What changed in this filing

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Item 2. Management’s Discussion and Analysis

2021-07-29 compared with 2021-04-29 · 172 added, 121 removed, 153 unchanged (66% of the section changed)

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HealthStream’s customers include healthcare organizations, pharmaceutical and medical device companies, and other participants in the healthcare industry.

At March 31, 2021, we had approximately 4.34 million contracted subscriptions to hStream TM , our Platform-as-a-Service technology.

At June 30, 2021, we had approximately 4.52 million contracted subscriptions to hStream TM , our Platform-as-a-Service technology.

hStream technology enables healthcare organizations and their respective workforces to easily connect to and gain value from the growing HealthStream ecosystem of applications, tools, and content.

Significant financial metrics for the first quarter of 2021 are set forth in the bullets below.

Revenues of $63.5 million in the first quarter of 2021, up 3% from $61.6 million in the first quarter of 2020.

Operating income of $3.3 million in the first quarter of 2021, down 54% from $7.2 million in the first quarter of 2020, which comparison was negatively impacted by a one-time contractual adjustment to cost of revenues in the amount of $3.4 million during the first quarter of 2020.

Net income of $2.3 million in the first quarter of 2021, down 68% from $7.1 million in the first quarter of 2020, which comparison was negatively impacted by $2.6 million from the contractual adjustment in the first quarter of 2020 referenced above.

Earnings per share (“EPS”) of $0.07 per share (diluted) in the first quarter of 2021 compared to $0.22 per share (diluted) in the first quarter of 2020, which was impacted by $0.08 from the contractual adjustment in the first quarter of 2020 referenced above.

Adjusted EBITDA 1 of $13.6 million in the first quarter of 2021, up 14% from $11.9 million in the first quarter of 2020.

Significant financial metrics for the second quarter of 2021 are set forth in the bullets below.

Revenues of $64.8 million in the second quarter of 2021, an increase of 7% from $60.6 million in the second quarter of 2020, offsetting a $9.7 million decline in legacy resuscitation revenues.

Operating income of $3.4 million in the second quarter of 2021, down 20% from $4.3 million in the second quarter of 2020.

Net income of $2.4 million in the second quarter of 2021, down 29% from $3.4 million in the second quarter of 2020.

Earnings per share (“EPS”) of $0.08 per share (diluted) in the second quarter of 2021 compared to $0.11 per share (diluted) in the second quarter of 2020.

Adjusted EBITDA 1 of $14.5 million in the second quarter of 2021, up 20% from $12.1 million in the second quarter of 2020.

Adjusted EBITDA is a non-GAAP financial measure.

A reconciliation of adjusted EBITDA to net income and disclosure regarding why we believe adjusted EBITDA provides useful information to investors is included later in this report.

On January 19, 2021, the Company acquired 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 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 HealthStream Workforce Solutions segment.

Impact of and Response to COVID-19 Pandemic

The COVID-19 pandemic, which spread throughout the world and the United States during 2020, has resulted in a significant economic downturn.

As vaccines have become more available, the number of COVID-19 cases has declined in the United States and various other countries, and economic conditions have improved.

However, uncertainty remains regarding the extent, timing, and duration of the pandemic, including the extent to which the availability of these vaccines will positively impact public health conditions and whether new, potentially more contagious and/or virulent strains of COVID-19 may pose additional public health risks.

The COVID-19 pandemic, which spread throughout the world and the United States during 2020, resulted in a significant economic downturn.

As vaccines have become more available, the number of COVID-19 cases has declined in the United States and various other countries in comparison to their highest levels earlier in pandemic, and economic conditions have generally improved.

The pandemic continues to cause uncertainty and potential economic volatility, including with regard to the pandemic’s various and unpredictable impacts on our healthcare customers and our business.

Recent surges in COVID-19 cases, particularly in connection with the Delta variant, could leave to a corollary increase in risk and volatility.

Our business is focused on providing workforce and provider solutions to healthcare organizations, and as such, the pandemic’s adverse impact on healthcare organizations has resulted in an adverse impact on our Company.

Although we believe that COVID-19 did not have a significant negative impact on our revenues or net income during 2020, we believe that it began to have a negative impact on our revenues during the three months ended March 31, 2021.

Additionally, certain developments related to COVID-19 have negatively impacted and are expected to continue to negatively impact our business during the remainder of 2021 and potentially thereafter, as described below.

In particular, sales cycles have been delayed or postponed such that declines in sales bookings by customers during 2020 and the three months ended March 31, 2021 will result in a negative impact to revenue and earnings during the remainder of 2021 and potentially thereafter.

In particular, sales cycles have been delayed or postponed such that declines in sales bookings by customers during 2020 and the six months ended June 30, 2021 will result in a negative impact to revenue and potentially to earnings during the remainder of 2021 and potentially thereafter.

Our operating results have benefited from a temporary reduction of operating expenses related to COVID-19 conditions, but the operating expense reduction itself—despite its positive impact on operating income and adjusted EBITDA—is indicative of the negative impact the pandemic has had, and may continue to have on new bookings and renewals.

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Given that we sell multiple year subscriptions to our solutions, the revenue impact of lost or delayed sales in a given period generally does not manifest until future periods, just as the revenue we recognize in a given period is generally the result of sales from a prior period.

Since mid-March 2020, our sales organization has been unable to travel and conduct onsite sales meetings with existing or prospective customers, and we have also cancelled tradeshows, which typically provide future sales opportunities.

As a result, operating income and adjusted EBITDA benefitted from a $1.2 million reduction in operating expense related to travel restrictions during the first quarter of 2021 compared to the first quarter of 2020.

Since mid-March 2020, our sales organization has had limited opportunities to travel and conduct onsite sales meetings with existing or prospective customers, and we have also cancelled in-person tradeshows, which typically generate future sales opportunities.

As a result, operating income and adjusted EBITDA benefitted from a $1.2 million reduction in operating expense related to travel restrictions during the first six months of 2021 compared to the first six months of 2020.

As travel restrictions lessen and travel begins to accelerate, we expect operating expenses associated with them to have a negative impact on operating income and EBITDA for the second half of 2021 and do not expect revenue generated from such activities to begin offsetting such increases to operating expenses until next year.

