HEALTHSTREAM INC 10-K

Item 8. Financial Statements and Supplementary Data HEALTHSTREAM, INC. INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Page Reports of Independent Registered Public Accounting Firm 42 Consolidated Balance Sheets 45 Consolidated Statements of Income 46 Consolidated Statements of Comprehensive Income 47 Consolidated Statements of Shareholders’ Equity 48 Consolidated Statements of Cash Flows 49 Notes to Consolidated Financial Statements 50 41 Table of Contents Report of Independent Registered Public Accounting Firm To the Shareholders and the Board of Directors of HealthStream, Inc. Opinion on the Financial Statements We have audited the accompanying consolidated balance sheets of HealthStream, Inc. (the Company) as of December 31, 2020 and December 31, 2019, the related consolidated statements of income, comprehensive income, shareholders' equity, and cash flows for each of the three years in the period ended December 31, 2020, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2020 and 2019, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2020, in conformity with U.S. generally accepted accounting principles. 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. Basis for Opinion These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures include examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion. Critical Audit Matters The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate. Revenue Recognition Description of the Matter As described in Note 1 of the consolidated financial statements, the Company recognizes revenue when control of the promised goods or services is transferred to the customer in an amount that reflects the consideration the Company expects to be entitled in exchange for transferring those goods or services. The Company’s contracts with customers often contain promises for multiple goods and services. The Company accounts for the promised goods and services in its contracts as separate performance obligations if they are distinct. 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 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. To test management’s determination of relative standalone selling price for each performance obligation, we performed audit procedures that included, among others, assessing the methodology applied and testing the data underlying the Company’s calculations. We inspected a sample of customer contracts to assess management’s treatment of significant terms and tested the amounts recognized as revenue or recorded in deferred revenue. 42 Table of Contents Valuation – Business Combinations Description of the Matter 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. The fair value estimate of the customer relationships intangible assets included significant assumptions in the prospective financial information (including revenue growth, customer attrition and EBITDA margin) and the discount rates. The fair value estimate of the developed technology intangible assets included significant assumptions such as the estimate of employee hours that would be needed to recreate the software. These significant assumptions are forward looking and could be affected by future economic and market conditions. How We Addressed the Matter in Our Audit We tested the Company's controls over its accounting for the acquisitions. Our tests included controls over the estimation process supporting the fair value estimates of the customer relationships and developed technology intangible assets, including management’s review of the significant assumptions discussed above. To test the estimated fair values of the customer relationships and developed technology intangible assets, we performed audit procedures that included, among others, evaluating the Company's selection of the valuation methodologies, testing the significant assumptions and the completeness and accuracy of the underlying data. For example, we compared the significant assumptions in the prospective financial information to current industry trends, as well as to the historical performance of the acquired business and a similar business segment of the Company. To test the number of employee hours that would be needed to recreate the developed technology, we performed inquiries with appropriate non-financial personnel, including IT department management, to corroborate management's assumptions. We also performed sensitivity analyses to evaluate the changes in the fair value of the intangible assets that would result from the changes in significant assumptions. We involved our valuation specialists to assist with our evaluation of the methodologies used by the Company and the evaluation of the discount rates by comparing them against discount rate ranges that were independently developed using publicly available market data for comparable entities. /s/ Ernst & Young LLP We have served as the Company’s auditor since 1998. Nashville, Tennessee February 25, 2021 43 Table of Contents Report of Independent Registered Public Accounting Firm To the Shareholders and the Board of Directors of HealthStream, Inc. Opinion on the Internal Control Over Financial Reporting We have audited HealthStream, Inc.’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) (the COSO criteria). In our opinion, HealthStream, Inc. (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. as of December 31, 2020 and 2019, and the related consolidated statements of income, comprehensive income, shareholders’ equity, and cash flows for each of the three years in the period ended December 31, 2020, and the related notes and our report dated February 25, 2021, expressed an unqualified opinion thereon. Basis for Opinion The Company’s management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with the respect to the Company in accordance with U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. Definition and Limitations of Internal Control Over Financial Reporting A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. /s/ Ernst & Young LLP Nashville, Tennessee February 25, 2021 44 Table of Contents HEALTHSTREAM, INC. CONSOLIDATED BALANCE SHEETS (In thousands) December 31, December 31, 2020 2019 ASSETS Current assets: Cash and cash equivalents $ 36,566 $ 131,538 Marketable securities 9,928 41,328 Accounts receivable, net of allowance for doubtful accounts of $ 549 and $ 843 at December 31, 2020 and 2019, respectively 40,726 27,650 Accounts receivable - unbilled 5,374 2,726 Prepaid royalties, net of amortization 9,571 11,898 Other prepaid expenses and other current assets 12,560 9,432 Total current assets 114,725 224,572 Property and equipment, net of accumulated depreciation of $ 19,237 and $ 19,291 at December 31, 2020 and 2019, respectively 22,218 26,065 Capitalized software development, net of accumulated amortization of $ 70,516 and $ 57,768 at December 31, 2020 and 2019, respectively 26,631 21,445 Operating lease right of use assets, net 28,081 29,615 Goodwill 178,440 102,196 Customer-related intangibles, net of accumulated amortization of $ 36,723 and $ 29,760 at December 31, 2020 and 2019, respectively 76,927 52,554 Other intangible assets, net of accumulated amortization of $ 10,748 and $ 12,735 at December 31, 2020 and 2019, respectively 23,788 7,527 Deferred tax assets 974 269 Deferred commissions 19,907 17,645 Non-marketable equity investments 6,845 6,782 Other assets 1,777 874 Total assets $ 500,313 $ 489,544 LIABILITIES AND SHAREHOLDERS’ EQUITY Current liabilities: Accounts payable $ 9,333 $ 4,810 Accrued royalties 8,809 16,736 Accrued liabilities 20,124 18,128 Deferred revenue 81,176 65,511 Total current liabilities 119,442 105,185 Deferred tax liabilities 14,523 13,183 Deferred revenue, non-current 1,603 1,918 Operating lease liability, non-current 28,479 30,733 Other long-term liabilities 2,204 357 Commitments and contingencies Shareholders’ equity: Common stock, no par value, 75,000 shares authorized; 31,493 and 32,379 shares issued and outstanding at December 31, 2020 and 2019, respectively 271,784 290,021 Retained earnings 62,277 48,143 Accumulated other comprehensive income 1 4 Total shareholders’ equity 334,062 338,168 Total liabilities and shareholders’ equity $ 500,313 $ 489,544 See accompanying notes to the Consolidated Financial Statements. 