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Item 2. Management’s Discussion and Analysis

2023-10-26 compared with 2023-07-27 · 104 added, 96 removed, 149 unchanged (57% of the section changed)

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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 focused on helping healthcare organizations meet their ongoing clinical development, talent management, training, education, assessment, competency management, safety and compliance, scheduling, and provider credentialing, privileging, and enrollment needs.

HealthStream primarily provides SaaS based applications for healthcare organizations—all designed to improve business and clinical outcomes by supporting the people who deliver patient care. We are focused on helping healthcare organizations meet their ongoing clinical development, talent management, training, education, assessment, competency management, safety and compliance, scheduling, and provider credentialing, privileging, and enrollment needs.

Our business is managed and organized around a single platform strategy, also referred to as our One HealthStream approach. At the center of this single platform strategy is our hStream technology platform. By facilitating interoperability among our applications, as well as third party applications, we believe that our hStream technology platform is allowing stand-alone applications to leverage each other to more efficiently and effectively empower our customers to manage their business and improve their outcomes.

As indicated in the Company’s Annual Report on Form 10-K for the year ended December 31, 2022, filed on February 28, 2023, the Company has reached an inflection point in its efforts to operate according to its One HealthStream approach. Since January 1, 2023, the Company’s business has been organized and managed around a consolidated, enterprise approach, including with regard to technology, operations, accounting, internal reporting (including the nature of information reviewed by our key decision maker), organization structure, compensation, performance assessment, and resource allocation.

As the result of these developments, the Company determined that Workforce Solutions and Provider Solutions were no longer separate operating segments or separate reportable segments as of January 1, 2023, such that the Company would no longer present two reportable segments for periods beginning on and after this date. As such, since January 1, 2023, the Company has had a single reportable segment, such that the Company is presenting historical financial information on a single segment basis in this Quarterly Report on Form 10-Q for the three and six months ended June 30, 2023.

Significant financial metrics for the second quarter of 2023 are set forth in the bullets below.

Revenues of $69.2 million in the second quarter of 2023, up 5% from $65.6 million in the second quarter of 2022, attributable primarily to growth in several of our subscription-based product categories, including contributions from recent acquisitions

Operating income of $4.0 million in the second quarter of 2023, up 36% from $3.0 million in the second quarter of 2022

Net income of $4.1 million in the second quarter of 2023, up 34% from $3.1 million in the second quarter of 2022

Earnings per share (“EPS”) of $0.13 per share (diluted) in the second quarter of 2023 and $0.10 per share (diluted) in the second quarter of 2022

Adjusted EBITDA 1  of $15.3 million in the second quarter of 2023, up 17% from $13.1 million in the second quarter of 2022

As indicated in the Company’s 2022 Form10-K, the Company has reached an inflection point in its efforts to operate according to its One HealthStream approach. Since January 1, 2023, the Company’s business has been organized and managed around a consolidated, enterprise approach, including with regard to technology, operations, accounting, internal reporting (including the nature of information reviewed by our key decision maker), organization structure, compensation, performance assessment, and resource allocation.

Significant financial metrics for the third quarter of 2023 are set forth in the bullets below.

Revenues of $70.3 million in the third quarter of 2023, up 5% from $67.3 million in the third quarter of 2022

Operating income of $4.9 million in the third quarter of 2023, up 104% from $2.4 million in the third quarter of 2022

Net income of $3.9 million in the third quarter of 2023, up 5% from $3.7 million in the third quarter of 2022

Earnings per share (“EPS”) of $0.13 per share (diluted) in the third quarter of 2023, up from $0.12 per share (diluted) in the third quarter of 2022

Adjusted EBITDA 1  of $16.2 million in the third quarter of 2023, up 28% from $12.7 million in the third quarter of 2022

Adjusted EBITDA is a non-GAAP financial measure.

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

We believe that certain developments related to the pandemic negatively impacted our business in 2021 and to a lesser extent in 2022 and the six months ended June 30, 2023.

