What changed in this filing

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Item 2. Management’s Discussion and Analysis

2021-10-28 compared with 2021-07-29 · 192 added, 183 removed, 142 unchanged (73% of the section changed)

Management's Discussion and Analysis of Financial Condition and Results of Operations

Special Cautionary Notice Regarding Forward‑Looking Statements

You should read the following discussion and analysis in conjunction with our Condensed Consolidated Financial Statements and related Notes included elsewhere in this report and our audited Consolidated Financial Statements and the Notes thereto for the year ended December 31, 2020, appearing in our Annual Report on Form 10-K that was filed with the Securities and Exchange Commission (“SEC”) on February 25, 2021 (the “2020 Form 10-K”).

Special Cautionary Notice Regarding Forward ‑

Looking Statements

You should read the following discussion and analysis in conjunction with our Condensed Consolidated Financial Statements and related Notes included elsewhere in this report and our audited Consolidated Financial Statements and the Notes thereto for the year ended December 31, 2020, appearing in our Annual Report on Form 10-K that was filed with the Securities and Exchange Commission (“SEC”) on February 25, 2021 (the “2020 Form 10-K”).

Statements contained in this Quarterly Report on Form 10-Q that are not historical facts are forward-looking statements that the Company intends to be covered by the safe harbor provisions for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995.

Statements that are predictive in nature, that depend on or refer to future events or conditions, or that include words such as “anticipates,” “believes,” “could,” “estimates,” “expects,” “intends,” “may,” “plans,” “potential,” “predicts,” “projects,” “should,” “will,” “would,” and similar expressions are forward-looking statements.

Statements that are predictive in nature, that depend on or refer to future events or conditions, or that include words such as “anticipates,”

“believes,”

“could,”

“estimates,”

“expects,”

“intends,”

“may,”

“plans,”

“potential,”

“predicts,”

“projects,”

“should,”

“will,”

“would,”

and similar expressions are forward-looking statements.

The Company cautions that forward-looking statements involve known and unknown risks, uncertainties, and other factors that may cause actual results, performance, or achievements to be materially different from any future results, performance, or achievements expressed or implied by the forward-looking statements.

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Business Overview

HealthStream 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, schedule, and develop healthcare workforce talent;

Our solutions include multiple Software-as-a-Service (SaaS) applications, and focus on some of the most significant challenges facing the healthcare workforce and healthcare organizations today, including the need to effectively manage, retain, engage, schedule, and develop healthcare workforce talent;

meet rigorous compliance requirements;

and efficiently manage ongoing medical staff credentialing and privileging processes.

HealthStream’s customers include healthcare organizations, pharmaceutical and medical device companies, and other participants in the healthcare industry.

At June 30, 2021, we had approximately 4.52 million contracted subscriptions to hStream TM , our Platform-as-a-Service technology.

HealthStream’s customers include healthcare organizations, pharmaceutical and medical device companies, and other participants in the healthcare industry.

At September 30, 2021, we had approximately 4.92 million contracted subscriptions to hStream TM , our Platform-as-a-Service technology.

hStream technology enables healthcare organizations and their respective workforces to easily connect to and gain value from the growing HealthStream ecosystem of applications, tools, and content.

Significant financial metrics for the second quarter of 2021 are set forth in the bullets below.

Revenues of $64.8 million in the second quarter of 2021, an increase of 7% from $60.6 million in the second quarter of 2020, offsetting a $9.7 million decline in legacy resuscitation revenues.

Operating income of $3.4 million in the second quarter of 2021, down 20% from $4.3 million in the second quarter of 2020.

Net income of $2.4 million in the second quarter of 2021, down 29% from $3.4 million in the second quarter of 2020.

Earnings per share (“EPS”) of $0.08 per share (diluted) in the second quarter of 2021 compared to $0.11 per share (diluted) in the second quarter of 2020.

Adjusted EBITDA 1 of $14.5 million in the second quarter of 2021, up 20% from $12.1 million in the second quarter of 2020.

Significant financial metrics for the third quarter of 2021 are set forth in the bullets below.

Revenues of $64.1 million in the third quarter of 2021, an increase of 5% from $60.9 million in the third quarter of 2020, offsetting a $9.2 million decline in legacy resuscitation revenues.

Operating income of $1.8 million in the third quarter of 2021, down 43% from $3.1 million in the third quarter of 2020.

Net income of $1.5 million in the third quarter of 2021, down 43% from $2.6 million in the third quarter of 2020.

Earnings per share (“EPS”) of $0.05 per share (diluted) in the third quarter of 2021 compared to $0.08 per share (diluted) in the third quarter of 2020.

Adjusted EBITDA 1  of $12.5 million in the third quarter of 2021, up 12% from $11.2 million in the third quarter of 2020.

Adjusted EBITDA is a non-GAAP financial measure.

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The COVID-19 pandemic, which spread throughout the world and the United States during 2020, resulted in a significant economic downturn.

As vaccines have become more available, the number of COVID-19 cases has declined in the United States and various other countries in comparison to their highest levels earlier in pandemic, and economic conditions have generally improved.

However, uncertainty remains regarding the extent, timing, and duration of the pandemic, including the extent to which the availability of these vaccines will positively impact public health conditions and whether new, potentially more contagious and/or virulent strains of the COVID-19 virus, including possible strains that may be resistant to currently available vaccines, may pose additional public health risks.

The pandemic continues to cause uncertainty and potential economic volatility, including with regard to the pandemic’s various and unpredictable impacts on our healthcare customers and our business.

Recent surges in COVID-19 cases, particularly in connection with the Delta variant, could leave to a corollary increase in risk and volatility.

Our business is focused on providing workforce and provider solutions to healthcare organizations, and as such, the pandemic’s adverse impact on healthcare organizations has resulted in an adverse impact on our Company.

Although we believe that COVID-19 did not have a significant negative impact on our revenues or net income during 2020, we believe that it began to have a negative impact on our revenues during the six months ended June 30, 2021.

Additionally, certain developments related to COVID-19 have negatively impacted and are expected to continue to negatively impact our business during the remainder of 2021 and potentially thereafter, as described below.

In particular, sales cycles have been delayed or postponed such that declines in sales bookings by customers during 2020 and the six months ended June 30, 2021 will result in a negative impact to revenue and potentially to earnings during the remainder of 2021 and potentially thereafter.

Our operating results have benefited from a temporary reduction of operating expenses related to COVID-19 conditions, but the operating expense reduction itself—despite its positive impact on operating income and adjusted EBITDA—is indicative of the negative impact the pandemic has had, and may continue to have on new bookings and renewals.

As vaccines have become widely available in the United States, economic conditions have generally improved in 2021 compared to 2020.

However, during the third quarter of 2021, the number of COVID-19 cases and hospitalizations increased in the United States in comparison to earlier levels as a result of the Delta variant, causing restrictive measures to be implemented or reinstituted, including by many of our healthcare customers. Uncertainty remains regarding the extent, timing, and duration of the pandemic, including the extent to which the availability and sustained efficacy of vaccines will positively impact public health conditions and whether potentially more contagious and/or virulent strains of the COVID-19 virus, including strains that may be resistant to currently available vaccines, may pose additional public health risks.

Although COVID-19 did not have a significant negative impact on our revenues or net income during 2020, we believe that it began to have a negative impact on our revenues during the nine months ended September 30, 2021.

Additionally, certain developments related to COVID-19 have negatively impacted and are expected to continue to negatively impact our business during the remainder of 2021 and potentially thereafter.

