HEALTHSTREAM INC 10-Q

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Special Cautionary Notice Regarding Forward‑Looking Statements You should read the following discussion and analysis in conjunction with our Condensed Consolidated Financial Statements and related notes included elsewhere in this report and our audited Consolidated Financial Statements and the notes thereto for the year ended December 31, 2019, appearing in our Annual Report on Form 10-K that was filed with the Securities and Exchange Commission (“SEC”) on February 26, 2020 (the “2019 Form 10-K”). Statements contained in this Quarterly Report on Form 10-Q that are not historical facts are forward-looking statements that the Company intends to be covered by the safe harbor provisions for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995. Statements that are predictive in nature, that depend on or refer to future events or conditions, or that include words such as “anticipates,” “believes,” “could,” “estimates,” “expects,” “intends,” “may,” “plans,” “potential,” “predicts,” “ projects,” “should,” “will,” “would,” and similar expressions are forward-looking statements. The Company cautions that forward-looking statements involve known and unknown risks, uncertainties, and other factors that may cause actual results, performance, or achievements to be materially different from any future results, performance, or achievements expressed or implied by the forward-looking statements. Forward-looking statements reflect our current views with respect to future events and are based on assumptions and subject to risks and uncertainties. Given these uncertainties, you should not place undue reliance on these forward-looking statements. In evaluating any forward-looking statement, you should specifically consider the information regarding forward-looking statements and the information set forth under the caption Part II, Item 1A. Risk Factors in this Quarterly Report and under the caption Part I, Item 1A. Risk Factors in our 2019 Form 10-K and the information regarding forward-looking statements and other disclosures in our 2019 Form 10-K, earnings releases, and other filings with the SEC from time to time, as well as other cautionary statements contained elsewhere in this report, including the matters discussed in “Critical Accounting Policies and Estimates.” We undertake no obligation beyond that required by law to update publicly any forward-looking statements for any reason, even if new information becomes available or other events occur in the future. You should read this report and the documents that we reference in this report and have filed as exhibits to this report completely and with the understanding that our actual future results may be materially different from what we currently expect. Business Overview HealthStream provides workforce and provider solutions for healthcare organizations—all designed to assess and develop the people that deliver patient care, which, in turn, supports the improvement of business and clinical outcomes. Workforce Solutions products are used by healthcare organizations to meet a broad range of their clinical development, talent management, training, certification, competency assessment, and performance appraisal needs. Provider Solutions products are used by healthcare organizations for provider credentialing, privileging, and enrollment needs. HealthStream’s customers include healthcare organizations, pharmaceutical and medical device companies, and other participants in the healthcare industry. At September 30, 2020, we had approximately 3.82 million contracted subscriptions to hStream TM , our Platform-as-a-Service technology. hStream technology enables healthcare organizations and their respective workforces to easily connect to and gain value from the growing HealthStream ecosystem of applications, tools, and content. On February 12, 2018, the Company divested its Patient Experience (“PX”) business to Press Ganey for $65.2 million in cash (after giving effect to the post-closing adjustment). Prior to the disposition of the PX business, our Patient Experience Solutions products provided our customers information about patients’ experiences and how to improve them, workforce engagement, physician relations, and community perceptions of their services. The gain on sale of the PX business recorded in prior periods are reflected in the Company’s Consolidated Financial Statements as discontinued operations 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. Except where otherwise noted herein, our results are presented on a continuing operations basis. This sale of the PX business resulted in the Company’s divestiture of the patient experience solutions business segment. Significant financial metrics for the third quarter of 2020 are set forth in the bullets below. • Revenues of $60.9 million in the third quarter of 2020, down 3% from $62.5 million in the third quarter of 2019 • Operating income of $3.1 million in the third quarter of 2020, down 16% from $3.7 million in the third quarter of 2019 • Income from continuing operations of $2.6 million in the third quarter of 2020, down 24% from $3.5 million in the third quarter of 2019 • Earnings per share (EPS) from continuing operations of $0.08 per share (diluted) in the third quarter of 2020 down from $0.11 per share (diluted) in the third quarter of 2019 • Adjusted EBITDA 1 from continuing operations of $11.1 million in the third quarter of 2020, down 3% from $11.5 million in the third quarter of 2019 17 (1) Adjusted EBITDA from continuing operations is a non-GAAP financial measure. A reconciliation of adjusted EBITDA from continuing operations to income from continuing operations and disclosure regarding why we believe adjusted EBITDA from continuing operations provides useful information to investors is included later in this report. 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 financial results of NurseGrid have been included in the Workforce Solutions segment from March 9, 2020. Impact of and Response to COVID-19 Pandemic The COVID-19 pandemic has resulted in authorities throughout the United States and the world implementing widespread measures attempting to contain the spread and impact of COVID-19, such as travel bans and restrictions, quarantines, shelter-in-place orders, the promotion of social distancing, and limitations on business activity. These measures and the pandemic have caused a significant economic downturn in the United States and globally, resulted in increased unemployment and underemployment levels, and have adversely impacted consumer confidence and spending. Moreover, differing approaches among governmental authorities in the United States regarding whether and how to begin lifting shelter-in-place and business restriction orders have caused additional uncertainty. Additionally, some governmental authorities have reinstated previously relaxed restrictions due to a recent rise in diagnosed cases of COVID-19 in many regions of the United States. This pandemic has also led to disruption and volatility in financial and capital markets. Our business is focused on providing workforce and provider solutions to