What changed in this filing

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Item 1. Financial Statements

2020-07-30 compared with 2020-04-30 · 165 added, 112 removed, 329 unchanged (46% of the section changed)

7 unchanged sentences

Accounts receivable, net of allowance for doubtful accounts of $ 855 and

$ 843 at March 31, 2020 and December 31, 2019, respectively

$ 843 at June 30, 2020 and December 31, 2019, respectively

Accounts receivable - unbilled

3 unchanged sentences

Property and equipment, net of accumulated depreciation of $ 22,865 and

$ 19,291 at March 31, 2020 and December 31, 2019, respectively

$ 19,291 at June 30, 2020 and December 31, 2019, respectively

Capitalized software development, net of accumulated amortization of $ 63,796 and

$ 57,768 at March 31, 2020 and December 31, 2019, respectively

$ 57,768 at June 30, 2020 and December 31, 2019, respectively

Operating lease right of use assets, net

Customer-related intangibles, net of accumulated amortization of $ 33,129 and

$ 29,760 at March 31, 2020 and December 31, 2019, respectively

$ 29,760 at June 30, 2020 and December 31, 2019, respectively

Other intangible assets, net of accumulated amortization of $ 14,363 and

$ 12,735 at March 31, 2020 and December 31, 2019, respectively

$ 12,735 at June 30, 2020 and December 31, 2019, respectively

Deferred tax assets

15 unchanged sentences

31,997 and 32,379 shares

issued and outstanding at March 31, 2020 and December 31, 2019, respectively

issued and outstanding at June 30, 2020 and December 31, 2019, respectively

Retained earnings

Accumulated other comprehensive (loss) income

Accumulated other comprehensive income

Total shareholders’ equity

Total liabilities and shareholders’ equity

See accompanying notes to the unaudited Condensed Consolidated Financial Statements.

See accompanying Notes to the Condensed Consolidated Financial Statements (unaudited).

HEALTHSTREAM, INC.

2 unchanged sentences

Three Months Ended

Six Months Ended

Revenues, net

24 unchanged sentences

Weighted average shares of common stock outstanding:

See accompanying notes to the unaudited Condensed Consolidated Financial Statements.

See accompanying Notes to the Condensed Consolidated Financial Statements (unaudited).

HEALTHSTREAM, INC.

2 unchanged sentences

Three Months Ended

Six Months Ended

Other comprehensive income, net of taxes:

Foreign currency translation adjustments

Unrealized (loss) gain on marketable securities

Total other comprehensive (loss) income

Unrealized gain on marketable securities

Total other comprehensive income (loss)

Comprehensive income

See accompanying notes to the unaudited Condensed Consolidated Financial Statements.

See accompanying Notes to the Condensed Consolidated Financial Statements (unaudited).

HEALTHSTREAM, INC.

CONDENSED CONSOLIDATED STATEMENTs OF SHAREHOLDERS' EQUITY (UNAUDITED)

(In thousands, except per share data)

Three Months Ended March 31, 2020

(In thousands)

Six Months Ended June 30, 2020

Accumulated Other Comprehensive

8 unchanged sentences

Balance at March 31, 2020

Three Months Ended March 31, 2019

Comprehensive income

Stock based compensation

Common stock issued under stock plans,

net of shares withheld for employee taxes

Repurchase of common stock

Balance at June 30, 2020

See accompanying Notes to the Condensed Consolidated Financial Statements (unaudited).

HEALTHSTREAM, INC.

CONDENSED CONSOLIDATED STATEMENTs OF SHAREHOLDERS' EQUITY (UNAUDITED)

(In thousands, except per share data)

Six Months Ended June 30, 2019

Accumulated Other Comprehensive

7 unchanged sentences

Balance at March 31, 2019

See accompanying notes to the unaudited Condensed Consolidated Financial Statements .

Comprehensive income

Stock donated to Company (held in treasury)

Stock based compensation

Common stock issued under stock plans,

net of shares withheld for employee taxes

Balance at June 30, 2019

See accompanying Notes to the Condensed Consolidated Financial Statements (unaudited).

HEALTHSTREAM, INC.

