hstm-10q_20190331.htm
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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 March 31, 2019

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)

 

209 10th Avenue South, Suite 450,

Nashville, Tennessee 37203

(Former address of principal executive offices)

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 29, 2019, there were 32,388,307 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, 2019 and December 31, 2018

 

1

 

 

 

 

 

 

 

Condensed Consolidated Statements of Income (Unaudited) – Three Months ended March 31, 2019 and 2018

 

2

 

 

 

 

 

 

 

Condensed Consolidated Statements of Comprehensive Income (Unaudited) – Three Months ended March 31, 2019 and 2018

 

3

 

 

 

 

 

 

 

Condensed Consolidated Statement of Shareholders' Equity (Unaudited) – Three Months ended March 31, 2019 and 2018

 

4

 

 

 

 

 

 

 

Condensed Consolidated Statements of Cash Flows (Unaudited) – Three Months ended March 31, 2019 and 2018

 

5

 

 

 

 

 

 

 

Notes to Condensed Consolidated Financial Statements (Unaudited)

 

6

 

 

 

 

 

Item 2.

 

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

 

17

 

 

 

 

 

Item 3.

 

Quantitative and Qualitative Disclosures about Market Risk

 

23

 

 

 

 

 

Item 4.

 

Controls and Procedures

 

24

 

 

 

 

 

Part II.

 

Other Information

 

24

 

 

 

 

 

Item 6.

 

Exhibits

 

24

 

 

 

 

 

 

 

SIGNATURE

 

25

 

 

 

 

 

 


 

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

HEALTHSTREAM, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)

(In thousands)

 

 

 

March 31,

 

 

December 31,

 

 

 

2019

 

 

2018

 

ASSETS

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

110,610

 

 

$

134,321

 

Marketable securities

 

 

36,322

 

 

 

34,497

 

Accounts receivable, net of allowance for doubtful accounts of $936 and

   $1,161 at March 31, 2019 and December 31, 2018, respectively

 

 

37,432

 

 

 

38,124

 

Accounts receivable - unbilled

 

 

3,156

 

 

 

2,880

 

Prepaid royalties, net of amortization

 

 

16,416

 

 

 

13,596

 

Other prepaid expenses and other current assets

 

 

19,806

 

 

 

18,016

 

Total current assets

 

 

223,742

 

 

 

241,434

 

 

 

 

 

 

 

 

 

 

Property and equipment, net of accumulated depreciation of $22,351 and

   $20,827 at March 31, 2019 and December 31, 2018, respectively

 

 

23,708

 

 

 

15,866

 

Capitalized software development, net of accumulated amortization of $49,223 and

   $46,757 at March 31, 2019 and December 31, 2018, respectively

 

 

20,425

 

 

 

18,352

 

Operating lease right of use assets, net

 

 

31,710

 

 

 

 

Goodwill

 

 

95,252

 

 

 

86,144

 

Customer-related intangibles, net of accumulated amortization of $24,952 and

   $23,245 at March 31, 2019 and December 31, 2018, respectively

 

 

57,263

 

 

 

53,469

 

Other intangible assets, net of accumulated amortization of $10,505 and

   $9,663 at March 31, 2019 and December 31, 2018, respectively

 

 

7,792

 

 

 

5,909

 

Deferred tax assets

 

 

257

 

 

 

145

 

Deferred commissions

 

 

15,731

 

 

 

16,470

 

Non-marketable equity investments

 

 

6,772

 

 

 

3,376

 

Other assets

 

 

848

 

 

 

783

 

Total assets

 

$

483,500

 

 

$

441,948

 

 

 

 

 

 

 

 

 

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable and accrued expenses

 

$

19,281

 

 

$

25,037

 

Accrued royalties

 

 

19,099

 

 

 

15,756

 

Deferred revenue

 

 

72,602

 

 

 

66,061

 

Total current liabilities

 

 

110,982

 

