hstm-10q_20200331.htm
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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

Quarterly Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended March 31, 2020

Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

Commission File No.: 000-27701

HealthStream, Inc.

(Exact name of registrant as specified in its charter)

 

Tennessee

62-1443555

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification No.)

 

 

500 11th Avenue North, Suite 1000,

 

Nashville, Tennessee

37203

(Address of principal executive offices)

(Zip Code)

 

(615) 301-3100

(Registrant's telephone number, including area code)

 

 

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common Stock (Par Value $0.00)

HSTM

Nasdaq

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. Yes   No

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). Yes   No

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

 

 

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   No

As of April 28, 2020, there were 31,997,499 shares of the registrant’s common stock outstanding.

 

 

 

 

 

 


Index to Form 10‑Q

HEALTHSTREAM, INC.

 

 

 

 

 

 

 

 

 

 

 

Page

Number

 

 

 

 

 

Part I.

 

Financial Information

 

1

 

 

 

 

 

Item 1.

 

Financial Statements

 

1

 

 

 

 

 

 

 

Condensed Consolidated Balance Sheets (Unaudited) – March 31, 2020 and December 31, 2019

 

1

 

 

 

 

 

 

 

Condensed Consolidated Statements of Income (Unaudited) – Three Months ended March 31, 2020 and 2019

 

2

 

 

 

 

 

 

 

Condensed Consolidated Statements of Comprehensive Income (Unaudited) – Three Months ended March 31, 2020 and 2019

 

3

 

 

 

 

 

 

 

Condensed Consolidated Statement of Shareholders' Equity (Unaudited) – Three Months ended March 31, 2020 and 2019

 

4

 

 

 

 

 

 

 

Condensed Consolidated Statements of Cash Flows (Unaudited) – Three Months ended March 31, 2020 and 2019

 

5

 

 

 

 

 

 

 

Notes to Condensed Consolidated Financial Statements (Unaudited)

 

6

 

 

 

 

 

Item 2.

 

Management's Discussion and Analysis of Financial Condition and Results of Operations

 

15

 

 

 

 

 

Item 3.

 

Quantitative and Qualitative Disclosures about Market Risk

 

23

 

 

 

 

 

Item 4.

 

Controls and Procedures

 

24

 

 

 

 

 

Part II.

 

Other Information

 

25

 

 

 

 

 

Item 1A.

 

Risk Factors

 

25

 

 

 

 

 

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

 

26

 

 

 

 

 

Item 6.

 

Exhibits

 

26

 

 

 

 

 

 

 

SIGNATURE

 

27

 

 

 

 

 

 


 

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

HEALTHSTREAM, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)

(In thousands)

 

 

 

March 31,

 

 

December 31,

 

 

 

2020

 

 

2019

 

ASSETS

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

107,425

 

 

$

131,538

 

Marketable securities

 

 

34,585

 

 

 

41,328

 

Accounts receivable, net of allowance for doubtful accounts of $1,004 and

   $843 at March 31, 2020 and December 31, 2019, respectively

 

 

32,301

 

 

 

27,650

 

Accounts receivable - unbilled

 

 

2,454

 

 

 

2,726

 

Prepaid royalties, net of amortization

 

 

15,100

 

 

 

11,898

 

Other prepaid expenses and other current assets

 

 

8,791

 

 

 

9,432

 

Total current assets

 

 

200,656

 

 

 

224,572

 

 

 

 

 

 

 

 

 

 

Property and equipment, net of accumulated depreciation of $21,155 and

   $19,291 at March 31, 2020 and December 31, 2019, respectively

 

 

24,425

 

 

 

26,065

 

Capitalized software development, net of accumulated amortization of $60,752 and

   $57,768 at March 31, 2020 and December 31, 2019, respectively

 

 

22,209

 

 

 

21,445

 

Operating lease right of use assets, net

 

 

29,135

 

 

 

29,615

 

Goodwill

 

 

123,283

 

 

 

102,196

 

Customer-related intangibles, net of accumulated amortization of $31,446 and

   $29,760 at March 31, 2020 and December 31, 2019, respectively

 

 

50,904

 

 

 

52,554

 

Other intangible assets, net of accumulated amortization of $13,651 and

   $12,735 at March 31, 2020 and December 31, 2019, respectively

 

 

8,421

 

 

 

7,527

 

Deferred tax assets

 

 

269

 

 

 

269

 

Deferred commissions

 

