UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark One) ☒ Quarterly Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the quarterly period ended September 30, 2021 ☐ Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 Commission File No.: 000-27701 HealthStream, Inc. (Exact name of registrant as specified in its charter) Tennessee 62-1443555 (State or other jurisdiction of incorporation or organization) ...

Financial Data and Key Metrics Changes - For Q3 2021, revenues were $64.1 million, reflecting a 5% increase compared to the same period last year, despite a $9.2 million decline in legacy resuscitation revenues [24][54] - Year-to-date revenues increased by 5% and adjusted EBITDA rose by 15% compared to the first nine months of the previous year [23][51] - Adjusted EBITDA for Q3 was $12.5 million, an increase of 11.5% year-over-year, with an EBITDA margin of 19.5% compared to 18.4% last year [53][56] Business Line Data and Key Metrics Changes - Workforce Solutions revenues were $51.2 million, up 4%, while Provider Solutions revenues were $12.9 million, up 10.7% [53] - Excluding legacy resuscitation revenues, consolidated revenues grew by approximately 24%, with 10.5% organic growth and 13.7% from acquisitions [54] Market Data and Key Metrics Changes - The company noted a regional impact on client operations due to COVID-19, leading to delays in implementation and sales cycles [113] - The ongoing impact of COVID-19 has caused longer sales cycles and delayed decisions from customers, particularly those with high COVID patient admissions [60] Company Strategy and Development Direction - The company is transitioning to a one-platform model with hStream, which will interconnect various application suites, including learning and development, credentialing and privileging, and scheduling and capacity management [65][68] - The focus is on enhancing the functionality of applications through the hStream platform, which allows for better data mobility and integration across services [73][75] Management's Comments on Operating Environment and Future Outlook - Management expressed optimism about the company's ability to grow despite challenges posed by the pandemic and employee turnover, indicating a strong hiring environment [20][58] - The company anticipates that the turnover rate will stabilize, allowing for more effective hiring and operational efficiency in the coming quarters [21][29] Other Important Information - The company hosted its second annual Nurse Well-being Week, engaging over 6,500 nurses in activities focused on well-being [104] - A virtual Users Group conference called Thrive21 is scheduled for November 2 and 3, focusing on credentialing industry trends [106] Q&A Session Summary Question: Update on the health of the client base and ED volumes - Management noted that client operations have been regionally impacted by COVID-19, causing delays in implementation and creating "air gaps" in business operations [113]

Washington, D.C. 20549 UNITED STATES SECURITIES AND EXCHANGE COMMISSION FORM 10-Q (Mark One) ☒ Quarterly Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the quarterly period ended June 30, 2021 ☐ Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 Commission File No.: 000-27701 HealthStream, Inc. (Exact name of registrant as specified in its charter) Tennessee 62-1443555 (State or other jurisdiction of incorporation or organization) 500 ...

Financial Data and Key Metrics Changes - The company reported a 7% increase in topline revenues, reaching $64.8 million, and a 20% increase in adjusted EBITDA to a record $14.5 million compared to the same period last year [9][35][36] - The full-year revenue guidance was updated to a range of $253 million to $257 million, reflecting a $5 million increase from the previous midpoint [10] - Adjusted EBITDA for the full year is now expected to be between $48 million and $50 million, up from the previous range of $40 million to $44 million [11][44] Business Line Data and Key Metrics Changes - Workforce Solutions revenues were $52.2 million, up 6.7%, while Provider Solutions revenues were $12.7 million, up 8.5% [37] - Excluding revenues from the Legacy Resuscitation business, consolidated revenues grew by 28%, comprised of 13% organic growth and 15% from acquisitions [39] - The gross margin was reported at 65%, consistent with the company's objective to maintain mid-60% margins [40] Market Data and Key Metrics Changes - The company faced a $38.4 million decline in revenue from legacy resuscitation products, impacting overall revenue growth [10] - The market response to newer solutions, such as the American Red Cross Resuscitation Suite and the AI-driven Jane product, has been positive, contributing to growth [20][21] Company Strategy and Development Direction - The company is focused on transitioning to higher-margin products and has articulated three key transitions to achieve this goal [23] - Investments will be made in the newly acquired scheduling and capacity management business, aiming to replicate the success of the VerityStream application suite [55][56] - The company aims for organic high single-digit revenue growth rates of 7% to 9% and adjusted EBITDA margins of 17% to 21% for 2022 [17][18] Management's Comments on Operating Environment and Future Outlook - Management acknowledged the challenges posed by the Delta variant and its impact on hospitalizations, but remains hopeful for continued progress in overcoming the pandemic [6][7] - The company expects to see a return to travel expenses and increased personnel costs in the second half of the year due to hiring needs and turnover [12][14] - There is a degree of uncertainty in the market, particularly regarding delayed purchasing decisions from hospitals [51] Other Important Information - The company has adopted a hybrid work policy, allowing employees to work from home or the office, and is reducing office space needs [52][64] - The company has seen a significant increase in new sales bookings and renewals, indicating improving market conditions [50] Q&A Session Summary Question: Can you discuss the hiring environment and turnover? - Management noted increased turnover rates but emphasized a strong company culture that attracts new employees, with no significant increase in hiring costs observed [71][72][76] Question: What are the expectations for travel expenses in the second half? - Travel expenses are expected to gradually increase, with a budget of $250,000 in Q3 and $500,000 in Q4 [82][84] Question: How is the company addressing hiring challenges faced by hospitals? - The company is positioning its products to support workforce development and retention, which is increasingly important for hospitals [92][93] Question: Can you provide an update on the Jane product's pipeline? - The company continues to achieve its sales objective of one sale per week for Jane, despite some hesitancy in purchasing decisions [105][106]