In particular, sales cycles in 2021 and 2022 were delayed or postponed such that declines in sales bookings by customers over this period resulted in a negative impact to revenue and earnings in 2022 and the six months ended June 30, 2023 and may continue to result in a negative impact (to a lesser extent) to revenue and earnings for a portion of the remainder of 2023.

We believe that certain developments related to the pandemic negatively impacted our business in 2021 and to a lesser extent in 2022 and the nine months ended September 30, 2023.

In particular, sales cycles in 2021 and 2022 were delayed or postponed such that declines in sales bookings by customers over this period resulted in a negative impact to revenue and earnings in 2022 and the nine months ended September 30, 2023 and may continue to result in a negative impact (to a lesser extent) to revenue and earnings for the remainder of 2023.

Earlier in the pandemic, such impacts on our healthcare organization customers were more frequently associated with the need to focus on providing critical care to pandemic victims and the negative economic impact many of our healthcare organization customers experienced from being forced to temporarily reduce or discontinue services, like elective surgeries, from which they derive revenue.

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Macroeconomic conditions in the U.S.

continue to be challenging in various respects, including as the result of ongoing inflationary pressures, elevated interest rate levels, disruptions to global supply networks, challenging labor market conditions, and potential instability in the banking system.

Such negative macroeconomic conditions have adversely affected, and may continue to adversely affect, us and our customers in the healthcare industry.

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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 $69.2 million and $138.1 million for the three and six months ended June 30, 2023, respectively, compared to $65.6 million and $131.0 million for the three and six months ended June 30, 2022, respectively.

Revenues, net, were $70.3 million and $208.5 million for the three and nine months ended September 30, 2023, respectively, compared to $67.3 million and $198.3 million for the three and nine months ended September 30, 2022, 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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Additionally, short-term cash incentive bonuses and 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 $15.3 million and $29.1 million for the three and six months ended June 30, 2023, respectively, compared to $13.1 million and $27.1 million for the three and six months ended June 30, 2022, respectively.

Adjusted EBITDA was $16.2 million and $45.3 million for the three and nine months ended September 30, 2023, respectively, compared to $12.7 million and $39.8 million for the three and nine months ended September 30, 2022, 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, 2023, we had approximately 5.59 million contracted subscriptions to hStream, compared to 5.30 million as of June 30, 2022.

At September 30, 2023, we had approximately 5.70 million contracted subscriptions to hStream, compared to 5.35 million as of September 30, 2022.

Consolidation Program

As previously disclosed, the Company approved a consolidation program involving the elimination of 33 job roles during the first quarter of 2023, many of which job roles were duplicative as a result of several areas of consolidation. In connection with these job reductions, we incurred severance charges in the amount of $1.0 million during the three months ended March 31, 2023. In addition, while these job reductions were completed during the three months ended March 31, 2023, we incurred related severance charges in the amount of $0.1 million during the three months ended June 30, 2023, and expect to incur additional related severance charges in the aggregate amount of up to $40,000 during the remainder of 2023. 

We did not incur any additional related severance charges during the three months ended September 30, 2023, and we do not expect to incur any additional related severance charges on a going forward basis. 

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 2022 Form 10-K.

Three Months Ended June 30, 2023 Compared to Three Months Ended June 30, 2022

Three Months Ended September 30, 2023 Compared to Three Months Ended September 30, 2022

Revenues, net.

Revenues increased approximately $3.6 million, or 5%, to $69.2 million for the three months ended June 30, 2023 from $65.6 million for the three months ended June 30, 2022.

The revenue growth was attributable to growth in several product categories , including $0.8 million, or 1%, of contributions from our recent acquisitions.

Revenues increased approximately $3.1 million, or 5%, to $70.3 million for the three months ended September 30, 2023 from $67.3 million for the three months ended September 30, 2022.

The revenue growth was attributable to growth in several product categories , including $0.5 million, or 1%, of contributions from our recent acquisitions.