 

17,088

 

 

 

17,645

 

Non-marketable equity investments

 

 

4,329

 

 

 

6,782

 

Other assets

 

 

792

 

 

 

874

 

Total assets

 

$

481,511

 

 

$

489,544

 

 

 

 

 

 

 

 

 

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable and accrued expenses

 

$

16,366

 

 

$

22,938

 

Accrued royalties

 

 

13,738

 

 

 

16,736

 

Deferred revenue

 

 

72,370

 

 

 

65,511

 

Total current liabilities

 

 

102,474

 

 

 

105,185

 

 

 

 

 

 

 

 

 

 

Deferred tax liabilities

 

 

11,565

 

 

 

13,183

 

Deferred revenue, noncurrent

 

 

1,591

 

 

 

1,918

 

Operating lease liability, noncurrent

 

 

30,108

 

 

 

30,733

 

Other long-term liabilities

 

 

357

 

 

 

357

 

Commitments and contingencies

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Shareholders’ equity:

 

 

 

 

 

 

 

 

Common stock, no par value, 75,000 shares authorized; 32,003 and 32,379 shares

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

 

 

280,322

 

 

 

290,021

 

Retained earnings

 

 

55,235

 

 

 

48,143

 

Accumulated other comprehensive (loss) income

 

 

(141

)

 

 

4

 

Total shareholders’ equity

 

 

335,416

 

 

 

338,168

 

Total liabilities and shareholders’ equity

 

$

481,511

 

 

$

489,544

 

 

See accompanying notes to the unaudited Condensed Consolidated Financial Statements.

1

 


 

HEALTHSTREAM, INC.

CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)

(In thousands, except per share data)

 

 

 

Three Months Ended

 

 

 

March 31,

2020

 

 

March 31,

2019

 

Revenues, net

 

$

61,572

 

 

$

65,187

 

Operating costs and expenses:

 

 

 

 

 

 

 

 

Cost of revenues (excluding depreciation and amortization)

 

 

20,359

 

 

 

26,861

 

Product development

 

 

7,468

 

 

 

6,927

 

Sales and marketing

 

 

9,188

 

 

 

9,521

 

Other general and administrative expenses

 

 

9,864

 

 

 

9,970

 

Depreciation and amortization

 

 

7,449

 

 

 

6,539

 

Total operating costs and expenses

 

 

54,328

 

 

 

59,818

 

 

 

 

 

 

 

 

 

 

Operating income

 

 

7,244

 

 

 

5,369

 

 

 

 

 

 

 

 

 

 

Other income, net

 

 

1,706

 

 

 

822

 

 

 

 

 

 

 

 

 

 

Income from continuing operations before income tax provision

 

 

8,950

 

 

 

6,191

 

Income tax provision

 

 

1,858

 

 

 

1,411

 

Income from continuing operations

 

 

7,092

 

 

 

4,780

 

Discontinued operations:

 

 

 

 

 

 

 

 

Gain on sale of discontinued operations

 

 

 

 

 

1,620

 

Income tax provision

 

 

 

 

 

426

 

Income from discontinued operations

 

 

 

 

 

1,194

 

Net income

 

$

7,092

 

 

$

5,974

 

 

 

 

 

 

 

 

 

 

Net income per share - basic:

 

 

 

 

 

 

 

 

Continuing operations

 

$

0.22

 

 

$

0.15

 

Discontinued operations

 

 

 

 

 

0.03

 

Net income per share - basic

 

$

0.22

 

 

$

0.18

 

 

 

 

 

 

 

 

 

 

Net income per share - diluted:

 

 

 

 

 

 

 

 

Continuing operations

 

$

0.22

 

 

$

0.15

 

Discontinued operations

 

 

 

 

 

0.03

 

Net income per share - diluted

 

$

0.22

 

 

$

0.18

 

 

 

 

 

 

 

 

 

 

Weighted average shares of common stock outstanding:

 

 

 

 

 

 

 

 

Basic

 

 

32,334

 

 

 

32,337

 

Diluted

 

 

32,357

 

 

 

32,377

 

 

 

 

 

 

 

 

 

 

See accompanying notes to the unaudited Condensed Consolidated Financial Statements.

