures that included, among others, evaluating the Company's selection of the valuation methodologies, testing the significant
assumptions and the completeness and accuracy of the underlying data. For example, we compared the significant assumptions in the
prospective financial information to current industry trends, as well as to the historical performance of the acquired business and a
similar business segment of the Company. To test the number of employee hours that would be needed to recreate the developed
technology, we performed inquiries with appropriate non-financial personnel, including IT department management, to corroborate
management's assumptions. We also performed sensitivity analyses to evaluate the changes in the fair value of the intangible assets
that would result from the changes in significant assumptions. We involved our valuation specialists to assist with our evaluation of the
methodologies used by the Company and the evaluation of the discount rates by comparing them against discount rate ranges that were
independently developed using publicly available market data for comparable entities.
/s/ Ernst & Young LLP
We have served as the Company’s auditor since 1998.
Nashville, Tennessee
February 26, 2020
39
Table of Contents
To the Shareholders and the Board of Directors of HealthStream, Inc.
Report of Independent Registered Public Accounting Firm
Opinion on the Internal Control Over Financial Reporting
We have audited HealthStream, Inc.’s internal control over financial reporting as of December 31, 2019, 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 our opinion, HealthStream,
Inc. (the Company) maintained, in all material respects, effective internal control over financial reporting as of December 31, 2019, 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 consolidated balance
sheets of HealthStream, Inc. as of December 31, 2019 and 2018, 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, 2019, and the related notes and our report dated February 26, 2020, expressed an unqualified
opinion thereon.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal
control over financial reporting included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an
opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required
to be independent with the respect to the Company in accordance with U.S. federal securities laws and the applicable 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 reasonable assurance
about whether effective internal control over financial reporting was maintained in all material respects.
Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the
design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the
circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial
reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions
and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with
authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the
policies or procedures may deteriorate.
/s/ Ernst & Young LLP
Nashville, Tennessee
February 26, 2020
40
Table of Contents
HEALTHSTREAM, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands)
December 31,
2019
December 31,
2018
ASSETS
Current assets:
Cash and cash equivalents
Marketable securities
Accounts receivable, net of allowance for doubtful accounts of $843 and
$1,161 at December 31, 2019 and 2018, respectively
Accounts receivable - unbilled
Prepaid royalties, net of amortization
Other prepaid expenses and other current assets
Total current assets
Property and equipment, net of accumulated depreciation of $19,291 and
$20,827 at December 31, 2019 and 2018, respectively
Capitalized software development, net of accumulated amortization of $57,768 and
$46,757 at December 31, 2019 and 2018, respectively
Operating lease right of use assets, net
Goodwill
Customer-related intangibles, net of accumulated amortization of $29,760 and
$23,245 at December 31, 2019 and 2018, respectively
Other intangible assets, net of accumulated amortization of $12,735 and
$9,663 at December 31, 2019 and 2018, respectively
Deferred tax assets
Deferred commissions
Non-marketable equity investments
Other assets
Total assets
Current liabilities:
Accounts payable
Accrued royalties
Accrued liabilities
Deferred revenue
LIABILITIES AND SHAREHOLDERS’ EQUITY
Total current liabilities
Deferred tax liabilities
Deferred revenue, non-current
Operating lease liability, non-current
Other long-term liabilities
Commitments and contingencies
Shareholders’ equity:
Common stock, no par value, 75,000 shares authorized; 32,379 and 32,325 shares
issued and outstanding at December 31, 2019 and 2018,
respectively
Retained earnings
Accumulated other comprehensive income (loss)
Total shareholders’ equity
Total liabilities and shareholders’ equity
$
131,538 $
41,328
27,650
2,726
11,898
9,432
224,572
26,065
21,445
29,615
102,196
52,554
7,527
269
17,645
6,782
874
489,544 $
4,810 $
16,736
18,128
65,511
105,185
13,183
1,918
30,733
357
290,021
48,143
4
338,168
489,544 $
$
$
$
134,321
34,497
38,124
2,880
13,596
18,016
241,434
15,866
18,352
—
86,144
53,469
5,909
145
16,470
3,376
783
441,948
8,497
15,756
16,540
66,061
106,854
11,068
2,868
-
2,211
286,597
32,373
(23)
318,947
441,948
See accompanying notes to the Consolidated Financial Statements.
41
Table of Contents
HEALTHSTREAM, INC.
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data)
Revenues, net
Operating costs and expenses:
Cost of revenues (excluding depreciation and amortization)
Product development
Sales and marketing
Other general and administrative expenses
Depreciation and amortization
Total operating costs and expenses
Operating income
Other income, net
Income from continuing operations before income tax provision
Income tax provision
Income from continuing operations
Discontinued operations
(Loss) income from discontinued operations before income tax provision
Gain on sale of discontinued operations
Income tax provision (benefit)
Income from discontinued operations
Net income
Net income per share – basic:
Continuing operations
Discontinued operations
Net income per share - basic
Net income per share - diluted:
Continuing operations
Discontinued operations
Net income per share - diluted
Weighted average shares of common stock outstanding:
Basic
Diluted
Dividends declared per share
2019
Year Ended December 31,
2018
2017
$
254,112 $
231,616 $
214,899
103,890
29,109
37,945
40,579
27,869
239,392
96,014
25,735
35,698
34,447
24,231
216,125
14,720
15,491
3,209
1,084
17,929
3,733
14,196
—
2,053
479
1,574
15,770 $
0.44
0.05
0.49
0.44
0.05
0.49
$
$
$
$
16,575
3,324
13,251
(64)
29,489
10,459
18,966
32,217 $
0.41 $
0.59
1.00 $
0.41 $
0.59
1.00 $
87,208
24,148
38,606
31,483
24,047
205,492
9,407
733
10,140
1,302
8,838
393
—
(773)
1,166
10,004
0.27
0.04
0.31
0.27
0.04
0.31
32,372
32,428
— $
32,264
32,335
1.00 $
31,861
32,196
—
$
$
$
$
$
$
See accompanying notes to the Consolidated Financial Statements.
42
Table of Contents
HEALTHSTREAM, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)
Net income
Other comprehensive income, net of taxes:
Unrealized gain on marketable securities
Total other comprehensive income
Comprehensive income
2019
Year Ended December 31,
2018
2017
$
15,770 $
32,217 $
10,004
27
27
15,797 $
15
15
32,232 $
13
13
10,017
$
See accompanying notes to the Consolidated Financial Statements.
43
Table of Contents
HEALTHSTREAM, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
(In thousands)
Balance at December 31, 2016
Cumulative effect of accounting change
Net income
Comprehensive income
Stock based compensation
Common stock issued under stock plans, net of
shares withheld for employee taxes
Balance at December 31, 2017
Cumulative effect of accounting change
Net income
Comprehensive income
Dividends declared on common stock ($1.00 per share)
Stock based compensation
Common stock issued under stock plans, net of
shares withheld for employee taxes
Balance at December 31, 2018
Net income
Comprehensive income
Stock donated to Company (held in treasury)
Stock based compensation
Common stock issued under stock plans, net of
shares withheld for employee taxes
Balance at December 31, 2019
Common Stock
Shares
Amount
Retained
Earnings
Accumulated
Other
Comprehensive
(Loss)/Income
Total
Shareholders’
Equity
31,748 $
—
—
—
—
160
31,908
—
—
—
—
—
417
32,325
—
—
(86)
—
280,813 $
—
—
—
1,852
1
282,666
—
—
—
—
1,686
2,245
286,597
—
—
—
4,244
5,346 $
2,192
10,004
—
—
—
17,542
15,132
32,217
—
(32,518)
—
—
32,373
15,770
—
—
—
(51) $
—
—
13
—
—
(38)
—
—
15
—
—
—
(23)
—
27
—
—
286,108
2,192
10,004
13
1,852
1
300,170
15,132
32,217
15
(32,518)
1,686
2,245
318,947
15,770
27
—
4,244
140
32,379 $
(820)
290,021 $
—
48,143 $
—
4 $
(820)
338,168
See accompanying notes to the Consolidated Financial Statements.
44
Table of Contents
HEALTHSTREAM, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
OPERATING ACTIVITIES:
Net income
Income from discontinued operations
Adjustments to reconcile net income to net cash provided by operating activities:
2019
Year Ended December 31,
2018
2017
$
15,770
(1,574)
$
32,217
(18,966)
$
Depreciation and amortization
Stock based compensation
Amortization of deferred commissions
Provision for doubtful accounts
Deferred income taxes
(Gain) loss on equity method investments
Change in fair value of non-marketable equity investments
Other
Changes in operating assets and liabilities:
Accounts and unbilled receivables
Prepaid royalties
Other prepaid expenses and other current assets
Deferred commissions
Other assets
Accounts payable and accrued expenses
Accrued royalties
Deferred revenue
Net cash provided by continuing operating activities
Net cash (used in) provided by discontinued operating activities
Net cash provided by operating activities
INVESTING ACTIVITIES:
Business combinations, net of cash acquired
Proceeds from sale of discontinued operations, net of tax
Proceeds from maturities of marketable securities
Purchases of marketable securities
Proceeds from sale of property and equipment
Payments to acquire non-marketable equity investments
Payments associated with capitalized software development
Purchases of property and equipment
Net cash (used in) provided by continuing investing activities
Net cash used in discontinued investing activities
Net cash (used in) provided by investing activities
FINANCING ACTIVITIES:
Proceeds from exercise of stock options
Taxes paid related to net settlement of equity awards
Payment of earn-out related to prior acquisitions
Payment of debt issue costs
Payment of cash dividends
Net cash (used in) provided by financing activities
Net (decrease) increase in cash and cash equivalents
Cash and cash equivalents at beginning of period
Cash and cash equivalents at end of period
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid
Income taxes paid
Non-cash additions to property and equipment
27,869
4,244
8,305
211
2,167
(64)
—
(72)
11,605
1,698
4,862
(9,479)
(42)
1,098
979
(1,920)
65,657
—
65,657
(27,018)
6,070
80,589
(87,328)
15
(3,342)
(14,513)
(21,997)
(67,524)
—
(67,524)
214
(1,034)
(38)
—
(58)
(916)
24,231
1,777
7,659
1,033
3,017
(42)
1,271
(9)
(4,050)
1,639
(3,938)
(11,577)
(30)
2,008
2,907
5,103
44,250
(1,004)
43,246
—
44,049
68,992
(57,085)
—
(833)
(11,284)
(7,166)
36,673
(115)
36,558
2,582
(338)
(38)
(100)
(32,357)
(30,251)
$
$
$
$
(2,783)
134,321
131,538
$
101
630
31
$
$
$
49,553
84,768
134,321
$
117
16,513
1,013
$
$
$
10,004
(1,166)
24,047
1,736
—
1,568
(2,144)
5
—
409
1,125
2,046
(25)
—
(201)
5,784
(32)
(552)
42,604
4,108
46,712
—
—
90,073
(83,279)
—
(500)
(9,597)
(5,515)
(8,818)
(2,761)
(11,579)
413
(412)
—
—
—
1
35,134
49,634
84,768
101
638
—
See accompanying notes to the Consolidated Financial Statements.
45
Table of Contents
HEALTHSTREAM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Reporting Entity and Segments
HealthStream, Inc. (the Company) was incorporated in 1990 as a Tennessee corporation and is headquartered in Nashville, Tennessee. As of December 31, 2019, the
Company operated in two segments: Workforce Solutions and Provider Solutions. Workforce Solutions products help meet the ongoing training, certification,
assessment, and development needs of the healthcare workforce; they are delivered via a software-as-a-service (SaaS) model and are sold on a subscription basis.
Provider Solutions products offer healthcare organizations software applications for administering and tracking provider credentialing, privileging, call center, and
enrollment activities.
On February 12, 2018, the Company divested its Patient Experience (PX) business to Press Ganey Associates (Press Ganey) for $65.2 million in cash (after giving
effect to the post-closing working capital adjustment). This sale of the PX business resulted in the divestiture of the Company’s patient experience solutions business
segment. The results of operations for PX are presented as discontinued operations within the Notes to Consolidated Financial Statements herein.
Recently Adopted Accounting Standards
In February 2016, the FASB issued ASU 2016-02, Leases (ASC 842), which, among other things, requires an entity to recognize a right-of-use asset and a lease
liability on the balance sheet for substantially all leases, including operating leases. The Company adopted ASC 842 effective January 1, 2019 utilizing the modified
retrospective approach such that prior year financial statements were not recast under the new standard. Adoption of this standard resulted in changes to the
Company’s Consolidated Balance Sheets and accounting policies for leases but did not have an impact on the Consolidated Statements of Income or Cash Flows. See
Note 15 for additional information regarding the new standard and its impact on the Company’s financial statements.