healthcare organizations, and as such the pandemic’s adverse impact on healthcare organizations has resulted in an adverse impact on our Company. Although we believe that COVID-19 did not have a significant negative impact on our revenues or net income during the first nine months of 2020, certain developments related to COVID-19 have negatively impacted, and are expected to continue to negatively impact, our business this year and potentially longer, as described below. Our operating income for the nine months ended September 30, 2020 benefited from a temporary reduction of operating expenses related to COVID-19 conditions, but the operating expense reduction itself—despite its positive impact on operating income—is indicative of the negative impact the pandemic is having on new bookings and renewals. We have experienced, and expect to continue to experience, delayed and reduced bookings and renewals due to the pandemic. Given that we sell multiple year subscriptions to our solutions, the revenue impact of lost or delayed sales in a given period generally does not manifest until future periods, just as the revenue we recognize in a given period is generally the result of sales from a prior period. Since mid-March, our sales team has been unable to travel and conduct onsite sales meetings with existing or prospective customers, and we have also cancelled tradeshows. As a result, operating income benefitted from a $2.2 million reduction in operating expense related to the discontinuance of travel and a $0.2 million reduction in operating expenses related to the cancellation of tradeshows during the first nine months of 2020 compared to the same period last year. The extent, timing, and duration of the impacts of the COVID-19 pandemic on our business remain uncertain, and will depend upon, among other things, the length and severity of the pandemic, particularly with respect to the pandemic’s ongoing impact on healthcare organizations. We continue to closely monitor developments related to COVID-19 that may have an adverse impact on our operational and financial performance. We also continue to take actions focused on the safety and well-being of our employees, assisting our customers in this time of need, and mitigating operational and financial impacts to our business. We intend to continue serving our customers both in their battle to defeat the coronavirus and across the continuum of their other workforce and provider solution needs. In February of this year, our customers began using our proprietary technology platform to author and deliver COVID-19 training and education courses to their staff as they began to prepare for caring for COVID-19 patients. In March, we made available to all caregivers, free of charge, a curated library of proprietary content and to our customers, a bundle of cross-training courses to further their staff’s preparation to deliver safe and effective care to COVID-19 patients. This has resulted in approximately 3.0 million course completions related to COVID-19 through September 30, 2020, including courses self-authored by customers and proprietary courses, over our technology platform. Additionally, as previously announced, HealthStream, in partnership with the State of Tennessee Office of the Governor, is providing its COVID-19 Rapid Response Program, which includes training bundles and its workforce platform, along with other workforce resources to support the state’s efforts to rapidly train new, returning, and current caregivers who are volunteering to work in Alternate Healthcare Facilities being set-up across the state. This COVID-19 Rapid Response Program continues to be provided free of charge. Additionally, to promote the safety and well-being of our employees, we required our entire workforce to begin working remotely from home beginning March 16, 2020, and the entire workforce continues to work remotely to date. We have not established a date to return to non-remote working conditions. 18 Many healthcare organizations have been, and will likely continue to be, substantially adversely impacted by the COVID-19 pandemic. The period of time over which this adverse impact continues , the extent to which certain healthcare organizations continue to receive and/or are eligible to utilize governmental funds as the result of federal stimulus and relief measures, and whether conditions related to the pandemic continue to deteriorate are important factors that may impact our business. The pandemic has resulted in a significant reduction of revenue generating services for many healthcare organizations, such as elective surgeries and other elective procedures, while, in some cases, their cost of providing emergency care as the result of treating COVID-19 patients has increased. Adverse COVID-19 impacts such as these have result ed , and may continue to result, in significant adverse impacts to many healthcare organizations . In light of adverse developments with respect to healthcare organizations as noted above, we are continuing to monitor the ability or willingness of our customers to: • pay for our solutions in a timely manner, in full, or at all; • implement solutions they have purchased from us; and • renew existing or purchase new products or services from us. We monitor our cash position and credit exposure by evaluating, among other things, weekly cash receipts, days sales outstanding (“DSO”), customer requests to modify payment or contract terms, and bankruptcy notices. We experienced a decrease in cash receipts from customers in the first nine months of 2020 compared to the same period of the previous year and an increase in DSO from 40 days in the third quarter of 2019 to 43 days for the third quarter of 2020. While our cash balances increased by $5.2 million during the quarter, our cash flows from operations were $30.8 million this year compared to $52.5 million in the prior year, which was due primarily to the decline in legacy resuscitation sales and the impact of COVID-19. We are unable to know whether or to what extent such trends arising from the pandemic may continue or increase over time. Any continued deterioration in the collectability (or the timing of payments) of our accounts receivable will adversely impact our financial results. The timing of implementation of our services is also relevant to our business because our software solutions do not result in revenue recognition until they are implemented. To the extent our customers delay or fail to implement products they have previously purchased, our financial results will be adversely impacted. While we have experienced a negative impact from certain implementation delays related to COVID-19, these delays have not been consistent across products or across customers. Our Provider Solutions business segment has, in some instances, been more sensitive to implementation delays than our Workforce Solutions segment as the result of complexities associated with implementing certain of the solutions offered through that business segment. Conditions related to the pandemic may also adversely impact the ability or willingness of our customers to renew their contracts with us, to renew contracts on comparable