In particular, sales cycles have been delayed or postponed such that declines in sales bookings by customers during 2020 and the nine months ended September 30, 2021 will result in a negative impact to revenue and potentially to earnings during the remainder of 2021 and in 2022.

We have experienced, and expect to continue to experience, delayed and reduced bookings and renewals due to the pandemic.

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Since mid-March 2020, our sales organization has had limited opportunities to travel and conduct onsite sales meetings with existing or prospective customers, and we have also cancelled in-person tradeshows, which typically generate future sales opportunities.

As a result, operating income and adjusted EBITDA benefitted from a $1.2 million reduction in operating expense related to travel restrictions during the first six months of 2021 compared to the first six months of 2020.

As travel restrictions lessen and travel begins to accelerate, we expect operating expenses associated with them to have a negative impact on operating income and EBITDA for the second half of 2021 and do not expect revenue generated from such activities to begin offsetting such increases to operating expenses until next year.

However, the uncertain trajectory of COVID-19 may impact when and to what extent normal operating expenses, including expenses related sales travel and in-person tradeshows, accelerate or remain abated.

As a result, operating income and adjusted EBITDA benefitted from a $1.0 million reduction in operating expense related to travel restrictions during the first nine months of 2021 compared to the first nine months of 2020.

When travel restrictions lessen and travel resumes at a more normal level, we expect operating expenses associated with travel to have a negative impact on operating income and EBITDA, and we do not expect revenue generated from such activities to begin offsetting such increases to operating expenses at the same time we incur such expenses. However, the uncertain trajectory of COVID-19 may impact when and to what extent normal operating expenses, including expenses related to sales travel and in-person tradeshows, accelerate or remain abated.

We continue to closely monitor developments related to COVID-19 that may have an adverse impact on our operational and financial performance.

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Additionally, to promote the safety and well-being of our employees, we required our entire workforce to begin working remotely from home beginning March 16, 2020, and the entire workforce continues to work remotely to date.

We have established safety protocols and dates in the third quarter of 2021 for each of our offices to re-open;

however, we will be offering our employees the option to work under a hybrid model of working either in our offices or remotely, or a combination of both.

Although we previously intended to reopen our offices during the third quarter of 2021, due to the recent surges in COVID-19 cases as noted above, we have deferred the time at which our offices will reopen, and are continuing to monitor local public health conditions before making a decision to reopen.

Many healthcare organizations have been, and may continue to be, substantially adversely impacted by the COVID-19 pandemic.

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We monitor our cash position and credit exposure by evaluating, among other things, weekly cash receipts, days sales outstanding (DSO), customer requests to modify payment or contract terms, and bankruptcy notices.

We experienced modest improvements in DSO during the second quarter of 2021 compared to the second quarter of 2020.

Additionally, while we have not experienced any adverse impacts to customer defaults resulting from COVID-19, we are unable to know whether or to what extent future negative trends related to the pandemic may arise in the future.

We experienced modest improvements in DSO during the third quarter of 2021 compared to the third quarter of 2020.

However, while we have not experienced any adverse impacts to customer defaults resulting from COVID-19, we are unable to know whether or to what extent negative trends related to the pandemic may arise in the future.

Any deterioration in the collectability (or the timing of payments) of our accounts receivable could adversely impact our financial results.

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While we have experienced a negative impact from certain implementation delays related to COVID-19, these delays have not been consistent across products or across customers.

In fact, we have become more efficient in implementing certain products during the pandemic.

Our Provider Solutions business segment has, in some instances, been more sensitive to implementation delays than our Workforce Solutions segment as the result of complexities associated with implementing certain of the solutions offered through that business segment.

Conditions related to the pandemic have also adversely impacted the ability or willingness of some customers to renew their contracts with us or to renew contracts at the same levels.

In fact, we have become more efficient in implementing certain products during the pandemic, particularly with respect to certain Workforce Solutions segment products. In contrast, our Provider Solutions business segment has, in some instances, been more sensitive to implementation delays as the result of complexities associated with implementing certain of the solutions offered through that business segment.

Conditions related to the pandemic have caused some customers to delay purchasing decisions they would have otherwise made.

Such conditions also adversely impacted the ability or willingness of some customers to renew their contracts with us or to renew contracts at the same levels.

Pandemic-related conditions have also delayed or otherwise adversely impacted our ability to enter into contracts with new potential customers, as some potential customers have been focused on dealing with the impact and demands that COVID-19 is having on their businesses.

In addition, the limitations noted above on onsite sales meetings and in-person trade shows, as well as our customers’ ongoing uncertainties due to COVID-19 have reduced, and may continue to reduce, the ability of our sales team to make sales they otherwise would likely make but for the impact of COVID-19.

As the pandemic has persisted, we have, however, continued to evolve our sales approach such that our sales representatives have been in frequent contact with customers via video conference and other remote means that do not require physical travel or onsite visits to our customers’ facilities.

Moreover, there has begun to be a resumption of certain in-person activities as COVID-19 conditions have improved.

Whether this resumption of in-person activities will continue and increase or falter and decrease may be dependent on the prevalence of future COVID-19 outbreaks, including with regard to new variants that continue to emerge.

In addition, the limitations noted above on onsite sales meetings and in-person trade shows, as well as our customers’

ongoing uncertainties due to COVID-19 have reduced, and may continue to reduce, the ability of our sales team to make sales they otherwise would likely make but for the impact of COVID-19.

The timing and extent of the resumption of in-person activities will be dependent on the prevalence of future COVID-19 outbreaks, including with regard to new variants that may continue to emerge.

Given the uncertainty surrounding the adverse impacts that COVID-19 could have on our business, we took certain expense management measures in 2020 as previously disclosed.

We have generally discontinued these expense management measures taking into account the improved economic environment and current conditions related to the pandemic, provided that certain expenses such as those associated with travel and tradeshows remain significantly lower than pre-pandemic levels due to limitations on our ability to engage in such activities at the same levels as prior to the pandemic.

However, we are continuing to monitor developments related to the COVID-19 pandemic and will continue to make such expense management adjustments as we deem necessary.

We are continuing to monitor developments related to the COVID-19 pandemic and will continue to make such expense management adjustments as we deem necessary.

Key Business Metrics

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Revenues, net, reflect income generated by the sales of goods and services related to our operations and reflects deferred revenue write-downs associated with fair value accounting for acquired businesses.

Revenues, net were $64.8 million and $128.3 million for the three and six months ended June 30, 2021 compared to $60.6 million and $122.1 million for the three and six months ended June 30, 2020.

Management utilizes revenue in connection with managing our business and believes that this metric provides useful information to investors as a key indicator of growth and success of our products.

Revenues, net, were $64.1 million and $192.4 million for the three and nine months ended September 30, 2021 compared to $60.9 million and $183.0 million for the three and nine months ended September 30, 2020.

Management utilizes revenue in connection with managing our business and believes that this metric provides useful information to investors as a key indicator of the growth and success of our products.

Operating Income .

Operating income represents the amount of profit realized from our operations and is calculated as the difference between revenues, net and operating costs and expenses.

Operating income was $3.4 million and $6.7 million for the three and six months ended June 30, 2021 compared to $4.3 million and $11.5 million for the three and six months ended June 30, 2020.

Operating income was $1.8 million and $8.5 million for the three and nine months ended September 30, 2021 compared to $3.1 million and $14.7 million for the three and nine months ended September 30, 2020.

Management utilizes operating income in connection with managing our business and believes that our operating income provides useful information to investors as a key indicator of profitability.