Recognition of Revenue
Revenues are recognized when control of the promised goods or services is transferred to the customer in an amount that reflects the consideration the Company
expects to be entitled in exchange for transferring those goods or services. The Company adopted ASU 2014-09, Revenue from Contracts with Customer (referred to
as Accounting Standards Codification (ASC) Topic 606 or ASC 606) effective as of January 1, 2018 utilizing the modified retrospective approach. This accounting
standard required changes to the Company’s accounting policies for revenue recognition, trade and other receivables, and deferred commissions.
Revenue is recognized based on the following five step model:
•
•
•
•
•
Identification of the contract with a customer
Identification of the performance obligations in the contract
Determination of the transaction price
Allocation of the transaction price to the performance obligations in the contract
Recognition of revenue when, or as, the Company satisfies a performance obligation
Subscription revenues primarily consist of fees in consideration of providing customers access to one or more of our SaaS-based solutions and/or courseware
subscriptions, as well as fees related to licensing agreements, all of which include routine customer support and technology enhancements. Revenue is generally
recognized over time during the contract term beginning when the service is made available to the customer. Subscription contracts are generally non-cancelable, one
to five years in length, and billed annually, semi-annually, quarterly, or monthly in advance.
Professional services revenues primarily consist of fees for implementation services, consulting, custom courseware development, and training. The majority of our
professional services contracts are billed in advance based on a fixed price basis, and revenue is recognized over time as the services are performed. For both
subscription services and professional services, the time between billing the customer and when performance obligations are satisfied is generally not significant.
Our contracts with customers often contain promises for multiple goods and services. For these contracts, the Company accounts for the promised goods and services
in its contracts as separate performance obligations if they are distinct. The contract price, which represents transaction price, is allocated to the separate performance
obligations on a relative standalone selling price basis. We generally determine standalone selling prices based on the standard list price for each product, taking into
consideration certain factors, including contract length and the number of subscriptions within the contract.
46
Table of Contents
HEALTHSTREAM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
We receive payments from customers based on billing schedules established in our contracts. Accounts receivable - unbilled represent contract assets related to our
conditional right to consideration for subscription and professional services contracts where performance has occurred under the contract. Accounts receivable are
primarily comprised of trade receivables that are recorded at the invoice amount, net of an allowance for doubtful accounts, when the right to consideration becomes
unconditional.
Deferred revenue represents contract liabilities that are recorded when cash payments are received or are due in advance of our satisfaction of performance
obligations.
Principles of Consolidation
The Consolidated Financial Statements include the accounts of the Company and its wholly owned subsidiaries. All intercompany accounts and transactions have
been eliminated in consolidation.
Use of Estimates
The Consolidated Financial Statements are prepared in accordance with U.S. generally accepted accounting principles. These accounting principles require
management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from
those estimates and such differences could be material to the Consolidated Financial Statements.
Cash Equivalents
The Company considers cash equivalents to be unrestricted, highly liquid investments with initial maturities of less than three months.
Marketable Securities
Marketable securities are classified as available for sale and are stated at fair market value, with the unrealized gains and losses, net of tax, reported in other
accumulated comprehensive income (loss) on the accompanying Consolidated Balance Sheets. Realized gains and losses and declines in market value judged to be
other than temporary on investments in marketable securities are included in other income, net on the accompanying Consolidated Statements of Income. The cost of
securities sold is based on the specific identification method. Interest and dividends on securities classified as available for sale are included in other income, net on
the accompanying Consolidated Statements of Income. Premiums and discounts are amortized over the life of the related available for sale security as an adjustment
to the yield using the effective interest method.
Deferred Commissions
Deferred commissions represent incremental costs to acquire contracts with customers, such as the initial sales commission payment, which are capitalized and
amortized consistent with the transfer of the goods or services to the customer over the expected period of benefit. Capitalized contract costs are included under the
caption deferred commissions in the accompanying Consolidated Balance Sheet. The expected period of benefit is the contract term, except when the capitalized
commission is expected to provide economic benefit to the Company for a period longer than the contract term, such as for new customer or incremental sales where
renewals are expected and renewal commissions are not commensurate with initial commissions. Non-commensurate commissions are amortized over the greater of
the contract term or technological obsolescence period of three years.
Prepaid Royalties
Prepaid royalties represent advance payments to royalty partners under revenue sharing arrangements for which the Company sells and delivers such partner products
to its customers. Royalties are typically paid in advance at the commencement of the subscription period or periodically throughout the subscription period, such as in
quarterly, bi-annual, or annual installments. Royalty payments are amortized over the term of the underlying subscription contracts, which generally range from one to
five years, in order to match the direct royalty costs to the same period the subscription revenue is recognized. Amortization of royalties is included under the caption
cost of revenues (excluding depreciation and amortization) in the accompanying Consolidated Statements of Income.
47
Table of Contents
HEALTHSTREAM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Allowance for Doubtful Accounts
The Company estimates its allowance for doubtful accounts to include accounts that may become uncollectible in the future, along with using a specific identification
method in which management considers the facts and circumstances surrounding each potentially uncollectible receivable. Uncollectible receivables are written-off in
the period management believes it has exhausted its ability to collect payment from the customer. Bad debt expense is recorded when events or circumstances indicate
an additional allowance is required.
Changes in the allowance for doubtful accounts and the amounts charged to bad debt expense for the years ended December 31 were as follows (in thousands):
2019
2018
2017
Allowance Balance at
Beginning of Period
Charged to Costs and
Expenses
Write-offs
Allowance Balance at
End of Period
$
1,161 $
1,979
839
211 $
1,033
1,568
(529) $
(1,851)
(428)
843
1,161
1,979
Capitalized Software Development
Capitalized software development is stated on the basis of cost and is presented net of accumulated amortization. The Company capitalizes costs incurred during the
software development phase for projects when such costs are material. These assets are generally amortized using the straight-line method over three years. The
Company capitalized $14.1 million and $11.9 million during 2019 and 2018, respectively. Amortization of capitalized software development was $11.0 million, $9.6
million, and $8.9 million during 2019, 2018, and 2017, respectively. Maintenance and operating costs are expensed as incurred. As of December 31, 2019 and 2018,
there were no capitalized software development costs for external computer software developed for resale.
Fair Value Measurements
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in the principal or most advantageous market in an orderly
transaction between market participants at the measurement date. The fair value hierarchy prioritizes the inputs to valuation techniques used in measuring fair value.
There are three levels to the fair value hierarchy based on the reliability of inputs, as follows:
Level 1 – Observable inputs that reflect quoted prices (unadjusted) for identical assets or liabilities in active markets.
Level 2 – Inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly.
Level 3 – Unobservable inputs in which little or no market data exists, therefore requiring the Company to develop its own assumptions.
The Company evaluates assets and liabilities subject to fair value measurements on a recurring basis to determine the appropriate level at which to classify them for
each reporting period. This determination requires significant judgments to be made by the Company. At December 31, 2019 and 2018, our assets measured at fair
value on a recurring basis consisted of marketable securities, which are classified as available for sale (see Note 4 – Marketable Securities).
Property and Equipment
Property and equipment are stated on the basis of cost. Depreciation is provided on the straight-line method over the following estimated useful lives, except for assets
under financing leases and leasehold improvements, which are amortized over the shorter of the estimated useful life or their respective lease term.
Furniture and fixtures
Equipment
48
Years
5 - 7
3
Table of Contents
HEALTHSTREAM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Goodwill and Intangible Assets
Goodwill represents the excess of purchase price in a business combination over the fair value of the net identifiable assets acquired, including intangible assets. The
Company estimates fair values of intangible assets using the income and cost methods, which are based on management’s estimates and assumptions. The carrying
amount of our goodwill is evaluated for impairment at least annually during the fourth quarter and whenever events or changes in facts or circumstances indicate that
impairment may exist. In accordance with ASC 350, Intangibles – Goodwill and Other, companies may opt to first assess qualitative factors to determine whether 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 as financial performance,
industry and market metrics, and other factors affecting the reporting unit. If this assessment concludes that it is more likely than not that the fair value of a reporting
unit exceeds its carrying value, then goodwill is not considered impaired and no further impairment testing is required. Conversely, if the 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 must then compare the fair value of the reporting unit to
its carrying value. The Company determines fair value of the reporting units using both income and market-based models. These models require the use of various
assumptions relating to cash flow projections, growth rates, discount rates, and terminal value calculations. There were no goodwill impairments identified or
recorded for the years ended December 31, 2019, 2018, or 2017.
As of December 31, 2019, intangible assets include customer relationships, internally developed technology, non-competition agreements, and trade names. These
intangible assets are considered to have definite useful lives and are being amortized on a straight-line basis over periods ranging between three and thirteen years.
The weighted average amortization period for definite lived intangible assets as of December 31, 2019 was 11.0 years. Intangible assets are reviewed for impairment
whenever events or changes in facts or circumstances indicate that the carrying amount of the assets may not be recoverable. There were no intangible asset
impairments identified or recorded for the years ended December 31, 2019, 2018, or 2017.
Long-Lived Assets
Long-lived assets to be held for use are reviewed for events or changes in facts and circumstances, both internally and externally, which may indicate that an
impairment of long-lived assets held for use is present. The Company measures any impairment using observable market values or discounted future cash flows from
the related long-lived assets. The cash flow estimates and discount rates incorporate management’s best estimates, using appropriate and customary assumptions and
projections at the date of evaluation. Management periodically evaluates whether the carrying value of long-lived assets, including intangible assets, property and
equipment, capitalized software development, deferred commissions, and other assets will be recoverable. There were no long-lived asset impairments identified or
recorded for the years ended December 31, 2019, 2018, or 2017.
Non-Marketable Equity Investments
Non-marketable equity investments are accounted for using the equity method when the Company can exercise significant influence over the investee. Investments for
which the Company is not able to exercise significant influence over the investee are accounted for using the measurement alternative for equity investments that do
not have readily determinable fair values. ASU 2016-01, Financial Instruments – Overall (Subtopic 825-10), became effective for the Company as of January 1, 2018
and requires equity investments (except those accounted for under the equity method of accounting or those that result in consolidation of the investee) to be measured
at fair value with changes in fair value recognized in net income. The fair value of non-marketable equity investments is not estimated if there are no identified events
or changes in circumstances that may have a significant adverse effect on the fair value of the investment. The proportionate share of income or loss from equity
method investments and any changes in fair value of investments accounted for using the measurement alternative are recorded under the caption other income, net in
the accompanying Consolidated Statements of Income.
Financial Instruments
The 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 or short-term nature of
such instruments. The Company also has marketable securities, which are recorded at approximate fair value based on quoted market prices or alternative pricing
sources (see Note 4 – Marketable Securities).
Advertising
The Company expenses the costs of advertising as incurred. Advertising expense for the years ended December 31, 2019, 2018, and 2017 was $765,000, $721,000,
and $868,000, respectively, and is included under the caption sales and marketing expense in the accompanying Consolidated Statements of Income.
Shipping and Handling Costs
Shipping and handling costs that are associated with our products and services are included under the caption cost of revenues (excluding depreciation and
amortization) in the accompanying Consolidated Statements of Income.
49
Table of Contents
HEALTHSTREAM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Income Taxes
Income taxes are accounted for using the asset and liability method, whereby deferred tax assets and liabilities are determined based on the temporary differences
between the financial statement and tax bases of assets and liabilities measured at tax rates that will be in effect for the year in which the differences are expected to
affect taxable income. Management evaluates all available evidence, both positive and negative, to determine whether, based on the weight of that evidence, a
valuation allowance is needed. Future realization of the tax benefit of an existing deductible temporary difference or carryforward ultimately depends on the existence
of sufficient taxable income of the appropriate character within the carryback or carryforward period available under the tax law. There are four possible sources of
taxable income that may be available under the tax law to realize a tax benefit for deductible temporary differences and carryforwards: 1) future reversals of existing
taxable temporary differences, 2) future taxable income exclusive of reversing temporary differences and carryforwards, 3) taxable income in prior carryback year(s)
if carryback is permitted under the tax law, and 4) tax-planning strategies that would, if necessary, be implemented to realize deductible temporary differences or
carryforwards prior to their expiration. Management reviews the realizability of its deferred tax assets each reporting period to identify whether any significant
changes in circumstances or assumptions have occurred that could materially affect the realizability of deferred tax assets. As of December 31, 2019, the Company
had established a valuation allowance of $64,000 for the portion of its net deferred tax assets that are not more likely than not expected to be realized. The Company
accounts for income tax uncertainties using a more-likely-than-not recognition threshold based on the technical merits of the tax position taken. Tax positions that
meet the more-likely-than-not recognition threshold are measured in order to determine the tax benefit to be recognized in the financial statements.
