SEC Form 10-Q filed by HealthStream Inc.
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
(Mark One)
| | Quarterly Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the quarterly period ended
| | Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
Commission File No.:
HealthStream, Inc.
(Exact name of registrant as specified in its charter)
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| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
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| (Address of principal executive offices) | (Zip Code) |
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(Registrant's telephone number, including area code)
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
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Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer | ☐ | | ☒ | ||
| Non-accelerated filer | ☐ | Smaller reporting company | | ||
| Emerging growth company | |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes
As of October 21, 2024, there were
HEALTHSTREAM, INC.
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| Part I. |
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| Item 1. |
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| Condensed Consolidated Balance Sheets (Unaudited) – September 30, 2024 and December 31, 2023 |
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| Notes to Condensed Consolidated Financial Statements (Unaudited) |
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| Item 2. |
Management's Discussion and Analysis of Financial Condition and Results of Operations |
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| Item 3. |
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| Item 4. |
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| Part II. |
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| Item 1. | Legal Proceedings | 21 |
| Item 1A. |
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| Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds | 21 |
| Item 5. | Other Information | 21 |
| Item 6. |
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Item 1. Financial Statements
HEALTHSTREAM, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(In thousands)
| September 30, | December 31, | |||||||
| 2024 | 2023 | |||||||
| ASSETS | ||||||||
| Current assets: | ||||||||
| Cash and cash equivalents | $ | $ | ||||||
| Marketable securities | ||||||||
| Accounts receivable, net of allowance for doubtful accounts of $ and $ at September 30, 2024 and December 31, 2023, respectively | ||||||||
| Accounts receivable - unbilled | ||||||||
| Prepaid royalties, net of amortization | ||||||||
| Prepaid software maintenance and subscriptions | ||||||||
| Other prepaid expenses and other current assets | ||||||||
| Total current assets | ||||||||
| Property and equipment, net of accumulated depreciation of $ and $ at September 30, 2024 and December 31, 2023, respectively | ||||||||
| Capitalized software development, net of accumulated amortization of $ and $ at September 30, 2024 and December 31, 2023, respectively | ||||||||
| Operating lease right of use assets, net | ||||||||
| Goodwill | ||||||||
| Customer-related intangibles, net of accumulated amortization of $ and $ at September 30, 2024 and December 31, 2023, respectively | ||||||||
| Other intangible assets, net of accumulated amortization of $ and $ at September 30, 2024 and December 31, 2023, respectively | ||||||||
| Deferred commissions | ||||||||
| Non-marketable equity investments | ||||||||
| Other assets | ||||||||
| Total assets | $ | $ | ||||||
| LIABILITIES AND SHAREHOLDERS’ EQUITY | ||||||||
| Current liabilities: | ||||||||
| Accounts payable | $ | $ | ||||||
| Accrued expenses | ||||||||
| Accrued royalties | ||||||||
| Deferred revenue | ||||||||
| Total current liabilities | ||||||||
| Deferred tax liabilities | ||||||||
| Deferred revenue, noncurrent | ||||||||
| Operating lease liability, noncurrent | ||||||||
| Other long-term liabilities | ||||||||
| Shareholders’ equity: | ||||||||
| Common stock, par value, shares authorized; and shares issued and outstanding at September 30, 2024 and December 31, 2023, respectively | ||||||||
| Retained earnings | ||||||||
| Accumulated other comprehensive loss | ( | ) | ( | ) | ||||
| Total shareholders’ equity | ||||||||
| Total liabilities and shareholders’ equity | $ | $ | ||||||
See accompanying Notes to the unaudited Condensed Consolidated Financial Statements.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(In thousands, except per share data)
| Three Months Ended |
Nine Months Ended |
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| September 30, 2024 |
September 30, 2023 |
September 30, 2024 |
September 30, 2023 |
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| Revenues, net |
$ | $ | $ | $ | ||||||||||||
| Operating costs and expenses: |
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| Cost of revenues (excluding depreciation and amortization) |
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| Product development |
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| Sales and marketing |
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| Other general and administrative expenses |
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| Depreciation and amortization |
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| Total operating costs and expenses |
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| Operating income |
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| Other income, net |
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| Income before income tax provision |
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| Income tax provision |
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| Net income |
$ | $ | $ | $ | ||||||||||||
| Net income per share: |
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| Basic |
$ | $ | $ | $ | ||||||||||||
| Diluted |
$ | $ | $ | $ | ||||||||||||
| Weighted average shares of common stock outstanding: |
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| Basic |
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| Diluted |
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| Dividends declared per share |
$ | $ | $ | $ | ||||||||||||
See accompanying Notes to the unaudited Condensed Consolidated Financial Statements.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
(In thousands)
| Three Months Ended |
Nine Months Ended |
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| September 30, 2024 |
September 30, 2023 |
September 30, 2024 |
September 30, 2023 |
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| Net income |
$ | $ | $ | $ | ||||||||||||
| Other comprehensive income (loss), net of taxes: |
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| Foreign currency translation adjustments |
( |
) | ( |
) | ( |
) | ||||||||||
| Unrealized gain (loss) on marketable securities |
( |
) | ||||||||||||||
| Total other comprehensive income (loss) |
( |
) | ( |
) | ( |
) | ||||||||||
| Comprehensive income |
$ | $ | $ | $ | ||||||||||||
See accompanying Notes to the unaudited Condensed Consolidated Financial Statements.