1 unchanged sentence

(In thousands)

Three Months Ended March 31,

Six Months Ended June 30,

OPERATING ACTIVITIES:

20 unchanged sentences

Business combinations, net of cash acquired

Proceeds from sale of discontinued operations

Proceeds from maturities of marketable securities

Purchases of marketable securities

Proceeds from sale of property and equipment

Payments to acquire non-marketable equity investments

6 unchanged sentences

Payments of earn-outs related to acquisitions

Repurchase of common stock

Repurchases of common stock

Payment of cash dividends

4 unchanged sentences

Cash and cash equivalents at end of period

See accompanying notes to the unaudited Condensed Consolidated Financial Statements.

SUPPLEMENTAL CASH FLOW INFORMATION:

Non-cash additions to non-marketable equity investments

See accompanying Notes to the Condensed Consolidated Financial Statements (unaudited).

HEALTHSTREAM, INC.

1 unchanged sentence

BASIS OF PRESENTATION

The accompanying unaudited Condensed Consolidated Financial Statements have been prepared in accordance with accounting principles generally accepted in the United States (“US GAAP”) for interim financial information and with the instructions to Form 10‑Q and Article 10 of Regulation S‑X.

Accordingly, Condensed Consolidated Financial Statements do not include all of the information and footnotes required by US GAAP for complete financial statements.

The accompanying Condensed Consolidated Financial Statements (unaudited) have been prepared in accordance with accounting principles generally accepted in the United States (“US GAAP”) for interim financial information and with the instructions to Form 10‑Q and Article 10 of Regulation S‑X.

Accordingly, Condensed Consolidated Financial Statements do not include all information and footnotes required by US GAAP for complete financial statements.

In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included.

All intercompany transactions have been eliminated in consolidation.

Operating results for the three months ended March 31, 2020 are not necessarily indicative of the results that may be expected for the year ending December 31, 2020.

Operating results for the three and six months ended June 30, 2020 are not necessarily indicative of the results that may be expected for the year ending December 31, 2020.

On February 12, 2018, the Company divested its Patient Experience (“PX”) business to Press Ganey Associates, Inc.

(“Press Ganey”).

The sale of the PX business resulted in the divestiture of the Company’s patient experience solutions business segment.

The Company has classified the gain on sale of its previously owned PX business as discontinued operations in its Condensed Consolidated Statements of Income for all periods presented.

The sale of the PX business resulted in the Company’s divestiture of the Company’s patient experience solutions business segment.

The Company has classified the results of its previously owned PX segment as discontinued operations in its Condensed Consolidated Statement of Income for the six months ended June 30, 2019.

See Note 10 for additional information.

The Condensed Consolidated Balance Sheet at December 31, 2019 was derived from the audited Consolidated Financial Statements at that date but does not include all of the information and footnotes required by US GAAP for a complete set of financial statements.

The Condensed Consolidated Balance Sheet at December 31, 2019 has been derived from the audited Consolidated Financial Statements at that date does not include all information and footnotes required by US GAAP for complete financial statements.

For further information, refer to the Consolidated Financial Statements and footnotes thereto for the year ended December 31, 2019 (included in the Company's Annual Report on Form 10-K, filed with the Securities and Exchange Commission on February 26, 2020).

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Measurement of Credit Losses on Financial Instruments , which amends guidance on reporting credit losses for assets held at amortized cost basis and available for sale debt securities.

For assets held at amortized cost basis, ASC 326 eliminates the probable initial recognition threshold in current GAAP and, instead, requires an entity to reflect its current estimate of all expected credit losses.

For assets held at amortized cost basis, ASC 326 eliminates the probable initial recognition threshold in prior GAAP and, instead, requires an entity to reflect its current estimate of all expected credit losses.

The Company adopted this ASU on January 1, 2020, and the effect of adoption on the Company’s Consolidated Financial Statements and related disclosures was not material.

1 unchanged sentence

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.

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 to in exchange for transferring those goods or services.

Revenue is recognized based on the following five step model:

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Recognition of revenue when, or as, the Company satisfies a performance obligation

The following table represents revenues disaggregated by revenue source for the three months ended March 31, 2020 and 2019 (in thousands).

HEALTHSTREAM, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

The following table represents revenues disaggregated by revenue source for the three and six months ended June 30, 2020 and 2019 (in thousands).

Sales taxes are excluded from revenues.