Earnings per Share
Basic earnings per share is computed by dividing the net income available to common shareholders for the period by the weighted average number of common shares
outstanding during the period. Diluted earnings per share is computed by dividing the net income for the period by the weighted average number of common and
common equivalent shares outstanding during the period. Common equivalent shares are composed of incremental common shares issuable upon the exercise of stock
options and restricted share units subject to vesting. The dilutive effect of common equivalent shares is included in diluted earnings per share by application of the
treasury stock method. Common equivalent shares that have an anti-dilutive effect on diluted net income per share were excluded from the calculation of diluted
weighted average shares outstanding for the years ended December 31, 2019, 2018, and 2017.
Concentrations of Credit Risk and Significant Customers
The Company’s credit risks relate primarily to cash and cash equivalents, marketable securities, and accounts receivable. The Company places its temporary excess
cash investments in high quality, short-term money market instruments. At times, such investments may be in excess of the FDIC insurance limits. Marketable
securities consist primarily of investment grade corporate debt securities and government sponsored enterprise debt securities.
The Company sells its products and services to various companies in the healthcare industry that are primarily located in the United States. Customer credit
worthiness evaluations are performed on an as-needed basis, and the Company generally requires no collateral from customers. An allowance for doubtful accounts is
maintained for potentially uncollectible accounts receivable. The Company did not have any single customer representing over 10% of net revenues or accounts
receivable during 2019, 2018, or 2017.
Stock Based Compensation
As of December 31, 2019, the Company maintained two stock based compensation plans under which awards are outstanding, as described in Note 11. The Company
accounts for stock based compensation using the fair-value based method for costs related to share-based payments, including stock options and restricted share units.
The Company uses the Black Scholes option pricing model for calculating the fair value of option awards issued under its stock based compensation plan. The
Company measures compensation cost of restricted share units based on the closing fair market value of the Company’s stock on the date of grant. Stock based
compensation cost is measured at the grant date, based on the fair value of the award that is ultimately expected to vest, and is recognized as an expense over the
requisite service period. The Company recognizes tax benefits from stock based compensation if an excess tax benefit is realized. Excess tax benefits are reflected in
the Consolidated Statements of Income as a component of the provision for income taxes when realized.
Recently Issued Accounting Pronouncements Not Yet Adopted
In June 2016, the FASB issued ASU 2016-03, Financial Instruments—Credit Losses (ASC 326): Measurement of Credit Losses on Financial Instruments, which
amends guidance on reporting credit losses for assets held at amortized cost basis and available for sale debt securities. For assets held at amortized cost basis, ASC
326 eliminates the probable initial recognition threshold in current GAAP and, instead, requires an entity to reflect its current estimate of all expected credit losses.
The Company adopted this ASU on January 1, 2020 and the effect of adoption on the Company’s consolidated financial statements and related disclosures is not
expected to be material.
50
Table of Contents
2. SHAREHOLDERS’ EQUITY
HEALTHSTREAM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Common Stock
The Company is authorized to issue up to 75 million shares of common stock. The number of common shares issued and outstanding as of December 31, 2019 and
2018 was 32.4 million and 32.3 million, respectively.
Preferred Stock
The Company is authorized to issue up to 10 million shares of preferred stock in one or more series, having the relative voting powers, designations, preferences,
rights and qualifications, limitations or restrictions, and other terms as the Board of Directors may fix in providing for the issuance of such series, without any vote or
action of the shareholders.
3. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings per share for the three years ended December 31, 2019 (in thousands, except per share
amounts):
Numerator:
Income from continuing operations
Income from discontinued operations
Net income
Denominator:
Weighted-average shares outstanding
Effect of dilutive shares
Weighted-average diluted shares
Earnings per share – basic:
Continuing operations
Discontinued operations
Earnings per share - basic
Earnings per share – diluted:
Continuing operations
Discontinued operations
Earnings per share - diluted
2019
Year Ended
December 31,
2018
2017
$
$
$
$
$
$
14,196
1,574
15,770
$
$
32,372
56
32,428
0.44 $
0.05
0.49 $
0.44 $
0.05
0.49 $
13,251
18,966
32,217
$
$
32,264
71
32,335
0.41 $
0.59
1.00 $
0.41 $
0.59
1.00 $
8,838
1,166
10,004
31,861
335
32,196
0.27
0.04
0.31
0.27
0.04
0.31
Potentially dilutive shares representing 93,000, 91,000, and 58,000 shares of common stock for the years ended December 31, 2019, 2018, and 2017, respectively,
were excluded from the calculation of diluted earnings per share because their effect would have been anti-dilutive.
4. MARKETABLE SECURITIES
At December 31, 2019 and 2018, the fair value of marketable securities, which were all classified as available for sale, included the following (in thousands):
Level 2:
Corporate debt securities
Government-sponsored enterprise debt securities
Total
Adjusted
Cost
December 31, 2019
Unrealized
Gains
Unrealized
Losses
Fair Value
37,325 $
4,001
41,326 $
7 $
—
7 $
(5) $
—
(5) $
37,327
4,001
41,328
$
$
51
Table of Contents
HEALTHSTREAM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Level 2:
Corporate debt securities
Government-sponsored enterprise debt securities
Total
Adjusted
Cost
December 31, 2018
Unrealized
Gains
Unrealized
Losses
Fair Value
$
$
31,521 $
2,999
34,520
— $
—
—
(23) $
—
(23) $
31,498
2,999
34,497
The carrying amounts of the marketable securities reported in the Consolidated Balance Sheets approximate fair value based on quoted market prices or alternative
pricing sources and models utilizing market observable inputs. As of December 31, 2019, the Company does not consider any of its marketable securities to be other
than temporarily impaired. During the years ended December 31, 2019 and 2018, the Company did not reclassify any items out of accumulated other comprehensive
income to net income. All investments in marketable securities are classified as a current asset on the Consolidated Balance Sheet because the underlying securities
mature within one year from the balance sheet date.
5. REVENUE RECOGNITION AND SALES COMMISSIONS
Revenue Recognition
Revenues are recognized when control of the promised goods or services is transferred to the customer in an amount that reflects the consideration the Company
expects to be entitled in exchange for transferring those goods or services.
The following table represents revenues included in continuing operations disaggregated by revenue source for the years ended December 31, 2019 and 2018 (in
thousands). Sales taxes are excluded from revenues.
Business Segments
Subscription services
Professional services
Total revenues, net
Business Segments
Subscription services
Professional services
Total revenues, net
Workforce
Solutions
Year Ended December 31, 2019
Provider
Solutions
Consolidated
202,479 $
6,120
208,599 $
38,022 $
7,491
45,513 $
240,501
13,611
254,112
Workforce
Solutions
Year Ended December 31, 2018
Provider
Solutions
Consolidated
184,926 $
5,213
190,139 $
35,542 $
5,935
41,477 $
220,468
11,148
231,616
$
$
$
$
For the years ended December 31, 2019 and 2018, the Company recognized $0.2 million and $1.0 million, respectively, in impairment losses on receivables and
contract assets arising from the Company’s contracts with customers.
During the years ended December 31, 2019 and 2018, we recognized revenues of $64.7 million and $63.7 million from amounts included in deferred revenue at the
beginning of the respective period. As of December 31, 2019, $433 million of revenue is expected to be recognized from remaining performance obligations under
contracts with customers. We expect to recognize revenue on approximately 47% of these remaining performance obligations over the 12 months ending December
31, 2020, with the remaining amounts recognized thereafter.
Sales Commissions
Sales commissions earned by our sales force are considered incremental and recoverable costs of obtaining a contract with a customer. The Company’s sales
commission plans for 2018 and 2019 included multiple payments, including an initial payment in the period a customer contract is obtained and subsequent payments
either 15 or 27 months after the initial payment. Under ASC 606, costs to acquire contracts with customers, such as the initial sales commission payment, are
capitalized in the period a customer contract is obtained and are amortized consistent with the transfer of the goods or services to the customer over the expected
period of benefit, whereas subsequent sales commission payments which require a substantive service condition of the employee are expensed ratably through the
payment date. The capitalized contract cost is included in deferred commissions in the accompanying Consolidated Balance Sheets. The Company recorded
amortization of deferred commissions of $8.3 million and $7.7 million for
52
Table of Contents
HEALTHSTREAM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
the years ended December 31, 2019 and 2018, which is included in sales and marketing expenses in the accompanying Consolidated Statements of Income.
6. PROPERTY AND EQUIPMENT
Property and equipment consist of the following (in thousands):
Equipment
Leasehold improvements
Furniture and fixtures
Gross property and equipment
Accumulated depreciation and amortization
Property and equipment, net
December 31,
2019
2018
$
$
25,199 $
14,909
5,248
45,356
(19,291)
26,065 $
21,129
11,572
3,992
36,693
(20,827)
15,866
Depreciation of property and equipment totaled $7.3 million, $5.5 million, and $5.9 million for the years ended December 31, 2019, 2018, and 2017, respectively.
7. GOODWILL AND INTANGIBLE ASSETS
The changes in the carrying amount of goodwill for the years ended December 31, 2019 and 2018 are as follows (in thousands):
Balance at January 1, 2019
Acquisition of Providigm, LLC
Acquisition of CredentialMyDoc
Balance at December 31, 2019
Balance at January 1, 2018
Changes in carrying amount
Balance at December 31, 2018
Workforce
Solutions
Provider
Solutions
16,381 $
11,395
—
27,776 $
69,763 $
—
4,657
74,420 $
Workforce
Solutions
Provider
Solutions
16,381 $
—
16,381 $
69,763 $
—
69,763 $
$
$
$
$
Total
86,144
11,395
4,657
102,196
Total
86,144
—
86,144
During the year ended December 31, 2019, the Company recorded $11.4 million of goodwill in relation to the January 2019 acquisition of Providigm, LLC as well as
$4.7 million of goodwill in relation to the December 2019 acquisition of CredentialMyDoc.
Intangible assets other than goodwill are considered to have finite useful lives. Customer-related intangibles consist of customer relationships and are amortized over
their estimated useful lives ranging from five to thirteen years. Other intangible assets include technology, non-competition agreements, and trade names and are
amortized over their estimated useful lives ranging from three to nine years. Amortization of intangible assets was $9.6 million, $9.1 million, and $9.2 million for the
years ended December 31, 2019, 2018, and 2017, respectively.
Identifiable intangible assets are comprised of the following (in thousands):
Customer related
Other
Total
As of December 31, 2019
Accumulated
Amortization
Gross
Amount
Net
Gross
Amount
As of December 31, 2018
Accumulated
Amortization
$
$
82,314 $
20,262
102,576 $
(29,760) $
(12,735)
(42,495) $
52,554 $
7,527
60,081 $
76,714 $
15,572
92,286 $
(23,245) $
(9,663)
(32,908) $
Net
53,469
5,909
59,378
53
Table of Contents
HEALTHSTREAM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The expected future annual amortization expense for the years ending December 31, is as follows (in thousands):
2020
2021
2022
2023
2024
Thereafter
Total
8. BUSINESS COMBINATIONS
Providigm, LLC
$
$
9,683
8,914
7,835
7,186
5,679
20,784
60,081
On January 10, 2019, the Company acquired the outstanding equity of Providigm, LLC (Providigm), a Denver, Colorado based company focusing on quality assurance
and performance improvement in healthcare, primarily serving skilled nursing facilities. The Company acquired Providigm to add its comprehensive quality management
system, known as abaqis®, to its product portfolio and gain customers in the skilled nursing market. The consideration paid for Providigm consisted of $18.0 million in
cash, which the Company funded with cash on hand. In addition, up to an additional $500,000 in cash may be paid by the Company based on the financial performance of
Providigm during an 18-month period following closing. Of the purchase price paid by the Company at closing, $3.65 million is being held in escrow for a period of time
following the closing to serve as a source of recovery for certain potential indemnification claims by the Company. The Company incurred $388,000 in transaction costs,
of which $63,000 was incurred during 2019 and $325,000 was incurred during 2018. The transaction costs were recorded in other general and administrative expense in
the Consolidated Statements of Income. The results of operations for Providigm have been included in the Workforce Solutions segment of the Company’s Financial
Statements from the date of acquisition.
