What changed in this filing

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Item 8. Financial Statements and Supplementary Data

2021-02-26 compared with 2020-02-26 · 324 added, 235 removed, 665 unchanged (46% of the section changed)

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Notes to Consolidated Financial Statements

The supplementary financial information required by this Item 8 is included in Item 7 under the caption Selected Quarterly Operating Results.

Report of Independent Registered Public Accounting Firm

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We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of December 31, 2020, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) and our report dated February 25, 2021, expressed an unqualified opinion thereon.

Adoption of New Accounting Standard

As discussed in Note 1 to the consolidated financial statements, the Company changed its method for recognizing revenue in 2018 due to the adoption of Accounting Standards Update No.

2014-09, Revenue from Contracts with Customers , as amended .

Basis for Opinion

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The transaction price is then allocated to the separate performance obligations on a relative standalone selling price basis.

Auditing the Company’s accounting for revenue recognition was challenging due to the judgment and effort required to analyze the Company’s contracts to determine whether promised goods and services are distinct performance obligations and to determine standalone selling prices used to allocate the transaction price to those performance obligations.

How We Addressed the

Matter in Our Audit

We obtained an understanding, evaluated the design and tested the operating effectiveness of controls over the Company's process to identify and evaluate performance obligations and determine the standalone selling prices used to allocate the transaction price to those performance obligations.

Auditing the Company’s accounting for revenue recognition was challenging due to the judgment and effort required to analyze the Company’s contracts to determine whether promised goods and services are distinct performance obligations and to determine stand-alone selling prices used to allocate the transaction price to those performance obligations.

How We Addressed the Matter in Our Audit

We obtained an understanding, evaluated the design and tested the operating effectiveness of controls over the Company's process to identify and evaluate performance obligations and determine the stand-alone selling prices used to allocate the transaction price to those performance obligations.

Among other procedures to evaluate management’s identification and determination of the distinct performance obligations, we obtained an understanding of the Company’s various product and service offerings and tested the application of the revenue recognition accounting requirements to determine which performance obligations were distinct.

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Description of the Matter

During 2019, the Company completed its acquisitions of Providigm, LLC (Providigm) for consideration of $18.0 million and CredentialMyDoc for consideration of $9.0 million, as disclosed in Note 8 to the consolidated financial statements.

Both transactions were accounted for as business combinations.

The Company recorded definite-lived intangible assets of $6.0 million for Providigm and $4.3 million for CredentialMyDoc, primarily consisting of customer relationships and developed technology.

Auditing the Company's accounting for its acquisitions of Providigm and CredentialMyDoc was challenging due to the estimation uncertainty in the Company’s determination of the fair value of the customer relationships and developed technology.

During 2020, the Company completed four acquisitions for a total consideration of $121.3 million as disclosed in Note 8 to the consolidated financial statements.

These transactions were accounted for as business combinations.

The Company preliminarily allocated $43.3 million of the purchase price from the acquisitions of HcT2 Co.

dba NurseGrid (“NurseGrid”), ShiftWizard, Inc.

(“ShiftWizard”) and Change Healthcare’s staff scheduling business, consisting of the ANSOS TM Staff Scheduling application and related products (“ANSOS”) to the fair value of acquired customer relationships and developed technology intangible assets.

Auditing the Company's accounting for its acquisitions of NurseGrid, ShiftWizard, and ANSOS was challenging due to the estimation uncertainty in the Company’s determination of the fair value of the customer relationships and developed technology.

The estimation uncertainty was primarily due to the sensitivity of the respective fair values to the underlying significant assumptions.

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(the Company) maintained, in all material respects, effective internal control over financial reporting as of December 31, 2020, based on the COSO criteria.

As described in Management’s Report on Internal Control over Financial Reporting, management excluded the following acquired businesses from its assessment of internal control over financial reporting as of December 31, 2020:

(i) ShiftWizard, whose assets as of December 31, 2020 represented approximately 1% of the Company’s total consolidated assets as of such date, and whose net revenues during the year ended December 31, 2020 (including the period in 2020 prior to the Company’s acquisition of ShiftWizard) represented approximately 2% of the consolidated net revenues of the Company during its fiscal year ended December 31, 2020 , (ii) ANSOS, whose assets as of December 31, 2020 represented approximately 3% of the Company’s total consolidated assets as of such date, and whose net revenues represented during the year ended December 31, 2020 (including the period in 2020 prior to the Company’s acquisition of ANSOS) represented approximately 11% of the Company’s consolidated net revenues during its fiscal year ended December 31, 2020, and (iii) myClinicalExchange, whose assets as of December 31, 2020 represented less than 1% of the Company’s total consolidated assets as of such date, and whose net revenues during the year ended December 31, 2020 (including the period in 2020 prior to the Company’s acquisition of myClinicalExchange) represented less than 1% of HealthStream’s consolidated net revenues during such fiscal year.

Accordingly, our audit did not include the internal control over financial reporting with respect to the acquired businesses of ShiftWizard, ANSOS and myClinicalExchange.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of HealthStream, Inc.

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31,493 and 32,379 shares

issued and outstanding at December 31, 2019 and 2018,

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

Retained earnings

Accumulated other comprehensive income (loss)

Accumulated other comprehensive income

Total shareholders’ equity

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Discontinued operations

(Loss) income from discontinued operations before income tax provision

Loss from discontinued operations before income tax provision

Gain on sale of discontinued operations

Income tax provision (benefit)

Income tax provision

Income from discontinued operations

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Other comprehensive income, net of taxes:

Unrealized gain on marketable securities

Foreign currency translation adjustments

Unrealized (loss) gain on marketable securities

Total other comprehensive income

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Comprehensive income

Dividends declared on common stock ($ 1.00 per share)

Stock based compensation

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Balance at December 31, 2018

Cumulative effect of accounting change

Comprehensive income

Dividends declared on common stock ($ 1.00 per share)

Stock donated to Company (held in treasury)

Stock based compensation

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Balance at December 31, 2019