Three Months Ended March 31, 2020

Three Months Ended March 31, 2019

Three Months Ended June 30, 2020

Six Months Ended June 30, 2020

Business Segments

2 unchanged sentences

Total revenues, net

HEALTHSTREAM, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

For the three months ended March 31, 2020 and 2019 , the Company recognized $ 288,000 and $ 2,000 , respectively, in impairment losses on receivables and contract assets arising from the Company’s contracts with customers.

Three Months Ended June 30, 2019

Six Months Ended June 30, 2019

Business Segments

Subscription services

Professional services

Total revenues, net

For the three months ended June 30, 2020 and 2019, the Company recognized $ 63,000 and $ 46,000 in impairment losses on receivables and contract assets arising from the Company’s contracts with customers, respectively.

For the six months ended June 30, 2020 and 2019, the Company recognized $ 351,000 and $ 48,000 in impairment losses on receivables and contract assets arising from the Company’s contracts with customers, respectively.

Deferred revenue represents contract liabilities that are recorded when cash payments are received or are due in advance of our satisfaction of performance obligations.

During the three months ended March 31, 2020 and 2019, we recognized revenues of approximately $ 31.6 million and $ 31.2 million, respectively, from amounts included in deferred revenue at the beginning of the respective periods.

As of March 31, 2020, approximately $ 402 million of revenue is expected to be recognized from remaining performance obligations under contracts with customers.

We expect to recognize revenue related to approximately 47 % of these remaining performance obligations over the next 12 months, with the remaining amounts recognized thereafter.

During the three months ended June 30, 2020 and 2019, we recognized $ 35.2 million and $ 36.3 million of revenue from amounts included in deferred revenues at the beginning of the respective periods.

During the six months ended June 30, 2020 and 2019, we recognized $ 49.9 million and $ 51.2 million of revenue from amounts included in deferred revenues at the beginning of the respective periods.

As of June 30, 2020, $ 380 million of revenue is expected to be recognized from remaining performance obligations under contract with customers.

We expect to recognize revenue with respect to 45 % of these remaining performance obligations over the next 12 months, with the remaining amounts recognized thereafter.

Sales Commissions

Sales commissions earned by our sales force are considered incremental and recoverable costs of obtaining a contract with a customer.

T he sales commission plan for 2020 typically includes two payments;

the initial payment is due in the period a customer contract is obtained and the final payment is due 60 days after product implementation is completed.

The sales commission plan for 2019 typically included an initial payment in the period a customer contract was obtained and subsequent payments either 15 or 27 months after the initial payment depending on the contract term.

Under ASC 606, costs to acquire contracts with customers, such as the initial sales commission payment, are capitalized in the period a customer contract is obtained and are amortized consistent with the transfer of the goods or services to the customer over the expected period of benefit, whereas subsequent sales commission payments which require a substantive performance condition of the employee are expensed ratably through the payment date.

Under the 2020 plan, both the initial payment and subsequent payment are capitalized in the period the contract is obtained, whereas under the 2019 plan, only the initial payment was capitalized, and the subsequent payment was expensed ratably through the payment date.

The primary change from an accounting perspective under the 2020 plan compared to the 2019 plan is the time between when the contract is obtained and when it is implemented does not result in a substantive performance condition of the employee.

The capitalized contract cost is included in Deferred commissions in the accompanying Condensed Consolidated Balance Sheet.

The sales commission plan for 2020 typically includes two payments;

the initial payment is due in the period a customer contract is entered into, and the final payment is due 60 days after the product implementation is completed.

The sales commission plan for 2019 typically included an initial payment in the period a customer contract was entered into, and subsequent payments either 15 or 27 months after the initial payment, depending on the contract term.

Under ASC 606, costs to acquire contracts with customers, such as the initial sales commission payment, are capitalized in the period a customer contract is entered into and are amortized consistent with the transfer of the goods or services to the customer over the expected period of benefit, whereas subsequent sales commission payments which require a substantive performance condition of the employee are expensed ratably through the payment date.

Under the 2020 plan, both the initial payment and subsequent payment are capitalized in the period the contract is entered into, whereas under the 2019 plan only the initial payment was capitalized, and the subsequent payment was expensed ratably through the payment date.

The timing of the second payment under the 2020 plan from an accounting perspective does not result in a substantive performance condition of the employee.

The capitalized contract cost is included in deferred commissions in the accompanying Condensed 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 approximately three years .