A summary of the purchase price is as follows (in thousands):
Cash paid at closing (including the post-closing working capital adjustment)
Cash held in escrow
Total consideration paid
$
$
The following table summarizes the fair value of the assets acquired and liabilities assumed as of the date of acquisition (in thousands):
Accounts and unbilled receivable, net
Prepaid assets
Property and equipment
Operating lease right-of-use assets
Other assets
Deferred tax assets
Goodwill
Intangible assets
Accounts payable and accrued liabilities
Deferred revenue
Operating lease liabilities
Net assets acquired
$
$
14,368
3,650
18,018
960
847
50
1,233
49
104
11,395
5,950
(1,196)
(141)
(1,233)
18,018
The excess of purchase price over the fair values of net tangible and intangible assets is recorded as goodwill. The fair values of tangible and identifiable intangible
assets and liabilities are based on management’s estimates and assumptions. The primary intangible assets acquired were customer relationships and developed
technology. The fair value estimate for customer relationships intangible asset included significant assumptions in the prospective financial information, such as
revenue growth, customer attrition, and EBITDA margin, and the discount rate. The fair value estimate for developed technology intangible asset included significant
assumptions, including the estimate of employee hours that would be needed to recreate the technology. Additionally, these assumptions are forward looking and
could be affected by future economic and market conditions. The goodwill balance is primarily attributed to the assembled workforce, additional market opportunities
from offering Providigm’s products, and expected synergies from integrating Providigm with other products or other combined functional areas within the Company.
The goodwill balance is deductible for U.S. income tax purposes. The net tangible assets include deferred revenue, which was adjusted down from a book value at the
acquisition date of $266,000 to an estimated fair value of $141,000. The $125,000 write-down of deferred
54
Table of Contents
HEALTHSTREAM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
revenue will result in lower revenues than would have otherwise been recognized for such services. The acquired assets and liabilities include a $750,000
indemnification asset and liability related to tax liabilities. The purchase agreement also provides that the Company will pay up to $500,000 of additional
consideration based on the achievement of financial performance targets by Providigm during an 18-month period following the closing date. Management assessed the
likelihood of achieving these financial performance targets, which has been included in the purchase price allocation.
The following table sets forth the preliminary components of identifiable intangible assets and their estimated useful lives as of the acquisition date (in thousands):
Customer relationships
Developed technology
Trade Name
Total preliminary intangible assets subject to amortization
Fair Value
Useful life
$
$
3,500
2,200
250
5,950
12 years
5 years
7 years
The amounts of revenue and operating loss of Providigm included in the Company’s Consolidated Statement of Income since the date of acquisition of January 10, 2019
for the twelve months ended December 31, 2019 are as follows (in thousands):
Revenues, net
Operating loss
$
$
6,916
(491)
The following unaudited pro forma financial information summarizes the results of operations of the Company and Providigm as though the companies were combined as
of January 1, 2018 (in thousands, except per share data):
Total revenues
Income from continuing operations
Net income
Net income per share - basic
Net income per share - diluted
For the twelve months ended
2019
2018
$
$
$
$
$
254,437 $
14,262 $
15,836 $
0.49 $
0.49 $
243,992
13,102
32,068
0.99
0.99
These unaudited pro forma combined results of operations include certain adjustments arising from the acquisition, such as amortization of intangible assets, depreciation
of property and equipment, interest expense related to Providigm’s previously outstanding debt, and fair value adjustments of acquired deferred revenue balances. The
unaudited pro forma combined results of operations are for informational purposes only and is not indicative of what the Company’s results of operations would have been
had the transaction occurred at the beginning of the earliest period presented or to project the Company’s results of operations in any future period.
CredentialMyDoc
On December 16, 2019, the Company acquired substantially all the assets of CredentialMyDoc, a Savannah, Georgia based company focusing on intuitive, easy to use,
and fast to implement software-as-a-service solution, especially in ambulatory care settings. The consideration paid for CredentialMyDoc consisted of $9.0 million in cash,
subject to a post-closing working capital adjustment. Of the purchase price paid at closing, $1.1 million is being held in escrow for a period of time following the closing
to serve as a source of recovery for the working capital adjustment and certain potential indemnification claims by the Company. The results of operations for
CredentialMyDoc have been included in the Provider Solutions segment of the Company’s Financial Statements from the date of acquisition.
A summary of the purchase price is as follows (in thousands):
Cash paid at closing
Cash held in escrow
Total consideration paid
55
$
$
7,920
1,080
9,000
Table of Contents
HEALTHSTREAM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The following table summarizes the preliminary fair value of the assets acquired and liabilities assumed as of the date of acquisition (in thousands):
Accounts and unbilled receivable, net
Prepaid and other current assets
Operating lease right-of-use assets
Deferred tax assets
Goodwill
Intangible assets
Accounts payable and accrued liabilities
Deferred revenue
Operating lease liabilities
Net assets acquired
$
$
216
3
30
71
4,657
4,340
(7)
(280)
(30)
9,000
The excess of preliminary purchase price over the preliminary fair values of net tangible and intangible assets is recorded as goodwill. The preliminary fair values of
tangible and identifiable intangible assets and liabilities are based on management’s estimates and assumptions. The primary intangible assets acquired were customer
relationships and developed technology. The fair value estimate for customer relationships intangible asset included significant assumptions in the prospective
financial information, such as revenue growth, customer attrition, and EBITDA margin, and the discount rate. The fair value estimate for developed technology
intangible asset included significant assumptions, including the estimate of employee hours that would be needed to recreate the technology. Additionally, these
assumptions are forward looking and could be affected by future economic and market conditions. The preliminary fair values of assets acquired and liabilities
assumed continue to be subject to change during the measurement period (up to one year from the acquisition date) as the Company finalizes the valuation of these
items. The primary areas of the preliminary purchase price allocation that are not finalized include the composition and valuation of intangible assets. The goodwill
balance is primarily attributed to the assembled workforce, additional market opportunities from offering CredentialMyDoc products, and expected synergies from
integrating CredentialMyDoc with other products or other combined functional areas within the Company. The goodwill balance is deductible for U.S. income tax
purposes. The net tangible assets include deferred revenue, which was adjusted down from a book value at the acquisition date of $595,000 to an estimated fair value
of $280,000. The $315,000 write-down of deferred revenue will result in lower revenues than would have otherwise been recognized for such services.
The following table sets forth the preliminary components of identifiable intangible assets and their estimated useful lives as of the acquisition date (in thousands):
Customer relationships
Developed technology
Non-compete
Trade name
Total intangible assets subject to amortization
Preliminary Fair
value
Useful life
$
$
2,100
2,100
110
30
4,340
9 years
4 years
5 years
3 years
The amounts of revenue and operating loss of CredentialMyDoc included in the Company’s Consolidated Statement of Income since the date of acquisition of December
16, 2019 for the twelve months ended December 31, 2019 are as follows (in thousands):
Total revenues
Operating loss
$
$
34
(49)
56
Table of Contents
HEALTHSTREAM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The following unaudited pro forma financial information summarizes the results of operations of the Company and CredentialMyDoc as though the companies were
combined as of January 1, 2018 (in thousands, except per share data):
Total revenues
Income from continuing operations
Net income
Net income per share - basic
Net income per share - diluted
Year Ended
December 31,
2019
2018
$
$
$
$
$
256,053 $
13,936 $
15,510 $
0.48 $
0.48 $
236,445
12,687
31,652
0.98
0.98
These unaudited pro forma combined results of operations include certain adjustments arising from the acquisition, such as amortization of intangible assets, depreciation
of property and equipment, and fair value adjustments of acquired deferred revenue balances. The unaudited pro forma combined results of operations is for informational
purposes only and is not indicative of what the Company’s results of operations would have been had the transaction occurred at the beginning of the earliest period
presented or to project the Company’s results of operations in any future period.
9. BUSINESS SEGMENTS
The Company provides services to healthcare organizations and other members within the healthcare industry. The Company’s services are focused on the delivery of
workforce development products and services (Workforce Solutions) and provider credentialing, privileging, call center, and enrollment products and services
(Provider Solutions).
The Company measures segment performance based on operating income before income taxes and prior to the allocation of certain corporate overhead expenses,
interest income, interest expense, gains and losses from equity investments, and depreciation. The Unallocated component below includes corporate functions, such as
accounting, human resources, legal, investor relations, administrative and executive personnel, depreciation, a portion of amortization, and certain other expenses,
which are not currently allocated in measuring segment performance. The following is the Company’s business segment information as of and for the years ended
December 31, 2019, 2018, and 2017 (in thousands).
Revenues, net:
Workforce Solutions
Provider Solutions
Total revenues, net
Operating income:
Workforce Solutions
Provider Solutions
Unallocated
Total operating income
Workforce Solutions
Provider Solutions
Discontinued operations
Unallocated
Total
Assets*
2019
118,382 $
148,398
—
222,764
489,544 $
$
$
2018
104,668 $
145,637
—
191,643
441,948 $
2019
2018
2017
208,599 $
45,513
254,112 $
190,139 $
41,477
231,616 $
178,061
36,838
214,899
2019
2018
2017
40,296 $
5,384
(30,960)
14,720 $
38,834 $
3,474
(26,817)
15,491 $
33,579
879
(25,051)
9,407
$
$
$
$
Purchases of long-lived assets
2018
2017
2019
Depreciation and amortization
2018
2017
2019
14,972
2,959
—
13,602
31,533
$
$
12,820 $
5,240
180
7,191
25,431 $
9,888 $
3,619
2,764
1,762
18,033 $
10,813
9,757
—
7,299
27,869
$
$
9,780 $
8,895
181
5,375
24,231 $
9,982
8,147
2,235
5,919
26,283
* Segment assets include accounts and unbilled receivables, prepaid royalties, prepaid and other current assets, other assets, capitalized software development, deferred commissions, certain property and equipment, and
intangible assets. Cash and cash equivalents, marketable securities, non-marketable equity investments, and certain ROU assets are not allocated to individual segments and are included within Unallocated. A significant
portion of property and equipment assets are included within Unallocated.
57
Table of Contents
10. INCOME TAXES
HEALTHSTREAM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The provision (benefit) for income taxes is comprised of the following (in thousands):
Current federal
Current state
Deferred federal
Deferred state
Provision for income taxes
2019
Year Ended December 31,
2018
2017
$
$
233 $
634
2,717
149
3,733 $
(79) $
386
2,661
356
3,324 $
1,819
923
(1,464)
24
1,302
A reconciliation of income taxes at the statutory federal income tax rate to the provision for income taxes included in the accompanying Consolidated Statements of
Income is as follows (in thousands):
Federal tax provision at the statutory rate
State income tax provision, net of federal benefit
Tax credits
Change in state valuation allowance
Tax Act revaluation of deferred tax balances
Stock compensation
Other
Provision for income taxes
2019
Year Ended December 31,
2018
2017
$
$
3,765 $
895
(614)
(247)
—
(117)
51
3,733 $
3,482 $
658
(509)
2
—
(560)
251
3,324 $
3,549
491
(583)
151
(1,680)
(626)
—
1,302
Management periodically assesses the realizability of its deferred tax assets, and to the extent that a recovery is not likely, a valuation allowance is established to
reduce the deferred tax asset to the amount estimated to be recoverable. At December 31, 2019, the Company has a valuation allowance of $64,000 recorded against
deferred tax assets for state net operating losses.
As of December 31, 2019, the Company had state net operating loss carryforwards of $5.0 million. Certain losses have an indefinite carryforward period, while other
loss carryforwards will expire in years 2031 through 2040. The Company is subject to income taxation at the federal and various state levels. The Company is no
longer subject to U.S. federal tax examinations for tax years before 2016, and with few exceptions, the Company is not subject to examination by state tax authorities
for tax years which ended before 2016. Loss carryforwards and credit carryforwards generated or utilized in years earlier than 2016 are also subject to examination
and adjustment.
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% effective
January 1, 2018. The Company reflected the income tax effects of the Tax Act as of December 31, 2017.