[PART I. FINANCIAL INFORMATION](index=3&type=section&id=Part%20I.%20Financial%20Information) This section provides HealthStream's unaudited condensed consolidated financial statements and management's analysis for Q1 2021 [Item 1. Financial Statements](index=3&type=section&id=Item%201.%20Financial%20Statements) This section presents HealthStream's unaudited condensed consolidated financial statements and related notes for Q1 2021 and prior periods [Condensed Consolidated Balance Sheets (Unaudited)](index=3&type=section&id=Condensed%20Consolidated%20Balance%20Sheets%20(Unaudited)) This section presents the unaudited condensed consolidated balance sheets for HealthStream, Inc. as of March 31, 2021, and December 31, 2020 Condensed Consolidated Balance Sheets (Unaudited) - Key Figures (in thousands USD) | Metric | March 31, 2021 | December 31, 2020 | | :-------------------------------- | :------------- | :---------------- | | Total current assets | $114,977 | $114,725 | | Total assets | $501,682 | $500,313 | | Total current liabilities | $116,906 | $119,442 | | Total shareholders' equity | $336,805 | $334,062 | | Total liabilities and shareholders' equity | $501,682 | $500,313 | - Total assets increased slightly from **$500.3 million** at December 31, 2020, to **$501.7 million** at March 31, 2021. Total shareholders' equity also saw a modest increase from **$334.1 million** to **$336.8 million**[9](index=9&type=chunk) [Condensed Consolidated Statements of Income (Unaudited)](index=4&type=section&id=Condensed%20Consolidated%20Statements%20of%20Income%20(Unaudited)) This section presents the unaudited condensed consolidated statements of income for the three months ended March 31, 2021, and 2020 Condensed Consolidated Statements of Income (Unaudited) - Key Figures (in thousands USD, except per share data) | Metric | Three Months Ended March 31, 2021 | Three Months Ended March 31, 2020 | | :-------------------------------- | :-------------------------------- | :-------------------------------- | | Revenues, net | $63,468 | $61,572 | | Total operating costs and expenses | $60,168 | $54,328 | | Operating income | $3,300 | $7,244 | | Net income | $2,291 | $7,092 | | Net income per share (Diluted) | $0.07 | $0.22 | - Net revenues increased by **3% year-over-year**, from **$61.6 million** in Q1 2020 to **$63.5 million** in Q1 2021. However, operating income decreased by **54%** and net income decreased by **68%** due to higher operating costs and expenses in 2021 and a one-time contractual adjustment in 2020[12](index=12&type=chunk) [Condensed Consolidated Statements of Comprehensive Income (Unaudited)](index=5&type=section&id=Condensed%20Consolidated%20Statements%20of%20Comprehensive%20Income%20(Unaudited)) This section presents the unaudited condensed consolidated statements of comprehensive income for the three months ended March 31, 2021, and 2020 Condensed Consolidated Statements of Comprehensive Income (Unaudited) - Key Figures (in thousands USD) | Metric | Three Months Ended March 31, 2021 | Three Months Ended March 31, 2020 | | :-------------------------------- | :-------------------------------- | :-------------------------------- | | Net income | $2,291 | $7,092 | | Total other comprehensive income (loss) | $234 | $(145) | | Comprehensive income | $2,525 | $6,947 | - Comprehensive income decreased significantly from **$6.9 million** in Q1 2020 to **$2.5 million** in Q1 2021, primarily driven by the decrease in net income, despite a positive shift in other comprehensive income from a loss to a gain[14](index=14&type=chunk) [Condensed Consolidated Statement of Shareholders' Equity (Unaudited)](index=6&type=section&id=Condensed%20Consolidated%20Statement%20of%20Shareholders%27%20Equity%20(Unaudited)) This section presents the unaudited condensed consolidated statement of shareholders' equity for the three months ended March 31, 2021 Condensed Consolidated Statement of Shareholders' Equity (Unaudited) - Key Figures (in thousands USD) | Metric | Balance at Dec 31, 2020 | Balance at Mar 31, 2021 | | :-------------------------------- | :---------------------- | :---------------------- | | Total Shareholders' Equity | $334,062 | $336,805 | | Net income | N/A | $2,291 | | Stock based compensation | N/A | $616 | | Common stock issued under stock plans, net | N/A | $(399) | - Total shareholders' equity increased from **$334.1 million** at December 31, 2020, to **$336.8 million** at March 31, 2021, primarily due to net income and stock-based compensation, partially offset by common stock issued under stock plans[16](index=16&type=chunk) [Condensed Consolidated Statements of Cash Flows (Unaudited)](index=7&type=section&id=Condensed%20Consolidated%20Statements%20of%20Cash%20Flows%20(Unaudited)) This section presents the unaudited condensed consolidated statements of cash flows for the three months ended March 31, 2021, and 2020 Condensed Consolidated Statements of Cash Flows (Unaudited) - Key Figures (in thousands USD) | Activity | Three Months Ended March 31, 2021 | Three Months Ended March 31, 2020 | | :-------------------------------- | :-------------------------------- | :-------------------------------- | | Net cash provided by operating activities | $19,104 | $6,116 | | Net cash used in investing activities | $(9,660) | $(19,904) | | Net cash used in financing activities | $(411) | $(10,279) | | Net increase (decrease) in cash and cash equivalents | $8,782 | $(24,113) | | Cash and cash equivalents at end of period | $45,348 | $107,425 | - Net cash provided by operating activities significantly increased to **$19.1 million** in Q1 2021 from **$6.1 million** in Q1 2020. Net cash used in investing activities decreased, and net cash used in financing activities also decreased substantially, leading to a net increase in cash and cash equivalents in Q1 2021 compared to a decrease in Q1 2020[19](index=19&type=chunk) [Notes to Condensed Consolidated Financial Statements (Unaudited)](index=8&type=section&id=Notes%20to%20Condensed%20Consolidated%20Financial%20Statements%20(Unaudited)) This section provides detailed notes explaining the basis of presentation, revenue recognition, income taxes, and other financial statement items [1. BASIS OF PRESENTATION](index=8&type=section&id=1.%20BASIS%20OF%20PRESENTATION) This note describes the basis for preparing the unaudited condensed consolidated financial statements in accordance with US GAAP and Form 10-Q - The unaudited Condensed Consolidated Financial Statements are prepared in accordance with US GAAP for interim financial information and Form 10-Q instructions, including normal recurring accruals. Operating results for Q1 2021 are not indicative of the full year[20](index=20&type=chunk) [2. REVENUE RECOGNITION AND SALES COMMISSIONS](index=8&type=section&id=2.