The Company recorded amortization of deferred commissions of approximately $ 2.2 million and $ 2.1 million for the three months ended March 31, 2020 and 2019, respectively, which is included in sales and marketing expenses in the accompanying Condensed Consolidated Statements of Income.

The Company recorded amortization of deferred commissions of $ 2.1 million for both the three months ended June 30, 2020 and 2019, and $ 4.3 million and $ 4.2 million for the six months ended June 30, 2020 and 2019, respectively, which is included in sales and marketing expenses in the accompanying Condensed Consolidated Statements of Income.

HEALTHSTREAM, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

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.

During the three months ended March 31, 2020 and 2019 , the Company recorded a provision for income taxes from continuing operations of approximately $ 1.9 million and $ 1.4 million, respectively.

The Company’s effective tax rate for continuing operations for the three months ended March 31, 2020 and 2019 was 21 % and 23 %, respectively.

During the three months ended June 30, 2020 and 2019 , the Company recorded a provision for income taxes of $ 1.1 million and $ 0.7 million, respectively.

During the six months ended June 30, 2020 and 2019 , the Company recorded a provision for income taxes from continuing operations of $ 2.9 million and $ 2.1 million, respectively.

The Company’s effective tax rate for continuing operations for the six months ended June 30, 2020 and 2019 was 22 % and 23 %, respectively.

The Company’s effective tax rate primarily reflects the statutory corporate income tax rate, the net effect of state taxes, and the effect of various permanent tax differences.

During the three months ended March 31, 2020, the Company recorded a $ 1.2 million change in fair value of non-marketable equity investments as a result of the NurseGrid acquisition, which is not a taxable transaction, resulting in a tax benefit of $ 0.3 million.

The Company recognizes excess tax benefits and tax deficiencies associated with stock based awards as a component of its provision for income taxes.

The Company recorded additional income tax expense associated with tax deficiencies of approximately $ 26,000 during the three months ended March 31, 2020 and recorded a reduction to income tax expense for excess tax benefits of approximately $ 83,000 during the three months ended March 31, 2019.

The Company recorded additional income tax expense associated with tax deficiencies of $ 26,000 during the six months ended June 30, 2020 and recorded a reduction to income tax expense for excess tax benefits of $ 123,000 during the six months ended June 30, 2019.

SHAREHOLDERS’ EQUITY

1 unchanged sentence

The Company has stock awards outstanding under its 2016 Omnibus Incentive Plan.

The Company accounts for its stock based compensation plan using the fair-value based method for costs related to share based payments, including restricted share units (“RSUs”).

During the three months ended March 31, 2020, the Company issued 111,510 RSUs, subject to service-based time vesting, with a grant date fair value of $ 22.96 per share, measured based on the closing fair market value of the Company’s stock on the date of grant.

During the three months ended March 31, 2019, the Company issued 86,220 RSUs, subject to service-based time vesting, with a weighted average grant date fair value of $ 27.39 per share, measured based on the closing fair market value of the Company’s stock on the date of grant.

HEALTHSTREAM, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

During the three months ended June 30, 2018, the Company issued 70,000 performance-based RSUs, the vesting of which occurs over a five-year period and is contingent upon continued service and achieving certain performance criteria established by the Compensation Committee on an annual basis in increments of 10 %, 15 %, 20 %, 25 %, and 30 % based on performance in 2018, 2019, 2020, 2021, and 2022, respectively.

The performance criteria for 14,000 of these performance-based RSUs will be based on 2020 performance.

The measurement date for these 14,000 performance-based RSUs was established during the three months ended March 31, 2020 with a grant date fair value of $ 22.96 per share, measured based on the closing fair market value of the Company’s stock on the date the performance criteria was established.

The performance criteria for 17,500 of these performance-based RSUs was previously established based on performance in 2018 and 2019, as applicable, and the performance criteria for the remaining 38,500 performance-based RSUs has not yet been determined and will be established on an annual basis based on performance in 2021 and 2022, as applicable;

therefore, the measurement date for these remaining 38,500 performance-based RSUs cannot be determined until the performance criteria have been established.

Total stock based compensation expense recognized for the three months ended March 31, 2020 and 2019 in the Condensed Consolidated Statements of Income is as follows (in thousands):

The Company accounts for its stock based compensation plans using the fair-value based method for costs related to share based payments, including restricted share units (“RSUs”).

