e10vq
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
Quarterly Report pursuant to Section 13 or 15(d) of the Securities Exchange Act
of 1934
For the quarterly period ended September 30, 2011
Commission File No.: 000-27701
HealthStream, Inc.
(Exact name of registrant as specified in its charter)
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Tennessee
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62-1443555 |
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(State or other jurisdiction of
incorporation or organization)
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(I.R.S. Employer Identification No.) |
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209 10th Avenue South, Suite 450
Nashville, Tennessee
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37203 |
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(Address of principal executive offices)
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(Zip Code) |
(615) 301-3100
(Registrants telephone number, including area code)
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 þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period
that the registrant was required to submit and post such files). Yes
þ No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer, or a smaller reporting company. See definitions of large accelerated
filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act.
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Large accelerated filer o
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Accelerated filer o
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Non-accelerated filer o
(Do not check if a smaller reporting company)
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Smaller reporting company þ |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Exchange Act). Yes o No þ
As of October 27, 2011, 22,211,085 shares of the registrants common stock were outstanding.
Index to Form 10-Q
HEALTHSTREAM, INC.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
HEALTHSTREAM, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
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September 30, |
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December 31, |
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2011 |
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2010 |
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(Unaudited) |
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ASSETS |
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Current assets: |
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Cash and cash equivalents |
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$ |
30,236 |
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$ |
17,868 |
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Investments in short-term marketable securities |
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5,703 |
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Restricted cash |
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15 |
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85 |
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Interest receivable |
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51 |
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Accounts receivable, net of allowance for doubtful accounts of $152
and $157 at September 30, 2011 and December 31, 2010, respectively |
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13,141 |
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11,069 |
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Accounts receivable unbilled |
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1,117 |
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1,314 |
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Deferred tax assets, current |
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3,437 |
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3,437 |
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Prepaid royalties, net of amortization |
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1,913 |
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3,145 |
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Other prepaid expenses and other current assets |
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1,844 |
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1,599 |
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Total current assets |
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51,703 |
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44,271 |
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Property and equipment: |
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Equipment |
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16,088 |
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14,348 |
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Leasehold improvements |
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4,048 |
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2,738 |
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Furniture and fixtures |
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2,384 |
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2,027 |
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22,520 |
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19,113 |
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Less accumulated depreciation and amortization |
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(16,386 |
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(15,288 |
) |
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6,134 |
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3,825 |
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Capitalized software development, net of accumulated amortization of
$7,673 and $5,887 at September 30, 2011 and December 31, 2010, respectively |
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7,746 |
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4,333 |
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Goodwill |
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21,147 |
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21,147 |
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Intangible assets, net of accumulated amortization of $8,712
and $8,043 at September 30, 2011 and December 31, 2010, respectively |
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2,175 |
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2,844 |
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Deferred tax assets, noncurrent |
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2,445 |
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5,347 |
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Other assets |
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85 |
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244 |
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Total assets |
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$ |
91,435 |
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$ |
82,011 |
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LIABILITIES AND SHAREHOLDERS EQUITY |
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Current liabilities: |
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Accounts payable |
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$ |
1,302 |
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$ |
2,375 |
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Accrued liabilities |
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4,123 |
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4,121 |
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Accrued compensation and related expenses |
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1,499 |
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1,506 |
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Deferred revenue |
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20,488 |
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16,740 |
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Capital lease obligations |
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4 |
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Total current liabilities |
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27,412 |
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24,746 |
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Other long-term liabilities |
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458 |
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474 |
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Commitments and contingencies |
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Shareholders equity: |
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Common stock, no par value, 75,000 shares authorized;
22,211 and 21,805 shares issued and outstanding
at September 30, 2011 and December 31, 2010, respectively |
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98,844 |
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97,227 |
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Accumulated deficit |
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(35,279 |
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(40,431 |
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Accumulated other comprehensive loss |
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(5 |
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Total shareholders equity |
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63,565 |
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56,791 |
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Total liabilities and shareholders equity |
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$ |
91,435 |
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$ |
82,011 |
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See accompanying notes to the condensed consolidated financial statements.
1
HEALTHSTREAM, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
(In thousands, except per share data)
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Three Months Ended September 30, |
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2011 |
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2010 |
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Revenues, net |
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$ |
20,618 |
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$ |
16,616 |
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Operating costs and expenses: |
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Cost of revenues (excluding depreciation and amortization) |
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7,915 |
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6,274 |
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Product development |
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1,946 |
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1,750 |
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Sales and marketing |
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3,810 |
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3,358 |
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Other general and administrative expenses |
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2,782 |
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2,401 |
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Depreciation and amortization |
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1,471 |
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1,143 |
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Total operating costs and expenses |
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17,924 |
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14,926 |
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Income from operations |
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2,694 |
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1,690 |
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Other income (expense): |
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Interest and other income |
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5 |
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4 |
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Interest and other expense |
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(13 |
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(9 |
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Total other expense, net |
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(8 |
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(5 |
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Income before income tax provision |
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2,686 |
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1,685 |
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Income tax provision |
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890 |
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889 |
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Net income |
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$ |
1,796 |
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$ |
796 |
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Net income per share: |
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Basic |
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$ |
0.08 |
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$ |
0.04 |
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Diluted |
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$ |
0.08 |
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$ |
0.04 |
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Weighted average shares of common stock outstanding: |
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Basic |
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22,164 |
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21,807 |
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Diluted |
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23,496 |
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22,511 |
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See accompanying notes to the condensed consolidated financial statements.
2
HEALTHSTREAM, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
(In thousands, except per share data)
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Nine Months Ended September 30, |
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2011 |
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2010 |
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Revenues, net |
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$ |
60,175 |
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$ |
48,114 |
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Operating costs and expenses: |
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Cost of revenues (excluding depreciation and amortization) |
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22,623 |
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17,643 |
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Product development |
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5,644 |
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4,999 |
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Sales and marketing |
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11,674 |
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9,369 |
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Other general and administrative expenses |
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8,009 |
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6,885 |
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Depreciation and amortization |
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3,868 |
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3,769 |
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Total operating costs and expenses |
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51,818 |
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42,665 |
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Income from operations |
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8,357 |
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5,449 |
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Other income (expense): |
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Interest and other income |
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43 |
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13 |
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Interest and other expense |
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(35 |
) |
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(31 |
) |
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Total other income (expense), net |
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8 |
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(18 |
) |
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Income before income tax provision |
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8,365 |
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5,431 |
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Income tax provision |
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3,213 |
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2,481 |
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Net income |
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$ |
5,152 |
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$ |
2,950 |
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Net income per share: |
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Basic |
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$ |
0.23 |
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$ |
0.14 |
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Diluted |
|
$ |
0.22 |
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$ |
0.13 |
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Weighted average shares of common stock outstanding: |
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Basic |
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22,001 |
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|
21,759 |
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Diluted |
|
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23,272 |
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22,358 |
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See accompanying notes to the condensed consolidated financial statements.
3
HEALTHSTREAM, INC.
CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS EQUITY
(UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30, 2011
(In thousands)
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Accumulated Other |
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Total |
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Common Stock |
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Accumulated |
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Comprehensive |
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Shareholders |
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Shares |
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Amount |
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Deficit |
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(Loss) |
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Equity |
|
Balance at December 31, 2010 |
|
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21,805 |
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$ |
97,227 |
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$ |
(40,431 |
) |
|
$ |
(5 |
) |
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$ |
56,791 |
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|
|
|
|
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Net income |
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|
|
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|
5,152 |
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5,152 |
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Unrealized gain on investments
in marketable securities |
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5 |
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5 |
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Stock based compensation expense |
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|
597 |
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|
597 |
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Exercise of stock options |
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|
406 |
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|
1,020 |
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1,020 |
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Balance at September 30, 2011 |
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22,211 |
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|
$ |
98,844 |
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$ |
(35,279 |
) |
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$ |
|
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$ |
63,565 |
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See accompanying notes to the condensed consolidated financial statements.
4
HEALTHSTREAM, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(In thousands)
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Nine Months Ended September 30, |
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2011 |
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2010 |
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OPERATING ACTIVITIES: |
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Net income |
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$ |
5,152 |
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$ |
2,950 |
|
Adjustments to reconcile net income to net cash provided by
operating activities: |
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Depreciation and amortization |
|
|
3,868 |
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|
3,769 |
|
Stock based compensation expense |
|
|
597 |
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|
498 |
|
Deferred income taxes |
|
|
2,902 |
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|
2,338 |
|
Provision for doubtful accounts |
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|
45 |
|
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|
20 |
|
Changes in operating assets and liabilities: |
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Accounts and unbilled receivables |
|
|
(1,920 |
) |
|
|
(1,366 |
) |
Restricted cash |
|
|
70 |
|
|
|
23 |
|
Prepaid royalties |
|
|
1,233 |
|
|
|
314 |
|
Other prepaid expenses and other current assets |
|
|
(356 |
) |
|
|
(402 |
) |
Other assets |
|
|
243 |
|
|
|
134 |
|
Accounts payable |
|
|
(1,073 |
) |
|
|
(730 |
) |
Accrued liabilities and accrued compensation and related expenses
and other long-term liabilities |
|
|
(21 |
) |
|
|
(600 |
) |
Deferred revenue |
|
|
3,748 |
|
|
|
4,869 |
|
|
|
|
|
|
|
|
Net cash provided by operating activities |
|
|
14,488 |
|
|
|
11,817 |
|
|
|
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|
|
|
|
|
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|
|
INVESTING ACTIVITIES: |
|
|
|
|
|
|
|
|
Proceeds from maturities of investments in marketable securities |
|
|
10,351 |
|
|
|
|
|
Purchases of investments in marketable securities |
|
|
(4,728 |
) |
|
|
|
|
Payments associated with capitalized software development |
|
|
(5,199 |
) |
|
|
(1,586 |
) |
Purchases of property and equipment |
|
|
(3,560 |
) |
|
|
(850 |
) |
|
|
|
|
|
|
|
Net cash used in investing activities |
|
|
(3,136 |
) |
|
|
(2,436 |
) |
|
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|
FINANCING ACTIVITIES: |
|
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|
|
|
|
|
|
Proceeds from exercise of stock options |
|
|
1,020 |
|
|
|
469 |
|
Repurchase of common stock |
|
|
|
|
|
|
(380 |
) |
Payments on note payable |
|
|
|
|
|
|
(307 |
) |
Payments on capital lease obligations |
|
|
(4 |
) |
|
|
(7 |
) |
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities |
|
|
1,016 |
|
|
|
(225 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase in cash and cash equivalents |
|
|
12,368 |
|
|
|
9,156 |
|
Cash and cash equivalents at beginning of period |
|
|
17,868 |
|
|
|
12,287 |
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period |
|
$ |
30,236 |
|
|
$ |
21,443 |
|
|
|
|
|
|
|
|
See accompanying notes to the condensed consolidated financial statements.
5
HEALTHSTREAM, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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 significant intercompany transactions have been eliminated in
consolidation. Operating results for the three and nine months ended September 30, 2011 are not
necessarily indicative of the results that may be expected for the year ending December 31, 2011.
The balance sheet at December 31, 2010 is consistent with the audited 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, 2010 (included in the Companys
Annual Report on Form 10-K, filed with the Securities and Exchange
Commission on March 23, 2011 and as amended on August 10, 2011).
2. 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 nine months ended September 30, 2011 and 2010, the Company recorded a provision for
income taxes of $3.2 million and $2.5 million, respectively. The Companys effective tax rate for
the nine months ended September 30, 2011 and 2010 was 38.4% and 45.7%, respectively. The Companys
effective tax rate primarily reflects the statutory corporate income tax rate, the net effect of
state taxes, and the effect of various immaterial permanent tax differences.
3. STOCK BASED COMPENSATION
The Company maintains two stock incentive plans. The Company accounts for its stock based
compensation plans using the fair-value based method for costs related to share-based payments,
including stock options. During the nine months ended September 30, 2011, the Company granted
362,750 stock options with a weighted average grant date fair value of $4.67. During the nine
months ended September 30, 2010, the Company granted 319,000 stock options with a weighted average
grant date fair value of $2.07. The fair value of stock based awards granted during the nine months
ended September 30, 2011 and 2010 was estimated using the Black Scholes option pricing model, with
the assumptions as follows:
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
|
2011 |
|
|
2010 |
|
Risk-free interest rate |
|
|
1.05 2.39 |
% |
|
|
2.39 2.49 |
% |
Expected dividend yield |
|
|
0.0 |
% |
|
|
0.0 |
% |
Expected life |
|
5 7 years |
|
5 7 years |
Expected forfeiture rate |
|
|
05 |
% |
|
|
010 |
% |
Volatility |
|
|
50 |
% |
|
|
55 |
% |
Total stock based compensation expense recorded for the three and nine months ended September
30, 2011 and 2010, which is recorded in the condensed consolidated statements of income, is as
follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2011 |
|
|
2010 |
|
|
2011 |
|
|
2010 |
|
Cost of revenues (excluding depreciation and amortization) |
|
$ |
9 |
|
|
$ |
9 |
|
|
$ |
29 |
|
|
$ |
28 |
|
Product development |
|
|
34 |
|
|
|
32 |
|
|
|
110 |
|
|
|
96 |
|
Sales and marketing |
|
|
35 |
|
|
|
40 |
|
|
|
117 |
|
|
|
126 |
|
Other general and administrative |
|
|
145 |
|
|
|
85 |
|
|
|
341 |
|
|
|
248 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stock based compensation expense |
|
$ |
223 |
|
|
$ |
166 |
|
|
$ |
597 |
|
|
$ |
498 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6
HEALTHSTREAM, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
4. NET INCOME PER SHARE
Basic net income 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 net income per share is computed by dividing the net income for the period by the weighted
average number of common and common equivalent shares outstanding during the period. Common
equivalent shares, composed of incremental common shares issuable upon the exercise of stock
options and warrants, escrowed or restricted shares, and shares subject to vesting are included in
diluted net income per share only to the extent these shares are dilutive. Common equivalent shares
are dilutive when the average market price during the period exceeds the exercise price of the
underlying shares. The total number of common equivalent shares excluded from the calculations of
diluted net income per share, due to their anti-dilutive effect, was approximately 0.1 million and
0.3 million for the three and nine months ended
September 30, 2011, respectively, and approximately 0.3 million
and 0.5 million for the three and nine months ended September 30, 2010, respectively.