2

 


 

HEALTHSTREAM, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)

(In thousands)

 

 

 

Three Months Ended

 

 

 

March 31,

2020

 

 

March 31,

2019

 

Net income

 

$

7,092

 

 

$

5,974

 

 

 

 

 

 

 

 

 

 

Other comprehensive income, net of taxes:

 

 

 

 

 

 

 

 

Foreign currency translation adjustments

 

 

(44

)

 

 

(1

)

Unrealized (loss) gain on marketable securities

 

 

(101

)

 

 

33

 

Total other comprehensive (loss) income

 

 

(145

)

 

 

32

 

Comprehensive income

 

$

6,947

 

 

$

6,006

 

 

See accompanying notes to the unaudited Condensed Consolidated Financial Statements.

3

 


 

HEALTHSTREAM, INC.

CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (UNAUDITED)

(In thousands, except per share data)

 

 

 

Three Months Ended March 31, 2020

 

 

 

Common Stock

 

 

Retained

 

 

Accumulated Other Comprehensive

 

 

Total Shareholders’

 

 

 

Shares

 

 

Amount

 

 

Earnings

 

 

Income (Loss)

 

 

Equity

 

Balance at December 31, 2019

 

 

32,379

 

 

$

290,021

 

 

$

48,143

 

 

$

4

 

 

$

338,168

 

Net income

 

 

 

 

 

 

 

 

7,092

 

 

 

 

 

 

7,092

 

Comprehensive loss

 

 

 

 

 

 

 

 

 

 

 

(145

)

 

 

(145

)

Stock based compensation

 

 

 

 

 

550

 

 

 

 

 

 

 

 

 

550

 

Common stock issued under stock plans,

    net of shares withheld for employee taxes

 

 

62

 

 

 

(373

)

 

 

 

 

 

 

 

 

(373

)

Repurchase of common stock

 

 

(438

)

 

 

(9,876

)

 

 

 

 

 

 

 

 

(9,876

)

Balance at March 31, 2020

 

 

32,003

 

 

$

280,322

 

 

$

55,235

 

 

$

(141

)

 

$

335,416

 

 

 

 

 

Three Months Ended March 31, 2019

 

 

 

Common Stock

 

 

Retained

 

 

Accumulated Other Comprehensive

 

 

Total Shareholders’

 

 

 

Shares

 

 

Amount

 

 

Earnings

 

 

(Loss) Income

 

 

Equity

 

Balance at December 31, 2018

 

 

32,325

 

 

$

286,597

 

 

$

32,373

 

 

$

(23

)

 

$

318,947

 

Net income

 

 

 

 

 

 

 

 

5,974

 

 

 

 

 

 

5,974

 

Comprehensive income

 

 

 

 

 

 

 

 

 

 

 

32

 

 

 

32

 

Stock based compensation

 

 

 

 

 

516

 

 

 

 

 

 

 

 

 

516

 

Common stock issued under stock plans,

    net of shares withheld for employee taxes

 

 

63

 

 

 

(328

)

 

 

 

 

 

 

 

 

(328

)

Balance at March 31, 2019

 

 

32,388

 

 

$

286,785

 

 

$

38,347

 

 

$

9

 

 

$

325,141

 

 

See accompanying notes to the unaudited Condensed Consolidated Financial Statements.

 

4

 


 

HEALTHSTREAM, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

(In thousands)

 

 

 

Three Months Ended March 31,

 

 

 

2020

 

 

2019

 

OPERATING ACTIVITIES:

 

 

 

 

 

 

 

 

Net income

 

$

7,092

 

 

$

5,974

 

Income from discontinued operations

 

 

 

 

 

(1,194

)

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

7,449

 

 

 

6,539

 

Stock based compensation

 

 

550

 

 

 

516

 

Amortization of deferred commissions

 

 

2,159

 

 

 

2,121

 

Provision for doubtful accounts

 

 

288

 

 

 

2

 

Deferred income taxes

 

 

500

 

 

 

433

 

Loss (gain) on non-marketable equity investments

 

 

11

 

 

 

(54

)

Non-cash royalty expense

 

 

(3,440

)

 

 

 

Change in fair value of non-marketable equity investments

 

 

(1,152

)

 

 

 

Other

 

 

47

 

 

 

(28

)

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Accounts and unbilled receivables

 

 

(4,573

)

 

 

1,387

 

Prepaid royalties

 

 

(3,202

)

 

 

(2,820

)

Other prepaid expenses and other current assets

 

 

735

 

 

 

251

 

Deferred commissions

 

 

(1,602

)

 

 

(1,382

)

Other assets

 

 

