HEALTHSTREAM INC 10-Q

Item 1. Financial Statements HEALTHSTREAM, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED) (In thousands) September 30, December 31, 2020 2019 ASSETS Current assets: Cash and cash equivalents $ 107,007 $ 131,538 Marketable securities 42,666 41,328 Accounts receivable, net of allowance for doubtful accounts of $ 648 and $ 843 at September 30, 2020 and December 31, 2019, respectively 26,372 27,650 Accounts receivable - unbilled 3,933 2,726 Prepaid royalties, net of amortization 10,504 11,898 Other prepaid expenses and other current assets 8,615 9,432 Total current assets 199,097 224,572 Property and equipment, net of accumulated depreciation of $ 24,524 and $ 19,291 at September 30, 2020 and December 31, 2019, respectively 21,793 26,065 Capitalized software development, net of accumulated amortization of $ 67,103 and $ 57,768 at September 30, 2020 and December 31, 2019, respectively 24,679 21,445 Operating lease right of use assets, net 27,707 29,615 Goodwill 123,285 102,196 Customer-related intangibles, net of accumulated amortization of $ 34,814 and $ 29,760 at September 30, 2020 and December 31, 2019, respectively 47,535 52,554 Other intangible assets, net of accumulated amortization of $ 15,118 and $ 12,735 at September 30, 2020 and December 31, 2019, respectively 6,953 7,527 Deferred tax assets 269 269 Deferred commissions 17,783 17,645 Non-marketable equity investments 6,889 6,782 Other assets 567 874 Total assets $ 476,557 $ 489,544 LIABILITIES AND SHAREHOLDERS’ EQUITY Current liabilities: Accounts payable and accrued expenses $ 22,141 $ 22,938 Accrued royalties 10,263 16,736 Deferred revenue 62,610 65,511 Total current liabilities 95,014 105,185 Deferred tax liabilities 13,394 13,183 Deferred revenue, noncurrent 1,751 1,918 Operating lease liability, noncurrent 28,665 30,733 Other long term liabilities 1,468 357 Commitments and contingencies Shareholders’ equity: Common stock, no par value, 75,000 shares authorized; 31,686 and 32,379 shares issued and outstanding at September 30, 2020 and December 31, 2019, respectively 274,905 290,021 Retained earnings 61,354 48,143 Accumulated other comprehensive income 6 4 Total shareholders’ equity 336,265 338,168 Total liabilities and shareholders’ equity $ 476,557 $ 489,544 See accompanying Notes to the Condensed Consolidated Financial Statements (unaudited). 1 HEALTHSTREAM, INC. CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) (In thousands, except per share data) Three Months Ended Nine Months Ended September 30, 2020 September 30, 2019 September 30, 2020 September 30, 2019 Revenues, net $ 60,883 $ 62,450 $ 183,008 $ 191,417 Operating costs and expenses: Cost of revenues (excluding depreciation and amortization) 23,302 25,348 66,596 79,015 Product development 8,192 7,195 23,491 21,763 Sales and marketing 8,863 9,003 26,286 28,343 Other general and administrative expenses 9,986 10,007 29,949 30,283 Depreciation and amortization 7,406 7,149 22,005 20,629 Total operating costs and expenses 57,749 58,702 168,327 180,033 Operating income 3,134 3,748 14,681 11,384 Other income, net 100 853 2,006 2,528 Income from continuing operations before income tax provision 3,234 4,601 16,687 13,912 Income tax provision 600 1,140 3,519 3,270 Income from continuing operations 2,634 3,461 13,168 10,642 Discontinued operations: Gain on sale of discontinued operations — 340 — 1,960 Income tax provision — 89 — 515 Income from discontinued operations — 251 — 1,445 Net income $ 2,634 $ 3,712 $ 13,168 $ 12,087 Net income per share – basic: Continuing operations $ 0.08 $ 0.11 $ 0.41 $ 0.33 Discontinued operations — — — 0.04 Net income per share - basic $ 0.08 $ 0.11 $ 0.41 $ 0.37 Net income per share - diluted: Continuing operations $ 0.08 $ 0.11 $ 0.41 $ 0.33 Discontinued operations — — — 0.04 Net income per share - diluted $ 0.08 $ 0.11 $ 0.41 $ 0.37 Weighted average shares of common stock outstanding: Basic 31,955 32,376 32,095 32,369 Diluted 31,981 32,437 32,121 32,416 See accompanying Notes to the Condensed Consolidated Financial Statements (unaudited). 