The following table sets forth the computation of basic and diluted net income per share for the
three and nine months ended September 30, 2011 and 2010 (in thousands, except per share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2011 |
|
|
2010 |
|
|
2011 |
|
|
2010 |
|
Numerator: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
1,796 |
|
|
$ |
796 |
|
|
$ |
5,152 |
|
|
$ |
2,950 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
|
22,164 |
|
|
|
21,807 |
|
|
|
22,001 |
|
|
|
21,759 |
|
Employee stock options |
|
|
1,332 |
|
|
|
704 |
|
|
|
1,271 |
|
|
|
599 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted |
|
|
23,496 |
|
|
|
22,511 |
|
|
|
23,272 |
|
|
|
22,358 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
0.08 |
|
|
$ |
0.04 |
|
|
$ |
0.23 |
|
|
$ |
0.14 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted |
|
$ |
0.08 |
|
|
$ |
0.04 |
|
|
$ |
0.22 |
|
|
$ |
0.13 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5. COLLABORATIVE ARRANGEMENT
On June 23, 2010, the Company announced the formation of SimVentures, a collaborative arrangement
between HealthStream and Laerdal Medical Corporation (Laerdal Medical). The Company receives 50
percent of the profits or losses generated from this collaborative
arrangement. The parties did not form a separate legal entity as part of the collaborative arrangement; therefore, the Company accounts for
SimVentures as a collaborative arrangement in accordance with applicable accounting guidance.
During the first quarter of 2011, the Company acquired a fifty
percent ownership interest in Laerdal Medicals
Advanced Video System (AVS) product for $3.5 million in cash. AVS is a product that enables users
of advanced patient simulators to easily capture video, audio, data logs, and patient responses.
The AVS product is now jointly owned through SimVentures. During the second quarter of 2011,
SimVentures launched SimStore, one of the components of SimCenter that offers healthcare
providers an opportunity to sample and purchase simulation scenarios to use in their simulation
training activities. During the nine months ended September 30, 2011, the Company recorded
approximately $0.5 million of revenues and $0.9 million of expenses related to the collaborative
arrangement. The expenses are primarily recorded in the product development, sales and marketing
and depreciation and amortization categories within the condensed consolidated statements of
income. The Company also recorded approximately $4.0 million of capitalized software development
for SimVentures during 2011, comprised of the $3.5 million paid for the AVS product and $0.5
million associated with SimStoreTM.
6. BUSINESS SEGMENTS
The Company primarily provides services to healthcare organizations, and to a lesser extent, to
pharmaceutical and medical device companies and other members within the healthcare industry. The
Companys services are primarily focused on the delivery of education and training products and
services (HealthStream Learning), as well as survey and research services (HealthStream Research).
The accounting policies of the segments are the same as those described in the summary of
significant accounting policies in the Companys Annual Report
on Form 10-K, as amended, for the year ended
December 31, 2010.
7
HEALTHSTREAM, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
6. BUSINESS SEGMENTS (continued)
The Company measures segment performance based on operating income before income taxes and prior to
the allocation of certain corporate overhead expenses, interest income, interest expense, and
depreciation. The following is the Companys business segment information as of and for the three
and nine months ended September 30, 2011 and 2010 (in thousands).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
September 30, |
|
Revenues |
|
2011 |
|
|
2010 |
|
|
2011 |
|
|
2010 |
|
HealthStream Learning |
|
$ |
14,805 |
|
|
$ |
11,527 |
|
|
$ |
42,248 |
|
|
$ |
33,070 |
|
HealthStream Research |
|
|
5,813 |
|
|
|
5,089 |
|
|
|
17,927 |
|
|
|
15,044 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net revenue |
|
$ |
20,618 |
|
|
$ |
16,616 |
|
|
$ |
60,175 |
|
|
$ |
48,114 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
HealthStream Learning |
|
$ |
4,649 |
|
|
$ |
3,686 |
|
|
$ |
13,124 |
|
|
$ |
11,033 |
|
HealthStream Research |
|
|
504 |
|
|
|
39 |
|
|
|
1,977 |
|
|
|
665 |
|
Unallocated |
|
|
(2,459 |
) |
|
|
(2,035 |
) |
|
|
(6,744 |
) |
|
|
(6,249 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total income from operations |
|
$ |
2,694 |
|
|
$ |
1,690 |
|
|
$ |
8,357 |
|
|
$ |
5,449 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment assets * |
|
September 30, 2011 |
|
|
December 31, 2010 |
|
HealthStream Learning |
|
$ |
23,670 |
|
|
$ |
18,731 |
|
HealthStream Research |
|
|
25,256 |
|
|
|
26,702 |
|
Unallocated |
|
|
42,509 |
|
|
|
36,578 |
|
|
|
|
|
|
|
|
Total assets |
|
$ |
91,435 |
|
|
$ |
82,011 |
|
|
|
|
|
|
|
|
|
|
|
* |
|
Segment assets include restricted cash, accounts and unbilled receivables, prepaid and other
current assets, other assets, capitalized software development, certain property and equipment,
and intangible assets. Cash and cash equivalents and investments in marketable securities are not
allocated to individual segments, and are included within Unallocated. A significant portion of
property and equipment assets are included within Unallocated. |
8
Item 2. Managements 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 report and our
audited consolidated financial statements and the notes thereto for
the year ended December 31,
2010, appearing in our Annual Report on Form 10-K that was filed with the Securities and Exchange
Commission (SEC) on March 23, 2011 as amended on August 10, 2011 (the 2010 Form 10-K). Statements contained in this Quarterly
Report on Form 10-Q that are not historical fact 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 and the information set forth under the caption Item 1A. Risk
Factors in our 2010 Form 10-K and the information regarding forward-looking statements in our
earnings releases, as well as other cautionary statements contained elsewhere in this report,
including the matters discussed in Critical Accounting Policies and Estimates. We undertake no
obligation beyond that required by law to update publicly any forward-looking statements for any
reason, even if new information becomes available or other events occur in the future. You should
read this report and the documents that we reference in this report and have filed as exhibits to
this report completely and with the understanding that our actual future results may be materially
different from what we expect.
Overview
HealthStream
provides services to healthcare organizations, pharmaceutical and medical device companies,
and other participants within the healthcare industry. Our services are primarily focused on the
delivery of education and training products and services (HealthStream Learning), as well as survey
and research services (HealthStream Research). HealthStream Learning products and services include
our Internet-based HealthStream Learning Center® (HLC), authoring tools, courseware subscriptions,
implementation and consulting services, content development, online sales training courses
(RepDirect), HospitalDirect®, SimVentures, and other products focused on education and training to
serve professionals that work within healthcare organizations. HealthStream Research provides a
wide range of quality and satisfaction surveys, data analyses of survey results, and other
research-based measurement tools focused on patients, employees, physicians, and members of the
community. Our learning solutions help healthcare organizations improve their required regulatory
training, while also offering an opportunity to train their employees in multiple clinical areas.