A reconciliation of the beginning and ending liability for gross unrecognized tax benefits are as follows (in thousands):
Balance at beginning of year
Additions for tax positions in the current year
Reductions for tax positions of prior years
Balance at end of year
December 31,
2019
2018
$
$
317 $
—
—
317 $
340
—
(23)
317
The Company recognized $14,000 and $2,000 for interest and penalties related to unrecognized tax benefits within the provision for income taxes during the years
ended December 31, 2019 and 2018. Unrecognized tax benefits included tax positions of $317,000 for both December 31, 2019 and 2018 that if recognized would
impact the Company’s effective tax rate. The reduction for tax positions of prior years reflected in the table above as of December 31, 2018 relates to an item
considered to be effectively settled due to lapse of the statute of limitations.
58
Table of Contents
HEALTHSTREAM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Deferred federal and state income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of deferred tax assets and deferred tax liabilities are as follows (in thousands):
Deferred tax assets:
Allowance for doubtful accounts
Accrued liabilities
Lease liability
Stock based compensation
Deferred revenue
Basis difference on investments
Net operating loss carryforwards
Total deferred tax assets
Less: Valuation allowance
Deferred tax assets, net of valuation allowance
Deferred tax liabilities:
Deductible goodwill
Nondeductible intangible assets
Right of use assets
Prepaid assets
Capitalized software development
Depreciation
PX sale deferral
Total deferred tax liabilities
Net deferred tax liabilities
December 31,
2019
2018
$
215 $
1,775
8,778
683
198
381
263
12,293
(64)
12,229
2,236
801
7,773
6,275
5,580
2,478
—
25,143
297
1,887
389
623
135
396
291
4,018
(311)
3,707
1,760
1,049
—
5,698
4,746
659
718
14,630
$
12,914 $
10,923
The Company realized $117,000 of excess tax benefits related to stock based awards during the year ended December 31, 2019, which was reflected in the statement
of income as a component of the provision for income taxes.
11. STOCK BASED COMPENSATION
Stock Incentive Plans
The Company has outstanding stock based awards under its 2016 Omnibus Incentive Plan (2016 Plan) and 2010 Stock Incentive Plan (2010 Plan) (collectively, the
2016 Plan and the 2010 Plan, referred to as the Plans). In addition, the 2016 Plan authorizes the grant of options, restricted share units (RSUs), or other forms of stock
based compensation to employees, officers, directors, and others, and such grants must be approved by the Compensation Committee of the Board of Directors. The
2016 Plan allows the Compensation Committee of the Board of Directors to determine the vesting period and parameters of each grant. The vesting period of the
options and RSUs granted has historically ranged from immediate vesting to annual vesting up to four years, generally beginning one year after the grant date. As of
December 31, 2019, 867,000 shares of unissued common stock remained reserved for future stock incentive grants under the 2016 Plan. The Company issues new
shares of common stock when options are exercised or when RSUs become vested.
59
Table of Contents
Stock Option Activity
HEALTHSTREAM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
A summary of activity and various other information relative to stock options for the year ended December 31, 2019 is presented in the tables below (in thousands,
except exercise price).
Outstanding at beginning of period
Granted
Exercised
Expired
Forfeited
Outstanding at end of period
Exercisable at end of period
Common
Shares
Weighted-
Average
Exercise Price
Aggregate
Intrinsic Value
19 $
—
(19)
—
—
— $
— $
11.27
—
11.27
—
—
— $
— $
—
—
Other information relative to option activity during the three years ended December 31, 2019 is as follows (in thousands):
Total intrinsic value of stock options exercised
Cash proceeds from exercise of stock options
Restricted Share Unit Activity
2019
2018
2017
$
$
277 $
214 $
6,130 $
2,582 $
1,973
413
A summary of activity relative to RSUs for the year ended December 31, 2019 is as follows (in thousands, except weighted average grant date fair value):
Outstanding at beginning of period
Granted
Vested
Forfeited
Outstanding at end of period
Number of
RSU’s
Weighted-
Average
Grant Date
Fair Value
Aggregate
Intrinsic Value
289 $
100
(82)
(19)
288 $
24.31
27.24
23.29
24.38
25.61 $
7,847
The aggregate intrinsic value for stock options represents the total difference between the Company’s closing stock price on December 30, 2019 (the last trading day
of the year) of $27.22 per share and the grant date fair value, multiplied by the number of unvested RSUs as of December 31, 2019.
The aggregate fair value of RSUs that vested during the year ended December 31, 2019 and 2018, as of the respective vesting dates, was $1.9 million and $1.8
million, respectively. A portion of RSUs that vested in 2019 and 2018 were net-share settled such that the Company withheld shares with value equivalent to the
employees’ minimum statutory obligation for the applicable income and other employment taxes and remitted the cash to the appropriate taxing authorities. The total
shares withheld for RSUs during 2019 and 2018 were 15,000 and 13,000, respectively, and were based on the value of the RSUs on their respective settlement dates
as determined by the Company’s closing stock price. Total payments related to RSUs for the employees’ tax obligations to taxing authorities were $0.4 million in
2019, $0.3 million in 2018, and $0.4 million in 2017, and are reflected as a financing activity within the Consolidated Statements of Cash Flows. These net-share
settlements had the effect of share repurchases by the Company as they reduced and retired the number of shares that would have otherwise been issued as a result of
the vesting and did not represent an expense to the Company.
60
Table of Contents
Stock Based Compensation
HEALTHSTREAM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Total stock based compensation expense, which is recorded in our Consolidated Statements of Income, recorded for the years ended December 31, is as follows (in
thousands):
Cost of revenues (excluding depreciation and amortization)
Product development
Sales and marketing
Other general and administrative
Total stock based compensation expense
2019
Years Ended December 31,
2018
2017
$
$
699 $
956
614
1,975
4,244 $
37 $
296
183
1,261
1,777 $
29
228
244
1,235
1,736
The Company amortizes the fair value of all stock based awards, net of estimated forfeitures, on a straight-line basis over the requisite service period, which generally
is the vesting period. As of December 31, 2019, total unrecognized compensation expense related to non-vested stock options and RSUs was $3.5 million, net of
estimated forfeitures, with a weighted average expense recognition period remaining of 2.4 years. The Company realized $117,000 of excess tax benefits related to
stock based awards during the year ended December 31, 2019, which was reflected in the Consolidated Statement of 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 based compensation
cost for stock options is estimated at the grant date based on the fair value calculated using the Black-Scholes method. The Company did not grant any stock options
during the years ended December 31, 2019, 2018, or 2017.
Stock Awards
During June 2019, the Company’s Chief Executive Officer, Robert A. Frist, Jr., contributed 78,520 of his personally owned shares of HealthStream, Inc.
common stock (valued at $2.0 million) to the Company, without any consideration paid to him, for the benefit of the Company’s employees. In connection
therewith, effective June 26, 2019 the Company approved the award of 78,520 fully vested shares of common stock to approximately 820 employees of the
Company under the HealthStream, Inc. 2016 Omnibus Incentive Plan. These shares were issued in July 2019. As required by ASC Topic 718, Compensation
– Stock Compensation, the Company recognized $2.0 million of stock based compensation expense for these stock awards during the three months ended
June 30, 2019 based on the closing fair market value of the Company’s stock on the date of the Company’s approval of these grants. Total payments related to
the employees’ tax obligations to taxing authorities for these stock awards were $0.6 million and are reflected as a financing activity within the Consolidated
Statement of Cash Flows for 2019. In addition, the employer taxes and expenses associated with these grants were $0.2 million and were recorded as an
expense during June 2019. Mr. Frist contributed an additional 7,852 of his personally owned shares to cover these costs. The receipt of shares from Mr. Frist
and in connection with the withholding of shares as set forth above are presented on the Company’s Statement of Shareholders’ Equity in a similar manner as
a share repurchase (i.e., reduction of outstanding shares).
61
Table of Contents
12. EMPLOYEE BENEFIT PLAN
HEALTHSTREAM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
401(k) Plan
The Company has a defined-contribution employee benefit plan (401(k) Plan) incorporating provisions of Section 401(k) of the Internal Revenue Code. Employees
must have attained the age of 21 and have completed thirty days of service to be eligible to participate in the 401(k) Plan. Under the provisions of the 401(k) Plan, a
plan member may make contributions, on a tax-deferred basis, subject to IRS limitations. The Company elected to provide eligible employees with matching
contributions totaling $1.4 million, $1.3 million, and $0.7 million for the years ended December 31, 2019, 2018, and 2017, respectively.
13. DISCONTINUED OPERATIONS
On February 12, 2018, the Company divested its PX business to Press Ganey for $65.2 million in cash (after giving effect to the post-closing working capital
adjustment), resulting in a gain, net of tax, of $20.5 million, of which $19.0 million was recorded during the year ended December 31, 2018 and $1.5 million was
recorded during the year ended December 31, 2019.
This sale of the PX business resulted in the divestiture of the Company’s patient experience solutions business segment. The Company has classified the results of its
PX business segment as discontinued operations in its Consolidated Statements of Income and Cash Flows for all periods presented.
The financial results of the PX business for the period prior to divestiture during the years ended December 31, 2018 and 2017 are presented in discontinued
operations in the Company’s Consolidated Statements of Income. The following table presents the financial results of the PX business (in thousands):
Revenues, net
Operating costs and expenses:
Cost of revenues (excluding depreciation and amortization)
Product development
Sales and marketing
Other general and administrative expenses
Depreciation and amortization
Total operating costs and expenses
Operating (loss) income
Other income
(Loss) income from discontinued operations before income tax provision
Income tax benefit
(Loss) income from discontinued operations, net of income taxes
$
14. DEBT
At December 31, 2019 and 2018, the Company had no debt outstanding.
Revolving Credit Facility
Year Ended
December 31,
2018
2017
$
3,342
$
1,982
554
460
229
181
3,406
(64)
—
(64)
—
(64)
$
32,763
18,792
3,751
4,310
3,282
2,235
32,370
393
—
393
(773)
1,166
The Company entered into a Second Amendment to Revolving Credit Agreement (Revolving Credit Facility), amending the Revolving Credit Facility, dated as of
December 31, 2018 with SunTrust Bank (SunTrust), extending the maturity date to November 24, 2020. Under the Revolving Credit Facility, the Company 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 an accordion feature that
allows the Company to increase the Revolving Credit Facility by a total of up to $25.0 million, subject to securing additional commitments from existing lenders or
new lending institutions. The obligations under the Revolving Credit Facility are guaranteed by each of the Company’s subsidiaries. At the Company’s election, the
borrowings under the Revolving Credit Facility bear interest at either (1) a rate per annum equal to the highest of SunTrust’s prime rate or 0.5% in excess of the
Federal Funds Rate or 1.0% in excess of
62
Table of Contents
HEALTHSTREAM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
one-month LIBOR (the Base Rate), plus an applicable margin, or (2) the one, two, three, or six-month per annum LIBOR for deposits in the applicable currency (the
Eurocurrency Rate), as selected by the Company, plus an applicable margin. The applicable margin for Eurocurrency Rate loans depends on the Company’s funded
debt leverage ratio and varies from 1.50% to 2.00%. The applicable margin for Base Rate loans depends on the Company’s funded debt leverage ratio and varies from
0.50% to 1.50%. Commitment fees and letter of credit fees are also payable under the Revolving Credit Facility. Principal is payable in full at maturity on
November 24, 2020, and there are no scheduled principal payments prior to maturity. The Company is required to pay a commitment fee ranging between 20 and 30
basis points per annum of the average daily unused portion of the Revolving Credit Facility, depending on the Company’s funded debt leverage ratio.
The purpose of the Revolving Credit Facility is for general working capital needs, permitted acquisitions (as defined in the Loan Agreement), and for stock repurchase
and/or redemption transactions that the Company may authorize.
The Revolving Credit Facility contains certain covenants that, among other things, restrict additional indebtedness, liens and encumbrances, changes to the character
of the Company’s business, acquisitions, asset dispositions, mergers and consolidations, sale or discount of receivables, creation or acquisitions of additional
subsidiaries, and other matters customarily restricted in such agreements.
In addition, the Revolving Credit Facility requires the Company to meet certain financial tests, including, without limitation:
•
•
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, 2019, the Company was in compliance with all covenants. There were no balances outstanding on the Revolving Credit Facility as of
December 31, 2019 and there were no borrowings under the Revolving Credit Facility during the year ended December 31, 2019.