%20REVENUE%20RECOGNITION%20AND%20SALES%20COMMISSIONS) This note details the company's revenue recognition policies and disaggregates revenues by business segment for the reported periods Revenues Disaggregated by Source (in thousands USD) | Business Segments | Three Months Ended March 31, 2021 | Three Months Ended March 31, 2020 | | :------------------ | :-------------------------------- | :-------------------------------- | | Workforce Solutions | $51,247 | $49,824 | | Provider Solutions | $12,221 | $11,748 | | Total revenues, net | $63,468 | $61,572 | - The Company expects to recognize approximately **$446 million** of revenue from remaining performance obligations, with about **46%** recognized over the next **12 months**. Amortization of deferred commissions was **$2.1 million** in Q1 2021 and **$2.2 million** in Q1 2020[24](index=24&type=chunk)[26](index=26&type=chunk) [3. INCOME TAXES](index=9&type=section&id=3.%20INCOME%20TAXES) This note provides information on the income tax provision and effective tax rates for the three months ended March 31, 2021, and 2020 Income Tax Provision and Effective Tax Rate (in thousands USD) | Metric | Three Months Ended March 31, 2021 | Three Months Ended March 31, 2020 | | :-------------------- | :-------------------------------- | :-------------------------------- | | Income tax provision | $922 | $1,858 | | Effective tax rate | 29% | 21% | - The effective tax rate increased to **29%** in Q1 2021 from **21%** in Q1 2020, primarily due to discrete tax expense related to purchase accounting adjustments and a state tax rate change in 2021, compared to a tax benefit from a non-taxable acquisition in 2020[28](index=28&type=chunk) [4. SHAREHOLDERS' EQUITY](index=9&type=section&id=4.%20SHAREHOLDERS%27%20EQUITY) This note details changes in shareholders' equity, including stock-based compensation and the company's share repurchase program Stock Based Compensation Expense (in thousands USD) | Expense Category | Three Months Ended March 31, 2021 | Three Months Ended March 31, 2020 | | :-------------------------------- | :-------------------------------- | :-------------------------------- | | Cost of revenues | $20 | $7 | | Product development | $102 | $81 | | Sales and marketing | $65 | $49 | | Other general and administrative | $429 | $413 | | Total stock based compensation expense | $616 | $550 | - Total stock-based compensation expense increased to **$616,000** in Q1 2021 from **$550,000** in Q1 2020. The Company's share repurchase program, authorized for up to **$30.0 million**, expired on March 12, 2021, with no repurchases occurring in Q1 2021[31](index=31&type=chunk)[32](index=32&type=chunk) [5. EARNINGS PER SHARE](index=10&type=section&id=5.%20EARNINGS%20PER%20SHARE) This note provides the calculation of basic and diluted earnings per share for the three months ended March 31, 2021, and 2020 Earnings Per Share (in thousands USD, except per share data) | Metric | Three Months Ended March 31, 2021 | Three Months Ended March 31, 2020 | | :-------------------------------- | :-------------------------------- | :-------------------------------- | | Net income | $2,291 | $7,092 | | Weighted-average shares outstanding (Basic) | 31,504 | 32,334 | | Weighted-average diluted shares | 31,526 | 32,357 | | Net income per share (Basic) | $0.07 | $0.22 | | Net income per share (Diluted) | $0.07 | $0.22 | - Diluted EPS decreased to **$0.07** in Q1 2021 from **$0.22** in Q1 2020, reflecting the lower net income for the period. Approximately **148,000** common equivalent shares were excluded from diluted EPS calculations in Q1 2021 due to anti-dilutive effects or contingent performance conditions[33](index=33&type=chunk)[34](index=34&type=chunk) [6. MARKETABLE SECURITIES](index=10&type=section&id=6.%20MARKETABLE%20SECURITIES) This note details the fair value of marketable securities, classified as available for sale, as of March 31, 2021, and December 31, 2020 Marketable Securities Fair Value (in thousands USD) | Category | March 31, 2021 Fair Value | December 31, 2020 Fair Value | | :-------------------- | :-------------------------- | :--------------------------- | | Cash | $45,348 | $31,558 | | Time deposits | $5,022 | $10,021 | | Corporate debt securities | $5,600 | $4,915 | | Total | $55,970 | $46,494 | - The fair value of marketable securities, classified as available for sale, increased to **$56.0 million** at March 31, 2021, from **$46.5 million** at December 31, 2020. All marketable securities are classified as current assets[35](index=35&type=chunk)[36](index=36&type=chunk) [7. BUSINESS COMBINATIONS](index=11&type=section&id=7.%20BUSINESS%20COMBINATIONS) This note provides details on recent acquisitions, including NurseGrid, ShiftWizard, ANSOS Staff Scheduling, myClinicalExchange, and ComplyALIGN - The Company completed several acquisitions: NurseGrid (March 2020), ShiftWizard (October 2020), ANSOS Staff Scheduling (December 2020), myClinicalExchange (December 2020), and ComplyALIGN (January 2021). These acquisitions primarily enhance the Workforce Solutions segment[37](index=37&type=chunk)[41](index=41&type=chunk)[45](index=45&type=chunk)[52](index=52&type=chunk)[53](index=53&type=chunk) Goodwill and Intangible Assets from Key Acquisitions (in thousands USD) | Acquisition | Goodwill | Intangible Assets | | :---------- | :------- | :---------------- | | NurseGrid | $21,085 | $1,845 | | ShiftWizard | $19,307 | $12,660 | | ANSOS | $36,963 | $32,440 | - Goodwill increased by **$2.7 million** in Q1 2021, including a **$1.7 million** measurement period adjustment for ANSOS, **$0.6 million** from ComplyALIGN, and **$0.4 million** from currency translation[54](index=54&type=chunk) [8. BUSINESS SEGMENTS](index=15&type=section&id=8.%20BUSINESS%20SEGMENTS) This note presents financial information disaggregated by the Workforce Solutions and Provider Solutions business segments Business Segment Performance (in thousands USD) | Metric | Segment | Three Months Ended March 31, 2021 | Three Months Ended March 31, 2020 | | :-------------------- | :------------------ | :-------------------------------- | :-------------------------------- | | Revenues, net | Workforce Solutions | $51,247 | $49,824 | | | Provider Solutions | $12,221 | $11,748 | | Operating income | Workforce Solutions | $9,027 | $13,370 | | | Provider Solutions | $2,055 | $1,197 | | Segment assets (Mar 31, 2021) | Workforce Solutions | $267,993 | $270,924 (Dec 31, 2020) | | | Provider Solutions | $136,926 | $140,490 (Dec 31, 2020) | - **Workforce Solutions** revenues increased **3% YoY**, while **Provider Solutions** revenues increased **4% YoY**. Workforce Solutions operating income decreased significantly, whereas Provider Solutions operating income nearly doubled[58](index=58&type=chunk) [9. DEBT](index=16&type=section&id=9.