Our research products provide customers valuable insight into measuring quality and satisfaction of
patients, employees, physicians, and members of the community.
Key financial indicators for the third quarter of 2011 include:
|
|
|
Revenues of $20.6 million in the third quarter of 2011, up 24% over the third quarter of
2010 |
|
|
|
|
Operating income of $2.7 million in the third quarter of 2011, up 59% over the third
quarter of 2010 |
|
|
|
|
Net income of $1.8 million, up 126% from net income of $796,000 in the third quarter of
2010, and earnings per share (EPS) of $0.08 per share (diluted) in the third quarter of 2011, up 100%
from EPS of $0.04 per share (diluted) in the third quarter of 2010 |
|
|
|
|
Adjusted EBITDA of $4.4 million in the third quarter of 2011, up 46% from $3.0 million
in the third quarter of 2010 |
Critical Accounting Policies and Estimates
Our condensed consolidated financial statements are prepared in accordance with accounting
principles generally accepted in the United States (US GAAP). These accounting principles require
us to make certain estimates, judgments and assumptions during the preparation of our 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
financial statements, as well as the reported amounts of revenues and expenses during the periods
presented. To the extent there are material differences between these estimates, judgments or
assumptions and actual results, our financial statements will be affected.
9
The accounting policies and estimates that we believe are the most critical in fully understanding
and evaluating our reported financial results include the following:
|
|
|
Revenue recognition |
|
|
|
|
Accounting for income taxes |
|
|
|
|
Product development costs and related capitalization |
|
|
|
|
Goodwill, intangibles, and other long-lived assets |
|
|
|
|
Allowance for doubtful accounts |
|
|
|
|
Accrual for service credits |
|
|
|
|
Stock based compensation |
|
|
|
|
Nonmonetary exchange of content rights and deferred service credits |
In many cases, the accounting treatment of a particular transaction is specifically dictated by US
GAAP and does not require managements judgment in its application. There are also areas in which
managements judgment in selecting among available alternatives would not produce a materially
different result. See Notes to Consolidated Financial Statements in our 2010 Form 10-K, which
contains 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 2010 Form 10-K.
Revenues and Expense Components
The following descriptions of the components of revenues and expenses apply to the comparison of
results of operations.
Revenues, net. Revenues for our HealthStream Learning business segment primarily consist of the
following products and services: provision of services through our Internet-based HLC, authoring
tools, a variety of courseware subscriptions, implementation and consulting services, content
development, online sales training courses (RepDirect), HospitalDirect®, SimVentures, and a
variety of other educational activities to serve professionals that work within healthcare
organizations. Revenues for our HealthStream Research business segment consist of quality and
satisfaction surveys, data analyses of survey results, and other research-based measurement tools
focused on patients, employees, physicians, and other members of the community.
Cost of Revenues (excluding depreciation and amortization). Cost of revenues (excluding
depreciation and amortization) consists primarily of salaries and employee benefits, stock based
compensation, employee travel and lodging, materials, outsourced phone survey support, contract
labor, hosting costs, and other direct expenses associated with revenues, as well as royalties paid
by us to content providers based on a percentage of revenues. Personnel costs within cost of
revenues are associated with individuals that facilitate product delivery, provide services,
conduct, process and manage phone and paper-based surveys, handle customer support calls or
inquiries, manage the technology infrastructure for our hosted applications, manage content and
survey services, coordinate content maintenance services, and provide training or implementation
services.
Product Development. Product development consists primarily of salaries and employee benefits,
contract labor, stock based compensation, content acquisition costs before technological
feasibility is achieved, costs associated with the development of content and expenditures
associated with maintaining, developing and operating our training, delivery and administration
platforms. In addition, product development expenses are associated with the development of new
software feature enhancements and new products. Personnel costs within product development include
our systems, application development, and quality assurance teams, product managers, and other
personnel associated with content and product development.
Sales and Marketing. Sales and marketing consists primarily of salaries, commissions and employee
benefits, stock based compensation, employee travel and lodging, advertising, trade shows,
promotions, and related marketing costs. We host a national customer conference in Nashville known
as The Summit, a portion of the costs of which are included in sales and marketing expenses.
Personnel costs within sales and marketing include our HealthStream Learning and HealthStream
Research sales teams, strategic account management, consultants, and marketing personnel, as well
as our account management group.
Other General and Administrative Expenses. Other general and administrative expenses consist
primarily of salaries and employee benefits, stock based compensation, employee travel and lodging,
facility costs, office expenses, fees for professional services, and other operational expenses.
Personnel costs within general and administrative expenses include individuals associated with
normal corporate functions (accounting, legal, human resources, administrative, internal
information systems, and executive management) as well as personnel who maintain our accreditation
status with various organizations.
Depreciation and Amortization. Depreciation and amortization consist of fixed asset depreciation,
amortization of intangibles considered to have definite lives, amortization of content development
fees, and amortization of capitalized software development.
10
Other Income (Expense). The primary component of other income is interest income related to
interest earned on cash, cash equivalents and investments in marketable securities. The primary
component of other expense is interest expense related to capital leases and our revolving credit
facility.
Three Months Ended September 30, 2011 Compared to Three Months Ended September 30, 2010
Revenues, net. Revenues increased approximately $4.0 million, or 24.1%, to $20.6 million for the
three months ended September 30, 2011 from $16.6 million for the three months ended September 30,
2010. Revenues for 2011 consisted of $14.8 million, or 72% of total revenue, for HealthStream
Learning and $5.8 million, or 28% of total revenue, for HealthStream Research. In 2010, revenues
consisted of $11.5 million, or 69% of total revenue, for HealthStream Learning and $5.1 million, or
31% of total revenue, for HealthStream Research.
Revenues for HealthStream Learning increased $3.3 million, or 28.4%, over the third quarter of
2010. Revenues from our Internet-based subscription learning products increased by $3.2 million
over the prior year third quarter, and were comprised of revenue increases from the HLC of $1.1
million and from courseware subscriptions of $2.0 million. Revenues from our Internet-based
subscription products increased 29.4% over the prior year third quarter due to a higher number of
subscribers and more courseware consumption by subscribers. Our HLC subscriber base increased to
2,536,000 fully-implemented subscribers and 2,653,000 contracted subscribers at September 30, 2011
compared to 2,175,000 fully-implemented subscribers and 2,365,000 contracted subscribers at
September 30, 2010. Contracted subscribers include both those already implemented (2,536,000 and
2,175,000 at September 30, 2011 and 2010, respectively) and those in the process of implementation
(117,000 and 190,000 at September 30, 2011 and 2010,
respectively). Revenues from SimVentures, our collaborative arrangement with Laerdal Medical Corporation, were approximately $321,000 during the
third quarter of 2011. Revenues from project-based services declined by $251,000 compared to the
prior year third quarter.