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (UNAUDITED)
(In thousands, except per share data)
| Nine Months Ended September 30, 2024 | ||||||||||||||||||||
| Common Stock | Retained | Accumulated Other Comprehensive | Total Shareholders’ | |||||||||||||||||
| Shares | Amount | Earnings | (Loss)/Income | Equity | ||||||||||||||||
| Balance at December 31, 2023 | $ | $ | $ | ( | ) | $ | ||||||||||||||
| Net income | — | |||||||||||||||||||
| Comprehensive loss | — | ( | ) | ( | ) | |||||||||||||||
| Dividends declared on common stock ($ per share) | — | ( | ) | ( | ) | |||||||||||||||
| Stock-based compensation | — | |||||||||||||||||||
| Common stock issued under stock plans, net of shares withheld for employee taxes | ( | ) | — | ( | ) | |||||||||||||||
| Balance at March 31, 2024 | $ | $ | $ | ( | ) | $ | ||||||||||||||
| Net income | — | |||||||||||||||||||
| Comprehensive loss | — | ( | ) | ( | ) | |||||||||||||||
| Dividends declared on common stock ($ per share) | — | ( | ) | ( | ) | |||||||||||||||
| Stock-based compensation | — | |||||||||||||||||||
| Common stock issued under stock plans, net of shares withheld for employee taxes | ( | ) | — | ( | ) | |||||||||||||||
| Balance at June 30, 2024 | $ | $ | $ | ( | ) | $ | ||||||||||||||
| Net income | — | |||||||||||||||||||
| Comprehensive income | — | |||||||||||||||||||
| Dividends declared on common stock ($ per share) | — | ( | ) | ( | ) | |||||||||||||||
| Stock-based compensation | — | |||||||||||||||||||
| Common stock issued under stock plans, net of shares withheld for employee taxes | ( | ) | — | ( | ) | |||||||||||||||
| Balance at September 30, 2024 | $ | $ | $ | ( | ) | $ | ||||||||||||||
| Nine Months Ended September 30, 2023 | ||||||||||||||||||||
| Common Stock | Retained | Accumulated Other Comprehensive | Total Shareholders’ | |||||||||||||||||
| Shares | Amount | Earnings | (Loss)/Income | Equity | ||||||||||||||||
| Balance at December 31, 2022 | $ | $ | $ | ( | ) | $ | ||||||||||||||
| Net income | — | |||||||||||||||||||
| Comprehensive loss | — | ( | ) | ( | ) | |||||||||||||||
| Dividends declared on common stock ($ per share) | — | ( | ) | ( | ) | |||||||||||||||
| Stock-based compensation | — | |||||||||||||||||||
| Common stock issued under stock plans, net of shares withheld for employee taxes | ( | ) | — | ( | ) | |||||||||||||||
| Balance at March 31, 2023 | $ | $ | $ | ( | ) | $ | ||||||||||||||
| Net income | — | |||||||||||||||||||
| Comprehensive income | — | |||||||||||||||||||
| Dividends declared on common stock ($ per share) | — | ( | ) | ( | ) | |||||||||||||||
| Stock-based compensation | — | |||||||||||||||||||
| Common stock issued under stock plans, net of shares withheld for employee taxes | ( | ) | — | ( | ) | |||||||||||||||
| Balance at June 30, 2023 | $ | $ | $ | ( | ) | $ | ||||||||||||||
| Net income | — | |||||||||||||||||||
| Comprehensive loss | — | ( | ) | ( | ) | |||||||||||||||
| Dividends declared on common stock ($ per share) | — | ( | ) | ( | ) | |||||||||||||||
| Stock-based compensation | — | |||||||||||||||||||
| Common stock issued under stock plans, net of shares withheld for employee taxes | ( | ) | — | ( | ) | |||||||||||||||
| Repurchase of common stock | ( | ) | ( | ) | ( | ) | ||||||||||||||
| Balance at September 30, 2023 | $ | $ | $ | ( | ) | $ | ||||||||||||||
See accompanying Notes to the unaudited Condensed Consolidated Financial Statements.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(In thousands)
| Nine Months Ended September 30, |
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| 2024 |
2023 |
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| OPERATING ACTIVITIES: |
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| Net income |
$ | $ | ||||||
| Adjustments to reconcile net income to net cash provided by operating activities: |
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| Depreciation and amortization |
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| Stock-based compensation |
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| Amortization of deferred commissions |
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| Provision for credit losses |
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| Deferred income taxes |
( |
) | ( |
) | ||||
| Loss on equity method investments |
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| Change in fair value of non-marketable equity investments |
( |
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| Other |
( |
) | ( |
) | ||||
| Changes in operating assets and liabilities: |
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| Accounts and unbilled receivables |
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| Prepaid royalties |
( |
) | ||||||
| Other prepaid expenses and other current assets |
( |
) | ( |
) | ||||
| Deferred commissions |
( |
) | ( |
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| Other assets |
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| Accounts payable and accrued expenses |
( |
) | ( |
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| Accrued royalties |
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| Deferred revenue |
( |
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| Net cash provided by operating activities |
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| INVESTING ACTIVITIES: |
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| Business combinations, net of cash acquired |
( |
) | ||||||
| Proceeds from maturities of marketable securities |
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| Purchases of marketable securities |
( |
) | ( |
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| Proceeds from sale of non-marketable equity investments |
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| Payments associated with capitalized software development |
( |
) | ( |
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| Purchases of property and equipment |
( |
) | ( |
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| Net cash used in investing activities |
( |
) | ( |
) | ||||
| FINANCING ACTIVITIES: |
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| Taxes paid related to net settlement of equity awards |
( |
) | ( |
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| Repurchases of common stock |
( |
) | ||||||
| Payment of cash dividends |
( |
) | ( |
) | ||||
| Net cash used in financing activities |
( |
) | ( |
) | ||||
| Effect of exchange rate changes on cash and cash equivalents |
( |
) | ||||||
| Net increase (decrease) in cash and cash equivalents |
( |
) | ||||||
| Cash and cash equivalents at beginning of period |
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| Cash and cash equivalents at end of period |
$ | $ | ||||||
See accompanying Notes to the unaudited Condensed Consolidated Financial Statements.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. OVERVIEW AND BASIS OF PRESENTATION
Company Overview
HealthStream provides primarily Software-as-a-Service ("SaaS") based applications for healthcare organizations—all designed to improve business and clinical outcomes by supporting the people who deliver patient care. The Company is focused on helping individuals and organizations in healthcare meet their ongoing learning, clinical development, credentialing, and scheduling needs. The Company also provides its solutions to nursing schools and nursing students.
The Company is organized and operated according to its One HealthStream approach, with its hStream technology platform at the center of that approach. Increasingly, SaaS-based applications in the Company's diverse ecosystem of solutions utilize the Company's proprietary hStream technology platform to enhance the value proposition for customers by creating interoperability with and among other applications. As used in this Quarterly Report on Form 10-Q (“Form 10-Q”), “HealthStream,” “Company,” “we,” “us,” and “our” mean HealthStream, Inc. and its subsidiaries, unless the context indicates otherwise.
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 and nine months ended September 30, 2024 are not necessarily indicative of the results that may be expected for the year ending December 31, 2024.
The Condensed Consolidated Balance Sheet at December 31, 2023 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, 2023 (included in the Company's Annual Report on Form 10-K, filed with the Securities and Exchange Commission on February 26, 2024).