15. LEASES
Effective January 1, 2019, the Company adopted ASC 842, which requires an entity to recognize a right-of-use (ROU) asset and a lease liability on the balance sheet
for substantially all leases, including operating leases, using the modified retrospective approach. The Company elected to use the package of practicable expedients
allowing companies to not reassess: (1) the lease classification for any expired or existing leases, (2) the treatment of initial direct costs as they related to existing
leases, and (3) whether existing contracts are or contain leases. The Company did not elect the use of the hindsight practical expedient but did elect the practical
expedient not to separate lease components from non-lease components related to its office space leases.
Upon adoption of ASC 842, the Company had non-cancellable operating leases for office space subject to recognition as ROU assets. Accordingly, on January 1, 2019
the Company recorded $4.8 million in ROU assets and $6.4 million in operating lease liabilities (the difference of $1.6 million related to existing deferred rent
liabilities as of December 31, 2018 which had the effect of reducing the ROU asset upon adoption). During 2019, the Company acquired operating leases as part of its
acquisitions of Providigm, resulting in a $1.2 million ROU asset and lease liability, and CredentialMyDoc, resulting in a $30,000 ROU asset and lease liability, and
another operating lease for office space commenced for the Company’s new corporate headquarters in Nashville, TN, resulting in a $26.5 million ROU asset and lease
liability. As of December 31, 2019, the Company had one lease that had not yet commenced that will add $85,000 to ROU asset and lease liability upon
commencement on January 1, 2020.
The Company does not have any lease contracts that contain: (1) an option to extend that the Company is reasonably certain to exercise, (2) an option to terminate that
the Company is reasonably certain not to exercise, or (3) an option to extend (or not to terminate) in which exercise of the option is controlled by the lessor.
Additionally, the Company does not have any leases with residual value guarantees or material restrictive covenants. For leases already commenced, the lease term
was determined to be the remaining months in the lease term as of January 1, 2019, the date of adoption. The Company has elected not to recognize leases with initial
terms of one year or less on the balance sheet. Lease liabilities and their corresponding right-of-use assets have been recorded based on the present value of the future
lease payments over the expected lease term. Most of the Company’s lease agreements contain provisions for escalating rent payments over the terms of the leases.
The Company’s leases do not contain readily determinable implicit discount rates, and as such the Company must use its incremental borrowing rate to discount the
future lease payments based on information available at lease commencement. The incremental borrowing rate was estimated by determining the rate of interest that
the Company would have to pay to borrow on a collateralized basis over a similar term an amount equal to the lease payments in a similar economic environment.
63
$
$
$
$
$
$
$
29,615
29,615
2,797
30,733
33,530
4,749
4,591
4,124
3,979
28,655
46,098
12,568
33,530
Table of Contents
HEALTHSTREAM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The Company’s operating lease cost as presented in other general and administrative expense in the Consolidated Statement of Income was $4.9 million for the twelve
months ended December 31, 2019. Cash paid for amounts included in the measurement of operating lease liabilities was $2.5 million for the year ended December 31,
2019. As of December 31, 2019, the weighted-average remaining lease term was 10.6 years, and the weighted-average incremental borrowing rate was 6%.
The table below presents the lease-related assets and liabilities recorded on the Consolidated Balance Sheet as of December 31, 2019 (in thousands).
Assets
Classification
Operating lease right of use assets, net
Operating lease right-of-use assets
Total leased assets
Liabilities
Operating lease liabilities, current
Operating lease liabilities, noncurrent
Total operating lease liabilities
Accounts payable and accrued expenses
Operating lease liability, noncurrent
The table below presents the maturities of lease liabilities under non-cancellable leases as of December 31, 2019 (in thousands).
2020
2021
2022
2023
Thereafter
Total undiscounted lease payments
Less imputed interest
Total lease liabilities
16. COLLABORATIVE ARRANGEMENT
The Company participated in a collaborative arrangement, SimVenturesTM, with Laerdal Medical A/S (Laerdal Medical), which ended effective March 1, 2018. Prior
to the termination of this collaborative arrangement, the Company received 50 percent of the profits or losses generated from the collaborative arrangement. For the
year ended December 31, 2018, the Company recorded $391,000 of revenues and $187,000 of expenses related to the collaborative arrangement. For the year ended
December 31, 2017, the Company recorded $2.2 million of revenues and $1.2 million of expenses related to the collaborative arrangement.
17. LITIGATION
In connection with its business, the Company is from time to time involved in various legal actions. The litigation process is inherently uncertain, and it is possible
that the resolution of such matters might have a material adverse effect upon the financial condition and/or results of operations of the Company. However, in the
opinion of the Company’s management, matters currently pending or threatened against the Company are not expected to have a material adverse effect on the
financial position or results of operations of the Company.
18. NON-MARKETABLE EQUITY INVESTMENTS
Non-marketable equity investments where the Company is not able to exercise significant influence over the investee are accounted for using the measurement
alternative for equity investments that do not have readily determinable fair values. ASU 2016-01, Financial Instruments – Overall (Subtopic 825-10), became
effective for the Company as of January 1, 2018 and requires equity investments (except those accounted for under the equity method of accounting or those that
result in consolidation of the investee) to be measured at fair value with changes in fair value recognized in net income. The aggregate carrying amount of all non-
marketable equity investments was $5.4 million and $2.1 million for the years ended December 31, 2019 and 2018, respectively, which carrying value we evaluate for
impairment at each reporting period. Cumulatively, the Company has recorded $1.3 million in reductions to the carrying value of non-marketable equity investments
due to downward changes in fair value based on observable prices from orderly transactions for similar investments made in the investee. The fair value of non-
marketable equity investments is not estimated if there are no identified events or changes in circumstances that may have a significant adverse effect on the fair value
of the investment.
64
Table of Contents
19. SUBSEQUENT EVENT
HEALTHSTREAM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
In June 2018, a contract with one of our royalty partners expired and was not renewed. However, the contract required continued royalty payments for any
subscriptions that extended beyond the contract termination date. Following the contract termination, there was a mutual disagreement related to various elements of
this past partnership, and the Company accrued but did not pay royalties to the partner following the contract expiration. During the first quarter of 2020, the
Company received a release of liability from the partner associated with this contract, resulting in no royalties to be paid to the partner. The de-recognition of this
liability will be recorded as a $3.4 million reduction to cost of goods sold in the first quarter of 2020.
65
Table of Contents
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Item 9A. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
HealthStream’s chief executive officer and principal financial officer have reviewed and evaluated the effectiveness of the Company’s disclosure controls and
procedures (as defined in Rules 13a-15(e) and 15d-15(e) promulgated under the Securities Exchange Act of 1934 (the Exchange Act)) as of December 31, 2019.
Based on that evaluation, the chief executive officer and principal financial officer have concluded that HealthStream’s disclosure controls and procedures were
effective to ensure that the information required to be disclosed by the Company in the reports the Company files or submits under the Exchange Act is recorded,
processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and the information required to
be disclosed in the reports the Company files or submits under the Exchange Act was accumulated and communicated to the Company’s management, including its
principal executive and principal financial officer, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.
Management’s Annual Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under
the Exchange Act, and for assessing the effectiveness of internal control over financial reporting. The Company’s internal control over financial reporting is designed
to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with
GAAP. The Company’s internal control over financial reporting includes those policies and procedures that: (1) pertain to the maintenance of records that, in
reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company; (2) provide reasonable assurance that transactions are
recorded as necessary to permit preparation of financial statements in accordance with GAAP, and that receipts and expenditures of the Company are being made only
in accordance with authorizations of management and directors of the Company; and (3) provide reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the Company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the
policies or procedures may deteriorate.
Management assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2019. In making this assessment, management
used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control-Integrated Framework (2013 Framework).
Management’s assessment included an evaluation of the design of our internal control over financial reporting and testing of the operational effectiveness of our
internal control over financial reporting. Management believes that, as of December 31, 2019, the Company’s internal control over financial reporting was effective
based on those criteria. The Company’s independent registered public accounting firm, Ernst & Young LLP, has issued an audit report on the Company’s internal
control over financial reporting, which appears in Item 8 of this Annual Report on Form 10-K.
Changes in Internal Control over Financial Reporting
There were no changes in HealthStream’s internal control over financial reporting that occurred during the fourth quarter of 2019 that have materially affected, or that
are reasonably likely to materially affect, HealthStream’s internal control over financial reporting.
Item 9B. Other Information
None.
66
Table of Contents
PART III
Item 10. Directors, Executive Officers and Corporate Governance
Information as to directors of the Company and corporate governance is incorporated by reference from the information to be contained in our proxy statement for the
2020 Annual Meeting of Shareholders (2020 Proxy Statement) that we will file with the Securities and Exchange Commission within 120 days of the end of the fiscal
year to which this report relates. Pursuant to General Instruction G(3), certain information concerning executive officers of the Company is included in Part I of this
Form 10-K, under the caption Information about our Executive Officers.
Item 11. Executive Compensation
Incorporated by reference from the information to be contained in the Company’s 2020 Proxy Statement.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Incorporated by reference from the information to be contained in the Company’s 2020 Proxy Statement.
Item 13. Certain Relationships and Related Transactions, and Director Independence
Incorporated by reference from the information to be contained in the Company’s 2020 Proxy Statement.
Item 14. Principal Accounting Fees and Services
Incorporated by reference from the information to be contained in the Company’s 2020 Proxy Statement.
67
Table of Contents
PART IV
Item 15. Exhibits, Financial Statement Schedules
(a)(1) Financial Statements
Reference is made to the financial statements included in Item 8 to this Report on Form 10-K.
(a)(2) Financial Statement Schedules
All schedules are omitted because they are not applicable or the required information is shown in the Consolidated Financial Statements or the notes
thereto.
(a)(3) Exhibits
Number
2.1 (1)
2.2 (2)
2.3 (16)
3.1*
3.2 (8) *
4.1*
4.2*
4.3
10.1^ (6)
10.2^*
10.3^ (3)
10.4^ (4)
10.5^ (4)
10.6^ (4)
10.7^ (5)
10.8^ (5)
10.9 (7)
10.10^
10.11^ (10)
10.12^ (11)
10.13^ (12)
10.14^ (12)
10.15 (13)
10.16 (14)
10.17 (15)
10.18^ (9)
Description
Membership Interest Purchase Agreement, dated as of February 12, 2015, between HealthStream, Inc., Littrell Holdings, Inc., HealthLine
Systems, Inc., the Shareholders of HealthLine Systems, Inc., and Dan Littrell in his individual capacity and as the Shareholders
Representative.
Stock Purchase Agreement, by and between Echo, Inc. and Morrisey Holdings, Inc., dated August 8, 2016.
Membership Interest Purchase Agreement, by and between HealthStream, Inc. and Press Ganey Associates, Inc., dated February 12,
2018.
Fourth Amended and Restated Charter of HealthStream, Inc.
Second Amended and Restated Bylaws of HealthStream, Inc.
Form of certificate representing the common stock, no par value per share, of HealthStream, Inc.
Reference is made to Exhibits 3.1 and 3.2.
Description of Capital Stock of HealthStream, Inc.
2010 Stock Incentive Plan, effective as of May 27, 2010
Form of Indemnification Agreement
Executive Employment Agreement, dated July 21, 2005, between HealthStream, Inc. and Robert A. Frist, Jr.
Form of HealthStream, Inc. Non-Qualified Stock Option Agreement (Employees) under 2010 Stock Incentive Plan
Form of HealthStream, Inc. Incentive Stock Option Agreement (Employees) under 2010 Stock Incentive Plan
Form of HealthStream, Inc. Non-Qualified Stock Option Agreement (Directors) under 2010 Stock Incentive Plan
Form of HealthStream, Inc. Restricted Share Unit Agreement (Officers) under 2010 Stock Incentive Plan
Form of HealthStream, Inc. Restricted Share Unit Agreement (Non-Employee Director) under 2010 Stock Incentive Plan
Revolving Credit Agreement, dated November 24, 2014, by and among HealthStream, Inc., the several banks and other financial
institutions and lenders from time to time party thereto and SunTrust Bank, as administrative agent, issuing bank, and swingline lender
Summary of Director and Executive Officer Compensation
Letter Agreement, dated as of September 24, 2015, between HealthStream, Inc. and Michael Sousa.
2016 Omnibus Incentive Plan.
Form of HealthStream, Inc. Restricted Share Unit Agreement (Officers) under 2016 Omnibus Incentive Plan.
Form of HealthStream, Inc. Restricted Share Unit Agreement (Non-Employee Director) under 2016 Omnibus Incentive Plan.
Lease Agreement, dated April 3, 2017, by and between HealthStream, Inc. and Capitol View Joint Venture.