terms, or to expand the quantity and type of solutions they purchase from us, particularly to the extent such customers have reduced their staff numbers or scope of operations due to COVID-19. Pandemic-related conditions have also been delaying or otherwise adversely impacting our ability to enter into contracts with new potential customers, as some potential customers have been focused on dealing with the impact and demands COVID-19 is having on their businesses. In addition, many of our customers are not currently allowing vendors, including representatives of the Company, on their premises, which has been reducing the ability of our sales team to make sales they otherwise would likely make but for the impact of COVID-19. In addition, our customer’s uncertainties due to COVID-19, combined with the inability to travel and conduct tradeshows, has had, and is likely to continue to have, a negative impact on our sales volumes. We continue to pursue new sales strategies, including those that do not require in-person meetings, tradeshows, or travel. Our business also relies on a network of partners whose solutions we resell or whose solutions are sold and delivered over our platform. At least one of our partners has declared bankruptcy since the pandemic began, though such partner continues operations. To the extent COVID-19 results in business disruption or adverse impacts to our partners, such disruptions and adverse impacts could adversely impact our business. Given the uncertainty surrounding the adverse impact that COVID-19 may have on our business, we have taken certain expense management measures, which have included: • Foregoing increases to base salaries in 2020, including executive base salaries. Normally, base salary increases become effective May 1 st . • Limiting hiring to critical positions. • Limiting the Company’s match to the 401(k) Plan to the previously approved 1% level, rather than providing a greater match as we have in the previous two years. • Restricting employee business travel. • Cancelling tradeshows and other events where large gatherings may occur. • Requesting key vendors of ours to allow payment term extension without penalty. • Evaluating iterative reductions to our capital expenditures to be deployed on an as-needed basis. 19 T hese expense management measures contributed to the decrease in our operating expenses , which compared to the prior year period declined by approximately $1.7 million and $3.4 million during the three and nine months ended September 30, 2020 , respectively . Additionally, we are continuing to monitor developments regarding the COVID-19 pandemic and may undertake further expense management initiatives if we deem necessary. The Company’s financial performance during the pandemic has remained solid, partly due to the above expense control measures. While we believe these expense control measures are prudent in light of current conditions, we also intend to strike a balance to ensure that our operations are financially stable for the future and that we continue to achieve our growth objectives. Our employees are vitally important to our success, and they have made numerous contributions during these unprecedented times. Although we have forgone salary increases for 2020 and previously limited the 401k match to one percent as noted above, during the third quarter we elected to provide our employees, excluding executive officers, with a supplemental payroll payment and an increase of the 401k match from one percent to two percent for all employees. The supplemental payroll payment approximates the dollar amount of salary increases that were foregone in 2020 as noted above. The impact of these two items reduced operating income by approximately $1.9 million during the third quarter. Key Business Metrics Our management utilizes the following financial and non-financial metrics in connection with managing our business. These performance indicators include measurements of gross margin, adjusted EBITDA, and hStream subscriptions. • Operating Income . Operating income represents the amount of profit realized from our operations and is calculated as the difference between revenues, net and operating costs and expenses. Operating income was $3.1 million and $14.7 million for the three and nine months ended September 30, 2020 compared to $3.7 million and $11.4 million for the three and nine months ended September 30, 2019. Management utilizes operating income in connection with managing our business as a key indicator of profitability. We also believe that operating income is useful to investors as a key measure of our profitability, which is among the reasons we have included such measure as among the metrics for which we have historically provided forward-looking guidance. For 2020, and for several previous years, executive bonuses have been based on the achievement of operating income targets as well. • Adjusted EBITDA . Adjusted EBITDA, calculated as set forth below under “Reconciliation of Non-GAAP Financial Measures,” is utilized by our management in connection with managing our business and provides useful information to investors because adjusted EBITDA reflects net income adjusted for certain non-cash and non-operating items, as more specifically set forth below. Management further believes that adjusted EBITDA from continuing operations is a useful measure for evaluating the operating performance of the Company because such measure excludes the gain on sale in connection with the sale of the PX business in February 2018 included in our results of operations during the three and nine months ended September 30, 2019, and thus reflects the Company’s ongoing business operations and assists in comparing the Company’s results of operations between periods. We believe that adjusted EBITDA and adjusted EBITDA from continuing operations are useful to many investors to assess the Company’s ongoing results from current operations. Adjusted EBITDA from continuing operations was $11.1 million and $34.9 million for the three and nine months ended September 30, 2020 compared to $11.5 million and $35.7 million for the three and nine months ended September 30, 2019. • hStream Subscriptions . hStream subscriptions are determined as the number of subscriptions under contract for hStream, our Platform-as-a-Service technology that enables healthcare organizations and their respective workforces to easily connect to and gain value from the growing HealthStream ecosystem of applications, tools, and content. Our management utilizes hStream subscriptions in connection with managing our business and believes this metric provides useful information to investors as a measure of our progress in growing the value of our customer base. At September 30, 2020, we had approximately 3.82 million contracted subscriptions to hStream compared to 2.78 million as of September 30, 2019. Critical Accounting Policies and Estimates The Company’s Condensed Consolidated Financial Statements are prepared in accordance with US GAAP. These accounting principles require us to make certain estimates, judgments, and assumptions during the preparation of our Financial Statements. We believe the estimates, judgments, and assumptions upon which we rely are reasonable based upon information available to us at the time they are made. These estimates, judgments, and assumptions can affect the reported amounts of assets and liabilities as of the date of the Financial Statements, as well as the reported amounts of revenues and expenses during the periods presented. To the extent there are material differences between these estimates, judgments, or assumptions and actual results, our Financial Statements will be affected. 