2. RECENT ACCOUNTING PRONOUNCEMENTS
In November 2023, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2023-07, Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures. The new guidance requires disclosures of significant reportable segment expenses that are regularly provided to the chief operating decision maker and other segment items on an interim and annual basis. Entities with a single reportable segment will also be required to apply the disclosure requirements in ASU 2023-07 on an interim and annual basis. ASU 2023-07 will be effective for the Company for annual periods beginning after December 15, 2023 and interim periods within fiscal years beginning after December 15, 2024. The Company is currently evaluating the standard; however, it is not expected to have a material impact on the Company's financial statements.
In December 2023, FASB issued ASU 2023-09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures, which requires public entities to provide disclosure of disaggregated information in the entity’s tax rate reconciliation, as well as disclosure of income taxes paid disaggregated by jurisdiction. ASU 2023-09 is effective for fiscal years beginning after December 15, 2024. The Company is currently evaluating the standard; however, it is not expected to have a material impact on the Company's financial statements.
HEALTHSTREAM, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
3. 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 September 30, | Nine Months Ended September 30, | |||||||||||||||
| 2024 | 2023 | 2024 | 2023 | |||||||||||||
| Subscription services | $ | $ | $ | $ | ||||||||||||
| Professional services | ||||||||||||||||
| Total revenues, net | $ | $ | $ | $ | ||||||||||||
During the three months ended September 30, 2024 and 2023, the Company recognized revenues of $
Sales Commissions
Sales commissions earned by the Company's sales employees are considered incremental and recoverable costs of obtaining a contract with a customer. The Company recorded amortization of deferred commissions of $
HEALTHSTREAM, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
4. 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 September 30, 2024 and 2023, the Company recorded a provision for income taxes of $
The Company’s effective tax rate was
5. SHAREHOLDERS’ EQUITY
Dividends on Common Stock
During the nine months ended September 30, 2024, the Company's Board of Directors (“Board”) declared the following quarterly dividends under the Company's dividend policy:
| Dividend Payment Date | Dividend Declaration Date | Dividend Per Share | Record Date | Cash Outlay | ||||||
| March 22, 2024 | $ | $ | ||||||||
| May 17, 2024 | ||||||||||
| August 16, 2024 | ||||||||||
| Total dividends | $ | $ | ||||||||
Additionally, on October 21, 2024, the Board declared a quarterly cash dividend of $
Stock-Based Compensation
The Company has stock awards outstanding under its 2016 Omnibus Incentive Plan and 2022 Omnibus Incentive Plan. The Company accounts for its stock-based compensation plans using the fair-value based method for costs related to share-based payments, including restricted share units (“RSUs”) and stock options. During the nine months ended September 30, 2024, the Company issued
HEALTHSTREAM, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
During the nine months ended September 30, 2024, the Company granted
During the nine months ended September 30, 2023, the Company granted
During the nine months ended September 30, 2022, the Company granted
Total stock-based compensation expense recognized in the Condensed Consolidated Statements of Income is as follows (in thousands):
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
| 2024 | 2023 | 2024 | 2023 | |||||||||||||
| Cost of revenues (excluding depreciation and amortization) | $ | $ | $ | $ | ||||||||||||
| Product development | ||||||||||||||||
| Sales and marketing | ||||||||||||||||
| Other general and administrative | ||||||||||||||||
| Total stock-based compensation expense | $ | $ | $ | $ | ||||||||||||
HEALTHSTREAM, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
6. 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
The following table sets forth the computation of basic and diluted earnings per share (in thousands, except per share data):
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
| 2024 | 2023 | 2024 | 2023 | |||||||||||||
| Numerator: | ||||||||||||||||
| Net income | $ | $ | $ | $ | ||||||||||||
| Denominator: | ||||||||||||||||
| Weighted-average shares outstanding | ||||||||||||||||
| Effect of dilutive shares | ||||||||||||||||
| Weighted-average diluted shares | ||||||||||||||||
| Net income per share: | ||||||||||||||||
| Basic | $ | $ | $ | $ | ||||||||||||
| Diluted | $ | $ | $ | $ | ||||||||||||
7. 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):
| September 30, 2024 | ||||||||||||||||
| Adjusted Cost | Unrealized Gains | Unrealized Losses | Fair Value | |||||||||||||
| Level 2: | ||||||||||||||||
| U.S. treasury securities | $ | $ | $ | ( | ) | $ | ||||||||||
| Total | $ | $ | $ | ( | ) | $ | ||||||||||
| December 31, 2023 | ||||||||||||||||
| Adjusted Cost | Unrealized Gains | Unrealized Losses | Fair Value | |||||||||||||
| Level 2: | ||||||||||||||||
| U.S. treasury securities | $ | $ | $ | ( | ) | $ | ||||||||||
| Total | $ | $ | $ | ( | ) | $ | ||||||||||
The carrying amounts reported in the Condensed Consolidated Balance Sheets approximate fair value based on quoted market prices or alternative pricing sources and models utilizing market observable inputs. As of September 30, 2024, the Company did recognize any allowance for credit impairments on its available for sale 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.
HEALTHSTREAM, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
8. DEBT
Revolving Credit Facility
On October 6, 2023, the Company entered into an Amended and Restated Revolving Credit Agreement (“Revolving Credit Facility”), amending the Revolving Credit Facility dated as of November 24, 2014, as amended, with certain lenders party thereto from time to time, and Truist, as Administrative Agent for the lenders. Under the Revolving Credit Facility, the Company may borrow up to $
The Company's obligations under the Revolving Credit Facility are unsecured. In addition, if the Company forms or acquires any domestic subsidiaries, the loans and other obligations under the Revolving Credit Facility will be guaranteed by such domestic subsidiaries.
At the Company’s election, the borrowings under the Revolving Credit Facility, other than the swingline loans, bear interest at either (1) a base rate defined as the highest of (a) the rate which the Administrative Agent announces from time to time as its prime lending rate, as in effect from time to time, or (b) the Federal Funds Rate, as in effect from time to time, plus one-half of one percent (
Principal is payable in full at maturity on October 6, 2026, and there are no scheduled principal payments prior to maturity. Interest on base rate loans and swingline loans is payable quarterly in arrears, and interest on SOFR loans is payable at the end of each interest period, and in the case of interest periods longer than three months, on each day which occurs every three months after the initial date of such interest period.
The purpose of the Revolving Credit Facility is for general working capital needs, permitted acquisitions (as defined in the Amended and Restated Revolving Credit Agreement), and for stock repurchase and/or redemption transactions that the Company may authorize.