Subscription revenues increased $3.4 million, or 5%, but were partially offset by $0.3 million of declines from professional services revenues.

A comparison of revenues by revenue source is as follows (in thousands):

Three Months Ended June 30,

Three Months Ended September 30,

Percentage Change

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Cost of Revenues (excluding Depreciation and Amortization).

Cost of revenues increased $1.4 million, or 6%, to $23.6 million for the three months ended June 30, 2023, from $22.2 million for the three months ended June 30, 2022.

Cost of revenues as a percentage of revenues were 34% for both the three months ended June 30, 2023 and 2022.

The increase in expense is primarily associated with higher costs for royalties and cloud hosting, as well as increased contract labor and software expenses. 

Cost of revenues increased $0.2 million, or 1%, to $23.6 million for the three months ended September 30, 2023, from $23.4 million for the three months ended September 30, 2022.

Cost of revenues as a percentage of revenues were 34% and 35% for the three months ended September 30, 2023 and 2022, respectively.

The increase in expense is primarily associated with higher costs for software and cloud hosting, which were partially offset by a reduction in labor costs. 

Product Development.

Product development expenses increased $0.4 million, or 4%, to $11.0 million for the three months ended June 30, 2023, from $10.6 million for the three months ended June 30, 2022.

Product development expenses as a percentage of revenues were 16% for both the three months ended June 30, 2023 and 2022.

The increase in expense is primarily due to increased personnel costs, contract labor, and software costs, which were partially offset by an increase in labor capitalized for internally developed software.

Product development expenses decreased $0.6 million, or 5%, to $10.9 million for the three months ended September 30, 2023, from $11.5 million for the three months ended September 30, 2022.

Product development expenses as a percentage of revenues were 15% and 17% for the three months ended September 30, 2023 and 2022, respectively.

The decrease in expense is primarily due to an increase in labor capitalized for internally developed software.

Sales and Marketing.

Sales and marketing expenses, including personnel costs, increased $0.4 million, or 4%, to $11.3 million for the three months ended June 30, 2023, from $10.9 million for the three months ended June 30, 2022.

Sales and marketing expenses were 16% and 17% of revenues for the three months ended June 30, 2023 and 2022, respectively.

The increase in expense is primarily due to increases in sales commissions, which were partially offset by a decrease in general marketing expenses.

Sales and marketing expenses, including personnel costs, decreased $75,000, or 1%, to $11.3 million for the three months ended September 30, 2023, from $11.4 million for the three months ended September 30, 2022.

Sales and marketing expenses were 16% and 17% of revenues for the three months ended September 30, 2023 and 2022, respectively.

Other General and Administrative Expenses.

Other general and administrative expenses decreased $0.5 million, or 5%, to $9.1 million for the three months ended June 30, 2023, from $9.6 million for the three months ended June 30, 2022.

Other general and administrative expenses were 13% and 15% of revenues for the three months ended June 30, 2023 and 2022, respectively.

The decrease is primarily due to lower bad debt expense, general office expenses, professional service fees, and software expenses.

Other general and administrative expenses increased $0.2 million, or 2%, to $9.3 million for the three months ended September 30, 2023, from $9.1 million for the three months ended September 30, 2022.

Other general and administrative expenses were 13% and 14% of revenues for the three months ended September 30, 2023 and 2022, respectively.

The increase in expense is primarily due to higher professional service fees and bad debt expense, which were partially offset by lower personnel costs and general office expenses.

Depreciation and Amortization.

Depreciation and amortization expense increased $0.8 million, or 9%, to $10.2 million for the three months ended June 30, 2023, from $9.4 million for the three months ended June 30, 2022.

Depreciation and amortization expense increased $0.8 million, or 8%, to $10.4 million for the three months ended September 30, 2023, from $9.6 million for the three months ended September 30, 2022.

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

Other Income, Net .

Other income, net was $0.5 million for the three months ended June 30, 2023, compared to $0.7 million for the three months ended June 30, 2022.