Adjusted EBITDA .

Adjusted EBITDA, calculated as set forth below under “Reconciliation of Non-GAAP Financial Measures,” is utilized by our management in connection with managing our business and provides useful information to investors because adjusted EBITDA reflects net income adjusted for certain non-cash and non-operating items.

We also believe that adjusted EBITDA is useful to investors to assess the Company’s ongoing operations.

Adjusted EBITDA, calculated as set forth below under “Reconciliation of Non-GAAP Financial Measures,” is utilized by our management in connection with managing our business and provides useful information to investors because adjusted EBITDA reflects net income adjusted for certain non-cash and non-operating items.

We also believe that adjusted EBITDA is useful to investors to assess the Company’s ongoing operations.

Additionally, beginning in 2021, executive bonuses are based on the achievement of adjusted EBITDA targets.

Adjusted EBITDA was $14.5 million and $28.1 million for the three and six months ended June 30, 2021, compared to $12.1 million and $24.0 million for the three and six months ended June 30, 2020.

Adjusted EBITDA was $12.5 million for the three months ended September 30, 2021, compared to $11.2 million for the three months ended September 30, 2020.

hStream Subscriptions .

hStream subscriptions are determined as the number of subscriptions under contract for hStream, our Platform-as-a-Service technology that enables healthcare organizations and their respective workforces to easily connect to and gain value from the growing HealthStream ecosystem of applications, tools, and content.

utilizes hStream subscriptions in connection with managing our business and believes that this metric provides useful information to investor s as a measure of our progress in growing the value of our customer base.

At June 3 0 , 202 1 , we had approximately 4.52 million contracted subscriptions to hStream, compared to 3.48 million as of June 3 0 , 20 20 .

Management utilizes hStream subscriptions in connection with managing our business and believes that this metric provides useful information to investors as a measure of our progress in growing the value of our customer base.

At September 30, 2021, we had approximately 4.92 million contracted subscriptions to hStream, compared to 3.82 million as of September 30, 2020.

Critical Accounting Policies and Estimates

The Company’s Condensed Consolidated Financial Statements are prepared in accordance with US GAAP.

These accounting principles require us to make certain estimates, judgments, and assumptions during the preparation of our Financial Statements.

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Goodwill, intangibles, and other long-lived assets

Allowance for doubtful accounts

In many cases, the accounting treatment of a particular transaction is specifically dictated by US GAAP and does not require management’s judgment in its application.

There are also areas where management’s judgment in selecting among available alternatives would not produce a materially different result.

In many cases, the accounting treatment of a particular transaction is specifically dictated by US GAAP and does not require management’s judgment in its application.

There are also areas where management’s judgment in selecting among available alternatives would not produce a materially different result.

See Notes to the Consolidated Financial Statements in our 2020 Form 10-K and the Notes to the Condensed Consolidated Financial Statements herein which contain additional information regarding our accounting policies and other disclosures required by US GAAP.

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Impact on Comparability of Operating Results

The comparability of our operating results for the six months ended June 30, 2021 to the same period for 2020 are impacted by several factors, including acquisitions, the reduction of revenues associated with legacy resuscitation products, and other non-cash items.

Between March 9, 2020 and January 19, 2021, we completed five acquisitions, which resulted in additional revenues and higher operating expenses during the three and six months ended June 30, 2021 compared to the three and six months ended June 30, 2020.

The comparability of our operating results for the nine months ended September 30, 2021 to the same period for 2020 are impacted by several factors, including acquisitions, the reduction of revenues associated with legacy resuscitation products, and other non-cash items.

Between March 9, 2020 and January 19, 2021, we completed five acquisitions, which resulted in additional revenues and higher operating expenses during the three and nine months ended September 30, 2021 compared to the three and nine months ended September 30, 2020.  

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.

Revenues associated with sales of HeartCode and RQI products pursuant to the Legacy Agreements were significant in past years, although margins on such products were lower than HealthStream’s average margin.

Revenue generated by HeartCode and RQI products pursuant to the Legacy Agreements was $10.7 million in the second quarter of 2020 compared to $1.0 million in the second quarter of 2021.

For additional information, see below under “Other Developments.”

During the six months ended June 30, 2021, the Company recorded a $1.0 million non-recurring, non-cash reduction to paid time off (PTO) expense as a result of modifications to the Company’s PTO policy.

During the six months ended June 30, 2020, the Company recorded a $3.4 million non-cash contractual adjustment that resulted in a decrease to royalty expense upon the resolution of a mutual disagreement relating to various elements of a past partnership.

Three Months Ended June 30, 2021 Compared to Three Months Ended June 30, 2020

Revenue generated by HeartCode and RQI products pursuant to the Legacy Agreements was $9.7 million in the third quarter of 2020 compared to $0.5 million in the third quarter of 2021.

For additional information, see below under “Other Developments.”

During the nine months ended September 30, 2021, the Company recorded a $1.0 million non-recurring, non-cash reduction to paid time off (PTO) expense as a result of modifications to the Company’s PTO policy.

During the nine months ended September 30, 2020, the Company recorded a $3.4 million non-cash contractual adjustment that resulted in a decrease to royalty expense upon the resolution of a mutual disagreement relating to various elements of a past partnership.

Three Months Ended September 30, 2021 Compared to Three Months Ended September 30, 2020

Revenues, net.

Revenues increased approximately $4.3 million, or 7%, to $64.8 million for the three months ended June 30, 2021 from $60.6 million for the three months ended June 30, 2020.

Revenues increased approximately $3.2 million, or 5%, to $64.1 million for the three months ended September 30, 2021 from $60.9 million for the three months ended September 30, 2020.

A comparison of revenues by business segment is as follows (in thousands):

Three Months Ended June 30,

Three Months Ended September 30,

Revenues by Business Segment:

Percentage Change

Workforce Solutions

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Provider Solutions

Revenues for Workforce Solutions increased $3.3 million, or 7%, to $52.2 million for the three months ended June 30, 2021 from $48.9 million for the three months ended June 30, 2020.

The Workforce Solutions segment achieved this 7% growth while overcoming a $9.7 million decline from the legacy resuscitation business.

In this regard, while revenues from legacy resuscitation products effectively ceased at the end of 2020, revenues for the three months ended June 30, 2021 included $1.0 million as we extended, with support from Laerdal, utilization of these products in 2021 for a small group of customers.

Revenues from recent acquisitions and growth in other solutions more than offset the lost legacy resuscitation revenues.

Revenues for Workforce Solutions increased $2.0 million, or 4%, to $51.2 million for the three months ended September 30, 2021 from $49.2 million for the three months ended September 30, 2020.

The Workforce Solutions segment achieved this 4% growth while overcoming a $9.2 million decline from the legacy resuscitation business.

In this regard, while revenues from legacy resuscitation products effectively ceased at the end of 2020, revenues for the three months ended September 30, 2021 included $0.5 million as we extended, with support from Laerdal, utilization of these products in 2021 for a small group of customers.

Revenues from recent acquisitions and growth in other solutions more than offset the decline in legacy resuscitation revenues.

Workforce revenues also benefited from a $0.5 million increase in professional services revenues, primarily associated with recently acquired businesses.

Revenues for Provider Solutions increased $1.0 million, or 9%, to $12.7 million for the three months ended June 30, 2021 from $11.7 million for the three months ended June 30, 2020.

Revenue growth was attributable to new subscription revenues.

Revenues for Provider Solutions increased $1.2 million, or 11%, to $12.9 million for the three months ended September 30, 2021 from $11.7 million for the three months ended September 30, 2020.