In addition, the Revolving Credit Facility required the Company to meet certain financial tests, including, without limitation:
| • | a funded debt leverage ratio (consolidated debt/consolidated EBITDA) of not greater than |
| • | an interest coverage ratio (consolidated EBITDA/consolidated interest expense) of not less than |
In addition, the Revolving Credit Facility contains certain customary affirmative and negative 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.
As of September 30, 2024, the Company was in compliance with all covenants. There were
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Special Cautionary Notice Regarding Forward‑Looking Statements
You should read the following discussion and analysis in conjunction with our Condensed Consolidated Financial Statements and related Notes included elsewhere in this Form 10-Q and our audited Consolidated Financial Statements and the Notes thereto for the year ended December 31, 2023, appearing in our Annual Report on Form 10-K that was filed with the Securities and Exchange Commission (“SEC”) on February 26, 2024 (the “2023 Form 10-K”). Statements contained in this Form 10-Q that are not historical facts are forward-looking statements that the Company intends to be covered by the safe harbor provisions for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995. Statements that are predictive in nature, that depend on or refer to future events or conditions, or that include words such as “anticipates,” “believes,” “could,” “estimates,” “expects,” “intends,” “may,” “plans,” “potential,” “predicts,” “projects,” “should,” “will,” “would,” and similar expressions are forward-looking statements.
The Company cautions that forward-looking statements involve known and unknown risks, uncertainties, and other factors that may cause actual results, performance, or achievements to be materially different from any future results, performance, or achievements expressed or implied by the forward-looking statements. Forward-looking statements reflect our current views with respect to future events and are based on assumptions and subject to risks and uncertainties. Given these uncertainties, you should not place undue reliance on these forward-looking statements.
In evaluating any forward-looking statement, you should specifically consider the information regarding forward-looking statements set forth above and the risks set forth under the caption Part I, Item 1A. Risk Factors in our 2023 Form 10-K and other disclosures in our 2023 Form 10-K, earnings releases, and other filings with the SEC from time to time, as well as other cautionary statements contained elsewhere in this Form 10-Q, including our critical accounting policies and estimates as discussed in this Form 10-Q and our 2023 Form 10-K. We undertake no obligation to update or revise any forward-looking statements. You should read this Form 10-Q and the documents that we reference in this Form 10-Q and have filed as exhibits to this Form 10-Q completely and with the understanding that our actual future results may be materially different from what we currently expect.
Business Overview
HealthStream provides primarily SaaS based applications for healthcare organizations—all designed to improve business and clinical outcomes by supporting the people who deliver patient care. We are focused on helping individuals and organizations in healthcare meet their ongoing learning, clinical development, credentialing, and scheduling needs. We also provide our solutions to nursing schools and nursing students.
Our business is managed and organized around a single platform strategy, also referred to as our One HealthStream approach. At the center of this single platform strategy is our hStream technology platform. By enabling our applications through hStream, we believe that stand-alone applications, which already provide a powerful value proposition on their own, are beginning to leverage each other to more efficiently and effectively empower our customers to manage their business and improve their outcomes. Further, the Company’s internal structure and executive leadership are likewise shaped by the organizing principle of a single platform, including with regard to technology, operations, accounting, internal reporting (including the nature of information reviewed by our key decision makers), organizational structure, compensation, performance assessment, and resource allocation.
Significant financial metrics for the third quarter of 2024 are set forth in the bullets below.
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Revenues of $73.1 million in the third quarter of 2024, up 3.9% from $70.3 million in the third quarter of 2023 |
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Operating income of $6.5 million in the third quarter of 2024, up 33.6% from $4.9 million in the third quarter of 2023 |
| • |
Net income of $5.7 million in the third quarter of 2024, up 48.0% from $3.9 million in the third quarter of 2023 |
| • |
Earnings per share (“EPS”) of $0.19 per share (diluted) in the third quarter of 2024, up from $0.13 per share (diluted) in the third quarter of 2023 |
| • |
Adjusted EBITDA1 of $17.7 million in the third quarter of 2024, up 9.0% from $16.2 million in the third quarter of 2023
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| 1 |
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 Form 10-Q. |
Recent Developments
Macroeconomic conditions in the U.S. continue to be challenging in various respects, including as the result of inflationary pressures, interest rate levels, which, despite recent declines, remain elevated, and uncertain geopolitical conditions. In this regard, we have experienced in certain recent periods, and believe that many of our customers have experienced, increased labor, supply chain, capital, and other expenditures associated with inflationary conditions. These conditions impacting the U.S. economy and our customers in the healthcare industry have adversely affected, and may continue to adversely impact, our business and results of operations.
While the COVID-19 pandemic continues to cause some level of uncertainty, the impact of the pandemic itself on public health and economic conditions has significantly lessened and normalized to the point of reaching an endemic stage. As our business is focused on providing solutions to healthcare organizations, we continue to closely monitor any developments related to COVID-19 or other public health related events and remain prepared to modify our operating approaches to address COVID 19-related developments or other public health related events as they may arise.
Key Financial Metrics
Our management utilizes the following financial metrics in connection with managing our business.