The decrease is primarily the result of the $0.9 million gain recorded during the three months ended June 30, 2022 due to the change in fair value of our previously held minority interest in CloudCME, LLC that was remeasured upon acquiring the remaining ownership interest of CloudCME during such period, partially offset by an increase in interest income earned on cash and investments during the three months ended June 30, 2023. 

Other income, net was $0.6 million for the three months ended September 30, 2023, compared to $2.5 million for the three months ended September 30, 2022.

The decrease 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, partially offset by an increase in interest income earned on cash and investments during the three months ended September 30, 2023. 

Income Tax Provision.

The Company recorded a provision for income taxes of $0.4 million for the three months ended June 30, 2023, compared to $0.5 million for the three months ended June 30, 2022. The Company’s effective tax rate was 8% for the three months ended June 30, 2023, compared to 15% for the three months ended June 30, 2022.

The Company recorded a provision for income taxes of $1.6 million for the three months ended September 30, 2023, compared to $1.3 million for the three months ended September 30, 2022. The Company’s effective tax rate was 29% for the three months ended September 30, 2023, compared to 26% for the three months ended September 30, 2022.

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 June 30, 2023, the Company recorded discrete tax benefits of $0.5 million, which consisted primarily of tax benefits in the amount of $0.6 million resulting from changes in apportionment rules in Tennessee upon the enactment of the Tennessee Works Tax Act, partially offset by $0.1 million of discrete tax expense related to reserves for uncertain tax positions.

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 as noted above.

Net income was $4.1 million and $3.1 million for the three months ended June 30, 2023 and 2022, respectively.

Earnings per share (EPS) were $0.13 per share (diluted) and $0.10 per share (diluted) for the three months ended June 30, 2023 and 2022, respectively.

Adjusted EBITDA was $15.3 million for the three months ended June 30, 2023, compared to $13.1 million for the three months ended June 30, 2022.

During the three months ended September 30, 2023, the Company recorded discrete tax expense of $0.5 million, which consisted primarily of $0.3 million resulting from the impact of merging VerityStream into HealthStream and $0.1 million related to reserves for uncertain tax positions. 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.

Net income was $3.9 million and $3.7 million for the three months ended September 30, 2023 and 2022, respectively.

Earnings per share ("EPS") were $0.13 per share (diluted) and $0.12 per share (diluted) for the three months ended September 30, 2023 and 2022, respectively.

Adjusted EBITDA was $16.2 million for the three months ended September 30, 2023, compared to $12.7 million for the three months ended September 30, 2022.

See “Reconciliation of Non-GAAP Financial Measures”

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

Six Months Ended June 30, 2023 Compared to Six Months Ended June 30, 2022

Nine Months Ended September 30, 2023 Compared to Nine Months Ended September 30, 2022

Revenues, net.

Revenues increased approximately $7.1 million, or 5%, to $138.1 million for the six months ended June 30, 2023, from $131.0 million for the six months ended June 30, 2022.

The revenue growth was attributable to growth in several product categories, including contributions from our recent acquisitions.

Revenues increased approximately $10.2 million, or 5%, to $208.5 million for the nine months ended September 30, 2023, from $198.3 million for the nine months ended September 30, 2022.

The revenue growth was attributable to growth in several product categories, including contribution of $2.6 million, or 1%, from our recent acquisitions.

Subscription revenues increased $11.4 million, or 6%, but were partially offset by $1.2 million of declines from professional services revenues.

A comparison of revenues by revenue source is as follows (in thousands):

Six Months Ended June 30,

Nine Months Ended September 30,

Percentage Change

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Cost of Revenues (excluding Depreciation and Amortization).

Cost of revenues increased $3.2 million, or 7%, to $47.4 million for the six months ended June 30, 2023, from $44.2 million for the six months ended June 30, 2022.

Cost of revenues as a percentage of revenues were 34%for both the six months ended June 30, 2023 and 2022.