 

 

106,854

 

 

 

 

 

 

 

 

 

 

Deferred tax liabilities

 

 

11,503

 

 

 

11,068

 

Deferred revenue, noncurrent

 

 

2,868

 

 

 

2,868

 

Operating lease liability, noncurrent

 

 

32,390

 

 

 

 

Other long term liabilities

 

 

616

 

 

 

2,211

 

Commitments and contingencies

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Shareholders’ equity:

 

 

 

 

 

 

 

 

Common stock, no par value, 75,000 shares authorized; 32,388 and 32,325 shares

   issued and outstanding at March 31, 2019 and December 31, 2018, respectively

 

 

286,785

 

 

 

286,597

 

Retained earnings

 

 

38,347

 

 

 

32,373

 

Accumulated other comprehensive income (loss)

 

 

9

 

 

 

(23

)

Total shareholders’ equity

 

 

325,141

 

 

 

318,947

 

Total liabilities and shareholders’ equity

 

$

483,500

 

 

$

441,948

 

 

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,

2019

 

 

March 31,

2018

 

Revenues, net

 

$

65,187

 

 

$

54,858

 

Operating costs and expenses:

 

 

 

 

 

 

 

 

Cost of revenues (excluding depreciation and amortization)

 

 

26,861

 

 

 

22,248

 

Product development

 

 

6,927

 

 

 

6,001

 

Sales and marketing

 

 

9,521

 

 

 

9,064

 

Other general and administrative expenses

 

 

9,970

 

 

 

7,742

 

Depreciation and amortization

 

 

6,539

 

 

 

6,073

 

Total operating costs and expenses

 

 

59,818

 

 

 

51,128

 

 

 

 

 

 

 

 

 

 

Operating income

 

 

5,369

 

 

 

3,730

 

 

 

 

 

 

 

 

 

 

Other income, net

 

 

822

 

 

 

313

 

 

 

 

 

 

 

 

 

 

Income from continuing operations before income tax provision

 

 

6,191

 

 

 

4,043

 

Income tax provision

 

 

1,411

 

 

 

414

 

Income from continuing operations

 

 

4,780

 

 

 

3,629

 

Discontinued operations:

 

 

 

 

 

 

 

 

Loss from discontinued operations before income tax provision

 

 

 

 

 

(64

)

Gain on sale of discontinued operations

 

 

1,620

 

 

 

30,991

 

Income tax provision

 

 

426

 

 

 

10,710

 

Income from discontinued operations

 

 

1,194

 

 

 

20,217

 

Net income

 

$

5,974

 

 

$

23,846

 

 

 

 

 

 

 

 

 

 

Net income per share - basic:

 

 

 

 

 

 

 

 

Continuing operations

 

$

0.15

 

 

$

0.11

 

Discontinued operations

 

 

0.03

 

 

 

0.63

 

Net income per share - basic

 

$

0.18

 

 

$

0.74

 

 

 

 

 

 

 

 

 

 

Net income per share - diluted:

 

 

 

 

 

 

 

 

Continuing operations

 

$

0.15

 

 

$

0.11

 

Discontinued operations

 

 

0.03

 

 

 

0.63

 

Net income per share - diluted

 

$

0.18

 

 

$

0.74

 

 

 

 

 

 

 

 

 

 

Weighted average shares of common stock outstanding:

 

 

 

 

 

 

 

 

Basic

 

 

32,337

 

 

 

32,097

 

Diluted

 

 

32,377

 

 

 

32,132

 

Dividends declared per share

 

$

 

 

$

1.00

 

 

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,

2019

 

 

March 31,

2018

 

Net income

 

$

5,974

 

 

$

23,846

 

 

 

 

 

 

 

 

 

 

Other comprehensive income, net of taxes:

 

 

 

 

 

 

 

 

Unrealized gain on marketable securities

 

 

32

 

 

 

15

 

Total other comprehensive income

 