2 HEALTHSTREAM, INC. CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED) (In thousands) Three Months Ended Nine Months Ended September 30, 2020 September 30, 2019 September 30, 2020 September 30, 2019 Net income $ 2,634 $ 3,712 $ 13,168 $ 12,087 Other comprehensive income, net of taxes: Foreign currency translation adjustments 23 ( 3 ) ( 4 ) 1 Unrealized (loss) gain on marketable securities ( 18 ) ( 11 ) 6 31 Total other comprehensive income (loss) 5 ( 14 ) 2 32 Comprehensive income $ 2,639 $ 3,698 $ 13,170 $ 12,119 See accompanying Notes to the Condensed Consolidated Financial Statements (unaudited). 3 HEALTHSTREAM, INC. CONDENSED CONSOLIDATED STATEMENTs OF SHAREHOLDERS' EQUITY (UNAUDITED) (In thousands) Nine Months Ended September 30, 2020 Common Stock Retained Accumulated Other Comprehensive Total Shareholders’ Shares Amount Earnings Income (Loss) Equity Balance at December 31, 2019 32,379 $ 290,021 $ 48,143 $ 4 $ 338,168 Net income — — 7,092 — 7,092 Comprehensive loss — — — ( 145 ) ( 145 ) Stock based compensation — 550 — — 550 Common stock issued under stock plans, net of shares withheld for employee taxes 62 ( 373 ) — — ( 373 ) Repurchase of common stock ( 438 ) ( 9,876 ) — — ( 9,876 ) Balance at March 31, 2020 32,003 $ 280,322 $ 55,235 $ ( 141 ) $ 335,416 Net income — — 3,442 — 3,442 Comprehensive income — — — 142 142 Stock based compensation — 557 — — 557 Repurchase of common stock ( 6 ) ( 133 ) — — ( 133 ) Balance at June 30, 2020 31,997 $ 280,746 $ 58,677 $ 1 $ 339,424 Net income — — 2,634 — 2,634 Dividend forfeitures — — 43 — 43 Comprehensive income — — — 5 5 Stock based compensation — 557 — — 557 Common stock issued under stock plans, net of shares withheld for employee taxes 8 ( 55 ) — — ( 55 ) Repurchase of common stock ( 319 ) ( 6,343 ) — — ( 6,343 ) Balance at September 30, 2020 31,686 $ 274,905 $ 61,354 $ 6 $ 336,265 See accompanying Notes to the Condensed Consolidated Financial Statements (unaudited). 4 HEALTHSTREAM, INC. CONDENSED CONSOLIDATED STATEMENTs OF SHAREHOLDERS' EQUITY (UNAUDITED) (In thousands, except per share data) Nine Months Ended September 30, 2019 Common Stock Retained Accumulated Other Comprehensive Total Shareholders’ Shares Amount Earnings (Loss) Income Equity Balance at December 31, 2018 32,325 $ 286,597 $ 32,373 $ ( 23 ) $ 318,947 Net income — — 5,974 — 5,974 Comprehensive income — — — 32 32 Stock based compensation — 516 — — 516 Common stock issued under stock plans, net of shares withheld for employee taxes 63 ( 328 ) — — ( 328 ) Balance at March 31, 2019 32,388 $ 286,785 $ 38,347 $ 9 $ 325,141 Net income — — 2,401 — 2,401 Comprehensive income — — — 14 14 Stock donated to Company (held in treasury) ( 86 ) — — — — Stock based compensation — 2,558 — 2,558 Common stock issued under stock plans, net of shares withheld for employee taxes 72 ( 443 ) — — ( 443 ) Balance at June 30, 2019 32,374 $ 288,900 $ 40,748 $ 23 $ 329,671 Net income — — 3,712 — 3,712 Comprehensive loss — — — ( 14 ) ( 14 ) Stock based compensation — 569 — — 569 Common stock issued under stock plans, net of shares withheld for employee taxes 4 ( 45 ) — — ( 45 ) Balance at September 30, 2019 32,378 $ 289,424 $ 44,460 $ 9 $ 333,893 See accompanying Notes to the Condensed Consolidated Financial Statements (unaudited). 5 HEALTHSTREAM, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (In thousands) Nine Months Ended September 30, 2020 2019 OPERATING ACTIVITIES: Net income $ 13,168 $ 12,087 Income from discontinued operations — ( 1,445 ) Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 22,005 20,629 Stock based compensation 1,665 3,643 Amortization of deferred commissions 6,555 6,269 Provision for doubtful accounts 160 99 Deferred income taxes 2,330 1,803 Loss (gain) on non-marketable equity investments 8 ( 87 ) Non-cash royalty expense ( 3,440 ) — Change in fair value of non-marketable equity investments ( 1,181 ) — Other 321 ( 101 ) Changes in operating assets and liabilities: Accounts and unbilled receivables ( 9 ) 13,624 Prepaid royalties 1,394 1,720 Other prepaid expenses and other current assets 972 4,090 Deferred commissions ( 6,693 ) ( 5,524 ) Other assets 308 ( 178 ) Accounts payable and accrued expenses ( 450 ) ( 1,077 ) Accrued royalties ( 3,218 ) ( 552 ) Deferred