20 The accounting policies and estimates that we believe are the most critical in fully understanding and evaluating our reported financial results include the following: • Revenue recognition • Accounting for income taxes • Software development costs • Goodwill, intangibles, and other long-lived assets • Allowance for doubtful accounts In many cases, the accounting treatment of a particular transaction is specifically dictated by US GAAP and does not require management’s judgment in its application. There are also areas where management’s judgment in selecting among available alternatives would not produce a materially different result. See Notes to Consolidated Financial Statements in our 2019 Form 10-K and the Notes to the Condensed Consolidated Financial Statements herein, which contain additional information regarding our accounting policies and other disclosures required by US GAAP. There have been no material changes in our critical accounting policies and estimates from those reported in our 2019 Form 10-K. Three Months Ended September 30, 2020 Compared to Three Months Ended September 30, 2019 Revenues, net. Revenues decreased $1.6 million, or 3%, to $60.9 million for the three months ended September 30, 2020 from $62.5 million for the three months ended September 30, 2019. A comparison of revenues by business segment is as follows (in thousands): Three Months Ended September 30, Revenues by Business Segment: 2020 2019 Percentage Change Workforce Solutions $ 49,197 $ 51,023 -4 % Provider Solutions 11,686 11,427 2 % Total revenues, net $ 60,883 $ 62,450 -3 % % of Revenues Workforce Solutions 81 % 82 % Provider Solutions 19 % 18 % Revenues for Workforce Solutions decreased $1.8 million, or 4%, to $49.2 million for the three months ended September 30, 2020 from $51.0 million for the three months ended September 30, 2019. Revenues from legacy resuscitation products decreased by $3.7 million and were $9.7 million in the third quarter of 2020 compared to $13.4 million in the third quarter of 2019. Other workforce revenues increased by $1.9 million, or 5%, and included growth in platform and content subscriptions of $2.6 million, or 7%, partially offset by a decline in professional services revenues of $0.7 million, or 43%, due to fewer projects than the prior year. Revenues for Provider Solutions increased $0.3 million, or 2%, to $11.7 million for the three months ended September 30, 2020 from $11.4 million for the three months ended September 30, 2019. Revenue growth of $0.3 million was primarily attributable to $0.4 million in revenues from the CredentialMyDoc acquisition, which was completed in December 2019, partially offset by a decline in professional services $0.1 million. Cost of Revenues (excluding depreciation and amortization). Cost of revenues decreased $2.0 million, or 8%, to $23.3 million for the three months ended September 30, 2020 from $25.3 million for the three months ended September 30, 2019. Cost of revenues as a percentage of revenues was 38% and 41% for the three months ended September 30, 2020 and 2019, respectively. Cost of revenues for Workforce Solutions decreased $2.2 million to $19.3 million and approximated 39% and 42% of revenues for Workforce Solutions for the three months ended September 30, 2020 and 2019, respectively. The decrease is primarily associated with decreased royalties paid by us resulting from a decline in revenues and lower travel expense. Cost of revenues for Provider Solutions increased $0.2 million to $4.0 million and approximated 34% and 33% of Provider Solutions revenues for the three months ended September 30, 2020 and 2019, respectively. The increase is primarily associated with the supplemental payroll payment recorded during the three months ended September 30, 2020 as noted above. Product Development. Product development expenses increased $1.0 million, or 14%, to $8.2 million for the three months ended September 30, 2020 from $7.2 million for the three months ended September 30, 2019. Product development expenses as a percentage of revenues were 13% and 12% for the three months ended September 30, 2020 and 2019, respectively. 21 Product development expenses for Workforce Solutions increased $0.6 million to $6.5 million and approximated 13% and 11% of revenues for Workforce Solutions for the three months ended September 30, 2020 and 2019 , respectively. The increase in amount is primarily due to additions to personnel resulting from the NurseGrid acquisition and the supplemental payroll payment to employees as noted above . Product development expenses for Provider Solutions increased $0.4 million to $1.7 million and approximated 15% and 12% of revenues for Provider Solutions for the three months ended September 30, 2020 and 2019 , respectively. The increase is primarily due to an increase in contract labor and additions to personnel resulting from the CredentialMyDoc acquisition . Sales and Marketing. Sales and marketing expenses, including personnel costs, decreased $0.1 million, or 2%, to $8.9 million for the three months ended September 30, 2020 from $9.0 million for the three months ended September 30, 2019. Sales and marketing expenses were 15% and 14% of revenues for the three months ended September 30, 2020 and 2019, respectively. Sales and marketing expenses for Workforce Solutions decreased $0.2 million to $7.0 million and approximated 14% of revenues for Workforce Solutions for both the three months ended September 30, 2020 and 2019. The decrease is primarily due to lower travel and entertainment expenses as a result of COVID-19 and lower sales commissions consistent with the decreases in revenues. Sales and marketing expenses for Provider Solutions increased $0.1 million to $1.6 million and approximated 14% and 13% of revenues for Provider Solutions for the three months ended September 30, 2020 and 2019, respectively. The increase is primarily due to additions to personnel resulting from the CredentialMyDoc acquisition and the supplemental payroll payment to employees as noted above. The unallocated portion of sales and marketing expenses decreased $26,000 to $0.3 million compared to the prior year period. Other General and Administrative Expenses. Other general and administrative expenses approximated $10.0 million for both the three months ended September 30, 2020 and 2019. Other general and administrative expenses as a percentage of revenues were 16% of revenues for both the three months ended September 30, 2020 and 2019. Other general and administrative expenses for Workforce Solutions increased $71,000 to $3.4 million and approximated 7% of Workforce Solutions revenues for both the three months ended September 30, 