The increase in expense is primarily associated with personnel costs, including severance costs associated with the elimination of 33 job roles as part of the consolidation of HealthStream's business under a single platform strategy.

In addition, we experienced higher costs for royalties, cloud hosting, contract labor, and software expenses. 

Cost of revenues increased $3.4 million, or 5%, to $71.0 million for the nine months ended September 30, 2023, from $67.6 million for the nine months ended September 30, 2022.

Cost of revenues as a percentage of revenues were 34% for both the nine months ended September 30, 2023 and 2022.

The increase in expense is primarily associated with higher costs for cloud hosting, software, royalties, and contract labor.

Product Development.

Product development expenses increased $1.7 million, or 8%, to $22.7 million for the six months ended June 30, 2023, from $21.0 million for the six months ended June 30, 2022.

Product development expenses as a percentage of revenues were 16% for both the six months ended June 30, 2023 and 2022.

The increase in expense is primarily due to increased personnel costs, including severance costs as noted above, and an increase in contract labor, which were partially offset by an increase in labor capitalized for internally developed software.

Product development expenses increased $1.1 million, or 4%, to $33.6 million for the nine months ended September 30, 2023, from $32.5 million for the nine months ended September 30, 2022.

Product development expenses as a percentage of revenues were 16% for both the nine months ended September 30, 2023 and 2022.

The increase in expense is primarily due to increased personnel costs, including severance costs associated with the elimination of 33 job roles as part of the consolidation of HealthStream's business under a single platform strategy as noted above, and an increase in contract labor, partially offset by an increase in labor capitalized for internally developed software.

Sales and Marketing.

Sales and marketing expenses, including personnel costs, increased $1.7 million, or 8%, to $23.0 million for the six months ended June 30, 2023, from $21.3 million for the six months ended June 30, 2022.

Sales and marketing expenses were 17% and 16% of revenues for the six months ended June 30, 2023 and 2022, respectively.

The increase is primarily due to increased personnel costs, including severance costs as noted above, as well as higher sales commissions and travel costs, which were partially offset by a decrease in general marketing expenses.

Sales and marketing expenses, including personnel costs, increased $1.7 million, or 5%, to $34.3 million for the nine months ended September 30, 2023, from $32.7 million for the nine months ended September 30, 2022.

Sales and marketing expenses were 16% of revenues for both the nine months ended September 30, 2023 and 2022.

The increase in expense is primarily due to increased personnel costs, including severance costs as noted above, as well as higher travel costs, which were partially offset by decreases in general marketing expenses and contract labor.

Other General and Administrative Expenses.

Other general and administrative expenses decreased $0.8 million, or 4%, to $17.9 million for the six months ended June 30, 2023, from $18.8 million for the six months ended June 30, 2022.

Other general and administrative expenses were 13% and 14% of revenues for the six months ended June 30, 2023 and 2022, respectively.

The decrease is primarily due to lower employee recruitment and onboarding expenses, professional service fees, software expenses, and general office expenses, which were partially offset by an increase in stock-based compensation.

Other general and administrative expenses decreased $0.6 million, or 2%, to $27.2 million for the nine months ended September 30, 2023, from $27.9 million for the nine months ended September 30, 2022.

Other general and administrative expenses were 13% and 14% of revenues for the nine months ended September 30, 2023 and 2022, respectively.

The decrease is primarily due to lower employee recruitment and onboarding expenses, software expenses, telecom expenses, and general office expenses, which were partially offset by an increase in bad debt expense.

Depreciation and Amortization.

Depreciation and amortization expense increased $1.4 million, or 7%, to $20.1 million for the six months ended June 30, 2023, from $18.7 million for the six months ended June 30, 2022.

Depreciation and amortization expense increased $2.2 million, or 8%, to $30.6 million for the nine months ended September 30, 2023, from $28.3 million for the nine months ended September 30, 2022.

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

Other Income, Net .