revenue ( 3,142 ) ( 2,453 ) Net cash provided by operating activities 30,753 52,547 INVESTING ACTIVITIES: Business combinations, net of cash acquired ( 21,449 ) ( 18,018 ) Proceeds from sale of discontinued operations — 6,035 Proceeds from maturities of marketable securities 59,522 58,637 Purchases of marketable securities ( 61,178 ) ( 62,742 ) Proceeds from sale of property and equipment — 13 Payments to acquire non-marketable equity investments ( 1,257 ) ( 3,342 ) Payments associated with capitalized software development ( 12,366 ) ( 11,179 ) Purchases of property and equipment ( 1,734 ) ( 21,451 ) Net cash used in investing activities ( 38,462 ) ( 52,047 ) FINANCING ACTIVITIES: Proceeds from exercise of stock options — 214 Taxes paid related to net settlement of equity awards ( 429 ) ( 1,030 ) Payments of earn-outs related to acquisitions — ( 38 ) Repurchases of common stock ( 16,352 ) — Payment of cash dividends ( 40 ) ( 53 ) Net cash used in financing activities ( 16,821 ) ( 907 ) Effect of exchange rate changes on cash and cash equivalents ( 1 ) — Net decrease in cash and cash equivalents ( 24,531 ) ( 407 ) Cash and cash equivalents at beginning of period 131,538 134,321 Cash and cash equivalents at end of period $ 107,007 $ 133,914 SUPPLEMENTAL CASH FLOW INFORMATION: Non-cash additions to non-marketable equity investments $ 1,300 $ — See accompanying Notes to the Condensed Consolidated Financial Statements (unaudited). 6 1. BASIS OF PRESENTATION 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 and nine months ended September 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 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 three and nine months ended September 30, 2019. See Note 10 for additional information. 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). 2. RECENT ACCOUNTING PRONOUNCEMENTS Accounting Standards Recently Adopted In June 2016, the FASB issued ASU 2016-03, Financial Instruments—Credit Losses (“ASC 326”): 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 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. 3. REVENUE RECOGNITION AND SALES COMMISSIONS Revenue Recognition Revenues are recognized when control of the promised goods or services is transferred to the customer in an amount that reflects the consideration the Company expects to be entitled to in exchange for transferring those goods or services. Revenue is recognized based on the following five step model: • Identification of the contract with a customer • Identification of the performance obligations in the contract • Determination of the transaction price • Allocation of the transaction price to the performance obligations in the contract • Recognition of revenue when, or as, the Company satisfies a performance obligation 7 The following table represents revenues disaggregated by revenue source for the three and nine months ended September 30, 2020 and 2019 (in thousands). Sales taxes are excluded from revenues. Three Months Ended September 30, 2020 Nine Months Ended September 30, 2020 Business Segments Workforce Solutions Provider Solutions Consolidated Workforce Solutions Provider Solutions Consolidated Subscription services $ 48,246 $ 9,999 $ 58,245 $ 144,945 $ 29,580 $ 174,525 Professional services 951 1,687 2,638 2,964 5,519 8,483 Total revenues, net $ 49,197 $ 11,686 $ 60,883 $ 147,909 $ 35,099 $ 183,008 Three Months Ended September 30, 2019 Nine Months Ended September 30, 2019 Business Segments Workforce Solutions Provider Solutions Consolidated Workforce Solutions Provider Solutions Consolidated Subscription services $ 49,339 $ 9,660 $ 58,999 $ 153,035 $ 28,241 $ 181,276 Professional services 1,684 1,767 3,451 4,704 5,437 10,141 Total revenues, net $ 51,023 $ 11,427 $ 62,450 $ 157,739 $ 33,678 $ 191,417 For the three months ended September 30, 2020 and 2019, the Company recognized a reduction of $ 0.2 million and a charge of $ 51,000 in impairment losses on receivables and contract assets arising from the Company’s contracts with customers, respectively. For the nine months ended September 30, 2020 and 2019, the Company recognized $ 0.2 million and $ 99,000 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 September 30, 2020 and 2019, we recognized $ 34.4 million and $ 33.8 million of revenue from amounts included in deferred revenues at the beginning of the respective periods. During the nine months ended September 30, 2020 and 2019, we recognized $ 60.5 million and $ 61.3 million of revenue from amounts included in deferred revenues at the beginning of the respective periods. As of September 30, 2020, $ 408 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. 