134

 

 

 

(16

)

Accounts payable and accrued expenses

 

 

(5,775

)

 

 

(5,386

)

Accrued royalties

 

 

442

 

 

 

3,342

 

Deferred revenue

 

 

6,453

 

 

 

6,400

 

Net cash provided by operating activities

 

 

6,116

 

 

 

16,085

 

 

 

 

 

 

 

 

 

 

INVESTING ACTIVITIES:

 

 

 

 

 

 

 

 

Business combinations, net of cash acquired

 

 

(21,421

)

 

 

(18,002

)

Proceeds from maturities of marketable securities

 

 

20,725

 

 

 

28,337

 

Purchases of marketable securities

 

 

(14,130

)

 

 

(30,101

)

Payments to acquire non-marketable equity investments

 

 

 

 

 

(3,342

)

Payments associated with capitalized software development

 

 

(4,068

)

 

 

(4,933

)

Purchases of property and equipment

 

 

(1,010

)

 

 

(11,338

)

Net cash used in investing activities

 

 

(19,904

)

 

 

(39,379

)

 

 

 

 

 

 

 

 

 

FINANCING ACTIVITIES:

 

 

 

 

 

 

 

 

Proceeds from exercise of stock options

 

 

 

 

 

31

 

Taxes paid related to net settlement of equity awards

 

 

(373

)

 

 

(359

)

Payments of earn-outs related to acquisitions

 

 

 

 

 

(37

)

Repurchase of common stock

 

 

(9,876

)

 

 

 

Payment of cash dividends

 

 

(30

)

 

 

(52

)

Net cash used in financing activities

 

 

(10,279

)

 

 

(417

)

 

 

 

 

 

 

 

 

 

Effect of exchange rate changes on cash and cash equivalents

 

 

(46

)

 

 

 

Net decrease in cash and cash equivalents

 

 

(24,113

)

 

 

(23,711

)

Cash and cash equivalents at beginning of period

 

 

131,538

 

 

 

134,321

 

Cash and cash equivalents at end of period

 

$

107,425

 

 

$

110,610

 

 

 

 

 

 

 

 

 

 

See accompanying notes to the unaudited Condensed Consolidated Financial Statements.

 

5

 


HEALTHSTREAM, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

1.  BASIS OF PRESENTATION

The accompanying unaudited Condensed Consolidated Financial Statements have been prepared in accordance with accounting principles generally accepted in the United States (“US GAAP”) for interim financial information and with the instructions to Form 10‑Q and Article 10 of Regulation S‑X. Accordingly, Condensed Consolidated Financial Statements do not include all of the information and footnotes required by US GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. All intercompany transactions have been eliminated in consolidation. Operating results for the three months ended March 31, 2020 are not necessarily indicative of the results that may be expected for the year ending December 31, 2020.

On February 12, 2018, the Company divested its Patient Experience (“PX”) business to Press Ganey Associates, Inc. (“Press Ganey”). The sale of the PX business resulted in the divestiture of the Company’s patient experience solutions business segment. The Company has classified the gain on sale of its previously owned PX business as discontinued operations in its Condensed Consolidated Statements of Income for all periods presented. See Note 10 for additional information.

The Condensed Consolidated Balance Sheet at December 31, 2019 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 footnotes thereto for the year ended December 31, 2019 (included in the Company's Annual Report on Form 10-K, filed with the Securities and Exchange Commission on February 26, 2020).

2. RECENT ACCOUNTING PRONOUNCEMENTS

Accounting Standards Recently Adopted

In June 2016, the FASB issued ASU 2016-03, Financial Instruments—Credit Losses (“ASC 326”): Measurement of Credit Losses on Financial Instruments, which amends guidance on reporting credit losses for assets held at amortized cost basis and available for sale debt securities. For assets held at amortized cost basis, ASC 326 eliminates the probable initial recognition threshold in current GAAP and, instead, requires an entity to reflect its current estimate of all expected credit losses. The Company adopted this ASU on January 1, 2020, and the effect of adoption on the Company’s Consolidated Financial Statements and related disclosures was not material.

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 for the three months ended March 31, 2020 and 2019 (in thousands). Sales taxes are excluded from revenues.

