HEALTHSTREAM INC 10-Q

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations   Special Cautionary Notice Regarding Forward ‑ Looking Statements   You should read the following discussion and analysis in conjunction with our Condensed Consolidated Financial Statements and related Notes included elsewhere in this report and our audited Consolidated Financial Statements and the Notes thereto for the year ended December 31, 2021, appearing in our Annual Report on Form 10-K that was filed with the Securities and Exchange Commission (“SEC”) on February 28, 2022 (the “2021 Form 10-K”). Statements contained in this Quarterly Report on Form 10-Q that are not historical facts are forward-looking statements that the Company intends to be covered by the safe harbor provisions for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995. Statements that are predictive in nature, that depend on or refer to future events or conditions, or that include words such as “anticipates,” “believes,” “could,” “estimates,” “expects,” “intends,” “may,” “plans,” “potential,” “predicts,” “projects,” “should,” “will,” “would,” and similar expressions are forward-looking statements.   The Company cautions that forward-looking statements involve known and unknown risks, uncertainties, and other factors that may cause actual results, performance, or achievements to be materially different from any future results, performance, or achievements expressed or implied by the forward-looking statements. Forward-looking statements reflect our current views with respect to future events and are based on assumptions and subject to risks and uncertainties. Given these uncertainties, you should not place undue reliance on these forward-looking statements.   In evaluating any forward-looking statement, you should specifically consider the information regarding forward-looking statements set forth above and the risks set forth under the caption Part I, Item 1A. Risk Factors in our 2021 Form 10-K and other disclosures in our 2021 Form 10-K, earnings releases and other filings with the SEC from time to time, as well as other cautionary statements contained elsewhere in this report, including our critical accounting policies and estimates as discussed in this report and our 2021 Form 10-K. We undertake no obligation to update or revise any forward-looking statements. You should read this report and the documents that we reference in this report and have filed as exhibits to this report completely and with the understanding that our actual future results may be materially different from what we currently expect.   Business Overview   HealthStream provides primarily SaaS based applications for healthcare organizations—all designed to improve business and clinical outcomes by supporting the people who deliver patient care.   We are in the process of more completely unifying the Company under a single platform strategy that will serve as the foundation for the entire enterprise. By enabling our applications through a common technology platform known as hStream, we believe that stand-alone applications, which already provide a powerful value proposition, will begin to leverage each other to more efficiently and effectively empower our customers to manage their organizations and improve their outcomes. As we continue to achieve this goal of orienting multiple applications in relation to a single technology platform, distinctions between our current reporting segments of Workforce Solutions and Provider Solutions may become less applicable, or even obsolete, in terms of how we operate and report on the Company's business. At the current time, what we characterize and report on as Workforce Solutions products are used by healthcare organizations to meet a broad range of their clinical development, learning and performance, certification, scheduling, safety and compliance, and competency assessment needs. Provider Solutions products are used by healthcare organizations for provider credentialing, privileging, and enrollment needs. HealthStream’s primary customers include healthcare organizations and other participants in the healthcare industry.   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.   1 Adjusted EBITDA is a non-GAAP financial measure. A reconciliation of adjusted EBITDA to net income and disclosure regarding why we believe adjusted EBITDA provides useful information to investors is included later in this report.   11 Table of Contents   COVID-19 Pandemic and Other Recent Developments   While the COVID-19 pandemic persists and remains a cause of uncertainty and potential volatility, public health conditions related to the pandemic have generally stabilized at the current time in the United States, and the impact of the pandemic on general economic conditions in the United States appears to have decreased. As the inflow of COVID patients with respect to healthcare organizations has become more manageable, certain areas of our business, such as our compliance and learning solutions, have begun to return to and, in some cases, even eclipse pre-pandemic norms. However, other parts of our business have continued to be negatively impacted by the ongoing impacts of the pandemic as well as current economic conditions. One of the more pronounced after-effects for our healthcare customers involves staffing challenges, including labor shortages and increased labor and staffing costs. 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 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.   During the height of the pandemic, including in 2021, we experienced delayed and reduced bookings and renewals due to the pandemic. 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 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. These conditions impacting the U.S. 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   Our management utilizes the following financial and non-financial metrics in connection with managing our business.     • Revenues, net . 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.     • Operating Income . Operating income represents the amount of profit realized from our operations and is calculated as the difference between revenues, net and operating costs and expenses. Operating income was $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.     • Adjusted EBITDA . Adjusted EBITDA, calculated as set forth below under “Reconciliation of Non-GAAP Financial Measures,” is utilized by our management in connection with managing our business and provides useful information to investors because adjusted EBITDA reflects net income adjusted for certain GAAP accounting, non-cash and non-operating items, as more specifically set forth below, which may not fully reflect the underlying operating performance of our business. We also believe that adjusted EBITDA is useful to investors to assess the Company’s ongoing operations. 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 $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 . hStream subscriptions are determined as the number of subscriptions under contract for hStream, our emerging technology platform that enables healthcare organizations and their respective workforces to easily connect to and gain value from the growing HealthStream ecosystem of applications, tools, and content. Management utilizes hStream subscriptions in connection with managing our business and believes that this metric provides useful information to investors as a measure of our progress in growing the value of our customer base. At September 30, 2022, we had approximately 5.35 million contracted subscriptions to hStream, compared to 4.92 million as of September 30, 2021.   12 Table of Contents   Critical Accounting Policies and Estimates   The Company’s Condensed Consolidated Financial Statements are prepared in accordance with US GAAP. These accounting principles require us to make certain estimates, judgments, and assumptions during the preparation of our Financial Statements. We believe the estimates, judgments, and assumptions upon which we rely are reasonable based upon information available to us at the time they are made. These estimates, judgments, and assumptions can affect the reported amounts of assets and liabilities as of the date of the Financial Statements, as well as the reported amounts of revenues and expenses during the periods presented and related disclosures. To the extent there are material differences between these estimates, judgments, or assumptions and actual results, our Financial Statements will be affected.   The accounting policies and estimates that we believe are the most critical in fully understanding and evaluating our reported financial results include the following:     • Revenue recognition     • Accounting for income taxes     • Goodwill   In many cases, the accounting treatment of a particular transaction is specifically dictated by US GAAP and does not require management’s judgment in its application. There are also areas where management’s judgment in selecting among available alternatives would not produce a materially different result. See Notes to the Consolidated Financial Statements in our 2021 Form 10-K and the Notes to the Condensed Consolidated Financial Statements herein which contain additional information regarding our accounting policies and other disclosures required by US GAAP. There have been no changes in our critical accounting policies and estimates from those reported in our 2021 Form 10-K.   Three Months Ended September 30, 2022 Compared to Three Months Ended September 30, 2021   Revenues, net. 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 September 30,   Revenues by Business Segment:   2022     2021     Percentage Change   Workforce Solutions   $ 54,063     $ 51,155       6 % Provider Solutions     13,222       12,936       2 % Total revenues, net   $ 67,285     $ 64,091       5 %                           % of Revenues                         Workforce Solutions     80 %     80 %         Provider Solutions     20 %     20 %           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 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.   13 Table of Contents   Product Development. 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 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 $1.2 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 $0.9 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 $0.5 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 $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 $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. 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 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. 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.   14 Table of Contents     Nine Months Ended September 30, 2022 Compared to Nine Months Ended September 30, 2021   Revenues, net. 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):       Nine Months Ended September 30,   Revenues by Business Segment:   2022     2021     Percentage Change   Workforce Solutions   $ 158,576     $ 154,559       3 % Provider Solutions     39,714       37,815       5 % Total revenues, net   $ 198,290     $ 192,374       3 %                           % of Revenues                         Workforce Solutions     80 %     80 %         Provider Solutions     20 %     20 %           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 $1.9 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 $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.   15 Table of Contents   Product Development. 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 $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 $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 $0.2 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 $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 $0.9 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 $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 $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. 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. See “Reconciliation of Non-GAAP Financial Measures” below for our reconciliation of Adjusted EBITDA to the most directly comparable measure under US GAAP.     16 Table of Contents   Reconciliation of Non-GAAP Financial Measures   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, 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. Additionally, short-term cash incentive bonuses and certain performance-based equity awards are based on the achievement of adjusted EBITDA (as defined in applicable bonus and equity grant documentation) targets.   