%20DEBT) This note describes the company's revolving credit facility and confirms compliance with all debt covenants - The Company has a **$65.0 million** Revolving Credit Facility, maturing October 28, 2023, with no outstanding balances as of March 31, 2021. The facility is for general working capital, permitted acquisitions, and stock repurchases, and the Company was in compliance with all covenants[59](index=59&type=chunk)[61](index=61&type=chunk)[64](index=64&type=chunk) [10. NON-MARKETABLE EQUITY INVESTMENTS](index=17&type=section&id=10.%20NON-MARKETABLE%20EQUITY%20INVESTMENTS) This note provides the aggregate carrying amount and adjustments for non-marketable equity investments - The aggregate carrying amount of non-marketable equity investments was **$3.9 million** as of March 31, 2021, and December 31, 2020. The Company has recorded cumulative net downward adjustments of **$0.1 million** to the carrying value of these investments[65](index=65&type=chunk) [Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations](index=18&type=section&id=Item%202.%20Management%27s%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) This section provides management's detailed analysis of HealthStream's financial condition, operational results, and liquidity for Q1 2021 [Special Cautionary Notice Regarding Forward‑Looking Statements](index=18&type=section&id=Special%20Cautionary%20Notice%20Regarding%20Forward%E2%80%91Looking%20Statements) This section warns readers about forward-looking statements, emphasizing inherent risks and uncertainties that may cause actual results to differ - The report contains forward-looking statements subject to known and unknown risks, uncertainties, and other factors that may cause actual results to differ materially. Readers are cautioned not to place undue reliance on these statements and to consider risk factors outlined in the 2020 Form 10-K[67](index=67&type=chunk)[68](index=68&type=chunk)[69](index=69&type=chunk) [Business Overview](index=18&type=section&id=Business%20Overview) This section provides an overview of HealthStream's SaaS-based healthcare solutions and key financial metrics for Q1 2021 - HealthStream provides SaaS-based workforce and provider solutions for healthcare organizations, focusing on talent management, compliance, and credentialing. As of March 31, 2021, the company had approximately **4.34 million** contracted subscriptions to its hStream™ Platform-as-a-Service technology[70](index=70&type=chunk) Significant Financial Metrics for Q1 2021 (in millions USD, except EPS) | Metric | Q1 2021 | Q1 2020 | Change (%) | | :-------------------- | :------ | :------ | :--------- | | Revenues | $63.5 | $61.6 | 3% | | Operating income | $3.3 | $7.2 | -54% | | Net income | $2.3 | $7.1 | -68% | | Diluted EPS | $0.07 | $0.22 | -68% | | Adjusted EBITDA | $13.6 | $11.9 | 14% | [Impact of and Response to COVID-19 Pandemic](index=19&type=section&id=Impact%20of%20and%20Response%20to%20COVID-19%20Pandemic) This section discusses the negative impact of the COVID-19 pandemic on revenues and earnings, and the company's operational adjustments - The COVID-19 pandemic has negatively impacted HealthStream's revenues in Q1 2021 and is expected to continue affecting revenue and earnings due to delayed or postponed sales cycles and reduced bookings/renewals. Operating expenses benefited from a **$1.2 million** reduction in travel-related costs in Q1 2021[74](index=74&type=chunk)[75](index=75&type=chunk) - The company continues to monitor customer ability to pay, implement solutions, and renew contracts, noting modest increases in Days Sales Outstanding (DSO) in Q1 2021. All employees have been working remotely since March 2020[77](index=77&type=chunk)[79](index=79&type=chunk) [Key Business Metrics](index=21&type=section&id=Key%20Business%20Metrics) This section highlights key operational and financial metrics, including hStream subscriptions and Adjusted EBITDA, for Q1 2021 Key Business Metrics (in millions USD, except subscriptions) | Metric | Q1 2021 | Q1 2020 | Change (%) | | :-------------------- | :------ | :------ | :--------- | | Revenues, net | $63.5 | $61.6 | 3% | | Operating Income | $3.3 | $7.2 | -54% | | Adjusted EBITDA | $13.6 | $11.9 | 14% | | hStream Subscriptions | 4.34 | 3.40 | 27.6% | - hStream subscriptions grew by **27.6%** to **4.34 million** as of March 31, 2021, indicating growth in the customer base for its Platform-as-a-Service technology[88](index=88&type=chunk) [Critical Accounting Policies and Estimates](index=21&type=section&id=Critical%20Accounting%20Policies%20and%20Estimates) This section outlines the company's critical accounting policies and estimates, with no reported changes from the prior fiscal year - The Company's critical accounting policies include revenue recognition, accounting for income taxes, software development costs, goodwill, intangibles, other long-lived assets, and allowance for doubtful accounts. No changes were reported from the 2020 Form 10-K[89](index=89&type=chunk) [Impact on Comparability of Operating Results](index=22&type=section&id=Impact%20on%20Comparability%20of%20Operating%20Results) This section explains factors affecting the comparability of Q1 2021 operating results, including acquisitions and specific non-cash adjustments - Comparability of Q1 2021 results to Q1 2020 is affected by five acquisitions completed between March 2020 and January 2021, which increased revenues and operating expenses. Revenues from legacy resuscitation products declined significantly from **$11.2 million** in Q1 2020 to **$1.8 million** in Q1 2021[91](index=91&type=chunk)[92](index=92&type=chunk) - Operating results were also impacted by a **$1.0 million** non-cash reduction to paid time off (PTO) expense in Q1 2021 and a **$3.4 million** non-cash contractual adjustment to royalty expense in Q1 2020[92](index=92&type=chunk) [Three Months Ended March 31, 2021 Compared to Three Months Ended March 31, 2020](index=22&type=section&id=Three%20Months%20Ended%20March%2031%2C%202021%20Compared%20to%20Three%20Months%20Ended%20March%2031%2C%202020) This section provides a detailed comparative analysis of HealthStream's revenues, costs, and expenses for Q1 2021 versus Q1 2020 [Revenues, net](index=22&type=section&id=Revenues%2C%20net) This section analyzes the net revenues by business segment, highlighting growth drivers for Workforce Solutions and Provider Solutions Revenues by Business Segment (in thousands USD) | Business Segment | Q1 2021 | Q1 2020 | Percentage Change | | :----------------- | :------ | :------ | :---------------- | | Workforce Solutions | $51,247 | $49,824 | 3% | | Provider Solutions | $12,221 | $11,748 | 4% | | Total revenues, net | $63,468 | $61,572 | 3% | - **Workforce Solutions** revenue growth was driven by recent acquisitions and other workforce solutions, offsetting declines from legacy resuscitation products. **Provider Solutions** revenue growth was due to new VerityStream subscriptions and professional services[93](index=93&type=chunk)[94](index=94&type=chunk) [Cost of Revenues (excluding Depreciation and Amortization)](index=22&type=section&id=Cost%20of%20Revenues%20(excluding%20Depreciation%20and%20Amortization)) This