HEALTHSTREAM INC 10-Q

Item 1. Financial Statements HEALTHSTREAM, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED) (In thousands) March 31, December 31, 2021 2020 ASSETS Current assets: Cash and cash equivalents $ 45,348 $ 36,566 Marketable securities 10,622 9,928 Accounts receivable, net of allowance for doubtful accounts of $ 519 and $ 549 at March 31, 2021 and December 31, 2020, respectively 33,195 40,726 Accounts receivable - unbilled 3,988 5,374 Prepaid royalties, net of amortization 11,786 9,571 Other prepaid expenses and other current assets 10,038 12,560 Total current assets 114,977 114,725 Property and equipment, net of accumulated depreciation of $ 20,968 and $ 19,237 at March 31, 2021 and December 31, 2020, respectively 20,653 22,218 Capitalized software development, net of accumulated amortization of $ 74,095 and $ 70,516 at March 31, 2021 and December 31, 2020, respectively 27,190 26,631 Operating lease right of use assets, net 27,276 28,081 Goodwill 181,161 178,440 Customer-related intangibles, net of accumulated amortization of $ 38,938 and $ 36,723 at March 31, 2021 and December 31, 2020, respectively 75,603 76,927 Other intangible assets, net of accumulated amortization of $ 12,371 and $ 10,748 at March 31, 2021 and December 31, 2020, respectively 22,683 23,788 Deferred tax assets 974 974 Deferred commissions 21,375 19,907 Non-marketable equity investments 7,791 6,845 Other assets 1,999 1,777 Total assets $ 501,682 $ 500,313 LIABILITIES AND SHAREHOLDERS’ EQUITY Current liabilities: Accounts payable and accrued expenses $ 20,012 $ 29,457 Accrued royalties 8,504 8,809 Deferred revenue 88,390 81,176 Total current liabilities 116,906 119,442 Deferred tax liabilities 16,560 14,523 Deferred revenue, noncurrent 1,518 1,603 Operating lease liability, noncurrent 27,675 28,479 Other long-term liabilities 2,218 2,204 Commitments and contingencies Shareholders’ equity: Common stock, no par value, 75,000 shares authorized; 31,553 and 31,493 shares issued and outstanding at March 31, 2021 and December 31, 2020, respectively 272,001 271,784 Retained earnings 64,569 62,277 Accumulated other comprehensive income 235 1 Total shareholders’ equity 336,805 334,062 Total liabilities and shareholders’ equity $ 501,682 $ 500,313 See accompanying Notes to the unaudited Condensed Consolidated Financial Statements. 1 HEALTHSTREAM, INC. CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) (In thousands, except per share data) Three Months Ended March 31, 2021 March 31, 2020 Revenues, net $ 63,468 $ 61,572 Operating costs and expenses: Cost of revenues (excluding depreciation and amortization) 21,237 20,359 Product development 9,361 7,468 Sales and marketing 8,924 9,188 Other general and administrative expenses 11,493 9,864 Depreciation and amortization 9,153 7,449 Total operating costs and expenses 60,168 54,328 Operating income 3,300 7,244 Other (loss) income, net ( 87 ) 1,706 Income before income tax provision 3,213 8,950 Income tax provision 922 1,858 Net income $ 2,291 $ 7,092 Net income per share: Basic $ 0.07 $ 0.22 Diluted $ 0.07 $ 0.22 Weighted average shares of common stock outstanding: Basic 31,504 32,334 Diluted 31,526 32,357 See accompanying Notes to the unaudited Condensed Consolidated Financial Statements. 2 HEALTHSTREAM, INC. CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED) (In thousands) Three Months Ended March 31, 2021 March 31, 2020 Net income $ 2,291 $ 7,092 Other comprehensive income, net of taxes: Foreign currency translation adjustments 230 ( 44 ) Unrealized gain (loss) on marketable securities 4 ( 101 ) Total other comprehensive income (loss) 234 ( 145 ) Comprehensive income $ 2,525 $ 6,947 See accompanying Notes to the unaudited Condensed Consolidated Financial Statements. 3 HEALTHSTREAM, INC. CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (UNAUDITED) (In thousands) Three Months Ended March 31, 2021 Common Stock Retained Accumulated Other Comprehensive Total Shareholders’ Shares Amount Earnings Income Equity Balance at December 31, 2020 31,493 $ 271,784 $ 62,277 $ 1 $ 334,062 Net income — — 2,291 — 2,291 Comprehensive income — — — 234 234 Stock based compensation — 616 — — 616 Common stock issued under stock plans, net of shares withheld for employee taxes 60 ( 399 ) — — ( 399 ) Balance at March 31, 2021 31,553 $ 272,001 $ 64,569 $ 235 $ 336,805 Three Months Ended March 31, 2020 Common Stock Retained Accumulated Other Comprehensive Total Shareholders’ Shares Amount Earnings Income (Loss) Equity Balance at December 31, 2019 32,379 $ 290,021 $ 48,143 $ 4 $ 338,168 Net income — — 7,092 — 7,092 Comprehensive loss — — — ( 145 ) ( 145 ) Stock based compensation — 550 — — 550 Common stock issued under stock plans, net of shares withheld for employee taxes 62 ( 373 ) — — ( 373 ) Repurchase of common stock ( 438 ) ( 9,876 ) — — ( 9,876 ) Balance at March 31, 2020 32,003 $ 280,322 $ 55,235 $ ( 141 ) $ 335,416 See accompanying Notes to the unaudited Condensed Consolidated Financial Statements . 