Dividend forfeitures on unvested equity awards

Comprehensive income

Stock donated to Company (held in treasury)

Stock based compensation

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shares withheld for employee taxes

Repurchase of common stock

Balance at December 31, 2020

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Deferred income taxes

(Gain) loss on equity method investments

Loss (gain) on equity method investments

Non-cash royalty expense

Change in fair value of non-marketable equity investments

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Deferred revenue

Net cash provided by continuing operating activities

Net cash (used in) provided by discontinued operating activities

Net cash provided by operating activities

Net cash used in discontinued operating activities

Net cash provided by operating activities

INVESTING ACTIVITIES:

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Proceeds from maturities of marketable securities

Proceeds from sales of marketable securities

Purchases of marketable securities

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Payment of earn-out related to prior acquisitions

Payment of debt issue costs

Payment of debt issue cost

Repurchases of common stock

Payment of cash dividends

Net cash (used in) provided by financing activities

Net cash used in financing activities

Effect of exchange rate changes on cash and cash equivalents

Net (decrease) increase in cash and cash equivalents

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Non-cash additions to property and equipment

Non-cash additions to non-marketable equity investments

See accompanying notes to the Consolidated Financial Statements.

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SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Reporting Entity and Segments

Description of Business

HealthStream, Inc.

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Workforce Solutions and Provider Solutions.

Workforce Solutions products help meet the ongoing training, certification, assessment, and development needs of the healthcare workforce;

they are delivered via a software-as-a-service (SaaS) model and are sold on a subscription basis.

Workforce Solutions products help meet the ongoing training, certification, assessment, development, and scheduling needs of the healthcare workforce;

they are primarily delivered via a software-as-a-service (SaaS) model and are sold on a subscription basis.

Provider Solutions products offer healthcare organizations software applications for administering and tracking provider credentialing, privileging, call center, and enrollment activities.

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Recently Adopted Accounting Standards

In February 2016, the FASB issued ASU 2016-02, Leases (ASC 842) , which, among other things, requires an entity to recognize a right-of-use asset and a lease liability on the balance sheet for substantially all leases, including operating leases.

The Company adopted ASC 842 effective January 1, 2019 utilizing the modified retrospective approach such that prior year financial statements were not recast under the new standard.

Adoption of this standard resulted in changes to the Company’s Consolidated Balance Sheets and accounting policies for leases but did not have an impact on the Consolidated Statements of Income or Cash Flows.

See Note 15 for additional information regarding the new standard and its impact on the Company’s financial statements.

In June 2016, the Financial Accounting Standards board (FASB) issued Accounting Standards Update (ASU) 2016-03, Financial Instruments—Credit Losses (ASU 326):

Measurement of Credit Losses on Financial Instruments , which amends the impairment model by requiring entities to use a forward-looking approach, based on expected losses, to estimate credit losses on certain types of financial instruments, including trade accounts receivables.

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.

Recognition of Revenue

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For these contracts, the Company accounts for the promised goods and services in its contracts as separate performance obligations if they are distinct.

The contract price, which represents transaction price, is allocated to the separate performance obligations on a relative standalone selling price basis.

We generally determine standalone selling prices based on the standard list price for each product, taking into consideration certain factors, including contract length and the number of subscriptions within the contract.

HEALTHSTREAM, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

The contract price, which represents transaction price when the contract reflects a fixed fee arrangement, or management’s estimate of variable consideration including application of the constraint when the contract does not have a fixed fee, is allocated to the separate performance obligations on a relative standalone selling price basis.

We receive payments from customers based on billing schedules established in our contracts.

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

Principles of Consolidation

Basis of Presentation

The Consolidated Financial Statements include the accounts of the Company and its wholly owned subsidiaries.

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Use of Estimates

The Consolidated Financial Statements are prepared in accordance with U.S.

generally accepted accounting principles.

The Consolidated Financial Statements are prepared in accordance with United States generally accepted accounting principles.

These accounting principles require management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes.

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Deferred Commissions

Deferred commissions represent incremental costs to acquire contracts with customers, such as the initial sales commission payment, which are capitalized and amortized consistent with the transfer of the goods or services to the customer over the expected period of benefit.

Deferred commissions represent incremental costs to acquire contracts with customers, such as the initial sales commission payment and associated payroll taxes, which are capitalized and amortized consistent with the transfer of the goods or services to the customer over the expected period of benefit.

Capitalized contract costs are included under the caption deferred commissions in the accompanying Consolidated Balance Sheet.

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Amortization of royalties is included under the caption cost of revenues (excluding depreciation and amortization) in the accompanying Consolidated Statements of Income.

HEALTHSTREAM, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Allowance for Doubtful Accounts

The Company estimates its allowance for doubtful accounts to include accounts that may become uncollectible in the future, along with using a specific identification method in which management considers the facts and circumstances surrounding each potentially uncollectible receivable.

The Company estimates its allowance for doubtful accounts based on its historical collection experience, a review in each period of the status of the then-outstanding accounts receivable, and external market factors.

Uncollectible receivables are written-off in the period management believes it has exhausted its ability to collect payment from the customer.

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Property and equipment are stated on the basis of cost.

Depreciation is provided on the straight-line method over the following estimated useful lives, except for assets under financing leases and leasehold improvements, which are amortized over the shorter of the estimated useful life or their respective lease term.

Depreciation is provided on the straight-line method over the following estimated useful lives, except for leasehold improvements, which are amortized over the shorter of the estimated useful life or their respective lease term.

Furniture and fixtures

HEALTHSTREAM, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Goodwill and Intangible Assets

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A qualitative assessment includes factors such as financial performance, industry and market metrics, and other factors affecting the reporting unit.

If this assessment concludes that it is more likely than not that the fair value of a reporting unit exceeds its carrying value, then goodwill is not considered impaired and no further impairment testing is required.

If this assessment concludes that it is more likely than not that the

fair value of a reporting unit exceeds its carrying value, then goodwill is not considered impaired and no further impairment testing is required.