Revenue growth was primarily attributable to new subscription revenues.

Cost of Revenues (excluding Depreciation and Amortization).

Cost of revenues decreased $0.2 million, or 1%, to $22.7 million for the three months ended June 30, 2021 from $22.9 million for the three months ended June 30, 2020.

Cost of revenues as a percentage of revenues was 35% and 38% for the three months ended June 30, 2021 and 2020, respectively.

Cost of revenues for Workforce Solutions decreased $0.3 million to $18.7 million for the three months ended June 30, 2021 compared to the prior year period and approximated 36% and 39% of revenues for Workforce Solutions for the three months ended June 30, 2021 and 2020, respectively.

The decrease is primarily attributable to a decrease in royalties payable by us related to legacy resuscitation products, partially offset by increased expenses related to recent acquisitions coupled with an increase in software expense classified as cost of revenues during the three months ended June 30, 2021.

Cost of revenues for Provider Solutions increased $0.1 million to $4.0 million for the three months ended June 30, 2021 compared to the prior year period and approximated 31% and 33% of Provider Solutions revenues for the three months ended June 30, 2021 and 2020, respectively.

The increase in amount is primarily associated with an increase in software expense classified as cost of revenues during the three months ended June 30, 2021.

Cost of revenues decreased $0.7 million, or 3%, to $22.6 million for the three months ended September 30, 2021 from $23.3 million for the three months ended September 30, 2020.

Cost of revenues as a percentage of revenues was 35% and 38% for the three months ended September 30, 2021 and 2020, respectively.

Cost of revenues for Workforce Solutions decreased $0.9 million to $18.4 million for the three months ended September 30, 2021 compared to the prior year period and approximated 36% and 39% of revenues for Workforce Solutions for the three months ended September 30, 2021 and 2020, respectively.

The decrease is primarily attributable to a decrease in royalties payable by us related to legacy resuscitation products, partially offset by increased expenses related to recent acquisitions coupled with an increase in software expense classified as cost of revenues during the three months ended September 30, 2021.

Cost of revenues for Provider Solutions increased $0.2 million to $4.2 million for the three months ended September 30, 2021 compared to the prior year period and approximated 33% and 34% of Provider Solutions revenues for the three months ended September 30, 2021 and 2020, respectively.

The increase in amount is primarily associated with an increase in software expense classified as cost of revenues during the three months ended September 30, 2021.

Product Development.

Product development expenses increased $2.5 million, or 32%, to $10.3 million for the three months ended June 30, 2021 from $7.8 million for the three months ended June 30, 2020.

Product development expenses as a percentage of revenues were 16% and 13% for the three months ended June 30, 2021 and 2020, respectively.

Product development expenses for Workforce Solutions increased $2.7 million to $8.9 million for the three months ended June 30, 2021 compared to the prior year period and approximated 17% and 13% of revenues for Workforce Solutions for the three months ended June 30, 2021 and 2020, respectively.

The increase is primarily associated with recent acquisitions and increased product development efforts across other workforce solutions.

Product development expenses for Provider Solutions decreased $0.2 million to $1.4 million for the three months ended June 30, 2021 compared to the prior year period and approximated 12% and 14% of revenues for Provider Solutions for the three months ended June 30, 2021 and 2020, respectively.

The decrease in product development expenses is primarily due to an increase in labor capitalized for internally developed software related to additional product investments across the VerityStream product suite.

Product development expenses increased $2.1 million, or 26%, to $10.3 million for the three months ended September 30, 2021 from $8.2 million for the three months ended September 30, 2020.

Product development expenses as a percentage of revenues were 16% and 13% for the three months ended September 30, 2021 and 2020, respectively.

Product development expenses for Workforce Solutions increased $2.2 million to $8.7 million for the three months ended September 30, 2021 compared to the prior year period and approximated 17% and 13% of revenues for Workforce Solutions for the three months ended September 30, 2021 and 2020, respectively.

The increase is primarily associated with recent acquisitions and increased product development efforts across other workforce solutions.

Product development expenses for Provider Solutions decreased $0.1 million to $1.6 million for the three months ended September 30, 2021 compared to the prior year period and approximated 12% and 15% of revenues for Provider Solutions for the three months ended September 30, 2021 and 2020, respectively.

The decrease in product development expenses is primarily due to an increase in labor capitalized for internally developed software related to additional product investments across the VerityStream product suite.

Sales and Marketing.

Sales and marketing expenses, including personnel costs, increased $1.3 million, or 15%, to $9.5 million for the three months ended June 30, 2021 from $8.2 million for the three months ended June 30, 2020.

Sales and marketing expenses were 15% and 14% of revenues for the three months ended June 30, 2021 and 2020, respectively.

Sales and marketing expenses for Workforce Solutions increased $1.1 million to $7.5 million for the three months ended June 30, 2021 compared to the prior year period and approximated 14% and 13% of revenues for Workforce Solutions for the three months ended June 30, 2021 and 2020, respectively.

The increase is primarily due to additional personnel expenses due to recent acquisitions partially offset by lower sales commissions associated with the decline in legacy resuscitation revenues.

Sales and marketing expenses for Provider Solutions increased $80,000 to $1.6 million for the three months ended June 30, 2021 compared to the prior year period and approximated 13% of revenues for Provider Solutions for both the three months ended June 30, 2021 and 2020.

The unallocated corporate portion of sales and marketing expenses increased $50,000 to $0.4 million for the three months ended June 30, 2021 compared to the prior year period.

Sales and marketing expenses, including personnel costs, increased $1.3 million, or 15%, to $10.2 million for the three months ended September 30, 2021 from $8.9 million for the three months ended September 30, 2020.

Sales and marketing expenses were 16% and 15% of revenues for the three months ended September 30, 2021 and 2020, respectively.

Sales and marketing expenses for Workforce Solutions increased $1.2 million to $8.2 million for the three months ended September 30, 2021 compared to the prior year period and approximated 16% and 14% of revenues for Workforce Solutions for the three months ended September 30, 2021 and 2020, respectively.

The increase is primarily due to an increase in general marketing expenses and additional personnel expenses due to recent acquisitions partially offset by lower sales commissions associated with the decline in legacy resuscitation revenues.

Sales and marketing expenses for Provider Solutions increased $0.1 million to $1.7 million for the three months ended September 30, 2021 compared to the prior year period and approximated 13% and 14% of revenues for Provider Solutions for the three months ended September 30, 2021 and 2020, respectively.

The unallocated corporate portion of sales and marketing expenses increased $70,000 to $0.3 million for the three months ended September 30, 2021 compared to the prior year period.

Other General and Administrative Expenses.

Other general and administrative expenses decreased $0.3 million, or 3%, to $9.8 million for the three months ended June 30, 2021, from $10.1 million for the three months ended June 30, 2020.

Other general and administrative expenses as a percentage of revenues were 15% and 17% of revenues for the three months ended June 30, 2021 and 2020, respectively.

Other general and administrative expenses for Workforce Solutions decreased $1.0 million to $3.0 million for the three months ended June 30, 2021 compared to the prior year period and approximated 6% and 8% of Workforce Solutions revenues for the three months ended June 30, 2021 and 2020, respectively.

The decrease is primarily due to a decrease in software expense classified as general and administrative expenses partially offset by expenses related to recent acquisitions.

Other general and administrative expenses for Provider Solutions increased $60,000 to $0.9 million for the three months ended June 30, 2021 compared to the prior year period and approximated 7% of Provider Solutions revenues for both the three months ended June 30, 2021 and 2020.