Other income, net was $0.7 million for the six months ended June 30, 2023, compared to $0.4 million for the six months ended June 30, 2022.

The increase is primarily the result of an increase in interest income earned on cash and investments during the six months ended June 30, 2023 compared to the prior year period coupled with a reduction in losses recorded on equity method investments, partially offset by the $0.9 million gain recorded due to the change in fair value of our previously held minority interest in CloudCME, LLC during the six months ended June 30, 2022 that was remeasured upon acquiring the remaining ownership interest of CloudCME, LLC such 2022 period.

Other income, net was $1.3 million for the nine months ended September 30, 2023, compared to $2.9 million for the nine months ended September 30, 2022.

The decrease is primarily the 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.

These decreases were partially offset by an increase in interest income earned on cash and investments during the nine months ended September 30, 2023 compared to the prior year period.

Income Tax Provision.

The Company recorded a provision for income taxes of $0.9 million for the six months ended June 30, 2023, compared to $1.4 million the six months ended June 30, 2022.

The Company’s effective tax rate was 12% for the six months ended June 30, 2023, compared to 19% for the six months ended June 30, 2022.

The Company recorded a provision for income taxes of $2.5 million for the nine months ended September 30, 2023, compared to $2.7 million for the nine months ended September 30, 2022.

The Company’s effective tax rate was 19% for the nine months ended September 30, 2023, compared to 22% for the nine months ended September 30, 2022.

During the six months ended June 30, 2023, the Company recorded discrete tax benefits of $0.5 million, which consisted primarily of tax benefits in the amount of $0.6 million resulting from changes in apportionment rules in Tennessee upon the enactment of the Tennessee Works Tax Act, and stock-based awards, in the amount of $0.1 million, partially offset by $0.2 million of discrete tax expense related to reserves for uncertain tax positions. 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 as noted above.

This tax benefit was partially offset by $0.1 million of excess tax deficiencies associated with stock-based awards.

Net income was $6.8 million and $6.0 million for the six months ended June 30, 2023 and 2022, respectively.

Earnings per share (EPS) were $0.22 per share (diluted) and $0.19 per share (diluted) for the six months ended June 30, 2023 and 2022, respectively.

Adjusted EBITDA was $29.1 million for the six months ended June 30, 2023, compared to $27.1 million for the six months ended June 30, 2022.

During the nine months ended September 30, 2023, the Company recorded discrete tax benefits of $0.1 million, which consisted primarily of tax benefits in the amount of $0.6 million resulting from changes in apportionment rules in Tennessee upon the enactment of the Tennessee Works Tax Act and stock-based awards in the amount of $0.1 million, partially offset by $0.3 million of discrete tax expense related to reserves for uncertain tax positions and $0.3 million of discrete tax expense related to the impact of merging VerityStream into HealthStream. 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.

Net income was $10.6 million and $9.6 million for the nine months ended September 30, 2023 and 2022, respectively.

EPS was $0.35 per share (diluted) and $0.31 per share (diluted) for the nine months ended September 30, 2023 and 2022, respectively.

Adjusted EBITDA was $45.3 million for the nine months ended September 30, 2023, compared to $39.8 million for the nine months ended September 30, 2022.

See “Reconciliation of Non-GAAP Financial Measures”

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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 decreased by $2.5 million to $25.5 million during the six months ended June 30, 2023, from $28.0 million during the six months ended June 30, 2022.

The decrease in net cash provided by operating activities is primarily due to $2.6 million of income tax payments made during the six months ended June 30, 2023 compared to $0.4 million in the prior year period.

Our days sales outstanding ("DSO") increased to 50 days for the second quarter of 2023 from 45 days for the second quarter of 2022 due to certain customers delaying payments longer than usual.

Net cash provided by operating activities increased by $7.1 million to $50.2 million during the nine months ended September 30, 2023, from $43.1 million during the nine months ended September 30, 2022.