During the six months ended June 30, 2020, the Company issued 111,510 RSUs, subject to service-based time vesting, with a weighted average grant date fair value of $ 22.96 per share measured based on the closing fair market value of the Company’s stock on the date of grant.

During the six months ended June 30, 2019, the Company issued 86,220 RSUs, subject to service-based time vesting, with a weighted average grant date fair value of $ 27.39 per share measured based on the closing fair market value of the Company’s stock on the date of grant.

Total stock based compensation expense recorded for the three and six months ended June 30, 2020 and 2019, which is recorded within continuing operations in the Condensed Consolidated Statements of Income, is as follows (in thousands):

Three Months Ended

Six Months Ended

Cost of revenues (excluding depreciation and amortization)

8 unchanged sentences

The share repurchase program does not require the Company to acquire any amount of shares and may be suspended or discontinued at any time.

Under this program during the first quarter of 2020, the Company repurchased 438,142 shares at an aggregate fair value of $ 9.9 million, reflecting an average price per share of $ 22.52 (excluding the cost of broker commissions).

Under this program during the three months ended June 30, 2020, the Company repurchased 5,799 shares at an aggregate fair value of $ 0.1 million, reflecting an average price per share of $ 22.87 (excluding the cost of dealer commissions).

During the six months ended June 30, 2020, the Company repurchased 443,941 shares at an aggregate fair value of $ 10.0 million, reflecting an average price per share of $ 22.53 (excluding the cost of broker commissions) .

During June 2019, the Company’s Chief Executive Officer, Robert A.

Frist, Jr., contributed 78,520 of his personally owned shares of HealthStream, Inc.

common stock (valued at $ 2.0 million) to the Company, without any consideration paid to him, for the benefit of the Company’s employees.

In connection therewith, effective June 26, 2019 the Company approved the award of 78,520 fully vested shares of common stock to approximately 820 employees of the Company under the

HEALTHSTREAM, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

HealthStream, Inc.

2016 Omnibus Incentive Plan.

These shares were issued in July 2019.

As required by ASC Topic 718, Compensation – Stock Compensation , the Company recognized $ 2.0 million of stock based compensation expense for these stock awards during the three months ended June 30, 2019 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 $ 0.6 million and are reflected as a financing activity within the Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2019.

In addition, the employer taxes and expenses associated with these grants were $ 0.2 million and were recorded as an expense during June 2019.

Frist contributed an additional 7,852 of his personally owned shares to cover these costs.

The receipt of shares from Mr.

Frist and in connection with the withholding of shares as set forth above are presented on the Company’s Condensed Consolidated Statement s of Shareholders’ Equity in a similar manner as a share repurchase (i.e., reduction of outstanding shares ) .

EARNINGS PER SHARE

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Diluted earnings per share is computed by dividing the net income available to common shareholders for the period by the weighted average number of potentially dilutive 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 RSUs subject to vesting.

Common equivalent shares are composed of incremental common shares issuable in connection with RSUs subject to vesting.

The dilutive effect of common equivalent shares is included in diluted earnings per share by application of the treasury stock method.

The total number of common equivalent shares excluded from the calculations of diluted earnings per share, due to their anti-dilutive effect or contingent performance conditions, was approximately 106,000 and 136,000 for the three months ended March 31, 2020 and 2019 , respectively.

HEALTHSTREAM, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

The following table sets forth the computation of basic and diluted earnings per share for the three months ended March 31, 2020 and 2019 (in thousands, except per share data):

The total number of common equivalent shares excluded from the calculations of diluted earnings per share due to their anti-dilutive effect or contingent performance conditions was 108,000 and 131,000 for the three months ended June 30, 2020 and 2019 , respectively, and 107,000 and 134,000 for the six months ended June 30, 2020 and 2019 , respectively.

The following table sets forth the computation of basic and diluted earnings per share for the three and six months ended June 30, 2020 and 2019 (in thousands, except per share data):

Three Months Ended

Six Months Ended

Income from continuing operations

11 unchanged sentences

Net income per share - diluted

HEALTHSTREAM, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

MARKETABLE SECURITIES

At March 31, 2020 and December 31, 2019, the fair value of marketable securities, which were all classified as available for sale, included the following (in thousands):

March 31, 2020

At June 30, 2020 and December 31, 2019, the fair value of marketable securities, which were all classified as available for sale, included the following (in thousands):

June 30, 2020

Corporate debt securities

2 unchanged sentences

Government-sponsored enterprise debt securities

The carrying amounts reported in the Condensed Consolidated Balance Sheet approximate the fair value based on quoted market prices or alternative pricing sources and models utilizing market observable inputs.