The unallocated corporate portion of other general and administrative expenses increased $0.6 million to $6.0 million for the three months ended June 30, 2021 compared to the prior year period primarily due to increased personnel costs.

Other general and administrative expenses was $10.0 million for both the three months ended September 30, 2021 and September 30, 2020.

Other general and administrative expenses were 16% of revenues for both the three months ended September 30, 2021 and 2020.

Other general and administrative expenses for Workforce Solutions decreased $0.5 million to $2.9 million for the three months ended September 30, 2021 compared to the prior year period and approximated 6% and 7% of Workforce Solutions revenues for the three months ended September 30, 2021 and 2020, respectively.

The decrease is primarily due to a decrease in software expense classified as general and administrative expenses partially offset by expenses related to recent acquisitions.

Other general and administrative expenses for Provider Solutions increased $0.1 million to $1.0 million for the three months ended September 30, 2021 compared to the prior year period and approximated 8% and 7% of Provider Solutions revenues for the three months ended September 30, 2021 and 2020, respectively.

The increase is primarily due to increased personnel costs compared to the prior year period.

The unallocated corporate portion of other general and administrative expenses increased $0.4 million to $6.1 million for the three months ended September 30, 2021 compared to the prior year period primarily due to increased personnel costs.

Depreciation and Amortization.

Depreciation and amortization expense was $9.1 million and $7.2 million for the three months ended June 30, 2021 and 2020, respectively.

This increase is primarily a result of increases to amortization associated with capitalized software and recent acquisitions.

Depreciation and amortization expense increased $1.7 million, or 23%, to $9.1 million for the three months ended September 30, 2021 from $7.4 million for the three months ended September 30, 2020.

This increase is primarily a result of increases to amortization associated with capitalized software and intangible assets from recent acquisitions.

Other (Loss) Income, Net .

Other (loss) income, net was a loss of $65,000 for the three months ended June 30, 2021 compared to income of $0.2 million for the three months ended June 30, 2020.

The decrease is a result of lower interest income due to reductions in cash and investment balances and lower interest rate yields during the three months ended June 30, 2021 compared to the prior year period.

Other (loss) income, net was a loss of $99,000 for the three months ended September 30, 2021 compared to income of $0.1 million for the three months ended September 30, 2020.

The decrease is a result of lower interest income due to reductions in cash and investment balances and lower interest rate yields during the three months ended September 30, 2021 compared to the prior year period.

Income Tax Provision.

The Company recorded a provision for income taxes of $0.9 million for the three months ended June 30, 2021 compared to $1.1 million for the three months ended June 30, 2020.

The Company’s effective tax rate was 27% for the three months ended June 30, 2021 compared to 24% for the three months ended June 30, 2020.

The Company’s effective tax rate primarily reflects the statutory corporate income tax rate, the net effect of state taxes, foreign income taxes, and the effect of various permanent tax differences.

Net income was approximately $2.4 million and $3.4 million for the three months ended June 30, 2021 and 2020, respectively.

Earnings per share (EPS) was $0.08 per share (diluted) and $0.11 per share (diluted) for the three months ended June 30, 2021 and 2020, respectively.

Adjusted EBITDA was $14.5 million for the three months ended June 30, 2021 compared to $12.1 million for the three months ended June 30, 2020.

See “Reconciliation of Non-GAAP Financial Measures” below for our reconciliation of adjusted EBITDA to the most directly comparable measures under US GAAP and disclosure regarding why we believe Adjusted EBITDA provides useful information to investors.

Six Months Ended June 30, 2021 Compared to Six Months Ended June 30, 2020

The Company recorded a provision for income taxes of $0.2 million for the three months ended September 30, 2021 compared to $0.6 million for the three months ended September 30, 2020.

The Company’s effective tax rate was 11% for the three months ended September 30, 2021 compared to 19% for the three months ended September 30, 2020.

The Company’s effective tax rate primarily reflects the statutory corporate income tax rate, the net effect of state taxes, foreign income taxes, the effect of various permanent tax differences, and recognition of discrete tax items.

Net income was approximately $1.5 million and $2.6 million for the three months ended September 30, 2021 and 2020, respectively.

Earnings per share (EPS) was $0.05 per share (diluted) and $0.08 per share (diluted) for the three months ended September 30, 2021 and 2020, respectively.

Adjusted EBITDA was $12.5 million for the three months ended September 30, 2021 compared to $11.2 million for the three months ended September 30, 2020.

See “Reconciliation of Non-GAAP Financial Measures”

below for our reconciliation of adjusted EBITDA to the most directly comparable measures under US GAAP and disclosure regarding why we believe Adjusted EBITDA provides useful information to investors.

Nine Months Ended September 30, 2021 Compared to Nine Months Ended September 30, 2020

Revenues, net.

Revenues increased $6.2 million, or 5%, to $128.3 million for the six months ended June 30, 2021 from $122.1 million for the six months ended June 30, 2020.

Revenues increased $9.4 million, or 5%, to $192.4 million for the nine months ended September 30, 2021 from $183.0 million for the nine months ended September 30, 2020.

A comparison of revenues by business segment is as follows (in thousands):

Six Months Ended

Nine Months Ended September 30,

Revenues by Business Segment:

Percentage Change

Workforce Solutions

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Provider Solutions

Revenues for Workforce Solutions increased $4.7 million, or 5%, over the first six months of 2020.

Contributions from recent acquisitions and growth in other workforce solutions more than offset the expected decline in revenues from legacy resuscitation products of $19.1 million.

While revenues from legacy resuscitation products effectively ceased at the end of 2020, revenues for the six months ended June 30, 2021 included $2.8 million as we extended, with support from Laerdal, utilization of these products into

2021 for a small group of customers.

Workforce revenues also benefited from a $0.9 million increase in professional services revenues, primarily associated with recently acquired businesses.

Revenues for Provider Solutions increased $1.5 million, or 6%, over the first six months of 2020.

Revenues for Workforce Solutions increased $6.7 million, or 4%, over the first nine months of 2020.

Contributions from recent acquisitions and growth in other workforce solutions more than offset the expected decline in revenues from legacy resuscitation products of $28.3 million.

While revenues from legacy resuscitation products effectively ceased at the end of 2020, revenues for the nine months ended September 30, 2021 included $3.2 million as we extended, with support from Laerdal, utilization of these products into 2021 for a small group of customers.

Workforce revenues also benefited from a $1.4 million increase in professional services revenues, primarily associated with recently acquired businesses.

Revenues for Provider Solutions increased $2.7 million, or 8%, over the first nine months of 2020.

Revenue growth was primarily attributable to new subscription revenues.

Cost of Revenues (excluding depreciation and amortization).

Cost of revenues increased $2.2 million, or 5%, to $45.5 million for the six months ended June 30, 2021 from $43.3 million for the six months ended June 30, 2020.

Cost of revenues as a percentage of revenues was 35% for both the six months ended June 30, 2021 and 2020.

Cost of revenues were favorably impacted by $0.2 million during the six months ended June 30, 2021, resulting from the non-cash reduction to PTO expense, and were favorably impacted in the amount of $3.4 million during the six months ended June 30, 2020 from the one-time non-cash contractual adjustment to royalty expense.

Cost of revenues for Workforce Solutions increased $2.1 million to $37.6 million and approximated 36% of revenues for Workforce Solutions for both the six months ended June 30, 2021 and 2020.