 

 

 

Three Months Ended March 31, 2020

 

 

Three Months Ended March 31, 2019

 

Business Segments

 

Workforce

Solutions

 

 

Provider

Solutions

 

 

Consolidated

 

 

Workforce

Solutions

 

 

Provider

Solutions

 

 

Consolidated

 

Subscription services

 

$

48,717

 

 

$

9,627

 

 

$

58,344

 

 

$

52,805

 

 

$

9,080

 

 

$

61,885

 

Professional services

 

 

1,107

 

 

 

2,121

 

 

 

3,228

 

 

 

1,490

 

 

 

1,812

 

 

 

3,302

 

Total revenues, net

 

$

49,824

 

 

$

11,748

 

 

$

61,572

 

 

$

54,295

 

 

$

10,892

 

 

$

65,187

 

 

 

 

6

 


HEALTHSTREAM, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

For the three months ended March 31, 2020 and 2019, the Company recognized $288,000 and $2,000, respectively, in impairment losses on receivables and contract assets arising from the Company’s contracts with customers.

Deferred revenue represents contract liabilities that are recorded when cash payments are received or are due in advance of our satisfaction of performance obligations. During the three months ended March 31, 2020 and 2019, we recognized revenues of approximately $31.6 million and $31.2 million, respectively, from amounts included in deferred revenue at the beginning of the respective periods. As of March 31, 2020, approximately $402 million of revenue is expected to be recognized from remaining performance obligations under contracts with customers. We expect to recognize revenue related to approximately 47% of these remaining performance obligations over the next 12 months, with the remaining amounts recognized thereafter.

Sales Commissions

Sales commissions earned by our sales force are considered incremental and recoverable costs of obtaining a contract with a customer. The sales commission plan for 2020 typically includes two payments; the initial payment is due in the period a customer contract is obtained and the final payment is due 60 days after product implementation is completed. The sales commission plan for 2019 typically included an initial payment in the period a customer contract was obtained and subsequent payments either 15 or 27 months after the initial payment depending on the contract term. Under ASC 606, costs to acquire contracts with customers, such as the initial sales commission payment, are capitalized in the period a customer contract is obtained and are amortized consistent with the transfer of the goods or services to the customer over the expected period of benefit, whereas subsequent sales commission payments which require a substantive performance condition of the employee are expensed ratably through the payment date. Under the 2020 plan, both the initial payment and subsequent payment are capitalized in the period the contract is obtained, whereas under the 2019 plan, only the initial payment was capitalized, and the subsequent payment was expensed ratably through the payment date. The primary change from an accounting perspective under the 2020 plan compared to the 2019 plan is the time between when the contract is obtained and when it is implemented does not result in a substantive performance condition of the employee. The capitalized contract cost is included in Deferred commissions in the accompanying Condensed Consolidated Balance Sheet. The expected period of benefit is the contract term, except when the capitalized commission is expected to provide economic benefit to the Company for a period longer than the contract term, such as for new customer or incremental sales where renewals are expected and renewal commissions are not commensurate with initial commissions. Non-commensurate commissions are amortized over the greater of the contract term or technological obsolescence period of approximately three years. The Company recorded amortization of deferred commissions of approximately $2.2 million and $2.1 million for the three months ended March 31, 2020 and 2019, respectively, which is included in sales and marketing expenses in the accompanying Condensed Consolidated Statements of Income.

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.

During the three months ended March 31, 2020 and 2019, the Company recorded a provision for income taxes from continuing operations of approximately $1.9 million and $1.4 million, respectively. The Company’s effective tax rate for continuing operations for the three months ended March 31, 2020 and 2019 was 21% and 23%, respectively. The Company’s effective tax rate primarily reflects the statutory corporate income tax rate, the net effect of state taxes, and the effect of various permanent tax differences. During the three months ended March 31, 2020, the Company recorded a $1.2 million change in fair value of non-marketable equity investments as a result of the NurseGrid acquisition, which is not a taxable transaction, resulting in a tax benefit of $0.3 million. The Company recognizes excess tax benefits and tax deficiencies associated with stock based awards as a component of its provision for income taxes. The Company recorded additional income tax expense associated with tax deficiencies of approximately $26,000 during the three months ended March 31, 2020 and recorded a reduction to income tax expense for excess tax benefits of approximately $83,000 during the three months ended March 31, 2019.