However, the uncertain trajectory of COVID-19 may impact when and to what extent normal operating expenses, including expenses related sales travel and in-person tradeshows, accelerate or remain abated.

We continue to closely monitor developments related to COVID-19 that may have an adverse impact on our operational and financial performance.

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Additionally, to promote the safety and well-being of our employees, we required our entire workforce to begin working remotely from home beginning March 16, 2020, and the entire workforce continues to work remotely to date.

We have not established a date to return to non-remote working conditions.

We have established safety protocols and dates in the third quarter of 2021 for each of our offices to re-open;

however, we will be offering our employees the option to work under a hybrid model of working either in our offices or remotely, or a combination of both.

Many healthcare organizations have been, and may continue to be, substantially adversely impacted by the COVID-19 pandemic.

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We monitor our cash position and credit exposure by evaluating, among other things, weekly cash receipts, days sales outstanding (DSO), customer requests to modify payment or contract terms, and bankruptcy notices.

We experienced modest increases in DSO during the first quarter of 2021 compared to the first quarter of 2020, which increase was partially due to the increase in accounts receivable balances from acquisitions completed in the fourth quarter of 2020.

We experienced modest improvements in DSO during the second quarter of 2021 compared to the second quarter of 2020.

Additionally, while we have not experienced any adverse impacts to customer defaults resulting from COVID-19, we are unable to know whether or to what extent future negative trends related to the pandemic may arise in the future.

Any deterioration in the collectability (or the timing of payments) of our accounts receivable will adversely impact our financial results.

Any deterioration in the collectability (or the timing of payments) of our accounts receivable could adversely impact our financial results.

The timing of implementation of our services is also relevant to our business because our software solutions do not result in revenue recognition until they are made available for use.

To the extent our customers delay or fail to implement products they have previously purchased, our financial results will be adversely impacted.

While we have experienced a negative impact

from certain implementation delays related to COVID-19, these delays have not been consistent across products or across customers.

To the extent our customers delay or fail to implement products they have purchased, our financial results will be adversely impacted.

While we have experienced a negative impact from certain implementation delays related to COVID-19, these delays have not been consistent across products or across customers.

In fact, we have become more efficient in implementing certain products during the pandemic.

Our Provider Solutions business segment has, in some instances, been more sensitive to implementation delays than our Workforce Solutions segment as the result of complexities associated with implementing certain of the solutions offered through that business segment.

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Pandemic-related conditions have also delayed or otherwise adversely impacted our ability to enter into contracts with new potential customers, as some potential customers have been focused on dealing with the impact and demands that COVID-19 is having on their businesses.

In addition, many existing or potential customers are not currently allowing vendors, including representatives of the Company, on their premises, which has reduced, and may continue to reduce, the ability of our sales team to make sales they otherwise would likely make but for the impact of COVID-19.

Also, our customers’ uncertainties due to COVID-19, combined with the inability to travel and conduct tradeshows, has had, and may continue to have, a negative impact on our sales volumes.

As the pandemic has persisted, we have, however, continued to evolve our sales approach such that our sales representatives are in frequent contact with customers via video conference and other remote means that do not require physical travel or onsite visits to our customers’ facilities.

While COVID-19 has had a negative impact on sales volumes, sales have continued throughout the pandemic albeit at a reduced bookings volume.

Our business also relies on a network of partners whose solutions we resell or whose solutions are sold and delivered over our platform.

To the extent that COVID-19 results in ongoing or increased business disruption or adverse impacts to our partners, such disruptions and adverse impacts could adversely impact our business.

In addition, the limitations noted above on onsite sales meetings and in-person trade shows, as well as our customers’ ongoing uncertainties due to COVID-19 have reduced, and may continue to reduce, the ability of our sales team to make sales they otherwise would likely make but for the impact of COVID-19.

As the pandemic has persisted, we have, however, continued to evolve our sales approach such that our sales representatives have been in frequent contact with customers via video conference and other remote means that do not require physical travel or onsite visits to our customers’ facilities.

Moreover, there has begun to be a resumption of certain in-person activities as COVID-19 conditions have improved.

Whether this resumption of in-person activities will continue and increase or falter and decrease may be dependent on the prevalence of future COVID-19 outbreaks, including with regard to new variants that continue to emerge.

Given the uncertainty surrounding the adverse impacts that COVID-19 could have on our business, we took certain expense management measures in 2020 as previously disclosed.

We have generally discontinued these expense management measures taking into account the improved economic environment and current conditions related to the pandemic, provided that certain expenses such as those associated with travel and tradeshows remain significantly lower than pre-pandemic levels due to an ongoing lack of opportunity to engage in such activities.

However, we are continuing to monitor developments related to the COVID-19 pandemic and may reinstate previous expense management measures or undertake further initiatives later in 2021 if we deem necessary.

We have generally discontinued these expense management measures taking into account the improved economic environment and current conditions related to the pandemic, provided that certain expenses such as those associated with travel and tradeshows remain significantly lower than pre-pandemic levels due to limitations on our ability to engage in such activities at the same levels as prior to the pandemic.

However, we are continuing to monitor developments related to the COVID-19 pandemic and will continue to make such expense management adjustments as we deem necessary.

Key Business Metrics

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Revenues, net reflect income generated by the sales of goods and services related to our operations and reflects deferred revenue write-downs associated with fair value accounting for acquired businesses.

Revenues, net were $63.5 million for the three months ended March 31, 2021 compared to $61.6 million for the three months ended March 31, 2020.

Revenues, net were $64.8 million and $128.3 million for the three and six months ended June 30, 2021 compared to $60.6 million and $122.1 million for the three and six months ended June 30, 2020.

Management utilizes revenue in connection with managing our business and believes that this metric provides useful information to investors as a key indicator of growth and success of our products.

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Operating income represents the amount of profit realized from our operations and is calculated as the difference between revenues, net and operating costs and expenses.

Operating income was $3.3 million for the three months ended March 31, 2021 compared to $7.2 million for the three months ended March 31, 2020.

