HEALTHSTREAM INC 10-Q

Item 1. Financial Statements   HEALTHSTREAM, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED) (In thousands)       September 30,     December 31,       2021     2020   ASSETS                 Current assets:                 Cash and cash equivalents   $ 55,459     $ 36,566   Marketable securities     5,095       9,928   Accounts receivable, net of allowance for doubtful accounts of $ 408 and $ 549 at September 30, 2021 and December 31, 2020, respectively     26,991       40,726   Accounts receivable - unbilled     3,754       5,374   Prepaid royalties, net of amortization     9,733       9,571   Other prepaid expenses and other current assets     11,224       12,560   Total current assets     112,256       114,725                     Property and equipment, net of accumulated depreciation of $ 24,131 and $ 19,237 at September 30, 2021 and December 31, 2020, respectively     18,333       22,218   Capitalized software development, net of accumulated amortization of $81,734 and $ 70,516 at September 30, 2021 and December 31, 2020, respectively     31,250       26,631   Operating lease right of use assets, net     25,869       28,081   Goodwill     181,114       178,440   Customer-related intangibles, net of accumulated amortization of $ 43,362 and $ 36,723 at September 30, 2021 and December 31, 2020, respectively     70,782       76,927   Other intangible assets, net of accumulated amortization of $ 15,431 and $ 10,748 at September 30, 2021 and December 31, 2020, respectively     19,563       23,788   Deferred tax assets     974       974   Deferred commissions     22,860       19,907   Non-marketable equity investments     8,338       6,845   Other assets     3,375       1,777   Total assets   $ 494,714     $ 500,313                     LIABILITIES AND SHAREHOLDERS’ EQUITY                 Current liabilities:                 Accounts payable and accrued expenses   $ 22,170     $ 29,457   Accrued royalties     5,203       8,809   Deferred revenue     74,577       81,176   Total current liabilities     101,950       119,442                     Deferred tax liabilities     18,205       14,523   Deferred revenue, noncurrent     1,915       1,603   Operating lease liability, noncurrent     26,852       28,479   Other long term liabilities     3,594       2,204   Commitments and contingencies                                       Shareholders’ equity:                 Common stock, no par value, 75,000 shares authorized; 31,562 and 31,493 shares issued and outstanding at September 30, 2021 and December 31, 2020, respectively     273,573       271,784   Retained earnings     68,510       62,277   Accumulated other comprehensive income     115       1   Total shareholders’ equity     342,198       334,062   Total liabilities and shareholders’ equity   $ 494,714     $ 500,313     See accompanying Notes to the unaudited Condensed Consolidated Financial Statements.     1 Table of Contents     HEALTHSTREAM, INC. CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) (In thousands, except per share data)       Three Months Ended     Nine Months Ended       September 30, 2021     September 30, 2020     September 30, 2021     September 30, 2020   Revenues, net   $ 64,091     $ 60,883     $ 192,374     $ 183,008   Operating costs and expenses:                                 Cost of revenues (excluding depreciation and amortization)     22,585       23,302       68,053       66,596   Product development     10,344       8,192       30,205       23,491   Sales and marketing     10,232       8,863       28,713       26,286   Other general and administrative expenses     10,004       9,986       29,445       29,949   Depreciation and amortization     9,141       7,406       27,443       22,005   Total operating costs and expenses     62,306       57,749       183,859       168,327                                     Operating income     1,785       3,134       8,515       14,681                                     Other (loss) income, net     ( 99 )     100       ( 250 )     2,006                                     Income before income tax provision     1,686       3,234       8,265       16,687   Income tax provision     186       600       2,033       3,519   Net income   $ 1,500     $ 2,634     $ 6,232     $ 13,168                                     Net income per share:                                 Basic   $ 0.05     $ 0.08     $ 0.20     $ 0.41   Diluted   $ 0.05     $ 0.08     $ 0.20     $ 0.41                                     Weighted average shares of common stock outstanding:                                 Basic     31,558       31,955       31,538       32,095   Diluted     31,684       31,981       31,609       32,121     See accompanying Notes to the unaudited Condensed Consolidated Financial Statements.   