Conversely, if the qualitative assessment concludes that it is more likely than not that the fair value of a reporting unit is less than its carrying value, we must then compare the fair value of the reporting unit to its carrying value.

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As of December 31, 2020, intangible assets include customer relationships, internally developed technology, non-competition agreements, and trade names.

These intangible assets are considered to have definite useful lives and are being amortized on a straight-line basis over periods ranging between three and thirteen years .

Intangible assets that are considered to have definite useful lives are being amortized on a straight-line basis over periods ranging between three and eighteen years .

The weighted average amortization period for definite lived intangible assets as of December 31, 2020 was 11.4 years.

Intangible assets are reviewed for impairment whenever events or changes in facts or circumstances indicate that the carrying amount of the assets may not be recoverable.

Intangible assets considered to have indefinite useful lives are evaluated for impairment at least annually during the fourth quarter, and all intangible assets are reviewed for impairment whenever events or changes in facts or circumstances indicate that the carrying amount of the assets may not be recoverable.

There were no intangible asset impairments identified or recorded for the years ended December 31, 2020, 2019, or 2018.

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Non-Marketable Equity Investments

Non-marketable equity investments are accounted for using the equity method when the Company can exercise significant influence over the investee.

Investments for which the Company is not able to exercise significant influence over the investee 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) , became effective for the Company as of January 1, 2018 and 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.

Non-marketable equity investments in limited liability companies with specific ownership accounts for each investor not resulting in a controlling financial interest are accounted for using the equity method of accounting.

Non-marketable equity investments of preferred stock in corporations that do not result in a controlling financial interest are accounted for using the measurement alternative for equity investments that do not have readily determinable fair values.

ASU 2016-01, Financial Instruments – Overall (Subtopic 825-10) requires equity investments (except those accounted for under the equity method of accounting or those that result in consolidation of the investee) to be measured at fair value with changes in fair value recognized in net income.

The fair value of non-marketable equity investments is not estimated if there are no identified events or changes in circumstances that may have a significant adverse effect on the fair value of the investment.

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The Company expenses the costs of advertising as incurred.

Advertising expense for the years ended December 31, 2019, 2018, and 2017 was $ 765,000 , $ 721,000 , and $ 868,000 , respectively, and is included under the caption sales and marketing expense in the accompanying Consolidated Statements of Income.

Advertising expense for the years ended December 31, 2020, 2019, and 2018 was $ 1.1 million, $ 0.8 million, and $ 0.7 million, respectively, and is included under the caption sales and marketing expense in the accompanying Consolidated Statements of Income.

Shipping and Handling Costs

Shipping and handling costs that are associated with our products and services are included under the caption cost of revenues (excluding depreciation and amortization) in the accompanying Consolidated Statements of Income.

HEALTHSTREAM, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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.

measured at tax rates that will be in effect for the year in which the differences are expected to affect taxable income.

Management evaluates all available evidence, both positive and negative, to determine whether, based on the weight of that evidence, a valuation allowance is needed.

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Management reviews the realizability of its deferred tax assets each reporting period to identify whether any significant changes in circumstances or assumptions have occurred that could materially affect the realizability of deferred tax assets.

As of December 31, 2019, the Company had established a valuation allowance of $ 64,000 for the portion of its net deferred tax assets that are not more likely than not expected to be realized.

As of December 31, 2020 , the Company had established a valuation allowance of $ 0.6 million for the portion of its net deferred tax assets that are not more likely than not expected to be realized.

The Company accounts for income tax uncertainties using a more-likely-than-not recognition threshold based on the technical merits of the tax position taken.

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Stock Based Compensation

As of December 31, 2019, the Company maintained two stock based compensation plans under which awards are outstanding, as described in Note 11.

As of December 31, 2020, the Company maintained one stock based compensation plan under which awards are outstanding, as described in Note 11.

The Company accounts for stock based compensation using the fair-value based method for costs related to share-based payments, including stock options and restricted share units.

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Excess tax benefits are reflected in the Consolidated Statements of Income as a component of the provision for income taxes when realized.

Recently Issued Accounting Pronouncements Not Yet 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 current 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 is not expected to be material.

HEALTHSTREAM, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

The Company has various non-cancelable agreements to lease office space.

Effective January 1, 2019 , the Company adopted ASC 842, which requires an entity to recognize a right-of-use (ROU) asset and a lease liability on the balance sheet for substantially all leases, including operating leases, using the modified retrospective approach.

The Company elected to use the package of practicable expedients allowing companies to not reassess:

(1) the lease classification for any expired or existing leases, (2) the treatment of initial direct costs as they related to existing leases, and (3) whether existing contracts are or contain leases.

The Company did not elect the use of the hindsight practical expedient but did elect the practical expedient not to separate lease components from non-lease components related to its office space leases.

The Company does not have any lease contracts that contain:

(1) an option to extend that the Company is reasonably certain to exercise, (2) an option to terminate that the Company is reasonably certain not to exercise, or (3) an option to extend (or not to terminate) in which exercise of the option is controlled by the lessor.

Additionally, the Company does not have any leases with residual value guarantees or material restrictive covenants.

For leases already commenced, the lease term was determined to be the remaining months in the lease term as of January 1, 2019, the date of adoption, or for current year acquisitions, the date of acquisition.

The Company has elected not to recognize leases with initial terms of one year or less on the balance sheet.

Lease liabilities and their corresponding right-of-use assets have been recorded based on the present value of the future lease payments over the expected lease term.

Most of the Company’s lease agreements contain provisions for escalating rent payments over the terms of the leases, which escalations are either fixed within the contract or are variable based on the consumer price index.

The Company’s leases do not contain readily determinable implicit discount rates, and as such the Company must use its incremental borrowing rate to discount the future lease payments based on information available at lease commencement.

The incremental borrowing rate was estimated by determining the rate of interest that the Company would have to pay to borrow on a collateralized basis over a similar term an amount equal to the lease payments in a similar economic environment.