2020 and 2019. Other general and administrative expenses for Provider Solutions decreased $95,000 to $0.9 million and approximated 7% and 8% of Provider Solutions revenues for the three months ended September 30, 2020 and 2019, respectively. The unallocated corporate portion of other general and administrative expenses approximated $5.7 million for both the current and prior year period. Higher expenses associated with due diligence costs, including costs related to our acquisition of ShiftWizard which was completed in October 2020, incurred in the quarter were mostly offset by reductions in other expense categories. Depreciation and Amortization. Depreciation and amortization increased $0.3 million, or 4%, to $7.4 million for the three months ended September 30, 2020 from $7.1 million for the three months ended September 30, 2019. The increase resulted from an increase in amortization of capitalized software and intangible assets. Other Income, Net . Other income, net was $0.1 million for the three months ended September 30, 2020 compared to $0.9 million for the three months ended September 30, 2019. The decrease is a result of lower interest income from cash and investments in marketable securities due to reductions in bond yields and bank deposit interest rates. Income Tax Provision. The Company recorded a provision for income taxes of $0.6 million for the three months ended September 30, 2020 compared to $1.1 million for the three months ended September 30, 2019. The Company’s effective tax rate was 19% and 25% for the three months ended September 30, 2020 and 2019, respectively. 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. Income from Continuing Operations. Income from continuing operations was $2.6 million in the third quarter of 2020, down 24% from $3.5 million in the third quarter of 2019, which decrease was driven by the $1.5 million expense, net of tax, associated with the supplemental payroll payment to employees and the additional 401k match as noted above. Earnings per diluted share from continuing operations were $0.08 and $0.11 for the three months ended September 30, 2020 and 2019, respectively. Income from Discontinued Operations. Income from discontinued operations was zero for the three months ended September 30, 2020 compared to $0.3 million for the three months ended September 30, 2019. Net Income. Net income was $2.6 million in the third quarter of 2020 compared to $3.7 million in the third quarter of 2019. Earnings per diluted share were $0.08 and $0.11 for the three months ended September 30, 2020 and 2019, respectively. Adjusted EBITDA (a non-GAAP financial measure which we define as net income before interest, income taxes, stock based compensation, depreciation and amortization, changes in fair value of non-marketable equity investments, and the de-recognition of non-cash royalty expense resulting from our resolution of a mutual disagreement related to various elements of a past partnership which resulted in a reduction to costs of revenues in the first quarter of 2020) from continuing operations decreased 3% to $11.1 million for the three months ended September 30, 2020 compared to $11.5 million for the three months ended September 30, 2019. 22 Adjusted EBITDA decreased to $11.1 million for the three months ended September 30, 2020 compared to $11.8 million for the three months ended September 30, 2019. S ee “Reconciliation of Non-GAAP Financial Measures” below for our reconciliation of Adjusted EBITDA from continuing operations and Adjusted EBITDA to the most directly comparable measures under US GAAP. Nine Months Ended September 30, 2020 Compared to Nine Months Ended September 30, 2019 Revenues, net. Revenues decreased $8.4 million, or 4%, to $183.0 million for the nine months ended September 30, 2020 from $191.4 million for the nine months ended September 30, 2019. A comparison of revenues by business segment is as follows (in thousands): Nine Months Ended September 30, Revenues by Business Segment: 2020 2019 Percentage Change Workforce Solutions $ 147,909 $ 157,739 -6 % Provider Solutions 35,099 33,678 4 % Total revenues, net $ 183,008 $ 191,417 -4 % % of Revenues Workforce Solutions 81 % 82 % Provider Solutions 19 % 18 % Revenues for Workforce Solutions decreased $9.8 million, or 6%, over the first nine months of 2019. Revenue from our legacy resuscitation products declined by $14.7 million and were $31.6 million in the first nine months of 2020 down from $46.3 million in the first nine months of 2019. Other workforce revenues increased by $4.9 million, representing an increase in platform and content subscriptions of $6.2 million, or 6%, partially offset by a decline in professional services revenues of $1.3 million, or 30%. Revenues for Provider Solutions increased $1.4 million, or 4%, over the first nine months of 2019. Revenue growth was primarily attributable to the CredentialMyDoc acquisition, which was completed in December 2019, contributing $1.2 million in revenues, along with new VerityStream platform subscriptions and professional services for implementation of new customers. Cost of Revenues (excluding depreciation and amortization). Cost of revenues decreased $12.4 million, or 16%, to $66.6 million for the nine months ended September 30, 2020 from $79.0 million for the nine months ended September 30, 2019. Cost of revenues as a percentage of revenues was 36% and 41% for the nine months ended September 30, 2020 and 2019, respectively. Cost of revenues for Workforce Solutions decreased $12.8 million to $54.8 million and approximated 37% and 43% of revenues for Workforce Solutions for the nine months ended September 30, 2020 and 2019, respectively. The decrease is primarily associated with the lower royalty expense associated with the decline in the legacy resuscitation revenues along with the favorable $3.4 million contractual adjustment that resulted in a decrease to royalty expense upon the resolution of a mutual disagreement relating to various elements of a past partnership recorded in the first quarter of 2020. Cost of revenues for Provider Solutions increased $0.4 million to $11.8 million and approximated 34% of Provider Solutions revenues for both the nine months ended September 30, 2020 and 2019. The increase in amount is primarily due to increased personnel over the prior year period, including the addition of personnel from the CredentialMyDoc acquisition, and the supplemental payroll payment to employees as noted above. Product Development. Product development expenses increased $1.7 million, or 8%, to $23.5 million for the nine months ended September 30, 2020 from $21.8 million for the nine months ended September 30, 2019. Product development expenses as a percentage of revenues were 13% and 11% for the nine months ended September 30, 2020 and 2019, respectively. Product development expenses for Workforce Solutions increased $0.5 million to $18.5 million and approximated 13% and 11% of revenues for Workforce Solutions for the nine months ended September 30, 2020 and 2019, respectively. The increase is primarily due to increased personnel as a result of the NurseGrid acquisition in March 2020. Product development expenses for Provider