2 Table of Contents     HEALTHSTREAM, INC. CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED) (In thousands)       Three Months Ended     Nine Months Ended       September 30, 2021     September 30, 2020     September 30, 2021     September 30, 2020   Net income   $ 1,500     $ 2,634     $ 6,232     $ 13,168                                     Other comprehensive income, net of taxes:                                 Foreign currency translation adjustments     ( 470 )     23       107       ( 4 ) Unrealized (loss) gain on marketable securities     ( 1 )     ( 18 )     7       6   Total other comprehensive (loss) income     ( 471 )     5       114       2   Comprehensive income   $ 1,029     $ 2,639     $ 6,346     $ 13,170     See accompanying Notes to the unaudited Condensed Consolidated Financial Statements.   3 Table of Contents     HEALTHSTREAM, INC. CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (UNAUDITED) (In thousands)       Nine Months Ended September 30, 2021       Common Stock     Retained     Accumulated Other Comprehensive     Total Shareholders’       Shares     Amount     Earnings     Income     Equity   Balance at December 31, 2020     31,493     $ 271,784     $ 62,277     $ 1     $ 334,062   Net income     —       —       2,291       —       2,291   Comprehensive income     —       —       —       234       234   Stock based compensation     —       616       —       —       616   Common stock issued under stock plans, net of shares withheld for employee taxes     60       ( 399 )     —       —       ( 399 ) Balance at March 31, 2021     31,553     $ 272,001     $ 64,569     $ 235     $ 336,805   Net income     —       —       2,441       —       2,441   Comprehensive income     —       —       —       351       351   Stock based compensation     —       782       —       —       782   Common stock issued under stock plans, net of shares withheld for employee taxes     1       —       —       —       —   Balance at June 30, 2021     31,554     $ 272,783     $ 67,010     $ 586     $ 340,379   Net income     —       —       1,500       —       1,500   Comprehensive loss     —       —       —       ( 471 )     ( 471 ) Stock based compensation     —       862       —       —       862   Common stock issued under stock plans, net of shares withheld for employee taxes     8       ( 72 )     —       —       ( 72 ) Balance at September 30, 2021     31,562     $ 273,573     $ 68,510     $ 115     $ 342,198     See accompanying Notes to the unaudited Condensed Consolidated Financial Statements.   4 Table of Contents   HEALTHSTREAM, INC. CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (UNAUDITED) (In thousands)     Nine Months Ended September 30, 2020       Common Stock     Retained     Accumulated Other Comprehensive     Total Shareholders’       Shares     Amount     Earnings     Income (Loss)     Equity   Balance at December 31, 2019     32,379     $ 290,021     $ 48,143     $ 4     $ 338,168   Net income     —       —       7,092       —       7,092   Comprehensive loss     —       —       —       ( 145 )     ( 145 ) Stock based compensation     —       550       —       —       550   Common stock issued under stock plans, net of shares withheld for employee taxes     62       ( 373 )     —       —       ( 373 ) Repurchase of common stock     ( 438 )     ( 9,876 )     —       —       ( 9,876 ) Balance at March 31, 2020     32,003     $ 280,322     $ 55,235     $ ( 141 )   $ 335,416   Net income     —       —       3,442       —       3,442   Comprehensive income     —       —       —       142       142   Stock based compensation     —       557       —       —       557   Repurchase of common stock     ( 6 )     ( 133 )     —       —       ( 133 ) Balance at June 30, 2020     31,997     $ 280,746     $ 58,677     $ 1     $ 339,424   Net income     —       —       2,634       —       2,634   Dividend forfeitures     —       —       43       —       43   Comprehensive income     —       —       —       5       5   Stock based compensation     —       557       —       —       557   Common stock issued under stock plans, net of shares withheld for employee taxes     8       ( 55 )     —       —       ( 55 ) Repurchase of common stock     ( 319 )     ( 6,343 )     —       —       ( 6,343 ) Balance at September 30, 2020     31,686     $ 274,905     $ 61,354     $ 6     $ 336,265     See accompanying Notes to the unaudited Condensed Consolidated Financial Statements.   5 Table of Contents     HEALTHSTREAM, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (In thousands)       Nine Months Ended September 30,       2021     2020   OPERATING ACTIVITIES:                 Net income   $ 6,232     $ 13,168   Adjustments to reconcile net income to net cash provided by operating activities:                 Depreciation and amortization     27,443       22,005   Stock based compensation     2,260       1,665   Amortization of deferred commissions     6,900       6,555   Provision for doubtful accounts     99       160   Deferred income taxes     2,066       2,330   Loss on non-marketable equity investments     258       8   Non-cash paid time off expense     ( 1,011 )     —   Non-cash royalty expense     —       ( 3,440 ) Change in fair value of