Foreign Currency

The functional currency for the Company’s subsidiaries is determined based on the primary economic environment in which the subsidiary operates.

The Company translates the assets and liabilities of its non-U.S.

dollar functional currency subsidiaries into U.S.

dollars using exchange rates in effect at the end of each period.

Revenues and expenses for these subsidiaries are translated using rates that approximate those in effect during the period.

Gains and losses from these translations are recognized as cumulative translation adjustment included in accumulated other comprehensive income in the Consolidated Balance Sheets.

SHAREHOLDERS’ EQUITY

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The Company is authorized to issue up to 10 million shares of preferred stock in one or more series, having the relative voting powers, designations, preferences, rights and qualifications, limitations or restrictions, and other terms as the Board of Directors may fix in providing for the issuance of such series, without any vote or action of the shareholders.

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.

During the year ended December 31, 2020, the Company repurchased 957,367 shares at an aggregate fair value of $ 20.0 million, based on an average price per share of $ 20.89 (excluding the cost of broker commissions).

EARNINGS PER SHARE

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Weighted-average diluted shares

Earnings per share – basic:

Net income per share – basic:

Continuing operations

Discontinued operations

Earnings per share - basic

Earnings per share – diluted:

Net income per share - basic

Net income per share – diluted:

Continuing operations

Discontinued operations

Earnings per share - diluted

Net income per share - diluted

Potentially dilutive shares representing 122,000 , 93,000 , and 91,000 shares of common stock for the years ended December 31, 2020, 2019, and 2018, respectively, were excluded from the calculation of diluted earnings per share because their effect would have been anti-dilutive.

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December 31, 2020

Cash and Cash Equivalents

Current Marketable Securities

Time deposits

Corporate debt securities

Government-sponsored enterprise debt securities

HEALTHSTREAM, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2019

Cash and Cash Equivalents

Current Marketable Securities

Corporate debt securities

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Total revenues, net

Year Ended December 31, 2018

Business Segments

Subscription services

Professional services

Total revenues, net

For the years ended December 31, 2020 and 2019, the Company recognized $ 0.3 million and $ 0.2 million, respectively, in impairment losses on receivables and contract assets arising from the Company’s contracts with customers.

During the years ended December 31, 2019 and 2018, we recognized revenues of $ 64.7 million and $ 63.7 million from amounts included in deferred revenue at the beginning of the respective period.

During the years ended December 31, 2020, 2019, and 2018, we recognized revenues of $ 64.5 million, $ 64.7 million, and $ 63.7 million from amounts included in deferred revenue at the beginning of the respective period.

As of December 31, 2020, $ 464 million of revenue is expected to be recognized from remaining performance obligations under contracts with customers.

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

The Company’s sales commission plans for 2018 and 2019 included multiple payments, including an initial payment in the period a customer contract is obtained and subsequent payments either 15 or 27 months after the initial payment.

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

The capitalized contract cost is included in deferred commissions in the accompanying Consolidated Balance Sheets.

The Company recorded amortization of deferred commissions of $ 8.3 million and $ 7.7 million for

HEALTHSTREAM, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

the year s ended December 31, 201 9 and 2018 , which is included in s ales and marketing expenses in the accompanying C onsolidated S tatement s of I ncome.

Under ASC 606, costs to acquire contracts with customers, such as the initial sales commission payment and associated payroll taxes, 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.

Capitalized contract costs are 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 $ 8.8 million, $ 8.3 million, and $ 7.7 million for the years ended December 31, 2020, 2019 and 2018, which is included in sales and marketing expenses in the accompanying Consolidated Statements of Income.

PROPERTY AND EQUIPMENT

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Balance at January 1, 2020

Acquisition of Providigm, LLC

Acquisition of CredentialMyDoc

Acquisition of NurseGrid

Acquisition of ShiftWizard

Acquisition of ANSOS

Acquisition of myClinicalExchange

Post-closing adjustment for CredentialMyDoc

Balance at December 31, 2020

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Balance at January 1, 2019

Changes in carrying amount

Acquisition of Providigm, LLC

Acquisition of CredentialMyDoc

Balance at December 31, 2019

During the year ended December 31, 2019, the Company recorded $ 11.4 million of goodwill in relation to the January 2019 acquisition of Providigm, LLC as well as $ 4.7 million of goodwill in relation to the December 2019 acquisition of CredentialMyDoc.

Intangible assets other than goodwill are considered to have finite useful lives.

Customer-related intangibles consist of customer relationships and are amortized over their estimated useful lives ranging from five to thirteen years .

Other intangible assets include technology, non-competition agreements, and trade names and are amortized over their estimated useful lives ranging from three to nine years .

Intangible assets other than goodwill that are considered to have finite useful lives include customer-related intangibles consisting of customer relationships, which are amortized over their estimated useful lives ranging from five to eighteen years , and other intangible assets consisting of technology, non-competition agreements, and trade names, which are amortized over their estimated useful lives ranging from one to nine years .

The Company also recorded an indefinite lived intangible for a trade name valued at $ 0.7 million.

Amortization of intangible assets was $ 10.5 million, $ 9.6 million, and $ 9.1 million for the years ended December 31, 2020, 2019, and 2018, respectively.

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Customer related

HEALTHSTREAM, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

The expected future annual amortization expense for the years ending December 31, is as follows (in thousands):

BUSINESS COMBINATIONS

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 held in NurseGrid, 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.

Acquisition-related transaction costs were $ 0.2 million.

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

Post-closing adjustment, net of cash received

Cash acquired

Net consideration paid

Fair value of existing equity interest in NurseGrid

Net consideration paid

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

Prepaid and other current assets

Operating lease right-of-use assets

Deferred tax assets

Intangible assets

Accounts payable and accrued liabilities

Deferred revenue

Operating lease liabilities

Net assets acquired

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 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 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 components of identifiable intangible assets and their estimated useful lives as of the acquisition date (in thousands):

Customer relationships

Developed technology

Total intangible assets

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

Total revenues

Operating loss

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):

Total revenues

Income from continuing operations

Net income per share - basic

Net income per share - diluted

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.