The increase in net cash provided by operating activities is primarily due to higher cash collections compared to the prior year period.

Our days sales outstanding ("DSO") was 43 days for the third quarter of 2023 compared to 38 days for the third quarter of 2022.

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, income tax payments, and general corporate expenses.

Net cash used in investing activities was $43.3 million for the six months ended June 30, 2023, compared to $14.0 million for the six months ended June 30, 2022.

During the six months ended June 30, 2023, the Company spent $6.6 million for the acquisition of substantially all of the assets of Electronic Education Documentation System, LLC ("eeds") (note:

the eeds acquisition was consummated on December 31, 2022, but was funded in January 2023 such that the purchase price for eeds impacted net cash used in investing activities during the six months ended June 30, 2023), invested in marketable securities of $32.0 million, made payments for capitalized software development of $13.3 million, and purchased property and equipment of $1.4 million.

These uses of cash were partially offset by $10.0 million in maturities of marketable securities. 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.

Net cash used in financing activities was approximately $2.3 million for the six months ended June 30, 2023, compared to $23.6 million for the six months ended June 30, 2022.

The uses of cash for the six months ended June 30, 2023 included $1.5 million for the payment of cash dividends and $0.8 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, 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.

Our balance sheet reflects positive working capital of $8.9 million at June 30, 2023, compared to negative working capital of $2.8 million at December 31, 2022.

Net cash used in investing activities was $47.2 million for the nine months ended September 30, 2023, compared to $18.0 million for the nine months ended September 30, 2022.

During the nine months ended September 30, 2023, the Company spent $6.6 million for the acquisition of substantially all of the assets of eeds (note:

the eeds acquisition was consummated on December 31, 2022, but was funded in January 2023 such that the purchase price for eeds impacted net cash used in investing activities during the nine months ended September 30, 2023), invested in marketable securities of $38.2 million, made payments for capitalized software development of $19.6 million, and purchased property and equipment of $1.9 million.

These uses of cash were partially offset by $19.0 million in maturities of marketable securities and $45,000 in proceeds from the sales of non-marketable equity investments. 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.

Net cash used in financing activities was approximately $4.8 million for the nine months ended September 30, 2023, compared to $23.7 million for the nine months ended September 30, 2022.

The uses of cash for the nine months ended September 30, 2023 included $2.3 million for the payment of cash dividends, $1.6 million for repurchases of common stock (note:

share repurchases totaled $2.1 million during the nine months ended September 30, 2023, with $1.6 million paid in cash and $0.5 million included in accrued expenses in the Company's Condensed Consolidated Balance Sheet as of September 30, 2023), and $0.8 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, 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.

Our balance sheet reflects positive working capital of $12.3 million at September 30, 2023, compared to negative working capital of $2.8 million at December 31, 2022.

The increase in working capital is primarily a result of an increase in cash and cash equivalents and marketable securities in the aggregate, despite the use of cash to fund the acquisition of eeds, which resulted in a corresponding decrease in accrued liabilities.

The Company’s primary source of liquidity as of June 30, 2023 was $25.8 million of cash and cash equivalents and $30.2 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, 2023.

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

On November 30, 2021, the Company announced a share repurchase program approved by the Company’s Board of Directors under which the Company was authorized to purchase up to $20.0 million of its common stock.

The Company’s primary source of liquidity as of September 30, 2023 was $44.1 million of cash and cash equivalents and $27.7 million of marketable securities.

On October 6, 2023, the Company entered into a new revolving credit facility, which amended and replaced our prior revolving credit facility.

There currently are no outstanding borrowings under the new revolving credit facility, and there were no outstanding borrowings under the prior revolving credit facility of the Company as of September 30, 2023. For additional information regarding the new revolving credit facility, see Note 9 to the Condensed Consolidated Financial Statements included herein.

For additional information regarding the prior revolving credit facility, see Note 8 to the Condensed Consolidated Financial Statements included herein.