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Revenues, net. Revenues, net, reflect income generated by the sales of goods and services related to our operations and, for businesses acquired prior to the adoption of ASU 2021-08 on January 1, 2022, reflects deferred revenue write-downs associated with fair value accounting for such acquired businesses. Revenues, net, were $73.1 million and $217.4 million for the three and nine months ended September 30, 2024, respectively, compared to $70.3 million and $208.5 million for the three and nine months ended September 30, 2023, respectively. Management utilizes revenue in connection with managing our business and believes that this metric provides useful information to investors as a key indicator of the growth and success of our products. |
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Net Income. Net income represents revenues, net, less all expenses. Net income was $5.7 million and $15.1 million for the three and nine months ended September 30, 2024, respectively, compared to $3.9 million and $10.6 million for the three and nine months ended September 30, 2023. Management utilizes net income in connection with managing our business, including with regard to our capital deployment strategies. |
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Adjusted EBITDA. Adjusted EBITDA, calculated as set forth below under “Reconciliation of Non-GAAP Financial Measures,” is utilized by our management in connection with managing our business and provides useful information to investors because adjusted EBITDA reflects net income adjusted for certain GAAP accounting, non-cash, and/or non-operating items, as more specifically set forth below, which may not fully reflect the underlying operating performance of our business. We also believe that adjusted EBITDA is useful to investors to assess the Company’s ongoing operations. Additionally, certain short-term cash incentive bonuses and performance-based equity award grants are based on the achievement of adjusted EBITDA (as defined in applicable bonus and equity grant documentation) targets. Adjusted EBITDA was $17.7 million and $50.6 million for the three and nine months ended September 30, 2024, respectively, compared to $16.2 million and $45.3 million for the three and nine months ended September 30, 2023, respectively. |
| • |
Capital Expenditures. Capital expenditures represent cash payments incurred for purchases of property and equipment and during the development phase for projects to develop software and content. Capital expenditures were $6.8 million and $21.3 million for the three and nine months ended September 30, 2024, respectively, compared to $6.7 million and $21.4 million for the three and nine months ended September 30, 2023, respectively. Management utilizes this metric in connection with managing the allocation of capitalized expenditures in which the Company invests related to the development of its products and believes that this metric is a key indicator of investment in products relative to their current and expected performance. |
Critical Accounting Policies and Estimates
The Company’s Condensed Consolidated Financial Statements are prepared in accordance with US GAAP. These accounting principles require us to make certain estimates, judgments, and assumptions during the preparation of our Condensed Consolidated Financial Statements. We believe the estimates, judgments, and assumptions upon which we rely are reasonable based upon information available to us at the time they are made. These estimates, judgments, and assumptions can affect the reported amounts of assets and liabilities as of the date of the Condensed Consolidated Financial Statements, as well as the reported amounts of revenues and expenses during the periods presented and related disclosures. To the extent there are material differences between these estimates, judgments, or assumptions and actual results, our Condensed Consolidated Financial Statements will be affected.
The accounting policies and estimates that we believe are the most critical in fully understanding and evaluating our reported financial results include the following:
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Revenue recognition |
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Accounting for income taxes |
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Goodwill |
In many cases, the accounting treatment of a particular transaction is specifically dictated by US GAAP and does not require management’s judgment in its application. There are also areas where management’s judgment in selecting among available alternatives would not produce a materially different result. See Notes to the Consolidated Financial Statements in our 2023 Form 10-K and the Notes to the Condensed Consolidated Financial Statements herein which contain additional information regarding our accounting policies and other disclosures required by US GAAP. There have been no changes in our critical accounting policies and estimates from those reported in our 2023 Form 10-K.
Three Months Ended September 30, 2024 Compared to Three Months Ended September 30, 2023
Revenues, net. Revenues increased $2.8 million, or 4%, to $73.1 million for the three months ended September 30, 2024 from $70.3 million for the three months ended September 30, 2023. Subscription revenues increased $2.5 million, or 4%, and professional services revenues increased by $0.3 million, or 11%, compared to the third quarter of 2023. The increase in professional services revenues is primarily due to a one-time payment as a result of a customer acquisition.
A comparison of revenues by revenue source is as follows (in thousands):
| Three Months Ended September 30, |
||||||||||||
| 2024 |
2023 |
Percentage Change |
||||||||||
| Subscription services |
$ | 69,918 | $ | 67,473 | 4 | % | ||||||
| Professional services |
3,177 | 2,866 | 11 | % | ||||||||
| Total revenues, net |
$ | 73,095 | $ | 70,339 | 4 | % | ||||||
| % of Revenues |
||||||||||||
| Subscription services |
96 | % | 96 | % | ||||||||
| Professional services |
4 | % | 4 | % | ||||||||
Cost of Revenues (excluding Depreciation and Amortization). Cost of revenues increased $0.9 million, or 4%, to $24.5 million for the three months ended September 30, 2024, from $23.6 million for the three months ended September 30, 2023. Cost of revenues as a percentage of revenues were 33% and 34% for the three months ended September 30, 2024 and 2023, respectively. The increase in expense is primarily associated with higher costs for software and cloud hosting as well as an increase in labor costs and royalties.
Product Development. Product development expenses increased $1.2 million, or 11%, to $12.1 million for the three months ended September 30, 2024, from $10.9 million for the three months ended September 30, 2023. Product development expenses as a percentage of revenues were 17% and 15% for the three months ended September 30, 2024 and 2023, respectively. The increase is primarily due to an increase in labor costs, partially offset by an increase in capitalized labor associated with software development activities.
Sales and Marketing. Sales and marketing expenses, including personnel costs, increased $0.2 million, or 2%, to $11.5 million for the three months ended September 30, 2024, from $11.3 million for the three months ended September 30, 2023. Sales and marketing expenses were 16% of revenues for both the three months ended September 30, 2024 and 2023. The increase in expense is primarily due to increases in commissions and software expense, which were partially offset by a decrease in labor costs.
Other General and Administrative Expenses. Other general and administrative expenses decreased $0.8 million, or 9%, to $8.5 million for the three months ended September 30, 2024, from $9.3 million for the three months ended September 30, 2023. Other general and administrative expenses were 12% and 13% of revenues for the three months ended September 30, 2024 and 2023, respectively. The decrease is primarily due to a $0.4 million recovery of sales taxes from prior software expense payments, partially offset by increased share-based compensation.
Depreciation and Amortization. Depreciation and amortization expense decreased $0.3 million, or 3%, to $10.1 million for the three months ended September 30, 2024, from $10.4 million for the three months ended September 30, 2023. This decrease is primarily a result of a decrease in amortization associated with capitalized software resulting from the recovery of sales taxes from prior capitalized payments related to contract labor associated with software development activities.
Other Income, Net. Other income, net was $1.0 million for the three months ended September 30, 2024, compared to $0.6 million for the three months ended September 30, 2023. The increase is primarily the result of an increase in interest income earned on cash and investments during the three months ended September 30, 2024.
Income Tax Provision. The Company recorded a provision for income taxes of $1.8 million for the three months ended September 30, 2024, compared to $1.6 million for the three months ended September 30, 2023. The Company’s effective tax rate was 23% for the three months ended September 30, 2024, compared to 29% for the three months ended September 30, 2023. The Company’s effective tax rate primarily reflects the statutory corporate income tax rate, the net effect of state taxes, foreign income taxes, the effect of various permanent tax differences, and recognition of discrete tax items. During the three months ended September 30, 2024, the Company recorded discrete tax expense of $88,000, which consisted primarily of discrete tax expense related to reserves for uncertain tax positions. During the three months ended September 30, 2023, the Company recorded discrete tax expense of $0.5 million, which consisted primarily of tax expense in the amount of $0.3 million resulting from the impact of merging VerityStream into HealthStream and $0.1 million related to reserves for uncertain tax positions.