On October 12, 2020, the Company acquired all of the outstanding stock of ShiftWizard, Inc.

(ShiftWizard) a Raleigh, North Carolina-based healthcare technology company offering a SaaS-based solution that integrates key workforce management capabilities, including scheduling, productivity, and forecasting.

The consideration paid for ShiftWizard consisted of $ 30.2 million in cash and is subject to a post-closing working capital and purchase price adjustment, of which $ 0.3 million has been accrued as a liability as of December 31, 2020.

Of the purchase price paid at closing, $ 0.5 million is being held in escrow for a period of time following the closing to serve as a source of recovery for certain potential indemnification claims by the Company.

Acquisition-related transaction costs were $ 0.3 million.

The financial results of ShiftWizard have been included in the Workforce Solutions segment from October 12, 2020.

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

Prepaid assets

Operating lease right-of-use assets

Property and equipment

Indemnification assets

Intangible asset

Accounts payable and accrued liabilities

Deferred revenue

Deferred tax liability

Operating lease liabilities

Indemnification liability

Net assets acquired

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

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

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 and working capital.

Included in the preliminary assets and liabilities is an indemnification asset and liability of $0.5 million associated with a Paycheck Protection Program loan pending forgiveness that has subsequently been forgiven.

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 ShiftWizard products, and expected synergies from integrating ShiftWizard with other products or 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 $ 2.7 million to an estimated fair value of $ 1.6 million.

The $ 1.1 million 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):

Customer relationships

Developed technology

Total preliminary intangible assets subject to amortization

The amounts of revenue and operating loss of ShiftWizard included in the Company’s Consolidated Statement of Income since the date of acquisition of October 12, 2020 through December 31, 2020 are as follows (in thousands):

Total revenues

Operating loss

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

Total revenues

Income from continuing operations

Net income per share - basic

Net income per share - diluted

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.

ANSOS TM Staff Scheduling application

On December 2, 2020, the Company acquired all of the equity interests of Change Healthcare’s staff scheduling business, consisting of the ANSOS TM Staff Scheduling application and related products (ANSOS).

The consideration paid for ANSOS was $ 68.0 million in cash, subject to a post-closing working capital and purchase price adjustment.

Of the purchase price paid at closing, $ 0.3 million is being held in escrow for a period of time following the closing to serve as a source of recovery for certain potential indemnification claims by the Company.

Acquisition-related transaction costs were $ 1.1 million.

The financial results of ANSOS have been included in the Workforce Solutions segment from December 2, 2020.

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

Prepaid assets

Operating lease right-of-use assets

Property and equipment

Deferred tax assets

Indemnification asset

Intangible assets

Accounts payable and accrued liabilities

Deferred revenue

Operating lease liabilities

Uncertain tax position liability

Net assets acquired

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

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

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

Included in the preliminary assets and liabilities acquired is an indemnification asset and an uncertain tax position liability of $ 0.7 million determined based on management’s estimate of the most likely value related to income tax attributes.

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

The fair value estimate for customer relationships intangible asset included significant assumptions regarding prospective financial information with respect to the acquisition, including with respect to 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 ANSOS products, and expected synergies from integrating ANSOS 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 $ 17.8 million to an estimated fair value of $ 14.5 million.

The $ 3.3 million 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):

Customer relationships

11 - 14 years

Developed technology

Total preliminary intangible assets subject to amortization

The amounts of revenue and operating loss of ANSOS included in the Company’s Consolidated Statement of Income since the date of acquisition of December 2, 2020 through December 31, 2020 are as follows (in thousands):

Total revenues

Operating loss

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

Total revenues

Income from continuing operations

Net income per share - basic

Net income per share - diluted

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.

Providigm, LLC

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The consideration paid for Providigm consisted of $ 18.0 million in cash, which the Company funded with cash on hand.

In addition, up to an additional $ 500,000 in cash may be paid by the Company based on the financial performance of Providigm during an 18-month period following closing.

Of the purchase price paid by the Company at closing, $ 3.65 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 Company incurred $ 388,000 in transaction costs, of which $ 63,000 was incurred during 2019 and $ 325,000 was incurred during 2018.

The transaction costs were recorded in other general and administrative expense in the Consolidated Statements of Income.

The results of operations for Providigm have been included in the Workforce 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 (including the post-closing working capital adjustment)

Cash held in escrow

Total consideration paid

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

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The net tangible assets include deferred revenue, which was adjusted down from a book value at the acquisition date of $ 266,000 to an estimated fair value of $ 141,000 .

The $ 125,000 write-down of deferred

HEALTHSTREAM, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

revenue will result in lower revenues than would have otherwise been recognized for such services.

The acquired assets and liabilities include a $ 750,000 indemnification asset and liability related to tax liabilities.

The purchase agreement also provides that the Company will pay up to $ 500,000 of additional consideration based on the achievement of financial performance targets by Providigm during an 18-month period following the closing date.

Management assessed the likelihood of achieving the se financial performance targets, which has been included in the purchase price allocation.

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

The $ 125,000 write-down of deferred revenue will result in lower revenues than would have otherwise been recognized for such services.

The acquired assets and liabilities included a $ 0.8 million indemnification asset and liability determined based on management’s estimate of the most likely value related to tax liabilities .

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

Customer relationships

1 unchanged sentence

Total preliminary intangible assets subject to amortization

The amounts of revenue and operating loss of Providigm included in the Company’s Consolidated Statement of Income since the date of acquisition of January 10, 2019 for the twelve months ended December 31, 2019 are as follows (in thousands):

Revenues, net

Operating loss

The following unaudited pro forma financial information summarizes the results of operations of the Company and Providigm as though the companies were combined as of January 1, 2018 (in thousands, except per share data):

For the twelve months ended

Total revenues

Income from continuing operations

Net income per share - basic

Net income per share - diluted

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 Providigm’s previously outstanding debt, and fair value adjustments of acquired deferred revenue balances.