 

32

 

 

 

15

 

Comprehensive income

 

$

6,006

 

 

$

23,861

 

 

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, 2019

 

 

 

Common Stock

 

 

Retained

 

 

Accumulated Other Comprehensive

 

 

Total Shareholders’

 

 

 

Shares

 

 

Amount

 

 

Earnings

 

 

Income (Loss)

 

 

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

 

 

 

 

 

Three Months Ended March 31, 2018

 

 

 

Common Stock

 

 

Retained

 

 

Accumulated Other Comprehensive

 

 

Total Shareholders’

 

 

 

Shares

 

 

Amount

 

 

Earnings

 

 

Loss

 

 

Equity

 

Balance at December 31, 2017

 

 

31,908

 

 

$

282,666

 

 

$

17,542

 

 

$

(38

)

 

$

300,170

 

Cumulative effect of accounting change

 

 

 

 

 

 

 

 

15,132

 

 

 

 

 

 

15,132

 

Net income

 

 

 

 

 

 

 

 

23,846

 

 

 

 

 

 

23,846

 

Comprehensive income

 

 

 

 

 

 

 

 

 

 

 

15

 

 

 

15

 

Dividends declared on common stock ($1.00 per share)

 

 

 

 

 

 

 

 

(32,518

)

 

 

 

 

 

(32,518

)

Stock based compensation

 

 

 

 

 

328

 

 

 

 

 

 

 

 

 

328

 

Common stock issued under stock plans,

    net of shares withheld for employee taxes

 

 

394

 

 

 

2,071

 

 

 

 

 

 

 

 

 

2,071

 

Balance at March 31, 2018

 

 

32,302

 

 

$

285,065

 

 

$

24,002

 

 

$

(23

)

 

$

309,044

 

 

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,

 

 

 

2019

 

 

2018

 

OPERATING ACTIVITIES:

 

 

 

 

 

 

 

 

Net income

 

$

5,974

 

 

$

23,846

 

Income from discontinued operations

 

 

(1,194

)

 

 

(20,217

)

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

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

6,539

 

 

 

6,073

 

Stock-based compensation

 

 

516

 

 

 

419

 

Amortization of deferred commissions

 

 

2,121

 

 

 

1,827

 

Provision for doubtful accounts

 

 

2

 

 

 

390

 

Deferred income taxes

 

 

433

 

 

 

608

 

Gain on non-marketable equity investments

 

 

(54

)

 

 

(7

)

Other

 

 

(28

)

 

 

30

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Accounts and unbilled receivables

 

 

1,387

 

 

 

(1,864

)

Prepaid royalties

 

 

(2,820

)

 

 

(2,467

)

Other prepaid expenses and other current assets

 

 

251

 

 

 

(530

)

Deferred commissions

 

 

(1,382

)

 

 

(1,654

)

Other assets

 

 

(16

)

 

 

248

 

Accounts payable and accrued expenses

 

 

(5,386

)

 

 

(6,074

)

Accrued royalties

 

 

3,342

 

 

 

506

 

Deferred revenue

 

 

6,400

 

 

 

8,417

 

Net cash provided by continuing operating activities

 

 

16,085

 

 

 

9,551

 

Net cash used in discontinued operating activities

 

 

 

 

 

(1,002

)

Net cash provided by operating activities

 

 

16,085

 

 

 

8,549

 

 

 

 

 

 

 

 

 

 

INVESTING ACTIVITIES:

 

 

 

 

 

 

 

 

Business combinations, net of cash acquired

 

 

(18,002

)

 

 

 

Proceeds from sale of discontinued operations

 

 

 

 

 

58,203

 

Proceeds from maturities of marketable securities

 

 

28,337

 

 

 

19,600

 

Purchases of marketable securities

 

 

(30,101

)

 

 

(12,612

)

Payments to acquire cost method investments

 

 

(3,342

)

 

 