Solutions increased $1.2 million to $5.0 million and approximated 14% and 11% of revenues for HealthStream Solutions for the nine months ended September 30, 2020 and 2019, respectively. The increase is primarily due to increased contract labor and increased personnel over the prior year period as a result of the CredentialMyDoc acquisition. Sales and Marketing. Sales and marketing expenses, including personnel costs, decreased $2.1 million, or 7%, to $26.3 million for the nine months ended September 30, 2020 from $28.3 million for the nine months ended September 30, 2019. Sales and marketing expenses were 14% and 15% of revenues for the nine months ended September 30, 2020 and 2019, respectively. Sales and marketing expenses for Workforce Solutions decreased $2.4 million to $20.8 million and approximated 14% and 15% of revenues for Workforce Solutions for the nine months ended September 30, 2020 and 2019, respectively. The decrease is primarily due to lower sales commissions, consistent with the decreases in revenues, decreases in travel and entertainment 23 expenses as well as tradeshow expenses as a result of COVID-1 9 conditions as set forth above, and dec lines in general marketing expenses. Sales and marketing expenses for Provider Solutions increased $0.3 million to $4.7 million and approximated 13% of revenues for Provider Solutions for both the nine months ended September 30, 2020 and 2019 . The increase in amount is primarily due to higher sales commissions, consistent with the increases in revenues . The unallocated portion of sales and marketing expenses approximated $0.8 million for both the current and prior year period. Other General and Administrative Expenses. Other general and administrative expenses decreased $0.3 million, or 1%, to $29.9 million for the nine months ended September 30, 2020 from $30.3 million for the nine months ended September 30, 2019. Other general and administrative expenses as a percentage of revenues were 16% of revenues for both the nine months ended September 30, 2020 and 2019. Other general and administrative expenses for Workforce Solutions increased $1.0 million to $11.3 million and approximated 8% and 6% of revenues for Workforce Solutions for the nine months ended September 30, 2020 and 2019, respectively. The increase is primarily due to increases in infrastructure expenses and the acquisition of NurseGrid . Other general and administrative expenses for Provider Solutions decreased $0.2 million to $2.4 million and approximated 7% and 8% of revenues for Provider Solutions for the nine months ended September 30, 2020 and 2019, respectively. The decrease is primarily associated with lower professional services expenses compared to the prior year period. The unallocated corporate portion of other general and administrative expenses decreased $1.1 million to $16.2 million compared to the first nine months of 2019 primarily due to decreases in contract labor over the prior year period and lower stock based compensation resulting from the impact of the stock awards granted the Company’s chief executive officer to employees during the three months ended June 30, 2019, but was partially offset by increased due diligence costs. Depreciation and Amortization. Depreciation and amortization increased $1.4 million, or 7%, to $22.0 million for the nine months ended September 30, 2020 from $20.6 million for the nine months ended September 30, 2019. The increase resulted from an increase in amortization of capitalized software and intangible assets. Other Income, Net . Other income, net was $2.0 million for the nine months ended September 30, 2020 compared to $2.5 million for the nine months ended September 30, 2019. This decrease is related to the $1.2 million gain associated with the change in fair value of the non-marketable equity investment in NurseGrid prior to the acquisition of NurseGrid on March 9, 2020, offset by lower interest income due to reductions in bond yields and bank deposit interest rates. Income Tax Provision. The Company recorded a provision for income taxes of $3.5 million and $3.3 million for the nine months ended September 30, 2020 and 2019, respectively. The Company’s effective tax rate was 21% for the nine months ended September 30, 2020 compared to 24% for the nine months ended September 30, 2019. 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. Income from Continuing Operations. Income from continuing operations was $13.2 million for the nine months ended September 30, 2020, up 24% from $10.6 million for the nine months ended September 30, 2019. Earnings per diluted share from continuing operations were $0.41 and $0.33 for the nine months ended September 30, 2020 and 2019, respectively. Income from Discontinued Operations. Income from discontinued operations was zero for the nine months ended September 30, 2020 compared to $1.4 million for the nine months ended September 30, 2019. The $1.4 million gain, net of tax, recorded during the nine months ended September 30, 2019 was the result of a release of escrow funds to us in connection with the PX disposition. Refer to Note 10 in the Notes to the Condensed Consolidated Financial Statements for further information. Net Income. Net income was $13.2 million for the nine months ended September 30, 2020 compared to $12.1 million for the nine months ended September 30, 2019. Earnings per diluted share were $0.41 and $0.37 for the nine months ended September 30, 2020 and 2019, respectively. Adjusted EBITDA from continuing operations decreased 2% to $34.9 million for the nine months ended September 30, 2020 compared to $35.7 million for the nine months ended September 30, 2019. Adjusted EBITDA (from continuing and discontinued operations) decreased $2.8 million to $34.9 million for the nine months ended September 30, 2020 compared to $37.7 million for the nine months ended September 30, 2019. This decrease resulted from the factors mentioned above. See “Reconciliation of Non-GAAP Financial Measures” below for our reconciliation of Adjusted EBITDA and Adjusted EBITDA from continuing operations to the most directly comparable measures under US GAAP. Discontinued Operations 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). This sale of the PX business resulted in the divestiture of our patient experience solutions business segment. We recorded a gain on sale, 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. With the proceeds 24 of this sale, our Board of Directors declared a $1.00 per common share special cash dividend, which was paid on April 3, 2018 to shareholders of record on March 6, 2018. We have classified the gain on sale of our PX business segment as discontinued operations in our Condensed Consolidated Statements of Income for all applicable periods. See Note 10 to our Condensed Consolidated Financial Statements included in this report for additional information. Other Developments Our legacy agreements with Laerdal (the “Legacy Agreements”) for the HeartCode and Resuscitation Quality Improvement (“RQI”) products expired pursuant to their terms on December 31, 2018. Revenues associated with sales of HeartCode and RQI products pursuant to the Legacy Agreements have been