non-marketable equity investments     —       ( 1,181 ) Other     132       321   Changes in operating assets and liabilities:                 Accounts and unbilled receivables     13,907       ( 9 ) Prepaid royalties     ( 162 )     1,394   Other prepaid expenses and other current assets     1,335       972   Deferred commissions     ( 9,854 )     ( 6,693 ) Other assets     ( 278 )     308   Accounts payable and accrued expenses     ( 3,062 )     ( 450 ) Accrued royalties     ( 3,606 )     ( 3,218 ) Deferred revenue     ( 6,223 )     ( 3,142 ) Net cash provided by operating activities     36,436       30,753                     INVESTING ACTIVITIES:                 Business combinations, net of cash acquired     ( 731 )     ( 21,449 ) Proceeds from maturities of marketable securities     9,931       59,522   Purchases of marketable securities     ( 5,223 )     ( 61,178 ) Payments to acquire non-marketable equity investments     —       ( 1,257 ) Payments to acquire equity method investments     ( 1,750 )     —   Payments associated with capitalized software development     ( 16,577 )     ( 12,366 ) Purchases of property and equipment     ( 2,602 )     ( 1,734 ) Net cash used in investing activities     ( 16,952 )     ( 38,462 )                   FINANCING ACTIVITIES:                 Taxes paid related to net settlement of equity awards     ( 471 )     ( 429 ) Repurchases of common stock     —       ( 16,352 ) Payment of cash dividends     ( 19 )     ( 40 ) Net cash used in financing activities     ( 490 )     ( 16,821 )                   Effect of exchange rate changes on cash and cash equivalents     ( 101 )     ( 1 ) Net increase (decrease) in cash and cash equivalents     18,893       ( 24,531 ) Cash and cash equivalents at beginning of period     36,566       131,538   Cash and cash equivalents at end of period   $ 55,459     $ 107,007                     SUPPLEMENTAL CASH FLOW INFORMATION:                 Non-cash additions to non-marketable equity investments   $ —     $ 1,300     See accompanying Notes to the unaudited Condensed Consolidated Financial Statements.   6 Table of Contents   HEALTHSTREAM, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)   1.    BASIS OF PRESENTATION   The accompanying unaudited Condensed Consolidated Financial Statements have been prepared in accordance with accounting principles generally accepted in the United States (“US GAAP”) for interim financial information and with the instructions to Form 10‑Q and Article 10 of Regulation S‑X. Accordingly, condensed consolidated financial statements do not include all of the information and footnotes required by US GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. All intercompany transactions have been eliminated in consolidation. Operating results for the  three and nine months ended September 30, 2021 are not necessarily indicative of the results that may be expected for the year ending December 31, 2021.   The Condensed Consolidated Balance Sheet at December  31,   2020 was derived from the audited Consolidated Financial Statements at that date but does not include all of the information and footnotes required by US GAAP for a complete set of financial statements. For further information, refer to the Consolidated Financial Statements and Notes thereto for the year ended December  31,   2020 (included in the Company's Annual Report on Form 10 -K, filed with the Securities and Exchange Commission on February 25, 2021).   2. 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.   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   The following table represents revenues disaggregated by revenue source (in thousands). Sales taxes are excluded from revenues.       Three Months Ended September 30, 2021     Nine Months Ended September 30, 2021   Business Segments   Workforce Solutions     Provider Solutions     Consolidated     Workforce Solutions     Provider Solutions     Consolidated   Subscription services   $ 49,729     $ 10,973     $ 60,702     $ 150,239     $ 32,475     $ 182,714   Professional services     1,426       1,963       3,389       4,320       5,340       9,660   Total revenues, net   $ 51,155     $ 12,936     $ 64,091     $ 154,559     $ 37,815     $ 192,374         Three Months Ended September 30, 2020     Nine Months Ended September 30, 2020   Business Segments   Workforce Solutions     Provider Solutions     Consolidated     Workforce Solutions     Provider Solutions     Consolidated   Subscription services   $ 48,246     $ 9,999     $ 58,245     $ 144,945     $ 29,937     $ 174,882   Professional services     951       1,687       2,638       2,964       5,162       8,126   Total revenues, net   $ 49,197     $ 11,686     $ 60,883     $ 147,909     $ 35,099     $ 183,008     For the nine months ended September 30, 2021 and 2020 , the Company recognized $ 0.1  million and $ 0.2  million in impairment losses on receivables and contract assets arising from the Company’s contracts with customers, respectively.   