HEALTHSTREAM INC 10-K

Item 8. Financial Statements and Supplementary Data HEALTHSTREAM, INC. INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Page Reports of Independent Registered Public Accounting Firm (PCAOB ID: 42 ) 39 Consolidated Balance Sheets 41 Consolidated Statements of Income 42 Consolidated Statements of Comprehensive Income 43 Consolidated Statements of Shareholders’ Equity 44 Consolidated Statements of Cash Flows 45 Notes to Consolidated Financial Statements 46 38 Table of Contents Report of Independent Registered Public Accounting Firm To the Shareholders and the Board of Directors of HealthStream, Inc. Opinion on the Financial Statements We have audited the accompanying consolidated balance sheets of HealthStream, Inc. (the Company) as of December 31, 2023 and December 31, 2022, the related consolidated statements of income, comprehensive income, shareholders' equity and cash flows for each of the three years in the period ended December 31, 2023, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2023 and 2022, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2023, in conformity with U.S. generally accepted accounting principles. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of December 31, 2023, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) and our report dated February 26, 2024 expressed an unqualified opinion thereon. Basis for Opinion These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion. Critical Audit Matter The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments. The communication of the critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates. Revenue Recognition Description of the Matter As described in Note 1 of the consolidated financial statements, the Company recognizes revenue when control of the promised goods or services is transferred to the customer in an amount that reflects the consideration the Company expects to be entitled in exchange for transferring those goods or services. The Company’s contracts with customers often contain promises for multiple goods and services. The Company accounts for the promised goods and services in its contracts as separate performance obligations if they are distinct. The transaction price is then allocated to the separate performance obligations on a relative standalone selling price basis. Auditing the Company’s accounting for revenue recognition was challenging due to the judgment and effort required to analyze the Company’s contracts to determine whether promised goods and services are distinct performance obligations and to determine stand-alone selling prices used to allocate the transaction price to those performance obligations. How We Addressed the Matter in Our Audit We obtained an understanding, evaluated the design and tested the operating effectiveness of controls over the Company's process to identify and evaluate performance obligations and determine the stand-alone selling prices used to allocate the transaction price to those performance obligations. Among other procedures to evaluate management’s identification and determination of the distinct performance obligations, we obtained an understanding of the Company’s various product and service offerings and tested the application of the revenue recognition accounting requirements to determine which performance obligations were distinct. To test management’s determination of relative standalone selling price for each performance obligation, we performed audit procedures that included, among others, assessing the methodology applied and testing the data underlying the Company’s calculations. We inspected a sample of customer contracts to assess management’s treatment of significant terms and tested the amounts recognized as revenue or recorded in deferred revenue. /s/ Ernst & Young LLP We have served as the Company’s auditor since 1998. Nashville, Tennessee February 26, 2024 39 Table of Contents Report of Independent Registered Public Accounting Firm To the Shareholders and the Board of Directors of HealthStream, Inc. Opinion on the Internal Control Over Financial Reporting We have audited HealthStream, Inc.’s internal control over financial reporting as of December 31, 2023, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria). In our opinion, HealthStream, Inc. (the Company) maintained, in all material respects, effective internal control over financial reporting as of December 31, 2023, based on the COSO criteria. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of the Company as of December 31, 2023 and 2022, the related consolidated statements of income, comprehensive income, shareholders’ equity and cash flows for each of the three years in the period ended December 31, 2023, and the related notes and our report dated February 26, 2024 expressed an unqualified opinion thereon. Basis for Opinion The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Annual Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. Definition and Limitations of Internal Control Over Financial Reporting A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. /s/ Ernst & Young LLP Nashville, Tennessee February 26, 2024 40 Table of Contents HEALTHSTREAM, INC. CONSOLIDATED BALANCE SHEETS (In thousands) December 31, December 31, 2023 2022 ASSETS Current assets: Cash and cash equivalents $ 40,333 $ 46,023 Marketable securities 30,800 7,885 Accounts receivable, net of allowance of $ 781 and $ 544 at December 31, 2023 and 2022, respectively 34,346 36,730 Accounts receivable - unbilled 4,100 5,980 Prepaid royalties, net of amortization 10,202 9,071 Prepaid software maintenance and subscriptions 7,397 6,034 Other prepaid expenses and other current assets 3,032 2,654 Total current assets 130,210 114,377 Property and equipment, net of accumulated depreciation of $ 19,503 and $ 20,280 at December 31, 2023 and 2022, respectively 13,005 15,483 Capitalized software development, net of accumulated amortization of $ 127,009 and $ 105,025 at December 31, 2023 and 2022, respectively 40,643 37,118 Operating lease right of use assets, net 20,114 22,759 Goodwill 191,379 192,398 Customer-related intangibles, net of accumulated amortization of $ 57,095 and $ 48,552 at December 31, 2023 and 2022, respectively 54,742 61,269 Other intangible assets, net of accumulated amortization of $ 16,603 and $ 12,818 at December 31, 2023 and 2022, respectively 13,289 20,284 Deferred commissions 31,700 28,344 Non-marketable equity investments 4,134 4,518 Other assets 726 1,191 Total assets $ 499,942 $ 497,741 LIABILITIES AND SHAREHOLDERS’ EQUITY Current liabilities: Accounts payable $ 7,465 $ 7,287 Accrued royalties 4,556 5,443 Accrued liabilities 22,717 25,014 Deferred revenue 83,623 79,469 Total current liabilities 118,361 117,213 Deferred tax liabilities 16,132 17,996 Deferred revenue, noncurrent 2,169 2,937 Operating lease liability, noncurrent 20,247 23,321 Other long-term liabilities 2,281 2,210 Commitments and contingencies Shareholders’ equity: Common stock, no par value, 75,000 shares authorized; 30,298 and 30,579 shares issued and outstanding at December 31, 2023 and 2022, respectively 249,075 254,832 Retained earnings 92,368 80,213 Accumulated other comprehensive loss ( 691 ) ( 981 ) Total shareholders’ equity 340,752 334,064 Total liabilities and shareholders’ equity $ 499,942 $ 497,741 See accompanying notes to the Consolidated Financial Statements. 41 Table of Contents HEALTHSTREAM, INC. CONSOLIDATED STATEMENTS OF INCOME (In thousands, except per share data) Year Ended December 31, 2023 2022 2021 Revenues, net $ 279,063 $ 266,826 $ 256,712 Operating costs and expenses: Cost of revenues (excluding depreciation and amortization) 95,021 91,143 91,033 Product development 45,540 44,277 41,659 Sales and marketing 45,743 44,146 39,457 Other general and administrative expenses 35,664 36,866 39,695 Depreciation and amortization 41,076 37,945 36,813 Total operating costs and expenses 263,044 254,377 248,657 Operating income 16,019 12,449 8,055 Other income (loss), net 2,492 3,136 ( 289 ) Income before income tax provision 18,511 15,585 7,766 Income tax provision 3,298 3,494 1,921 Net income $ 15,213 $ 12,091 $ 5,845 Net income per share: Basic $ 0.50 $ 0.39 $ 0.19 Diluted $ 0.50 $ 0.39 $ 0.18 Weighted average shares of common stock outstanding: Basic 30,571 30,648 31,534 Diluted 30,673 30,717 31,618 Dividends declared per share $ 0.10 $ — $ — See accompanying notes to the Consolidated Financial Statements. 42 Table of Contents HEALTHSTREAM, INC. CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (In thousands) Year Ended December 31, 2023 2022 2021 Net income $ 15,213 $ 12,091 $ 5,845 Other comprehensive income, net of taxes: Foreign currency translation adjustments 283 ( 1,091 ) 99 Unrealized gain on marketable securities 7 4 6 Total other comprehensive income (loss) 290 ( 1,087 ) 105 Comprehensive income $ 15,503 $ 11,004 $ 5,950 See accompanying notes to the Consolidated Financial Statements. 