On November 30, 2021, the Company announced a share repurchase program approved by the Company’s Board under which the Company was authorized to purchase up to $20.0 million of its common stock.

This share repurchase program concluded on March 8, 2022, when the maximum dollar amount authorized under the program was expended.

During the three months ended March 31, 2022 the Company repurchased 649,739 shares of common stock pursuant to this share repurchase program at an aggregate fair value of $14.9 million, reflecting 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 of common stock pursuant to this share repurchase program at an aggregate fair value of $14.9 million, reflecting an average price per share of $22.92 (excluding the cost of broker commissions).

On March 14, 2022, the Board 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 expired on March 13, 2023, and no repurchases occurred during the three months ended March 31, 2023.

Under this program, the Company repurchased a total of 402,050 shares 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), including 242,647 shares purchased during the three months ended March 31, 2022, at an aggregate fair value of $5.0 million, based on an average per share price of $20.52 (excluding the cost of broker commissions).

We may elect in the future to adopt a new share repurchase program.

The share repurchase program expired on March 13, 2023, and no repurchases occurred during the nine months ended September 30, 2023.

On September 13, 2023, the Company announced a share repurchase program approved by the Company’s Board under which the Company is authorized to purchase up to $10.0 million of its common stock.

Pursuant to the authorization, repurchases may be made from time to time in the open market, including under a Rule 10b5-1 plan, through privately negotiated transactions, or otherwise.

In addition, any repurchases under the authorization will be subject to prevailing market conditions, liquidity and cash flow considerations, applicable securities laws requirements (including under Rule 10b-18 and Rule 10b5-1 of the Securities Exchange Act of 1934, as applicable), and other factors.

During the three months ended September 30, 2023, the Company repurchased 99,090 shares of common stock pursuant to this share repurchase program at an aggregate fair value of $2.1 million, reflecting an average price per share of $21.60 (excluding the cost of broker commissions).

This share repurchase program is scheduled to terminate on the earlier of March 31, 2024, or when the maximum dollar amount authorized under the program has been expended.

This share repurchase program may be suspended or discontinued at any time.

On February 20, 2023, we announced that our Board approved a dividend policy under which we intend to pay quarterly cash dividends on our common stock, at an initial rate of $0.025 per share per fiscal quarter.

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On July 24, 2023, the Board approved the Company's third quarterly cash dividend of $0.025 per share, payable on September 29, 2023 to holders of record on September 18, 2023.

Further, the Company intends to declare and pay one more quarterly cash dividend in 2023. T he dividend policy and the declaration and payment of each quarterly cash dividend will be subject to our Board’s continuing determination that the policy and the declaration and payment of dividends thereunder are in the best interests of our stockholders and are in compliance with applicable law and our credit agreement.

On October 23, 2023, the Board approved the Company's fourth quarterly cash dividend of $0.025 per share, payable on December 22, 2023 to holders of record on December 11, 2023. 

T he dividend policy and the declaration and payment of each quarterly cash dividend will be subject to our Board’s continuing determination that the policy and the declaration and payment of dividends thereunder are in the best interests of our stockholders and are in compliance with applicable law and our credit agreement.

Our Board retains the power to modify, suspend, or cancel the dividend policy and quarterly dividends thereunder in any manner and at any time that our Board may deem necessary or appropriate.

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, dividend payments, and capital expenditures for at least the next 12 months and for the foreseeable future thereafter.

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, dividend payments, any repurchases of shares under our share repurchase program, 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.

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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 June 30, 2023, 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 provide assurance that if we need additional financing that it will be available on terms favorable to us, or at all.

Our new revolving credit facility entered into on October 6, 2023 (which amended and replaced our prior 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 new revolving credit facility would be dependent on the covenant calculations at the time of borrowing.

As of September 30, 2023, we were in compliance with all covenants under our prior revolving credit facility.

There can be no assurance that amounts available for borrowing under our new revolving credit facility will be sufficient to consummate any possible acquisitions, and we cannot provide assurance 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.

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