Operating income for the three months ended March 31, 2021 was negatively impacted by a one-time contractual adjustment to cost of revenues as described above in the amount of $3.4 million during the first quarter of 2020.

Operating income was $3.4 million and $6.7 million for the three and six months ended June 30, 2021 compared to $4.3 million and $11.5 million for the three and six months ended June 30, 2020.

Management utilizes operating income in connection with managing our business and believes that our operating income provides useful information to investors as a key indicator of profitability.

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Additionally, beginning in 2021, executive bonuses are based on the achievement of adjusted EBITDA targets.

Adjusted EBITDA was $13.6 million for the three months ended March 31, 2021, compared to $11.9 million for the three months ended March 31, 2020.

Adjusted EBITDA was $14.5 million and $28.1 million for the three and six months ended June 30, 2021, compared to $12.1 million and $24.0 million for the three and six months ended June 30, 2020.

hStream Subscriptions .

hStream subscriptions are determined as the number of subscriptions under contract for hStream, our Platform-as-a-Service technology that enables healthcare organizations and their respective workforces to easily connect to and gain value from the growing HealthStream ecosystem of applications, tools, and content.

Our management utilizes hStream subscriptions in connection with managing our business and believes that this metric provides useful information to investor, as a measure of our progress in growing the value of our customer base.

At March 31, 2021, we had approximately 4.34 million contracted subscriptions to hStream, compared to 3.40 million as of March 31, 2020.

utilizes hStream subscriptions in connection with managing our business and believes that this metric provides useful information to investor s as a measure of our progress in growing the value of our customer base.

At June 3 0 , 202 1 , we had approximately 4.52 million contracted subscriptions to hStream, compared to 3.48 million as of June 3 0 , 20 20 .

Critical Accounting Policies and Estimates

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There have been no changes in our critical accounting policies and estimates from those reported in our 2020 Form 10-K.

Impact on C omparability of O perating R esults

The comparability of our operating results for the three months ended March 31, 2021 to the same period for 2020 are impacted by several factors, including acquisitions, the reduction of revenues associated with legacy resuscitation products, and other non-cash items.

Between March 9, 2020 and January 19, 2021, we completed five acquisitions, which resulted in additional revenues and higher operating expenses during the three months ended March 31, 2021 compared to the three months ended March 31, 2020.

Impact on Comparability of Operating Results

The comparability of our operating results for the six months ended June 30, 2021 to the same period for 2020 are impacted by several factors, including acquisitions, the reduction of revenues associated with legacy resuscitation products, and other non-cash items.

Between March 9, 2020 and January 19, 2021, we completed five acquisitions, which resulted in additional revenues and higher operating expenses during the three and six months ended June 30, 2021 compared to the three and six months ended June 30, 2020.

Our legacy agreements with Laerdal (Legacy Agreements) for the HeartCode and Resuscitation Quality Improvement (RQI) products expired pursuant to their terms on December 31, 2018.

Revenues associated with sales of HeartCode and RQI products pursuant to the Legacy Agreements were significant in past years, although margins on such products were lower than HealthStream’s average margin.

Revenue generated by HeartCode and RQI products pursuant to the Legacy Agreements was $11.2 million in the first quarter of 2020 compared to $1.8 million in the first quarter of 2021.

Revenue generated by HeartCode and RQI products pursuant to the Legacy Agreements was $10.7 million in the second quarter of 2020 compared to $1.0 million in the second quarter of 2021.

For additional information, see below under “Other Developments.”

During the three months ended March 31, 2021, the Company recorded a $1.0 million non-recurring, non-cash reduction to paid time off (PTO) expense as a result of modifications to the Company’s PTO policy.

During the three months ended March 31, 2020, the Company recorded a $3.4 million non-cash contractual adjustment that resulted in a decrease to royalty expense upon the resolution of a mutual disagreement relating to various elements of a past partnership.

Three Months Ended March 31, 2021 Compared to Three Months Ended March 31, 2020

During the six months ended June 30, 2021, the Company recorded a $1.0 million non-recurring, non-cash reduction to paid time off (PTO) expense as a result of modifications to the Company’s PTO policy.

During the six months ended June 30, 2020, the Company recorded a $3.4 million non-cash contractual adjustment that resulted in a decrease to royalty expense upon the resolution of a mutual disagreement relating to various elements of a past partnership.

Three Months Ended June 30, 2021 Compared to Three Months Ended June 30, 2020

Revenues, net.

Revenues increased approximately $1.9 million, or 3%, to $63.5 million for the three months ended March 31, 2021 from $61.6 million for the three months ended March 31, 2020.

Revenues increased approximately $4.3 million, or 7%, to $64.8 million for the three months ended June 30, 2021 from $60.6 million for the three months ended June 30, 2020.

A comparison of revenues by business segment is as follows (in thousands):

Three Months Ended March 31,

Three Months Ended June 30,

Revenues by Business Segment:

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Provider Solutions

Revenues for Workforce Solutions increased $1.4 million, or 3%, to $51.2 million for the three months ended March 31, 2021 from $49.8 million for the three months ended March 31, 2020.

Contributions from recent acquisitions and growth in other workforce solutions more than offset the expected decline in revenues from legacy resuscitation products.

While revenues from legacy resuscitation products effectively ceased at the end of 2020, revenues for the three months ended March 31, 2021 included $1.8 million as we extended, with support from Laerdal, utilization of these products into 2021 for a small group of customers.

Revenues for Workforce Solutions increased $3.3 million, or 7%, to $52.2 million for the three months ended June 30, 2021 from $48.9 million for the three months ended June 30, 2020.

The Workforce Solutions segment achieved this 7% growth while overcoming a $9.7 million decline from the legacy resuscitation business.

In this regard, while revenues from legacy resuscitation products effectively ceased at the end of 2020, revenues for the three months ended June 30, 2021 included $1.0 million as we extended, with support from Laerdal, utilization of these products in 2021 for a small group of customers.

Revenues from recent acquisitions and growth in other solutions more than offset the lost legacy resuscitation revenues.

Workforce revenues also benefited from a $0.5 million increase in professional services revenues, primarily associated with recently acquired businesses.