Revenues for HealthStream Research increased $724,000, or 14.2%, over the third quarter of 2010.
Revenues from Patient Insights surveys, our survey research product that generates recurring
revenues, increased by $949,000, or 26.4%, over the prior year third quarter. Revenues from other
surveys, which are conducted on annual or bi-annual cycles, declined by $225,000, or 15.1%,
compared to the prior year third quarter due to fewer survey engagements.
Cost of Revenues (excluding depreciation and amortization). Cost of revenues increased
approximately $1.6 million, or 26.1%, to $7.9 million for the three months ended September 30, 2011
from $6.3 million for the three months ended September 30, 2010. Cost of revenues as a percentage
of revenues was 38.4% of revenues for the three months ended September 30, 2011 compared to 37.8%
of revenues for the three months ended September 30, 2010. Cost of revenues for HealthStream
Learning increased approximately $1.3 million to $4.8 million and approximated 32.5% and 30.2% of
revenues for HealthStream Learning for the three months ended September 30, 2011 and 2010,
respectively. The increase is primarily associated with increased royalties paid by us resulting
from growth in courseware subscription revenues. Cost of revenues for HealthStream Research
increased approximately $318,000 to $3.1 million and approximated 53.5% and 54.9% of revenues for
HealthStream Research for the three months ended September 30, 2011 and 2010, respectively. The
increase in amount is primarily the result of costs associated with the growth in patient survey
volume over the prior year third quarter.
Product Development. Product development expenses increased approximately $196,000, or 11.2%, to
$1.9 million for the three months ended September 30, 2011 from $1.7 million for the three months
ended September 30, 2010. Product development expenses as a percentage of revenues were 9.4% and
10.5% of revenues for the three months ended September 30, 2011 and 2010, respectively.
Product development expenses for HealthStream Learning increased approximately $158,000 and
approximated 10.3% and 11.8% of revenues for HealthStream Learning for the three months ended
September 30, 2011 and 2010, respectively. The decrease as a percentage of revenue is the result of
the growth in revenues over the prior year third quarter, while the increase in amount is due to
additional personnel expenses associated with platform maintenance and new product development
initiatives, including the Companys share of SimVentures
expenses. Product development expenses for HealthStream Research
increased approximately $38,000 and approximated 7.3% and 7.6% of revenues for HealthStream
Research for the three months ended September 30, 2011 and 2010, respectively.
Sales and Marketing. Sales and marketing expenses, including personnel costs, increased
approximately $452,000, or 13.5%, to $3.8 million for the three months ended September 30, 2011
from $3.4 million for the three months ended September 30, 2010. Sales and marketing expenses
approximated 18.5% and 20.2% of revenues for the three months ended September 30, 2011 and 2010,
respectively.
Sales and marketing expenses for HealthStream Learning increased $550,000 and approximated 18.0%
and 18.3% of revenues for HealthStream Learning for the three months ended September 30, 2011 and
2010, respectively. This expense increase is primarily due to additional personnel and related
expenses, increased marketing spending, and increased commissions associated with better sales
performance compared to the prior year. Sales and marketing expenses for HealthStream Research
decreased approximately $83,000, and approximated 18.2% and 22.4% of revenues for HealthStream
Research for the three months ended September 30, 2011 and 2010, respectively. The expense decrease
is primarily a result of lower commissions.
11
Other General and Administrative Expenses. Other general and administrative expenses increased
approximately $381,000, or 15.8%, to $2.8 million for the three months ended September 30, 2011
from $2.4 million for the three months ended September 30, 2010. Other general and administrative
expenses as a percentage of revenues approximated 13.5% and 14.5% for the three months ended
September 30, 2011 and 2010, respectively.
Other general and administrative expenses for HealthStream Learning increased $48,000 over the
prior year third quarter, while other general and administrative expenses for HealthStream Research
increased slightly compared to the prior year third quarter. The unallocated corporate portion of
other general and administrative expenses increased $328,000 over the prior year third quarter,
primarily associated with software maintenance renewal fees, personnel expenses, professional fees,
and stock based compensation expense.
Depreciation and Amortization. Depreciation and amortization increased approximately $328,000, or
28.7%, to $1.5 million for the three months ended September 30, 2011 from $1.1 million for the
three months ended September 30, 2010. The increase primarily resulted from amortization of
capitalized software development assets within HealthStream Learning and depreciation expense
associated with leasehold improvements to our Nashville, Tennessee office space.
Other Income (Expense), net. Other expense, net was approximately $8,000 for three months ended
September 30, 2011 compared to $6,000 for the three months ended September 30, 2010.
Provision for Income Taxes. The Company recorded a provision for income taxes of $890,000 for the
three months ended September 30, 2011 compared to $889,000 for the three months ended September 30,
2010. The Companys effective tax rate was 33.1% for the third quarter of 2011 compared to 52.8%
for the third quarter of 2010. We expect the full year 2011 effective tax rate to range between 38
and 39 percent, compared to the full year 2010 effective tax rate of 41%. Actual tax payments will
be substantially less than our income tax provision until we utilize our federal and state net
operating loss carry-forwards of approximately $18.0 million and $14.0 million, respectively, at
September 30, 2011, to offset taxable income.
Net Income. Net income increased approximately $1.0 million, or 125.7%, to $1.8 million for the
three months ended September 30, 2011 from $796,000 for the three months ended September 30, 2010.
Net income per diluted share was $0.08 per share for the three months ended September 30, 2011,
compared to $0.04 per diluted share for the three months ended September 30, 2010.
Adjusted EBITDA (which we define as net income before interest, income taxes, stock-based
compensation, and depreciation and amortization) improved by 46.3% to approximately $4.4 million
for the three months ended September 30, 2011 compared to $3.0 million for the three months ended
September 30, 2010. This improvement is consistent with the factors mentioned in managements
discussion and analysis of financial condition and results of operations herewith.
In order to better assess the Companys financial results, management believes that adjusted EBITDA
is an appropriate measure for evaluating the operating performance of the Company at this stage in
its life cycle because adjusted EBITDA reflects net income adjusted for non-cash and non-operating
items. Adjusted EBITDA is also used by many investors and securities analysts to assess the
Companys results from current operations. Adjusted EBITDA is a non-GAAP financial measure and
should not be considered as a measure of financial performance under US GAAP. Because adjusted
EBITDA is not a measurement determined in accordance with US GAAP, it is susceptible to varying
calculations. Accordingly, adjusted EBITDA, as presented, may not be comparable to other similarly
titled measures of other companies.
The Company understands that, although adjusted EBITDA is frequently used by investors and
securities analysts in their evaluation of companies, this measure has limitations as an analytical
tool, and you should not consider it in isolation, or as a substitute for an analysis of the
Companys results as reported under US GAAP. For example, adjusted EBITDA does not reflect cash
expenditures, or future requirements for capital expenditures or contractual commitments; it does
not reflect non-cash components of employee compensation; it does not reflect changes in, or cash
requirements for, our working capital needs; and due to the Companys utilization of federal and
state net operating loss carryforwards in 2010 and 2011, actual cash income tax payments have been
significantly less than the tax provision recorded in accordance with US GAAP, and income tax
payments will continue to be less than the income tax provision until our existing federal and
state net operating loss carryforwards have been fully utilized or have expired.