 

Payments associated with capitalized software development

 

 

(4,933

)

 

 

(2,541

)

Purchases of property and equipment

 

 

(11,338

)

 

 

(1,858

)

Net cash (used in) provided by continuing investing activities

 

 

(39,379

)

 

 

60,792

 

Net cash used in discontinued investing activities

 

 

 

 

 

(115

)

Net cash (used in) provided by investing activities

 

 

(39,379

)

 

 

60,677

 

 

 

 

 

 

 

 

 

 

FINANCING ACTIVITIES:

 

 

 

 

 

 

 

 

Proceeds from exercise of stock options

 

 

31

 

 

 

2,368

 

Taxes paid related to net settlement of equity awards

 

 

(359

)

 

 

(297

)

Payments of earn-outs related to acquisitions

 

 

(37

)

 

 

(37

)

Payment of cash dividends

 

 

(52

)

 

 

 

Net cash (used in) provided by continuing financing activities

 

 

(417

)

 

 

2,034

 

Net cash used in discontinued financing activities

 

 

 

 

 

 

Net cash (used in) provided by financing activities

 

 

(417

)

 

 

2,034

 

 

 

 

 

 

 

 

 

 

Net (decrease) increase in cash and cash equivalents

 

 

(23,711

)

 

 

71,260

 

Cash and cash equivalents at beginning of period

 

 

134,321

 

 

 

84,768

 

Cash and cash equivalents at end of period

 

$

110,610

 

 

$

156,028

 

 

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, 2019 are not necessarily indicative of the results that may be expected for the year ending December 31, 2019.

The Company receives royalties and recognizes revenues (through its Workforce Solutions business segment) from teaming agreements that are entered into on a discrete basis from time-to-time with one of its content partners. Upon review of the teaming agreements with this content partner, the Company discovered that this content partner had failed during certain prior periods to remit royalties to which the Company was entitled. The Company determined such royalties should have been recognized in prior periods as revenue in relation to amounts due and payable under this arrangement and that certain expenses were overstated in connection with this arrangement. If accounted for in these prior periods, the Company would have recognized additional revenue of approximately $689,000 and $172,000 in the years ended December 31, 2018 and 2017, respectively, and would have incurred lower operating expense of $56,000 and $63,000 in the years ended December 31, 2018 and 2017, respectively. These adjustments collectively resulted in additional revenue of $861,000, lower operating expense of $119,000 and additional income from continuing operations of $744,000 during the three months ended March 31, 2019, and additional accounts receivable of $861,000 as of March 31, 2019. The Company concluded that this error was immaterial to the Company’s consolidated financial statements for the three months ended March 31, 2019 and prior affected periods.

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 results of its previously owned PX business as discontinued operations in its condensed consolidated statements of income and cash flows for all periods presented. See Note 8 for additional information.

The condensed consolidated balance sheet at December 31, 2018 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, 2018 (included in the Company's Annual Report on Form 10-K, filed with the Securities and Exchange Commission on February 25, 2019).

2. RECENT ACCOUNTING PRONOUNCEMENTS

Accounting Standards Recently Adopted

In February 2016, the FASB issued ASU 2016-02, Leases (“ASC 842”), which, among other things, requires an entity to recognize a right-of-use asset and a lease liability on the balance sheet for substantially all leases, including operating leases. The Company adopted ASC 842 effective January 1, 2019 utilizing the modified retrospective approach such that prior year financial statements were not recast under the new standard. Adoption of this standard resulted in changes to the Company’s condensed consolidated balance sheets and accounting policies for leases but did not have an impact on the condensed consolidated statements of income or cash flows. See Note 12 for additional information regarding the new standard and its impact on the Company’s financial statements.

Accounting Standards Not Yet 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 standard will be effective for the first interim period within annual reporting periods beginning after December 15, 2019. The Company will adopt this ASU on January 1, 2020 and is currently evaluating the impact that adoption of this ASU will have on the Company’s consolidated financial position and results of operations.