Revenues for Provider Solutions increased $0.5 million, or 4%, to $12.2 million for the three months ended March 31, 2021 from $11.7 million for the three months ended March 31, 2020.

Revenue growth was attributable to new VerityStream subscriptions and professional services for client implementations.

Revenues for Provider Solutions increased $1.0 million, or 9%, to $12.7 million for the three months ended June 30, 2021 from $11.7 million for the three months ended June 30, 2020.

Revenue growth was attributable to new subscription revenues.

Cost of Revenues (excluding Depreciation and Amortization).

Cost of revenues increased $0.8 million, or 4%, to $21.2 million for the three months ended March 31, 2021 from $20.4 million for the three months ended March 31, 2020.

Cost of revenues as a percentage of revenues was 33% for both the three months ended March 31, 2021 and 2020.

Cost of revenues were favorably impacted by $0.2 million during the three months ended March 31, 2021, resulting from the non-cash reduction to PTO expense, and were favorably impacted in the amount of $3.4 million during the three months ended March 31, 2020 from the one-time non-cash contractual adjustment to royalty expense.

Cost of revenues for Workforce Solutions increased $0.9 million to $17.4 million for the three months ended March 31, 2021 compared to the prior year period and approximated 34% and 33% of revenues for Workforce Solutions for the three months ended March 31, 2021 and 2020, respectively.

The increase is primarily associated with the one-time contractual adjustment to cost of revenues in the amount of $3.4 million recorded during the first quarter of 2020, coupled with increased expenses related to recent acquisitions, offset by a decline in royalties related to legacy resuscitation products.

Cost of revenues for Provider Solutions decreased $0.1 million to $3.8 million for the three months ended March 31, 2021 compared to the prior year

period and approximated 31% and 33% of Provider Solutions revenues for the three months ended March 31, 2021 and 2020 , respectively .

The decrease is primarily associated with de creases in travel expenses over the prior year period as a result of COVID-19 pandemic .

Cost of revenues decreased $0.2 million, or 1%, to $22.7 million for the three months ended June 30, 2021 from $22.9 million for the three months ended June 30, 2020.

Cost of revenues as a percentage of revenues was 35% and 38% for the three months ended June 30, 2021 and 2020, respectively.

Cost of revenues for Workforce Solutions decreased $0.3 million to $18.7 million for the three months ended June 30, 2021 compared to the prior year period and approximated 36% and 39% of revenues for Workforce Solutions for the three months ended June 30, 2021 and 2020, respectively.

The decrease is primarily attributable to a decrease in royalties payable by us related to legacy resuscitation products, partially offset by increased expenses related to recent acquisitions coupled with an increase in software expense classified as cost of revenues during the three months ended June 30, 2021.

Cost of revenues for Provider Solutions increased $0.1 million to $4.0 million for the three months ended June 30, 2021 compared to the prior year period and approximated 31% and 33% of Provider Solutions revenues for the three months ended June 30, 2021 and 2020, respectively.

The increase in amount is primarily associated with an increase in software expense classified as cost of revenues during the three months ended June 30, 2021.

Product Development.

Product development expenses increased $1.9 million, or 25%, to $9.4 million for the three months ended March 31, 2021 from $7.5 million for the three months ended March 31, 2020.

Product development expenses as a percentage of revenues were 15% and 12% for the three months ended March 31, 2021 and 2020, respectively.

Product development expenses were favorably impacted in the amount of $0.4 million during the three months ended March 31, 2021 from the non-cash reduction to PTO expense.

Product development expenses for Workforce Solutions increased $2.1 million to $8.0 million for the three months ended March 31, 2021 compared to the prior year period and approximated 16% and 12% of revenues for Workforce Solutions for the three months ended March 31, 2021 and 2020, respectively.

Product development expenses increased $2.5 million, or 32%, to $10.3 million for the three months ended June 30, 2021 from $7.8 million for the three months ended June 30, 2020.

Product development expenses as a percentage of revenues were 16% and 13% for the three months ended June 30, 2021 and 2020, respectively.

Product development expenses for Workforce Solutions increased $2.7 million to $8.9 million for the three months ended June 30, 2021 compared to the prior year period and approximated 17% and 13% of revenues for Workforce Solutions for the three months ended June 30, 2021 and 2020, respectively.

The increase is primarily associated with recent acquisitions and increased product development efforts across other workforce solutions.

Product development expenses for Provider Solutions decreased $0.2 million to $1.4 million for the three months ended March 31, 2021 compared to the prior year period and approximated 11% and 14% of revenues for Provider Solutions for the three months ended March 31, 2021 and 2020, respectively.

Product development expenses for Provider Solutions decreased $0.2 million to $1.4 million for the three months ended June 30, 2021 compared to the prior year period and approximated 12% and 14% of revenues for Provider Solutions for the three months ended June 30, 2021 and 2020, respectively.

The decrease in product development expenses is primarily due to an increase in labor capitalized for internally developed software related to additional product investments across the VerityStream product suite.

Sales and Marketing.

Sales and marketing expenses, including personnel costs, decreased $0.3 million, or 3%, to $8.9 million for the three months ended March 31, 2021 from $9.2 million for the three months ended March 31, 2020.

Sales and marketing expenses were 14% and 15% of revenues for the three months ended March 31, 2021 and 2020, respectively.

Sales and marketing expenses, including personnel costs, increased $1.3 million, or 15%, to $9.5 million for the three months ended June 30, 2021 from $8.2 million for the three months ended June 30, 2020.

Sales and marketing expenses were 15% and 14% of revenues for the three months ended June 30, 2021 and 2020, respectively.

Sales and marketing expenses for Workforce Solutions increased $1.1 million to $7.5 million for the three months ended June 30, 2021 compared to the prior year period and approximated 14% and 13% of revenues for Workforce Solutions for the three months ended June 30, 2021 and 2020, respectively.

The increase is primarily due to additional personnel expenses due to recent acquisitions partially offset by lower sales commissions associated with the decline in legacy resuscitation revenues.

Sales and marketing expenses for Provider Solutions increased $80,000 to $1.6 million for the three months ended June 30, 2021 compared to the prior year period and approximated 13% of revenues for Provider Solutions for both the three months ended June 30, 2021 and 2020.