section analyzes the cost of revenues, excluding depreciation and amortization, and factors impacting its change Cost of Revenues (excluding Depreciation and Amortization) (in thousands USD) | Metric | Q1 2021 | Q1 2020 | Percentage Change | | :----------------- | :------ | :------ | :---------------- | | Cost of revenues | $21,237 | $20,359 | 4% | | % of revenues | 33% | 33% | 0% | - Cost of revenues increased by **$0.8 million**, or **4%**, but remained **33%** of revenues for both periods. Q1 2021 was favorably impacted by a **$0.2 million** PTO expense reduction, while Q1 2020 benefited from a **$3.4 million** one-time contractual adjustment to royalty expense[95](index=95&type=chunk) [Product Development](index=23&type=section&id=Product%20Development) This section analyzes product development expenses, highlighting increases due to acquisitions and development efforts Product Development Expenses (in thousands USD) | Metric | Q1 2021 | Q1 2020 | Percentage Change | | :----------------- | :------ | :------ | :---------------- | | Product development | $9,361 | $7,468 | 25% | | % of revenues | 15% | 12% | 3% | - Product development expenses increased by **$1.9 million**, or **25%**, primarily due to recent acquisitions and increased development efforts in Workforce Solutions. Provider Solutions saw a decrease due to increased capitalized labor for internally developed software[98](index=98&type=chunk)[99](index=99&type=chunk) [Sales and Marketing](index=23&type=section&id=Sales%20and%20Marketing) This section analyzes sales and marketing expenses, noting decreases due to lower commissions and reduced travel costs Sales and Marketing Expenses (in thousands USD) | Metric | Q1 2021 | Q1 2020 | Percentage Change | | :----------------- | :------ | :------ | :---------------- | | Sales and marketing | $8,924 | $9,188 | -3% | | % of revenues | 14% | 15% | -1% | - Sales and marketing expenses decreased by **$0.3 million**, or **3%**, mainly due to lower sales commissions from declining legacy resuscitation revenues and reduced travel expenses due to COVID-19[100](index=100&type=chunk)[101](index=101&type=chunk) [Other General and Administrative Expenses](index=23&type=section&id=Other%20General%20and%20Administrative%20Expenses) This section analyzes other general and administrative expenses, highlighting increases from acquisitions and personnel costs Other General and Administrative Expenses (in thousands USD) | Metric | Q1 2021 | Q1 2020 | Percentage Change | | :----------------- | :------ | :------ | :---------------- | | Other G&A expenses | $11,493 | $9,864 | 17% | | % of revenues | 18% | 16% | 2% | - Other general and administrative expenses increased by **$1.6 million**, or **17%**, primarily due to expenses associated with recent acquisitions and increases in personnel and professional services costs in the unallocated corporate portion[102](index=102&type=chunk)[103](index=103&type=chunk) [Depreciation and Amortization](index=23&type=section&id=Depreciation%20and%20Amortization) This section analyzes depreciation and amortization expense, noting increases due to capitalized software and recent acquisitions Depreciation and Amortization Expense (in thousands USD) | Metric | Q1 2021 | Q1 2020 | Percentage Change | | :----------------- | :------ | :------ | :---------------- | | D&A expense | $9,153 | $7,449 | 23% | - Depreciation and amortization expense increased by **$1.7 million**, or **23%**, mainly due to increased amortization associated with capitalized software and recent acquisitions[104](index=104&type=chunk) [Other (Loss) Income, Net](index=23&type=section&id=Other%20(Loss)%20Income%2C%20Net) This section analyzes the shift in other (loss) income, net, from a gain in Q1 2020 to a loss in Q1 2021 Other (Loss) Income, Net (in thousands USD) | Metric | Q1 2021 | Q1 2020 | | :----------------- | :------ | :------ | | Other (loss) income, net | $(87) | $1,706 | - Other (loss) income, net, shifted from a **$1.7 million** income in Q1 2020 to an **$87,000** loss in Q1 2021. This change was primarily due to a one-time **$1.2 million** gain from the NurseGrid acquisition in Q1 2020 and lower interest income in Q1 2021[105](index=105&type=chunk) [Income Tax Provision](index=23&type=section&id=Income%20Tax%20Provision) This section analyzes the income tax provision and effective tax rate, highlighting factors influencing their changes Income Tax Provision and Effective Tax Rate (in millions USD) | Metric | Q1 2021 | Q1 2020 | | :----------------- | :------ | :------ | | Income tax provision | $0.9M | $1.9M | | Effective tax rate | 29% | 21% | - The income tax provision decreased to **$0.9 million** in Q1 2021 from **$1.9 million** in Q1 2020, while the effective tax rate increased to **29%** from **21%**. This was influenced by discrete tax expense in 2021 (purchase accounting, state tax rate change) and a tax benefit in 2020 (NurseGrid acquisition)[106](index=106&type=chunk)[107](index=107&type=chunk) [Net Income](index=24&type=section&id=Net%20Income) This section analyzes the decrease in net income and diluted EPS for Q1 2021 compared to Q1 2020 Net Income and EPS (in millions USD, except per share data) | Metric | Q1 2021 | Q1 2020 | | :----------------- | :------ | :------ | | Net income | $2.3 | $7.1 | | Diluted EPS | $0.07 | $0.22 | - Net income decreased to **$2.3 million** (**$0.07** diluted EPS) in Q1 2021 from **$7.1 million** (**$0.22** diluted EPS) in Q1 2020. The Q1 2020 figures were positively impacted by a one-time contractual adjustment of **$2.6 million** (**$0.08** per diluted share)[108](index=108&type=chunk) [Other Developments](index=24&type=section&id=Other%20Developments) This section discusses the cessation of legacy resuscitation product revenues and the marketing of new resuscitation offerings - Revenues from legacy resuscitation products (HeartCode and RQI) under agreements with Laerdal effectively ceased at the end of 2020, contributing **$1.8 million** in Q1 2021 (down from **$11.2 million** in Q1 2020). The company expects de minimis revenue from these products in H2 2021[92](index=92&type=chunk)[110](index=110&type=chunk) - A new agreement with RQI Partners (Laerdal and American Heart Association) provides for fees when HeartCode and RQI are delivered via HealthStream Learning Center, but these fees will not replace prior legacy agreement revenues[111](index=111&type=chunk) - HealthStream is actively marketing its new American Red Cross Resuscitation Suite, launched in 2019, and other simulation-based offerings, which are expected to yield higher margins than the legacy products[112](index=112&type=chunk) [Reconciliation of Non-GAAP Financial Measures](index=24&type=section&id=Reconciliation%20of%20Non-GAAP%20Financial%20Measures) This section provides a reconciliation of GAAP net income to Adjusted EBITDA and explains revisions to its