significant in recent years, although margins on such products have been lower than HealthStream’s average margin. Revenue generated by HeartCode and RQI products pursuant to the Legacy Agreements was $58.9 million and $54.6 million in 2019 and 2018, respectively. During the nine months ended September 30, 2020, as noted above, we recorded revenue of $31.6 million related to HeartCode and RQI products under the Legacy Agreements compared to $46.3 million for the nine months ended September 30, 2019. During the three months ended September 30, 2020, we recorded revenue of $9.7 million related to HeartCode and RQI products under the Legacy Agreements compared to $13.4 million for the three months ended September 30, 2019. We expect revenue from these products generated pursuant to the Legacy Agreements to approximate $6.0 million in the fourth quarter of 2020 and to be zero in the first quarter of 2021. On December 6, 2018, we announced a new agreement with RQI Partners, a joint venture between Laerdal and the American Heart Association. This agreement with RQI Partners was not an extension or renewal of the expired Legacy Agreements with Laerdal and should not be construed as such. Under our agreement with RQI Partners, HealthStream will neither market nor sell HeartCode or RQI. Our RQI Partners agreement provides for continuity of service for customers that desire to purchase HeartCode or RQI from RQI Partners after December 31, 2018 and receive it via the HealthStream Learning Center. RQI Partners will remit a fee to us when new sales of HeartCode and RQI are delivered via the HealthStream Learning Center. This fee will not be sufficient to supplant the revenue runout associated with the Legacy Agreements, and no material revenues have been recognized under this agreement through September 30, 2020. We remain actively engaged in efforts to broaden the scope and utilization of our simulation-related offerings to include a range of clinical competencies that extend beyond resuscitation, and we intend to bring to market a broadened scope of simulation-based offerings, including resuscitation programs. On January 17, 2019, as part of a seven-year collaboration agreement with the American Red Cross, which spans to 2026, we announced the launch of the American Red Cross Resuscitation Suite. We are actively engaged in efforts to market, sell, and deliver our new resuscitation offering, which includes the American Red Cross Resuscitation Suite and validation of skills through a technology enabled Innosonian manikin. A growing number of customers have been implemented on our new resuscitation offering and we believe that the solution is gaining acceptance in the market. We believe our efforts to market, sell, and deliver the American Red Cross Resuscitation Suite, along with efforts to bring additional simulation-related offerings to market, have the potential to give rise to additional and higher margin opportunities than those that existed under the Legacy Agreements. However, there is no assurance that we will be successful in these efforts, and to the extent that new simulation-based or other solutions do not generate revenue and/or earnings in a manner that supplants the impact of the Legacy Agreements, our revenue and results of operations may be adversely affected. Reconciliation of Non-GAAP Financial Measures This report presents adjusted EBITDA from continuing operations and adjusted EBITDA, both of which are non-GAAP financial measures used by management in analyzing our financial results and ongoing operational performance. In order to better assess the Company’s financial results, management believes that net income before interest, income taxes, stock based compensation, depreciation and amortization, changes in fair value of non-marketable equity investments, and the de-recognition of non-cash royalty expense resulting from our resolution of a mutual disagreement related to various elements of a past partnership which resulted in a reduction to costs of revenues in the first quarter of 2020 (“adjusted EBITDA”) is a useful measure for evaluating the operating performance of the Company because adjusted EBITDA reflects net income adjusted for certain non-cash and non-operating items. Management also believes that adjusted EBITDA from continuing operations is a useful measure for evaluating the operating performance of the Company because such measure excludes the gain on sale in connection with the sale of the PX business in February 2018 and thus reflects the Company’s ongoing business operations and assists in comparing the Company’s results of operations between periods. We also believe that adjusted EBITDA and adjusted EBITDA from continuing operations are useful to many investors to assess the Company’s ongoing results from current operations. Adjusted EBITDA and adjusted EBITDA from continuing operations are non-GAAP financial measures and should not be considered as measures of financial performance under GAAP. Because adjusted EBITDA and adjusted EBITDA from continuing operations are not measurements determined in accordance with GAAP, such non-GAAP 25 financial measures are susceptible to varying calculations. Accordingly, adjusted EBITDA and adjusted EBITDA from continuing operations, as presented, may not be comparable to other similarly titled measures of other companies. These non-GAAP financial measures should not be considered as a substitute for, or superior to, measures of financial performance which are prepared in accordance with US GAAP and may be different from non-GAAP financial measures used by other companies and have limitations as analytical tools. A reconciliation of adjusted EBITDA and adjusted EBITDA from continuing operations to the most directly comparable GAAP measures is set forth below (in thousands). Three Months Ended September 30, Nine Months Ended September 30, 2020 2019 2020 2019 GAAP income from continuing operations $ 2,634 $ 3,461 $ 13,168 $ 10,642 Interest income (88 ) (864 ) (919 ) (2,538 ) Interest expense 26 26 76 77 Income tax provision 600 1,140 3,519 3,270 Stock based compensation expense 557 569 1,665 3,643 Depreciation and amortization 7,406 7,149 22,005 20,629 Change in fair value of non-marketable equity investments — — (1,181 ) — Non-cash royalty expense — — (3,440 ) — Adjusted EBITDA from continuing operations $ 11,135 $ 11,481 $ 34,893 $ 35,723 GAAP net income $ 2,634 $ 3,712 $ 13,168 $ 12,087 Interest income (88 ) (864 ) (919 ) (2,538 ) Interest expense 26 26 76 77 Income tax provision 600 1,229 3,519 3,785 Stock based compensation expense 557 569 1,665 3,643 Depreciation and amortization 7,406 7,149 22,005 20,629 Change in fair value of non-marketable equity investments — — (1,181 ) — Non-cash royalty expense — — (3,440 ) — Adjusted EBITDA $ 11,135 $ 11,821 $ 34,893 $ 37,683 Liquidity and Capital Resources Net cash provided by operating activities decreased by $21.8 million to $30.8 million during the nine months ended September 30, 2020 from $52.5 million during the nine months ended September 30, 2019. Such decrease was largely driven by a decline in cash receipts primarily resulting from the decline in legacy resuscitation sales noted above