Management compensates for the inherent limitations associated with using adjusted EBITDA through
disclosure of such limitations, presentation of our financial statements in accordance with US
GAAP, and reconciliation of adjusted EBITDA to net income, the most directly comparable US GAAP
measure.
Nine Months Ended September 30, 2011 Compared to Nine Months Ended September 30, 2010
Revenues, net. Revenues increased approximately $12.1 million, or 25.1%, to $60.2 million for the
nine months ended September 30, 2011 from $48.1 million for the nine months ended September 30,
2010. Revenues for 2011 consisted of $42.3 million, or 70% of total revenue, for HealthStream
Learning and $17.9 million, or 30% of total revenue, for HealthStream Research. In 2010, revenues
consisted of $33.1 million, or 69% of total revenue, for HealthStream Learning and $15.0 million,
or 31% of total revenue, for HealthStream Research.
Revenues for HealthStream Learning increased $9.2 million, or 27.8%, over 2010. Revenues from our
Internet-based subscription learning products increased by $9.1 million over the prior year, and
were comprised of revenue increases from the HLC of $3.2 million and from courseware subscriptions
of $5.8 million. Revenues from our Internet-based subscription products increased 29.5% over the
prior year due to a higher number of subscribers and more courseware consumption by subscribers.
Revenues from SimVentures, our collaborative arrangement with Laerdal
Medical Corporation, were $469,000 during
2011. Project-based revenues declined by $431,000 compared to the prior year due to fewer
engagements.
Revenues for HealthStream Research increased $2.9 million, or 19.2%, over 2010. Revenues from
Patient Insights surveys, our survey research product that generates recurring revenues, increased
by $2.8 million, or 26.4%, over the prior year. Revenues from other surveys, which are conducted on
annual or bi-annual cycles, increased by $123,000, or 2.7%, over the prior year.
Cost of Revenues (excluding depreciation and amortization). Cost of revenues increased
approximately $5.0 million, or 28.2%, to $22.6 million for the nine months ended September 30, 2011
from $17.6 million for the nine months ended September 30, 2010. Cost of revenues as a percentage
of revenues was 37.6% of revenues for the nine months ended September 30, 2011 compared to 36.7% of
revenues for the nine months ended September 30, 2010. Cost of revenues for HealthStream Learning
increased approximately $3.7 million to $13.5 million and approximated 32.0% and 29.6% of revenues
for HealthStream Learning for the nine months ended September 30, 2011 and 2010, respectively. The
increase is primarily associated with increased royalties paid by us resulting from growth in
courseware subscription revenues and from additional personnel expenses. Cost of revenues for
HealthStream Research increased
12
approximately $1.3 million to $9.1 million and approximated 50.9%
and 52.1% of revenues for HealthStream Research for the nine
months ended September 30, 2011 and 2010, respectively. The increase in amount is primarily the
result of costs associated with the growth in patient survey volume over the prior year.
Product Development. Product development expenses increased approximately $645,000, or 12.9%, to
$5.6 million for the nine months ended September 30, 2011 from $5.0 million for the nine months
ended September 30, 2010. Product development expenses as a percentage of revenues were 9.4% and
10.4% of revenues for the nine months ended September 30, 2011 and 2010, respectively.
Product development expenses for HealthStream Learning increased approximately $582,000 and
approximated 10.6% and 11.8% of revenues for HealthStream Learning for the nine months ended
September 30, 2011 and 2010, respectively. The decrease as a percentage of revenue is the result of
the growth in revenues over the prior year, while the increase in amount is due to additional
personnel expenses associated with platform maintenance and new product development initiatives,
including SimVentures. Product development expenses for HealthStream Research increased
approximately $63,000 and approximated 6.5% and 7.3% of revenues for HealthStream Research for the
nine months ended September 30, 2011 and 2010, respectively. The decrease as a percentage of
revenue is the result of the growth in revenues over the prior year.
Sales and Marketing. Sales and marketing expenses, including personnel costs, increased
approximately $2.3 million, or 24.6%, to $11.7 million for the nine months ended September 30, 2011
from $9.4 million for the nine months ended September 30, 2010. Approximately $627,000 of the
increase resulted from the Summit, which occurred during the second quarter of 2011, but did not
occur during 2010. Sales and marketing expenses approximated 19.4% and 19.5% of revenues for the
nine months ended September 30, 2011 and 2010, respectively.
Sales and marketing expenses for HealthStream Learning increased $2.0 million and approximated
18.6% and 17.7% of revenues for HealthStream Learning for the nine months ended September 30, 2011
and 2010, respectively. This expense increase is primarily due to the Summit, additional personnel
and related expenses, increased marketing spending, and increased commissions associated with
better sales performance compared to the prior year. Sales and marketing expenses for HealthStream
Research increased approximately $249,000, and approximated 19.5% and 21.6% of revenues for
HealthStream Research for the nine months ended September 30, 2011 and 2010, respectively. The
expense increase for HealthStream Research resulted from the Summit and additional personnel and
related expenses.
Other General and Administrative Expenses. Other general and administrative expenses increased
approximately $1.1 million, or 16.3%, to $8.0 million for the nine months ended September 30, 2011
from $6.9 million for the nine months ended September 30, 2010. Other general and administrative
expenses as a percentage of revenues approximated 13.3% and 14.3% for the nine months ended
September 30, 2011 and 2010, respectively.
Other general and administrative expenses for HealthStream Learning increased $245,000 over the
prior year, primarily associated with increased rent expense and recruiting costs for new
employees, while other general and administrative expenses for
HealthStream Research were comparable
to the prior year. The unallocated corporate portion of other general and administrative expenses
increased $875,000 over the prior year, primarily associated with software maintenance renewal
fees, personnel expenses, professional fees, stock based compensation expense and rent expense.
Depreciation and Amortization. Depreciation and amortization increased approximately $99,000, or
2.6%, to $3.9 million for the nine months ended September 30, 2011 from $3.8 million for the nine
months ended September 30, 2010. The increase primarily resulted from an increase from amortization
of capitalized software development, but was partially offset by lower depreciation expense
associated with certain assets reaching the end of their useful lives.
Other Income (Expense), net. Other income, net was approximately $8,000 for the nine months ended
September 30, 2011 compared to a net expense of $18,000 for the nine months ended September 30,
2010. The improvement over the prior year was associated with higher interest income resulting from
both higher invested balances and higher yields on cash and investments in marketable securities.
Provision for Income Taxes. The Company recorded a provision for income taxes of approximately $3.2
million for the nine months ended September 30, 2011 compared to $2.5 million for the nine months
ended September 30, 2010. The Companys effective tax rate was 38.4% for 2011 compared to 45.7% for
2010.