First Amendment to Revolving Credit Agreement, dated November 13, 2017, by and between HealthStream, Inc. and SunTrust Bank.
Second Amendment to Revolving Credit Agreement, dated as of December 31, 2018, by and between HealthStream, Inc. and SunTrust
Bank.
Form of HealthStream, Inc. Restricted Share Unit Agreement (Performance) under 2016 Omnibus Plan between HealthStream, Inc. and
J. Edward Pearson
68
Table of Contents
10.19^ (9)
10.20^ (17)
10.21^ (17)
10.22^ (17)
21.1
23.1
31.1
31.2
32.1
32.2
101.1 INS
101.1 SCH
101.1 CAL
101.1 DEF
101.1 LAB
101.1 PRE
104
*
^
(1)
(2)
(3)
(4)
(5)
(6)
(7)
(8)
(9)
(10)
(11)
(12)
(13)
(14)
(15)
(16)
(17)
Form of HealthStream, Inc. Restricted Share Unit Agreement (Performance) under 2016 Stock Incentive Plan between HealthStream,
Inc. and Michael Sousa
HealthStream, Inc. Amended 2019 Executive and Corporate Management Cash Incentive Bonus Plan
HealthStream, Inc. Amended 2019 Provider Solutions Cash Incentive Bonus Plan
Contribution Agreement dated as of June 26, 2019 between HealthStream, Inc. and Robert A. Frist, Jr.
Subsidiaries of HealthStream, Inc.
Consent of Independent Registered Public Accounting Firm
Certification of the Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
Certification of the Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded
within the Inline XBRL document.
Inline XBRL Taxonomy Extension Schema
Inline XBRL Taxonomy Extension Calculation Linkbase
Inline XBRL Taxonomy Extension Definition Linkbase
Inline XBRL Taxonomy Extension Label Linkbase
Inline XBRL Taxonomy Extension Presentation Linkbase
Cover Page Interactive Data File (formatted in Inline XBRL and included in Exhibit 101.1)
Incorporated by reference to Registrant’s Registration Statement on Form S-1, as amended (Reg. No. 333-88939).
Management contract or compensatory plan or arrangement
Incorporated by reference from exhibit filed on our Current Report on Form 8-K, dated February 13, 2015.
Incorporated by reference from exhibit filed on our Current Report on Form 8-K, dated August 8, 2016.
Incorporated by reference from exhibit filed on our Current Report on Form 8-K, dated July 25, 2005.
Incorporated by reference from exhibit filed on our Current Report on Form 8-K, dated June 1, 2010.
Incorporated by reference from exhibit filed on our Quarterly Report on Form 10-Q, for the quarterly period ended March 31, 2012 filed
with the SEC on April 30, 2012.
Incorporated by reference to Appendix B of the Company’s Definitive Proxy Statement filed with the SEC on April 29, 2010.
Incorporated by reference from exhibit filed on our Current Report on Form 8-K, dated November 25, 2014.
Incorporated by reference from exhibit filed on our Current Report on Form 8-K, dated October 23, 2015.
Incorporated by reference from exhibit filed on our Current Report on Form 8-K, dated May 16, 2018.
Incorporated by reference from exhibit filed on our Quarterly Report on Form 10-Q, for the quarterly period ended September 30, 2015,
filed with the SEC on October 30, 2015.
Incorporated by reference from exhibit filed on our Current Report on Form 8-K, dated May 31, 2016.
Incorporated by reference from exhibit filed on our Quarterly Report on Form 10-Q, for the quarterly period ended March 31, 2017, filed
with the SEC on May 1, 2017.
Incorporated by reference from exhibit filed on our Quarterly Report on Form 10-Q, for the quarterly period ended June 30, 2017, filed
with the SEC on July 31, 2017.
Incorporated by reference from exhibit filed on our Current Report on Form 8-K, dated November 14, 2017.
Incorporated by reference from exhibit filed on our Current Report on Form 8-K, dated January 2, 2019.
Incorporated by reference from exhibit filed on our Current Report on Form 8-K, dated February 12, 2018.
Incorporated by reference from exhibit filed on our Quarterly Report on Form 10-Q, for the quarterly period ended June 30, 2019, filed
with the SEC on July 26, 2019.
Item 16. Form 10-K Summary
None.
69
Table of Contents
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized on this 26th day of February 2020.
HEALTHSTREAM, INC.
By: /s/ ROBERT A. FRIST, JR.
Robert A. Frist, Jr.
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the registrant and in the
capacities and on the dates indicated:
Signature
Title(s)
/s/ ROBERT A. FRIST, JR.
Robert A. Frist, Jr.
/s/ SCOTT A. ROBERTS
Scott A. Roberts
/s/ THOMPSON DENT
Thompson Dent
/s/ FRANK GORDON
Frank Gordon
/s/ C. MARTIN HARRIS
C. Martin Harris
/s/ JEFFREY L. MCLAREN
Jeffrey L. McLaren
/s/ LINDA REBROVICK
Linda Rebrovick
/s/ MICHAEL SHMERLING
Michael Shmerling
/s/ WILLIAM STEAD
William Stead
/s/ DEBORAH TAYLOR TATE
Deborah Taylor Tate
Chief Executive Officer and
Chairman (Principal Executive Officer)
Chief Financial Officer and Senior Vice President
(Principal Financial and Accounting Officer)
Director
Director
Director
Director
Director
Director
Director
Director
70
Date
February 26, 2020
February 26, 2020
February 26, 2020
February 26, 2020
February 26, 2020
February 26, 2020
February 26, 2020
February 26, 2020
February 26, 2020
February 26, 2020
Exhibit 4.3
Description of Capital Stock
The following description of the capital stock of HealthStream, Inc. (“us,” “our,” “we,” “HSTM” or the “Company”) is a summary of the rights of our
common stock and certain provisions of our Fourth Amended and Restated Charter (the “Charter”) and Second Amended and Restated Bylaws (the “Bylaws”) as
currently in effect. This summary does not purport to be complete and is qualified in its entirety by the provisions of our Charter and Bylaws, each of which are
incorporated by reference by reference as an exhibit to this Annual Report on Form 10-K, of which this Exhibit 4 is a part. We encourage you to read our Charter,
Bylaws, and the Tennessee Business Corporation Act (the “TBCA”) for additional information.
General
Our authorized capitalization consists of 85,000,000 shares, of which 75,000,000 shares are classified and designated common stock, no par value per
share, and 10,000,000 shares are classified and designated preferred stock, no par value per share.
Common Stock
Our common stock is listed and traded on the Nasdaq Global Select Market under the symbol “HSTM.” All outstanding shares of our common stock are
fully paid and nonassessable. Each outstanding share of our common stock is entitled to one vote on all matters submitted to a vote of shareholders. Our Board of
Directors (the “Board”) is divided into three classes, and directors are elected by classes to three-year terms. The holders of our outstanding common stock do not
have the right to cumulate their votes with respect to the election of directors or any other matters. The holders of outstanding shares of our common stock are entitled
to receive dividends out of assets legally available for the payment of dividends at the times and in the amounts as our Board may from time to time determine. The
shares of common stock are neither redeemable nor convertible. Holders of our common stock have no preemptive or subscription rights to purchase any securities of
the Company. Upon liquidation, dissolution or winding up of the Company, the holders of our common stock are entitled to receive pro rata the assets of the Company
that are legally available for distribution, after payment of all debts and other liabilities and subject to the prior rights of any holders of preferred stock then
outstanding.
Preferred Stock
Our Charter authorizes our Board to issue, without further shareholder approval, up to 10,000,000 shares of preferred stock from time to time in one or
more series with such designations, powers, preferences and relative rights, including voting rights, conversion rights, distribution rights, dividend rights, liquidation
preference, transfer rights, redemption rights, merger rights and other rights, or restrictions as may be provided for the issue of such series by resolution and
amendment to our Charter adopted by our Board. This generally is referred to as “blank check” preferred stock. The preferred stock could have priority over common
stock as to dividends and as to the distribution of our assets upon any liquidation, dissolution or winding up of the Company. Accordingly, the Board’s ability to
authorize, without shareholder approval, the issuance of preferred stock with conversion and other rights may adversely affect the rights of holders of our common
stock or other series of preferred stock that may be outstanding. No shares of our preferred stock are currently issued and outstanding.
Transfer Agent and Registrar
The transfer agent and registrar for our common stock is ComputerShare Trust Company, N.A.
Our Charter and Bylaws Contain Provisions That May Have an Anti-Takeover Effect
Certain provisions of our Charter and Bylaws may delay or make more difficult acquisitions or changes of control of us that are not approved by our
Board. These provisions could have the effect of discouraging third parties from making proposals involving an acquisition or change of control of the Company,
although these kinds of proposals, if made, might be considered desirable by a majority of our shareholders. These provisions may also have the effect of making it
more difficult for third parties to cause the replacement of our current management without the concurrence of our Board.
Undesignated preferred stock. As discussed above, our Board has the ability to designate and issue preferred stock with voting or other rights or
preferences that could deter hostile takeovers or delay changes in our control or management.
Limits on the ability of shareholders to act by written consent. Our Bylaws provide that our shareholders may not act by written consent, which may
lengthen the amount of time required to take shareholder actions. As a result, the holders of a majority of
1
our capital stock would not be able to amend our Charter or Bylaws or remove directors without holding a meeting of shareholders called in accordance with our
Bylaws.
Requirements for advance notification of shareholder nominations and proposals. Our Charter and Bylaws contain advance notice procedures with
respect to shareholder proposals and the nomination of candidates for election as directors, other than nominations made by or at the direction of our Board or a
committee of the Board. These advance notice procedures may have the effect of precluding the conduct of certain business at a meeting if the proper procedures are
not followed and may also discourage or deter a potential acquirer from conducting a solicitation of proxies to elect the acquirer’s own slate of directors or otherwise
attempt to obtain control of our company.
Amendment of Charter and Bylaws. Tennessee law provides generally that the affirmative vote of a majority of the shares entitled to vote on any matter
is required to amend a corporation’s charter or bylaws, unless a corporation’s charter or bylaws, as the case may be, requires a greater percentage. Our Charter
provides that certain sections of our Charter and Bylaws may only be amended or revised by the affirmative vote of at least two-thirds of the voting power of the
outstanding shares of capital stock outstanding and entitled to vote at an election of directors.
Classified Board of Directors.
Our Charter and Bylaws provide that our Board is to be divided into three classes as nearly equal in number as
possible. Directors are elected by classes to three-year terms, so that approximately one-third of the directors of the Company are elected at each annual meeting of the
shareholders. In addition, our Bylaws provide that the power to increase or decrease the number of directors and to fill vacancies is vested in the Board. The overall
effect of these provisions may be to prevent a person or entity from seeking to acquire control of the Company through an increase in the number of directors on the
Board and the election of designated nominees to fill newly created vacancies.
Removal of directors. Under Tennessee law, a director can be removed by shareholders with or without cause, unless a corporation’s charter provides
that the director can only be removed for cause. Our Charter includes this restriction, which could make it more difficult for shareholders to remove existing members
of our Board other than in connection with an annual meeting at which their annual terms expire.
Calling a special meeting. Under Tennessee law, a special meeting of a Tennessee corporation’s shareholders can be called by its board of directors or,
unless the charter provides otherwise, the holders of at least 10% of the outstanding voting stock. Our Charter and Bylaws provide that special meetings of
stockholders, for any purpose or purposes, may only be called by our Board, the chairman of our Board, or our President.
Tennessee Anti-Takeover Statutes
In addition to certain of the Charter and Bylaws provisions discussed above and below, Tennessee has adopted a series of statutes which can have an anti-
takeover effect and may delay or prevent a tender offer or takeover attempt that a shareholder might consider in its best interest, including those attempts that might
result in a premium over the market price for our capital stock.
The Tennessee Business Corporation Act
The Tennessee Business Combination Act (the “TN Business Combination Act”) provides that an interested shareholder (defined as a person owning,
either directly or indirectly, 10% or more of the voting securities in a Tennessee corporation) cannot engage in a business combination with that corporation unless the
transaction takes place at least five years after the interested shareholder first becomes an interested shareholder, and unless either the transaction (a) is approved by at
least two-thirds of the shares of the corporation not beneficially owned by an interested shareholder and the affiliates and associates of such interested shareholder or
(b) satisfies certain fairness conditions specified in the TN Business Combination Act relating to the price to be paid to the non-interested shareholders in such
transaction.