As of March 31, 2020, the Company did no t 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 balance sheet because the underlying securities mature within one year from the balance sheet date.

HEALTHSTREAM, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

The carrying amounts reported in the Condensed Consolidated Balance Sheets approximate the fair value based on quoted market prices or alternative pricing sources and models utilizing market observable inputs.

As of June 30, 2020, the Company did no t 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 Condensed Consolidated Balance Sheets because the underlying securities mature within one year from the balance sheet date.

BUSINESS COMBINATIONS

CrendentialMyDoc

On December 16, 2019, the Company acquired substantially all the assets of Covenant Technology Group, LLC (“CredentialMyDoc”), a Savannah, Georgia-based company focusing on intuitive, easy to use, and fast to implement software-as-a-service solution, especially in ambulatory care settings.

The consideration paid for CredentialMyDoc consisted of $ 9.0 million in cash, subject to a post-closing working capital adjustment.

CredentialMyDoc

The consideration paid for CredentialMyDoc consisted of $ 9.0 million in cash, after giving effect to the post-closing working capital adjustment.

Of the purchase price paid at closing, $ 1.1 million is being held in escrow for a period of time following the closing to serve as a source of recovery for the working capital adjustment and certain potential indemnification claims by the Company.

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Cash paid at closing

Cash held in escrow

Working capital adjustment - post-closing

Total consideration paid

The following table summarizes the preliminary fair value of the assets acquired and liabilities assumed as of the date of acquisition (in thousands):

The following table summarizes the fair value of the assets acquired and liabilities assumed as of the date of acquisition (in thousands):

Accounts and unbilled receivable, net

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Net assets acquired

The excess of preliminary purchase price over the preliminary fair values of net tangible and intangible assets is recorded as goodwill.

The preliminary fair values of tangible and identifiable intangible assets and liabilities are based on management’s estimates and assumptions.

HEALTHSTREAM, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

The excess of purchase price over the fair values of net tangible and intangible assets is recorded as goodwill.

The fair values of tangible and identifiable intangible assets and liabilities are based on management’s estimates and assumptions.

The primary intangible assets acquired were customer relationships and developed technology.

The fair value estimate for customer relationships intangible asset included significant assumptions in the prospective financial information, such as revenue growth, customer attrition, and EBITDA margin, and the discount rate.

The fair value estimate for developed technology intangible asset included significant assumptions, including the estimate of employee hours that would be needed to recreate the technology.

Additionally, these assumptions are forward looking and could be affected by future economic and market conditions.

The preliminary fair values of assets acquired and liabilities assumed continue to be subject to change during the measurement period (up to one year from the acquisition date) as the Company finalizes the valuation of these items.

The primary areas of the preliminary purchase price allocation that are not finalized include the composition and valuation of intangible assets and working capital.

The goodwill balance is primarily attributed to the assembled workforce, additional market opportunities from offering CredentialMyDoc products, and expected synergies from integrating CredentialMyDoc with other products or other combined functional areas within the Company.

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The $ 311,000 write-down of deferred revenue will result in lower revenues than would have otherwise been recognized for such services .

The following table sets forth the preliminary components of identifiable intangible assets and their estimated useful lives as of the acquisition date (in thousands):

Preliminary Fair value

The following table sets forth the components of identifiable intangible assets and their estimated useful lives as of the acquisition date (in thousands):

Customer relationships

Developed technology

Total intangible assets subject to amortization

Total intangible assets

The following unaudited pro forma financial information summarizes the results of operations of the Company and CredentialMyDoc as though the companies were combined as of January 1, 2019 (in thousands, except per share data):

HEALTHSTREAM, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Three Months Ended

Six Months Ended

Total revenues

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On March 9, 2020, the Company acquired all of the outstanding stock of HcT2 Co.

dba NurseGrid (“NurseGrid”), a Portland, Oregon-based healthcare technology company offering NurseGrid Mobile and its corollary application for nurse managers, NurseGrid Enterprise for net cash consideration of approximately $ 21.4 million, subject to a post-closing working capital adjustment.

dba NurseGrid (“NurseGrid”), a Portland, Oregon-based healthcare technology company offering NurseGrid Mobile and its corollary application for nurse managers, NurseGrid Enterprise, for net cash consideration of approximately $ 21.5 million, after giving effect to the post-closing working capital adjustment.