As noted above, the definition of adjusted EBITDA includes an adjustment for the impact of the deferred revenue write-downs associated with fair value accounting for acquired businesses. Prior to the Company early adopting ASU 2021-08 effective January 1, 2022, following the completion of any acquisition by the Company, the Company was required to record the acquired deferred revenue at fair value as defined in GAAP, which typically resulted in a write-down of the acquired deferred revenue. When the Company was required to record a write-down of deferred revenue, it resulted in lower recognized revenue, operating income, and net income in subsequent periods. Revenue for any such acquired business was deferred and was typically recognized over a one-to-two year period following the completion of any particular acquisition, so our GAAP revenues for this one-to-two year period would not reflect the full amount of revenues that would have been reported if the acquired deferred revenue was not written down to fair value. Management believes that including an adjustment in the definition of adjusted EBITDA for the impact of the deferred write-downs associated with fair value accounting for businesses acquired prior to the January 1, 2022 effective date of the Company's adoption of ASU 2021-08 provides useful information to investors because the deferred revenue write-down recognized in periods after an acquisition may, given the nature of this non-cash accounting impact, cause our GAAP financial results during such periods to not fully reflect our underlying operating performance and thus adjusting for this amount may assist in comparing the Company’s results of operations between periods. Following the adoption of ASU 2021-08, contracts acquired in an acquisition completed on or after January 1, 2022 will be measured as if the Company had originated the contract (rather than the contract being measured at fair value) such that, for such acquisitions, the Company will no longer record deferred revenue write-downs associated with acquired businesses (for acquisitions completed prior to January 1, 2022, the Company will continue to record deferred revenue write-downs associated with fair value accounting for periods on and after January 1, 2022 consistent with past practice). At the current time, the Company intends to continue to include an adjustment in the definition of adjusted EBITDA for the impact of deferred revenue write-downs from business acquired prior to January 1, 2022 given the ongoing impact of such deferred revenue on our financial results.   Adjusted EBITDA is a non-GAAP financial measure and should not be considered as a measure of financial performance under GAAP. Because adjusted EBITDA is not a measurement determined in accordance with GAAP, adjusted EBITDA is susceptible to varying calculations. Accordingly, adjusted EBITDA, as presented, may not be comparable to other similarly titled measures of other companies and has limitations as analytical tools.    A reconciliation of adjusted EBITDA to the most directly comparable GAAP measure is set forth below (in thousands).       Three Months Ended September 30,     Nine Months Ended September 30,       2022     2021     2022     2021   GAAP net income   $ 3,666     $ 1,500     $ 9,642     $ 6,232   Deferred revenue write-down     46       805       223       3,657   Interest income     (124 )     (24 )     (155 )     (64 ) Interest expense     33       33       99       99   Income tax provision     1,259       186       2,675       2,033   Stock-based compensation expense     918       861       2,609       2,260   Depreciation and amortization     9,592       9,141       28,334       27,443   Change in fair value of non-marketable equity investments     (2,653 )     —       (3,596 )     —   Non-cash paid time off expense     —       —       —       (1,011 ) Adjusted EBITDA   $ 12,737     $ 12,502     $ 39,831     $ 40,649     17 Table of Contents   Liquidity and Capital Resources   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. The Company’s primary sources of cash were receipts generated from the sales of our products and services. The primary uses of cash to fund operations included personnel expenses, sales commissions, royalty payments, payments for contract labor and other direct expenses associated with delivery of our products and services, and general corporate expenses.   Net cash used in investing activities was $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 $23.7 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.   On November 30, 2021, the Company's Board of Directors authorized a share repurchase program to repurchase up to $20.0 million of the Company's outstanding shares of common stock. The share repurchase program concluded on March 8, 2022, when the maximum dollar amount authorized under the program was expended. 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 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 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.   In addition, the Company’s growth strategy includes acquiring businesses or making strategic investments in businesses that complement or enhance our business. It is anticipated that future acquisitions or strategic investments, if any, would be effected through cash consideration, stock consideration, or a combination of both. The issuance of our stock as consideration for an acquisition or to raise additional capital could have a dilutive effect on earnings per share and could adversely affect our stock price. Our revolving credit facility contains financial covenants and availability calculations designed to set a maximum leverage ratio of outstanding debt to adjusted EBITDA and an interest coverage ratio of adjusted EBITDA to interest expense. Therefore, the maximum borrowings against our revolving credit facility would be dependent on the covenant calculations at the time of borrowing. 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. Failure to generate sufficient cash flow from operations or raise additional capital when required in sufficient amounts and on terms acceptable to us could harm our business, financial condition, and results of operations.   18 Table of Contents