Net Income. Net income increased approximately $2.2 million, or 74.6%, to $5.2 million for the nine
months ended September 30, 2011 from $3.0 million for the nine months ended September 30, 2010. Net
income per diluted share was $0.22 per share for the nine months ended September 30, 2011, compared
to $0.13 per diluted share for the nine months ended September 30, 2010.
Adjusted EBITDA improved by 32.0% to approximately $12.8 million for the nine months ended
September 30, 2011 compared to $9.7 million for the nine months ended September 30, 2010. This
improvement is consistent with the factors mentioned in managements
13
discussion and analysis of financial condition and results of operations herewith. Our
reconciliation of Adjusted EBITDA to net income is listed in the table below.
Income before interest, income tax provision, stock based compensation expense, depreciation and
amortization, or adjusted EBITDA (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2011 |
|
|
2010 |
|
|
2011 |
|
|
2010 |
|
Net income |
|
$ |
1,796 |
|
|
$ |
796 |
|
|
$ |
5,152 |
|
|
$ |
2,950 |
|
Interest income |
|
|
(5 |
) |
|
|
(4 |
) |
|
|
(36 |
) |
|
|
(11 |
) |
Interest expense |
|
|
13 |
|
|
|
10 |
|
|
|
35 |
|
|
|
31 |
|
Income tax provision |
|
|
890 |
|
|
|
889 |
|
|
|
3,213 |
|
|
|
2,481 |
|
Stock based compensation expense |
|
|
223 |
|
|
|
166 |
|
|
|
597 |
|
|
|
498 |
|
Depreciation and amortization |
|
|
1,471 |
|
|
|
1,143 |
|
|
|
3,868 |
|
|
|
3,769 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted EBITDA |
|
$ |
4,388 |
|
|
$ |
3.000 |
|
|
$ |
12,829 |
|
|
$ |
9,718 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liquidity and Capital Resources
Net cash provided by operating activities was approximately $14.5 million and $11.8 million during
the nine months ended September 30, 2011 and 2010, respectively. The Companys primary sources of
cash were receipts generated from the sales of our products and services. Days sales outstanding
(DSO) which is calculated by dividing the accounts receivable balance, excluding unbilled and
other receivables, by average daily revenues for the quarter, approximated 59 days for the third
quarter of 2011 compared to 61 days for the third quarter of 2010. The primary uses of cash to fund
operations included personnel expenses, sales commissions, royalty payments, payments for contract
labor and other direct expenses associated with delivery of our products and services, and general
corporate expenses.
Net cash used in investing activities was approximately $3.1 million and $2.4 million for the
nine months ended September 30, 2011 and 2010, respectively. During 2011, the Company purchased
$4.7 million of investments in marketable securities, spent $5.2 million for capitalized software
development, and purchased $3.6 million of property and equipment. Approximately $1.8 million of
the property and equipment purchases during 2011 were associated with the expansion of our Nashville,
Tennessee office space, while the remainder is associated with hardware and software to support our
business operations. Approximately $3.5 million of the capitalized software development spending
related to the acquisition of a 50 percent ownership stake in Laerdal Medicals AVS product. These
uses of cash were partially offset by maturities and sales of investments in marketable securities
of $10.4 million. During 2010, the Company spent $1.6 million for capitalized software development
and purchased $850,000 of property and equipment.
Cash provided by financing activities was approximately $1.0 million for the nine months ended
September 30, 2011, while $225,000 was used by financing activities during the nine months ended
September 30, 2010. The primary source of cash from financing activities for
14
2011 and 2010 resulted
from proceeds associated with the exercise of employee stock options. The primary uses of cash for
2011
related to payments under capital lease obligations, and for 2010 related to repurchases of common
stock and payments under a promissory note and capital lease obligations.
Revenues increased and operating income improved over the prior year period, and our balance sheet
reflects positive working capital of $24.3 million at September 30, 2011 compared to $19.5 million
at December 31, 2010. The increase in working capital was primarily due to the cash generated from
operations. The Companys primary source of liquidity is $30.3 million of cash and cash equivalents
and restricted cash. The Company also has a $20.0 million revolving credit facility loan agreement,
all of which was available at September 30, 2011.
We believe that our existing cash and cash equivalents, cash generated from operations, and
available borrowings under our revolving credit facility will be sufficient to meet anticipated
cash needs for working capital, new product development and capital expenditures for at least the
next 12 months.
Additionally, our shelf registration statement on Form S-3, which was
declared effective on August 12, 2011, provides us with the ability
to raise additional capital of up to $75 million through the issuance
of shares of common stock, subject to market conditions.
As part of our growth strategy, we review possible acquisitions that complement our
products and services. We anticipate that future acquisitions, if any, would be effected through a
combination of stock and cash consideration. We may need to raise additional capital through the
issuance of equity or debt securities and/or borrowings under our revolving credit facility, or
another facility, to finance any future acquisitions. The issuance of our stock as consideration
for an acquisition could have a dilutive effect on earnings per share and could adversely affect
our stock price. Because we have no material debt or outstanding borrowings under our revolving
credit facility, our balance sheet is unleveraged. Our revolving credit facility contains
financial covenants and availability calculations designed to set a maximum leverage ratio of
outstanding debt to equity. Therefore, if we were to borrow against our revolving credit facility,
our debt capacity would be dependent on the covenant values at the time of borrowing. The credit
markets have been experiencing extreme volatility and disruption, and we cannot assure you 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. The Company does not have any
foreign currency exchange rate risk or commodity price risk. As of September 30, 2011, the Company
had no outstanding indebtedness. 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 is based on 30 Day LIBOR plus a margin of either 175 or 200 basis points determined
in accordance with a pricing grid. We are also exposed to market risk with respect to our cash and
investment balances. At September 30, 2011, the Company had cash and cash equivalents and
restricted cash totaling approximately $30.3 million. Our current investment rates of return
approximate 0.08%. Assuming a 0.08% rate of return on $30.3 million, a hypothetical 10% decrease in
interest rates would decrease interest income and decrease net income on an annualized basis by
approximately $2,400.
The Company manages its investment risk by investing in corporate debt securities, foreign
corporate debt, secured corporate debt, and municipal debt securities with minimum acceptable
credit ratings. For certificates of deposit and corporate obligations, ratings must be A1/A, BBB,
FDIC insured or better; A1/P1 or better for commercial paper, and MIG 1/S, P/1 or better for
municipal debt securities. The Company also requires that all securities must mature within 24
months from the original settlement date, the average portfolio shall not exceed 18 months, and the
greater of 10% or $5.0 million shall mature within 90 days. Further, the Companys investment
policy also limits concentration exposure and other potential risk areas.
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.
15
Item 4. Controls and Procedures
Evaluation of Controls and Procedures
HealthStreams chief executive officer and principal financial officer have reviewed and evaluated
the effectiveness of the Companys 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 Quarterly Report. Based on that evaluation, the chief
executive officer and principal financial officer have concluded that HealthStreams 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 Securities and Exchange
Commissions 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 Companys
management, including its chief executive 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 HealthStreams internal control over financial reporting that occurred
during the period covered by this Quarterly Report that has materially affected, or that is
reasonably likely to materially affect, HealthStreams internal control over financial reporting.