and lower new sales relative to the prior year period. Our DSO was 43 days for the third quarter of 2020, compared to 47 days for the second quarter of 2020 and 40 days for the third quarter of 2019. The Company calculates DSO by dividing the average accounts receivable balance for the quarter by average daily revenues for the quarter. We believe that developments related to the COVID-19 pandemic have contributed to higher DSO during 2020 compared to the prior year, the reduction in cash receipts, and lower bookings of new contracts and renewal of existing contracts in the first nine months of 2020 compared to the same period in 2019, and this trend may continue if negative economic conditions arising from the pandemic persist or continue to deteriorate. The Company’s primary sources of cash were receipts generated from the sales of our products and services. The primary uses of cash to fund operations included personnel expenses, sales commissions, royalty payments, payments for contract labor and other direct expenses associated with delivery of our products and services, and general corporate expenses. Net cash used in investing activities was $38.5 million for the nine months ended September 30, 2020 compared to $52.0 million for the nine months ended September 30, 2019. During the nine months ended September 30, 2020, the Company spent $21.4 million on business combinations, primarily the acquisition of NurseGrid, invested in marketable securities of $61.2 million, made payments for capitalized software development of $12.4 million, purchased property and equipment of $1.7 million, and invested $1.3 million in non-marketable equity investments . These uses of cash were partially offset by $59.5 million in maturities of marketable securities. During the nine months ended September 30, 2019, the Company acquired Providigm for $18.0 million, invested in marketable securities of $58.6 million, purchased property and equipment of $21.5 million, made payments for capitalized software development of $11.2 million, and invested $3.3 million in non-marketable equity investments. These uses of cash were partially offset by $58.6 million in maturities of marketable securities and $6.0 million in proceeds from the sale of its PX business segment. Net cash used in financing activities from continuing operations was $16.8 million for the nine months ended September 30, 2020 compared to $0.9 million for the nine months ended September 30, 2019. The uses of cash for the nine months ended September 30, 2020 primarily included $16.4 million for common stock repurchases, $0.4 million for the payment of employee payroll taxes 26 in relation to the vesting of restricted share units, and $ 40 ,000 of cash dividend payments. The uses of cash for the nine months ended September 30, 2019 included $1.0 million for the payment of employee payroll taxes in relation to the vesting of restricted share units, $5 3 ,000 of cash dividends payments, and $3 8 ,000 of earn-out payments related to prior acquisitions. The source of cash from financing activities for the nine months ended September 30, 2019 was $0.2 million from the exercise of stock options. Our balance sheet reflects positive working capital of $104.1 million at September 30, 2020 compared to $119.4 million at December 31, 2019. The decrease in working capital is primarily a result of the reduction in cash to fund the acquisition of NurseGrid and share repurchases. The Company’s primary source of liquidity as of September 30, 2020 was $107.0 million of cash and cash equivalents and $42.7 million of marketable securities comprised of corporate debt securities and time deposits. As of September 30, 2020, the Company also had a $50.0 million revolving credit facility, all of which was available for additional borrowing on such date. On October 28, 2020, the Company entered into an amendment to this revolving credit facility, which increased the capacity under this facility to $65.0 million and extended the maturity date to October 28, 2023. On March 13, 2020, we announced a share repurchase program authorized by our Board of Directors under which we may purchase up to $30.0 million of our common stock. 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. Under this program, during the first nine months of 2020, we 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). We may continue to make repurchases under this share repurchase program based on prevailing market conditions, liquidity, and cash flow considerations, applicable securities laws requirements (including under Rule 10b-18 and Rule 10b5-1 of the Securities Exchange Act of 1934, as applicable), and other factors. The share repurchase program will terminate on the earlier of March 12, 2021 or when the maximum dollar amount has been expended. We believe that our existing cash and cash equivalents, marketable securities (including time deposits and corporate bond securities), cash generated from operations, and available borrowings under our revolving credit facility will be sufficient to meet anticipated working capital needs, new product development, any additional repurchases under our share repurchase program, and capital expenditures for at least the next 12 months. If the impact of COVID-19 persists longer than expected or causes economic conditions to further deteriorate, we are prepared to curtail or discontinue new product development and/or repurchases under the share repurchase authorization as we deem in the best interest of shareholders and the Company. In addition, the Company’s growth strategy includes acquiring businesses or making strategic investments in businesses that complement or enhance our business. It is anticipated that future acquisitions or strategic investments, if any, would be effected through cash consideration, stock consideration, or a combination of both. The issuance of our stock as consideration for an acquisition or to raise additional capital could have a dilutive effect on earnings per share and could adversely affect our stock price. Our revolving credit facility contains financial covenants and availability calculations designed to set a maximum leverage ratio of outstanding debt to adjusted EBITDA and an interest coverage ratio of adjusted EBITDA to interest expense. Therefore, the maximum borrowings against our revolving credit facility would be dependent on the covenant calculations at the time of borrowing. As of September 30, 2020 , we were in compliance with all covenants. There can be no assurance that amounts available for borrowing under our revolving credit facility will be sufficient to consummate any possible acquisitions, and we cannot assure that if we need additional financing that it will be available on terms favorable to us, or at all. Failure to generate sufficient cash flow from operations or raise additional capital when required in sufficient amounts and on terms acceptable to us could harm our business, financial condition, and results of operations. Moreover, the COVID-19 pandemic has resulted in, and may continue to result in, disruptions of financial and capital markets, which could impair our ability to access additional capital if needed.