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 payment 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 represent 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 $ 2.3 million and $ 2.1 million for the three months ended September 30, 2020 and 2019, and $ 6.6 million and $ 6.3 million for the nine months ended September 30, 2020 and 2019, respectively, which is included in sales and marketing expenses in the accompanying Condensed Consolidated Statements of Income. 8 4. INCOME TAXES Income taxes are accounted for using the asset and liability method, whereby deferred tax assets and liabilities are determined based on the temporary differences between the financial statement and tax bases of assets and liabilities measured at tax rates that will be in effect for the year in which the differences are expected to affect taxable income. During the three months ended September 30, 2020 and 2019 , the Company recorded a provision for income taxes from continuing operations of $ 0.6 million and $ 1.1 million, respectively. During the nine months ended September 30, 2020 and 2019 , the Company recorded a provision for income taxes from continuing operations of $ 3.5 million and $ 3.3 million, respectively. The Company’s effective tax rate for continuing operations for the nine months ended September 30, 2020 and 2019 was 21 % and 24 %, 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 and discrete tax differences. The decrease in the effective tax rate is primarily due to the recognition of tax benefits resulting from higher research and development tax credits than previously estimated. The Company recorded additional income tax expense associated with tax deficiencies of $ 30,000 during the nine months ended September 30, 2020 and recorded a reduction to income tax expense for excess tax benefits of $ 0.1 million during the nine months ended September 30, 2019. 5. SHAREHOLDERS’ EQUITY Stock Based Compensation The Company has stock awards outstanding under its 2016 Omnibus Incentive Plan. 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 nine months ended September 30, 2020, the Company issued 114,784 RSUs, subject to service-based time vesting, with a weighted average grant date fair value of $ 22.94 per share measured based on the closing fair market value of the Company’s stock on the date of grant. During the nine months ended September 30, 2019, the Company issued 96,828 RSUs, subject to service-based time vesting, with a weighted average grant date fair value of $ 27.31 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 nine months ended September 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 September 30, Nine Months Ended September 30, 2020 2019 2020 2019 Cost of revenues (excluding depreciation and amortization) $ 16 $ 13 $ 39 $ 684 Product development 92 77 266 895 Sales and marketing 60 57 170 575 Other general and administrative 389 422 1,190 1,489 Total stock based compensation expense $ 557 $ 569 $ 1,665 $ 3,643 Share Repurchase Plan On March 13, 2020, the Company’s Board of Directors authorized a share repurchase program to repurchase up to $ 30.0 million of outstanding shares of common stock. The share repurchase program will terminate on the earlier of March 12, 2021 or when the maximum dollar amount has been expended. Pursuant to this authorization, repurchases have been made, and may continue to be made from time to time, in the open market through privately negotiated transactions or otherwise, including under a Rule 10b5-1 plan, which permits shares to be repurchased when the Company might otherwise be precluded from doing so under insider trading laws in accordance with specific prearranged terms related to timing, price, and volume (among others), without further direction from the Company. 