16
PART II OTHER INFORMATION
Item 6. Exhibits
|
(a) |
|
Exhibits
31.1 Certification of the Chief Executive Officer Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
31.2 Certification of the Principal Financial Officer Pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002
32.1 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
32.2 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
101.1 INS* XBRL Instance Document
101.1 SCH* XBRL Taxonomy Extension Schema
101.1 CAL* XBRL Taxonomy Extension Calculation Linkbase
101.1 DEF* XBRL Taxonomy Extension Definition Linkbase
101.1 LAB* XBRL Taxonomy Extension Label Linkbase
101.1 PRE* XBRL Taxonomy Extension Presentation Linkbase
|
*-
The XBRL-related information in Exhibit No. 101 to this Quarterly Report on Form 10-Q is furnished and not filed for purposes of
Sections 11 and 12 of the Securities Act of 1933 and Section 18 of the Securities Exchange Act of 1934.
17
SIGNATURE
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.
|
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HEALTHSTREAM, INC.
|
|
October 31, 2011 |
By: |
/s/ Gerard M. Hayden, Jr.
|
|
|
|
Gerard M. Hayden, Jr. |
|
|
|
Chief Financial Officer |
|
18
HEALTHSTREAM, INC.
EXHIBIT INDEX
31.1 |
|
Certification of the Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002 |
31.2 |
|
Certification of the Principal Financial Officer Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002 |
32.1 |
|
Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002 |
32.2 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
101.1 INS* XBRL Instance Document
101.1 SCH* XBRL Taxonomy Extension Schema
101.1 CAL* XBRL Taxonomy Extension Calculation Linkbase
101.1 DEF* XBRL Taxonomy Extension Definition Linkbase
101.1 LAB* XBRL Taxonomy Extension Label Linkbase
101.1 PRE* XBRL Taxonomy Extension Presentation Linkbase
*- The XBRL-related information in Exhibit No.101 to this Quarterly Report on Form 10-Q is furnished and not filed for purposes of Sections
11 and 12 of the Securities Act of 1933 and Section 18 of the Securities Exchange Act of 1934.
19
exv31w1
Exhibit 31.1
I, Robert A. Frist, Jr., certify that:
1. I have reviewed this quarterly report on Form 10-Q of HealthStream, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or
omit to state a material fact necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to the period covered by this
report;
3. Based on my knowledge, the financial statements, and other financial information included in
this report, fairly present in all material respects the financial condition, results of operations
and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrants other certifying officer and I are responsible for establishing and maintaining
disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and
internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and
15d-15(f)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and
procedures to be designed under our supervision, to ensure that material information relating
to the registrant, including its consolidated subsidiaries, is made known to us by others
within those entities, particularly during the period in which this report is being prepared;
b) Designed such internal control over financial reporting, or caused such internal control
over financial reporting to be designed under our supervision, to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of financial statements
for external purposes in accordance with generally accepted accounting principles;
c) Evaluated the effectiveness of the registrants disclosure controls and procedures and
presented in this report our conclusions about the effectiveness of the disclosure controls and
procedures, as of the end of the period covered by this report based on such evaluation; and
d) Disclosed in this report any change in the registrants internal control over financial
reporting that occurred during the registrants most recent fiscal quarter (the registrants
fourth fiscal quarter in the case of an annual report) that has materially affected, or is
reasonably likely to materially affect, the registrants internal control over financial
reporting; and
5. The registrants other certifying officer and I have disclosed, based on our most recent
evaluation of internal control over financial reporting, to the registrants auditors and the audit
committee of the registrants board of directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal
control over financial reporting which are reasonably likely to adversely affect the
registrants ability to record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a
significant role in the registrants internal control over financial reporting.
|
|
|
|
|
|
|
|
Date: October 31, 2011 |
/s/ robert a. frist, Jr.
|
|
|
Robert A. Frist, Jr. |
|
|
Chief Executive Officer |
|
exv31w2
Exhibit 31.2
I, Gerard M. Hayden, Jr., certify that:
1. I have reviewed this quarterly report on Form 10-Q of HealthStream, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or
omit to state a material fact necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to the period covered by this
report;
3. Based on my knowledge, the financial statements, and other financial information included in
this report, fairly present in all material respects the financial condition, results of operations
and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrants other certifying officer and I are responsible for establishing and maintaining
disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and
internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and
15d-15(f)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and
procedures to be designed under our supervision, to ensure that material information relating
to the registrant, including its consolidated subsidiaries, is made known to us by others
within those entities, particularly during the period in which this report is being prepared;
b) Designed such internal control over financial reporting, or caused such internal control
over financial reporting to be designed under our supervision, to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of financial statements
for external purposes in accordance with generally accepted accounting principles;
c) Evaluated the effectiveness of the registrants disclosure controls and procedures and
presented in this report our conclusions about the effectiveness of the disclosure controls and
procedures, as of the end of the period covered by this report based on such evaluation; and
d) Disclosed in this report any change in the registrants internal control over financial
reporting that occurred during the registrants most recent fiscal quarter (the registrants
fourth fiscal quarter in the case of an annual report) that has materially affected, or is
reasonably likely to materially affect, the registrants internal control over financial
reporting; and
5. The registrants other certifying officer and I have disclosed, based on our most recent
evaluation of internal control over financial reporting, to the registrants auditors and the audit
committee of the registrants board of directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal
control over financial reporting which are reasonably likely to adversely affect the
registrants ability to record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a
significant role in the registrants internal control over financial reporting.
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Date: October 31, 2011 |
/s/ Gerard M. Hayden, Jr.
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Gerard M. Hayden, Jr. |
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Chief Financial Officer |
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exv32w1
Exhibit 32.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of HealthStream, Inc. (the Company) on Form 10-Q for the
period ending September 30, 2011, as filed with the Securities and Exchange Commission on the date
hereof (the Report), Robert A. Frist, Jr., Chief Executive Officer of the Company, certifies,
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002, that:
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(1) |
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The Report fully complies with the requirements of Section 13(a) or 15(d) of the
Securities Exchange Act of 1934; and |
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(2) |
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The information contained in the Report fairly presents, in all material
respects, the financial condition and results of operations of the Company. |
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/s/ robert a. frist, Jr.
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Robert A. Frist, Jr. |
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Chief Executive Officer October 31, 2011 |
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exv32w2
Exhibit 32.2
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of HealthStream, Inc. (the Company) on Form 10-Q for the
period ending September 30, 2011, as filed with the Securities and Exchange Commission on the date
hereof (the Report), Gerard M. Hayden, Jr., Chief Financial Officer of the Company, certifies,
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002, that:
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(1) |
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The Report fully complies with the requirements of Section 13(a) or 15(d) of the
Securities Exchange Act of 1934; and |
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(2) |
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The information contained in the Report fairly presents, in all material
respects, the financial condition and results of operations of the Company. |
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/s/ Gerard M. Hayden, Jr.
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Gerard M. Hayden, Jr. |
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Chief Financial Officer October 31, 2011 |
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