4 HEALTHSTREAM, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (In thousands) Three Months Ended March 31, 2021 2020 OPERATING ACTIVITIES: Net income $ 2,291 $ 7,092 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 9,153 7,449 Stock based compensation 616 550 Amortization of deferred commissions 2,133 2,159 Provision for doubtful accounts 142 288 Deferred income taxes 486 500 Loss on non-marketable equity investments 54 11 Non-cash paid time off expense ( 1,011 ) — Non-cash royalty expense — ( 3,440 ) Change in fair value of non-marketable equity investments — ( 1,152 ) Other 15 47 Changes in operating assets and liabilities: Accounts and unbilled receivables 7,379 ( 4,573 ) Prepaid royalties ( 2,215 ) ( 3,202 ) Other prepaid expenses and other current assets 2,521 735 Deferred commissions ( 3,602 ) ( 1,602 ) Other assets ( 76 ) 134 Accounts payable and accrued expenses ( 5,339 ) ( 5,775 ) Accrued royalties ( 305 ) 442 Deferred revenue 6,862 6,453 Net cash provided by operating activities 19,104 6,116 INVESTING ACTIVITIES: Business combinations, net of cash acquired ( 731 ) ( 21,421 ) Proceeds from maturities of marketable securities 4,500 20,725 Purchases of marketable securities ( 5,205 ) ( 14,130 ) Payments to acquire non-marketable equity investments ( 1,000 ) — Payments associated with capitalized software development ( 5,326 ) ( 4,068 ) Purchases of property and equipment ( 1,898 ) ( 1,010 ) Net cash used in investing activities ( 9,660 ) ( 19,904 ) FINANCING ACTIVITIES: Taxes paid related to net settlement of equity awards ( 399 ) ( 373 ) Repurchase of common stock — ( 9,876 ) Payment of cash dividends ( 12 ) ( 30 ) Net cash used in financing activities ( 411 ) ( 10,279 ) Effect of exchange rate changes on cash and cash equivalents ( 251 ) ( 46 ) Net increase (decrease) in cash and cash equivalents 8,782 ( 24,113 ) Cash and cash equivalents at beginning of period 36,566 131,538 Cash and cash equivalents at end of period $ 45,348 $ 107,425 See accompanying Notes to the unaudited Condensed Consolidated Financial Statements. 5 HEALTHSTREAM, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 1. BASIS OF PRESENTATION The accompanying unaudited Condensed Consolidated Financial Statements have been prepared in accordance with accounting principles generally accepted in the United States (“US GAAP”) for interim financial information and with the instructions to Form 10‑Q and Article 10 of Regulation S‑X. Accordingly, condensed consolidated financial statements do not include all of the information and footnotes required by US GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. All intercompany transactions have been eliminated in consolidation. Operating results for the three months ended March 31, 2021 are not necessarily indicative of the results that may be expected for the year ending December 31, 2021. The Condensed Consolidated Balance Sheet at December 31, 2020 was derived from the audited Consolidated Financial Statements at that date but does not include all of the information and footnotes required by US GAAP for a complete set of financial statements. For further information, refer to the Consolidated Financial Statements and Notes thereto for the year ended December 31, 2020 (included in the Company's Annual Report on Form 10-K, filed with the Securities and Exchange Commission on February 25, 2021). 2. 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. 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 The following table represents revenues disaggregated by revenue source (in thousands). Sales taxes are excluded from revenues. Three Months Ended March 31, 2021 Three Months Ended March 31, 2020 Business Segments Workforce Solutions Provider Solutions Consolidated Workforce Solutions Provider Solutions Consolidated Subscription services $ 49,770 $ 10,597 $ 60,367 $ 48,717 $ 9,984 $ 58,701 Professional services 1,477 1,624 3,101 1,107 1,764 2,871 Total revenues, net $ 51,247 $ 12,221 $ 63,468 $ 49,824 $ 11,748 $ 61,572 For the three months ended March 31, 2021 and 2020, the Company recognized $ 0.1 million and $ 0.3 million, respectively, in impairment losses on receivables and contract assets arising from the Company’s contracts with customers. Deferred revenue represents contract liabilities that are recorded when cash payments are received or are due in advance of our satisfaction of performance obligations. During the three months ended March 31, 2021 and 2020, we recognized revenues of approximately $ 33.6 million and $ 31.6 million, respectively, from amounts included in deferred revenue at the beginning of the respective periods. As of March 31, 2021, approximately $ 446 million of revenue is expected to be recognized from remaining performance obligations under contracts with customers. We expect to recognize revenue related to approximately 46 % of these remaining performance obligations over the next 12 months, with the remaining amounts recognized thereafter. Sales Commissions Sales commissions earned by our sales force are considered incremental and recoverable costs of obtaining a contract with a customer. 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 6 HEALTHSTREAM, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) benefit to the Company for a period longer than the contract term, such as for new customer or incremental sales where renewals are expected and renewal commissions are not commensurate with initial commissions. Non-commensurate commissions are amortized over the greater of the contract term or technological obsolescence period of approximately three years . The Company recorded amortization of deferred commissions of approximately $ 2.1 million and $ 2.2 million for the three months ended March 31, 2021 and 2020 , respectively, which is included in s ales and marketing expenses in the accompanying C ondensed C onsolidated S tatements of I ncome. 3. INCOME TAXES Income taxes are accounted for using the asset and liability method, whereby deferred tax assets and liabilities are determined based on the temporary differences between the financial statement and tax bases of assets and liabilities measured at tax rates that will be in effect for the year in which the differences are expected to affect taxable income. The Company computes its interim period provision for income taxes by applying the estimated annual effective tax rate to year-to-date pretax income or loss and adjusts the provision for discrete tax items recorded in the period. During the three months ended March 31, 2021 and 2020 , the Company recorded a provision for income taxes of approximately $ 0.9 million and $ 1.9 million, respectively. The Company’s effective tax rate for the three months ended March 31, 2021 and 2020 was 29 % and 21 %, respectively. The Company’s effective tax rate primarily reflects the statutory corporate income tax rate, the net effect of state taxes, foreign income taxes, and the effect of various permanent tax differences. During the three months ended March 31, 2021, the Company recorded discrete tax expense of $ 0.1 million related to various items, including recording a permanent difference related to purchase accounting adjustments and the impact of a state tax rate change enacted during the period. During the three months ended March 31, 2020, the Company recorded a $ 1.2 million change in fair value of non-marketable equity investments as a result of the NurseGrid acquisition, which is not a taxable transaction, resulting in a tax benefit of $ 0.3 million. The Company recognizes excess tax benefits and tax deficiencies associated with stock based awards as a component of its provision for income taxes. The Company recorded additional income tax expense associated with tax deficiencies of approximately $ 17,000 and $ 26,000 during the three months ended March 31, 2021 and 2020, respectively. 4. SHAREHOLDERS’ EQUITY Stock Based Compensation The Company has stock awards outstanding under its 2016 Omnibus Incentive Plan. The Company accounts for its stock based compensation plan using the fair-value based method for costs related to share based payments, including restricted share units (“RSUs”). During the three months ended March 31, 2021, the Company issued 121,551 RSUs, subject to service-based time vesting, with a weighted average grant date fair value of $ 23.16 per share, measured based on the closing fair market value of the Company’s stock on the date of grant. During the three months ended March 31, 2020, the Company issued 111,510 RSUs, subject to service-based time vesting, with a weighted average grant date fair value of $ 22.96 per share, measured based on the closing fair market value of the Company’s stock on the date of grant. During the three months ended June 30, 2018, the Company issued 70,000 performance-based RSUs, the vesting of which occurs over a five-year period and is contingent upon continued service and achieving certain performance criteria established by the Compensation Committee on an annual basis in increments of 10 %, 15 %, 20 %, 25 %, and 30 % based on performance in 2018, 2019, 2020, 2021, and 2022, respectively. The performance criteria for 17,500 of these performance-based RSUs, along with 7,000 performance-based catch-up RSUs which did not vest based on 2020 performance and remain eligible for vesting, will be based on 2021 performance. The measurement date for these 24,500 performance-based RSUs was established during the three months ended March 31, 2021 with a grant date fair value of $ 23.01 per share, measured based on the closing fair market value of the Company’s stock on the date the performance criteria was established. The performance criteria for the remaining 21,000 performance-based RSUs has not yet been determined and will be established in 2022 based on performance in 2022; therefore, the measurement date for these remaining 21,000 performance-based RSUs cannot be determined until the performance criteria have been established. Total stock based compensation expense recognized in the Condensed Consolidated Statements of Income is as follows (in thousands): Three Months Ended March 31, 2021 2020 Cost of revenues (excluding depreciation and amortization) $ 20 $ 7 Product development 102 81 Sales and marketing 65 49 Other general and administrative 429 413 Total stock based compensation expense $ 616 $ 550 7 HEALTHSTREAM, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 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 expired on March 12, 2021 . Under this program, the Company repurchased a total of 957,367 shares in open market purchases at an aggregate fair value of $ 20.0 million, reflecting an average price per share of $ 20.89 (excluding the cost of broker commissions). No repurchases occurred during the three months ended March 31, 2021. 5 . EARNINGS PER SHARE Basic earnings per share is computed by dividing the net income available to common shareholders for the period by the weighted average number of common shares outstanding during the period. Diluted earnings per share is computed by dividing the net income available to common shareholders for the period by the weighted average number of potentially dilutive common and common equivalent shares outstanding during the period. Common equivalent shares are composed of incremental common shares issuable upon the exercise of stock options and RSUs subject to vesting. The dilutive effect of common equivalent shares is included in diluted earnings per share by application of the treasury stock method. The total number of common equivalent shares excluded from the calculations of diluted earnings per share, due to their anti-dilutive effect or contingent performance conditions, was approximately 148,000 and 106,000 for the three months ended March 31, 2021 and 2020 , respectively. The following table sets forth the computation of basic and diluted earnings per share (in thousands, except per share data): Three Months Ended March 31, 2021 2020 Numerator: Net income $ 2,291 $ 7,092 Denominator: Weighted-average shares outstanding 31,504 32,334 Effect of dilutive shares 22 23 Weighted-average diluted shares 31,526 32,357 Net income per share: Basic $ 0.07 $ 0.22 Diluted $ 0.07 $ 0.22 6. MARKETABLE SECURITIES The fair value of marketable securities, which were all classified as available for sale and which the Company does not intend to sell nor will the Company be required to sell prior to recovery of their amortized cost basis, included the following (in thousands): March 31, 2021 Adjusted Cost Unrealized Gains Unrealized Losses Fair Value Cash and Cash Equivalents Current Marketable Securities Cash $ 45,348 $ — $ — $ 45,348 $ 45,348 $ — Level 2: Time deposits 5,022 — — 5,022 — 5,022 Corporate debt securities 5,604 — ( 4 ) 5,600 — 5,600 Total $ 55,974 $ — $ ( 4 ) $ 55,970 $ 45,348 $ 10,622 8 HEALTHSTREAM, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 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 The carrying amounts reported in the Condensed Consolidated Balance Sheets approximate the fair value based on quoted market prices or alternative pricing sources and models utilizing market observable inputs. As of March 31, 2021, the Company did no t recognize any allowance for credit impairments on its available for sale debt securities. All investments in marketable securities are classified as current assets on the Condensed Consolidated Balance Sheets because the underlying securities mature within one year from the balance sheet date. 7. 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, which was accounted for as a non-marketable equity investment measured using the fair value alternative, to fair value at the acquisition date based on the total enterprise value, adjusting for a control premium. The fair value of the Company’s interest in NurseGrid was $ 3.6 million at closing, resulting in a gain of $ 1.2 million, recorded as a change in fair value of non-marketable equity investments in the Company’s Condensed Consolidated Statement of Income during the three months ended March 31, 2020. Additionally, the Company’s previously recorded non-marketable equity investment in NurseGrid was de-recognized from the Company’s Condensed Consolidated Balance Sheet during the same period. 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 Total purchase price $ 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 9 HEALTHSTREAM, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) economic and market conditions. The goodwill balance is primarily attributed to the assembled workforce, future market opportunities to engage and support the NurseGrid Mobile user community, and expected synergies from integrating NurseGrid with other combined functional areas within the Company. The goodwill balance is not deductible for U.S. income tax purposes. The net tangible assets include deferred revenue, which was adjusted down from a book value at the acquisition date of $ 157,000 to an estimated fair value of $ 78,000 . The $ 79,000 write-down of deferred revenue will result in lower revenues than would have otherwise been recognized for such services. The following table sets forth the components of identifiable intangible assets and their estimated useful lives as of the acquisition date (in thousands): 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 following unaudited pro forma financial information summarizes the results of operations of the Company and NurseGrid as though the companies were combined as of January 1, 2019 (in thousands, except per share data): Three Months Ended March 31, 2021 2020 Total revenues $ 63,472 $ 61,644 Net income $ 2,295 $ 6,525 Net income per share - basic $ 0.07 $ 0.20 Net income per share - diluted $ 0.07 $ 0.20 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., 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 $ 30.5 million in cash after giving effect to the post-closing working capital adjustment. Acquisition-related transaction costs were $ 0.3 million. The financial results of ShiftWizard have been included in the Workforce Solutions segment from October 12, 2020. The following table summarizes the preliminary fair value of the assets acquired and liabilities assumed as of the date of acquisition (in thousands): Cash $ 1,091 Accounts and unbilled receivable, net 1,038 Prepaid assets 106 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 ( 600 ) Deferred revenue ( 1,601 ) Deferred tax liability ( 1,559 ) Operating lease liabilities ( 183 ) Indemnification liability ( 464 ) Net assets acquired $ 30,492 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 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 10 HEALTHSTREAM, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 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 . Included in the assets and liabilities is an indemnification asset and liability of $ 0.5 million associated with a Paycheck Protection Program loan pending forgiveness as of the acquisition date that was subsequently 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 intangible assets $ 12,660 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): Three Months Ended March 31, 2021 2020 Total revenues $ 63,719 $ 62,576 Net income $ 2,493 $ 6,740 Net income per share - basic $ 0.08 $ 0.21 Net income per share - diluted $ 0.08 $ 0.21 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 $ 66.4 million in cash, after giving effect to the post-closing working capital adjustment. 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. 11 HEALTHSTREAM, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 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 10,053 Prepaid assets 233 Operating lease right-of-use assets 888 Property and equipment 66 Deferred tax assets 2,936 Indemnification asset 708 Goodwill 36,963 Intangible assets 32,440 Accounts payable and accrued liabilities ( 1,693 ) Deferred revenue ( 14,537 ) Operating lease liabilities ( 888 ) Deferred tax liability ( 1,612 ) Uncertain tax position liability ( 708 ) Net assets acquired $ 66,448 The excess of 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. During the three months ended March 31, 2021, the Company determined that a portion of the acquired accounts receivable balance required an adjustment to net realizable value. Additionally, the Company recorded opening balance sheet deferred tax liabilities related to the allocation of intangible assets to the foreign entities. As a result of these two items coupled with the post-closing working capital adjustment, the Company recorded a measurement period adjustment which increased goodwill by $ 1.7 million. The measurement period adjustment had no effect on current or prior period earnings. 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 accounts. Included in the preliminary assets and liabilities acquired is an indemnification asset and an uncertain tax position liability of $ 0.7 million determined based on management’s estimate of the most likely value related to income tax attributes. The primary intangible assets acquired were customer relationships and developed technology. The fair value estimate for customer relationships intangible asset included significant assumptions regarding prospective financial information with respect to the acquisition, including with respect to revenue growth, customer attrition, EBITDA margin, and the discount rate. The fair value estimate for developed technology intangible asset included significant assumptions, including the estimate of employee hours that would be needed to recreate the technology. Additionally, these assumptions are forward looking and could be affected by future economic and market conditions. The goodwill balance is primarily attributed to the assembled workforce, additional market opportunities from offering ANSOS products, and expected synergies from integrating ANSOS with other products or other combined functional areas within the Company. The portion of goodwill allocated to the U.S. entity is deductible for U.S. income tax purposes (representing 95%). 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 intangible assets $ 32,440 12 HEALTHSTREAM, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) The following unaudited pro forma financial information summarizes the results of operations of the Company and ANSOS as though the companies were combined as of January 1, 2019 (in thousands, except per share data): Three Months Ended March 31, 2021 2020 Total revenues $ 64,567 $ 68,437 Net income $ 3,124 $ 8,262 Net income per share - basic $ 0.10 $ 0.26 Net income per share - diluted $ 0.10 $ 0.26 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. 