definition Adjusted EBITDA Reconciliation (in thousands USD) | Metric | Q1 2021 | Q1 2020 | | :-------------------------------- | :------ | :------ | | GAAP net income | $2,291 | $7,092 | | Deferred revenue write-down | $1,622 | $144 | | Interest income | $(18) | $(594) | | Interest expense | $32 | $25 | | Income tax provision | $922 | $1,858 | | Stock based compensation expense | $616 | $550 | | Depreciation and amortization | $9,153 | $7,449 | | Non-cash paid time off expense | $(1,011)| — | | Change in fair value of non-marketable equity investments | — | $(1,152)| | Non-cash royalty expense | — | $(3,440)| | Adjusted EBITDA | $13,607 | $11,932 | - Adjusted EBITDA increased by **14%** to **$13.6 million** in Q1 2021 from **$11.9 million** in Q1 2020. The definition of Adjusted EBITDA was revised to include adjustments for non-cash paid time off expense and deferred revenue write-downs from acquisitions, as these are considered non-ordinary course or non-operating items[114](index=114&type=chunk)[116](index=116&type=chunk)[117](index=117&type=chunk)[120](index=120&type=chunk) [Liquidity and Capital Resources](index=25&type=section&id=Liquidity%20and%20Capital%20Resources) This section analyzes HealthStream's cash flows, liquidity position, and capital resources, including its revolving credit facility - Net cash provided by operating activities increased by **$13.0 million** to **$19.1 million** in Q1 2021, driven by higher cash collections. Days Sales Outstanding (DSO) increased to **52 days** in Q1 2021 from **44 days** in Q1 2020[121](index=121&type=chunk) - Net cash used in investing activities decreased to **$9.7 million** in Q1 2021 from **$19.9 million** in Q1 2020, primarily due to lower spending on business combinations and marketable securities. Net cash used in financing activities decreased significantly to **$0.4 million** from **$10.3 million**, mainly due to no common stock repurchases in Q1 2021[122](index=122&type=chunk)[123](index=123&type=chunk)[124](index=124&type=chunk) - The Company's liquidity includes **$45.3 million** in cash and cash equivalents, **$10.6 million** in marketable securities, and an available **$65.0 million** revolving credit facility. Management believes these resources are sufficient for the next **12 months**, including potential acquisitions[125](index=125&type=chunk)[127](index=127&type=chunk)[128](index=128&type=chunk) [Item 3. Quantitative and Qualitative Disclosures about Market Risk](index=26&type=section&id=Item%203.%20Quantitative%20and%20Qualitative%20Disclosures%20about%20Market%20Risk) This section details HealthStream's exposure to market risks, including interest rate, foreign currency, and investment risks [Interest Rate Risk](index=26&type=section&id=Interest%20Rate%20Risk) This section discusses the company's exposure to interest rate risk, particularly concerning future borrowings and investment income - The Company had no outstanding debt as of March 31, 2021, but may be subject to interest rate risk from future borrowings under its revolving credit facility. A hypothetical **10%** decrease in interest rates would reduce annualized interest income from cash and investments by approximately **$8,000**[130](index=130&type=chunk) [Foreign Currency Risk](index=26&type=section&id=Foreign%20Currency%20Risk) This section outlines HealthStream's exposure to foreign currency risks from international revenues and expenses - HealthStream is exposed to foreign currency risks from revenues and operating expenses denominated in Canadian, New Zealand, and Australian dollars. While increases/decreases in foreign-denominated revenue are often offset by corresponding changes in expenses, growing international operations could increase this risk. The company has not used hedging contracts to date[131](index=131&type=chunk)[132](index=132&type=chunk) [Investment Risk](index=27&type=section&id=Investment%20Risk) This section describes the company's investment policy and the risks associated with strategic equity investments - The Company's investment policy focuses on highly rated securities to minimize principal loss, with limits on credit exposure and portfolio maturity. Strategic investments in privately held, early-stage healthcare technology companies may introduce volatility due to market price changes, observable price changes, and impairments[134](index=134&type=chunk)[135](index=135&type=chunk) [Item 4. Controls and Procedures](index=27&type=section&id=Item%204.%20Controls%20and%20Procedures) This section confirms the effectiveness of HealthStream's disclosure controls and reports on internal control changes for Q1 2021 [Evaluation of Controls and Procedures](index=27&type=section&id=Evaluation%20of%20Controls%20and%20Procedures) This section confirms the effectiveness of HealthStream's disclosure controls and procedures as evaluated by management - HealthStream's CEO and Principal Financial Officer evaluated the effectiveness of disclosure controls and procedures as of March 31, 2021, concluding they were effective in ensuring timely and accurate reporting of information required under the Exchange Act[137](index=137&type=chunk) [Changes in Internal Control over Financial Reporting](index=27&type=section&id=Changes%20in%20Internal%20Control%20over%20Financial%20Reporting) This section reports that no material changes occurred in HealthStream's internal control over financial reporting during Q1 2021 - No changes in HealthStream's internal control over financial reporting occurred during Q1 2021 that materially affected, or are reasonably likely to materially affect, the company's internal control over financial reporting[138](index=138&type=chunk) [PART II. OTHER INFORMATION](index=27&type=section&id=Part%20II.%20Other%20Information) This section provides additional information including risk factors, equity security sales, and a list of exhibits [Item 1A. Risk Factors](index=27&type=section&id=Item%201A.%20Risk%20Factors) This section states that there have been no material changes to the risk factors previously disclosed in the company's 2020 Form 10-K - There have been no material changes to the risk factors previously disclosed in the 2020 Form 10-K[139](index=139&type=chunk) [Item 2. Unregistered Sales of Equity Securities and Use of Proceeds](index=27&type=section&id=Item%202.%20Unregistered%20Sales%20of%20Equity%20Securities%20and%20Use%20of%20Proceeds) This section details the company's share repurchase program, which expired on March 12, 2021, with no repurchases in Q1 2021 - The share repurchase program, authorized for up to **$30.0 million**, expired on March 12, 2021. Under this program, the Company repurchased **957,367 shares** for **$20.0 million** at an average price of **$20.89 per share**. No repurchases occurred during the three months ended March 31, 2021[140](index=140&type=chunk)[142](index=142&type=chunk) [Item 6. Exhibits](index=28&type=section&id=Item%206.%20Exhibits) This section lists all exhibits filed with the Form 10-Q, including bonus plans, stock election plans, and certifications - Exhibits include the 2021 Executive and Corporate Management Cash Incentive Bonus Plan, 2021 Provider Solutions Cash Incentive Bonus Plan, Directors Stock Election Plan, CEO and Principal Financial Officer Certifications (Sections 302 and 906 of Sarbanes-Oxley Act), and various Inline XBRL documents[144](index=144&type=chunk) [SIGNATURE](index=29&type=section&id=SIGNATURE) This section provides the official signature confirming the filing of the report - The report was signed on April 29, 2021, by **Scott A. Roberts**, Chief Financial Officer, on behalf of HealthStream, Inc[146](index=146&type=chunk)[148](index=148&type=chunk)