The increase in amount is primarily associated with increased expenses related to recent acquisitions, the one-time contractual adjustment to cost of revenues in the amount of $3.4 million recorded during the six months ended June 30, 2020, and an increase in software expense classified as cost of revenues during the six months ended June 30, 2021, partially offset by a decline in royalties related to legacy resuscitation products.

Cost of revenues for Provider Solutions increased $0.1 million to $7.9 million and approximated 32% and 33% of Provider Solutions revenues for the six months ended June 30, 2021 and 2020, respectively.

The increase in amount is primarily associated with an increase in software expense classified as cost of revenues during the six months ended June 30, 2021.

Cost of revenues increased $1.5 million, or 2%, to $68.1 million for the nine months ended September 30, 2021 from $66.6 million for the nine months ended September 30, 2020.

Cost of revenues as a percentage of revenues was 35% and 36% for the nine months ended September 30, 2021 and 2020, respectively.

Cost of revenues were favorably impacted by $0.2 million during the nine months ended September 30, 2021, resulting from the non-cash reduction to PTO expense, and were favorably impacted in the amount of $3.4 million during the nine months ended September 30, 2020 from the one-time non-cash contractual adjustment to royalty expense.

Cost of revenues for Workforce Solutions increased $1.2 million to $55.9 million and approximated 36% and 37% of revenues for Workforce Solutions for the nine months ended September 30, 2021 and 2020, respectively.

The increase in amount is primarily associated with increased expenses related to recent acquisitions, the one-time contractual adjustment to cost of revenues in the amount of $3.4 million recorded during the nine months ended September 30, 2020, and an increase in software expense classified as cost of revenues during the nine months ended September 30, 2021, partially offset by a decline in royalties related to legacy resuscitation products.

Cost of revenues for Provider Solutions increased $0.3 million to $12.1 million and approximated 32% and 34% of Provider Solutions revenues for the nine months ended September 30, 2021 and 2020, respectively.

The increase in amount is primarily associated with an increase in software expense classified as cost of revenues during the nine months ended September 30, 2021.  

Product Development.

Product development expenses increased $4.6 million, or 30%, to $19.9 million for the six months ended June 30, 2021 from $15.3 million for the six months ended June 30, 2020.

Product development expenses as a percentage of revenues were 15% and 13% of revenues for the six months ended June 30, 2021 and 2020, respectively.

Product development expenses were favorably impacted in the amount of $0.4 million during the six months ended June 30, 2021 from the non-cash reduction to PTO expense.

Product development expenses for Workforce Solutions increased $5.0 million to $17.0 million and approximated 16% and 12% of revenues for Workforce Solutions for the six months ended June 30, 2021 and 2020, respectively.

The increase in amount is primarily associated with recent acquisitions and increased product development efforts across other workforce solutions.

Product development expenses for Provider Solutions decreased $0.4 million to $2.9 million and approximated 11% and 14% of revenues for HealthStream Solutions for the six months ended June 30, 2021 and 2020, respectively.

The decrease is primarily due to an increase in labor capitalized for internally developed software related to additional product investments across the VerityStream product suite.

Product development expenses increased $6.7 million, or 29%, to $30.2 million for the nine months ended September 30, 2021 from $23.5 million for the nine months ended September 30, 2020.

Product development expenses as a percentage of revenues were 16% and 13% of revenues for the nine months ended September 30, 2021 and 2020, respectively.

Product development expenses were favorably impacted in the amount of $0.4 million during the nine months ended September 30, 2021 from the non-cash reduction to PTO expense.

Product development expenses for Workforce Solutions increased $7.3 million to $25.8 million and approximated 17% and 13% of revenues for Workforce Solutions for the nine months ended September 30, 2021 and 2020, respectively.

The increase in amount is primarily associated with recent acquisitions and increased product development efforts across other workforce solutions.

Product development expenses for Provider Solutions decreased $0.6 million to $4.4 million and approximated 12% and 14% of revenues for Provider Solutions for the nine months ended September 30, 2021 and 2020, respectively.

The decrease is primarily due to an increase in labor capitalized for internally developed software related to additional product investments across the VerityStream product suite.

Sales and Marketing.

Sales and marketing expenses, including personnel costs, increased $1.1 million, or 6%, to $18.5 million for the six months ended June 30, 2021 from $17.4 million for the six months ended June 30, 2020.

Sales and marketing expenses were 14% of revenues for both the six months ended June 30, 2021 and 2020.

Sales and marketing expenses were favorably impacted by $0.

2 million during the six months ended June 30, 2021 resulting from the non-cash reduction to PTO expense.

Sales and marketing expenses for Workforce Solutions increased $0.9 million to $14.6 million and approximated 14% of revenues for Workforce Solutions for both the six months ended June 30, 2021 and 2020.

The increase is primarily associated with increases in general marketing expenses and recent acquisitions, partially offset by lower sales commissions associated with the decline in legacy resuscitation revenues and decreases in travel expenses as a result of the COVID-19 pandemic.

Sales and marketing expenses for Provider Solutions increased $47,000 to $3.2 million and approximated 13% of revenues for Provider Solutions for both the six months ended June 30, 2021 and 2020.

The unallocated portion of sales and marketing expenses increased $96,000 to $0.7 million compared to the prior year period.

Sales and marketing expenses, including personnel costs, increased $2.4 million, or 9%, to $28.7 million for the nine months ended September 30, 2021 from $26.3 million for the nine months ended September 30, 2020.

Sales and marketing expenses were 15% and 14% of revenues for the nine months ended September 30, 2021 and 2020, respectively.

Sales and marketing expenses were favorably impacted by $0.2 million during the nine months ended September 30, 2021 resulting from the non-cash reduction to PTO expense.

Sales and marketing expenses for Workforce Solutions increased $2.1 million to $22.9 million and approximated 15% and 14% of revenues for Workforce Solutions for the nine months ended September 30, 2021 and 2020, respectively.

The increase is primarily associated with increases in general marketing expenses and recent acquisitions, partially offset by lower sales commissions associated with the decline in legacy resuscitation revenues and decreases in travel expenses as a result of the COVID-19 pandemic.

Sales and marketing expenses for Provider Solutions increased $0.1 million to $4.9 million and approximated 13% of revenues for Provider Solutions for both the nine months ended September 30, 2021 and 2020.

The unallocated portion of sales and marketing expenses increased $0.2 million to $1.0 million compared to the prior year period.

Other General and Administrative Expenses.

Other general and administrative expenses decreased $0.6 million, or 3%, to $19.4 million for the six months ended June 30, 2021 from $20.0 million for the six months ended June 30, 2020.

Other general and administrative expenses as a percentage of revenues were 15% and 16% of revenues for the six months ended June 30, 2021 and 2020, respectively.

Other general and administrative expenses were favorably impacted by $0.

2 million during the six months ended June 30, 2021 resulting from the non-cash reduction to PTO expense.

Other general and administrative expenses for Workforce Solutions decreased $1.8 million to $6.0 million and approximated 6% and 8% of revenues for Workforce Solutions for the six months ended June 30, 2021 and 2020, respectively.

The decrease is primarily associated with a decrease in software expense classified as general and administrative expenses during the six months ended June 30, 2021, partially offset by expenses associated with recent acquisitions.

Other general and administrative expenses for Provider Solutions increased $40,000 to $1.6 million and approximated 7% of revenues for Provider Solutions for both the six months ended June 30, 2021 and 2020.

The unallocated corporate portion of other general and administrative expenses increased $1.2 million to $11.7 million compared to the first six months of 2020 primarily due to increased personnel expenses as well as professional services expenses over the prior year period.

