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Item 2. Management’s Discussion and Analysis

2022-10-27 compared with 2022-07-28 · 120 added, 114 removed, 165 unchanged (59% of the section changed)

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HealthStream’s primary customers include healthcare organizations and other participants in the healthcare industry.

Significant financial metrics for the second quarter of 2022 are set forth in the bullets below.

Revenues of $65.6 million in the second quarter of 2022, up 1% from $64.8 million in the second quarter of 2021.

Operating income of $3.0 million in the second quarter of 2022, down 14% from $3.4 million in the second quarter of 2021.

Net income of $3.1 million in the second quarter of 2022, up 26% from $2.4 million in the second quarter of 2021.

Earnings per share (“EPS”) of $0.10 per share (diluted) in the second quarter of 2022 compared to $0.08 per share (diluted) in the second quarter of 2021.

Adjusted EBITDA 1  of $13.1 million in the second quarter of 2022, down 10% from $14.5 million in the second quarter of 2021.

Significant financial metrics for the third quarter of 2022 are set forth in the bullets below.

Revenues of $67.3 million in the third quarter of 2022, up 5% from $64.1 million in the third quarter of 2021.

Operating income of $2.4 million in the third quarter of 2022, up 33% from $1.8 million in the third quarter of 2021.

Net income of $3.7 million in the third quarter of 2022, up 144% from $1.5 million in the third quarter of 2021.

Net income was positively impacted in the amount of $2.1 million by the gain on the sale of a non-marketable equity investment recognized in the third quarter of 2022.

Earnings per share (“EPS”) of $0.12 per share (diluted) in the third quarter of 2022 compared to $0.05 per share (diluted) in the third quarter of 2021.

EPS was positively impacted in the amount of $0.07 per share (diluted) by the gain on the sale of a non-marketable equity investment recognized in the third quarter of 2022.

Adjusted EBITDA 1  of $12.7 million in the third quarter of 2022, up 2% from $12.5 million in the third quarter of 2021.

Adjusted EBITDA is a non-GAAP financial measure.

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In some instances, we believe that the pressures associated with these challenges continue to result in delayed sales for certain of our products, particularly those that are more elective in nature.

However, we have recently begun to observe an increase in sales engagement with customers through both in-person and virtual meetings when compared to the height of the pandemic.

However, we have begun to observe an increase in sales engagement with customers through both in-person and virtual meetings when compared to the height of the pandemic.

Ultimately, we believe that our product offerings are well-positioned to help our healthcare customers successfully manage issues associated with onboarding, training, developing, engaging, and retaining employees—nurses in particular—and we remain dedicated to helping our customers overcome the challenges associated with the pandemic and ongoing economic conditions.

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Given that we sell multiple year subscriptions to our solutions, the revenue impact of lost or delayed sales in a given period generally does not manifest until future periods, just as the revenue we recognize in a given period is generally the result of sales from a prior period.

We believe that the delay in bookings from the height of the pandemic negatively impacted our revenue growth in the first half of 2022, and, to a lesser extent, will continue to negatively impact our revenue at least through the third quarter of 2022 and potentially throughout the remainder of the year.

However, we also experienced increased bookings in the first half of 2022, which we believe will begin to benefit revenue that we will recognize in the latter half of 2022. 

We believe that the delay in bookings from the height of the pandemic negatively impacted our revenue growth in the first three quarters of 2022, and, to a lesser extent, will continue to negatively impact our revenue throughout the remainder of the year.

However, we also have experienced increased bookings during the nine months ended September 30, 2022, in comparison to the prior year period, which we expect to have a positive impact on revenue during the remainder of 2022. 

In addition, the U.S.

economy has been experiencing various challenges, including recessionary concerns, ongoing inflation, significant disruptions to global supply networks, and challenging labor market conditions.

In this regard, we have recently experienced, and believe that many of our customers have experienced, increased labor, supply chain, capital, and other expenditures associated with current inflationary pressures.

In this regard, we have recently experienced and believe that many of our customers have experienced increased labor, supply chain, capital, and other expenditures associated with current inflationary pressures.

These conditions impacting the U.S.

economy and our customers in the healthcare industry may adversely impact our business and results of operations.

However, as discussed above, we also believe that our product offerings are well positioned to help customers mitigate some of the negative impacts otherwise associated with current labor challenges as we continue to fulfill our vision of improving healthcare by developing the people who provide care.

economy and our customers in the healthcare industry have adversely affected, and may continue to adversely impact, our business and results of operations.

However, as discussed above, we also believe that our product offerings are well positioned to help customers mitigate some of the negative impacts otherwise associated with current labor challenges as we continue to fulfill our vision to improve the quality of healthcare by developing the people who deliver care.

Key Business Metrics

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Revenues, net .

Revenues, net, reflect income generated by the sales of goods and services related to our operations and, prior to the adoption of ASU 2021-08 on January 1, 2022, reflects deferred revenue write-downs associated with fair value accounting for acquired businesses.

Revenues, net, were $65.6 million and $131.0 million for the three and six months ended June 30, 2022, respectively, compared to $64.8 million and $128.3 million for the three and six months ended June 30, 2021, respectively.

Revenues, net, reflect income generated by the sales of goods and services related to our operations and, for businesses acquired prior to the adoption of ASU 2021-08 on January 1, 2022, reflects deferred revenue write-downs associated with fair value accounting for such acquired businesses.

Revenues, net, were $67.3 million and $198.3 million for the three and nine months ended September 30, 2022, respectively, compared to $64.1 million and $192.4 million for the three and nine months ended September 30, 2021, respectively.

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.

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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 $3.0 million and $7.0 million for the three and six months ended June 30, 2022, respectively, compared to $3.4 million and $6.7 million for the three and six months ended June 30, 2021, respectively.

Operating income was $2.4 million and $9.4 million for the three and nine months ended September 30, 2022, respectively, compared to $1.8 million and $8.5 million for the three and nine months ended September 30, 2021, respectively.

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

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Additionally, short-term cash incentive bonuses and certain performance-based equity award grants are based on the achievement of adjusted EBITDA (as defined in applicable bonus and equity grant documentation) targets.

Adjusted EBITDA was $13.1 million and $27.1 million for the three and six months ended June 30, 2022, respectively, compared to $14.5 million and $28.1 million for the three and six months ended June 30, 2021, respectively.

Adjusted EBITDA was $12.7 million and $39.8 million for the three and nine months ended September 30, 2022, respectively, compared to $12.5 million and $40.6 million for the three and nine months ended September 30, 2021, respectively.

hStream Subscriptions .

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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 June 30, 2022, we had approximately 5.30 million contracted subscriptions to hStream, compared to 4.52 million as of June 30, 2021.

At September 30, 2022, we had approximately 5.35 million contracted subscriptions to hStream, compared to 4.92 million as of September 30, 2021.

Critical Accounting Policies and Estimates

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There have been no changes in our critical accounting policies and estimates from those reported in our 2021 Form 10-K.

Three Months Ended June 30, 2022 Compared to Three Months Ended June 30, 2021

Three Months Ended September 30, 2022 Compared to Three Months Ended September 30, 2021

Revenues, net.

Revenues increased approximately $0.8 million, or 1%, to $65.6 million for the three months ended June 30, 2022 from $64.8 million for the three months ended June 30, 2021.

Revenues increased approximately $3.2 million, or 5%, to $67.3 million for the three months ended September 30, 2022 from $64.1 million for the three months ended September 30, 2021.

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:

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Provider Solutions

Revenues for Workforce Solutions increased $0.3 million, or 1%, to $52.5 million for the three months ended June 30, 2022, from $52.2 million for the three months ended June 30, 2021.

The Workforce Solutions segment experienced growth in several product categories, including contributions from recent acquisitions, partially offset by declines from the legacy resuscitation business of $0.9 million, as well as lower installed software license sales from the legacy portion of our Scheduling application suite.

Revenues for Provider Solutions increased $0.5 million, or 4%, to $13.2 million for the three months ended June 30, 2022, from $12.7 million for the three months ended June 30, 2021.

Revenue growth was primarily attributable to new subscription revenues.

Revenues for Workforce Solutions increased $2.9 million, or 6%, to $54.1 million for the three months ended September 30, 2022, from $51.2 million for the three months ended September 30, 2021.

The Workforce Solutions segment experienced growth in several product categories, including contributions from recent acquisitions, but was partially offset by declines from the legacy resuscitation business of $0.4 million.

Revenues for Provider Solutions increased $0.3 million, or 2%, to $13.2 million for the three months ended September 30, 2022, from $12.9 million for the three months ended September 30, 2021.

Revenue growth was primarily attributable to new subscription revenues but was partially offset by a $0.5 million decrease in professional services revenue.

Cost of Revenues (excluding Depreciation and Amortization).

Cost of revenues decreased $0.5 million, or 2%, to $22.2 million for the three months ended June 30, 2022, from $22.7 million for the three months ended June 30, 2021.

Cost of revenues as a percentage of revenues was 34% and 35% for the three months ended June 30, 2022 and 2021, respectively.

Cost of revenues for Workforce Solutions decreased $1.0 million to $17.7 million for the three months ended June 30, 2022, compared to the prior year period and approximated 34% and 36% of revenues for Workforce Solutions for the three months ended June 30, 2022 and 2021, respectively.

The decrease is primarily attributable to a lower royalties payable by us related to legacy resuscitation products, consistent with the reduction in these revenues. Cost of revenues for Provider Solutions increased $0.5 million to $4.5 million for the three months ended June 30, 2022, compared to the prior year period and approximated 34% and 31% of Provider Solutions revenues for the three months ended June 30, 2022 and 2021, respectively.

The increase in amount is primarily associated with an increase in personnel, hosting, and software costs during the three months ended June 30, 2022.

Cost of revenues increased $0.8 million, or 3%, to $23.4 million for the three months ended September 30, 2022, from $22.6 million for the three months ended September 30, 2021.

Cost of revenues as a percentage of revenues was 35% for both the three months ended September 30, 2022 and 2021.

Cost of revenues for Workforce Solutions increased $0.2 million to $18.6 million for the three months ended September 30, 2022, compared to the prior year period and approximated 34% and 36% of revenues for Workforce Solutions for the three months ended September 30, 2022 and 2021, respectively.

The increase is primarily attributable to increases in personnel, partially related to recent acquisitions, and cloud hosting costs. Cost of revenues for Provider Solutions increased $0.6 million to $4.8 million for the three months ended September 30, 2022, compared to the prior year period and approximated 36% and 33% of Provider Solutions revenues for the three months ended September 30, 2022 and 2021, respectively.

The increase in amount is primarily associated with an increase in personnel, cloud hosting, and software costs.

Product Development.

Product development expenses increased $0.3 million, or 2%, to $10.6 million for the three months ended June 30, 2022, from $10.3 million for the three months ended June 30, 2021.

Product development expenses as a percentage of revenues were 16% for both the three months ended June 30, 2022 and 2021.

Product development expenses for Workforce Solutions decreased $8,000 to $8.8 million for the three months ended June 30, 2022, compared to the prior year period and approximated 17% of revenues for Workforce Solutions for both the three months ended June 30, 2022 and 2021.

Product development expenses increased $1.2 million, or 11%, to $11.5 million for the three months ended September 30, 2022, from $10.3 million for the three months ended September 30, 2021.

Product development expenses as a percentage of revenues were 17% and 16% for the three months ended September 30, 2022 and 2021, respectively.

Product development expenses for Workforce Solutions increased $0.9 million to $9.7 million for the three months ended September 30, 2022, compared to the prior year period and approximated 18% and 17% of revenues for Workforce Solutions for the three months ended September 30, 2022 and 2021, respectively.

Personnel expenses and contract labor costs increased over the prior year, but were partially offset by an increase in labor capitalized for internally developed software.

Product development expenses for Provider Solutions increased $0.3 million to $1.8 million for the three months ended June 30, 2022, compared to the prior year period and approximated 13% and 12% of revenues for Provider Solutions for the three months ended June 30, 2022 and 2021, respectively.

Product development expenses for Provider Solutions increased $0.3 million to $1.8 million for the three months ended September 30, 2022, compared to the prior year period and approximated 14% and 12% of revenues for Provider Solutions for the three months ended September 30, 2022 and 2021, respectively.

The increase in product development expenses is primarily due to an increase in personnel costs compared to the prior year period.

Sales and Marketing.

Sales and marketing expenses, including personnel costs, increased $1.4 million, or 15%, to $10.9 million for the three months ended June 30, 2022, from $9.5 million for the three months ended June 30, 2021.

Sales and marketing expenses were 17% and 15% of revenues for the three months ended June 30, 2022 and 2021, respectively.

Sales and marketing expenses for Workforce Solutions increased $1.3 million to $8.8 million for the three months ended June 30, 2022, compared to the prior year period and approximated 17% and 14% of revenues for Workforce Solutions for the three months ended June 30, 2022 and 2021, respectively.

The increase is primarily due to increases in personnel expenses, contract labor, marketing expenses, travel expense, and sales commissions.

Sales and marketing expenses for Provider Solutions increased $0.2 million to $1.8 million for the three months ended June 30, 2022, compared to the prior year period and approximated 14% and 13% of revenues for Provider Solutions for the three months ended June 30, 2022 and 2021, respectively.

The increase is primarily due to an increase in personnel expenses, increased software costs, the return of travel expense, and increased sales commissions.

The unallocated corporate portion of sales and marketing expenses decreased $0.1 million to $0.3 million for the three months ended June 30, 2022, compared to the prior year period, primarily due to a reduction in personnel costs and marketing expenses.

Sales and marketing expenses, including personnel costs, increased $1.2 million, or 11%, to $11.4 million for the three months ended September 30, 2022, from $10.2 million for the three months ended September 30, 2021.

Sales and marketing expenses were 17% and 16% of revenues for the three months ended September 30, 2022 and 2021, respectively.

Sales and marketing expenses for Workforce Solutions increased $1.0 million to $9.2 million for the three months ended September 30, 2022, compared to the prior year period and approximated 17% and 16% of revenues for Workforce Solutions for the three months ended September 30, 2022 and 2021, respectively.

The increase is primarily due to increases in personnel and related expenses, sales commissions, and travel expense.

The increase was partially offset by a decrease in marketing expense compared to the prior year period.

Sales and marketing expenses for Provider Solutions increased $0.2 million to $1.9 million for the three months ended September 30, 2022, compared to the prior year period and approximated 15% and 13% of revenues for Provider Solutions for the three months ended September 30, 2022 and 2021, respectively.

The increase is primarily due to increased tradeshow expense, sales commissions, and travel expense.

The unallocated corporate portion of sales and marketing expenses decreased $56,000 to $0.3 million for the three months ended September 30, 2022, compared to the prior year period, primarily due to a reduction in personnel costs and marketing expenses.

Other General and Administrative Expenses.

Other general and administrative expenses decreased $0.2 million, or 2%, to $9.6 million for the three months ended June 30, 2022, from $9.8 million for the three months ended June 30, 2021.

Other general and administrative expenses were 15% of revenues for both the three months ended June 30, 2022 and 2021.

Other general and administrative expenses for Workforce Solutions decreased $0.5 million to $2.5 million for the three months ended June 30, 2022, compared to the prior year period and approximated 5% and 6% of Workforce Solutions revenues for the three months ended June 30, 2022 and 2021, respectively.

The decrease is primarily due to reductions in facilities costs associated with closing certain leased satellite offices and a decrease in contract labor.

Other general and administrative expenses for Provider Solutions increased $0.1 million to $1.0 million for the three months ended June 30, 2022, compared to the prior year period and approximated 7% of Provider Solutions revenues for both the three months ended June 30, 2022 and 2021.

The unallocated corporate portion of other general and administrative expenses increased $0.2 million to $6.1 million for the three months ended June 30, 2022, compared to the prior year period primarily due to increases in software expense and employee recruitment expenses.

Other general and administrative expenses decreased $0.9 million, or 9%, to $9.1 million for the three months ended September 30, 2022, from $10.0 million for the three months ended September 30, 2021.

Other general and administrative expenses were 14% and 16% of revenues for the three months ended September 30, 2022 and 2021, respectively.

Other general and administrative expenses for Workforce Solutions decreased $0.9 million to $2.0 million for the three months ended September 30, 2022, compared to the prior year period and approximated 4% and 6% of Workforce Solutions revenues for the three months ended September 30, 2022 and 2021, respectively.

The decrease is primarily due to reductions in facilities costs associated with closing certain leased satellite offices, a reduction in contract labor, and lower transition service costs associated with prior acquisitions, including with regard to the end of our transition services agreement with Change Healthcare, which related to our acquisition of the Scheduling and Capacity Management business. Other general and administrative expenses for Provider Solutions increased $21,000 to $1.0 million for the three months ended September 30, 2022, compared to the prior year period and approximated 8% of Provider Solutions revenues for both the three months ended September 30, 2022 and 2021.

The unallocated corporate portion of other general and administrative expenses decreased $29,000 to $6.0 million for the three months ended September 30, 2022, compared to the prior year period.

Depreciation and Amortization.

Depreciation and amortization expense increased $0.3 million, or 3%, to $9.4 million for the three months ended June 30, 2022, from $9.1 million for the three months ended June 30, 2021.

This increase is primarily a result of an increase in amortization associated with capitalized software.

Depreciation and amortization expense increased $0.5 million, or 5%, to $9.6 million for the three months ended September 30, 2022, from $9.1 million for the three months ended September 30, 2021.

This increase is primarily a result of an increase in amortization associated with capitalized software but was partially offset by lower depreciation expense.

Other Income (Loss), Net .

Other income (loss), net was income of $0.7 million for the three months ended June 30, 2022, compared to a loss of $65,000 for the three months ended June 30, 2021.

The increase is primarily a result of the $0.9 million gain recorded due to the change in fair value of our previously held minority interest in CloudCME that was remeasured upon acquiring the remaining ownership interest of CloudCME during the three months ended June 30, 2022.

Other income (loss), net was income of $2.5 million for the three months ended September 30, 2022, compared to a loss of $99,000 for the three months ended September 30, 2021.

The increase is primarily the result of a $2.7 million gain recorded during the three months ended September 30, 2022, upon the sale of a non-marketable equity investment.

Income Tax Provision.

The Company recorded a provision for income taxes of $0.5 million for the three months ended June 30, 2022, compared to $0.9 million the three months ended June 30, 2021.

The Company’s effective tax rate was 15% for the three months ended June 30, 2022, compared to 27% for the three months ended June 30, 2021.

The Company recorded a provision for income taxes of $1.3 million for the three months ended September 30, 2022, compared to $0.2 million the three months ended September 30, 2022.

The Company’s effective tax rate was 26% for the three months ended September 30, 2022, compared to 11% for the three months ended September 30, 2021.

During the three months ended June 30, 2022, the Company recorded discrete tax benefits of $0.2 million, which consisted primarily of a $0.2 million tax benefit associated with a nontaxable gain of $0.9 million recognized from the change in fair value of our previously held minority interest in CloudCME, LLC.

Net income was $3.1 million and $2.4 million for the three months ended June 30, 2022 and 2021, respectively.

Earnings per share (EPS) was $0.10 per share (diluted) and $0.08 per share (diluted) for the three months ended June 30, 2022 and 2021, respectively.

Adjusted EBITDA was $13.1 million for the three months ended June 30, 2022, compared to $14.5 million for the three months ended June 30, 2021.

During the three months ended September 30, 2022, the Company recorded discrete tax expense of $0.1 million, which consisted primarily of $0.2 million tax expense related to uncertain tax positions.

The discrete tax expense was partially offset by a $0.1 million tax benefit for changes in estimated tax credits.

During the three months ended September 30, 2021, the Company recorded discrete tax expense of $69,000 primarily related to changes in estimated tax credits. 

Net income was $3.7 million and $1.5 million for the three months ended September 30, 2022 and 2021, respectively.

Earnings per share (EPS) was $0.12 per share (diluted) and $0.05 per share (diluted) for the three months ended September 30, 2022 and 2021, respectively.

Net income and EPS were positively influenced by the gain from the sale of the non-marketable equity investment mentioned above, which had a positive impact on net income equal to $2.1 million and positive impact on EPS equal to $0.07 per share (diluted) during the three months ended September 30, 2022.

Adjusted EBITDA was $12.7 million for the three months ended September 30, 2022, compared to $12.5 million for the three months ended September 30, 2021.

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, 2022 Compared to Six Months Ended June 30, 2021

Nine Months Ended September 30, 2022 Compared to Nine Months Ended September 30, 2021

Revenues, net.

Revenues increased approximately $2.7 million, or 2%, to $131.0 million for the six months ended June 30, 2022 from $128.3 million for the six months ended June 30, 2021.

Revenues increased approximately $5.9 million, or 3%, to $198.3 million for the nine months ended September 30, 2022 from $192.4 million for the nine months ended September 30, 2021.

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

Six Months Ended June 30,

Nine Months Ended September 30,

Revenues by Business Segment:

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Provider Solutions

Revenues for Workforce Solutions increased $1.1 million, or 1%, over the first six months of 2021.

Revenues for Workforce Solutions increased $4.0 million, or 3%, over the first nine months of 2021.

Contributions from recent acquisitions and growth in other workforce solutions more than offset the expected decline in revenues from legacy resuscitation products of $3.1 million.

Revenues for Provider Solutions increased $1.6 million, or 6%, over the first six months of 2021.

Revenue growth was primarily attributable to new subscription revenues.

Revenues for Provider Solutions increased $1.9 million, or 5%, over the first nine months of 2021.

Revenue growth was primarily attributable to new subscription revenues but was partially offset by lower revenues from professional services.

Cost of Revenues (excluding Depreciation and Amortization).

Cost of revenues decreased $1.3 million, or 3%, to $44.2 million for the six months ended June 30, 2022, from $45.5 million for the six months ended June 30, 2021.

Cost of revenues as a percentage of revenues was 34% and 35% for the six months ended June 30, 2022 and 2021, respectively.

Cost of revenues for Workforce Solutions decreased $2.2 million to $35.3 million and approximated 34% and 36% of revenues for Workforce Solutions for the six months ended June 30, 2022 and 2021, respectively.

The decrease in amount is primarily attributable to a lower royalties payable by us related to legacy resuscitation products, consistent with the reduction in these revenues.

Cost of revenues for Provider Solutions increased $0.9 million to $8.9 million and approximated 34% and 32% of Provider Solutions revenues for the six months ended June 30, 2022 and 2021, respectively.

The increase in amount is primarily associated with an increase in personnel costs, hosting, and software expense during the six months ended June 30, 2022.

Cost of revenues decreased $0.5 million, or 1%, to $67.6 million for the nine months ended September 30, 2022, from $68.1 million for the nine months ended September 30, 2021.

Cost of revenues as a percentage of revenues was 34% and 35% for the nine months ended September 30, 2022 and 2021, respectively.

Cost of revenues for Workforce Solutions decreased $2.1 million to $53.9 million and approximated 34% and 36% of revenues for Workforce Solutions for the nine months ended September 30, 2022 and 2021, respectively.

The decrease in amount is primarily attributable to a lower royalties payable by us related to legacy resuscitation products, consistent with the reduction in these revenues, but was partially offset by higher cloud hosting costs and expenses associated with recent acquisitions.

Cost of revenues for Provider Solutions increased $1.6 million to $13.7 million and approximated 35% and 32% of Provider Solutions revenues for the nine months ended September 30, 2022 and 2021, respectively.

The increase in amount is primarily associated with an increase in personnel costs, cloud hosting, and software costs during the nine months ended September 30, 2022.

Product Development.

Product development expenses increased $1.1 million, or 6%, to $21.0 million for the six months ended June 30, 2022 from $19.9 million for the six months ended June 30, 2021.

Product development expenses as a percentage of revenues were 16% and 15% of revenues for the six months ended June 30, 2022 and 2021, respectively. 

Product development expenses for Workforce Solutions increased $0.6 million to $17.7 million and approximated 17% and 16% of revenues for Workforce Solutions for the six months ended June 30, 2022 and 2021, respectively.

The increase is primarily associated with an increase in personnel costs, partially related to recent acquisitions, and contract labor, which was partially offset by an increase in labor capitalized for internally developed software. Additionally, the six months ended June 30, 2021 included a non-recurring, non-cash benefit related to the reduction of paid time off ("PTO") expense as a result of modifications to the Company's PTO policy.

Product development expenses for Provider Solutions increased $0.5 million to $3.3 million and approximated 13% and 11% of revenues for Provider Solutions for the six months ended June 30, 2022 and 2021, respectively.

Product development expenses increased $2.3 million, or 8%, to $32.5 million for the nine months ended September 30, 2022 from $30.2 million for the nine months ended September 30, 2021.

Product development expenses as a percentage of revenues were 16% of revenues for both the nine months ended September 30, 2022 and 2021. 

Product development expenses for Workforce Solutions increased $1.6 million to $27.3 million and approximated 17% of revenues for Workforce Solutions for both the nine months ended September 30, 2022 and 2021.

The increase is primarily associated with an increase in personnel costs, partially related to recent acquisitions, and contract labor, which was partially offset by an increase in labor capitalized for internally developed software. Additionally, the nine months ended September 30, 2021 included a non-recurring, non-cash benefit related to the reduction of paid time off ("PTO") expense as a result of modifications to the Company's PTO policy.

Product development expenses for Provider Solutions increased $0.7 million to $5.2 million and approximated 13% and 12% of revenues for Provider Solutions for the nine months ended September 30, 2022 and 2021, respectively.

The increase is primarily due to an increase in personnel costs.

Sales and Marketing.

Sales and marketing expenses, including personnel costs, increased $2.8 million, or 15%, to $21.3 million for the six months ended June 30, 2022 from $18.5 million for the six months ended June 30, 2021.

Sales and marketing expenses were 16% and 14% of revenues for the six months ended June 30, 2022 and 2021, respectively. 

Sales and marketing expenses for Workforce Solutions increased $2.6 million to $17.2 million and approximated 16% and 14% of revenues for Workforce Solutions for the six months ended June 30, 2022 and 2021, respectively.

The increase is primarily associated with increases in personnel costs, sales commissions, travel, and marketing expenses.

Sales and marketing expenses for Provider Solutions increased $0.4 million to $3.6 million and approximated 13% of revenues for Provider Solutions for both the six months ended June 30, 2022 and 2021.

The increase in amount is a result of increased personnel costs, software costs, travel, and sales commissions.

Sales and marketing expenses, including personnel costs, increased $4.0 million, or 14%, to $32.7 million for the nine months ended September 30, 2022 from $28.7 million for the nine months ended September 30, 2021.

Sales and marketing expenses were 16% and 15% of revenues for the nine months ended September 30, 2022 and 2021, respectively. 

Sales and marketing expenses for Workforce Solutions increased $3.6 million to $26.4 million and approximated 17% and 15% of revenues for Workforce Solutions for the nine months ended September 30, 2022 and 2021, respectively.

The increase is primarily associated with increases in personnel and related costs, sales commissions, travel, and software costs.

Sales and marketing expenses for Provider Solutions increased $0.6 million to $5.5 million and approximated 14% and 13% of revenues for Provider Solutions for the nine months ended September 30, 2022 and 2021, respectively.

The increase in amount is a result of increased sales commissions, marketing expenses, and travel expenses.

The unallocated portion of sales and marketing expenses decreased $0.2 million to $0.8 million compared to the prior year period primarily due to a decrease in personnel costs and marketing expenses.

Other General and Administrative Expenses.

Other general and administrative expenses decreased $0.6 million, or 3%, to $18.8 million for the six months ended June 30, 2022 from $19.4 million for the six months ended June 30, 2021.

Other general and administrative expenses as a percentage of revenues were 14% and 15% of revenues for the six months ended June 30, 2022 and 2021, respectively. 

Other general and administrative expenses for Workforce Solutions decreased $1.5 million to $4.6 million and approximated 4% and 6% of revenues for Workforce Solutions for the six months ended June 30, 2022 and 2021, respectively.

Other general and administrative expenses decreased $1.5 million, or 5%, to $27.9 million for the nine months ended September 30, 2022 from $29.4 million for the nine months ended September 30, 2021.

Other general and administrative expenses as a percentage of revenues were 14% and 15% of revenues for the nine months ended September 30, 2022 and 2021, respectively. 

Other general and administrative expenses for Workforce Solutions decreased $2.3 million to $6.6 million and approximated 4% and 6% of revenues for Workforce Solutions for the nine months ended September 30, 2022 and 2021, respectively.

The decrease is primarily due to reductions in facilities costs associated with closing certain leased satellite offices, lower transition service costs associated with prior acquisitions, including with regard to the end of our transition services agreement with Change Healthcare, which related to our acquisition of the Scheduling and Capacity Management business, and a decrease in contract labor.

Other general and administrative expenses for Provider Solutions increased $0.3 million to $1.9 million and approximated 7% of revenues for Provider Solutions for both the six months ended June 30, 2022 and 2021.

Other general and administrative expenses for Provider Solutions increased $0.2 million to $2.9 million and approximated 7% of revenues for Provider Solutions for both the nine months ended September 30, 2022 and 2021.

The increase in amount is primarily due to increased personnel costs.

The unallocated corporate portion of other general and administrative expenses increased $0.6 million to $12.3 million compared to the first six months of 2021 primarily due to increased employee recruitment expenses as well as software expenses over the prior year period.

The unallocated corporate portion of other general and administrative expenses increased $0.6 million to $18.3 million compared to the first nine months of 2021 primarily due to increased employee recruitment expenses as well as software expenses over the prior year period.

Depreciation and Amortization.

Depreciation and amortization expense increased $0.4 million, or 2%, to $18.7 million for the six months ended June 30, 2022, from $18.3 million for the six months ended June 30, 2021.

This increase is primarily a result of an increase in amortization associated with capitalized software.

Depreciation and amortization expense increased $0.9 million, or 3%, to $28.3 million for the nine months ended September 30, 2022, from $27.4 million for the nine months ended September 30, 2021.

This increase is primarily a result of an increase in amortization associated with capitalized software but was partially offset by lower depreciation expense.

Other Income (Loss), Net .

Other income (loss), net was income of $0.4 million for the six months ended June 30, 2022, compared to a loss of $0.2 million for the six months ended June 30, 2021.

Other income (loss), net was income of $2.9 million for the nine months ended September 30, 2022, compared to a loss of $0.3 million for the nine months ended September 30, 2021.

The increase is primarily a result of the $2.7 million gain recorded upon the sale of a non-marketable equity investment during the nine months ended September 30, 2022 as well as the $0.9 million gain recorded due to the change in fair value of our previously held minority interest in CloudCME that was remeasured upon acquiring the remaining ownership interest of CloudCME during the nine months ended September 30, 2022.

Income Tax Provision.

The Company recorded a provision for income taxes of $1.4 million and $1.8 million for the six months ended June 30, 2022 and 2021, respectively.

The Company’s effective tax rate was 19% for the six months ended June 30, 2022, compared to 28% for the six months ended June 30, 2021.

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. During the six months ended June 30, 2022, the Company recorded discrete tax benefits of $0.1 million, which consisted primarily of a $0.2 million tax benefit associated with a nontaxable gain of $0.9 million recognized from the change in fair value of our previously held minority interest in CloudCME, LLC.

This tax benefit was partially offset by $0.1 million of excess tax deficiencies associated with stock-based awards. During the six months ended June 30, 2021, the Company recorded discrete tax expense a $0.2 million primarily related to purchase accounting adjustments and the impact of a state tax rate change enacted during the period. 

Net income was approximately $6.0 million and $4.7 million for the six months ended June 30, 2022 and 2021, respectively.

Earnings per share (EPS) was $0.19 per share (diluted) and $0.15 per share (diluted) for the six months ended June 30, 2022 and 2021, respectively.

Adjusted EBITDA decreased $1.0 million to $27.1 million for the six months ended June 30, 2022, compared to $28.1 million for the six months ended June 30, 2021.

The Company recorded a provision for income taxes of $2.7 million and $2.0 million for the nine months ended September 30, 2022 and 2021, respectively.

The Company’s effective tax rate was 22% for the nine months ended September 30, 2022, compared to 25% for the nine months ended September 30, 2021.

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. During the nine months ended September 30, 2022, the Company recorded discrete tax benefits of $16,000, which consisted primarily of a $0.3 million tax benefit associated with a nontaxable gain of $0.9 million recognized from the change in fair value of our previously held minority interest in CloudCME as well as a $0.1 million tax benefit for changes in estimated tax credits.

This tax benefit was partially offset by $0.3 million of tax expense related to uncertain tax positions and $0.1 million of excess tax deficiencies associated with stock-based awards. During the nine months ended September 30, 2021, the Company recorded discrete tax expense of $0.2 million primarily related to purchase accounting adjustments, the impact of a state tax rate changes enacted during the period, and changes in estimated tax credits. 

Net income was approximately $9.6 million and $6.2 million for the nine months ended September 30, 2022 and 2021, respectively.

Earnings per share (EPS) was $0.31 per share (diluted) and $0.20 per share (diluted) for the nine months ended September 30, 2022 and 2021, respectively.

Net income and EPS were positively influenced by the gains from previously held investments mentioned above.

Adjusted EBITDA decreased $0.8 million to $39.8 million for the nine months ended September 30, 2022, compared to $40.6 million for the nine months ended September 30, 2021.

This decrease resulted from the factors mentioned above.

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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 (as discussed in greater detail below) and before interest, income taxes, stock-based compensation, depreciation and amortization, changes in fair value of non-marketable equity investments, and the de-recognition of non-cash expense resulting from the paid time off expense reduction in the first quarter of 2021 (“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.

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 (as discussed in greater detail below) and before interest, income taxes, stock-based compensation, depreciation and amortization, changes in fair value of, including gains (losses) on the sale of, non-marketable equity investments, and the de-recognition of non-cash expense resulting from the paid time off expense reduction in the first quarter of 2021 (“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/or 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.

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

Three Months Ended June 30,

Six Months Ended June 30,

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 $3.7 million to $28.0 million during the six months ended June 30, 2022, from $24.3 million during the six months ended June 30, 2021.

This increase was primarily due to lower royalties paid by us compared to the prior year period and was partially offset by lower cash receipts and increased labor costs.

Our days sales outstanding ("DSO") was 45 days for the second quarter of 2022 compared to 43 days for the second quarter of 2021.

Net cash provided by operating activities increased by $6.7 million to $43.1 million during the nine months ended September 30, 2022, from $36.4 million during the nine months ended September 30, 2021.

This increase was primarily due to higher cash collections and lower royalties paid by us compared to the prior year period, which was partially offset by increased labor costs.

Our days sales outstanding ("DSO") was 38 days for the third quarter of 2022 compared to 40 days for the third quarter of 2021.

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

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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 $14.0 million for the six months ended June 30, 2022, compared to $10.6 million for the six months ended June 30, 2021.

During the six months ended June 30, 2022, the Company spent $3.9 million to acquire the remaining ownership interest in CloudCME on a net cash basis and spent $62,000 related to post-closing adjustments for prior acquisitions for a net cash outflow of $4.0 million for business combinations, invested in marketable securities of $2.0 million, made payments for capitalized software development of $11.8 million, and purchased property and equipment of $1.2 million.

These uses of cash were partially offset by $5.0 million in maturities of marketable securities. During the six months ended June 30, 2021, the Company spent $2.0 million to acquire ComplyALIGN and on a net cash basis received $1.3 million of proceeds upon settling post-closing adjustments related to ANSOS and ShiftWizard acquisitions for a net cash outflow of $0.7 million for 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 non-marketable equity investments.

Net cash used in investing activities was $18.0 million for the nine months ended September 30, 2022, compared to $17.0 million for the nine months ended September 30, 2021.

During the nine months ended September 30, 2022, the Company spent $3.9 million to acquire the remaining ownership interest in CloudCME on a net cash basis and spent $62,000 related to post-closing adjustments for prior acquisitions for a net cash outflow of $4.0 million for business combinations, invested in marketable securities of $5.6 million, made payments for capitalized software development of $17.4 million, and purchased property and equipment of $1.6 million.

These uses of cash were partially offset by $7.0 million in maturities of marketable securities and $3.5 million in proceeds from the sales of non-marketable equity investments. During the nine months ended September 30, 2021, the Company spent $2.0 million to acquire ComplyALIGN and on a net cash basis received $1.3 million of proceeds upon settling post-closing adjustments related to ANSOS and ShiftWizard acquisitions for a net cash outflow of $0.7 million for 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 non-marketable equity investments.

These uses of cash were partially offset by $9.9 million in maturities of marketable securities. 

Net cash used in financing activities was approximately $23.6 million for the six months ended June 30, 2022, compared to $0.4 million for the six months ended June 30, 2021.

The uses of cash for the six months ended June 30, 2022 included $23.1 million for repurchases of common stock and $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 six months ended June 30, 2021 primarily included $0.4 million for the payment of employee payroll taxes in relation to the vesting of restricted share units.

Our balance sheet reflects negative working capital of $9.6 million at June 30, 2022, compared to positive working capital of $6.5 million at December 31, 2021.

The decrease in working capital is primarily a result of a reduction in cash to fund the acquisition of CloudCME, repurchases of common stock and an increase in deferred revenue.

The Company’s primary source of liquidity as of June 30, 2022 was $37.2 million of cash and cash equivalents and $2.0 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, 2022.

Net cash used in financing activities was approximately $23.7 million for the nine months ended September 30, 2022, compared to $0.5 million for the nine months ended September 30, 2021.

The uses of cash for the nine months ended September 30, 2022 included $23.1 million for repurchases of common stock and $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, 2021 primarily included $0.5 million for the payment of employee payroll taxes in relation to the vesting of restricted share units.

Our balance sheet reflects negative working capital of $1.0 million at September 30, 2022, compared to positive working capital of $6.5 million at December 31, 2021.

The decrease in working capital is primarily a result of the use of cash to fund the acquisition of CloudCME, repurchases of common stock and an increase in deferred revenue.

The Company’s primary source of liquidity as of September 30, 2022 was $48.3 million of cash and cash equivalents and $3.6 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, 2022.

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

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Under this program, the Company repurchased a total of 853,023 shares in open market purchases at an aggregate value of $20.0 million, reflecting an average price per share of $23.45 (excluding the cost of broker commissions).

During the six months ended June 30, 2022, the Company repurchased 649,739 shares pursuant to this share repurchase program at an aggregate fair value of $14.9 million, based on an average price per share of $22.92 (excluding the cost of broker commissions).

During the nine months ended September 30, 2022, the Company repurchased 649,739 shares pursuant to this share repurchase program at an aggregate fair value of $14.9 million, based on an average price per share of $22.92 (excluding the cost of broker commissions).

On March 14, 2022, the Company's Board of Directors approved an expansion of the Company's share repurchase program by authorizing the repurchase of up to an additional $10.0 million of the Company's outstanding shares of common stock.

The share repurchase program is scheduled to terminate on the earlier of March 13, 2023, or when the maximum dollar amount has been expended.

During the six months ended June 30, 2022, the Company repurchased 402,050 shares pursuant to this share repurchase program at an aggregate fair value of $8.1 million, based on an average price per share of $20.19 (excluding the cost of broker commissions).

During the nine months ended September 30, 2022, the Company repurchased 402,050 shares pursuant to this share repurchase program at an aggregate fair value of $8.1 million, based on an average price per share of $20.19 (excluding the cost of broker commissions).

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 and for the foreseeable future thereafter.

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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, 2022, we were in compliance with all covenants.

As of September 30, 2022, 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.

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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