Financial Data and Key Metrics Changes - The company reported revenues of $63.5 million, a 3% increase year-over-year, despite a $1.6 million reduction due to deferred revenue write-downs related to acquisitions [52][56] - Operating income decreased by 54% to $3.3 million, while net income fell by 68% to $2.3 million, resulting in EPS of $0.07, down from $0.22 in the prior year [53][54] - Adjusted EBITDA improved to $13.6 million, marking a 14% increase and a record quarterly high for the company [54][55] - Gross margin was 66.5%, slightly down from 66.9% last year, but improved from an adjusted 61.3% when excluding a one-time reduction in cost of revenues [58] Business Line Data and Key Metrics Changes - Workforce Solutions revenues were $51.3 million, up 3%, while Provider Solutions revenues reached $12.2 million, up 4% [55] - Revenues from legacy resuscitation products declined significantly, contributing only $1.8 million in Q1 2021, down from $11.2 million last year [56][57] - Excluding legacy product revenues, consolidated revenues grew by 22%, with 8% organic growth and 14% from acquisitions [57] Market Data and Key Metrics Changes - The company added approximately 21,000 net new hStream subscriptions, bringing the total to about 4.34 million subscriptions [47] - The Verity hStream Application Suite contracted with 45 new customer accounts, totaling approximately 390 customers [39][40] Company Strategy and Development Direction - The company is focused on innovation, particularly with new products like Jane, an AI-driven competency development system for healthcare professionals [19][24] - The transition to a more comprehensive portfolio, including the Red Cross Resuscitation Suite and the Verity hStream platform, is seen as a key strategic move [30][39] - The company aims to achieve a gross margin of approximately 65% and return to adjusted EBITDA margins of 15% to 20% [17] Management's Comments on Operating Environment and Future Outlook - Management expressed cautious optimism regarding the ongoing pandemic and its impact on operations, emphasizing the need for continued investment and adaptation to new work-from-home models [8][50] - The company anticipates revenue growth despite challenges from declining legacy products and expects to achieve revenue between $245 million and $255 million for the full year 2021 [13][64] - Management highlighted the importance of customer adoption of new technologies and the potential for improved patient outcomes through investments in workforce competency [110][114] Other Important Information - The company ended the quarter with approximately $56 million in cash and investments, no debt, and full availability under its $65 million line of credit [76] - The company is evaluating potential M&A opportunities to support long-term growth objectives [77] Q&A Session Summary Question: What is driving the success of the Verity hStream product line? - Management attributed success to the comprehensive nature of the CredentialStream platform, which integrates the best features from acquired companies, leading to improved win rates in competitive situations [96][98] Question: How does the demand for workforce management solutions fit into broader AI priorities? - Management noted that while education and training often rank lower in budget priorities, organizations that recognize the link between competency and clinical outcomes are beginning to invest in solutions like Jane [108][110] Question: How are hospitals shifting their priorities as the pandemic eases? - Management observed a continued focus on quality outcomes, with stronger organizations prioritizing tools that can help achieve these goals, including the Verity hStream and other solutions [121][122]

Table of Contents UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K ☒ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 2020 OR ☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM TO Commission File Number 000-27701 HEALTHSTREAM, INC. Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of t ...

Financial Data and Key Metrics Changes - For Q4 2020, revenues were $61.8 million, down 1% year-over-year, while operating income decreased by 66% to $1.1 million [20][25] - Income from continuing operations was $0.9 million, down 74%, and EPS from continuing operations was $0.03 per diluted share, down from $0.11 [20][25] - Adjusted EBITDA was $10.7 million, a decline of 4% [20][25] - Cash flows from operations were $35.9 million, down from $65.7 million the previous year, primarily due to lower cash receipts from legacy resuscitation products [26] Business Line Data and Key Metrics Changes - Workforce Solutions segment revenues totaled $49.7 million, down 2% year-over-year, while revenues from legacy resuscitation products declined by $5.7 million [22] - Revenues from the American Red Cross simulation suite program contributed positively to Q4 revenue growth [23] - Provider Solutions segment revenues were $12.1 million, growing by 3% year-over-year, mainly due to the acquisition of CredentialMyDoc [23] Market Data and Key Metrics Changes - The company signed over 180 new contracts for the Red Cross Suite in 2020, indicating strong market acceptance [14] - Approximately 345 customer accounts were contracted for the Verity hStream application suite, showing significant adoption [16] - The company added approximately 380,000 net new hStream subscriptions, bringing the total to approximately 4.2 million [17] Company Strategy and Development Direction - The company aims for organic high single-digit revenue growth rates and a gross margin profile of approximately 65% by 2022 [10][11] - The focus is on transitioning from legacy resuscitation products to new offerings, including the Red Cross Resuscitation Suite and Verity hStream [13][18] - The company plans to invest in R&D and acquisitions to enhance its technology platform and maintain a competitive edge [12][30] Management's Comments on Operating Environment and Future Outlook - Management expressed optimism about a gradual return to normalcy in hospital operations as vaccination rates increase [62][64] - The