Deferred revenue represents contract liabilities that are recorded when cash payments are received or are due in advance of our satisfaction of performance obligations. During the three  months ended  September 30, 2021 and 2020 , we recognized revenues of approximately $ 39.4  million and $ 34.4  million, respectively, from amounts included in deferred revenue at the beginning of the respective periods. During the nine months ended September 30, 2021 and 2020 , we recognized $ 59.3  million and $ 60.5 million of revenue from amounts included in deferred revenues at the beginning of the respective periods. As of September 30, 2021 , approximately $ 446  million of revenue is expected to be recognized from remaining performance obligations under contracts with customers. We expect to recognize revenue related to approximately  46 % of these remaining performance obligations over the next 12 months, with the remaining amounts recognized thereafter.   7 Table of Contents   HEALTHSTREAM, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)   Sales Commissions   Sales commissions earned by our sales force are considered incremental and recoverable costs of obtaining a contract with a customer. Under ASC 606, costs to acquire contracts with customers, such as the initial sales commission payment and associated payroll taxes, are capitalized in the period a customer contract is entered into 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 performance condition of the employee are expensed ratably through the payment date. Capitalized contract costs are included in deferred commissions in the accompanying Condensed Consolidated Balance Sheets. 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 approximately three years. The Company recorded amortization of deferred commissions of approximately $ 2.4  million and $ 2.3  million for the three  months ended September 30, 2021 and 2020 , and $ 6.9  million and $ 6.6  million for the nine months ended September 30, 2021 and 2020 , respectively, which is included in sales and marketing expenses in the accompanying Condensed Consolidated Statements of Income.   3. 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.   The Company computes its interim period provision for income taxes by applying the estimated annual effective tax rate to year-to-date pretax income or loss and adjusts the provision for discrete tax items recorded in the period. During the three  months ended September 30, 2021 and 2020 , the Company recorded a provision for income taxes of approximately $ 0.2  million and $ 0.6  million, respectively. During the nine months ended September 30, 2021 and 2020 , the Company recorded a provision for income taxes of $ 2.0  million and $ 3.5  million, respectively. The Company’s effective tax rate for the nine months ended September 30, 2021 and 2020 was 25 % and 21 %, respectively. 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.   4.    SHAREHOLDERS ’ EQUITY   Stock Based Compensation   The Company has stock awards outstanding under its 2016 Omnibus Incentive Plan. The Company accounts for its stock based compensation plan using the fair-value based method for costs related to share based payments, including restricted share units (“RSUs”). During the nine months ended September 30, 2021 , the Company issued 129,906  RSUs, subject to service-based time vesting, with a weighted average grant date fair value of $ 23.44  per share, measured based on the closing fair market value of the Company’s stock on the date of grant. During the nine months ended September 30, 2020 , the Company issued 114,784  RSUs, subject to service-based time vesting, with a weighted average grant date fair value of $ 22.94  per share, measured based on the closing fair market value of the Company’s stock on the date of grant.   Total stock based compensation expense recognized in the Condensed Consolidated Statements of Income is as follows (in thousands):     Three Months Ended September 30,     Nine Months Ended September 30,       2021     2020     2021     2020   Cost of revenues (excluding depreciation and amortization)   $ 31     $ 16     $ 82     $ 39   Product development     111       92       329       266   Sales and marketing     76       60       217       170   Other general and administrative     644       389       1,632       1,190   Total stock based compensation expense   $ 862     $ 557     $ 2,260     $ 1,665     8 Table of Contents   HEALTHSTREAM, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)   5.    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 available to common shareholders for the period by the weighted average number of potentially dilutive 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 RSUs subject to vesting. The dilutive effect of common equivalent shares is included in diluted earnings per share by application of the treasury stock method. The total number of common equivalent shares excluded from the calculations of diluted earnings per share, due to their anti-dilutive effect or contingent performance conditions, was approximately 26,000  and 115,000  for the three  months ended September 30, 2021 and 2020 , respectively, and 95,000  and 112,000  for the nine months ended September 30, 2021 and 2020 , respectively.   