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 three months ended September 30, 2020, the Company repurchased 318,902 shares at an aggregate fair value of $ 6.3 million, reflecting an average price per share of $ 19.87 (excluding the cost of dealer commissions). During the nine months ended September 30, 2020, the Company repurchased 762,843 shares at an aggregate fair value of $ 16.3 million, reflecting an average price per share of $ 21.42 (excluding the cost of broker commissions) . Stock Awards 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 9 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 nine months ended September 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. Mr. 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 ) . 6. EARNINGS PER SHARE Basic earnings per share is computed by dividing the net income available to common shareholders for the period by the weighted average number of common shares outstanding during the period. Diluted earnings per share is computed by dividing the net income 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 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 115,000 and 54,000 for the three months ended September 30, 2020 and 2019 , respectively, and 112,000 and 107,000 for the nine months ended September 30, 2020 and 2019 , respectively. The following table sets forth the computation of basic and diluted earnings per share for the three and nine months ended September 30, 2020 and 2019 (in thousands, except per share data): Three Months Ended September 30, Nine Months Ended September 30, 2020 2019 2020 2019 Numerator: Income from continuing operations $ 2,634 $ 3,461 $ 13,168 $ 10,642 Income from discontinued operations — 251 — 1,445 Net income $ 2,634 $ 3,712 $ 13,168 $ 12,087 Denominator: Weighted-average shares outstanding 31,955 32,376 32,095 32,369 Effect of dilutive shares 26 61 26 47 Weighted-average diluted shares 31,981 32,437 32,121 32,416 Net income per share - basic: Continuing operations $ 0.08 $ 0.11 $ 0.41 $ 0.33 Discontinued operations — — — 0.04 Net income per share - basic $ 0.08 $ 0.11 $ 0.41 $ 0.37 Net income per share - diluted: Continuing operations $ 0.08 $ 0.11 $ 0.41 $ 0.33 Discontinued operations — — — 0.04 Net income per share - diluted $ 0.08 $ 0.11 $ 0.41 $ 0.37 10 7. MARKETABLE SECURITIES At September 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): September 30, 2020 Adjusted Cost Unrealized Gains Unrealized Losses Fair Value Cash and Cash Equivalents Current Marketable Securities Cash $ 102,007 $ — $ — $ 102,007 $ 102,007 $ — Level 2: Time deposits 15,000 — — 15,000 5,000 10,000 Corporate debt securities 32,657 14 ( 5 ) 32,666 — 32,666 Total $ 149,664 $ 14 $ ( 5 ) $ 149,673 $ 107,007 $ 42,666 December 31, 2019 Adjusted Cost Unrealized Gains Unrealized Losses Fair Value Cash and Cash Equivalents Current Marketable Securities Cash $ 131,538 $ — $ — 131,538 $ 131,538 $ — Level 2: Corporate debt securities 37,325 7 ( 5 ) 37,327 — 37,327 Government-sponsored enterprise debt securities 4,001 — — 4,001 — 4,001 Total $ 172,864 $ 7 $ ( 5 ) $ 172,866 $ 131,538 $ 41,328 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 September 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. 8. BUSINESS COMBINATIONS CredentialMyDoc On December 16, 2019, the Company acquired substantially all the assets of Covenant Technology Group, LLC (“CredentialMyDoc”), a Savannah, Georgia-based company focusing on an intuitive, easy to use, and fast to implement provider credentialing and enrollment SaaS solution, primarily in ambulatory care settings. 