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. 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 Condensed Consolidated Financial Statements from the date of acquisition and are included in the Workforce Solutions segment. On January 19, 2021, the Company acquired the issued and outstanding equity of ProcessDATA, Ltd. (d/b/a ComplyALIGN and HospitalPORTAL) (“ComplyALIGN”), a Chicago, Illinois-based healthcare technology company offering a SaaS-based policy management system for healthcare organizations, for $ 2.0 million in cash. 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. Acquisition-related transaction costs were $ 0.1 million. The results of operations for ComplyALIGN are included in the Company’s Condensed Consolidated Financial Statements from the date of acquisition and are included in the Workforce Solutions segment. During the three months ended March 31, 2021, the carrying amount of goodwill increased by $ 2.7 million, consisting of a $ 1.7 million of measurement period adjustment related to ANSOS, $ 0.6 million of acquired goodwill related to ComplyALIGN, and $ 0.4 million for the effect of currency translation adjustments. 8. 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). 13 HEALTHSTREAM, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) The Company measures segment performance based on operating income before income taxes and prior to the allocation of certain corporate overhead expenses, interest income, interest expense, gains and losses from equity investments, and depreciation. The Unallocated component below includes corporate functions, such as accounting, human resources, legal, investor relations, information systems, administrative and executive personnel, depreciation, a portion of amortization, and certain other expenses, which are not currently allocated in measuring segment performance. The following is the Company’s business segment information (in thousands). Three Months Ended March 31, Revenues, net: 2021 2020 Workforce Solutions $ 51,247 $ 49,824 Provider Solutions 12,221 11,748 Total revenues, net $ 63,468 $ 61,572 Operating income: Workforce Solutions $ 9,027 $ 13,370 Provider Solutions 2,055 1,197 Unallocated ( 7,782 ) ( 7,323 ) Total operating income $ 3,300 $ 7,244 Segment assets * March 31, 2021 December 31, 2020 Workforce Solutions $ 267,993 $ 270,924 Provider Solutions 136,926 140,490 Unallocated 96,763 88,899 Total assets $ 501,682 $ 500,313 * 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, goodwill, 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. 9 . DEBT Revolving Credit Facility On October 28, 2020, 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. Under the Revolving Credit Facility, the Company may borrow up to $ 65.0 million, which includes a $ 5.0 million swing line sub-facility and a $ 5.0 million letter of credit sub-facility, as well as an accordion feature that allows the Company to increase the Revolving Credit Facility by a total of up to $ 25.0 million, subject to securing additional commitments from existing lenders or new lending institutions. 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 Revolving Credit Facility), and for stock repurchase and/or redemption transactions that the Company may authorize. The Revolving Credit Facility contains certain covenants that, among other things, restrict additional indebtedness, liens and encumbrances, changes to the character of the Company’s business, acquisitions, asset dispositions, mergers and consolidations, sale or discount of receivables, creation or acquisitions of additional subsidiaries, and other matters customarily restricted in such agreements. 14 HEALTHSTREAM, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 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 March 31, 2021, the Company was in compliance with all covenants. There were no balances outstanding on the Revolving Credit Facility as of or during the three months ended March 31, 2021. 10. 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 as of March 31, 2021 and December 31, 2020, which carrying value we evaluate for impairment at each reporting period. Cumulatively, the Company has recorded $ 0.1 million in downward adjustments to the carrying value of non-marketable equity investments. Such is the combination of cumulative downward adjustments of $ 1.3 million offset by cumulative upward adjustments of $ 1.2 million. These adjustments are the result of changes in fair value based on observable prices from orderly transactions for similar investments made in investees. The fair value of non-marketable equity investments is not estimated if there are no identified events or changes in circumstances that may have a significant adverse effect on the fair value of the investment. 15