The following table sets forth the computation of basic and diluted earnings per share (in thousands, except per share data):     Three Months Ended September 30,     Nine Months Ended September 30,       2021     2020     2021     2020   Numerator:                                 Net income   $ 1,500     $ 2,634     $ 6,232     $ 13,168   Denominator:                                 Weighted-average shares outstanding     31,558       31,955       31,538       32,095   Effect of dilutive shares     126       26       71       26   Weighted-average diluted shares     31,684       31,981       31,609       32,121                                     Net income per share:                                 Basic   $ 0.05     $ 0.08     $ 0.20     $ 0.41   Diluted   $ 0.05     $ 0.08     $ 0.20     $ 0.41     6. MARKETABLE SECURITIES   The fair value of marketable securities, which were all classified as available for sale and which the Company does not intend to sell nor will the Company be required to sell prior to recovery of their amortized cost basis, included the following (in thousands):       September 30, 2021       Adjusted Cost     Unrealized Gains     Unrealized Losses     Fair Value     Cash and Cash Equivalents     Current Marketable Securities   Cash   $ 55,459     $ —     $ —     $ 55,459     $ 55,459     $ —   Level 2:                                                 Corporate debt securities     5,096       —       ( 1 )     5,095       —       5,095   Total   $ 60,555     $ —     $ ( 1 )   $ 60,554     $ 55,459     $ 5,095         December 31, 2020       Adjusted Cost     Unrealized Gains     Unrealized Losses     Fair Value     Cash and Cash Equivalents     Current Marketable Securities   Cash   $ 31,558     $ —     $ —     $ 31,558     $ 31,558     $ —   Level 2:                                                 Time deposits     10,021       —       —       10,021       5,008       5,013   Corporate debt securities     4,923       —       ( 8 )     4,915       —       4,915   Total   $ 46,502     $ —     $ ( 8 )   $ 46,494     $ 36,566     $ 9,928     The carrying amounts reported in the Condensed Consolidated Balance Sheets approximate the fair value based on quoted market prices or alternative pricing sources and models utilizing market observable inputs. As of September 30, 2021 , the Company did not recognize any allowance for credit impairments on its available for sale debt securities. All investments in marketable securities are classified as current assets on the Condensed Consolidated Balance Sheets because the underlying securities mature within one year from the balance sheet date.   9 Table of Contents   HEALTHSTREAM, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)   7. BUSINESS COMBINATIONS   NurseGrid   On March 9, 2020, the Company acquired all of the outstanding stock of HcT2 Co. dba NurseGrid (“NurseGrid”), a Portland, Oregon-based healthcare technology company offering NurseGrid Mobile and its corollary application for nurse managers, NurseGrid Enterprise, for net cash consideration of approximately $ 21.5 million, after giving effect to the post-closing working capital adjustment. The Company accounted for this transaction as a business combination achieved in stages which required the Company to remeasure its previously existing minority ownership interest, which was accounted for as a non-marketable equity investment measured using the fair value alternative, to fair value at the acquisition date based on the total enterprise value, adjusting for a control premium. The fair value of the Company’s interest in NurseGrid was $ 3.6 million at closing, resulting in a gain of $ 1.2 million, recorded as a change in fair value of non-marketable equity investments in the Company’s Condensed Consolidated Statement of Income during the three months ended March 31, 2020. Additionally, the Company’s previously recorded non-marketable equity investment in NurseGrid was de-recognized from the Company’s Condensed Consolidated Balance Sheet during the same period. Acquisition-related transaction costs were $ 0.2 million. The financial results of NurseGrid have been included in the Workforce Solutions segment from March 9, 2020.   A summary of the purchase price is as follows (in thousands):   Cash paid at closing   $ 25,485   Post-closing adjustment, net of cash received     33   Cash acquired     ( 4,064 ) Net consideration paid     21,454   Fair value of existing equity interest in NurseGrid     3,623   Net consideration paid   $ 25,077     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   $ 92   Prepaid and other current assets     155   Operating lease right-of-use assets     50   Deferred tax assets     2,121   Goodwill     21,085   Intangible assets     1,845   Accounts payable and accrued liabilities     ( 143 ) Deferred revenue     ( 78 ) Operating lease liabilities     ( 50 ) Net assets acquired   $ 25,077     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 developed technology and trade name. 