Net Income. Net income was $5.7 million and $3.9 million for the three months ended September 30, 2024 and 2023, respectively. EPS was $0.19 per share (diluted) and $0.13 per share (diluted) for the three months ended September 30, 2024 and 2023, respectively.
Adjusted EBITDA was $17.7 million for the three months ended September 30, 2024, compared to $16.2 million for the three months ended September 30, 2023. See “Reconciliation of Non-GAAP Financial Measures” below for our reconciliation of adjusted EBITDA to the most directly comparable measure under US GAAP and disclosure regarding why we believe adjusted EBITDA provides useful information to investors.
Nine Months Ended September 30, 2024 Compared to Nine Months Ended September 30, 2023
Revenues, net. Revenues increased $8.9 million, or 4%, to $217.4 million for the nine months ended September 30, 2024 from $208.5 million for the nine months ended September 30, 2023. Subscription revenues increased $9.1 million, or 5%, but were partially offset by $0.2 million of declines from professional services revenues.
A comparison of revenues by revenue source is as follows (in thousands):
| Nine Months Ended September 30, |
||||||||||||
| 2024 |
2023 |
Percentage Change |
||||||||||
| Subscription services |
$ | 209,136 | $ | 199,993 | 5 | % | ||||||
| Professional services |
8,275 | 8,489 | -3 | % | ||||||||
| Total revenues, net |
$ | 217,411 | $ | 208,482 | 4 | % | ||||||
| % of Revenues |
||||||||||||
| Subscription services |
96 | % | 96 | % | ||||||||
| Professional services |
4 | % | 4 | % | ||||||||
Cost of Revenues (excluding Depreciation and Amortization). Cost of revenues increased $1.8 million, or 3%, to $72.8 million for the nine months ended September 30, 2024, from $71.0 million for the nine months ended September 30, 2023. Cost of revenues as a percentage of revenues were 33% and 34% the nine months ended September 30, 2024 and 2023, respectively. The increase in expense is primarily associated with higher software expenses and cloud hosting costs, partially offset by lower labor costs. Labor costs recognized during the nine months ended September 30, 2023 included severance costs incurred in connection with the Company's previously disclosed restructuring under a single platform strategy.
Product Development. Product development expenses increased $2.6 million, or 8%, to $36.2 million for the nine months ended September 30, 2024, from $33.6 million for the nine months ended September 30, 2023. Product development expenses as a percentage of revenues were 17% and 16% for the nine months ended September 30, 2024 and 2023, respectively. The increase is primarily due to an increase in labor costs, partially offset by an increase in capitalized labor associated with software development activities.
Sales and Marketing. Sales and marketing expenses, including personnel costs, increased $0.4 million, or 1%, to $34.7 million for the nine months ended September 30, 2024, from $34.3 million for the nine months ended September 30, 2023. Sales and marketing expenses were 16% of revenues for both the nine months ended September 30, 2024 and 2023. The increase in expense is primarily due to increases in general marketing expenses, commissions, and travel expenses, which were partially offset by a decrease in labor costs.
Other General and Administrative Expenses. Other general and administrative expenses decreased $0.9 million, or 3%, to $26.3 million for the nine months ended September 30, 2024, from $27.2 million for the nine months ended September 30, 2023. Other general and administrative expenses were 12% and 13% of revenues for the nine months ended September 30, 2024 and 2023, respectively. The decrease is primarily due to lower labor costs, professional service fees, and a $0.4 million recovery of sales taxes from prior software expense payments, which were partially offset by an increase in bad debt expense of $1.4 million, which was primarily associated with a single-customer bankruptcy.
Depreciation and Amortization. Depreciation and amortization expense increased $0.2 million, or 1%, to $30.8 million for the nine months ended September 30, 2024, from $30.6 million for the nine months ended September 30, 2023. This increase is primarily a result of an increase in amortization associated with capitalized software.
Other Income, Net. Other income, net was $2.7 million for the nine months ended September 30, 2024, compared to $1.3 million for the nine months ended September 30, 2023. The increase is primarily the result of an increase in interest income earned on cash and investments during the nine months ended September 30, 2024.
Income Tax Provision. The Company recorded a provision for income taxes of $4.2 million for the nine months ended September 30, 2024, compared to $2.5 million for the nine months ended September 30, 2023. The Company’s effective tax rate was 22% for the nine months ended September 30, 2024, compared to 19% for the nine months ended September 30, 2023. The Company’s effective tax rate primarily reflects the statutory corporate income tax rate, the net effect of state taxes, foreign income taxes, the effect of various permanent tax differences, and recognition of discrete tax items. During the nine months ended September 30, 2024, the Company recorded discrete tax expense of $0.1 million, which consisted primarily of discrete tax expense of $0.2 million related to reserves for uncertain tax positions, partially offset by a $0.1 million discrete tax benefit associated with stock-based awards. During the nine months ended September 30, 2023, the Company recorded discrete tax benefits of $0.1 million, which consisted primarily of tax benefits in the amount of $0.6 million resulting from changes in state apportionment rules in Tennessee upon the enactment of the Tennessee Works Tax Act and stock-based awards in the amount of $0.1 million. This tax benefit was partially offset by $0.3 million of discrete tax expense related to reserves for uncertain tax positions and $0.3 million of discrete tax expenses related to the impact of merging VerityStream into HealthStream.
Net Income. Net income was $15.1 million and $10.6 million for the nine months ended September 30, 2024 and 2023, respectively. EPS was $0.50 per share (diluted) and $0.35 per share (diluted) for the nine months ended September 30, 2024 and 2023, respectively.
Adjusted EBITDA was $50.6 million for the nine months ended September 30, 2024, compared to $45.3 million for the nine months ended September 30, 2023. See “Reconciliation of Non-GAAP Financial Measures” below for our reconciliation of adjusted EBITDA to the most directly comparable measure under US GAAP and disclosure regarding why we believe adjusted EBITDA provides useful information to investors.
Reconciliation of Non-GAAP Financial Measures
This Form 10-Q 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 before interest, income taxes, stock-based compensation, depreciation and amortization, and changes in fair value of, including gains (losses) on the sale of, non-marketable equity investments (“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/or non-operating items which may not, in any such case, fully reflect the underlying operating performance of our business. In addition, as discussed below, for periods ended on or prior to December 31, 2023, adjusted EBITDA excludes the impact of deferred revenue write-downs associated with fair value accounting for acquired businesses. We believe that adjusted EBITDA is useful to investors to assess the Company’s ongoing operating performance and to compare the Company’s operating performance between periods. Additionally, certain short-term cash incentive bonuses and performance-based equity awards are based on the achievement of adjusted EBITDA (as defined in applicable bonus and equity grant documentation) targets.