43 Table of Contents HEALTHSTREAM, INC. CONSOLIDATED STATEMENTS OF SHAREHOLDERS ’ EQUITY (In thousands) Common Stock Retained Accumulated Other Comprehensive Total Shareholders’ Shares Amount Earnings (Loss)/Income Equity Balance at December 31, 2020 31,493 $ 271,784 $ 62,277 $ 1 $ 334,062 Net income — — 5,845 — 5,845 Comprehensive income — — — 105 105 Stock donated to Company (held in treasury) ( 94 ) — — — — Stock-based compensation — 5,303 — — 5,303 Common stock issued under stock plans, net of shares withheld for employee taxes 131 ( 1,182 ) — — ( 1,182 ) Repurchase of common stock ( 203 ) ( 5,114 ) — — ( 5,114 ) Balance at December 31, 2021 31,327 270,791 68,122 106 339,019 Net income — — 12,091 — 12,091 Comprehensive loss — — — ( 1,087 ) ( 1,087 ) Issuance of common stock in acquisition 209 4,084 — — 4,084 Stock-based compensation — 3,554 — — 3,554 Common stock issued under stock plans, net of shares withheld for employee taxes 95 ( 565 ) — — ( 565 ) Repurchase of common stock ( 1,052 ) ( 23,032 ) — — ( 23,032 ) Balance at December 31, 2022 30,579 254,832 80,213 ( 981 ) 334,064 Net income — — 15,213 — 15,213 Comprehensive income — — — 290 290 Dividends declared on common stock ($ 0.100 per share) — — ( 3,058 ) — ( 3,058 ) Stock-based compensation — 4,153 — — 4,153 Common stock issued under stock plans, net of shares withheld for employee taxes 123 ( 934 ) — — ( 934 ) Excise tax on repurchase of common stock — ( 47 ) — — ( 47 ) Repurchase of common stock ( 404 ) ( 8,929 ) — — ( 8,929 ) Balance at December 31, 2023 30,298 $ 249,075 $ 92,368 $ ( 691 ) $ 340,752 See accompanying notes to the Consolidated Financial Statements. 44 Table of Contents HEALTHSTREAM, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) Year Ended December 31, 2023 2022 2021 OPERATING ACTIVITIES: Net income $ 15,213 $ 12,091 $ 5,845 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 41,076 37,945 36,813 Stock-based compensation 4,153 3,554 5,303 Amortization of deferred commissions 11,495 10,599 9,169 Provision for credit losses 1,021 385 723 Deferred income taxes ( 1,725 ) 710 1,539 (Gain) loss on disposal of fixed assets — ( 25 ) 21 Loss on equity method investments 384 747 462 Non-cash paid time off expense — — ( 1,011 ) Change in fair value of non-marketable equity investments ( 425 ) ( 3,596 ) ( 279 ) Other ( 891 ) 3 184 Changes in operating assets and liabilities: Accounts and unbilled receivables 3,243 ( 7,770 ) 10,344 Prepaid royalties ( 1,131 ) 84 416 Other prepaid expenses and other current assets ( 1,243 ) 2,329 1,772 Deferred commissions ( 14,852 ) ( 14,931 ) ( 13,274 ) Other assets 328 208 52 Accounts payable and accrued expenses 4,825 3,742 ( 4,329 ) Accrued royalties ( 887 ) 406 ( 3,772 ) Deferred revenue 3,386 4,707 ( 7,593 ) Net cash provided by operating activities 63,970 51,188 42,385 INVESTING ACTIVITIES: Business combinations, net of cash acquired ( 6,621 ) ( 3,965 ) ( 4,705 ) Proceeds from maturities of marketable securities 28,250 10,625 9,931 Purchases of marketable securities ( 50,268 ) ( 13,467 ) ( 5,223 ) Proceeds from sale of fixed assets — 26 — Proceeds from sale of non-marketable equity investments 47 3,494 1,370 Payments to acquire non-marketable equity investments — — ( 1,750 ) Payments associated with capitalized software development ( 25,806 ) ( 23,334 ) ( 21,929 ) Purchases of property and equipment ( 2,200 ) ( 1,768 ) ( 3,417 ) Net cash used in investing activities ( 56,598 ) ( 28,389 ) ( 25,723 ) FINANCING ACTIVITIES: Taxes paid related to net settlement of equity awards ( 934 ) ( 565 ) ( 1,182 ) Payment of debt issue costs ( 118 ) — — Repurchases of common stock ( 8,929 ) ( 23,137 ) ( 5,008 ) Payment of cash dividends ( 3,058 ) — ( 19 ) Net cash used in financing activities ( 13,039 ) ( 23,702 ) ( 6,209 ) Effect of exchange rate changes on cash and cash equivalents ( 23 ) 21 ( 114 ) Net (decrease) increase in cash and cash equivalents ( 5,690 ) ( 882 ) 10,339 Cash and cash equivalents at beginning of period 46,023 46,905 36,566 Cash and cash equivalents at end of period $ 40,333 $ 46,023 $ 46,905 SUPPLEMENTAL CASH FLOW INFORMATION: Interest paid $ 132 $ 99 $ 132 Income taxes paid (refunded) $ 2,611 $ 718 $ ( 92 ) See accompanying notes to the Consolidated Financial Statements. 45 Table of Contents HEALTHSTREAM, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Description of Business HealthStream, Inc. (the "Company") was incorporated in 1990 as a Tennessee corporation and is headquartered in Nashville, Tennessee. The Company primarily provides Software-as-a-Service ("SaaS") based applications for healthcare organizations—all designed to improve business and clinical outcomes by supporting the people who deliver patient care. The Company is 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. The Company is organized and operated according to its One HealthStream approach, with its hStream technology platform at the center of that approach. Increasingly, SaaS-based applications in its diverse ecosystem of solutions utilize its proprietary hStream technology platform to enhance their value proposition by creating interoperability with and among other applications. Recognition of Revenue In accordance with Accounting Standards Codification ("ASC") 606, Revenue from Contracts with Customers , the Company's revenues are recognized when control of the promised goods or services is transferred to the customer in an amount that reflects the consideration the Company expects to be entitled in exchange for transferring those goods or services. Revenue is recognized based on the following five step model: • Identification of the contract with a customer • Identification of the performance obligations in the contract • Determination of the transaction price • Allocation of the transaction price to the performance obligations in the contract • Recognition of revenue when, or as, the Company satisfies a performance obligation Subscription revenues primarily consist of fees in consideration of providing customers access to one or more of its SaaS-based solutions and/or courseware subscriptions, as well as fees related to licensing agreements, all of which include routine customer support and technology enhancements. Revenue is generally recognized over time during the contract term beginning when the service is made available to the customer. Subscription contracts are generally non-cancelable, one to five years in length, and billed annually, semi-annually, quarterly, or monthly in advance. Professional services revenues primarily consist of fees for implementation and onboarding services, consulting, and training. The majority of professional services contracts are billed in advance based on a fixed price basis, and revenue is recognized over time as the services are performed. For both subscription services and professional services, the time between billing the customer and when performance obligations are satisfied is generally not significant. Contracts with customers often contain promises for multiple goods and services. For these contracts, the Company accounts for the promised goods and services in its contracts as separate performance obligations if they are distinct. The contract price, which represents transaction price when the contract reflects a fixed fee arrangement, or management’s estimate of variable consideration including application of the constraint when the contract does not have a fixed fee, is allocated to the separate performance obligations on a relative standalone selling price basis. The Company generally determines standalone selling prices based on the standard list price for each product, taking into consideration certain factors, including contract length and the number of subscriptions within the contract. The Company receives payments from customers based on billing schedules established in its contracts. Accounts receivable - unbilled represent contract assets related to its conditional right to consideration for subscription and professional services contracts where performance has occurred under the contract. Accounts receivable are primarily comprised of trade receivables that are recorded at the invoice amount, net of an allowance for credit losses, when the right to consideration becomes unconditional. Deferred revenue represents contract liabilities that are recorded when cash payments are received or are due in advance of satisfaction of performance obligations. 46 Table of Contents Basis of Presentation The Consolidated Financial Statements include the accounts of the Company and its wholly owned subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation. Business Segments The Company’s chief operating decision maker ("CODM") is its Chief Executive Officer. 