5.  SHAREHOLDERS’ EQUITY

Stock Based Compensation

The Company has stock awards outstanding under its 2016 Omnibus Incentive Plan. The Company accounts for its stock based compensation plan using the fair-value based method for costs related to share based payments, including restricted share units (“RSUs”). During the three months ended March 31, 2020, the Company issued 111,510 RSUs, subject to service-based time vesting, with a grant date fair value of $22.96 per share, measured based on the closing fair market value of the Company’s stock on the date of grant. During the three months ended March 31, 2019, the Company issued 86,220 RSUs, subject to service-based time vesting, with a weighted average grant date fair value of $27.39 per share, measured based on the closing fair market value of the Company’s stock on the date of grant.

7

 


HEALTHSTREAM, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

During the three months ended June 30, 2018, the Company issued 70,000 performance-based RSUs, the vesting of which occurs over a five-year period and is contingent upon continued service and achieving certain performance criteria established by the Compensation Committee on an annual basis in increments of 10%, 15%, 20%, 25%, and 30% based on performance in 2018, 2019, 2020, 2021, and 2022, respectively. The performance criteria for 14,000 of these performance-based RSUs will be based on 2020 performance. The measurement date for these 14,000 performance-based RSUs was established during the three months ended March 31, 2020 with a grant date fair value of $22.96 per share, measured based on the closing fair market value of the Company’s stock on the date the performance criteria was established. The performance criteria for 17,500 of these performance-based RSUs was previously established based on performance in 2018 and 2019, as applicable, and the performance criteria for the remaining 38,500 performance-based RSUs has not yet been determined and will be established on an annual basis based on performance in 2021 and 2022, as applicable; therefore, the measurement date for these remaining 38,500 performance-based RSUs cannot be determined until the performance criteria have been established.

Total stock based compensation expense recognized for the three months ended March 31, 2020 and 2019 in the Condensed Consolidated Statements of Income is as follows (in thousands):

 

 

 

Three Months Ended

March 31,

 

 

 

2020

 

 

2019

 

Cost of revenues (excluding depreciation and amortization)

 

$

7

 

 

$

1

 

Product development

 

 

81

 

 

 

53

 

Sales and marketing

 

 

49

 

 

 

56

 

Other general and administrative

 

 

413

 

 

 

406

 

Total stock based compensation expense

 

$

550

 

 

$

516

 

 

Share Repurchase Plan

On March 13, 2020, the Company’s Board of Directors authorized a share repurchase program to repurchase up to $30.0 million of outstanding shares of common stock. The share repurchase program will terminate on the earlier of March 12, 2021 or when the maximum dollar amount has been expended. Pursuant to this authorization, repurchases have been made, and may continue to be made from time to time in the open market through privately negotiated transactions or otherwise, including under a Rule 10b5-1 plan, which permits shares to be repurchased when the Company might otherwise be precluded from doing so under insider trading laws in accordance with specific prearranged terms related to timing, price, and volume (among others), without further direction from the Company. The share repurchase program does not require the Company to acquire any amount of shares and may be suspended or discontinued at any time. Under this program during the first quarter of 2020, the Company repurchased 438,142 shares at an aggregate fair value of $9.9 million, reflecting an average price per share of $22.52 (excluding the cost of broker commissions).

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 106,000 and 136,000 for the three months ended March 31, 2020 and 2019, respectively.

8

 


HEALTHSTREAM, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

The following table sets forth the computation of basic and diluted earnings per share for the three months ended March 31, 2020 and 2019 (in thousands, except per share data):

 

 

Three Months Ended

March 31,

 

 

 

2020

 

 

2019

 

Numerator:

 

 

 

 

 

 

 

 

Income from continuing operations

 

$

7,092

 

 

$

4,780

 

Income from discontinued operations

 

 

 

 

 

1,194

 

Net income

 

$

7,092

 

 

$

5,974

 

Denominator:

 

 

 

 

 

 

 

 

Weighted-average shares outstanding

 

 

32,334

 

 

 

32,337

 

Effect of dilutive shares

 

 

23

 

 

 

40

 

Weighted-average diluted shares

 

 

32,357

 

 

 

32,377

 

 

 

 

 

 

 

 

 

 

Net income per share - basic:

 

 

 

 

 

 

 

 

Continuing operations

 

$

0.22

 

 

$

0.15

 

Discontinued operations

 

 

 

 

 

0.03

 

Net income per share - basic

 

$

0.22

 

 

$

0.18

 

 

 

 

 

 

 

 

 

 

Net income per share - diluted:

 

 

 

 

 

 

 

 

Continuing operations

 

$

0.22

 

 

$

0.15

 

Discontinued operations