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 certain potential indemnification claims by the Company. The results of operations for CredentialMyDoc have been included in the Provider Solutions segment of the Company’s Financial Statements from the date of acquisition. A summary of the purchase price is as follows (in thousands): Cash paid at closing $ 9,000 Working capital adjustment - post-closing ( 5 ) Total consideration paid $ 8,995 11 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 $ 204 Prepaid and other current assets 3 Operating lease right-of-use assets 30 Deferred tax assets 70 Goodwill 4,661 Intangible assets 4,340 Accounts payable and accrued liabilities ( 7 ) Deferred revenue ( 276 ) Operating lease liabilities ( 30 ) Net assets acquired $ 8,995 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, 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 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. The goodwill balance is deductible for U.S. income tax purposes. The net tangible assets include deferred revenue, which was adjusted down from a book value at the acquisition date of $ 587,000 to an estimated fair value of $ 276,000 . 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 components of identifiable intangible assets and their estimated useful lives as of the acquisition date (in thousands): Fair value Useful life Customer relationships $ 2,100 9 years Developed technology 2,100 4 years Non-compete 110 5 years Trade name 30 3 years Total intangible assets $ 4,340 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): Three Months Ended September 30, Nine Months Ended September 30, 2020 2019 2020 2019 Total revenues $ 60,927 $ 62,956 $ 183,257 $ 192,845 Income from continuing operations $ 2,669 $ 3,378 $ 13,359 $ 10,386 Net income $ 2,669 $ 3,628 $ 13,359 $ 11,831 Net income per share - basic $ 0.08 $ 0.11 $ 0.42 $ 0.37 Net income per share - diluted $ 0.08 $ 0.11 $ 0.42 $ 0.36 These unaudited pro forma combined results of operations include certain adjustments arising from the acquisition, such as amortization of intangible assets, depreciation of property and equipment, and fair value adjustments of acquired deferred revenue balances. The unaudited pro forma combined results of operations is for informational purposes only and is not indicative of what the Company’s results of operations would have been had the transaction occurred at the beginning of the earliest period presented or to project the Company’s results of operations in any future period. 12 NurseGrid 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 $ 21.5 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 Statements 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. A summary of the purchase price is as follows (in thousands): Cash paid at closing $ 25,485 Post-closing adjustment, net of cash received 33 Cash acquired ( 4,064 ) Net consideration paid 21,454 Fair value of existing equity interest in NurseGrid 3,623 Net consideration paid $ 25,077 The following table summarizes the preliminary fair value of the assets acquired and liabilities assumed as of the date of acquisition (in thousands): Accounts and unbilled receivable, net $ 92 Prepaid and other current assets 155 Operating lease right-of-use assets 50 Deferred tax assets 2,121 Goodwill 21,085 Intangible assets 1,845 Accounts payable and accrued liabilities ( 143 ) Deferred revenue ( 78 ) Operating lease liabilities ( 50 ) Net assets acquired $ 25,077 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. 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 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 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. The goodwill balance is not deductible for U.S. income tax purposes. The net tangible assets include deferred revenue, which was adjusted down from a book value at the acquisition date of $ 157,000 to an estimated fair value of $ 78,000 . The $ 79,000 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): 13 Preliminary Fair value Useful life Customer relationships $ 35 8 years Developed technology 1,110 5 years Trade name 700 Indefinite Total intangible assets $ 1,845 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 nine months ended September 30, 2020 are as follows (in thousands): Three Months Ended September 30, 2020 Nine Months Ended September 30, 2020 Total revenues $ 59 $ 156 Operating loss $ ( 811 ) $ ( 1,834 ) 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 September 30, Nine Months Ended September 30, 2020 2019 2020 2019 Total revenues $ 60,900 $ 63,239 $ 183,133 $ 