The unallocated corporate portion of sales and marketing expenses increased $50,000 to $0.4 million for the three months ended June 30, 2021 compared to the prior year period.

Other General and Administrative Expenses.

Other general and administrative expenses decreased $0.3 million, or 3%, to $9.8 million for the three months ended June 30, 2021, from $10.1 million for the three months ended June 30, 2020.

Other general and administrative expenses as a percentage of revenues were 15% and 17% of revenues for the three months ended June 30, 2021 and 2020, respectively.

Other general and administrative expenses for Workforce Solutions decreased $1.0 million to $3.0 million for the three months ended June 30, 2021 compared to the prior year period and approximated 6% and 8% of Workforce Solutions revenues for the three months ended June 30, 2021 and 2020, respectively.

The decrease is primarily due to a decrease in software expense classified as general and administrative expenses partially offset by expenses related to recent acquisitions.

Other general and administrative expenses for Provider Solutions increased $60,000 to $0.9 million for the three months ended June 30, 2021 compared to the prior year period and approximated 7% of Provider Solutions revenues for both the three months ended June 30, 2021 and 2020.

The unallocated corporate portion of other general and administrative expenses increased $0.6 million to $6.0 million for the three months ended June 30, 2021 compared to the prior year period primarily due to increased personnel costs.

Depreciation and Amortization.

Depreciation and amortization expense was $9.1 million and $7.2 million for the three months ended June 30, 2021 and 2020, respectively.

This increase is primarily a result of increases to amortization associated with capitalized software and recent acquisitions.

Other (Loss) Income, Net .

Other (loss) income, net was a loss of $65,000 for the three months ended June 30, 2021 compared to income of $0.2 million for the three months ended June 30, 2020.

The decrease is a result of lower interest income due to reductions in cash and investment balances and lower interest rate yields during the three months ended June 30, 2021 compared to the prior year period.

Income Tax Provision.

The Company recorded a provision for income taxes of $0.9 million for the three months ended June 30, 2021 compared to $1.1 million for the three months ended June 30, 2020.

The Company’s effective tax rate was 27% for the three months ended June 30, 2021 compared to 24% for the three months ended June 30, 2020.

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.

Net income was approximately $2.4 million and $3.4 million for the three months ended June 30, 2021 and 2020, respectively.

Earnings per share (EPS) was $0.08 per share (diluted) and $0.11 per share (diluted) for the three months ended June 30, 2021 and 2020, respectively.

Adjusted EBITDA was $14.5 million for the three months ended June 30, 2021 compared to $12.1 million for the three months ended June 30, 2020.

See “Reconciliation of Non-GAAP Financial Measures” below for our reconciliation of adjusted EBITDA to the most directly comparable measures under US GAAP and disclosure regarding why we believe Adjusted EBITDA provides useful information to investors.

Six Months Ended June 30, 2021 Compared to Six Months Ended June 30, 2020

Revenues, net.

Revenues increased $6.2 million, or 5%, to $128.3 million for the six months ended June 30, 2021 from $122.1 million for the six months ended June 30, 2020.

A comparison of revenues by business segment is as follows (in thousands):

Six Months Ended

Revenues by Business Segment:

Workforce Solutions

Provider Solutions

Total revenues, net

% of Revenues

Workforce Solutions

Provider Solutions

Revenues for Workforce Solutions increased $4.7 million, or 5%, over the first six months of 2020.

Contributions from recent acquisitions and growth in other workforce solutions more than offset the expected decline in revenues from legacy resuscitation products of $19.1 million.

While revenues from legacy resuscitation products effectively ceased at the end of 2020, revenues for the six months ended June 30, 2021 included $2.8 million as we extended, with support from Laerdal, utilization of these products into

2021 for a small group of customers.

Workforce revenues also benefited from a $0.9 million increase in professional services revenues, primarily associated with recently acquired businesses.

Revenues for Provider Solutions increased $1.5 million, or 6%, over the first six months of 2020.

Revenue growth was primarily attributable to new subscription revenues.

Cost of Revenues (excluding depreciation and amortization).

Cost of revenues increased $2.2 million, or 5%, to $45.5 million for the six months ended June 30, 2021 from $43.3 million for the six months ended June 30, 2020.

Cost of revenues as a percentage of revenues was 35% for both the six months ended June 30, 2021 and 2020.

Cost of revenues were favorably impacted by $0.2 million during the six months ended June 30, 2021, resulting from the non-cash reduction to PTO expense, and were favorably impacted in the amount of $3.4 million during the six months ended June 30, 2020 from the one-time non-cash contractual adjustment to royalty expense.

Cost of revenues for Workforce Solutions increased $2.1 million to $37.6 million and approximated 36% of revenues for Workforce Solutions for both the six months ended June 30, 2021 and 2020.

The increase in amount is primarily associated with increased expenses related to recent acquisitions, the one-time contractual adjustment to cost of revenues in the amount of $3.4 million recorded during the six months ended June 30, 2020, and an increase in software expense classified as cost of revenues during the six months ended June 30, 2021, partially offset by a decline in royalties related to legacy resuscitation products.

Cost of revenues for Provider Solutions increased $0.1 million to $7.9 million and approximated 32% and 33% of Provider Solutions revenues for the six months ended June 30, 2021 and 2020, respectively.

The increase in amount is primarily associated with an increase in software expense classified as cost of revenues during the six months ended June 30, 2021.

Product Development.

Product development expenses increased $4.6 million, or 30%, to $19.9 million for the six months ended June 30, 2021 from $15.3 million for the six months ended June 30, 2020.

Product development expenses as a percentage of revenues were 15% and 13% of revenues for the six months ended June 30, 2021 and 2020, respectively.

Product development expenses were favorably impacted in the amount of $0.4 million during the six months ended June 30, 2021 from the non-cash reduction to PTO expense.

Product development expenses for Workforce Solutions increased $5.0 million to $17.0 million and approximated 16% and 12% of revenues for Workforce Solutions for the six months ended June 30, 2021 and 2020, respectively.

The increase in amount is primarily associated with recent acquisitions and increased product development efforts across other workforce solutions.