The Company accounted for this transaction as a business combination achieved in stages which required the Company to remeasure its previously existing minority ownership interest, which was accounted for as a non-marketable equity investment measured using the fair value alternative, to fair value at the acquisition date based on the total enterprise value, adjusting for a control premium.

The fair value of the Company’s interest in NurseGrid was $ 3.6 million at closing, resulting in a gain of $ 1.2 million, recorded as a change in fair value of non-marketable equity investments in the Company’s Condensed Consolidated Statement of Income.

Additionally, the Company’s previously recorded non-marketable equity investment in NurseGrid was de-recognized from the Company’s Condensed Consolidated Balance Sheet.

The financial results of NurseGrid have been included in the Workforce Solutions segment from March 9, 2020.

HEALTHSTREAM, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

A summary of the purchase price is as follows (in thousands):

Cash paid at closing

Post-closing adjustment, net of cash received

Cash acquired

1 unchanged sentence

Fair value of existing equity interest in NurseGrid

Total purchase price

Net consideration paid

The following table summarizes the preliminary fair value of the assets acquired and liabilities assumed as of the date of acquisition (in thousands):

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The preliminary fair values of tangible and identifiable intangible assets and liabilities are based on management’s estimates and assumptions.

The primary intangible assets acquired were developed technology and trade name.

The fair value estimate for developed technology intangible asset included significant assumptions, including the estimate of employee hours that would be needed to recreate the technology.

The fair value estimate for trade name intangible asset included significant assumptions in the prospective financial information, such as projected revenues, royalty rate, and the discount rate.

Additionally, these assumptions are forward looking and could be affected by future economic and market conditions.

The primary areas of the preliminary purchase price allocation that are not finalized include the composition and valuation of intangible assets, income tax attributes, and working capital.

The primary areas of the preliminary purchase price allocation that are not finalized include the composition and valuation of intangible assets and income tax attributes.

The goodwill balance is primarily attributed to the assembled workforce, future market opportunities to engage and support the NurseGrid Mobile user community, and expected synergies from integrating NurseGrid with other combined functional areas within the Company.

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The $ 79,000 write-down of deferred revenue will result in lower revenues than would have otherwise been recognized for such services.

HEALTHSTREAM, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

The following table sets forth the preliminary components of identifiable intangible assets and their estimated useful lives as of the acquisition date (in thousands):

2 unchanged sentences

Developed technology

Total intangible assets subject to amortization

The amounts of revenue and operating loss of NurseGrid included in the Company’s Consolidated Statement of Income since the date of acquisition of March 9, 2020 for the three months ended March 31, 2020 are as follows (in thousands):

Total intangible assets

The amounts of revenue and operating loss of NurseGrid included in the Company’s Consolidated Statement of Income since the date of acquisition of March 9, 2020 for the three and six months ended June 30, 2020 are as follows (in thousands):

Three Months Ended

June 30, 2020

Six Months Ended

June 30, 2020

Total revenues

Operating loss

HEALTHSTREAM, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

The following unaudited pro forma financial information summarizes the results of operations of the Company and NurseGrid as though the companies were combined as of January 1, 2019 (in thousands, except per share data):

Three Months Ended

Six Months Ended

Total revenues

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The Company’s services are focused on the delivery of workforce development products and services (Workforce Solutions) and provider credentialing, privileging, and enrollment products and services (Provider Solutions).

HEALTHSTREAM, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

The Company measures segment performance based on operating income before income taxes and prior to the allocation of certain corporate overhead expenses, interest income, interest expense, and depreciation.

The Unallocated component below includes corporate functions, such as accounting, human resources, legal, investor relations, information systems, administrative and executive personnel, depreciation, a portion of amortization, and certain other expenses, which are not currently allocated in measuring segment performance.

The following is the Company’s business segment information for the three months ended March 31, 2020 and 2019 and as of March 31, 2020 and December 31, 2019 (in thousands).

The Unallocated component below includes corporate functions, such as accounting, human resources, legal, investor relations, administrative and executive personnel, depreciation, a portion of amortization, and certain other expenses, which are not currently allocated in measuring segment performance.