Other general and administrative expenses decreased $0.5 million, or 2%, to $29.4 million for the nine months ended September 30, 2021 from $29.9 million for the nine months ended September 30, 2020.

Other general and administrative expenses as a percentage of revenues were 15% and 16% of revenues for the nine months ended September 30, 2021 and 2020, respectively.

Other general and administrative expenses were favorably impacted by $0.2 million during the nine months ended September 30, 2021 resulting from the non-cash reduction to PTO expense.

Other general and administrative expenses for Workforce Solutions decreased $2.3 million to $9.0 million and approximated 6% and 8% of revenues for Workforce Solutions for the nine months ended September 30, 2021 and 2020, respectively.

The decrease is primarily associated with a decrease in software expense classified as general and administrative expenses during the nine months ended September 30, 2021, partially offset by expenses associated with recent acquisitions.

Other general and administrative expenses for Provider Solutions increased $0.2 million to $2.7 million and approximated 7% of revenues for Provider Solutions for both the nine months ended September 30, 2021 and 2020.

The unallocated corporate portion of other general and administrative expenses increased $1.6 million to $17.8 million compared to the first nine months of 2020 primarily due to increased personnel expenses over the prior year period.

Depreciation and Amortization.

Depreciation and amortization increased $3.7 million, or 25 %, to $18.3 million for the six months ended June 30, 2021 from $14.6 million for the six months ended June 30, 2020 .

The increase resulted from an increase in amortization of capitalized software and intangible assets .

Depreciation and amortization increased $5.4 million, or 25%, to $27.4 million for the nine months ended September 30, 2021 from $22.0 million for the nine months ended September 30, 2020.

The increase resulted from increases in amortization associated with capitalized software and intangible assets from recent acquisitions.

Other (Loss) Income, Net .

Other (loss) income, net was loss of $0.2 million for the six months ended June 30, 2021 compared to income of $1.9 million for the six months ended June 30, 2020.

This decrease is driven by the $1.2 million gain associated with the change in fair value of the non-marketable equity investment in NurseGrid prior to the acquisition of NurseGrid on March 9, 2020, coupled with lower interest income due to reductions in bond yields and bank interest rates during the six months ended June 30, 2021 compared to the prior year period.

Other (loss) income, net was a loss of $0.3 million for the nine months ended September 30, 2021 compared to income of $2.0 million for the nine months ended September 30, 2020.

This decrease is driven by the $1.2 million gain associated with the change in fair value of the non-marketable equity investment in NurseGrid prior to the acquisition of NurseGrid on March 9, 2020, coupled with lower interest income due to reductions in bond yields and bank interest rates during the nine months ended September 30, 2021 compared to the prior year period.

Income Tax Provision.

The Company recorded a provision for income taxes of $1.8 million and $2.9 million for the six months ended June 30, 2021 and 2020, respectively.

The Company’s effective tax rate was 28% for the six months ended June 30, 2021 compared to 22% for the six months ended June 30, 2020.

During the six months ended June 30, 2021, the Company recorded discrete tax expense of $0.2 million related to various items, including recording a permanent difference related to purchase accounting adjustments and the impact of a state tax rate change enacted during the period.

During the six months ended June 30, 2020, the Company recorded a $1.2 million change in fair value of non-marketable equity investments as a result of the NurseGrid acquisition, which is not a taxable transaction, resulting in a tax benefit of $0.3 million.

Net income was $4.7 million for the six months ended June 30, 2021 compared to $10.5 million for the six months ended June 30, 2020.

Earnings per diluted share were $0.15 and $0.33 per share for the six months ended June 30, 2021 and 2020, respectively.

Adjusted EBITDA increased $4.1 million to $28.1 million for the six months ended June 30, 2021 compared to $24.0 million for the six months ended June 30, 2020.

This increase resulted from the factors mentioned above.

See “Reconciliation of Non-GAAP Financial Measures” below for our reconciliation of Adjusted EBITDA to the most directly comparable measure under US GAAP.

The Company recorded a provision for income taxes of $2.0 million and $3.5 million for the nine months ended September 30, 2021 and 2020, respectively.

The Company’s effective tax rate was 25% for the nine months ended September 30, 2021 compared to 21% for the nine months ended September 30, 2020. The Company’s effective tax rate primarily reflects the statutory corporate income tax rate, the net effect of state taxes, foreign income taxes, and the effect of various permanent tax differences.

During the nine months ended September 30, 2021, the Company recorded discrete tax expense of $0.2 million, which included purchase accounting adjustments, changes in state tax rates enacted during the period, and lower research and development tax credits recognized than previously estimated.

During the nine months ended September 30, 2020, the Company recorded a $1.2 million change in fair value of non-marketable equity investments as a result of the NurseGrid acquisition, which is not a taxable transaction, resulting in a tax benefit of $0.3 million, and recognized tax benefits resulting from higher research and development tax credits than previously estimated.

Net income was $6.2 million for the nine months ended September 30, 2021 compared to $13.2 million for the nine months ended September 30, 2020.

Earnings per diluted share were $0.20 and $0.41 per share for the nine months ended September 30, 2021 and 2020, respectively.

Adjusted EBITDA increased $5.4 million to $40.6 million for the nine months ended September 30, 2021 compared to $35.2 million for the nine months ended September 30, 2020.

This increase resulted from the factors mentioned above.

See “Reconciliation of Non-GAAP Financial Measures”

below for our reconciliation of Adjusted EBITDA to the most directly comparable measure under US GAAP.

Other Developments

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.

Revenues associated with sales of HeartCode and RQI products pursuant to the Legacy Agreements were 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 $38.4 million and $58.9 million in 2020 and 2019, respectively.

While revenues from legacy resuscitation products effectively ceased at the end of 2020, revenues for the six months ended June 30, 2021 included $2.8 million as we extended, with Laerdal’s support, utilization of these products for a small group of customers.

We expect revenue from legacy products to be de minimis for the second half of 2021.

While revenues from legacy resuscitation products effectively ceased at the end of 2020, revenues for the nine months ended September 30, 2021 included $3.2 million as we extended, with Laerdal’s support, utilization of these products for a small group of customers.

We expect revenue from legacy products to be de minimis for the fourth 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.

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Reconciliation of Non-GAAP Financial Measures

This report presents adjusted EBITDA, which is a non-GAAP financial measure used by management in analyzing our financial results and ongoing operational performance.

stock based compensation, depreciation and amortization, changes in fair value of non-marketable equity investments, the de-recognition of non-cash expense resulting from the paid time off expense reduction in the first quarter of 2021 , and the resolution of a mutual disagreement related to various elements of a past partnership which resulted in a reduction to cost of sales in the first quarter of 2020 (“adjusted EBITDA”) is a useful measure for evaluating the operating performance of the Company because adjusted EBITDA reflects net income adjusted for certain GAAP accounting, non-cash and non-operating items which may not, in any such case, fully reflect the underlying operating performance of our business.

We also believe that adjusted EBITDA is useful to many investors to assess the Company’s ongoing operating performance and to compare the Company’s operating performance between periods.