Product development expenses for Provider Solutions decreased $0.4 million to $2.9 million and approximated 11% and 14% of revenues for HealthStream Solutions for the six months ended June 30, 2021 and 2020, respectively.

The decrease is primarily due to an increase in labor capitalized for internally developed software related to additional product investments across the VerityStream product suite.

Sales and Marketing.

Sales and marketing expenses, including personnel costs, increased $1.1 million, or 6%, to $18.5 million for the six months ended June 30, 2021 from $17.4 million for the six months ended June 30, 2020.

Sales and marketing expenses were 14% of revenues for both the six months ended June 30, 2021 and 2020.

Sales and marketing expenses were favorably impacted by $0.

2 million during the three months ended March 31, 2021 resulting from the non-cash reduction to PTO expense.

Sales and marketing expenses for Workforce Solutions decreased $0.3 million to $7.1 million for the three months ended March 31, 2021 compared to the prior year period and approximated 14% and 15% of revenues for Workforce Solutions for the three months ended March 31, 2021 and 2020, respectively.

The decrease in amount is primarily due to lower sales commissions associated with the decline in legacy resuscitation revenues as well as decreases in travel expenses as a result of the COVID-19 pandemic.

Sales and marketing expenses for Provider Solutions decreased $40,000 to $1.5 million for the three months ended March 31, 2021 compared to the prior year period and approximated 13% of revenues for Provider Solutions for both the three months ended March 31, 2021 and 2020.

The unallocated corporate portion of sales and marketing expenses increased $34,000 to $0.3 million for the three months ended March 31, 2021 compared to the prior year period.

2 million during the six months ended June 30, 2021 resulting from the non-cash reduction to PTO expense.

Sales and marketing expenses for Workforce Solutions increased $0.9 million to $14.6 million and approximated 14% of revenues for Workforce Solutions for both the six months ended June 30, 2021 and 2020.

The increase is primarily associated with increases in general marketing expenses and recent acquisitions, partially offset by lower sales commissions associated with the decline in legacy resuscitation revenues and decreases in travel expenses as a result of the COVID-19 pandemic.

Sales and marketing expenses for Provider Solutions increased $47,000 to $3.2 million and approximated 13% of revenues for Provider Solutions for both the six months ended June 30, 2021 and 2020.

The unallocated portion of sales and marketing expenses increased $96,000 to $0.7 million compared to the prior year period.

Other General and Administrative Expenses.

Other general and administrative expenses increased $1.6 million, or 17%, to $11.5 million for the three months ended March 31, 2021, from $9.9 million for the three months ended March 31, 2020.

Other general and administrative expenses as a percentage of revenues were 18% and 16% of revenues for the three months ended March 31, 2021 and 2020, respectively.

Other general and administrative expenses decreased $0.6 million, or 3%, to $19.4 million for the six months ended June 30, 2021 from $20.0 million for the six months ended June 30, 2020.

Other general and administrative expenses as a percentage of revenues were 15% and 16% of revenues for the six months ended June 30, 2021 and 2020, respectively.

Other general and administrative expenses were favorably impacted by $0.

2 million during the three months ended March 31, 2021 resulting from the non-cash reduction to PTO expense.

Other general and administrative expenses for Workforce Solutions increased $0.9 million to $4.8 million for the three months ended March 31, 2021 compared to the prior year period and approximated 9% and 8% of Workforce Solutions revenues for the three months ended March 31, 2021 and 2020, respectively.

The increase is primarily due to expenses associated with recent acquisitions.

Other general and administrative expenses for Provider Solutions increased $0.1 million to $0.9 million for the three months ended March 31, 2021 compared to the prior year period and approximated 7% of Provider Solutions revenues for both the three months ended March 31, 2021 and 2020.

The unallocated corporate portion of other general and administrative expenses increased $0.6 million to $5.8 million for the three months ended March 31, 2021 compared to the prior year period primarily due to increases personnel costs and professional services expenses.

2 million during the six months ended June 30, 2021 resulting from the non-cash reduction to PTO expense.

Other general and administrative expenses for Workforce Solutions decreased $1.8 million to $6.0 million and approximated 6% and 8% of revenues for Workforce Solutions for the six months ended June 30, 2021 and 2020, respectively.

The decrease is primarily associated with a decrease in software expense classified as general and administrative expenses during the six months ended June 30, 2021, partially offset by expenses associated with recent acquisitions.

Other general and administrative expenses for Provider Solutions increased $40,000 to $1.6 million and approximated 7% of revenues for Provider Solutions for both the six months ended June 30, 2021 and 2020.

The unallocated corporate portion of other general and administrative expenses increased $1.2 million to $11.7 million compared to the first six months of 2020 primarily due to increased personnel expenses as well as professional services expenses over the prior year period.

Depreciation and Amortization.

Depreciation and amortization expense was $9.2 million and $7.4 million for the three months ended March 31, 2021 and 2020, respectively.

This increase is primarily a result of increases to amortization associated with capitalized software and recent acquisitions.

Depreciation and amortization increased $3.7 million, or 25 %, to $18.3 million for the six months ended June 30, 2021 from $14.6 million for the six months ended June 30, 2020 .

The increase resulted from an increase in amortization of capitalized software and intangible assets .

Other (Loss) Income, Net .

Other (loss) income, net was a loss of $87,000 for the three months ended March 31, 2021 compared to income of $1.7 million for the three months ended March 31, 2020.

The decrease resulted primarily from a one-time $1.2 million gain associated with the change in fair value of the non-marketable equity investment in NurseGrid prior to the acquisition of NurseGrid on March 9, 2020 coupled with lower interest income due to reductions in cash and investment balances and lower interest rate yields during the three months ended March 31, 2021 compared to the prior year period.

Other (loss) income, net was loss of $0.2 million for the six months ended June 30, 2021 compared to income of $1.9 million for the six months ended June 30, 2020.

This decrease is driven by the $1.2 million gain associated with the change in fair value of the non-marketable equity investment in NurseGrid prior to the acquisition of NurseGrid on March 9, 2020, coupled with lower interest income due to reductions in bond yields and bank interest rates during the six months ended June 30, 2021 compared to the prior year period.

Income Tax Provision.

The Company recorded a provision for income taxes of $0.9 million for the three months ended March 31, 2021 compared to $1.9 million for the three months ended March 31, 2020.

The Company’s effective tax rate was 29% for the three months ended March 31, 2021 compared to 21% for the three months ended March 31, 2020.

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.

T he Company recorded an increase to the provision for income taxe s associated with tax deficiencies resulting from stock based awards of $17,000 and $26,000 during the three months ended March 31, 2021 and 2020, respectively.

Net income was approximately $2.3 million and $7.1 million for the three months ended March 31, 2021 and 2020, respectively.

Earnings per share (EPS) was $0.07 per share (diluted) and $0.22 per share (diluted) for the three months ended March 31, 2021 and 2020.

The one-time contractual adjustment discussed above positively impacted net income in the amount of $2.6 million, or $0.08 per diluted share, for the three months ended March 31, 2020.

Adjusted EBITDA was $13.6 million for the three months ended March 31, 2021 compared to $11.9 million for the three months ended March 31, 2020.

See “Reconciliation of Non-GAAP Financial Measures” below for our reconciliation of adjusted EBITDA to the most directly comparable measures under US GAAP and disclosure regarding why we believe these non-GAAP financial measures provide useful information to investors.

The Company recorded a provision for income taxes of $1.8 million and $2.9 million for the six months ended June 30, 2021 and 2020, respectively.

The Company’s effective tax rate was 28% for the six months ended June 30, 2021 compared to 22% for the six months ended June 30, 2020.

During the six months ended June 30, 2021, the Company recorded discrete tax expense of $0.2 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 six months ended June 30, 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.

Net income was $4.7 million for the six months ended June 30, 2021 compared to $10.5 million for the six months ended June 30, 2020.

Earnings per diluted share were $0.15 and $0.33 per share for the six months ended June 30, 2021 and 2020, respectively.

Adjusted EBITDA increased $4.1 million to $28.1 million for the six months ended June 30, 2021 compared to $24.0 million for the six months ended June 30, 2020.

This increase resulted from the factors mentioned above.

See “Reconciliation of Non-GAAP Financial Measures” below for our reconciliation of Adjusted EBITDA to the most directly comparable measure under US GAAP.

Other Developments

Our legacy agreements with Laerdal (Legacy Agreements) for the HeartCode and Resuscitation Quality Improvement (RQI) products expired pursuant to their terms on December 31, 2018.

Revenues associated with sales of HeartCode and RQI products pursuant to the Legacy Agreements have been significant in recent years, although margins on such products have been lower than HealthStream’s average margin.

Revenues associated with sales of HeartCode and RQI products pursuant to the Legacy Agreements were significant in recent years, although margins on such products have been lower than HealthStream’s average margin.

Revenue generated by HeartCode and RQI products pursuant to the Legacy Agreements was $38.4 million and $58.9 million in 2020 and 2019, respectively.

While revenues from legacy resuscitation products effectively ceased at the end of 2020, revenues for the three months ended March 31, 2021 included $1.8 million as we extended, with Laerdal’s support, utilization of these products for a small group of customers.

We expect legacy product revenues in the second quarter of 2021 to be approximately $700,000 and expect revenue from legacy products to be de minimis for the second half of 2021.

While revenues from legacy resuscitation products effectively ceased at the end of 2020, revenues for the six months ended June 30, 2021 included $2.8 million as we extended, with Laerdal’s support, utilization of these products for a small group of customers.

We expect revenue from legacy products to be de minimis for the second half of 2021.

On December 6, 2018, we announced a new agreement with RQI Partners, a joint venture between Laerdal and the American Heart Association.

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We are actively engaged in efforts to market, sell, and deliver our new resuscitation offering, which includes the American Red Cross Resuscitation Suite and validation of skills through a technology enabled Innosonian manikin.

A growing number of customers have been implemented on our new resuscitation offering and the solution is gaining acceptance in the market.

A growing number of customers have been implemented on our new resuscitation offering and the solution continues to gain acceptance in the market.

We believe our efforts to market, sell, and deliver the American Red Cross Resuscitation Suite, along with efforts to bring additional simulation-related offerings to market, are giving rise to additional and higher margin opportunities than those that existed under the Legacy Agreements.

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This report presents adjusted EBITDA, which is a non-GAAP financial measure used by management in analyzing our financial results and ongoing operational performance.

In order to better assess the Company’s financial results, management believes that net income excluding the impact of the deferred revenue write-downs associated with fair value accounting for acquired businesses and before interest, income taxes, stock based compensation, depreciation and amortization, changes in fair value of non-marketable equity investments, the de-recognition of non-cash expense resulting from the paid time off expense reduction in the first quarter of 2021 and the resolution of a mutual disagreement related to various elements of a past partnership which resulted in a reduction to cost of sales in the first quarter of 2020 (“adjusted EBITDA”) is a useful measure for evaluating the operating performance of the Company because adjusted EBITDA reflects net income adjusted for certain GAAP accounting, non-cash and non-operating items which may not, in any such case, fully reflect the underlying operating performance of our business.

We also believe that adjusted EBITDA is useful to many investors to assess the Company’s ongoing operating performance and to compare the

Company’s operating performance between periods.

stock based compensation, depreciation and amortization, changes in fair value of non-marketable equity investments, the de-recognition of non-cash expense resulting from the paid time off expense reduction in the first quarter of 2021 , and the resolution of a mutual disagreement related to various elements of a past partnership which resulted in a reduction to cost of sales in the first quarter of 2020 (“adjusted EBITDA”) is a useful measure for evaluating the operating performance of the Company because adjusted EBITDA reflects net income adjusted for certain GAAP accounting, non-cash and non-operating items which may not, in any such case, fully reflect the underlying operating performance of our business.

We also believe that adjusted EBITDA is useful to many investors to assess the Company’s ongoing operating performance and to compare the Company’s operating performance between periods.

Additionally, beginning in 2021, executive bonuses are based on the achievement of adjusted EBITDA targets .