The following is the Company’s business segment information for the three and six months ended June 30, 2020 and 2019 and as of June 30, 2020 and December 31, 2019 (in thousands).

Three Months Ended

Six Months Ended

Revenues, net:

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Segment assets *

March 31, 2020

June 30, 2020

December 31, 2019

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Provider Solutions

Segment assets include accounts and unbilled receivables, prepaid royalties, prepaid and other current assets, other assets, capitalized software development, deferred commissions, certain property and equipment, and intangible assets.

Cash and cash equivalents, marketable securities, non-marketable equity investments, and certain ROU assets are not allocated to individual segments and are included within Unallocated.

Segment assets include accounts and unbilled receivables, prepaid and other current assets, other assets, capitalized software development, certain property and equipment, goodwill, and intangible assets.

Cash and cash equivalents and marketable securities are not allocated to individual segments and are included within Unallocated.

A significant portion of property and equipment assets are included within Unallocated.

HEALTHSTREAM, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

DISCONTINUED OPERATIONS

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On February 12, 2018, the Company divested its PX business to Press Ganey for $ 65.2 million in cash (after giving effect to the post-closing working capital adjustment), resulting in a gain, net of tax, of $ 20.5 million, of which $ 19.0 million was recorded during the year ended December 31, 2018 and $ 1.5 million was recorded during the year ended December 31, 2019.

This sale of the PX business resulted in the divestiture of the Company’s patient experience solutions business segment.

The Company has classified the gain on sale of its PX business segment as discontinued operations in its Condensed Consolidated Statements of Income for all periods presented.

This sale of the PX business resulted in the Company’s divestiture of the Company’s patient experience solutions business segment.

The Company has classified this gain on the sale of the PX business as discontinued operations in its Condensed Consolidated Statement of Income for the six months ended June 30, 2019.

Our results for the three months ended June 30, 2020 and 2019 and for the six months ended June 30, 2020 do not include any discontinued operations.

Revolving Credit Facility

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Principal is payable in full at maturity on November 24, 2020, and there are no scheduled principal payments prior to maturity.

HEALTHSTREAM, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

The Company is required to pay a commitment fee ranging between 20 and 30 basis points per annum of the average daily unused portion of the Revolving Credit Facility, depending on the Company’s funded debt leverage ratio.

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an interest coverage ratio (consolidated EBITDA/consolidated interest expense) of not less than 3.0 to 1.0.

As of March 31, 2020, the Company was in compliance with all covenants.

There were no balances outstanding on the Revolving Credit Facility as of or during the three months ended March 31, 2020.

As of June 30, 2020, the Company was in compliance with all covenants.

There were no balances outstanding on the Revolving Credit Facility as of or during the three and six months ended June 30, 2020.

NON-MARKETABLE EQUITY INVESTMENTS

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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 aggregate carrying amount of all non-marketable equity investments was $ 3.0 million and $ 5.4 million as of March 31, 2020 and December 31, 2019, respectively, which carrying value we evaluate for impairment at each reporting period.

During the three months ended March 31, 2020, the Company recorded a $ 1.2 million upward adjustment to the carrying value of our non-marketable equity investment in NurseGrid due to a change in fair value based on the consideration paid upon our acquisition of NurseGrid on March 9, 2020 (See Note 8).

The aggregate carrying amount of all non-marketable equity investments accounted for using the measurement alternative was $ 2.1 million and $ 4.5 million as of June 30, 2020 and December 31, 2019, respectively, which carrying value we evaluate for impairment at each reporting period.

During the six months ended June 30, 2020, the Company recorded a $ 1.2 million upward adjustment to the carrying value of our non-marketable equity investment in NurseGrid due to a change in fair value based on the consideration paid upon the Company’s acquisition of NurseGrid on March 9, 2020 (see Note 8).

Cumulatively, the Company has recorded $ 0.1 million in downward adjustments to the carrying value of non-marketable equity investments.

Such is the combination of cumulative downward adjustments of $ 1.3 million offset by cumulative upward adjustments of $ 1.2 million.

Such is the combination of cumulative downward adjustments of $ 1.3 million offset by

HEALTHSTREAM, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

cumulative upward adjustments of $ 1.2 million.

These adjustments are the result of changes in fair value based on observable prices from orderly transactions for similar investments made in investees.

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 1. Financial Statements