As previously disclosed, prior to the Company early adopting ASU 2021-08 effective January 1, 2022, following the completion of any acquisition by the Company, the Company was required to record the acquired deferred revenue at fair value as defined in GAAP, which typically resulted in a write-down of the acquired deferred revenue. In connection therewith, management determined that including an adjustment in the definition of adjusted EBITDA for the impact of the deferred revenue write-downs associated with fair value accounting for businesses acquired prior to the January 1, 2022 effective date of the Company's adoption of ASU 2021-08 (the “Pre-2022 Acquisitions”) provided useful information to investors because the deferred revenue write-down recognized in periods after any such Pre-2022 Acquisitions could, given the nature of this non-cash accounting impact, cause our GAAP financial results during such periods to not fully reflect our underlying operating performance. Following the adoption of ASU 2021-08, contracts acquired in an acquisition completed on or after January 1, 2022 have been measured as if the Company had originated the contract (rather than the contract being measured at fair value) such that, for such acquisitions, the Company no longer records deferred revenue write-downs associated with acquired businesses. With respect to periods ended on or prior to December 31, 2023, the Company has included an adjustment in the calculation of adjusted EBITDA for the impact of deferred revenue write-downs associated with the Pre-2022 Acquisitions consistent with this prior accounting standard, given the ongoing impact of such deferred revenue on the Company's financial results under GAAP over this time period. With respect to periods beginning on and after January 1, 2024, the Company no longer recognizes any deferred revenue write-downs associated with the Pre-2022 Acquisitions under GAAP, and accordingly such deferred revenue write-downs are not an adjustment in connection with the calculation of adjusted EBITDA for periods on and after January 1, 2024.
Adjusted EBITDA is a non-GAAP financial measure and should not be considered as a measure of financial performance under GAAP. Because adjusted EBITDA is not a measurement determined in accordance with GAAP, adjusted EBITDA is susceptible to varying calculations. Accordingly, adjusted EBITDA, as presented, may not be comparable to other similarly titled measures of other companies and has limitations as an analytical tool.
A reconciliation of adjusted EBITDA to the most directly comparable GAAP measure, net income, is set forth below (in thousands).
| Three Months Ended September 30, |
Nine Months Ended September 30, |
|||||||||||||||
| 2024 |
2023 |
2024 |
2023 |
|||||||||||||
| GAAP net income |
$ | 5,725 | $ | 3,867 | $ | 15,118 | $ | 10,623 | ||||||||
| Deferred revenue write-down |
— | 30 | — | 128 | ||||||||||||
| Interest income |
(1,007 | ) | (667 | ) | (2,856 | ) | (1,580 | ) | ||||||||
| Interest expense |
26 | 33 | 75 | 99 | ||||||||||||
| Income tax provision |
1,754 | 1,586 | 4,202 | 2,471 | ||||||||||||
| Stock-based compensation expense |
1,131 | 1,038 | 3,285 | 3,076 | ||||||||||||
| Depreciation and amortization |
10,073 | 10,403 | 30,779 | 30,550 | ||||||||||||
| Change in fair value of non-marketable equity investments |
— | (45 | ) | — | (45 | ) | ||||||||||
| Adjusted EBITDA |
$ | 17,702 | $ | 16,245 | $ | 50,603 | $ | 45,322 | ||||||||
Liquidity and Capital Resources
Net cash provided by operating activities decreased by $3.7 million to $46.5 million during the nine months ended September 30, 2024, from $50.2 million during the nine months ended September 30, 2023. The decrease in net cash provided by operating activities is primarily due to a $3.6 million increase in income tax payments, while cash receipts increased modestly compared to the prior year. Our days sales outstanding (“DSO”) was 37 days for the third quarter of 2024 compared to 43 days for the third quarter of 2023. The Company calculates DSO by dividing the average accounts receivable balance for the quarter by average daily revenues for the quarter. The Company’s primary sources of cash were receipts generated from the sales of our products and services. The primary uses of cash to fund operations included personnel expenses, sales commissions, royalty payments, payments for contract labor and other direct expenses associated with delivery of our products and services, income tax payments, and general corporate expenses.
Net cash used in investing activities was $25.9 million for the nine months ended September 30, 2024, compared to $47.2 million for the nine months ended September 30, 2023. During the nine months ended September 30, 2024, the Company invested in marketable securities of $51.5 million, made payments for capitalized software development of $20.1 million, and purchased property and equipment of $1.2 million. These uses of cash were partially offset by $46.2 million in maturities of marketable securities and $0.8 million received upon the settlement and release of escrowed proceeds related to a prior sale of a non-marketable equity investment. During the nine months ended September 30, 2023, the Company spent $6.6 million for the acquisition of substantially all of the assets of Electronic Education Documentation System, LLC (“eeds”) (note: the eeds acquisition was consummated on December 31, 2022, but was funded in January 2023 such that the purchase price for eeds impacted net cash used in investing activities during the nine months ended September 30, 2023), invested in marketable securities of $38.2 million, made payments for capitalized software development of $19.6 million, and purchased property and equipment of $1.9 million. These uses of cash were partially offset by $19.0 million in maturities of marketable securities and $45,000 in proceeds from the sales of non-marketable equity investments.
Net cash used in financing activities was $3.5 million for the nine months ended September 30, 2024, compared to $4.8 million for the nine months ended September 30, 2023. The uses of cash for the nine months ended September 30, 2024 included $2.6 million for the payment of cash dividends and $0.9 million for the payment of employee payroll taxes in relation to the vesting of restricted share units. The uses of cash for the nine months ended September 30, 2023 included $2.3 million for the payment of cash dividends, $1.6 million for repurchases of common stock (note: share repurchases totaled $2.1 million during the nine months ended September 30, 2023, with $1.6 million paid in cash and $0.5 million included in accrued expenses in the Company's Condensed Consolidated Balance Sheet as of September 30, 2023), and $0.8 million for the payment of employee payroll taxes in relation to the vesting of restricted share units.