The Company has revised its definition of adjusted EBITDA to adjust for the derecognition of non-cash expense resulting from the paid time off policy modification in the first quarter of 2021 as the result of the fact that management believes that such non-cash expense is outside of the ordinary course of the Company’s operations and is not reflective of the Company’s underlying operating performance.

As noted above, the definition of adjusted EBITDA also adjusts for the impact of the deferred revenue write-downs associated with fair value accounting for acquired businesses.

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Three Months Ended

Six Months Ended

GAAP net income

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Liquidity and Capital Resources

Net cash provided by operating activities increased by $13.0 million to $19.1 million during the three months ended March 31, 2021 from $6.1 million during the three months ended March 31, 2020.

Net cash provided by operating activities increased by $10.8 million to $24.3 million during the six months ended June 30, 2021 from $13.5 million during the six months ended June 30, 2020.

Such increase was primarily driven by higher cash collections.

Our DSO was 52 days for the first quarter of 2021 compared to 44 days for the first quarter of 2020, which increase resulted from higher average receivable balances compared to the prior year.

Our DSO was 43 days for the second quarter of 2021 compared to 47 days for the second quarter of 2020.

The Company calculates DSO by dividing the average accounts receivable balance for the quarter by average daily revenues for the quarter.

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The primary uses of cash to fund operations included personnel expenses, sales commissions, royalty payments, payments for contract labor and other direct expenses associated with delivery of our products and services, and general corporate expenses.

Net cash used in investing activities was approximately $9.7 million for the three months ended March 31, 2021 compared to $19.9 million for the three months ended March 31, 2020.

During the three months ended March 31, 2021, the Company spent $2.0 million to acquire ComplyALIGN and on a net basis received $1.3 million of proceeds upon settling post-closing adjustments related to the ANSOS and ShiftWizard acquisitions for a net cash outflow of $0.7 million for business combinations, invested in marketable securities of $5.2 million, made payments for capitalized software development of $5.3 million, purchased property

and equipment of $ 2.0 million , and made non-marketable equity payments of $1.0 million .

Net cash used in investing activities was $10.6 million for the six months ended June 30, 2021 compared to $22.1 million for the six months ended June 30, 2020.

During the six months ended June 30, 2021, the Company spent $0.7 million on business combinations, invested in marketable securities of $5.2 million, made payments for capitalized software development of $10.3 million, purchased property and equipment of $2.4 million, and invested $1.8 million in equity method investments .

These uses of cash were partially offset by $9.7 million in maturities of marketable securities.

During the three months ended March 31, 2020 the Company paid $21.4 million in cash to acquire NurseGrid, invested in marketable securities of $14.1 million, made payments for capitalized software development of $4.1 million, and purchased property and equipment of $1.0 million.

During the six months ended June 30, 2020 the

Company paid $21.4 million on business combinations, invested in marketable securities of $36.9 million, made payments for capitalized software development of $7.6 million, purchased property and equipment of $1.3 million, and invested $1.0 million in non-marketable equity investments .

These uses of cash were partially offset by $46.2 million in maturities of marketable securities.

Net cash used in financing activities was approximately $0.4 million for the three months ended March 31, 2021 compared to $10.3 million for the three months ended March 31, 2020.

The uses of cash for the three months ended March 31, 2021 primarily included $0.4 million for the payment of employee payroll taxes in relation to the vesting of restricted share units, and $12,000 of cash dividend payments.

The uses of cash for the three months ended March 31, 2020 primarily included $9.9 million for common stock repurchases, $0.4 million for the payment of employee payroll taxes in relation to the vesting of restricted share units, and $30,000 of cash dividend payments.

Our balance sheet reflects negative working capital of $1.9 million at March 31, 2021 compared to negative working capital of $4.7 million at December 31, 2020.

The improvement in working capital is primarily a result of strong cash collections.

The Company’s primary source of liquidity as of March 31, 2021 was $45.3 million of cash and cash equivalents and $10.6 million of marketable securities.

The Company also has a $65.0 million revolving credit facility, all of which was available for additional borrowing at March 31, 2021.

Net cash used in financing activities was approximately $0.4 million for the six months ended June 30, 2021 compared to $10.4 million for the six months ended June 30, 2020.

The use of cash for the six months ended June 30, 2021 included $0.4 million for the payment of employee payroll taxes in relation to the vesting of restricted share units.

The uses of cash for the six months ended June 30, 2020 included $10.0 million for common stock repurchases and $0.4 million for the payment of employee payroll taxes in relation to the vesting of restricted share units.

Our balance sheet reflects positive working capital of $4.2 million at June 30, 2021 compared to negative working capital of $4.7 million at December 31, 2020.

The improvement in working capital is primarily a result of strong cash collections during the first six months of 2021.

The Company’s primary source of liquidity as of June 30, 2021 was $49.8 million of cash and cash equivalents and $5.3 million of marketable securities.

The Company also has a $65.0 million revolving credit facility, all of which was available for additional borrowing at June 30, 2021.

The revolving credit facility expires on October 28, 2023, unless earlier renewed or amended.

On March 13, 2020, we announced a share repurchase program authorized by our Board of Directors under which we could purchase up to $30.0 million of our common stock.

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).

The program expired on March 12, 2021, and no repurchases occurred during the three months ended March 31, 2021.

We may elect in the future to adopt a new share repurchase program and/or otherwise repurchase our common stock, including through privately negotiated transactions.

Any such equity repurchases would depend upon prevailing market conditions, contractual restrictions, liquidity and cash flow considerations, applicable securities laws requirements, and other factors.

We believe that our existing cash and cash equivalents, marketable securities, cash generated from operations, and available borrowings under our revolving credit facility will be sufficient to meet anticipated working capital needs, new product development, and capital expenditures for at least the next 12 months.

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Therefore, the maximum borrowings against our revolving credit facility would be dependent on the covenant calculations at the time of borrowing.

As of March 31, 2021 , we were in compliance with all covenants.

As of June 30, 2021 , we were in compliance with all covenants.

There can be no assurance that amounts available for borrowing under our revolving credit facility will be sufficient to consummate any possible acquisitions, and we cannot assure you that if we need additional financing that it will be available on terms favorable to us, or at all.

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

What changed 10-Q

Item 2. Management’s Discussion and Analysis