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. The fair value estimate for trade name intangible asset included significant assumptions in the prospective financial information, such as projected revenues, royalty rate, and the discount rate. 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, future market opportunities to engage and support the NurseGrid Mobile user community, and expected synergies from integrating NurseGrid with other combined functional areas within the Company. The goodwill balance is not 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 $ 157,000  to an estimated fair value of $ 78,000 . The $ 79,000  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 components of identifiable intangible assets and their estimated useful lives as of the acquisition date (in thousands):     Fair value     Useful life (in years)   Customer relationships   $ 35       8   Developed technology     1,110       5   Trade name     700     Indefinite   Total intangible assets   $ 1,845             10 Table of Contents   HEALTHSTREAM, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)     The following unaudited pro forma financial information summarizes the results of operations of the Company and NurseGrid as though the companies were combined as of January 1, 2019 ( in thousands, except per share data):       Three Months Ended September 30,     Nine Months Ended September 30,       2021     2020     2021     2020   Total revenues   $ 64,091     $ 60,900     $ 192,379     $ 183,133   Net income   $ 1,500     $ 2,648     $ 6,236     $ 12,632   Net income per share - basic   $ 0.05     $ 0.08     $ 0.20     $ 0.39   Net income per share - diluted   $ 0.05     $ 0.08     $ 0.20     $ 0.39     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 NurseGrid’s previously outstanding debt, 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.   ShiftWizard   On October 12, 2020, the Company acquired all of the outstanding stock of ShiftWizard, Inc., a Raleigh, North Carolina-based healthcare technology company offering a SaaS-based solution that integrates key workforce management capabilities, including scheduling, productivity, and forecasting. The consideration paid for ShiftWizard consisted of $ 30.5  million in cash after giving effect to the post-closing working capital adjustment. Acquisition-related transaction costs were $ 0.3  million. The financial results of ShiftWizard have been included in the Workforce Solutions segment from October 12, 2020.   The following table summarizes the fair value of the assets acquired and liabilities assumed as of the date of acquisition (in thousands):   Cash   $ 1,091   Accounts and unbilled receivable, net     1,038   Prepaid assets     106   Operating lease right-of-use assets     183   Property and equipment     50   Indemnification assets     464   Goodwill     19,307   Intangible asset     12,660   Accounts payable and accrued liabilities     ( 600 ) Deferred revenue     ( 1,601 ) Deferred tax liability     ( 1,559 ) Operating lease liabilities     ( 183 ) Indemnification liability     ( 464 ) Net assets acquired   $ 30,492     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. Included in the assets and liabilities is an indemnification asset and liability of $ 0.5 million associated with a Paycheck Protection Program loan pending forgiveness as of the acquisition date that was subsequently forgiven. 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, 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 ShiftWizard products, and expected synergies from integrating ShiftWizard with other products or other combined functional areas within the Company. The goodwill balance is not 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 $ 2.7  million to an estimated fair value of $ 1.6  million. The $ 1.1  million write-down of deferred revenue will result in lower revenues than would have otherwise been recognized for such services.   11 Table of Contents   HEALTHSTREAM, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)   The following table sets forth the components of identifiable intangible assets and their estimated useful lives as of the acquisition date (in thousands):     Fair Value     Useful life (in years)   Customer relationships   $ 7,800       18   Developed technology     4,050       5   Non-compete     580       1 - 5   Trade name     230       5   Total intangible assets   $ 12,660             The following unaudited pro forma financial information summarizes the results of operations of the Company and ShiftWizard as though the companies were combined as of January 1, 2019 ( in thousands, except per share data):       Three Months Ended September 30,     Nine Months Ended September 30,       2021     2020     2021     2020   Total revenues   $ 64,210     $ 61,930     $ 192,910     $ 186,049   Net income   $ 1,615     $ 2,169     $ 6,690     $ 11,985   Net income per share - basic   $ 0.05     $ 0.07     $ 0.21     $ 0.37   Net income per share - diluted   $ 0.05     $ 0.07     $ 0.21     $ 0.37     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.   