45 Table of Contents HEALTHSTREAM, INC. CONSOLIDATED STATEMENTS OF INCOME (In thousands, except per share data) Year Ended December 31, 2020 2019 2018 Revenues, net $ 244,826 $ 254,112 $ 231,616 Operating costs and expenses: Cost of revenues (excluding depreciation and amortization) 89,332 103,890 96,014 Product development 32,305 29,109 25,735 Sales and marketing 35,297 37,945 35,698 Other general and administrative expenses 41,885 40,579 34,447 Depreciation and amortization 30,189 27,869 24,231 Total operating costs and expenses 229,008 239,392 216,125 Operating income 15,818 14,720 15,491 Other income, net 2,005 3,209 1,084 Income from continuing operations before income tax provision 17,823 17,929 16,575 Income tax provision 3,732 3,733 3,324 Income from continuing operations 14,091 14,196 13,251 Discontinued operations Loss from discontinued operations before income tax provision — — ( 64 ) Gain on sale of discontinued operations — 2,053 29,489 Income tax provision — 479 10,459 Income from discontinued operations — 1,574 18,966 Net income $ 14,091 $ 15,770 $ 32,217 Net income per share – basic: Continuing operations $ 0.44 $ 0.44 $ 0.41 Discontinued operations — 0.05 0.59 Net income per share - basic $ 0.44 $ 0.49 $ 1.00 Net income per share - diluted: Continuing operations $ 0.44 $ 0.44 $ 0.41 Discontinued operations — 0.05 0.59 Net income per share - diluted $ 0.44 $ 0.49 $ 1.00 Weighted average shares of common stock outstanding: Basic 31,960 32,372 32,264 Diluted 31,989 32,428 32,335 Dividends declared per share $ — $ — $ 1.00 See accompanying notes to the Consolidated Financial Statements. 46 Table of Contents HEALTHSTREAM, INC. CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (In thousands) Year Ended December 31, 2020 2019 2018 Net income $ 14,091 $ 15,770 $ 32,217 Other comprehensive income, net of taxes: Foreign currency translation adjustments 6 2 — Unrealized (loss) gain on marketable securities ( 9 ) 25 15 Total other comprehensive income ( 3 ) 27 15 Comprehensive income $ 14,088 $ 15,797 $ 32,232 See accompanying notes to the Consolidated Financial Statements. 47 Table of Contents HEALTHSTREAM, INC. CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY (In thousands) Common Stock Retained Accumulated Other Comprehensive Total Shareholders’ Shares Amount Earnings (Loss)/Income Equity Balance at December 31, 2017 31,908 $ 282,666 $ 17,542 $ ( 38 ) $ 300,170 Cumulative effect of accounting change — — 15,132 — 15,132 Net income — — 32,217 — 32,217 Comprehensive income — — — 15 15 Dividends declared on common stock ($ 1.00 per share) — — ( 32,518 ) — ( 32,518 ) Stock based compensation — 1,686 — — 1,686 Common stock issued under stock plans, net of shares withheld for employee taxes 417 2,245 — — 2,245 Balance at December 31, 2018 32,325 286,597 32,373 ( 23 ) 318,947 Net income — — 15,770 — 15,770 Comprehensive income — — — 27 27 Stock donated to Company (held in treasury) ( 86 ) — — — — Stock based compensation — 4,244 — — 4,244 Common stock issued under stock plans, net of shares withheld for employee taxes 140 ( 820 ) — — ( 820 ) Balance at December 31, 2019 32,379 290,021 48,143 4 338,168 Net income — — 14,091 — 14,091 Dividend forfeitures on unvested equity awards — — 43 — 43 Comprehensive income — — — ( 3 ) ( 3 ) Stock based compensation — 2,217 — — 2,217 Common stock issued under stock plans, net of shares withheld for employee taxes 71 ( 435 ) — — ( 435 ) Repurchase of common stock ( 957 ) ( 20,019 ) — — ( 20,019 ) Balance at December 31, 2020 31,493 $ 271,784 $ 62,277 $ 1 $ 334,062 See accompanying notes to the Consolidated Financial Statements. 48 Table of Contents HEALTHSTREAM, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) Year Ended December 31, 2020 2019 2018 OPERATING ACTIVITIES: Net income $ 14,091 $ 15,770 $ 32,217 Income from discontinued operations — ( 1,574 ) ( 18,966 ) Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 30,189 27,869 24,231 Stock based compensation 2,217 4,244 1,777 Amortization of deferred commissions 8,768 8,305 7,659 Provision for doubtful accounts 274 211 1,033 Deferred income taxes 4,295 2,167 3,017 Loss (gain) on equity method investments 51 ( 64 ) ( 42 ) Non-cash royalty expense ( 3,440 ) — — Change in fair value of non-marketable equity investments ( 1,181 ) — 1,271 Other 347 ( 72 ) ( 9 ) Changes in operating assets and liabilities: Accounts and unbilled receivables ( 2,992 ) 11,605 ( 4,050 ) Prepaid royalties 2,397 1,698 1,639 Other prepaid expenses and other current assets ( 2,985 ) 4,862 ( 3,938 ) Deferred commissions ( 11,030 ) ( 9,479 ) ( 11,577 ) Other assets ( 112 ) ( 42 ) ( 30 ) Accounts payable and accrued expenses 1,124 1,098 2,008 Accrued royalties ( 4,672 ) 979 2,907 Deferred revenue ( 1,467 ) ( 1,920 ) 5,103 Net cash provided by operating activities 35,874 65,657 44,250 Net cash used in discontinued operating activities — — ( 1,004 ) Net cash provided by operating activities 35,874 65,657 43,246 INVESTING ACTIVITIES: Business combinations, net of cash acquired ( 121,342 ) ( 27,018 ) — Proceeds from sale of discontinued operations, net of tax — 6,070 44,049 Proceeds from maturities of marketable securities 77,120 80,589 68,992 Proceeds from sales of marketable securities 15,051 — — Purchases of marketable securities ( 61,179 ) ( 87,328 ) ( 57,085 ) Proceeds from sale of property and equipment — 15 — Payments to acquire non-marketable equity investments ( 1,257 ) ( 3,342 ) ( 833 ) Payments associated with capitalized software development ( 16,815 ) ( 14,513 ) ( 11,284 ) Purchases of property and equipment ( 1,988 ) ( 21,997 ) ( 7,166 ) Net cash (used in) provided by continuing investing activities ( 110,410 ) ( 67,524 ) 36,673 Net cash used in discontinued investing activities — — ( 115 ) Net cash (used in) provided by investing activities ( 110,410 ) ( 67,524 ) 36,558 FINANCING ACTIVITIES: Proceeds from exercise of stock options — 214 2,582 Taxes paid related to net settlement of equity awards ( 435 ) ( 1,034 ) ( 338 ) Payment of earn-out related to prior acquisitions — ( 38 ) ( 38 ) Payment of debt issue cost — — ( 100 ) Repurchases of common stock ( 20,019 ) — — Payment of cash dividends ( 40 ) ( 58 ) ( 32,357 ) Net cash used in financing activities ( 20,494 ) ( 916 ) ( 30,251 ) Effect of exchange rate changes on cash and cash equivalents 58 — — Net (decrease) increase in cash and cash equivalents ( 94,972 ) ( 2,783 ) 49,553 Cash and cash equivalents at beginning of period 131,538 134,321 84,768 Cash and cash equivalents at end of period $ 36,566 $ 131,538 $ 134,321 SUPPLEMENTAL CASH FLOW INFORMATION: Interest paid $ 96 $ 101 $ 117 Income taxes paid $ 877 $ 630 $ 16,513 Non-cash additions to property and equipment $ — $ 31 $ 1,013 Non-cash additions to non-marketable equity investments $ 1,300 $ — $ — See accompanying notes to the Consolidated Financial Statements. 49 Table of Contents HEALTHSTREAM, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Description of Business HealthStream, Inc. (the Company) was incorporated in 1990 as a Tennessee corporation and is headquartered in Nashville, Tennessee. As of December 31, 2020, the Company operated in two segments: Workforce Solutions and Provider Solutions. 