192,750 Income from continuing operations $ 2,648 $ 3,176 $ 12,632 $ 8,653 Net income $ 2,648 $ 3,427 $ 12,632 $ 10,098 Net income per share - basic $ 0.08 $ 0.11 $ 0.39 $ 0.31 Net income per share - diluted $ 0.08 $ 0.11 $ 0.39 $ 0.31 These unaudited pro forma combined results of operations include certain adjustments arising from the acquisition, such as amortization of intangible assets, depreciation of property and equipment, interest expense related to NurseGrid’s previously outstanding debt, and fair value adjustments of acquired deferred revenue balances . The unaudited pro forma combined results of operations is for informational purposes only and is not indicative of what the Company’s results of operations would have been had the transaction occurred at the beginning of the earliest period presented or to project the Company’s results of operations in any future period. 9. BUSINESS SEGMENTS The Company provides services to healthcare organizations and other members within the healthcare industry. 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). 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, 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 nine months ended September 30, 2020 and 2019 and as of September 30, 2020 and December 31, 2019 (in thousands). Three Months Ended September 30, Nine Months Ended September 30, Revenues, net: 2020 2019 2020 2019 Workforce Solutions $ 49,197 $ 51,023 $ 147,909 $ 157,739 Provider Solutions 11,686 11,427 35,099 33,678 Total revenues, net $ 60,883 $ 62,450 $ 183,008 $ 191,417 Operating income from continuing operations: Workforce Solutions $ 9,758 $ 10,274 $ 33,575 $ 30,694 Provider Solutions 913 1,385 3,382 4,206 Unallocated ( 7,537 ) ( 7,911 ) ( 22,276 ) ( 23,516 ) Total operating income from continuing operations $ 3,134 $ 3,748 $ 14,681 $ 11,384 14 Segment assets * September 30, 2020 December 31, 2019 Workforce Solutions $ 139,602 $ 118,382 Provider Solutions 140,655 148,398 Unallocated 196,300 222,764 Total assets $ 476,557 $ 489,544 * 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. 10. DISCONTINUED OPERATIONS Patient Experience 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 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 three and nine months ended September 30, 2019. Our results for the three and nine months ended September 30, 2020 do not include any discontinued operations. 11. DEBT Revolving Credit Facility On December 31, 2018, the Company entered into a Second Amendment to its Revolving Credit Agreement, dated as of November 24, 2014 (as amended, the “Revolving Credit Facility”), with SunTrust Bank (“SunTrust”), which extended the maturity date to November 24, 2020 . Under the Revolving Credit Facility, the Company may borrow up to $ 50.0 million, which includes a $ 5.0 million swing line sub-facility and a $ 5.0 million letter of credit sub-facility, as well as an accordion feature that allows the Company to increase the Revolving Credit Facility by a total of up to $ 25.0 million, subject to securing additional commitments from existing lenders or new lending institutions. The obligations under the Revolving Credit Facility are guaranteed by each of the Company’s subsidiaries. At the Company’s election, the borrowings under the Revolving Credit Facility bear interest at either (1) a rate per annum equal to the highest of SunTrust’s prime rate or 0.5 % in excess of the Federal Funds Rate or 1.0 % in excess of one-month LIBOR (the “Base Rate”), plus an applicable margin, or (2) the one, two, three, or six month per annum LIBOR for deposits in the applicable currency (the “Eurocurrency Rate”), as selected by the Company, plus an applicable margin. The applicable margin for Eurocurrency Rate loans depends on the Company’s funded debt leverage ratio and varies from 1.50 % to 2.00 %. The applicable margin for Base Rate loans depends on the Company’s funded debt leverage ratio and varies from 0.50 % to 1.50 % . Commitment fees and letter of credit fees are also payable under the Revolving Credit Facility. Principal is payable in full at maturity on November 24, 2020, and there are no scheduled principal payments prior to maturity. 