The unaudited pro forma combined results of operations are 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.

Pro forma results of operations have not been presented as the impact of the acquisition is not material to the Company’s financial results.

CredentialMyDoc

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

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

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

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

Acquisition-related transaction costs were $ 90,000 .

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

Cash held in escrow

Total consideration paid

HEALTHSTREAM, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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

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

Accounts and unbilled receivable, net

7 unchanged sentences

Net assets acquired

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

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

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 regarding prospective financial information with respect to this acquisition, including with respect to revenue growth, customer attrition, and EBITDA margin, and the discount rate.

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

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

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

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.

3 unchanged sentences

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

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

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

Preliminary Fair value

2 unchanged sentences

Total intangible assets subject to amortization

The amounts of revenue and operating loss of CredentialMyDoc included in the Company’s Consolidated Statement of Income since the date of acquisition of December 16, 2019 for the twelve months ended December 31, 2019 are as follows (in thousands):

Total revenues

Operating loss

HEALTHSTREAM, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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, 2018 (in thousands, except per share data):

Total revenues

Income from continuing operations

Net income per share - basic

Net income per share - diluted

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.

Pro forma results of operations have not been presented as the impact of the acquisition is not material to the Company’s financial results.

Other Business Combinations

On December 10, 2020, the Company acquired substantially all of the assets of myClinicalExchange, LLC, a Denver, Colorado-based information technologies company offering a SaaS-based solution that allows healthcare organizations to track, manage, and report the intern and clinical rotation educational requirements of medical, nursing, and allied healthcare students, as well as host required documentation for medical residents.

The consideration paid for myClinicalExchange consisted of $ 4.4 million in cash.

Of the purchase price paid at closing, $ 0.4 million is being held in escrow for a period of time following the closing to serve as a source of recovery for certain potential indemnification claims by the Company.

Acquisition-related transaction costs were $ 0.1 million.

The acquisition is not considered material to the Company’s financial statements.

The Company accounted for the acquisition as a business combination and has allocated the purchase consideration based on management’s estimates of fair value.

The results of operations for myClinicalExchange are included in the Company’s consolidated financial statements from the date of acquisition and are included in the HealthStream Workforce Solutions segment.

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, call center, and enrollment products and services (Provider Solutions).

The Company’s services are focused on the delivery of workforce training, certification, assessment, development, and scheduling products and services (Workforce Solutions) and provider credentialing, privileging, call center, 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, gains and losses from equity investments, 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 Unallocated component below includes corporate functions, such as accounting, human resources, legal, information systems, 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 as of and for the years ended December 31, 2020, 2019, and 2018 (in thousands).

15 unchanged sentences

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

HEALTHSTREAM, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

The provision (benefit) for income taxes is comprised of the following (in thousands):

Components of earnings before income taxes are as follows (in thousands):

Year Ended December 31,

United States

Earnings before income taxes

The provision for income taxes is comprised of the following (in thousands):

Year Ended December 31,

Current federal

Current state

Current foreign

Deferred federal

Deferred state

Deferred foreign

Provision for income taxes

3 unchanged sentences

State income tax provision, net of federal benefit

Change in state valuation allowance

Tax Act revaluation of deferred tax balances

Change in valuation allowance

Impact of foreign operations

Stock compensation

1 unchanged sentence

Management periodically assesses the realizability of its deferred tax assets, and to the extent that a recovery is not likely, a valuation allowance is established to reduce the deferred tax asset to the amount estimated to be recoverable.

At December 31, 2019, the Company has a valuation allowance of $ 64,000 recorded against deferred tax assets for state net operating losses.

As of December 31, 2019, the Company had state net operating loss carryforwards of $ 5.0 million.

At December 31, 2020, the Company has a valuation allowance of $ 0.6 million recorded against deferred tax assets for state net operating losses and certain foreign deferred tax assets.

As of December 31, 2020, the Company had federal, state, and foreign net operating loss carryforwards of $ 13.2 million, $ 23.2 million, and $ 0.2 million, respectively.

Certain losses have an indefinite carryforward period, while other loss carryforwards will expire in years 2021 through 2041 .

The Company is subject to income taxation at the federal and various state levels.

The net operating loss carryforwards may be subject to annual limitations under Internal Revenue Code Section 382.

The annual limitations could result in the expiration of a portion of net operating loss and tax credit carryforwards before they are fully utilized.

The Company is subject to income taxation at the federal, foreign, and various state levels.

The Company is no longer subject to U.S.

federal tax examinations for tax years before 2016, and with few exceptions, the Company is not subject to examination by state tax authorities for tax years which ended before 2016.

federal tax examinations for tax years before 2017, and with few exceptions, the Company is not subject to examination by foreign or state tax authorities for tax years which ended before 2017.

Loss carryforwards and credit carryforwards generated or utilized in years earlier than 2017 are also subject to examination and adjustment.

On December 22, 2017, the President signed into law the Tax Cuts and Jobs Act (the Tax Act), reducing the U.S.

corporate income tax rate to 21 % effective January 1, 2018.

The Company reflected the income tax effects of the Tax Act as of December 31, 2017.

A reconciliation of the beginning and ending liability for gross unrecognized tax benefits are as follows (in thousands):

1 unchanged sentence

Additions for tax positions in the current year

Reductions for tax positions of prior years

Additions for tax positions of prior years

Balance at end of year

1 unchanged sentence

Unrecognized tax benefits included tax positions of $ 317,000 for both December 31, 2020 and 2019, that if recognized would impact the Company’s effective tax rate.

The reduction for tax positions of prior years reflected in the table above as of December 31, 2018 relates to an item considered to be effectively settled due to lapse of the statute of limitations.

HEALTHSTREAM, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

The balance of the remaining unrecognized tax benefits are not expected to have a rate impact due to the liability being subject to an indemnification agreement.

Deferred federal and state income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes.