ANSOS ™ Staff Scheduling application   On December 2, 2020, the Company acquired all of the equity interests of Change Healthcare’s staff scheduling business, consisting of the ANSOS™ Staff Scheduling application and related products (ANSOS). The consideration paid for ANSOS was $ 66.4  million in cash, after giving effect to the post-closing working capital adjustment. Acquisition-related transaction costs were $ 1.2  million. The financial results of ANSOS have been included in the Workforce Solutions segment from December 2, 2020.   The following table summarizes the preliminary fair value of the assets acquired and liabilities assumed as of the date of acquisition (in thousands):   Cash   $ 1,599   Accounts and unbilled receivable, net     10,099   Prepaid assets     233   Operating lease right-of-use assets     888   Property and equipment     66   Deferred tax assets     2,855   Indemnification asset     2,029   Goodwill     36,748   Intangible assets     32,440   Accounts payable and accrued liabilities     ( 1,776 ) Deferred revenue     ( 14,204 ) Operating lease liabilities     ( 888 ) Deferred tax liability     ( 1,612 ) Uncertain tax position liability     ( 2,029 ) Net assets acquired   $ 66,448     12 Table of Contents   HEALTHSTREAM, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)   The excess of purchase price over the preliminary 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 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 income tax attributes and working capital accounts. Included in the preliminary assets and liabilities acquired is an indemnification asset and an uncertain tax position liability determined based on management’s estimate of the most likely value related to income tax attributes. During the nine months ended September 30, 2021 , the Company made adjustments to accounts receivable, deferred revenue, indemnification asset, uncertain tax position liability, accounts payable and accrued liabilities, and deferred tax assets based on updated information obtained since our preliminary estimates were made. As a result of these items, coupled with the impact of the post-closing working capital adjustment, the Company recorded a measurement period adjustment which increased goodwill by $ 1.5 million. The measurement period adjustment had no effect on current or prior period earnings. The primary intangible assets acquired were customer relationships and developed technology. The fair value estimate for customer relationships intangible asset included significant assumptions regarding prospective financial information with respect to the acquisition, including with respect to revenue growth, customer attrition, 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 ANSOS products, and expected synergies from integrating ANSOS with other products or other combined functional areas within the Company.    The portion of goodwill allocated to the U.S. entity is deductible for U.S. income tax purposes (representing 95 %). The net tangible assets include deferred revenue, which was adjusted down from a book value at the acquisition date of $ 17.5  million to an estimated fair value of $ 14.2  million. The $ 3.3  million write-down of deferred revenue will result in lower revenues than would have otherwise been recognized for such services.   The following table sets forth the components of identifiable intangible assets and their estimated useful lives as of the acquisition date (in thousands):     Fair Value     Useful life (in years)   Customer relationships   $ 21,100       11 - 14   Developed technology     9,800       5   Trade name     1,540       10   Total intangible assets   $ 32,440             The following unaudited pro forma financial information summarizes the results of operations of the Company and ANSOS as though the companies were combined as of January 1, 2019 ( in thousands, except per share data):       Three Months Ended September 30,     Nine Months Ended September 30,       2021     2020     2021     2020   Total revenues   $ 64,636     $ 66,924     $ 194,856     $ 203,129   Net income   $ 1,965     $ 3,407     $ 8,190     $ 16,514   Net income per share - basic   $ 0.06     $ 0.11     $ 0.26     $ 0.51   Net income per share - diluted   $ 0.06     $ 0.11     $ 0.26     $ 0.51     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.   