Our balance sheet reflects working capital of $35.1 million at September 30, 2024, compared to $11.8 million at December 31, 2023. The increase in working capital is primarily a result of an increase in cash and cash equivalents. The Company’s primary source of liquidity as of September 30, 2024 was $57.5 million of cash and cash equivalents and $37.4 million of marketable securities.
The Company also has a $50.0 million revolving credit facility. There currently are no outstanding borrowings under the revolving credit facility. The revolving credit facility expires on October 6, 2026, unless earlier renewed or amended. For additional information regarding our revolving credit facility, see Note 8 to the Condensed Consolidated Financial Statements included herein.
On September 13, 2023, the Company announced a share repurchase program approved by the Company's Board under which the Company was authorized to purchase up to $10.0 million of the Company's outstanding shares of common stock. The share repurchase program expired according to its terms on March 31, 2024, and no repurchases occurred during the three months ended March 31, 2024. During the term of this program, the Company repurchased a total of 404,188 shares under this program at an aggregate fair value of $8.9 million, based on an average price per share of $22.07 (excluding the cost of broker commissions). We may elect in the future to adopt a new share repurchase program.
In addition, the Company’s growth strategy includes acquiring businesses or making strategic investments in businesses that complement or enhance our business. It is anticipated that future acquisitions or strategic investments, if any, would be effected through cash consideration, stock consideration, or a combination of both. The issuance of our stock as consideration for an acquisition or to raise additional capital could have a dilutive effect on earnings per share and could adversely affect our stock price. Our revolving credit facility contains financial covenants and availability calculations designed to set a maximum leverage ratio of outstanding debt to adjusted EBITDA and an interest coverage ratio of adjusted EBITDA to interest expense. Therefore, the maximum borrowings against our new revolving credit facility would be dependent on the covenant calculations at the time of borrowing. As of September 30, 2024, we were in compliance with all covenants under our revolving credit facility. 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 provide assurance that if we need additional financing that it will be available on terms favorable to us, or at all. Failure to generate sufficient cash flow from operations or raise additional capital when required in sufficient amounts and on terms acceptable to us could harm our business, financial condition, and results of operations.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
The Company is exposed to market risk from changes in interest rates, foreign currency risk, and investment risk. We do not have any commodity price risk.
Interest Rate Risk
As of September 30, 2024, and during the three months then ended, the Company had no outstanding debt. We may become subject to interest rate market risk associated with any future borrowings under our revolving credit facility. The interest rate under the revolving credit facility varies depending on the interest rate option selected by the Company plus a margin determined in accordance with a pricing grid. We are also exposed to market risk with respect to our cash and investment balances, which were $94.9 million at September 30, 2024. Assuming a hypothetical 10% decrease in interest rates for invested balances, interest income from cash and investments would decrease on an annualized basis by $0.4 million.
Foreign Currency Risk
We have foreign currency risks related to our revenue and operating expenses denominated in currencies other than the US dollar, including Canadian dollar, New Zealand dollar, and Australian dollar. Increases or decreases in our foreign-denominated revenue from movements in foreign exchange rates are often partially offset by the corresponding increases or decreases in our foreign-denominated operating expenses.
To the extent that our international operations grow, our risks associated with fluctuation in currency rates will become greater, and we will continue to assess our approach to managing this risk. In addition, currency fluctuations or a weakening US dollar can increase the costs of our international operations. To date, we have not entered into any foreign currency hedging contracts although we may do so in the future.
Investment Risk
The Company’s investment policy and strategy is focused on investing in highly rated securities with the objective of minimizing the potential risk of principal loss. The Company’s policy limits the amount of credit exposure to any single issuer and sets limits on the average portfolio maturity.
We have an investment portfolio that includes strategic investments in privately held companies, which primarily include early-stage companies. We primarily invest in healthcare technology companies that we believe can help expand our ecosystem. We may continue to make these types of strategic investments as opportunities arise that we find attractive. We may experience additional volatility to our Consolidated Financial Statements due to changes in market prices, observable price changes, and impairments to our strategic investments. These changes could be material based on market conditions and events.
The above market risk discussion and the estimated amounts presented are forward-looking statements of market risk assuming the occurrence of certain adverse market conditions. Actual results in the future may differ materially from those projected as a result of actual developments in the market.
Item 4. Controls and Procedures
Evaluation of Controls and Procedures
HealthStream’s chief executive officer and principal financial officer have reviewed and evaluated the effectiveness of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) promulgated under the Securities Exchange Act of 1934 (the “Exchange Act”)) as of the end of the period covered by this Form 10-Q. Based on that evaluation, the chief executive officer and principal financial officer have concluded that HealthStream’s disclosure controls and procedures were effective to ensure that the information required to be disclosed by the Company in the reports the Company files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and the information required to be disclosed in the reports the Company files or submits under the Exchange Act was accumulated and communicated to the Company’s management, including its chief executive officer and principal financial officer, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.
Changes in Internal Control over Financial Reporting
There was no change in HealthStream’s internal control over financial reporting that occurred during the third quarter of 2024 that has materially affected, or that is reasonably likely to materially affect, HealthStream’s internal control over financial reporting.
None.
There have been no material changes to the risk factors previously disclosed in Part I, Item 1A of the 2023 Form 10-K.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
None. Without limiting the generality of the foregoing, the Company did not have any share repurchase program in effect and did not purchase any shares of common stock of the Company during the three months ended September 30, 2024.
Without limiting the generality of the foregoing, during the three months ended September 30, 2024, director or officer of the Company adopted or terminated any “Rule 10b5-1 trading arrangement,” or any “non-Rule 10b-5 trading arrangement,” as such terms are defined in Item 408 of Regulation S-K.
| (a) |
Exhibits |
| 31.1 |
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| 31.2 |
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| 32.1 |
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| 32.2 |
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| 101.1 INS |
Inline XBRL Instance Document – The instant document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document. |
| 101.1 SCH |
Inline XBRL Taxonomy Extension Schema |
| 101.1 CAL |
Inline XBRL Taxonomy Extension Calculation Linkbase |
| 101.1 DEF |
Inline XBRL Taxonomy Extension Definition Linkbase |
| 101.1 LAB |
Inline XBRL Taxonomy Extension Label Linkbase |
| 101.1 PRE |
Inline XBRL Taxonomy Extension Presentation Linkbase |
| 104 | The cover page from the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2024, has been formatted in Inline XBRL |
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| HEALTHSTREAM, INC. |
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| October 24, 2024 | By: |
/s/ Scott A. Roberts |
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| Scott A. Roberts |
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| Chief Financial Officer |
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