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.

6

 


HEALTHSTREAM, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

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 included in continuing operations disaggregated by revenue source for the three months ended March 31, 2019 and 2018 (in thousands). Sales taxes are excluded from revenues.

 

 

 

Three Months Ended March 31, 2019

 

 

Three Months Ended March 31, 2018

 

Business Segments

 

Workforce

Solutions

 

 

Provider

Solutions

 

 

Consolidated

 

 

Workforce

Solutions

 

 

Provider

Solutions

 

 

Consolidated

 

Subscription/SaaS services

 

$

52,805

 

 

$

9,080

 

 

$

61,885

 

 

$

43,702

 

 

$

9,032

 

 

$

52,734

 

Professional services

 

 

1,490

 

 

 

1,812

 

 

 

3,302

 

 

 

1,245

 

 

 

879

 

 

 

2,124

 

Total revenues, net

 

$

54,295

 

 

$

10,892

 

 

$

65,187

 

 

$

44,947

 

 

$

9,911

 

 

$

54,858

 

 

Subscription/SaaS services revenues primarily consist of fees in consideration of providing customers access to one or more of our SaaS-based solutions and/or courseware subscriptions, as well as fees related to licensing agreements, all of which include routine customer support and technology enhancements. Revenue is generally recognized over time during the contract term beginning when the service is made available to the customer. Subscription/SaaS contracts are generally non-cancelable, one to five years in length, and billed annually, semi-annually, quarterly, or monthly in advance.

Professional services revenues primarily consist of fees for implementation services, custom courseware development, and training. The majority of our professional services contracts are billed in advance based on a fixed price basis, and revenue is recognized over time as the services are performed. For both subscription/SaaS services and professional services, the time between billing the customer and when performance obligations are satisfied is not significant.

Our contracts with customers often contain multiple performance obligations. For these contracts, the Company accounts for individual performance obligations separately if they are distinct. The contract price, which represents transaction price, is allocated to the separate performance obligations on a relative standalone selling price basis. We generally determine standalone selling prices based on the standard list price for each product, taking into consideration certain factors, including contract length and the number of subscriptions within the contract.

We receive payments from customers based on billing schedules established in our contracts. Accounts receivable - unbilled represent contract assets related to our conditional right to consideration for subscription/SaaS and professional services contracts where performance has occurred under the contract. Accounts receivable are primarily comprised of trade receivables that are recorded at the invoice amount, net of an allowance for doubtful accounts, when the right to consideration becomes unconditional.

Other receivables, which are included within Accounts Receivable, include receivables from certain content partners and are not material. For the three months ended March 31, 2019 and 2018, the Company recognized $2,000 and $390,000, 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, 2019 and 2018, we recognized revenues of approximately $31.2 million and $29.2 million, respectively, from amounts included in deferred revenue at the beginning of the respective periods. As of March 31, 2019, approximately $422 million of revenue is expected to be recognized from remaining performance obligations under contracts with customers. We expect to recognize revenue related to approximately 49% of these remaining performance obligations over the next 12 months, with the remaining amounts recognized thereafter.

7

 


HEALTHSTREAM, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Sales Commissions

Sales commissions earned by our sales organization are considered incremental and recoverable costs of obtaining a contract with a customer. The Company’s sales commission plans for 2018 and 2019 typically include multiple payments, including initial payments in the period a customer contract is obtained and subsequent payments either 15 or 27 months after the initial payment. 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. 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 expected customer relationship period, limited by the technological obsolescence period of approximately three years. The Company recorded amortization of deferred commissions of approximately $2.1 million and $1.8 million for the three months ended March 31, 2019 and 2018, 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, 2019 and 2018, the Company recorded a provision for income taxes from continuing operations of approximately $1.4 million and $414,000, respectively. The Company’s effective tax rate for continuing operations for the three months ended March 31, 2019 and 2018 was 23% and 10%, respectively. During the three months ended March 31, 2019 and 2018, the Company recorded excess tax benefits related to stock based awards of approximately $83,000 and $636,000, respectively, as a component of the provision for income taxes. 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.