These provisions apply to Tennessee corporations unless one of two events occur. A business combination with an entity can proceed without the five-year
moratorium if the business combination or transaction resulting in the shareholder becoming an interested shareholder is approved by the target corporation’s board of
directors before that entity becomes an interested shareholder. Alternatively, the corporation may enact an amendment to its charter or bylaws to remove itself entirely
from the Tennessee Business Combination Act. This amendment must be approved by a majority of the shareholders who have held shares for more than one year
prior to the vote and may not take effect for at least two years after the vote.
Our Charter has not adopted such a provision, and, therefore, we are subject to the Tennessee Business Combination Act.
2
The Tennessee Control Share Acquisition Act
The Tennessee Control Share Acquisition Act (the “TCSA”) takes away the voting rights of a purchaser’s shares any time an acquisition of shares in a
Tennessee corporation brings the purchaser’s voting power to 20%, 33-1/3%, or more than 50% of all voting power in such corporation. The purchaser’s voting rights
can be maintained or re-established only by a majority vote of all the shares entitled to vote generally with respect to the election of directors other than those shares
owned by the acquirer and the officers and inside directors of the corporation.
The TCSA applies only to a corporation that has adopted a provision in its charter or bylaws declaring that the TCSA will apply. Our Charter has not
adopted such a provision, and, therefore, we are not subject to the TCSA.
Tennessee Greenmail Act
The Tennessee Greenmail Act prohibits a Tennessee corporation whose stock is registered or traded on a national securities exchange or registered with
the Securities and Exchange Commission, from purchasing, directly or indirectly, any of its shares at a price above the market value of the shares from any person
who holds more than 3% of the class of securities to be purchased if such person has held the shares for less than two years, unless the purchase has been approved by
the affirmative vote of a majority of the outstanding shares of each class of voting stock issued by the corporation or the corporation makes an offer, of at least equal
value per share, to all holders of shares of the class. Under the Tennessee Greenmail Act, the market value of the shares is defined as the average of the highest and
lowest closing market price for the shares during the 30 trading days preceding the purchase and sale or preceding the commencement or announcement of a tender
offer if the seller of the shares has commenced a tender offer or announced an intention to seek control of the corporation.
Our common stock is traded on the Nasdaq Global Select Market and, therefore, is subject to the Tennessee Greenmail Act.
Tennessee Investor Protection Act
The Tennessee Investor Protection Act applies to tender offers directed at corporations, such as our Company, that have “substantial assets” in Tennessee
and that are either incorporated in or have a principal office in Tennessee. Pursuant to the Investor Protection Act, an offeror making a tender offer for an offeree
company who beneficially owns 5% or more of any class of equity securities of the offeree company, any of which was purchased within one year prior to the
proposed tender offer, is required to file a registration statement with the Commissioner of Commerce and Insurance. When the offeror intends to gain control of the
offeree company, the registration statement must indicate any plans the offeror has for the offeree. The Commissioner may require additional information concerning
the takeover offer and may call for hearings. The Investor Protection Act does not apply to an offer that the offeree company’s board of directors recommends to
shareholders.
In addition to requiring the offeror to file a registration statement with the Commissioner, the Investor Protection Act requires the offeror and the offeree
company to deliver to the Commissioner all solicitation materials used in connection with the tender offer. The Investor Protection Act prohibits fraudulent, deceptive,
or manipulative acts or practices by either side and gives the Commissioner standing to apply for equitable relief to the Chancery Court of Davidson County,
Tennessee, or to any other chancery court having jurisdiction whenever it appears to the Commissioner that the offeror, the offeree company or any of their respective
affiliates has engaged in or is about to engage in a violation of the Investor Protection Act. Upon proper showing, the chancery court may grant injunctive relief. The
Investor Protection Act further provides civil and criminal penalties for violations.
Indemnification
Our Charter provides that, to the fullest extent permitted by the TBCA, a director will not be liable to the Company or its shareholders for monetary
damages for breach of his or her fiduciary duty as a director. Under the TBCA, directors have a fiduciary duty which is not eliminated by this provision in our Charter.
In some circumstances, equitable remedies such as injunctive or other forms of nonmonetary relief will remain available. In addition, each director will continue to be
subject to liability under the TBCA:
▪
▪
▪
▪
for any breach of the director’s duty of loyalty to the Company or its shareholders; or
for acts or omissions which are found by a court of competent jurisdiction to be not in good faith or which involved intentional misconduct or knowing
violations of law;
in connection with any proceeding charging improper personal benefit to the director, whether or not involving action in the director’s official capacity, in
which the director was adjudged liable on the basis that personal benefit was improperly received by the director; and
for payment of distributions that are prohibited by the TBCA.
3
The TBCA provides that a corporation may indemnify any director or officer against liability incurred in connection with a proceeding if the director or
officer acted in good faith or reasonably believed, in the case of conduct in his or her official capacity with the corporation, that the conduct was in the corporation’s
best interests. In all other civil cases, a corporation must indemnify a director or officer who reasonably believed that his or her conduct was not opposed to the best
interests of the corporation. In connection with any criminal proceedings, a corporation may indemnify any director or officer who had no reasonable cause to believe
that his or her conduct was unlawful.
In actions brought by or in the right of the corporation, however, the TBCA does not allow indemnification if the director or officer is adjudged to be
liable to the corporation. Similarly, the TBCA prohibits indemnification of a director or officer if the director or officer is adjudged liable in a proceeding because a
personal benefit was improperly received.
Under our Charter, in cases when the director or officer is wholly successful, on the merits or otherwise, in the defense of any proceeding brought because
of his or her status as a director or officer of a corporation, the corporation must indemnify the director or officer against all expense, liability, and loss incurred in the
proceeding. Also, the TBCA provides that a court may order a corporation to indemnify a director or officer for reasonable expenses if the court determines that the
individual is entitled to mandatory indemnification, or, in consideration of all relevant circumstances, the court determines that the individual is fairly and reasonably
entitled to indemnification, whether or not the individual acted in good faith or reasonably believed his or her conduct was in the corporation’s best interest.
Our Bylaws provide that the Company shall indemnify and advance expenses to its directors and officers to the fullest extent permitted by the TBCA. The
Company also maintains insurance to protect any director or officer against any liability and has entered into indemnification agreements with its directors to create a
contractual obligation to indemnify its directors. These agreements, among other things, indemnify the Company’s directors for some expenses, judgments and fines
and amounts paid in settlement, actually and reasonably incurred by any of these persons in any threatened, pending or completed action, suit proceeding or
arbitration or any inquiry, hearing or investigation arising out of the person’s services as the Company’s director.
4
HealthStream, Inc. (the Company)
Summary of Director and Executive Officer Compensation
EXHIBIT 10.10
I. Director Compensation. Directors who are employees of the Company do not receive additional compensation for serving as directors of the Company. For fiscal
year 2019, each director received an annual retainer of $5,000, except for the Audit Committee Chair and Nominating and Corporate Governance Chair, who received
an additional annual retainer of $7,500, and the Compensation Committee Chair, who received an additional annual retainer of $2,000. Non-employee directors also
received a $20,000 flat-fee, except for members of the Audit Committee who received $22,500, for board and committee meeting attendance and participation in lieu
of per meeting fees.
In addition to the cash compensation set forth above, each non-employee director is eligible to receive a nondiscretionary annual grant of restricted share units. The
restricted share units are granted annually and vest ratably over a three-year period.
Director compensation for 2020 has not yet been determined by the Compensation Committee.
II. Executive Officer Compensation. The following table sets forth the current base salaries and fiscal 2019 performance bonuses to be provided to our executive
officers upon review and approval by the Compensation Committee, including the individuals who the Company expects to be its Named Executive Officers for 2020.
Executive Officer
Robert A. Frist, Jr.
J. Edward Pearson
Michael Sousa
Scott A. Roberts
Jeffrey D. Cunningham
Michael M. Collier
Trisha L. Coady
M. Scott McQuigg
Current Base Salary
$345,050
$339,900
$339,900
$250,000
$292,520
$272,950
$253,450
$250,000
Fiscal 2019 Bonus Amount*
$138,020
$135,960
$135,960
$46,937
$87,756
$81,885
$76,035
$70,963
* Fiscal 2019 bonus amounts remain subject to review and approval by the Compensation Committee.
Base salary adjustments for 2020, bonus targets for 2020 cash bonuses, and 2020 equity grants for executive officers have not yet been determined by the
Compensation Committee.
III. Additional Information. The foregoing information is summary in nature. Additional information regarding Director and Named Executive Officer
compensation will be contained in the Company’s 2020 Proxy Statement.
SUBSIDIARIES OF HEALTHSTREAM, INC.
Names Under Which We Do Business
State or Other Jurisdiction of
Incorporation or
Organization
EXHIBIT 21.1
Decision Critical, Inc.
VerityStream, Inc. (f/k/a Echo, Inc.)
Morrisey Associates, Inc.
Performance Management Services, Inc.
Nursing Registry Consultants Corporation
Health Care Compliance Strategies, Inc.
HealthStream Acquisition I, Inc.
HealthStream Acquisition II, Inc.
Providigm, LLC
Texas
Tennessee
Illinois
California
Delaware
New York
Tennessee
Tennessee
Colorado
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
EXHIBIT 23.1
We consent to the incorporation by reference in the following Registration Statements:
(1)
(2)
(3)
Registration Statement (Form S-3 ASR No. 333-230169) of HealthStream, Inc. for the registration of shares of its common stock;
Registration Statement (Form S-8 No. 333-211725) pertaining to the HealthStream, Inc. 2016 Omnibus Incentive Plan; and
Registration Statement (Form S-8 No. 333-167241) pertaining to the HealthStream, Inc. 2010 Stock Incentive Plan;
of our reports dated February 26, 2020, with respect to the consolidated financial statements of HealthStream, Inc. and the effectiveness of internal control over
financial reporting of HealthStream, Inc. included in this Annual Report (Form 10-K) of HealthStream, Inc. for the year ended December 31, 2019.
/s/ Ernst & Young LLP
Nashville, Tennessee
February 26, 2020
EXHIBIT 31.1
I,
1.
2.
3.
4.
Robert A. Frist, Jr., certify that:
I have reviewed this annual report on Form 10-K of HealthStream, Inc.;
CERTIFICATION
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements
made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial
condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act
Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and
have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure
that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly
during the period in which this report is being prepared;
b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to
provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in
accordance with generally accepted accounting principles;
c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of
the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal
quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the
registrant’s internal control over financial reporting; and
5.
The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s
auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely
to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over
financial reporting.
Date : February 26, 2020
/s/ ROBERT A. FRIST, JR.
Robert A. Frist, Jr.
Chief Executive Officer
EXHIBIT 31.2
I, Scott A. Roberts, certify that:
CERTIFICATION
1.
2.
3.
4.
I have reviewed this annual report on Form 10-K of HealthStream, Inc.;
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements
made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial
condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act
Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and
have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure
that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly
during the period in which this report is being prepared;
b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to
provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in
accordance with generally accepted accounting principles;
c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of
the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal
quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the
registrant’s internal control over financial reporting; and
5.
The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s
auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely
to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over
financial reporting.
Date : February 26, 2020
/s/ SCOTT A. ROBERTS
Scott A. Roberts
Chief Financial Officer
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
EXHIBIT 32.1
In connection with the Annual Report of HealthStream, Inc. (the “Company”) on Form 10-K for the year ending December 31, 2019, as filed with the Securities and
Exchange Commission on the date hereof (the “Report”), Robert A. Frist, Jr., Chief Executive Officer of the Company certifies, pursuant to 18 U.S.C. §1350, as
adopted pursuant to §906 of the Sarbanes-Oxley Act of 2002, that:
(1)
The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2)
The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
/s/ ROBERT A. FRIST, JR.
Robert A. Frist, Jr.
Chief Executive Officer
February 26, 2020
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
EXHIBIT 32.2
In connection with the Annual Report of HealthStream, Inc. (the “Company”) on Form 10-K for the year ending December 31, 2019, as filed with the Securities and
Exchange Commission on the date hereof (the “Report”), Scott A. Roberts, Chief Financial Officer of the Company certifies, pursuant to 18 U.S.C. § 1350, as adopted
pursuant to §906 of the Sarbanes-Oxley Act of 2002, that:
(1)
The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2)
The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
/s/ SCOTT A. ROBERTS
Scott A. Roberts
Chief Financial Officer
February 26, 2020