17 unchanged sentences

Capitalized software development

PX sale deferral

Total deferred tax liabilities

Net deferred tax liabilities

The Company realized $ 117,000 of excess tax benefits related to stock based awards during the year ended December 31, 2019, which was reflected in the statement of income as a component of the provision for income taxes.

The Company realized $ 27,000 of excess tax expense related to stock based awards during the year ended December 31, 2020, which was reflected in the statement of income as a component of the provision for income taxes.

STOCK BASED COMPENSATION

Stock Incentive Plans

The Company has outstanding stock based awards under its 2016 Omnibus Incentive Plan (2016 Plan) and 2010 Stock Incentive Plan (2010 Plan) (collectively, the 2016 Plan and the 2010 Plan, referred to as the Plans).

In addition, the 2016 Plan authorizes the grant of options, restricted share units (RSUs), or other forms of stock based compensation to employees, officers, directors, and others, and such grants must be approved by the Compensation Committee of the Board of Directors.

Stock Incentive Plan

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

The 2016 Plan authorizes the grant of options, restricted share units (RSUs), or other forms of stock based compensation to employees, officers, directors, and others, and such grants must be approved by the Compensation Committee of the Board of Directors.

The 2016 Plan allows the Compensation Committee of the Board of Directors to determine the vesting period and parameters of each grant.

The vesting period of the options and RSUs granted has historically ranged from immediate vesting to annual vesting up to four years , generally beginning one year after the grant date.

As of December 31, 2019, 867,000 shares of unissued common stock remained reserved for future stock incentive grants under the 2016 Plan.

The Company issues new shares of common stock when options are exercised or when RSUs become vested.

HEALTHSTREAM, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

As of December 31, 2020, 626,000 shares of common stock were available to be granted under the 2016 Plan.

Stock Option Activity

8 unchanged sentences

Cash proceeds from exercise of stock options

The aggregate intrinsic value for stock options in the table above represents the total difference between the Company’s closing stock price on December 31, 2020 (the last trading day of the year) of $ 21.84 per share and the option exercise price, multiplied by the number of in-the money options as of December 31, 2020.

The weighted average remaining contractual term of options outstanding at December 31, 2020 was 10 years.

Restricted Share Unit Activity

3 unchanged sentences

Outstanding at end of period

The aggregate intrinsic value for stock options represents the total difference between the Company’s closing stock price on December 30, 2019 (the last trading day of the year) of $ 27.22 per share and the grant date fair value, multiplied by the number of unvested RSUs as of December 31, 2019.

The aggregate fair value of RSUs that vested during the year ended December 31, 2020 and 2019, as of the respective vesting dates, was $ 2.2 million and $ 1.9 million, respectively.

2 unchanged sentences

Total payments related to RSUs for the employees’ tax obligations to taxing authorities were $ 0.4 million in 2020, $ 0.4 million in 2019, and $ 0.3 million in 2018, and are reflected as a financing activity within the Consolidated Statements of Cash Flows.

These net-share settlements had the effect of share repurchases by the Company as they reduced and retired the number of shares that would have otherwise been issued as a result of the vesting and did not represent an expense to the Company.

HEALTHSTREAM, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Stock Based Compensation

8 unchanged sentences

As of December 31, 2020, total unrecognized compensation expense related to non-vested stock options and RSUs was $ 4.3 million, net of estimated forfeitures, with a weighted average expense recognition period remaining of 2.6 years.

The Company realized $ 117,000 of excess tax benefits related to stock based awards during the year ended December 31, 2019, which was reflected in the Consolidated Statement of Income as a component of the provision for income taxes.

The Company realized $ 27,000 of excess tax expense related to stock based awards during the year ended December 31, 2020, which was reflected in the Consolidated Statement of Income as a component of the provision for income taxes.

Stock based compensation cost for RSUs is measured based on the closing fair market value of the Company’s stock on the date of grant.

Stock based compensation cost for stock options is estimated at the grant date based on the fair value calculated using the Black-Scholes method.

The Company did no t grant any stock options during the years ended December 31, 2019, 2018, or 2017.

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

10 unchanged sentences

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

HEALTHSTREAM, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

EMPLOYEE BENEFIT PLAN

7 unchanged sentences

The Company has classified the results of its PX business segment as discontinued operations in its Consolidated Statements of Income and Cash Flows for all periods presented.

The financial results of the PX business for the period prior to divestiture during the years ended December 31, 2018 and 2017 are presented in discontinued operations in the Company’s Consolidated Statements of Income.

The following table presents the financial results of the PX business (in thousands):

Revenues, net

Operating costs and expenses:

Cost of revenues (excluding depreciation and amortization)

Product development

Sales and marketing

Other general and administrative expenses

Depreciation and amortization

Total operating costs and expenses

Operating (loss) income

(Loss) income from discontinued operations before income tax provision

Income tax benefit

(Loss) income from discontinued operations, net of income taxes

At December 31, 2020 and 2019, the Company had no debt outstanding.

Revolving Credit Facility

The Company entered into a Second Amendment to Revolving Credit Agreement (Revolving Credit Facility), amending the Revolving Credit Facility, dated as of December 31, 2018 with SunTrust Bank (SunTrust), extending 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

HEALTHSTREAM, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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 Company entered into a Third Amendment to Revolving Credit Agreement (Revolving Credit Facility), amending the Revolving Credit Facility, dated as of November 24, 2014 with Truist Bank, successor by merger to SunTrust Bank (Truist), extending the maturity date to October 28, 2023 .

The Amendment also increased the capacity under the Revolving Credit Facility to $ 65.0 million, which continues to include 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.

In addition, the Amendment, among other things, (i) increased the basket for dividends to $ 65.0 million so long as the pro forma leverage ratio is less than or equal to 1.50 :1.00 and the Company has minimum liquidity of $ 30.0 million, (ii) increased the basket for permitted minority owned investments to $ 20.0 million, (iii) added a LIBOR floor of 0.50 %, and (iv) adjusted the applicable margin.

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 Truist’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 1.75 %.

1 unchanged sentence

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.

Principal is payable in full at maturity on October 28, 2023, 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 obligations under the Revolving Credit Facility are guaranteed by each of the Company’s subsidiaries.

The purpose of the Revolving Credit Facility is for general working capital needs, permitted acquisitions (as defined in the Loan Agreement), and for stock repurchase and/or redemption transactions that the Company may authorize.

5 unchanged sentences

There were no balances outstanding on the Revolving Credit Facility as of December 31, 2020 and there were no borrowings under the Revolving Credit Facility during the year ended December 31, 2020.

Effective January 1, 2019, the Company adopted ASC 842, which requires an entity to recognize a right-of-use (ROU) asset and a lease liability on the balance sheet for substantially all leases, including operating leases, using the modified retrospective approach.

The Company elected to use the package of practicable expedients allowing companies to not reassess:

Upon adoption of ASC 842, the Company had non-cancellable operating leases for office space subject to recognition as ROU assets.

Accordingly, on January 1, 2019 the Company recorded $ 4.8 million in ROU assets and $ 6.4 million in operating lease liabilities (the difference of $ 1.6 million related to existing deferred rent liabilities as of December 31, 2018 which had the effect of reducing the ROU asset upon adoption).

During 2019, the Company acquired operating leases as part of its acquisitions of Providigm, resulting in a $ 1.2 million ROU asset and lease liability, and CredentialMyDoc, resulting in a $ 30,000 ROU asset and lease liability, and another operating lease for office space commenced for the Company’s new corporate headquarters in Nashville, TN, resulting in a $ 26.5 million ROU asset and lease liability.

As of December 31, 2019, the Company had one lease that had not yet commenced that will add $ 85,000 to ROU asset and lease liability upon commencement on January 1, 2020.

The Company does not have any lease contracts that contain:

Additionally, the Company does not have any leases with residual value guarantees or material restrictive covenants.

For leases already commenced, the lease term was determined to be the remaining months in the lease term as of January 1, 2019, the date of adoption.

The Company has elected not to recognize leases with initial terms of one year or less on the balance sheet.

Lease liabilities and their corresponding right-of-use assets have been recorded based on the present value of the future lease payments over the expected lease term.

Most of the Company’s lease agreements contain provisions for escalating rent payments over the terms of the leases.

HEALTHSTREAM, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

The Company’s operating lease cost as presented in other general and administrative expense in the Consolidated Statement of Income was $ 4.9 million for the twelve months ended December 31, 2019.

Cash paid for amounts included in the measurement of operating lease liabilities was $ 2.5 million for the year ended December 31, 2019.

During 2020, the Company acquired operating leases as part of its acquisitions of NurseGrid, Shiftwizard, and ANSOS, resulting in a $ 1.1 million ROU asset and lease liability.

As of December 31, 2020, the Company did no t have any leases that have not yet commenced.

The Company’s operating lease expense as presented in other general and administrative expense in the Consolidated Statement of Income was $ 4.8 million and $ 4.9 million for the twelve months ended December 31, 2020 and 2019.

Cash paid for amounts included in the measurement of operating lease liabilities was $ 4.9 million and $ 2.5 million for the year ended December 31, 2020 and December 31, 2019.

As of December 31, 2020, the weighted-average remaining lease term was 9.6 years, and the weighted-average incremental borrowing rate was 6 %.

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Total lease liabilities

COLLABORATIVE ARRANGEMENT

The Company participated in a collaborative arrangement, SimVentures TM , with Laerdal Medical A/S (Laerdal Medical), which ended effective March 1, 2018.

Prior to the termination of this collaborative arrangement, the Company received 50 percent of the profits or losses generated from the collaborative arrangement.

For the year ended December 31, 2018, the Company recorded $ 391,000 of revenues and $ 187,000 of expenses related to the collaborative arrangement.

For the year ended December 31, 2017, the Company recorded $ 2.2 million of revenues and $ 1.2 million of expenses related to the collaborative arrangement.

In connection with its business, the Company is from time to time involved in various legal actions.

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NON-MARKETABLE EQUITY INVESTMENTS

Non-marketable equity investments where the Company is not able to exercise significant influence over the investee are accounted for using the measurement alternative for equity investments that do not have readily determinable fair values.

The aggregate carrying amount of all non-marketable equity investments was $ 5.4 million and $ 2.1 million for the years ended December 31, 2019 and 2018, respectively, which carrying value we evaluate for impairment at each reporting period.

The aggregate carrying amount of non-marketable equity investments accounted for using the measurement alternative for equity investments that do not have readily determinable fair values was $ 3.9 million and $ 5.9 million for the years ended December 31, 2020 and 2019, respectively, which carrying value we evaluate for impairment at each reporting period.

During the year ended December 31, 2020, the Company recorded a $ 1.2 million upward adjustment to the carrying value of our non-marketable equity investment in NurseGrid due to a change in fair value based on the consideration paid upon 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.

Cumulatively, the Company has recorded $ 1.3 million in reductions to the carrying value of non-marketable equity investments due to downward changes in fair value based on observable prices from orderly transactions for similar investments made in the investee.

HEALTHSTREAM, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

SUBSEQUENT EVENT

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 liability will be recorded as a $ 3.4 million reduction to cost of goods sold in the first quarter of 2020.

On January 19, 2021, the Company acquired the issued and outstanding equity of ProcessDATA, Ltd.

(d/b/a ComplyALIGN and HospitalPORTAL), a Chicago, Illinois-based healthcare technology company offering a SaaS-based policy management system for healthcare organizations, for $ 2.0 million in cash, subject to customary price adjustments.

The acquisition is not considered material to the Company’s financial statements.

The Company accounted for the acquisition as a business combination and has allocated the purchase consideration based on management’s estimates of fair value.

The results of operations for ComplyALIGN are included in the Company’s consolidated financial statements from the date of acquisition and are included in the HealthStream Workforce Solutions segment.

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

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

What changed 10-K

Item 8. Financial Statements and Supplementary Data