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. On February 12, 2018, the Company divested its Patient Experience (PX) business to Press Ganey Associates (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 the Company’s patient experience solutions business segment. The results of operations for PX are presented as discontinued operations within the Notes to Consolidated Financial Statements herein. Recently Adopted Accounting Standards 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 Revenues are recognized when control of the promised goods or services is transferred to the customer in an amount that reflects the consideration the Company expects to be entitled in exchange for transferring those goods or services. The Company adopted ASU 2014-09, Revenue from Contracts with Customer (referred to as Accounting Standards Codification (ASC) Topic 606 or ASC 606) effective as of January 1, 2018 utilizing the modified retrospective approach. This accounting standard required changes to the Company’s accounting policies for revenue recognition, trade and other receivables, and deferred commissions. Revenue is recognized based on the following five step model: • Identification of the contract with a customer • Identification of the performance obligations in the contract • Determination of the transaction price • Allocation of the transaction price to the performance obligations in the contract • Recognition of revenue when, or as, the Company satisfies a performance obligation Subscription revenues primarily consist of fees in consideration of providing customers access to one or more of our SaaS-based solutions and/or courseware subscriptions, as well as fees related to licensing agreements, all of which include routine customer support and technology enhancements. Revenue is generally recognized over time during the contract term beginning when the service is made available to the customer. Subscription contracts are generally non-cancelable, one to five years in length, and billed annually, semi-annually, quarterly, or monthly in advance. Professional services revenues primarily consist of fees for implementation services, consulting, custom courseware development, and training. The majority of our professional services contracts are billed in advance based on a fixed price basis, and revenue is recognized over time as the services are performed. For both subscription services and professional services, the time between billing the customer and when performance obligations are satisfied is generally not significant. 50 Table of Contents Our contracts with customers often contain promises for multiple goods and services. 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 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 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 or users within the contract. We receive payments from customers based on billing schedules established in our contracts. Accounts receivable - unbilled represent contract assets related to our conditional right to consideration for subscription and professional services contracts where performance has occurred under the contract. Accounts receivable are primarily comprised of trade receivables that are recorded at the invoice amount, net of an allowance for doubtful accounts, when the right to consideration becomes unconditional. Deferred revenue represents contract liabilities that are recorded when cash payments are received or are due in advance of our satisfaction of performance obligations. Basis of Presentation The Consolidated Financial Statements include the accounts of the Company and its wholly owned subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation. Use of Estimates 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. Actual results could differ from those estimates and such differences could be material to the Consolidated Financial Statements. Cash Equivalents The Company considers cash equivalents to be unrestricted, highly liquid investments with initial maturities of less than three months . Marketable Securities Marketable securities are classified as available for sale and are stated at fair market value, with the unrealized gains and losses, net of tax, reported in other accumulated comprehensive income (loss) on the accompanying Consolidated Balance Sheets. Realized gains and losses and declines in market value judged to be other than temporary on investments in marketable securities are included in other income, net on the accompanying Consolidated Statements of Income. The cost of securities sold is based on the specific identification method. Interest and dividends on securities classified as available for sale are included in other income, net on the accompanying Consolidated Statements of Income. Premiums and discounts are amortized over the life of the related available for sale security as an adjustment to the yield using the effective interest method. Deferred Commissions 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. 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 three years . Prepaid Royalties Prepaid royalties represent advance payments to royalty partners under revenue sharing arrangements for which the Company sells and delivers such partner products to its customers. Royalties are typically paid in advance at the commencement of the subscription period or periodically throughout the subscription period, such as in quarterly, bi-annual, or annual installments. Royalty payments are amortized over the term of the underlying subscription contracts, which generally range from one to five years , in order to match the direct royalty costs to the same period the subscription revenue is recognized. Amortization of royalties is included under the caption cost of revenues (excluding depreciation and amortization) in the accompanying Consolidated Statements of Income. 51 Table of Contents Allowance for Doubtful Accounts 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. Bad debt expense is recorded when events or circumstances indicate an additional allowance is required. Changes in the allowance for doubtful accounts and the amounts charged to bad debt expense for the years ended December 31 were as follows (in thousands): Allowance Balance at Beginning of Period Charged to Costs and Expenses Write-offs Allowance Balance at End of Period 2020 $ 843 $ 274 $ ( 568 ) $ 549 2019 1,161 211 ( 529 ) 843 2018 1,979 1,033 ( 1,851 ) 1,161 Capitalized Software Development Capitalized software development is stated on the basis of cost and is presented net of accumulated amortization. The Company capitalizes costs incurred during the software development phase for projects when such costs are material. These assets are generally amortized using the straight-line method over three years . The Company capitalized $ 17.9 million and $ 14.1 million during 2020 and 2019, respectively. Amortization of capitalized software development was $ 12.7 million, $ 11.0 million, and $ 9.6 million during 2020, 2019, and 2018, respectively. Maintenance and operating costs are expensed as incurred. As of December 31, 2020 and 2019, there were no capitalized software development costs for external computer software developed for resale. Fair Value Measurements Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in the principal or most advantageous market in an orderly transaction between market participants at the measurement date. The fair value hierarchy prioritizes the inputs to valuation techniques used in measuring fair value. There are three levels to the fair value hierarchy based on the reliability of inputs, as follows: Level 1 – Observable inputs that reflect quoted prices (unadjusted) for identical assets or liabilities in active markets. Level 2 – Inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. Level 3 – Unobservable inputs in which little or no market data exists, therefore requiring the Company to develop its own assumptions. The Company evaluates assets and liabilities subject to fair value measurements on a recurring basis to determine the appropriate level at which to classify them for each reporting period. This determination requires significant judgments to be made by the Company. At December 31, 2020 and 2019, our assets measured at fair value on a recurring basis consisted of marketable securities, which are classified as available for sale (see Note 4 – Marketable Securities). Property and Equipment 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 leasehold improvements, which are amortized over the shorter of the estimated useful life or their respective lease term. Years Furniture and fixtures 5 - 7 Equipment 3 Goodwill and Intangible Assets Goodwill represents the excess of purchase price in a business combination over the fair value of the net identifiable assets acquired, including intangible assets. The Company estimates fair values of intangible assets using the income and cost methods, which are based on management’s estimates and assumptions. The carrying amount of our goodwill is evaluated for impairment at least annually during the fourth quarter and whenever events or changes in facts or circumstances indicate that impairment may exist. In accordance with ASC 350, Intangibles – Goodwill and Other , companies may opt to first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. 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 52 Table of Contents 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. The Company determines fair value of the reporting units using both income and market - based models. These models require the use of various assumptions relating to cash flow projections, growth rates, discount rates , and terminal value calculations. There were no goodwill impairments identified or recorded for the years ended December 31, 2020, 2019, or 2018 . As of December 31, 2020, intangible assets include customer relationships, internally developed technology, non-competition agreements, and trade names. 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 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. Long-Lived Assets Long-lived assets to be held for use are reviewed for events or changes in facts and circumstances, both internally and externally, which may indicate that an impairment of long-lived assets held for use is present. The Company measures any impairment using observable market values or discounted future cash flows from the related long-lived assets. The cash flow estimates and discount rates incorporate management’s best estimates, using appropriate and customary assumptions and projections at the date of evaluation. Management periodically evaluates whether the carrying value of long-lived assets, including intangible assets, property and equipment, capitalized software development, deferred commissions, and other assets will be recoverable. There were no long-lived asset impairments identified or recorded for the years ended December 31, 2020, 2019, or 2018. Non-Marketable Equity Investments 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. The proportionate share of income or loss from equity method investments and any changes in fair value of investments accounted for using the measurement alternative are recorded under the caption other income, net in the accompanying Consolidated Statements of Income. Financial Instruments The Company has various financial instruments, including cash and cash equivalents, accounts receivable, accounts receivable-unbilled, accounts payable, accrued liabilities, and deferred revenue. The carrying amounts of these financial instruments approximate fair value because of the short-term maturity or short-term nature of such instruments. The Company also has marketable securities, which are recorded at approximate fair value based on quoted market prices or alternative pricing sources (see Note 4 – Marketable Securities). Advertising The Company expenses the costs of advertising as incurred. 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. Income Taxes Income taxes are accounted for using the asset and liability method, whereby deferred tax assets and liabilities are determined based on the temporary differences between the financial statement and tax bases of assets and liabilities 53 Table of Contents 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. Future realization of the tax benefit of an existing deductible temporary difference or carryforward ultimately depends on the existence of sufficient taxable income of the appropriate character within the carryback or carryforward period available under the tax law. There are four possible sources of taxable income that may be available under the tax law to realize a tax benefit for deductible temporary differences and carryforwards: 1) future reversals of existing taxable temporary differences, 2) future taxable income exclusive of reversing temporary differences and carryforwards, 3) taxable income in prior carryback year(s) if carryback is permitted under the tax law, and 4) tax-planning strategies that would, if necessary, be implemented to realize deductible temporary differences or carryforwards prior to their expiration. 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, 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. Tax positions that meet the more-likely-than-not recognition threshold are measured in order to determine the tax benefit to be recognized in the financial statements. Earnings per Share Basic earnings per share is computed by dividing the net income available to common shareholders for the period by the weighted average number of common shares outstanding during the period. Diluted earnings per share is computed by dividing the net income for the period by the weighted average number of common and common equivalent shares outstanding during the period. Common equivalent shares are composed of incremental common shares issuable upon the exercise of stock options and restricted share units subject to vesting. The dilutive effect of common equivalent shares is included in diluted earnings per share by application of the treasury stock method. Common equivalent shares that have an anti-dilutive effect on diluted net income per share were excluded from the calculation of diluted weighted average shares outstanding for the years ended December 31, 2020, 2019, and 2018. Concentrations of Credit Risk and Significant Customers The Company’s credit risks relate primarily to cash and cash equivalents, marketable securities, and accounts receivable. The Company places its temporary excess cash investments in high quality, short-term money market instruments. At times, such investments may be in excess of the FDIC insurance limits. Marketable securities consist primarily of investment grade corporate debt securities and government sponsored enterprise debt securities. The Company sells its products and services to various companies in the healthcare industry that are primarily located in the United States. Customer credit worthiness evaluations are performed on an as-needed basis, and the Company generally requires no collateral from customers. An allowance for doubtful accounts is maintained for potentially uncollectible accounts receivable. The Company did not have any single customer representing over 10% of net revenues or accounts receivable during 2020, 2019, or 2018 . Stock Based Compensation 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. The Company uses the Black Scholes option pricing model for calculating the fair value of option awards issued under its stock based compensation plan. The Company measures compensation cost of restricted share units based on the closing fair market value of the Company’s stock on the date of grant. Stock based compensation cost is measured at the grant date, based on the fair value of the award that is ultimately expected to vest, and is recognized as an expense over the requisite service period. The Company recognizes tax benefits from stock based compensation if an excess tax benefit is realized. Excess tax benefits are reflected in the Consolidated Statements of Income as a component of the provision for income taxes when realized. Leases 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. 54 Table of Contents 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. 2. SHAREHOLDERS’ EQUITY Common Stock The Company is authorized to issue up to 75 million shares of common stock. The number of common shares issued and outstanding as of December 31, 2020 and 2019 was 31.5 million and 32.4 million, respectively. Preferred Stock 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). 55 Table of Contents 3. EARNINGS PER SHARE The following table sets forth the computation of basic and diluted earnings per share for the three years ended December 31, 2020 (in thousands, except per share amounts): Year Ended December 31, 2020 2019 2018 Numerator: Income from continuing operations $ 14,091 $ 14,196 $ 13,251 Income from discontinued operations — 1,574 18,966 Net income $ 14,091 $ 15,770 $ 32,217 Denominator: Weighted-average shares outstanding 31,960 32,372 32,264 Effect of dilutive shares 29 56 71 Weighted-average diluted shares 31,989 32,428 32,335 Net income per share – basic: Continuing operations $ 0.44 $ 0.44 $ 0.41 Discontinued operations — 0.05 0.59 Net income per share - basic $ 0.44 $ 0.49 $ 1.00 Net income per share – diluted: Continuing operations $ 0.44 $ 0.44 $ 0.41 Discontinued operations — 0.05 0.59 Net income per share - diluted $ 0.44 $ 0.49 $ 1.00 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. 4. MARKETABLE SECURITIES At December 31, 2020 and 2019, the fair value of marketable securities, which were all classified as available for sale, included the following (in thousands): December 31, 2020 Adjusted Cost Unrealized Gains Unrealized Losses Fair Value Cash and Cash Equivalents Current Marketable Securities Cash $ 31,558 $ — $ — $ 31,558 $ 31,558 $ — Level 2: Time deposits 10,021 — — 10,021 5,008 5,013 Corporate debt securities 4,923 — ( 8 ) 4,915 — 4,915 Total $ 46,502 $ — $ ( 8 ) $ 46,494 $ 36,566 $ 9,928 December 31, 2019 Adjusted Cost Unrealized Gains Unrealized Losses Fair Value Cash and Cash Equivalents Current Marketable Securities Cash $ 131,538 $ — $ — $ 131,538 $ 131,538 $ — Level 2: Corporate debt securities 37,325 7 ( 5 ) 37,327 — 37,327 Government-sponsored enterprise debt securities 4,001 — — 4,001 — 4,001 Total $ 172,864 7 ( 5 ) $ 172,866 $ 131,538 $ 41,328 56 Table of Contents The carrying amounts of the marketable securities reported in the Consolidated Balance Sheets approximate fair value based on quoted market prices or alternative pricing sources and models utilizing market observable inputs. As of December 31, 2020, the Company does not consider any of its marketable securities to be other than temporarily impaired. During the years ended December 31, 2020 and 2019, the Company did not reclassify any items out of accumulated other comprehensive income to net income. All investments in marketable securities are classified as a current asset on the Consolidated Balance Sheet because the underlying securities mature within one year from the balance sheet date. 5. REVENUE RECOGNITION AND SALES COMMISSIONS Revenue Recognition Revenues are recognized when control of the promised goods or services is transferred to the customer in an amount that reflects the consideration the Company expects to be entitled in exchange for transferring those goods or services. The following table represents revenues included in continuing operations disaggregated by revenue source for the years ended December 31, 2020, 2019, and 2018 (in thousands). Sales taxes are excluded from revenues. Year Ended December 31, 2020 Business Segments Workforce Solutions Provider Solutions Consolidated Subscription services $ 193,673 $ 40,237 $ 233,910 Professional services 3,914 7,002 10,916 Total revenues, net $ 197,587 $ 47,239 $ 244,826 Year Ended December 31, 2019 Business Segments Workforce Solutions Provider Solutions Consolidated Subscription services $ 202,479 $ 38,022 $ 240,501 Professional services 6,120 7,491 13,611 Total revenues, net $ 208,599 $ 45,513 $ 254,112 Year Ended December 31, 2018 Business Segments Workforce Solutions Provider Solutions Consolidated Subscription services $ 184,926 $ 35,542 $ 220,468 Professional services 5,213 5,935 11,148 Total revenues, net $ 190,139 $ 41,477 $ 231,616 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, 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. We expect to recognize revenue on approximately 47 % of these remaining performance obligations over the 12 months ending December 31, 2020, with the remaining amounts recognized thereafter. Sales Commissions Sales commissions earned by our sales force are considered incremental and recoverable costs of obtaining a contract with a customer. 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. 57 Table of Contents 6. PROPERTY AND EQUIPMENT Property and equipment consist of the following (in thousands): December 31, 2020 2019 Equipment $ 21,401 $ 25,199 Leasehold improvements 14,980 14,909 Furniture and fixtures 5,074 5,248 Gross property and equipment 41,455 45,356 Accumulated depreciation and amortization ( 19,237 ) ( 19,291 ) Property and equipment, net $ 22,218 $ 26,065 Depreciation of property and equipment totaled $ 6.9 million, $ 7.3 million, and $ 5.5 million for the years ended December 31, 2020, 2019, and 2018, respectively. 7. GOODWILL AND INTANGIBLE ASSETS The changes in the carrying amount of goodwill for the years ended December 31, 2020 and 2019 are as follows (in thousands): Workforce Solutions Provider Solutions Total Balance at January 1, 2020 $ 27,776 $ 74,420 $ 102,196 Acquisition of NurseGrid 21,085 — 21,085 Acquisition of ShiftWizard 19,307 — 19,307 Acquisition of ANSOS 35,258 — 35,258 Acquisition of myClinicalExchange 590 — 590 Post-closing adjustment for CredentialMyDoc — 4 4 Balance at December 31, 2020 $ 104,016 $ 74,424 $ 178,440 Workforce Solutions Provider Solutions Total Balance at January 1, 2019 $ 16,381 $ 69,763 $ 86,144 Acquisition of Providigm, LLC 11,395 — 11,395 Acquisition of CredentialMyDoc — 4,657 4,657 Balance at December 31, 2019 $ 27,776 $ 74,420 $ 102,196 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. Identifiable intangible assets are comprised of the following (in thousands): As of December 31, 2020 As of December 31, 2019 Gross Amount Accumulated Amortization Net Gross Amount Accumulated Amortization Net Customer related $ 113,650 $ ( 36,723 ) $ 76,927 $ 82,314 $ ( 29,760 ) $ 52,554 Other 34,536 ( 10,748 ) 23,788 20,262 ( 12,735 ) 7,527 Total $ 148,186 $ ( 47,471 ) $ 100,715 $ 102,576 $ ( 42,495 ) $ 60,081 58 Table of Contents The expected future annual amortization expense for the years ending December 31, is as follows (in thousands): 2021 $ 14,723 2022 13,599 2023 12,937 2024 11,440 2025 10,724 Thereafter 36,593 Total $ 100,016 8. BUSINESS COMBINATIONS NurseGrid On March 9, 2020, the Company acquired all of the outstanding stock of HcT2 Co. dba NurseGrid (NurseGrid), a Portland, Oregon-based healthcare technology company offering NurseGrid Mobile and its corollary application for nurse managers, NurseGrid Enterprise, for net cash consideration of approximately $ 21.5 million, after giving effect to the post-closing working capital adjustment. The Company accounted for this transaction as a business combination achieved in stages which required the Company to remeasure its previously existing minority ownership interest 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 $ 25,485 Post-closing adjustment, net of cash received 33 Cash acquired ( 4,064 ) Net consideration paid 21,454 Fair value of existing equity interest in NurseGrid 3,623 Net consideration paid $ 25,077 The following table summarizes the fair value of the assets acquired and liabilities assumed as of the date of acquisition (in thousands): Accounts and unbilled receivable, net $ 92 Prepaid and other current assets 155 Operating lease right-of-use assets 50 Deferred tax assets 2,121 Goodwill 21,085 Intangible assets 1,845 Accounts payable and accrued liabilities ( 143 ) Deferred revenue ( 78 ) Operating lease liabilities ( 50 ) Net assets acquired $ 25,077 The excess of 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 59 Table of Contents 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): Fair value Useful life Customer relationships $ 35 8 years Developed technology 1,110 5 years Trade name 700 Indefinite Total intangible assets $ 1,845 The amounts of revenue and operating loss of NurseGrid included in the Company’s Consolidated Statement of Income since the date of acquisition of March 9, 2020 for the year ended December 31, 2020 are as follows (in thousands): Total revenues $ 219 Operating loss $ ( 2,650 ) 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): Year Ended December 31, 2020 2019 Total revenues $ 244,963 $ 255,566 Income from continuing operations $ 13,576 $ 11,405 Net income $ 13,576 $ 12,979 Net income per share - basic $ 0.42 $ 0.40 Net income per share - diluted $ 0.42 $ 0.40 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. ShiftWizard 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. 60 Table of Contents The following table summarizes the preliminary fair value of the assets acquired and liabilities assumed as of the date of acquisition (in thousands): Cash $ 1,091 Accounts and unbilled receivable, net 1,041 Prepaid assets 108 Operating lease right-of-use assets 183 Property and equipment 50 Indemnification assets 464 Goodwill 19,307 Intangible asset 12,660 Accounts payable and accrued liabilities ( 601 ) Deferred revenue ( 1,601 ) Deferred tax liability ( 1,559 ) Operating lease liabilities ( 183 ) Indemnification liability ( 464 ) Net assets acquired $ 30,496 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): Fair Value Useful life Customer relationships $ 7,800 18 years Developed technology 4,050 5 years Non-compete 580 1 - 5 years Trade name 230 5 years Total preliminary intangible assets subject to amortization $ 12,660 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 $ 731 Operating loss $ ( 553 ) 61 Table of Contents 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): Year Ended December 31, 2020 2019 Total revenues $ 248,306 $ 257,042 Income from continuing operations $ 13,056 $ 11,604 Net income $ 13,056 $ 13,178 Net income per share - basic $ 0.41 $ 0.41 Net income per share - diluted $ 0.41 $ 0.41 These unaudited pro forma combined results of operations include certain adjustments arising from the acquisition, such as amortization of intangible assets, depreciation of property and equipment, and fair value adjustments of acquired deferred revenue balances. The unaudited pro forma combined results of operations is for informational purposes only and is not indicative of what the Company’s results of operations would have been had the transaction occurred at the beginning of the earliest period presented or to project the Company’s results of operations in any future period. 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): Cash $ 1,599 Accounts and unbilled receivable, net 11,421 Prepaid assets 481 Operating lease right-of-use assets 888 Property and equipment 66 Deferred tax assets 2,938 Indemnification asset 708 Goodwill 35,258 Intangible assets 32,440 Accounts payable and accrued liabilities ( 1,693 ) Deferred revenue ( 14,529 ) Operating lease liabilities ( 888 ) Uncertain tax position liability ( 708 ) Net assets acquired $ 67,981 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 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 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. 62 Table of Contents 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): Fair Value Useful life Customer relationships $ 21,100 11 - 14 years Developed technology 9,800 5 years Trade name 1,540 10 years Total preliminary intangible assets subject to amortization $ 32,440 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 $ 959 Operating loss $ ( 469 ) 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): Year Ended December 31, 2020 2019 Total revenues $ 270,246 $ 278,491 Income from continuing operations $ 18,861 $ 16,534 Net income $ 18,861 $ 18,108 Net income per share - basic $ 0.59 $ 0.56 Net income per share - diluted $ 0.59 $ 0.56 These unaudited pro forma combined results of operations include certain adjustments arising from the acquisition, such as amortization of intangible assets, depreciation of property and equipment, and fair value adjustments of acquired deferred revenue balances. The unaudited pro forma combined results of operations is for informational purposes only and is not indicative of what the Company’s results of operations would have been had the transaction occurred at the beginning of the earliest period presented or to project the Company’s results of operations in any future period. Providigm, LLC On January 10, 2019, the Company acquired the outstanding equity of Providigm, LLC (Providigm), a Denver, Colorado based company focusing on quality assurance and performance improvement in healthcare, primarily serving skilled nursing facilities. The Company acquired Providigm to add its comprehensive quality management system, known as abaqis®, to its product portfolio and gain customers in the skilled nursing market. The consideration paid for Providigm consisted of $ 18.0 million in cash, which the Company funded with cash on hand. The Company incurred $ 388,000 in transaction costs, of which $ 63,000 was incurred during 2019 and $ 325,000 was incurred during 2018. 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. 63 Table of Contents 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 $ 960 Prepaid assets 847 Property and equipment 50 Operating lease right-of-use assets 1,233 Other assets 49 Deferred tax assets 104 Goodwill 11,395 Intangible assets 5,950 Accounts payable and accrued liabilities ( 1,196 ) Deferred revenue ( 141 ) Operating lease liabilities ( 1,233 ) Net assets acquired $ 18,018 The excess of purchase price over the fair values of net tangible and intangible assets is recorded as goodwill. The fair values of tangible and identifiable intangible assets and liabilities are based on management’s estimates and assumptions. The primary intangible assets acquired were customer relationships and developed technology. The fair value estimate for customer relationships intangible asset included significant assumptions in the prospective financial information, such as revenue growth, customer attrition, and EBITDA margin, and the discount rate. The fair value estimate for developed technology intangible asset included significant assumptions, including the estimate of employee hours that would be needed to recreate the technology. Additionally, these assumptions are forward looking and could be affected by future economic and market conditions. The goodwill balance is primarily attributed to the assembled workforce, additional market opportunities from offering Providigm’s products, and expected synergies from integrating Providigm 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 $ 266,000 to an estimated fair value of $ 141,000 . 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): Fair Value Useful life Customer relationships $ 3,500 12 years Developed technology 2,200 5 years Trade Name 250 7 years Total preliminary intangible assets subject to amortization $ 5,950 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, 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. 64 Table of Contents The following table summarizes the fair value of the assets acquired and liabilities assumed as of the date of acquisition (in thousands): Accounts and unbilled receivable, net $ 204 Prepaid and other current assets 3 Operating lease right-of-use assets 30 Deferred tax assets 70 Goodwill 4,661 Intangible assets 4,340 Accounts payable and accrued liabilities ( 7 ) Deferred revenue ( 276 ) Operating lease liabilities ( 30 ) Net assets acquired $ 8,995 The excess of purchase price over the fair values of net tangible and intangible assets is recorded as goodwill. The fair values of tangible and identifiable intangible assets and liabilities are based on management’s estimates and assumptions. The primary intangible assets acquired were customer relationships and developed technology. The fair value estimate for customer relationships intangible asset included significant assumptions 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 goodwill balance is primarily attributed to the assembled workforce, additional market opportunities from offering CredentialMyDoc products, and expected synergies from integrating CredentialMyDoc with other products or other combined functional areas within the Company. The goodwill balance is deductible for U.S. income tax purposes. The net tangible assets include deferred revenue, which was adjusted down from a book value at the acquisition date of $ 587,000 to an estimated fair value of $ 276,000 . The $ 311,000 write-down of deferred revenue will result in lower revenues than would have otherwise been recognized for such services. The following table sets forth the components of identifiable intangible assets and their estimated useful lives as of the acquisition date (in thousands): Preliminary Fair value Useful life Customer relationships $ 2,100 9 years Developed technology 2,100 4 years Non-compete 110 5 years Trade name 30 3 years Total intangible assets subject to amortization $ 4,340 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. 65 Table of Contents 9. BUSINESS SEGMENTS The Company provides services to healthcare organizations and other members within the healthcare industry. The Company’s services are focused on the delivery of workforce 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, 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). Revenues, net: 2020 2019 2018 Workforce Solutions $ 197,587 $ 208,599 $ 190,139 Provider Solutions 47,239 45,513 41,477 Total revenues, net $ 244,826 $ 254,112 $ 231,616 Operating income: 2020 2019 2018 Workforce Solutions $ 41,622 $ 40,296 $ 38,834 Provider Solutions 4,678 5,384 3,474 Unallocated ( 30,482 ) ( 30,960 ) ( 26,817 ) Total operating income $ 15,818 $ 14,720 $ 15,491 Assets* Purchases of long-lived assets Depreciation and amortization 2020 2019 2020 2019 2018 2020 2019 2018 Workforce Solutions $ 270,924 $ 118,382 $ 17,586 $ 14,972 $ 12,820 $ 12,930 $ 10,813 $ 9,780 Provider Solutions 140,490 148,398 2,849 2,959 5,240 10,311 9,757 8,895 Discontinued operations — — — — 180 — — 181 Unallocated 88,899 222,764 573 13,602 7,191 6,948 7,299 5,375 Total $ 500,313 $ 489,544 $ 21,008 $ 31,533 $ 25,431 $ 30,189 $ 27,869 $ 24,231 * Segment assets include accounts and unbilled receivables, prepaid royalties, prepaid and other current assets, other assets, capitalized software development, deferred commissions, certain property and equipment, and intangible assets. Cash and cash equivalents, marketable securities, non-marketable equity investments, and certain ROU assets are not allocated to individual segments and are included within Unallocated. A significant portion of property and equipment assets are included within Unallocated. 10. INCOME TAXES Components of earnings before income taxes are as follows (in thousands): Year Ended December 31, 2020 2019 2018 United States $ 17,719 $ 17,929 $ 16,575 Foreign 105 — — Earnings before income taxes $ 17,824 $ 17,929 $ 16,575 The provision for income taxes is comprised of the following (in thousands): Year Ended December 31, 2020 2019 2018 Current federal $ ( 1,022 ) $ 233 $ ( 79 ) Current state 387 634 386 Current foreign 71 — — Deferred federal 3,830 2,717 2,661 Deferred state 467 149 356 Deferred foreign ( 1 ) — — Provision for income taxes $ 3,732 $ 3,733 $ 3,324 66 Table of Contents A reconciliation of income taxes at the statutory federal income tax rate to the provision for income taxes included in the accompanying Consolidated Statements of Income is as follows (in thousands): Year Ended December 31, 2020 2019 2018 Federal tax provision at the statutory rate $ 3,743 $ 3,765 $ 3,482 State income tax provision, net of federal benefit 787 895 658 Tax credits ( 745 ) ( 614 ) ( 509 ) Change in valuation allowance 4 ( 247 ) 2 Impact of foreign operations 7 — — Stock compensation 27 ( 117 ) ( 560 ) Other ( 91 ) 51 251 Provision for income taxes $ 3,732 $ 3,733 $ 3,324 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, 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 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 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. A reconciliation of the beginning and ending liability for gross unrecognized tax benefits are as follows (in thousands): December 31, 2020 2019 Balance at beginning of year $ 317 $ 317 Additions for tax positions in the current year — — Additions for tax positions of prior years 645 — Balance at end of year $ 962 $ 317 The Company recognized $ 20,000 and $ 14,000 for interest and penalties related to unrecognized tax benefits within the provision for income taxes during the years ended December 31, 2020 and 2019. 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 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. 67 Table of Contents 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. Significant components of deferred tax assets and deferred tax liabilities are as follows (in thousands): December 31, 2020 2019 Deferred tax assets: Allowance for doubtful accounts $ 143 $ 215 Accrued liabilities 1,927 1,775 Lease liability 8,356 8,778 Tax credits 119 Stock based compensation 691 683 Deferred revenue 3,244 198 Basis difference on investments 395 381 Net operating loss carryforwards 3,692 263 Total deferred tax assets 18,567 12,293 Less: Valuation allowance ( 550 ) ( 64 ) Deferred tax assets, net of valuation allowance 18,017 12,229 Deferred tax liabilities: Deductible goodwill 2,614 2,236 Nondeductible intangible assets 3,752 801 Right of use assets 7,378 7,773 Prepaid assets 6,986 6,275 Capitalized software development 6,989 5,580 Depreciation 3,846 2,478 Total deferred tax liabilities 31,565 25,143 Net deferred tax liabilities $ 13,548 $ 12,914 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. 11. STOCK BASED COMPENSATION 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, 2020, 626,000 shares of common stock were available to be granted under the 2016 Plan. 68 Table of Contents Stock Option Activity A summary of activity and various other information relative to stock options for the year ended December 31, 2020 is presented in the tables below (in thousands, except exercise price). Weighted- Common Average Aggregate Shares Exercise Price Intrinsic Value Outstanding at beginning of period — $ — Granted 90 20.34 Exercised — — Expired — — Forfeited — — Outstanding at end of period 90 $ 20.34 $ 135 Exercisable at end of period — $ — $ — Other information relative to option activity during the three years ended December 31, 2020 is as follows (in thousands): 2020 2019 2018 Total intrinsic value of stock options exercised $ — $ 277 $ 6,130 Cash proceeds from exercise of stock options $ — $ 214 $ 2,582 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 A summary of activity relative to RSUs for the year ended December 31, 2020 is as follows (in thousands, except weighted average grant date fair value): Weighted- Number of Average Grant Date Aggregate RSU’s Fair Value Intrinsic Value Outstanding at beginning of period 287 $ 25.61 Granted 115 22.94 Vested ( 90 ) 24.53 Forfeited ( 13 ) 24.56 Outstanding at end of period 299 $ 24.95 $ 6,526 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. A portion of RSUs that vested in 2020 and 2019 were net-share settled such that the Company withheld shares with value equivalent to the employees’ minimum statutory obligation for the applicable income and other employment taxes and remitted the cash to the appropriate taxing authorities. The total shares withheld for RSUs during 2020 and 2019 were 19,000 and 15,000 , respectively, and were based on the value of the RSUs on their respective settlement dates as determined by the Company’s closing stock price. 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. 69 Table of Contents Stock Based Compensation Total stock based compensation expense, which is recorded in our Consolidated Statements of Income, recorded for the years ended December 31, is as follows (in thousands): Years Ended December 31, 2020 2019 2018 Cost of revenues (excluding depreciation and amortization) $ 41 $ 699 $ 37 Product development 363 956 296 Sales and marketing 199 614 183 Other general and administrative 1,615 1,975 1,261 Total stock based compensation expense $ 2,218 $ 4,244 $ 1,777 The Company amortizes the fair value of all stock based awards, net of estimated forfeitures, on a straight-line basis over the requisite service period, which generally is the vesting period. 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 $ 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. Stock Awards During June 2019, the Company’s Chief Executive Officer, Robert A. Frist, Jr., contributed 78,520 of his personally owned shares of HealthStream, Inc. common stock (valued at $ 2.0 million) to the Company, without any consideration paid to him, for the benefit of the Company’s employees. In connection therewith, effective June 26, 2019 the Company approved the award of 78,520 fully vested shares of common stock to approximately 820 employees of the Company under the HealthStream, Inc. 2016 Omnibus Incentive Plan. These shares were issued in July 2019. As required by ASC Topic 718, Compensation – Stock Compensation , the Company recognized $ 2.0 million of stock based compensation expense for these stock awards during the three months ended June 30, 2019 based on the closing fair market value of the Company’s stock on the date of the Company’s approval of these grants. Total payments related to the employees’ tax obligations to taxing authorities for these stock awards were $ 0.6 million and are reflected as a financing activity within the Consolidated Statement of Cash Flows for 2019. In addition, the employer taxes and expenses associated with these grants were $ 0.2 million and were recorded as an expense during June 2019. Mr. Frist contributed an additional 7,852 of his personally owned shares to cover these costs. The receipt of shares from Mr. Frist and in connection with the withholding of shares as set forth above are presented on the Company’s Statement of Shareholders’ Equity in a similar manner as a share repurchase (i.e., reduction of outstanding shares). 12. EMPLOYEE BENEFIT PLAN 401(k) Plan The Company has a defined-contribution employee benefit plan (401(k) Plan) incorporating provisions of Section 401(k) of the Internal Revenue Code. Employees must have attained the age of 21 and have completed thirty days of service to be eligible to participate in the 401(k) Plan. Under the provisions of the 401(k) Plan, a plan member may make contributions, on a tax-deferred basis, subject to IRS limitations. The Company elected to provide eligible employees with matching contributions totaling $ 1.2 million, $ 1.4 million, and $ 1.3 million for the years ended December 31, 2020, 2019, and 2018, respectively. 13. 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), resulting in a gain, net of tax, of $ 20.5 million, of which $ 19.0 million was recorded during the year ended December 31, 2018 and $ 1.5 million was recorded during the year ended December 31, 2019. This sale of the PX business resulted in the divestiture of the Company’s patient experience solutions business segment. The Company has classified the results of its PX business segment as discontinued operations in its Consolidated Statements of Income and Cash Flows for all periods presented. 14. DEBT At December 31, 2020 and 2019, the Company had no debt outstanding. 70 Table of Contents Revolving Credit Facility 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 %. The applicable margin for Base Rate loans depends on the Company’s funded debt leverage ratio and varies from 0.50 % to 0.75 % . Commitment fees and letter of credit fees are also payable under the Revolving Credit Facility. 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. The Revolving Credit Facility contains certain covenants that, among other things, restrict additional indebtedness, liens and encumbrances, changes to the character of the Company’s business, acquisitions, asset dispositions, mergers and consolidations, sale or discount of receivables, creation or acquisitions of additional subsidiaries, and other matters customarily restricted in such agreements. In addition, the Revolving Credit Facility requires the Company to meet certain financial tests, including, without limitation: • a funded debt leverage ratio (consolidated debt/consolidated EBITDA) of not greater than 3.0 to 1.0; and • an interest coverage ratio (consolidated EBITDA/consolidated interest expense) of not less than 3.0 to 1.0. As of December 31, 2020, the Company was in compliance with all covenants. 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. 15. LEASES 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 %. 71 Table of Contents The table below presents the lease-related assets and liabilities recorded on the Consolidated Balance Sheet as of December 31, 2020 (in thousands). Year Ended December 31, 2020 2019 Assets Classification Operating lease right-of-use assets Operating lease right of use assets, net $ 28,081 $ 29,615 Total leased assets $ 28,081 $ 29,615 Liabilities Operating lease liabilities, current Accounts payable and accrued expenses $ 3,390 $ 2,797 Operating lease liabilities, noncurrent Operating lease liability, noncurrent 28,479 30,733 Total operating lease liabilities $ 31,869 $ 33,530 The table below presents the maturities of lease liabilities under non-cancellable leases as of December 31, 2020 (in thousands). 2021 $ 5,229 2022 4,430 2023 4,130 2024 4,176 2025 3,942 Thereafter 20,650 Total undiscounted lease payments $ 42,557 Less imputed interest 10,688 Total lease liabilities $ 31,869 16. LITIGATION In connection with its business, the Company is from time to time involved in various legal actions. The litigation process is inherently uncertain, and it is possible that the resolution of such matters might have a material adverse effect upon the financial condition and/or results of operations of the Company. However, in the opinion of the Company’s management, matters currently pending or threatened against the Company are not expected to have a material adverse effect on the financial position or results of operations of the Company. 17. NON-MARKETABLE EQUITY INVESTMENTS 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. 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. 18. SUBSEQUENT EVENT 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. 72 Table of Contents Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None.