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 the CODM), organization structure, compensation, performance assessment, and resource allocation. The Company’s CODM uses consolidated financial information to make operating decisions, assess financial performance, and allocate resources. Discrete financial information to measure profitability is not prepared at any other level. Taking these factors into account, since January 1, 2023 , the Company has a single reportable segment, such that the Company has presented historical financial information and comparable performance on a single segment basis in this Annual Report on Form 10 -K for the year ended December 31, 2023 . Use of Estimates The Consolidated Financial Statements are prepared in accordance with United States generally accepted accounting principles. These accounting principles require management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates and such differences could be material to the Consolidated Financial Statements. Cash Equivalents The Company considers cash equivalents to be unrestricted, highly liquid investments with initial maturities of less than three months. Marketable Securities Marketable securities are classified as available for sale and are stated at fair market value, with the unrealized gains and losses, net of tax, reported in other accumulated comprehensive income (loss) on the accompanying Consolidated Balance Sheets. Realized gains and losses and declines in market value due to credit-related factors on investments in marketable securities are included in other income, net on the accompanying Consolidated Statements of Income. The cost of securities sold is based on the specific identification method. Interest and dividends on securities classified as available for sale are included in other income, net on the accompanying Consolidated Statements of Income. Premiums and discounts are amortized over the life of the related available for sale security as an adjustment to the yield using the effective interest method. Deferred Commissions Deferred commissions represent incremental costs to acquire contracts with customers, such as the sales commission payment and associated payroll taxes, which are capitalized and amortized consistent with the transfer of the goods or services to the customer over the expected period of benefit. Capitalized contract costs are included under the caption deferred commissions in the accompanying Consolidated Balance Sheets. The expected period of benefit is the contract term, except when the capitalized commission is expected to provide economic benefit to the Company for a period longer than the contract term, such as for new customer or incremental sales where renewals are expected and renewal commissions are not commensurate with initial commissions. Non-commensurate commissions are amortized over the greater of the contract term or technological obsolescence period of three years. Prepaid Royalties Prepaid royalties represent advance payments to business partners under revenue sharing arrangements for which the Company sells and delivers such partner products to its customers. Royalties are typically paid in advance at the commencement of the subscription period or periodically throughout the subscription period, such as in quarterly, bi-annual, or annual installments. Royalty payments are amortized over the term of the underlying subscription contracts, which generally range from one to five years, in order to match the direct royalty costs to the same period the subscription revenue is recognized. Amortization of prepaid royalties is included under the caption cost of revenues (excluding depreciation and amortization) in the accompanying Consolidated Statements of Income. 47 Table of Contents Allowance for Credit Losses The Company estimates its allowance for credit losses based on its historical collection experience, a review in each period of the aging status of the then-outstanding accounts receivable, and external market factors. Uncollectible receivables are written-off in the period management believes it has exhausted its ability to collect payment from the customer. Expected credit losses are recorded under the caption other general and administrative expenses in the accompanying Consolidated Statements of Income. Changes in the allowance for credit losses and the amounts charged to bad debt expense for the three years ended December 31, 2023 were as follows (in thousands): Allowance Balance at Beginning of Period Charged to Costs and Expenses Write-offs Allowance Balance at End of Period 2023 $ 544 $ 1,021 $ ( 784 ) $ 781 2022 853 385 ( 694 ) 544 2021 549 723 ( 419 ) 853 Capitalized Software and Content Development Capitalized software and content development is stated on the basis of cost and is presented net of accumulated amortization. The Company capitalizes costs incurred during the development phase for projects to develop software and content. These assets are generally amortized using the straight-line method over three years. The Company capitalized $ 25.5 million and $ 23.8 million during 2023 and 2022 , respectively. Amortization of capitalized software development was $ 22.0 million, $ 18.9 million, and $ 15.6 million during 2023 , 2022 , and 2021 , respectively. Maintenance and operating costs are expensed as incurred. As of December 31, 2023 and 2022 , there were no capitalized software development costs for external computer software developed for resale. Fair Value Measurements Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in the principal or most advantageous market in an orderly transaction between market participants at the measurement date. The fair value hierarchy prioritizes the inputs to valuation techniques used in measuring fair value. There are three levels to the fair value hierarchy based on the reliability of inputs, as follows: Level 1 – Observable inputs that reflect quoted prices (unadjusted) for identical assets or liabilities in active markets. Level 2 – Inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. Level 3 – Unobservable inputs in which little or no market data exists, therefore requiring the Company to develop its own assumptions. The Company evaluates assets and liabilities subject to fair value measurements on a recurring basis to determine the appropriate level at which to classify them for each reporting period. This determination may require significant judgments to be made by the Company. At December 31, 2023 and 2022 , the Company's assets measured at fair value on a recurring basis consisted of marketable securities, which are classified as available for sale (see Note 4 – Marketable Securities). Property and Equipment Property and equipment are stated on the basis of cost. Depreciation is provided on the straight-line method over the following estimated useful lives, except for leasehold improvements, which are amortized over the shorter of the estimated useful life or their respective lease term. Years Furniture and fixtures 5 - 7 Equipment 3 Goodwill Goodwill represents the excess of purchase price in a business combination over the fair value of the net identifiable assets acquired, including intangible assets. The carrying amount of its goodwill is evaluated for impairment at least annually during the fourth quarter and whenever events or changes in facts or circumstances indicate that impairment may exist. In accordance with ASC 350, Intangibles – Goodwill and Other , companies may opt to first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. A qualitative assessment includes factors such as financial performance, industry and market metrics, and other factors affecting the reporting unit. If this assessment concludes that it is more likely than not that the fair value of a reporting unit exceeds its carrying value, then goodwill is not considered impaired and no further impairment testing is required. Conversely, if the qualitative assessment concludes that it is more likely than not that the fair value of a reporting unit is less than its carrying value, the Company must then compare the fair value of the reporting unit to its carrying value. The Company determines fair value of the reporting unit using both income and market-based models. These models require the use of various assumptions relating to cash flow projections, growth rates, discount rates, and terminal value calculations. There were no goodwill impairments identified or recorded for the years ended December 31, 2023 , 2022 , or 2021 . 48 Table of Contents Intangible Assets The Company estimates fair values of intangible assets using the income and cost methods, which are based on management’s estimates and assumptions. As of December 31, 2023 , intangible assets include customer relationships, internally developed technologies, non-competition agreements, and trade names. Intangible assets that are considered to have definite useful lives are being amortized on a straight-line basis over periods ranging between two and eighteen years. The weighted average amortization period for definite lived intangible assets as of December 31, 2023 was 11.7 years. Intangible assets considered to have indefinite useful lives are evaluated for impairment at least annually during the fourth quarter, and all intangible assets are reviewed for impairment whenever events or changes in facts or circumstances indicate that the carrying amount of the assets may not be recoverable. There were no intangible asset impairments identified or recorded for the years ended December 31, 2023 , 2022 , or 2021 . Long-Lived Assets Long-lived assets to be held for use are reviewed for events or changes in facts and circumstances, both internally and externally, which may indicate that an impairment of long-lived assets held for use is present. Purchases of long-lived assets (including capitalized software and content development costs) totaled $ 27.3 million, $ 25.9 million, and $ 23.4 million for the years ended December 31, 2023, 2022, and 2021, respectively. The Company measures any impairment using observable market values or discounted future cash flows from the related long-lived assets. The cash flow estimates and discount rates incorporate management’s best estimates, using appropriate and customary assumptions and projections at the date of evaluation. Management periodically evaluates whether the carrying value of long-lived assets, including intangible assets, property and equipment, capitalized software development, deferred commissions, and other assets will be recoverable. There were no long-lived asset impairments identified or recorded for the years ended December 31, 2023 , 2022 , or 2021 . Non-Marketable Equity Investments Non-marketable equity investments in limited liability companies with specific ownership accounts for each investor not resulting in a controlling financial interest are accounted for using the equity method of accounting. Non-marketable equity investments of preferred stock in corporations that do not result in a controlling financial interest are accounted for using the measurement alternative for equity investments that do not have readily determinable fair values. Accounting Standards Update ("ASU") 2016 - 01, Financial Instruments – Overall (Subtopic 825 - 10 ) requires equity investments (except those accounted for under the equity method of accounting or those that result in consolidation of the investee) to be measured at fair value with changes in fair value recognized in net income. The fair value of non-marketable equity investments is not estimated if there are no identified events or changes in circumstances that may have a significant adverse effect on the fair value of the investment. The proportionate share of income or loss from equity method investments and any changes in fair value of investments accounted for using the measurement alternative are recorded under the caption other income, net in the accompanying Consolidated Statements of Income. Financial Instruments The Company has various financial instruments, including cash and cash equivalents, accounts receivable, accounts receivable-unbilled, accounts payable, and accrued liabilities. The carrying amounts of these financial instruments approximate fair value because of the short-term maturity or short-term nature of such instruments. The Company also has marketable securities, which are recorded at approximate fair value based on quoted market prices or alternative pricing sources (see Note 4 – Marketable Securities) and non-marketable equity investments, which are recorded under the equity method or under the measurement alternative (see Note 15 - Non-Marketable Equity Investments). Advertising The Company expenses the costs of advertising as incurred. Advertising expense for the years ended December 31, 2023 , 2022 , and 2021 was $ 1.5 million, $ 1.9 million, and $ 1.9 million, respectively, and is included under the caption sales and marketing expense in the accompanying Consolidated Statements of Income. Shipping and Handling Costs Shipping and handling costs that are associated with delivering products and services are included under the caption cost of revenues (excluding depreciation and amortization) in the accompanying Consolidated Statements of Income. 49 Table of Contents Income Taxes Income taxes are accounted for using the asset and liability method, whereby deferred tax assets and liabilities are determined based on the temporary differences between the financial statement and tax bases of assets and liabilities measured at tax rates that will be in effect for the year in which the differences are expected to affect taxable income. Management evaluates all available evidence, both positive and negative, to determine whether, based on the weight of that evidence, a valuation allowance is needed. Future realization of the tax benefit of an existing deductible temporary difference or carryforward ultimately depends on the existence of sufficient taxable income of the appropriate character within the carryback or carryforward period available under the tax law. There are four possible sources of taxable income that may be available under the tax law to realize a tax benefit for deductible temporary differences and carryforwards: 1 ) future reversals of existing taxable temporary differences, 2 ) future taxable income exclusive of reversing temporary differences and carryforwards, 3 ) taxable income in prior carryback year(s) if carryback is permitted under the tax law, and 4 ) tax-planning strategies that would, if necessary, be implemented to realize deductible temporary differences or carryforwards prior to their expiration. Management reviews the realizability of its deferred tax assets each reporting period to identify whether any significant changes in circumstances or assumptions have occurred that could materially affect the realizability of deferred tax assets. As of December 31, 2023 , the Company had established a valuation allowance of $ 2.0 million for the portion of its net deferred tax assets that are not more likely than not expected to be realized. The Company accounts for income tax uncertainties using a more-likely-than- not recognition threshold based on the technical merits of the tax position taken. Tax positions that meet the more-likely-than- not recognition threshold are measured in order to determine the tax benefit to be recognized in the financial statements. Earnings per Share Basic earnings per share is computed by dividing the net income available to common shareholders for the period by the weighted average number of common shares outstanding during the period. Diluted earnings per share is computed by dividing the net income for the period by the weighted average number of common and common equivalent shares outstanding during the period. Common equivalent shares are composed of incremental common shares issuable upon the exercise of stock options and restricted share units subject to vesting. The dilutive effect of common equivalent shares is included in diluted earnings per share by application of the treasury stock method. Common equivalent shares that have an anti-dilutive effect on diluted net income per share are excluded from the calculation of diluted weighted average shares outstanding. Concentrations of Credit Risk and Significant Customers The Company’s credit risks relate primarily to cash and cash equivalents, marketable securities, and accounts receivable. The Company places its temporary excess cash in high quality, short-term money market instruments. At times, such investments may be in excess of the FDIC insurance limits. Marketable securities consist primarily of U.S. treasuries. The Company sells its products and services to various companies in the healthcare industry that are primarily located in the United States. Customer credit worthiness evaluations are performed on an as-needed basis, and the Company generally requires no collateral from customers. An allowance for credit losses is maintained for potentially uncollectible accounts receivable. The Company did not have any single customer representing over 10% of net revenues or accounts receivable during or as of the years ended December 31, 2023 , 2022 , or 2021 , respectively. Stock-Based Compensation As of December 31, 2023 , the Company maintained two stock-based compensation plans under which awards are outstanding, as described in Note 10. The Company accounts for stock-based compensation using the fair-value based method for costs related to share-based payments, including stock options and restricted share units. The Company uses the Black Scholes option pricing model for calculating the fair value of option awards issued under its stock-based compensation plans. The Company measures compensation cost of restricted share units based on the closing fair market value of the Company’s stock on the date of grant. Stock-based compensation cost is measured at the grant date, based on the fair value of the award that is ultimately expected to vest, and is recognized as an expense over the requisite service period. The Company recognizes tax benefits or deficiencies from stock-based compensation if an excess tax benefit or deficiency is realized. Excess tax benefits and deficiencies are reflected in the Consolidated Statements of Income as a component of the provision for income taxes when realized. Leases The Company has several non-cancelable agreements to lease office space. For leases with a lease term greater than 12 months, the Company recognizes a right-of-use ("ROU") asset and a lease liability on the balance sheet at the lease commencement date. Lease liabilities and their corresponding ROU assets are recorded based on the present value of the future lease payments over the expected lease term. The Company does not have any lease contracts that contain: ( 1 ) an option to extend that the Company is reasonably certain to exercise, ( 2 ) an option to terminate that the Company is reasonably certain not to exercise, or ( 3 ) an option to extend (or not to terminate) in which exercise of the option is controlled by the lessor. Additionally, the Company does not have any leases with residual value guarantees or material restrictive covenants. Most of the Company’s lease agreements contain provisions for escalating rent payments over the terms of the leases, which escalations are either fixed within the contract or are variable based on the consumer price index. The Company’s leases do not contain readily determinable implicit discount rates, and as such the Company must use its incremental borrowing rate to discount the future lease payments based on information available at lease commencement. The incremental borrowing rate was estimated by determining the rate of interest that the Company would have to pay to borrow on a collateralized basis over a similar term an amount equal to the lease payments in a similar economic environment. 50 Table of Contents Foreign Currency The functional currency for the Company’s subsidiaries is determined based on the primary economic environment in which the subsidiary operates. The Company translates the assets and liabilities of its non-U.S. dollar functional currency subsidiaries into U.S. dollars using exchange rates in effect at the end of each period. Revenues and expenses for these subsidiaries are translated using rates that approximate those in effect during the period. Gains and losses from these translations are recognized as cumulative translation adjustments included in accumulated other comprehensive income in the Consolidated Balance Sheets. Recently Issued Accounting Pronouncements Not Yet Adopted In November 2023, the Financial Accounting Standards Board ("FASB") issued ASU 2023 - 07, Segment Reporting (Topic 280 ): Improvements to Reportable Segment Disclosures . The new guidance requires disclosures of significant reportable segment expenses that are regularly provided to the CODM and other segment items on an interim and annual basis. Entities with a single reportable segment will also be required to apply the disclosure requirements in ASU 2023 - 07 on an interim and annual basis. The ASU will be effective for annual periods beginning after December 15, 2023, and interim periods within fiscal years beginning after December 15, 2024. Early adoption of the ASU is permitted and should be applied retrospectively to all prior periods presented in the financial statements. The Company is currently evaluating the impact of adopting ASU 2023 - 07 and expects to adopt this ASU for the year ending December 31, 2024. In December 2023, the FASB issued ASU 2023 - 09, Income Taxes (Topic 740 ): Improvements to Income Tax Disclosures , which requires public entities to provide disclosure of disaggregated information in the entity’s tax rate reconciliation, as well as disclosure of income taxes paid disaggregated by jurisdiction. The ASU is effective for fiscal years beginning after December 15, 2024, with early adoption permitted. The Company is currently evaluating the impact of adopting this ASU. 2. SHAREHOLDERS ’ EQUITY Common Stock The Company is authorized to issue up to 75 million shares of common stock. The number of common shares issued and outstanding as of December 31, 2023 and 2022 was 30.3 million and 30.6 million, respectively. Preferred Stock The Company is authorized to issue up to 10 million shares of preferred stock in one or more series, having the relative voting powers, designations, preferences, rights and qualifications, limitations or restrictions, and other terms as the Board of Directors may fix in providing for the issuance of such series, without any vote or action of the shareholders. As of December 31, 2023 and 2022, there were no shares of preferred stock issued or outstanding. Dividends on Common Stock On February 20, 2023 , the Company's Board of Directors ("Board") approved a quarterly cash dividend policy, marking the first dividend policy adopted by the Company ("Dividend Policy"). During the year ended December 31, 2023 , the Board declared the following quarterly dividends under the Dividend Policy: Dividend Payment Date Dividend Declaration Date Dividend Per Share Record Date Cash Outlay April 28, 2023 February 20, 2023 $ 0.025 April 17, 2023 $ 767,000 June 23, 2023 April 24, 2023 0.025 June 12, 2023 767,000 September 29, 2023 July 24, 2023 0.025 September 18, 2023 767,000 December 22, 2023 October 23, 2023 0.025 December 11, 2023 757,000 Total dividends $ 0.10 $ 3,058,000 Additionally, on February 19, 2024, the Board approved the Company’s first quarter 2024 cash dividend of $0.028 per share, payable on March 22, 2024 to holders of record on March 11, 2024 . Share Repurchase Plan 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. This 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 through 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 year ended December 31, 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). 51 Table of Contents 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 expired on March 13, 2023 . During the year ended December 31, 2022, the Company repurchased 402,050 shares at an aggregate fair value of $ 8.1 million, reflecting an average price per share of $ 20.19 (excluding the cost of broker commissions). No repurchases occurred under this share repurchase program during the year ended December 31, 2023. On September 13, 2023 , the Company announced that the Board authorized a share repurchase program to repurchase up to $ 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 31, 2024 , or when the maximum dollar amount has been expended. During the year ended December 31, 2023 , the Company repurchased 404,188 shares at an aggregate fair value of $ 8.9 million, reflecting an average price per share of $ 22.07 (excluding the cost of broker commissions). 3. EARNINGS PER SHARE The following table sets forth the computation of basic and diluted earnings per share for the three years ended December 31, 2023 (in thousands, except per share amounts): Year Ended December 31, 2023 2022 2021 Numerator: Net income $ 15,213 $ 12,091 $ 5,845 Denominator: Weighted-average shares outstanding 30,571 30,648 31,534 Effect of dilutive shares 102 69 84 Weighted-average diluted shares 30,673 30,717 31,618 Net income per share: Basic $ 0.50 $ 0.39 $ 0.19 Diluted $ 0.50 $ 0.39 $ 0.18 Potentially dilutive shares representing 252,000 , 183,000 , and 78,000 shares of common stock for the years ended December 31, 2023 , 2022 , and 2021 , respectively, were excluded from the calculation of diluted earnings per share because their effect would have been anti-dilutive. 4. MARKETABLE SECURITIES At December 31, 2023 and 2022 , the fair value of marketable securities, which were all classified as available for sale, included the following (in thousands): December 31, 2023 Adjusted Cost Unrealized Gains Unrealized Losses Fair Value Level 2: U.S. government debt securities $ 30,791 $ 10 $ ( 1 ) $ 30,800 Total $ 30,791 $ 10 $ ( 1 ) $ 30,800 December 31, 2022 Adjusted Cost Unrealized Gains Unrealized Losses Fair Value Level 2: U.S. government debt securities $ 7,882 $ 3 $ — $ 7,885 Total $ 7,882 $ 3 $ — $ 7,885 The carrying amounts of the marketable securities reported in the Consolidated Balance Sheets approximate fair value based on quoted market prices or alternative pricing sources and models utilizing market observable inputs. As of December 31, 2023 and 2022 , the Company did not recognize any allowance for credit impairments on its available for sale debt securities. All investments in marketable securities are classified as current assets on the Consolidated Balance Sheets because the underlying securities mature within one year from the balance sheet date. 52 Table of Contents 5. REVENUE RECOGNITION AND SALES COMMISSIONS Revenue Recognition Revenues are recognized when control of the promised goods or services is transferred to the customer in an amount that reflects the consideration the Company expects to be entitled in exchange for transferring those goods or services. The following table represents revenues disaggregated by revenue source for the three years ended December 31, 2023 , 2022 , and 2021 (in thousands). Sales taxes are excluded from revenues. Year Ended December 31, 2023 2022 2021 Subscription services $ 267,935 $ 253,960 $ 243,617 Professional services 11,128 12,866 13,095 Total revenues, net $ 279,063 $ 266,826 $ 256,712 For the years ended December 31, 2023 , 2022 , and 2021 , the Company recognized $ 1.0 million, $ 0.4 million, and $ 0.7 million, respectively, in impairment losses on receivables and contract assets arising from contracts with customers. During the years ended December 31, 2023 , 2022 , and 2021 , the Company recognized revenues of $ 79.6 million, $ 71.4 million, and $ 62.3 million, respectively, from amounts included in deferred revenue at the beginning of the respective period. As of December 31, 2023 , $ 541 million of revenue is expected to be recognized from remaining performance obligations under contracts with customers. The Company expects to recognize revenue on approximately 42 % of these remaining performance obligations over the 12 months ending December 31, 2024, with the remaining amounts recognized thereafter. Sales Commissions Sales commissions earned by the Company's sales employees are considered incremental and recoverable costs of obtaining a contract with a customer. The Company recorded amortization of deferred commissions of $ 11.5 million, $ 10.6 million, and $ 9.2 million for the years ended December 31, 2023 , 2022 , and 2021 , respectively, which is included in sales and marketing expenses in the accompanying Consolidated Statements of Income. 6. PROPERTY AND EQUIPMENT Property and equipment consist of the following (in thousands): December 31, 2023 2022 Equipment $ 12,541 $ 15,843 Leasehold improvements 14,937 14,937 Furniture and fixtures 5,030 4,983 Gross property and equipment 32,508 35,763 Accumulated depreciation and amortization ( 19,503 ) ( 20,280 ) Property and equipment, net $ 13,005 $ 15,483 Depreciation of property and equipment totaled $ 4.2 million, $ 4.5 million, and $ 6.3 million for the years ended December 31, 2023 , 2022 , and 2021 , respectively. 53 Table of Contents 7. GOODWILL AND INTANGIBLE ASSETS The changes in the carrying amount of goodwill for the years ended December 31, 2023 and 2022 are as follows (in thousands): 2023 Balance at January 1, 2023 $ 192,398 Post-closing adjustment for eeds ( 1,305 ) Effect of exchange rate changes 286 Balance at December 31, 2023 $ 191,379 2022 Balance at January 1, 2022 $ 182,501 Acquisition of CloudCME 6,819 Acquisition of eeds 3,568 Post-closing adjustment for ANSOS 267 Post-closing adjustment for ComplyALIGN 40 Post-closing adjustment for Rievent 46 Effect of exchange rate changes ( 843 ) Balance at December 31, 2022 $ 192,398 Intangible assets other than goodwill that are considered to have finite useful lives include customer-related intangibles consisting of customer relationships, which are amortized over their estimated useful lives ranging from eight to eighteen years, and other intangible assets consisting of developed technology, non-competition agreements, and trade names, which are amortized over their estimated useful lives ranging from two to ten years. The Company also previously recorded an indefinite lived intangible for a trade name valued at $ 0.7 million. However, in January 2023, the Company reassessed the future expected use of the indefinite lived trade name such that beginning in 2023, it is being amortized over a ten year remaining useful life and is therefore included in the future annual amortization expense table below. Amortization of intangible assets was $ 14.9 million, $ 14.5 million, and $ 14.9 million for the years ended December 31, 2023 , 2022 , and 2021 , respectively. Identifiable intangible assets are comprised of the following (in thousands): As of December 31, 2023 As of December 31, 2022 Gross Amount Accumulated Amortization Net Gross Amount Accumulated Amortization Net Customer related $ 111,837 $ ( 57,095 ) $ 54,742 $ 109,821 $ ( 48,552 ) $ 61,269 Other 29,892 ( 16,603 ) 13,289 33,102 ( 12,818 ) 20,284 Total $ 141,729 $ ( 73,698 ) $ 68,031 $ 142,923 $ ( 61,370 ) $ 81,553 The expected future annual amortization expense for the years ending December 31, is as follows (in thousands): 2024 $ 13,348 2025 12,528 2026 9,453 2027 8,669 2028 5,472 Thereafter 18,561 Total $ 68,031 54 Table of Contents 8. BUSINESS COMBINATIONS On May 18, 2022 , the Company acquired the remaining ownership interest (representing approximately 82 % of the outstanding equity interests) of CloudCME, LLC ("CloudCME"), a Nashville-based healthcare technology company offering a SaaS-based application for managing all aspects of continuing education ("CME/CE") within a healthcare organization, for approximately $ 4.0 million in cash and $ 4.1 million in shares of HealthStream's common stock issued through a private placement at closing. The Company previously held a minority interest in CloudCME of approximately 18 %. Acquisition-related transaction costs were $ 0.1 million. The acquisition is not considered material to the Company’s financial statements. The Company accounted for the acquisition as a business combination and has allocated the purchase consideration based on management’s estimates of fair value. Net assets acquired were $ 9.6 million. Based on the fair value of assets acquired and liabilities assumed, including intangible assets of $ 3.8 million, goodwill of $ 6.8 million was established. The results of operations for CloudCME are included in the Company’s Consolidated Financial Statements from the date of acquisition. On December 31, 2022, the Company acquired substantially all of the assets of Electronic Education Documentation System, LLC (d/b/a eeds) ("eeds"), an Asheville, North Carolina-based healthcare technology company offering a SaaS-based CME/CE management application for healthcare organizations, for approximately $ 6.6 million in cash, reflecting customary purchase price adjustments made to the purchase price paid of $ 7.0 million. The purchase price was included in accrued liabilities in the Company's Consolidated Balance Sheet as of December 31, 2022 and was paid in January 2023. Of the purchase price paid at closing, $ 0.6 million is being held in escrow for a period of time following the closing to serve as a source of recovery for certain potential indemnification claims by the Company. Acquisition-related transaction costs were $ 0.1 million. The acquisition is not considered material to the Company’s financial statements. The Company accounted for the acquisition as a business combination and has allocated the purchase consideration based on management’s estimates of fair value. Net assets acquired were $ 6.6 million. Based on the fair value of assets acquired and liabilities assumed, including intangible assets of $ 4.7 million, goodwill of $ 2.3 million was established. The results of operations for eeds are included in the Company’s Consolidated Financial Statements from the date of acquisition. 55 Table of Contents 9. INCOME TAXES Components of earnings before income taxes are as follows (in thousands): Year Ended December 31, 2023 2022 2021 United States $ 18,472 $ 15,777 $ 8,006 Foreign 39 ( 192 ) ( 240 ) Earnings before income taxes $ 18,511 $ 15,585 $ 7,766 The provision for income taxes is comprised of the following (in thousands): Year Ended December 31, 2023 2022 2021 Current federal $ 4,066 $ 1,972 $ 5 Current state 942 923 406 Current foreign 15 ( 110 ) ( 29 ) Deferred federal ( 1,493 ) 495 926 Deferred state ( 214 ) 239 699 Deferred foreign ( 18 ) ( 25 ) ( 86 ) Provision for income taxes $ 3,298 $ 3,494 $ 1,921 A reconciliation of income taxes at the statutory federal income tax rate to the provision for income taxes included in the accompanying Consolidated Statements of Income is as follows (in thousands): Year Ended December 31, 2023 2022 2021 Federal tax provision at the statutory rate $ 3,887 $ 3,274 $ 1,631 State income tax provision, net of federal benefit 528 975 1,297 Tax credits ( 1,197 ) ( 1,227 ) ( 717 ) Change in valuation allowance 3 51 ( 272 ) Adjustments for prior year taxes ( 19 ) ( 261 ) ( 13 ) Changes in uncertain tax positions 167 767 ( 10 ) Other ( 71 ) ( 85 ) 5 Provision for income taxes $ 3,298 $ 3,494 $ 1,921 Management periodically assesses the realizability of its deferred tax assets, and to the extent that a recovery is not likely, a valuation allowance is established to reduce the deferred tax asset to the amount estimated to be recoverable. At December 31, 2023 , the Company has a valuation allowance of $ 2.0 million recorded against deferred tax assets for state net operating losses and certain foreign deferred tax assets. As of December 31, 2023 , the Company had federal, state, and foreign net operating loss carryforwards of $ 3.3 million, $ 9.0 million, and $ 8.4 million, respectively. Certain losses have an indefinite carryforward period, while other loss carryforwards will expire in years 2030 through 2043. A portion of the net operating loss carryforwards are subject to annual limitations under Internal Revenue Code Section 382. The annual limitations could result in the expiration of net operating loss and tax credit carryforwards before they are fully utilized. The Company is subject to income taxation at the federal, foreign, and various state levels. The Company is under examination by the Internal Revenue Service for the 2018 tax year, and it has agreed to finalization of this examination and does not expect the adjustment to exceed the uncertain tax position previously recorded. The Company is no longer subject to U.S. federal tax examinations for tax years before 2020, and with few exceptions, the Company is not subject to examination by foreign or state tax authorities for tax years which ended before 2020. Loss carryforwards and credit carryforwards generated or utilized in years earlier than 2020 are also subject to examination and adjustment. 56 Table of Contents A reconciliation of the beginning and ending liability for gross unrecognized tax benefits are as follows (in thousands): December 31, 2023 2022 Balance at beginning of year $ 1,036 $ 300 Additions for tax positions in current year 298 743 Reductions for tax positions of prior years ( 174 ) ( 7 ) Balance at end of year $ 1,160 $ 1,036 Upon reaching the final determination of the 2018 IRS examination, which resulted in a reduction to the research & development tax credit for 2018, the Company evaluated its research & development credit realizability for all open tax years. Taking into consideration the subjectivity of this credit qualification, the Company increased the reserve for uncertain tax positions by $ 0.1 million during the current year. The Company recognized $ 43,000 and $ 31,000 for interest and penalties related to unrecognized tax benefits within the provision for income taxes during the years ended December 31, 2023 and 2022 , respectively. Unrecognized tax benefits included tax positions of $ 1.2 million and $ 1.0 million for the years ended December 31, 2023 and 2022 , respectively, that if recognized would impact the Company’s effective tax rate. Deferred federal and state income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of deferred tax assets and deferred tax liabilities are as follows (in thousands): December 31, 2023 2022 Deferred tax assets: Allowance for credit losses $ 202 $ 142 Accrued liabilities 1,013 1,111 Lease liability 5,931 6,896 Tax credits 467 362 Stock-based compensation 1,161 1,064 Deferred revenue 628 653 Net operating loss carryforwards 3,282 4,069 Total deferred tax assets 12,684 14,297 Less: Valuation allowance ( 1,992 ) ( 1,947 ) Deferred tax assets, net of valuation allowance 10,692 12,350 Deferred tax liabilities: Deductible goodwill 6,829 5,691 Nondeductible intangible assets 2,087 2,878 Right of use assets 5,130 6,001 Prepaid assets 10,285 9,302 Capitalized software development 181 3,415 Depreciation 1,914 2,548 Basis difference on investments 151 128 Total deferred tax liabilities 26,577 29,963 Net deferred tax liabilities $ 15,885 $ 17,613 The Company realized $ 0.1 million of excess tax deductions related to stock-based awards during the year ended December 31, 2023 , which was reflected in the statement of income as a component of the provision for income taxes. 57 Table of Contents 10. STOCK-BASED COMPENSATION Stock Incentive Plan The Company has outstanding stock-based awards under its 2016 Omnibus Incentive Plan ( "2016 Plan") and 2022 Omnibus Incentive Plan ( "2022 Plan") (collectively, the "2016 Plan" and "2022 Plan", referred to as the "Plans"). The 2022 Plan authorizes the grant of options, restricted share units ("RSUs"), or other forms of stock-based compensation to employees, officers, directors, and others, and such grants must be approved by the Compensation Committee of the Board of Directors. The 2022 Plan allows the Compensation Committee of the Board of Directors to determine the vesting period and parameters of each grant. The vesting period of the options and RSUs granted has historically included annual vesting over a period of up to five years, generally beginning one year after the grant date. As of December 31, 2023 , 1,061,235 shares of common stock were available to be granted under the 2022 Plan. Stock Option Activity A summary of activity relative to stock options for the year ended December 31, 2023 is as follows (in thousands, except weighted-average exercise price). Weighted- Common Average Aggregate Shares Exercise Price Intrinsic Value Outstanding at beginning of period 90 $ 20.34 Granted — — Exercised — — Expired — — Forfeited — — Outstanding at end of period 90 $ 20.34 $ 602 Exercisable at end of period 59 $ 20.34 $ 391 The aggregate intrinsic value for stock options in the table above represents the total difference between the Company’s closing stock price on December 29, 2023 ( the last trading day of the year) of $ 27.03 per share and the option exercise price, multiplied by the number of in-the money options as of December 31, 2023 . The weighted average remaining contractual term of options outstanding at December 31, 2023 was 7 years. Restricted Share Unit Activity A summary of activity relative to RSUs for the year ended December 31, 2023 is as follows (in thousands, except weighted-average grant date fair value): Weighted- Number of Average Grant Date Aggregate RSU’s Fair Value Intrinsic Value Outstanding at beginning of period 532 $ 22.49 Granted 268 24.67 Vested ( 159 ) 23.55 Forfeited ( 22 ) 23.63 Outstanding at end of period 619 $ 23.12 $ 16,727 The aggregate fair value of RSUs that vested during the year ended December 31, 2023 and 2022 , as of the respective vesting dates, was $ 3.8 million and $ 3.1 million, respectively. A portion of RSUs that vested in 2023 and 2022 were net-share settled such that the Company withheld shares with value equivalent to the employees’ minimum statutory obligation for the applicable income and other employment taxes and remitted the cash to the appropriate taxing authorities. The total shares withheld for taxes during 2023 and 2022 were 36,000 and 28,000 , respectively, and were based on the value of the RSUs on their respective settlement dates as determined by the Company’s closing stock price. Total payments related to RSUs for the employees’ tax obligations to taxing authorities were $ 0.9 million in 2023 , $ 0.6 million in 2022 , and $ 0.5 million in 2021 , and are reflected as a financing activity within the Consolidated Statements of Cash Flows. 58 Table of Contents Stock-Based Compensation Total stock-based compensation expense recorded in the Consolidated Statements of Income for the years ended December 31, is as follows (in thousands): Years Ended December 31, 2023 2022 2021 Cost of revenues (excluding depreciation and amortization) $ 183 $ 155 $ 944 Product development 692 608 1,164 Sales and marketing 485 239 759 Other general and administrative 2,793 2,552 2,436 Total stock-based compensation expense $ 4,153 $ 3,554 $ 5,303 The Company amortizes the fair value of all stock-based awards, net of estimated forfeitures, on a straight-line basis over the requisite service period, which generally is the vesting period. As of December 31, 2023 , total unrecognized compensation expense related to non-vested stock options and RSUs was $ 6.5 million, net of estimated forfeitures, with a weighted average expense recognition period remaining of 2.5 years. The Company realized $ 0.1 million of excess tax deductions related to stock-based awards during the year ended December 31, 2023 , which was reflected in the Consolidated Statement of Income as a component of the provision for income taxes. Stock Awards During December 2021, the Company’s Chief Executive Officer, Robert A. Frist, Jr., contributed 86,494 of his personally owned shares of HealthStream, Inc. common stock (valued at $ 2.25 million) to the Company, without any consideration paid to him, for the benefit of the Company’s employees. In connection therewith, effective December 29, 2021 the Company approved the award of 86,494 fully vested shares of common stock to over 1,000 employees of the Company under the HealthStream, Inc. 2016 Omnibus Incentive Plan. These shares were issued in December 2021. As required by ASC Topic 718, Compensation – Stock Compensation , ("ASC 718" ) the Company recognized $ 2.25 million of stock-based compensation expense for these stock awards during the three months ended December 31, 2021 based on the closing fair market value of the Company’s stock on the date of the Company’s approval of these grants. Total payments related to the employees’ tax obligations to taxing authorities for these stock awards were $ 0.7 million and are reflected as a financing activity within the Consolidated Statement of Cash Flows for 2021. In addition, the employer taxes and expenses associated with these grants were $ 0.2 million and were recorded as an expense during December 2021. Mr. Frist contributed an additional 7,113 of his personally owned shares to cover these costs. The receipt of shares from Mr. Frist in connection with the withholding of shares as set forth above are presented on the Company’s Statement of Shareholders’ Equity in a similar manner as a share repurchase (i.e., reduction of outstanding shares). 11. EMPLOYEE BENEFIT PLAN 401 (k) Plan The Company has a defined-contribution employee benefit plan ( 401 (k) Plan) incorporating provisions of Section 401 (k) of the Internal Revenue Code. Employees must have attained the age of 21 and have completed thirty days of service to be eligible to participate in the 401 (k) Plan. Under the provisions of the 401 (k) Plan, a plan member may make contributions, on a tax-deferred basis, subject to IRS limitations. The Company elected to provide eligible employees with matching contributions totaling $ 1.6 million, $ 1.5 million, and $ 2.0 million for the years ended December 31, 2023 , 2022 , and 2021 , respectively. 59 Table of Contents 12. DEBT At December 31, 2023 and 2022 , the Company had no debt outstanding. Revolving Credit Facility On October 6, 2023 , the Company entered into an Amended and Restated Revolving Credit Agreement ("Revolving Credit Facility"), amending the Revolving Credit Facility dated as of November 24, 2014 , as amended, with certain lenders party thereto from time to time, and Truist, as Administrative Agent for the lenders. Under the Revolving Credit Facility, the Company may borrow up to $ 50.0 million, which includes a $ 5.0 million swingline sub-facility and a $ 5.0 million letter of credit sub-facility, as well as an accordion feature that allows the Company to increase the Revolving Credit Facility by a total of up to $ 25.0 million, subject to securing additional commitments from existing lenders or new lending institutions. The Revolving Credit Facility has a maturity date of October 6, 2026 . The Company's obligations under the Revolving Credit Facility are unsecured. In addition, if the Company forms or acquires any domestic subsidiaries, the loans and other obligations under the Revolving Credit Facility will be guaranteed by such domestic subsidiaries. At the Company’s election, the borrowings under the Revolving Credit Facility, other than the swingline loans, bear interest at either ( 1 ) a base rate defined as the highest of (a) the rate which the Administrative Agent announces from time to time as its prime lending rate, as in effect from time to time, or (b) the Federal Funds Rate, as in effect from time to time, plus one -half of one percent ( 0.50 %) per annum (any changes in such rates to be effective as of the date of any change in such rate), plus in each case an applicable margin that varies with the company’s funded debt leverage ratio; or ( 2 ) a term secured overnight financing rate (“SOFR”) defined as the greater of (a)(i) the forward-looking term rate based on SOFR determined as of the reference time for such interest period with a term equivalent to such interest period plus (ii) a term SOFR adjustment equal to 0.10 % per annum and (b) zero, plus, in each case, an applicable margin that varies with the Company’s consolidated total leverage ratio. The Company’s borrowings under the swingline loans bear interest at the base rate plus the applicable margin. The initial applicable margin for base rate loans is 0.50 % and the initial applicable margin SOFR loans is 1.50 %. The applicable margins will be adjusted quarterly, in each case two ( 2 ) business days after the Administrative Agent's receipt of the Company's quarterly financial statements. The Company is also required to pay a commitment fee accruing on the unused revolving commitment, which fee initially is 20 basis points per annum and a letter of credit fee, accruing at a rate per annum equal to the applicable margin for SOFR loans then in effect on the daily average amount of such lender’s letter of credit exposure. Principal is payable in full at maturity on October 6, 2026 , and there are no scheduled principal payments prior to maturity. Interest on base rate loans and swingline loans is payable quarterly in arrears, and interest on SOFR loans is payable at the end of each interest period, and in the case of interest periods longer than three months, on each day which occurs every three months after the initial date of such interest period. The purpose of the Revolving Credit Facility is for general working capital needs, permitted acquisitions (as defined in the Amended and Restated Revolving Credit Agreement), and for stock repurchase and/or redemption transactions that the Company may authorize. In addition, the Revolving Credit Facility requires the Company to meet certain financial tests, including, without limitation: • a funded debt leverage ratio (consolidated debt/consolidated EBITDA) of not greater than 3.0 to 1.0; and • an interest coverage ratio (consolidated EBITDA/consolidated interest expense) of not less than 3.0 to 1.0. In addition, the Revolving Credit Facility contains certain customary affirmative and negative covenants that, among other things, restrict additional indebtedness, liens and encumbrances, changes to the character of the Company’s business, acquisitions, asset dispositions, mergers and consolidations, sale or discount of receivables, creation or acquisitions of additional subsidiaries, and other matters customarily restricted in such agreements. As of December 31, 2023 , the Company was in compliance with all covenants. There were no balances outstanding on the Revolving Credit Facility as of December 31, 2023 and there were no borrowings under the Revolving Credit Facility during the year ended December 31, 2023 . 60 Table of Contents 13. LEASES The Company’s operating lease expense as presented in other general and administrative expense in the Consolidated Statements of Income was $ 4.6 million, $ 4.3 million, and $ 5.5 million for the twelve months ended December 31, 2023 , 2022 , and 2021 , respectively. Cash paid for amounts included in the measurement of operating lease liabilities was $ 4.4 million and $ 4.7 million for the years ended December 31, 2023 and 2022 , respectively. As of December 31, 2023 , the weighted-average remaining lease term was 7.3 years, and the weighted-average incremental borrowing rate was 6 %. As of December 31, 2023 , the Company did not have any leases that had not yet commenced. The table below presents the lease-related assets and liabilities recorded on the Consolidated Balance Sheets as of December 31, 2023 and 2022 (in thousands). Year Ended December 31, 2023 2022 Assets Classification Operating lease right-of-use assets Operating lease right of use assets, net $ 20,114 $ 22,759 Total leased assets $ 20,114 $ 22,759 Liabilities Operating lease liabilities, current Accounts payable and accrued expenses $ 2,974 $ 2,840 Operating lease liabilities, noncurrent Operating lease liability, noncurrent 20,247 23,321 Total operating lease liabilities $ 23,221 $ 26,161 The table below presents the maturities of lease liabilities under non-cancellable leases as of December 31, 2023 (in thousands). 2024 $ 4,296 2025 4,022 2026 3,650 2027 3,385 2028 3,453 Thereafter 10,163 Total undiscounted lease payments $ 28,969 Less imputed interest 5,748 Total lease liabilities $ 23,221 The Company subleases certain of its office space included above under non-cancellable leases and is due to receive future minimum rental payments of approximately $ 0.2 million and $ 37,000 for the years ended December 31, 2024 and 2025, respectively. 14. LITIGATION In connection with its business, the Company is from time to time involved in various legal actions. The litigation process is inherently uncertain, and it is possible that the resolution of such matters might have a material adverse effect upon the financial condition and/or results of operations of the Company. However, in the opinion of the Company’s management, matters currently pending or threatened against the Company are not expected to have a material adverse effect on the financial position or results of operations of the Company. 15. NON-MARKETABLE EQUITY INVESTMENTS The aggregate carrying amount of non-marketable equity investments accounted for using the measurement alternative for equity investments that do not have readily determinable fair values was $ 1.5 million for both the years ended December 31, 2023 and 2022 , which the Company evaluates for impairment at each reporting period. There have been no adjustments recorded due to changes in the fair value of the non-marketable equity investments the Company held as of December 31, 2023 and 2022. The fair value of non-marketable equity investments is not estimated if there are no identified events or changes in circumstances that may have a significant adverse effect on the fair value of the investment. 61 Table of Contents Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None.