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. The purpose of the Revolving Credit Facility is for general working capital needs, permitted acquisitions (as defined in the Revolving Credit Facility), and for stock repurchase and/or redemption transactions that the Company may authorize. The Revolving Credit Facility contains certain covenants that, among other things, restrict additional indebtedness, liens and encumbrances, changes to the character of the Company’s business, acquisitions, asset dispositions, mergers and consolidations, sale or discount of receivables, creation or acquisitions of additional subsidiaries, and other matters customarily restricted in such agreements. In addition, the Revolving Credit Facility requires the Company to meet certain financial tests, including, without limitation: • a funded debt leverage ratio (consolidated debt/consolidated EBITDA) of not greater than 3.0 to 1.0; and • an interest coverage ratio (consolidated EBITDA/consolidated interest expense) of not less than 3.0 to 1.0. As of September 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 nine months ended September 30, 2020. 15 12. NON-MARKETABLE EQUITY INVESTMENTS Non-marketable equity investments of preferred stock in corporations that do not result in a controlling financial interest are accounted for using the measurement alternative for equity investments that do not have readily determinable fair values. 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 accounted for using the measurement alternative was $ 3.9 million and $ 5.9 million as of September 30, 2020 and December 31, 2019, respectively, which carrying value we evaluate for impairment at each reporting period. During the nine months ended September 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. These adjustments are the result of changes in fair value based on observable prices from orderly transactions for similar investments made in investees. The fair value of non-marketable equity investments is not estimated if there are no identified events or changes in circumstances that may have a significant adverse effect on the fair value of the investment. 13. CONTRACTUAL ADJUSTMENT In June 2018, a contract with one of our royalty partners expired and was not renewed. However, the contract required continued royalty payments for any subscriptions that extended beyond the contract termination date. Following the contract termination, there was a mutual disagreement related to various elements of this past partnership, and the Company accrued but did not pay royalties to the partner following the contract expiration. During the first quarter of 2020, the Company received a release of liability from the partner associated with this contract, resulting in no royalties to be paid to the partner. The de-recognition of this royalty liability and related expense was recorded as a $ 3.4 million reduction to cost of revenues in the first quarter of 2020. 14. SUBSEQUENT EVENTS On October 12, 2020, the Company acquired all of the equity of ShiftWizard, Inc., a Raleigh, North Carolina-based company focused on providing a SaaS-based solution that integrates key workforce management capabilities, including scheduling, productivity, and forecasting, for $ 32.0 million in cash, subject to working capital and other purchase price adjustments. The acquisition will be accounted for using the acquisition method of business combination under ASC 805, Business Combinations. The initial accounting for the business combination is incomplete due to the timing of the acquisition. Therefore, we are unable disclose certain information required by ASC 805. We will provide preliminary purchase price allocation information in our Annual Report on Form 10-K for the year ending December 31, 2020. On October 28, 2020, the Company entered into a Third Amendment to its Revolving Credit Agreement, dated as of November 24, 2014 (as amended, the “Revolving Credit Facility”), with Truist Bank (“Truist”), which increased the capacity under the Revolving Credit Facility to $ 65.0 million and extended the maturity date to October 28, 2023 . 16