Other Business Combinations   On December 10, 2020, the Company acquired substantially all of the assets of myClinicalExchange, LLC, a Denver, Colorado-based information technologies company offering a SaaS-based solution that allows healthcare organizations to track, manage, and report the intern and clinical rotation educational requirements of medical, nursing, and allied healthcare students as well as host required documentation for medical residents. The consideration paid for myClinicalExchange consisted of $ 4.4  million in cash. Acquisition-related transaction costs were $ 0.1  million. The acquisition is not considered material to the Company’s Financial Statements. The Company accounted for the acquisition as a business combination and has allocated the purchase consideration based on management’s estimates of fair value. The results of operations for myClinicalExchange are included in the Company’s Condensed Consolidated Financial Statements from the date of acquisition and are included in the Workforce Solutions segment.   13 Table of Contents   HEALTHSTREAM, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)   On January 19, 2021, the Company acquired the issued and outstanding equity of ProcessDATA, Ltd. (d/b/a ComplyALIGN and HospitalPORTAL) (“ComplyALIGN”), a Chicago, Illinois-based healthcare technology company offering a SaaS-based policy management system for healthcare organizations, for $ 2.0  million in cash. The acquisition is not considered material to the Company’s financial statements. The Company accounted for the acquisition as a business combination and has allocated the purchase consideration based on management’s estimates of fair value. Acquisition-related transaction costs were $ 0.1 million. The results of operations for ComplyALIGN are included in the Company’s Condensed Consolidated Financial Statements from the date of acquisition and are included in the Workforce Solutions segment.   During the nine months ended September 30, 2021 , the carrying amount of goodwill increased by $ 2.7  million, consisting of a $ 1.5 million of measurement period adjustment related to ANSOS, $ 1.0 million of acquired goodwill related to ComplyALIGN, and $ 0.2  million for the effect of currency translation adjustments.   8. 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 training, certification, assessment, development, and scheduling 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, information systems, 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 (in thousands).         Three Months Ended September 30,     Nine Months Ended September 30,   Revenues, net:   2021     2020     2021     2020   Workforce Solutions   $ 51,155     $ 49,197     $ 154,559     $ 147,909   Provider Solutions     12,936       11,686       37,815       35,099   Total revenues, net   $ 64,091     $ 60,883     $ 192,374     $ 183,008   Operating income:                                 Workforce Solutions   $ 7,732     $ 9,758     $ 25,981     $ 33,575   Provider Solutions     1,974       913       6,195       3,382   Unallocated     ( 7,921 )     ( 7,537 )     ( 23,661 )     ( 22,276 ) Total operating income   $ 1,785     $ 3,134     $ 8,515     $ 14,681     Segment assets *   September 30, 2021     December 31, 2020   Workforce Solutions   $ 259,036     $ 270,924   Provider Solutions     134,793       140,490   Unallocated     100,885       88,899   Total assets   $ 494,714     $ 500,313     * 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, goodwill, 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.   14 Table of Contents   HEALTHSTREAM, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)   9. DEBT   Revolving Credit Facility   On October 28, 2020, the Company entered into a Third Amendment to Revolving Credit Agreement (Revolving Credit Facility), amending the Revolving Credit Facility dated as of November 24, 2014 with Truist Bank, successor by merger to SunTrust Bank (Truist), extending the maturity date to October 28, 2023. Under the Revolving Credit Facility, the Company may borrow up to $ 65.0 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.        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 Truist’s prime rate or 0.5 % in excess of the Federal Funds Rate or 1.0 % in excess of one -month LIBOR (the Base Rate), plus an applicable margin, or ( 2 ) the one, two, three, or six -month per annum LIBOR for deposits in the applicable currency (the 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 1.75 %. The applicable margin for Base Rate loans depends on the Company’s funded debt leverage ratio and varies from 0.50 % to 0.75 %. Commitment fees and letter of credit fees are also payable under the Revolving Credit Facility. Principal is payable in full at maturity on October 28, 2023, 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 obligations under the Revolving Credit Facility are guaranteed by each of the Company’s subsidiaries.   The purpose of the Revolving Credit Facility is for general working capital needs, permitted acquisitions (as defined in the Revolving Credit Facility), 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 September 30, 2021 , the Company was in compliance with all covenants. There were no balances outstanding on the Revolving Credit Facility as of or during the three and nine months ended September 30, 2021 .     15 Table of Contents