5.  SHAREHOLDERS’ EQUITY

Dividends on Common Stock

On February 12, 2018, the Company’s Board of Directors declared a $1.00 per common share special cash dividend, which was paid on April 3, 2018 to shareholders of record on March 6, 2018.

Stock Based Compensation

The Company has stock awards outstanding under two stock incentive plans: the Company’s 2016 Omnibus Incentive Plan and 2010 Stock Incentive Plan. The Company accounts for its stock based compensation plans using the fair-value based method for costs related to share based payments, including stock options and restricted share units (“RSUs”). 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. During the three months ended March 31, 2018, the Company issued 83,168 RSUs, subject to service-based time vesting, with a weighted average grant date fair value of $24.70 per share, measured based on the closing fair market value of the Company’s stock on the date of grant.

During the three months ended June 30, 2018, the Company issued 70,000 performance-based RSUs, the vesting of which occurs over a five-year period and is contingent upon continued service and achieving certain performance criteria established by the Compensation Committee on an annual basis. The performance criteria for 7,000 of these performance-based RSUs was determined in the three months ended June 30, 2018, and was based on 2018 performance, 3,500 of which RSUS vested. In addition, the performance criteria for 10,500 of these performance-based RSUs, along with 3,500 performance-based catch-up RSUs which did not vest based on 2018 performance as noted above but remained eligible for vesting, will be based on 2019 performance. The measurement date for these 10,500 performance-based RSUs, along with the 3,500 catch-up RSUs, was established during the three months ended March 31, 2019, with a grant date fair value of $27.61 per share, measured based on the closing fair market value of the Company’s stock on the date the performance criteria was established. The performance criteria for the remaining 52,500 performance-based RSUs has not yet been determined and will be established on an annual basis in 2020, 2021, and 2022, as applicable; therefore, the measurement date for these performance-based RSUs cannot be determined until the performance criteria have been established.

8

 


HEALTHSTREAM, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Total stock based compensation expense recognized for the three months ended March 31, 2019 and 2018, which is recorded within continuing operations in the condensed consolidated statements of income, is as follows (in thousands):

 

 

 

Three Months Ended

March 31,

 

 

 

2019

 

 

2018

 

Cost of revenues (excluding depreciation and amortization)

 

$

1

 

 

$

8

 

Product development

 

 

53

 

 

 

74

 

Sales and marketing

 

 

56

 

 

 

31

 

Other general and administrative

 

 

406

 

 

 

306

 

Total stock based compensation expense

 

$

516

 

 

$

419

 

 

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 136,000 and 159,000 for the three months ended March 31, 2019 and 2018, respectively.

The following table sets forth the computation of basic and diluted earnings per share for the three months ended March 31, 2019 and 2018 (in thousands, except per share data):

 

 

Three Months Ended

March 31,

 

 

 

2019

 

 

2018

 

Numerator:

 

 

 

 

 

 

 

 

Income from continuing operations

 

$

4,780

 

 

$

3,629

 

Income from discontinued operations

 

 

1,194

 

 

 

20,217

 

Net income

 

$

5,974

 

 

$

23,846

 

Denominator:

 

 

 

 

 

 

 

 

Weighted-average shares outstanding

 

 

32,337

 

 

 

32,097

 

Effect of dilutive shares

 

 

40

 

 

 

35

 

Weighted-average diluted shares

 

 

32,377

 

 

 

32,132

 

 

 

 

 

 

 

 

 

 

Net income per share - basic:

 

 

 

 

 

 

 

 

Continuing operations

 

$

0.15

 

 

$

0.11

 

Discontinued operations

 

 

0.03