This Quarterly Report on Form 10-Q presents adjusted EBITDA, which is a non-GAAP financial measure 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 excluding the impact of the deferred revenue write-downs associated with fair value accounting for acquired businesses and before interest, income taxes, stock based compensation, depreciation and amortization, changes in fair value of non-marketable equity investments, the de-recognition of non-cash expense resulting from the paid time off expense reduction in the first quarter of 2021, and the resolution of a mutual disagreement related to various elements of a past partnership which resulted in a reduction to cost of sales in the first quarter of 2020 (“adjusted EBITDA”) is a useful measure for evaluating the operating performance of the Company because adjusted EBITDA reflects net income adjusted for certain GAAP accounting, non-cash and non-operating items which may not, in any such case, fully reflect the underlying operating performance of our business.

We also believe that adjusted EBITDA is useful to many investors to assess the Company’s ongoing operating performance and to compare the Company’s operating performance between periods.

Additionally, beginning in 2021, executive bonuses are based on the achievement of adjusted EBITDA targets.

As noted above, the definition of adjusted EBITDA also adjusts for the impact of the deferred revenue write-downs associated with fair value accounting for acquired businesses.

As noted above, the definition of adjusted EBITDA includes an adjustment for the impact of the deferred revenue write-downs associated with fair value accounting for acquired businesses.

Following the completion of any acquisition by the Company, the Company must record the acquired deferred revenue at fair value as defined in GAAP, which may result in a write-down of deferred revenue.

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Revenue for any such acquired business is deferred and is typically recognized over a one-to-two year period following the completion of any particular acquisition, so our GAAP revenues for this one-to-two year period will not reflect the full amount of revenues that would have been reported if the acquired deferred revenue was not written down to fair value.

Management believes that including an adjustment in the definition of adjusted EBITDA for the impact of the deferred write-downs associated with fair value accounting for acquired businesses provides useful information to investors because the deferred revenue write-down recognized in periods after an acquisition may, given the nature of this non-cash accounting impact, cause our GAAP financial results during such periods to not fully reflect our underlying operating performance and thus adjusting for this amount may assist in comparing the Company’s results of operations between periods.

Adjusted EBITDA is a non-GAAP financial measure and should not be considered as a measure of financial performance under GAAP.

Because adjusted EBITDA is not a measurement determined in accordance with GAAP, adjusted EBITDA is susceptible to varying calculations.

Accordingly, adjusted EBITDA, as presented, may not be comparable to other similarly titled measures of other companies and have limitations as analytical tools.

In addition, adjusted EBITDA should not be considered a substitute for, or superior to, measures of financial performance which are prepared in accordance with GAAP.

Accordingly, adjusted EBITDA, as presented, may not be comparable to other similarly titled measures of other companies and has limitations as analytical tools. 

A reconciliation of adjusted EBITDA to the most directly comparable GAAP measure is set forth below (in thousands).

Three Months Ended

Six Months Ended

Three Months Ended September 30,

Nine Months Ended September 30,

GAAP net income

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Liquidity and Capital Resources

Net cash provided by operating activities increased by $10.8 million to $24.3 million during the six months ended June 30, 2021 from $13.5 million during the six months ended June 30, 2020.

Net cash provided by operating activities increased by $5.6 million to $36.4 million during the nine months ended September 30, 2021 from $30.8 million during the nine months ended September 30, 2020.

Such increase was primarily driven by higher cash collections.

Our DSO was 43 days for the second quarter of 2021 compared to 47 days for the second quarter of 2020.

Our DSO was 40 days for the third quarter of 2021 compared to 43 days for the third quarter of 2020.

The Company calculates DSO by dividing the average accounts receivable balance for the quarter by average daily revenues for the quarter.

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 $10.6 million for the six months ended June 30, 2021 compared to $22.1 million for the six months ended June 30, 2020.

During the six months ended June 30, 2021, the Company spent $0.7 million on business combinations, invested in marketable securities of $5.2 million, made payments for capitalized software development of $10.3 million, purchased property and equipment of $2.4 million, and invested $1.8 million in equity method investments .

These uses of cash were partially offset by $9.7 million in maturities of marketable securities.

During the six months ended June 30, 2020 the

Company paid $21.4 million on business combinations, invested in marketable securities of $36.9 million, made payments for capitalized software development of $7.6 million, purchased property and equipment of $1.3 million, and invested $1.0 million in non-marketable equity investments .

These uses of cash were partially offset by $46.2 million in maturities of marketable securities.

Net cash used in financing activities was approximately $0.4 million for the six months ended June 30, 2021 compared to $10.4 million for the six months ended June 30, 2020.

The use of cash for the six months ended June 30, 2021 included $0.4 million for the payment of employee payroll taxes in relation to the vesting of restricted share units.

The uses of cash for the six months ended June 30, 2020 included $10.0 million for common stock repurchases and $0.4 million for the payment of employee payroll taxes in relation to the vesting of restricted share units.

Our balance sheet reflects positive working capital of $4.2 million at June 30, 2021 compared to negative working capital of $4.7 million at December 31, 2020.

The improvement in working capital is primarily a result of strong cash collections during the first six months of 2021.

The Company’s primary source of liquidity as of June 30, 2021 was $49.8 million of cash and cash equivalents and $5.3 million of marketable securities.

The Company also has a $65.0 million revolving credit facility, all of which was available for additional borrowing at June 30, 2021.

Net cash used in investing activities was $17.0 million for the nine months ended September 30, 2021 compared to $38.5 million for the nine months ended September 30, 2020.

During the nine months ended September 30, 2021, the Company spent $0.7 million on business combinations, invested in marketable securities of $5.2 million, made payments for capitalized software development of $16.6 million, purchased property and equipment of $2.6 million, and invested $1.8 million in equity method investments.

These uses of cash were partially offset by $9.9 million in maturities of marketable securities. During the nine months ended September 30, 2020 the Company paid $21.4 million on business combinations, invested in marketable securities of $61.2 million, made payments for capitalized software development of $12.4 million, purchased property and equipment of $1.7 million, and invested $1.3 million in non-marketable equity investments.

These uses of cash were partially offset by $59.5 million in maturities of marketable securities. 

Net cash used in financing activities was approximately $0.5 million for the nine months ended September 30, 2021 compared to $16.8 million for the nine months ended September 30, 2020.

The use of cash for the nine months ended September 30, 2021 included $0.5 million for the payment of employee payroll taxes in relation to the vesting of restricted share units.

The uses of cash for the nine months ended September 30, 2020 included $16.4 million for common stock repurchases and $0.4 million for the payment of employee payroll taxes in relation to the vesting of restricted share units.

Our balance sheet reflects positive working capital of $10.3 million at September 30, 2021 compared to negative working capital of $4.7 million at December 31, 2020.

The improvement in working capital is primarily a result of strong cash collections during the first nine months of 2021.

The Company’s primary source of liquidity as of September 30, 2021 was $55.5 million of cash and cash equivalents and $5.1 million of marketable securities.

The Company also has a $65.0 million revolving credit facility, all of which was available for additional borrowing at September 30, 2021.

The revolving credit facility expires on October 28, 2023, unless earlier renewed or amended.

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.

In addition, the Company’s growth strategy includes acquiring businesses or making strategic investments in businesses that complement or enhance our business.

It is anticipated that future acquisitions or strategic investments, if any, would be effected through cash consideration, stock consideration, or a combination of both.

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Therefore, the maximum borrowings against our revolving credit facility would be dependent on the covenant calculations at the time of borrowing.

As of June 30, 2021 , we were in compliance with all covenants.

As of September 30, 2021, we were in compliance with all covenants.

There can be no assurance that amounts available for borrowing under our revolving credit facility will be sufficient to consummate any possible acquisitions, and we cannot assure you that if we need additional financing that it will be available on terms favorable to us, or at all.

1 unchanged sentence

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis