What changed in this filing

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Item 2. Management’s Discussion and Analysis

2024-04-25 compared with 2023-10-26 · 121 added, 196 removed, 57 unchanged (85% of the section changed)

Management's Discussion and Analysis of Financial Condition and Results of Operations

Special Cautionary Notice Regarding Forward ‑

Looking Statements

You should read the following discussion and analysis in conjunction with our Condensed Consolidated Financial Statements and related Notes included elsewhere in this report and our audited Consolidated Financial Statements and the Notes thereto for the year ended December 31, 2022, appearing in our Annual Report on Form 10-K that was filed with the Securities and Exchange Commission (“SEC”) on February 28, 2023 (the “2022 Form 10-K”).

Statements contained in this Quarterly Report on Form 10-Q that are not historical facts are forward-looking statements that the Company intends to be covered by the safe harbor provisions for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995.

Statements that are predictive in nature, that depend on or refer to future events or conditions, or that include words such as “anticipates,”

“believes,”

“could,”

“estimates,”

“expects,”

“intends,”

“may,”

“plans,”

“potential,”

“predicts,”

“projects,”

“should,”

“will,”

“would,”

and similar expressions are forward-looking statements.

Special Cautionary Notice Regarding Forward ‑ Looking Statements

You should read the following discussion and analysis in conjunction with our Condensed Consolidated Financial Statements and related Notes included elsewhere in this Form 10-Q and our audited Consolidated Financial Statements and the Notes thereto for the year ended December 31, 2023, appearing in our Annual Report on Form 10-K that was filed with the Securities and Exchange Commission (“SEC”) on February 26, 2024 (the “2023 Form 10-K”).

Statements contained in this Form 10-Q that are not historical facts are forward-looking statements that the Company intends to be covered by the safe harbor provisions for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995.

Statements that are predictive in nature, that depend on or refer to future events or conditions, or that include words such as “anticipates,” “believes,” “could,” “estimates,” “expects,” “intends,” “may,” “plans,” “potential,” “predicts,” “projects,” “should,” “will,” “would,” and similar expressions are forward-looking statements.

The Company cautions that forward-looking statements involve known and unknown risks, uncertainties, and other factors that may cause actual results, performance, or achievements to be materially different from any future results, performance, or achievements expressed or implied by the forward-looking statements.

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In evaluating any forward-looking statement, you should specifically consider the information regarding forward-looking statements set forth above and the risks set forth under the caption Part I, Item 1A.

Risk Factors in our 2022 Form 10-K and other disclosures in our 2022 Form 10-K, earnings releases, and other filings with the SEC from time to time, as well as other cautionary statements contained elsewhere in this report, including our critical accounting policies and estimates as discussed in this report and our 2022 Form 10-K.

Risk Factors in our 2023 Form 10-K and other disclosures in our 2023 Form 10-K, earnings releases, and other filings with the SEC from time to time, as well as other cautionary statements contained elsewhere in this Form 10-Q, including our critical accounting policies and estimates as discussed in this Form 10-Q and our 2023 Form 10-K.

We undertake no obligation to update or revise any forward-looking statements.

You should read this report and the documents that we reference in this report and have filed as exhibits to this report completely and with the understanding that our actual future results may be materially different from what we currently expect.

You should read this Form 10-Q and the documents that we reference in this Form 10-Q and have filed as exhibits to this Form 10-Q completely and with the understanding that our actual future results may be materially different from what we currently expect.

Business Overview

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 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.

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 nine months ended September 30, 2023.

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

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 individuals and organizations in healthcare meet their ongoing learning, clinical development, credentialing, and scheduling needs.

We also provide our solutions to nursing schools and nursing students.

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 enabling our applications through hStream, we believe that stand-alone applications, which already provide a powerful value proposition on their own, are beginning to leverage each other to more efficiently and effectively empower our customers to manage their business and improve their outcomes.

Further, the Company’s internal structure and executive leadership are likewise shaped by the organizing principle of a single platform, including with regard to technology, operations, accounting, internal reporting (including the nature of information reviewed by our key decision makers), organizational structure, compensation, performance assessment, and resource allocation.

Significant financial metrics for the first quarter of 2024 are set forth in the bullets below.

Revenues of $72.8 million in the first quarter of 2024, up 6% from $68.9 million in the first quarter of 2023

Operating income of $5.7 million in the first quarter of 2024, up 97% from $2.9 million in the first quarter of 2023

Net income of $5.2 million in the first quarter of 2024, up 99% from $2.6 million in the first quarter of 2023

Earnings per share (“EPS”) of $0.17 per share (diluted) in the first quarter of 2024, up from $0.09 per share (diluted) in the first quarter of 2023

Adjusted EBITDA 1 of $17.1 million in the first quarter of 2024, up 24% from $13.7 million in the first quarter of 2023

Adjusted EBITDA is a non-GAAP financial measure.

A reconciliation of adjusted EBITDA to net income and disclosure regarding why we believe adjusted EBITDA provides useful information to investors is included later in this report.

COVID-19 Pandemic and Other Recent Developments

The impact of the COVID-19 pandemic continues to cause uncertainty and potential economic volatility, including with regard to our healthcare customers and our business.

However, the impact of the pandemic itself on public health and economic conditions has significantly lessened and conditions have normalized since the height of the pandemic in 2020 and 2021, potentially to the point of reaching an endemic stage.

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 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.

More recently, such impacts on healthcare customers appear to be associated with the cessation of or significant reduction in governmental funds such customers have received or anticipate receiving through earlier federal stimulus and relief measures, including the Public Health Emergency Fund, the Paycheck Protection Program, and the Provider Relief Fund.

A reconciliation of adjusted EBITDA to net income and disclosure regarding why we believe adjusted EBITDA provides useful information to investors is included later in this Form 10-Q.

Recent Developments

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, geopolitical instability, 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.

In particular, we have experienced, and believe that some of our customers have experienced, increased labor, supply chain, capital, and other expenditures associated with current inflationary pressures and labor market conditions.

Key Business Metrics

Our management utilizes the following financial and non-financial metrics in connection with managing our business.

continue to be challenging in various respects, including as the result of ongoing inflationary pressures, elevated interest rate levels, challenging labor market conditions, and uncertain geopolitical conditions.

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

These conditions impacting the U.S.

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

While the COVID-19 pandemic continues to cause some level of uncertainty, the impact of the pandemic itself on public health and economic conditions has significantly lessened and normalized to the point of reaching an endemic stage.

As our business is focused on providing solutions to healthcare organizations, we continue to closely monitor any developments related to COVID-19 and remain prepared to modify our operating approaches to address COVID 19-related developments or other public health related events as they may arise.

Key Financial Metrics

Our management utilizes the following financial metrics in connection with managing our business.

Revenues, net .

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

Revenues, net, were $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.

Revenues, net, were $72.8 million for the three months ended March 31, 2024, compared to $68.9 million for the three months ended March 31, 2023.

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.

Adjusted EBITDA .

Adjusted EBITDA, calculated as set forth below under “Reconciliation of Non-GAAP Financial Measures,” is utilized by our management in connection with managing our business and provides useful information to investors because adjusted EBITDA reflects net income adjusted for certain GAAP accounting, non-cash, and/or non-operating items, as more specifically set forth below, which may not fully reflect the underlying operating performance of our business.

We also believe that adjusted EBITDA is useful to investors to assess the Company’s ongoing operations.

Additionally, short-term cash incentive bonuses and 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 $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 .

hStream subscriptions are determined as the number of subscriptions under contract for hStream, our proprietary technology platform that enables healthcare organizations and their respective workforces to connect to and gain value from the HealthStream ecosystem of applications, tools, and content.

Management utilizes hStream subscriptions in connection with managing our business and believes that this metric provides useful information to investors as a measure of our progress in growing the value of our customer base.

At September 30, 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.

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. 

Adjusted EBITDA, calculated as set forth below under “Reconciliation of Non-GAAP Financial Measures,” is utilized by our management in connection with managing our business and provides useful information to investors because adjusted EBITDA reflects net income adjusted for certain GAAP accounting, non-cash, and/or non-operating items, as more specifically set forth below, which may not fully reflect the underlying operating performance of our business.

We also believe that adjusted EBITDA is useful to investors to assess the Company’s ongoing operations.

Additionally, certain 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 $17.1 million for the three months ended March 31, 2024, compared to $13.7 million for the three months ended March 31, 2023.

Capital Expenditures .

Capital expenditures represent cash payments incurred for purchases of property and equipment and during the development phase for projects to develop software and content.

Capital expenditures were $7.8 million for the three months ended March 31, 2024 compared to $8.4 million for the three months ended March 31, 2023.

Management utilizes this metric in connection with managing the allocation of capitalized expenditures in which the Company invests related to the development of its products and believes that this metric is a key indicator of investment in products relative to their current and expected performance.

Net income represents revenues, net less all expenses.

Net income was $5.2 million for the three months ended March 31, 2024, compared to $2.6 million for the three months ended March 31, 2023.

Management utilizes net income in connection with managing our business, including with regard to our capital deployment strategies.

Critical Accounting Policies and Estimates

The Company’s Condensed Consolidated Financial Statements are prepared in accordance with US GAAP.

These accounting principles require us to make certain estimates, judgments, and assumptions during the preparation of our Financial Statements.

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Accounting for income taxes

In many cases, the accounting treatment of a particular transaction is specifically dictated by US GAAP and does not require management’s judgment in its application.

There are also areas where management’s judgment in selecting among available alternatives would not produce a materially different result.

See Notes to the Consolidated Financial Statements in our 2022 Form 10-K and the Notes to the Condensed Consolidated Financial Statements herein which contain additional information regarding our accounting policies and other disclosures required by US GAAP.

There have been no changes in our critical accounting policies and estimates from those reported in our 2022 Form 10-K.

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

Revenues, net.

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 September 30,

Percentage Change

Subscription services

Professional services

Total revenues, net

% of Revenues

Subscription services

Professional services

Cost of Revenues (excluding Depreciation and Amortization).

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 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, 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 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 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 $0.6 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 $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 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.

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

In many cases, the accounting treatment of a particular transaction is specifically dictated by US GAAP and does not require management’s judgment in its application.

There are also areas where management’s judgment in selecting among available alternatives would not produce a materially different result.

See Notes to the Consolidated Financial Statements in our 2023 Form 10-K and the Notes to the Condensed Consolidated Financial Statements herein which contain additional information regarding our accounting policies and other disclosures required by US GAAP.

There have been no changes in our critical accounting policies and estimates from those reported in our 2023 Form 10-K.

Three Months Ended March 31, 2024 Compared to Three Months Ended March 31, 2023

Revenues, net.

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.

Revenues increased $3.8 million, or 6%, to $72.8 million for the three months ended March 31, 2024 from $68.9 million for the three months ended March 31, 2023.

Subscription revenues increased $4.2 million, or 6%, but were partially offset by $0.4 million of declines from professional services revenues.

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

Nine Months Ended September 30,

Three Months Ended March 31,

Percentage Change

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Cost of Revenues (excluding Depreciation and Amortization).

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.

Cost of revenues increased $0.7 million, or 3%, to $24.6 million for the three months ended March 31, 2024, from $23.9 million for the three months ended March 31, 2023.

Cost of revenues as a percentage of revenues were 34% and 35% for the three months ended March 31, 2024 and 2023, respectively.

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

Labor costs recognized during the three months ended March 31, 2023 included severance costs incurred in connection with the Company's previously disclosed restructuring under a single platform strategy.

Product Development.

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.

Product development expenses increased $0.3 million, or 3%, to $12.0 million for the three months ended March 31, 2024, from $11.7 million for the three months ended March 31, 2023.

Product development expenses as a percentage of revenues were 17% for both the three months ended March 31, 2024 and 2023.

The increase in expense is primarily due to an increase in labor costs, 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 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.

Sales and marketing expenses, including personnel costs, increased $45,000 to $11.8 million for the three months ended March 31, 2024, from $11.7 million for the three months ended March 31, 2023.

Sales and marketing expenses were 16% and 17% of revenues for the three months ended March 31, 2024 and 2023, respectively.

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

Other General and Administrative Expenses.

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.

Other general and administrative expenses decreased $0.6 million, or 6%, to $8.3 million for the three months ended March 31, 2024, from $8.9 million for the three months ended March 31, 2023.

Other general and administrative expenses were 11% and 13% of revenues for the three months ended March 31, 2024 and 2023, respectively.

The decrease is primarily due to lower labor costs and professional service fees, which were partially offset by higher software expenses.

Depreciation and Amortization.

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.

Depreciation and amortization expense increased $0.4 million, or 4%, to $10.3 million for the three months ended March 31, 2024, from $9.9 million for the three months ended March 31, 2023.

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

Other Income, Net .

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.

Other income, net was $0.9 million for the three months ended March 31, 2024, compared to $0.3 million for the three months ended March 31, 2023.

The increase is primarily the result of an increase in interest income earned on cash and investments during the three months ended March 31, 2024.

Income Tax Provision.

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 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”

The Company recorded a provision for income taxes of $1.3 million for the three months ended March 31, 2024, compared to $0.5 million for the three months ended March 31, 2023.

The Company’s effective tax rate was 20% for the three months ended March 31, 2024, compared to 16% for the three months ended March 31, 2023.

During the three months ended March 31, 2024, the Company recorded discrete tax benefits of $17,000, which consisted primarily of a $129,000 tax benefit associated with stock-based awards, partially offset by $112,000 of discrete tax expense related to reserves for uncertain tax positions.

During the three months ended March 31, 2023, the Company recorded discrete tax benefits of $53,000, which consisted primarily of a $133,000 tax benefit associated with stock-based awards.

This tax benefit was partially offset by $80,000 of discrete tax expense related to uncertain tax positions.

Net income was $5.2 million and $2.6 million for the three months ended March 31, 2024 and 2023, respectively.

EPS was $0.17 per share (diluted) and $0.09 per share (diluted) for the three months ended March 31, 2024 and 2023, respectively.

Adjusted EBITDA was $17.1 million for the three months ended March 31, 2024, compared to $13.7 million for the three months ended March 31, 2023.

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.

Reconciliation of Non-GAAP Financial Measures

This Quarterly Report on Form 10-Q presents adjusted EBITDA, which is a non-GAAP financial measure used by management in analyzing our financial results and ongoing operational performance.

In order to better assess the Company’s financial results, management believes that net income excluding the impact of the deferred revenue write-downs associated with fair value accounting for acquired businesses (as discussed in greater detail below) and before interest, income taxes, stock-based compensation, depreciation and amortization, and changes in fair value of, including gains (losses) on the sale of, non-marketable equity investments (“adjusted EBITDA”) is a useful measure for evaluating the operating performance of the Company because adjusted EBITDA reflects net income adjusted for certain GAAP accounting, non-cash, and/or non-operating items which may not, in any such case, fully reflect the underlying operating performance of our business.

We also believe that adjusted EBITDA is useful to investors to assess the Company’s ongoing operating performance and to compare the Company’s operating performance between periods.

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

As noted above, the definition of adjusted EBITDA includes an adjustment for the impact of the deferred revenue write-downs associated with fair value accounting for acquired businesses.

Prior to the Company early adopting ASU 2021-08 effective January 1, 2022, following the completion of any acquisition by the Company, the Company was required to record the acquired deferred revenue at fair value as defined in GAAP, which typically resulted in a write-down of the acquired deferred revenue.

When the Company was required to record a write-down of deferred revenue, it resulted in lower recognized revenue, operating income, and net income in subsequent periods.

Revenue for any such acquired business was deferred and was typically recognized over a one-to-two year period following the completion of any particular acquisition, so our GAAP revenues for this one-to-two year period would not reflect the full amount of revenues that would have been reported if the acquired deferred revenue was not written down to fair value.

Management believes that including an adjustment in the definition of adjusted EBITDA for the impact of the deferred write-downs associated with fair value accounting for businesses acquired prior to the January 1, 2022 effective date of the Company's adoption of ASU 2021-08 provides useful information to investors because the deferred revenue write-down recognized in periods after an acquisition may, given the nature of this non-cash accounting impact, cause our GAAP financial results during such periods to not fully reflect our underlying operating performance and thus adjusting for this amount may assist in comparing the Company’s results of operations between periods.

Following the adoption of ASU 2021-08, contracts acquired in an acquisition completed on or after January 1, 2022 are measured as if the Company had originated the contract (rather than the contract being measured at fair value) such that, for such acquisitions, the Company no longer records deferred revenue write-downs associated with acquired businesses (for acquisitions completed prior to January 1, 2022, the Company continues to record deferred revenue write-downs associated with fair value accounting for periods on and after January 1, 2022 consistent with past practice).

At the current time, the Company intends to continue to include an adjustment in the definition of adjusted EBITDA for the impact of deferred revenue write-downs from business acquired prior to January 1, 2022 given the ongoing impact of such deferred revenue on our financial results.

This Form 10-Q presents adjusted EBITDA, which is a non-GAAP financial measure used by management in analyzing our financial results and ongoing operational performance.

In order to better assess the Company’s financial results, management believes that net income before interest, income taxes, stock-based compensation, depreciation and amortization, and changes in fair value of, including gains (losses) on the sale of, non-marketable equity investments (“adjusted EBITDA”) is a useful measure for evaluating the operating performance of the Company because adjusted EBITDA reflects net income adjusted for certain GAAP accounting, non-cash, and/or non-operating items which may not, in any such case, fully reflect the underlying operating performance of our business.

In addition, as discussed below, for periods ended on or prior to December 31, 2023, adjusted EBITDA excludes the impact of deferred revenue write-downs associated with fair value accounting for acquired businesses.

We believe that adjusted EBITDA is useful to investors to assess the Company’s ongoing operating performance and to compare the Company’s operating performance between periods.

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

As previously disclosed, prior to the Company early adopting ASU 2021-08 effective January 1, 2022, following the completion of any acquisition by the Company, the Company was required to record the acquired deferred revenue at fair value as defined in GAAP, which typically resulted in a write-down of the acquired deferred revenue.

In connection therewith, management determined that including an adjustment in the definition of adjusted EBITDA for the impact of the deferred revenue write-downs associated with fair value accounting for businesses acquired prior to the January 1, 2022 effective date of the Company's adoption of ASU 2021-08 (the “Pre-2022 Acquisitions”) provided useful information to investors because the deferred revenue write-down recognized in periods after any such Pre-2022 Acquisition could, given the nature of this non-cash accounting impact, cause our GAAP financial results during such periods to not fully reflect our underlying operating performance.

Following the adoption of ASU 2021-08, contracts acquired in an acquisition completed on or after January 1, 2022 have been measured as if the Company had originated the contract (rather than the contract being measured at fair value) such that, for such acquisitions, the Company no longer records deferred revenue write-downs associated with acquired businesses.

With respect to periods ended on or prior to December 31, 2023, the Company has included an adjustment in the calculation of adjusted EBITDA for the impact of deferred revenue write-downs associated with the Pre-2022 Acquisitions consistent with this prior accounting standard, given the ongoing impact of such deferred revenue on the Company's financial results under GAAP over this time period.

With respect to periods beginning on or after January 1, 2024, the Company is no longer recognizing any deferred revenue write-downs associated with the Pre-2022 Acquisitions under GAAP, and accordingly such deferred revenue write-downs are no longer an adjustment in connection with the calculation of adjusted EBITDA for periods beginning on and after January 1, 2024.

Adjusted EBITDA is a non-GAAP financial measure and should not be considered as a measure of financial performance under GAAP.

Because adjusted EBITDA is not a measurement determined in accordance with GAAP, adjusted EBITDA is susceptible to varying calculations.

Accordingly, adjusted EBITDA, as presented, may not be comparable to other similarly titled measures of other companies and has limitations as an analytical tool. 

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

Three Months Ended September 30,

Nine Months Ended September 30,

GAAP net income

Accordingly, adjusted EBITDA, as presented, may not be comparable to other similarly titled measures of other companies and has limitations as an analytical tool.

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

Three Months Ended March 31,

Deferred revenue write-down

4 unchanged sentences

Depreciation and amortization

Change in fair value of non-marketable equity investments

Adjusted EBITDA

Liquidity and Capital Resources

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.

Net cash provided by operating activities increased by $0.4 million to $20.9 million during the three months ended March 31, 2024, from $20.5 million during the three months ended March 31, 2023.

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.

Our days sales outstanding ("DSO") was 46 days for the first quarter of 2024 compared to 51 days for the first quarter of 2023.

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

The Company’s primary sources of cash were receipts generated from the sales of our products and services.

The primary uses of cash to fund operations included personnel expenses, sales commissions, royalty payments, payments for contract labor and other direct expenses associated with delivery of our products and services, income tax payments, and general corporate expenses.

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 September 30, 2023 was $44.1 million of cash and cash equivalents and $27.7 million of marketable securities.

Net cash used in investing activities was $7.1 million for the three months ended March 31, 2024, compared to $16.9 million for the three months ended March 31, 2023.

During the three months ended March 31, 2024, the Company invested in marketable securities of $14.1 million, made payments for capitalized software development of $7.0 million, and purchased property and equipment of $0.7 million.

These uses of cash were partially offset by $14.0 million in maturities of marketable securities and $0.8 million received upon the settlement and release of escrowed proceeds related to a prior sale of a non-marketable equity investment.

During the three months ended March 31, 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 three months ended March 31, 2023), invested in marketable securities of $2.9 million, made payments for capitalized software development of $7.6 million, and purchased property and equipment of $0.9 million.

These uses of cash were partially offset by $1.0 million in maturities of marketable securities.

Net cash used in financing activities was approximately $1.7 million for the three months ended March 31, 2024, compared to $0.8 million for the three months ended March 31, 2023.

The uses of cash for the three months ended March 31, 2024 included $0.8 million for the payment of cash dividends and $0.9 million for the payment of employee payroll taxes in relation to the vesting of restricted share units.

The uses of cash for the three months ended March 31, 2023 included $0.8 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 $21.3 million at March 31, 2024, compared to positive working capital of $11.8 million at December 31, 2023.

The increase in working capital is primarily a result of an increase in cash and cash equivalents.

The Company’s primary source of liquidity as of March 31, 2024 was $52.4 million of cash and cash equivalents and $31.3 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 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 nine months ended September 30, 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), during the nine months ended September 30, 2022.

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.

We also announced that our Board declared the initial quarterly dividend under the new policy in the amount of $0.025 per share, which was paid on April 28, 2023 to the holders of record of all of the issued and outstanding shares of common stock as of the close of business on April 17, 2023.

This marked the first quarterly cash dividend policy adopted by the Company. On April 24, 2023, the Board approved the Company's second quarterly cash dividend of $0.025 per share, which was paid on June 23, 2023 to holders of record on June 12, 2023. 

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.

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.

There currently are no outstanding borrowings under our revolving credit facility.

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

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

The share repurchase program expired according to its terms on March 31, 2024, and no repurchases occurred during the three months ended March 31, 2024.

During the term of this program, the Company repurchased a total of 404,188 shares under this program at an aggregate fair value of $8.9 million, based on an average price per share of $22.07 (excluding the cost of broker commissions).

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

On February 20, 2023, we announced that our Board approved a quarterly dividend policy.

Under this dividend policy, our Board declared, and the Company paid, quarterly cash dividends on our common stock at the rate of $0.025 per share during the year ended December 31, 2023.

In addition, on February 19, 2024, our Board approved a quarterly dividend under this dividend policy at a rate of $0.028 per share, which was paid on March 22, 2024 to the holders of record of our common stock on March 11, 2024.

Moreover, on April 22, 2024, the Board approved a quarterly cash dividend of $0.028 per share, which will be payable on May 17, 2024 to holders of record of our common stock on May 6, 2024.

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, 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.

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 we may elect to make under any future 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.

It is anticipated that future acquisitions or strategic investments, if any, would be effected through cash consideration, stock consideration, or a combination of both.

The issuance of our stock as consideration for an acquisition or to raise additional capital could have a dilutive effect on earnings per share and could adversely affect our stock price.

Our 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.

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 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.

As of March 31, 2024, we were in compliance with all covenants under our revolving credit facility.

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.

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