company anticipates that customer purchasing decisions will improve as healthcare providers adapt to operating under COVID-19 conditions [63] - There is confidence in achieving revenue growth despite the challenges posed by the pandemic and the decline in legacy product revenues [57] Other Important Information - The company completed several acquisitions, including ShiftWizard, ANSOS, and myClinicalExchange, which are expected to enhance its service offerings [21][39] - The company ended the year with $46.5 million in cash and investments and renewed its revolving credit facility [34] - The company received two patents for its next-generation clinical solutions, indicating ongoing innovation [37][38] Q&A Session Summary Question: Can you elaborate on the 2022 outlook and specific drivers for growth? - Management highlighted confidence in achieving high single-digit organic growth due to successful adoption of the Red Cross Resuscitation Suite and the new Jane platform [50][52] Question: How are hospital purchasing conversations changing as the pandemic evolves? - Management noted that hospitals are learning to operate under both COVID-19 and traditional service models, leading to a gradual return to normal operations [62][63] Question: Will the sales cycle shorten with the new platforms? - Management refrained from projecting a shorter sales cycle due to ongoing uncertainties but noted that as the hStream architecture matures, it may facilitate quicker product launches [65] Question: Should we expect three different segments in financial modeling? - Management indicated that for the near future, the company will maintain its current segment structure but aims for a unified platform approach in the long term [69]

[PART I. FINANCIAL INFORMATION](index=3&type=section&id=Part%20I.%20Financial%20Information) This part presents the company's unaudited financial statements and management's analysis of its performance and condition [Item 1. Financial Statements](index=3&type=section&id=Item%201.%20Financial%20Statements) This section contains the unaudited condensed consolidated financial statements and accompanying notes for the period [Condensed Consolidated Balance Sheets (Unaudited)](index=3&type=section&id=Condensed%20Consolidated%20Balance%20Sheets%20(Unaudited)) The balance sheet shows a slight decrease in total assets and shareholders' equity as of September 30, 2020 Condensed Consolidated Balance Sheets (Unaudited) (in thousands) | Item | September 30, 2020 | December 31, 2019 | | :-------------------------------- | :------------------- | :------------------ | | **ASSETS** | | | | Cash and cash equivalents | $107,007 | $131,538 | | Marketable securities | $42,666 | $41,328 | | Total current assets | $199,097 | $224,572 | | Goodwill | $123,285 | $102,196 | | Total assets | $476,557 | $489,544 | | **LIABILITIES AND SHAREHOLDERS' EQUITY** | | | | Total current liabilities | $95,014 | $105,185 | | Total shareholders' equity | $336,265 | $338,168 | | Total liabilities and shareholders' equity | $476,557 | $489,544 | [Condensed Consolidated Statements of Income (Unaudited)](index=4&type=section&id=Condensed%20Consolidated%20Statements%20of%20Income%20(Unaudited)) The income statement reflects lower net revenues and net income for the third quarter of 2020 compared to 2019 Condensed Consolidated Statements of Income (Unaudited) (in thousands, except per share data) | Item | Three Months Ended Sep 30, 2020 | Three Months Ended Sep 30, 2019 | Nine Months Ended Sep 30, 2020 | Nine Months Ended Sep 30, 2019 | | :------------------------------------ | :------------------------------ | :------------------------------ | :----------------------------- | :----------------------------- | | Revenues, net | $60,883 | $62,450 | $183,008 | $191,417 | | Total operating costs and expenses | $57,749 | $58,702 | $168,327 | $180,033 | | Operating income | $3,134 | $3,748 | $14,681 | $11,384 | | Income from continuing operations | $2,634 | $3,461 | $13,168 | $10,642 | | Net income | $2,634 | $3,712 | $13,168 | $12,087 | | Net income per share – basic (Continuing operations) | $0.08 | $0.11 | $0.41 | $0.33 | | Net income per share – diluted (Continuing operations) | $0.08 | $0.11 | $0.41 | $0.33 | [Condensed Consolidated Statements of Comprehensive Income (Unaudited)](index=5&type=section&id=Condensed%20Consolidated%20Statements%20of%20Comprehensive%20Income%20(Unaudited)) Comprehensive income decreased in the third quarter of 2020 compared to the prior year period Condensed Consolidated Statements of Comprehensive Income (Unaudited) (in thousands) | Item | Three Months Ended Sep 30, 2020 | Three Months Ended Sep 30, 2019 | Nine Months Ended Sep 30, 2020 | Nine Months Ended Sep 30, 2019 | | :-------------------------------- | :------------------------------ | :------------------------------ | :----------------------------- | :----------------------------- | | Net income | $2,634 | $3,712 | $13,168 | $12,087 | | Total other comprehensive income (loss) | $5 | $(14) | $2 | $32 | | Comprehensive income | $2,639 | $3,698 | $13,170 | $12,119 | [Condensed Consolidated Statements of Shareholders' Equity (Unaudited)](index=6&type=section&id=Condensed%20Consolidated%20Statements%20of%20Shareholders'%20Equity%20(Unaudited)) Shareholders' equity slightly decreased due to stock repurchases exceeding net income for the nine-month period Condensed Consolidated Statements of Shareholders' Equity (Unaudited) (in thousands) | Item | Balance at Dec 31, 2019 | Balance at Sep 30, 2020 | | :-------------------------------- | :---------------------- | :---------------------- | | Total Shareholders' Equity | $338,168 | $336,265 | Changes for Nine Months Ended September 30, 2020 (in thousands) | Item | Amount | | :-------------------------------- | :------- | | Net income | $13,168 | | Stock based compensation | $1,665 | | Repurchase of common stock | $(16,352) | [Condensed Consolidated Statements of Cash Flows (Unaudited)](index=8&type=section&id=Condensed%20Consolidated%20Statements%20of%20Cash%20Flows%20(Unaudited)) Net cash from operating activities decreased significantly in the first nine months of 2020 compared to 2019 Condensed Consolidated Statements of Cash Flows (Unaudited) (in thousands) | Item | Nine Months Ended Sep 30, 2020 | Nine Months Ended Sep 30, 2019 | | :-------------------------------- | :----------------------------- | :----------------------------- | | Net cash provided by operating activities | $30,753 | $52,547 | | Net cash used in investing activities | $(38,462) | $(52,047) | | Net cash used in financing activities | $(16,821) | $(907) | | Net decrease in cash and cash equivalents | $(24,531) | $(407) | | Cash and cash equivalents at end of period | $107,007 | $133,914 | [Notes to Condensed Consolidated Financial Statements (Unaudited)](index=9&type=section&id=Notes%20to%20Condensed%20Consolidated%20Financial%20Statements%20(Unaudited)) These notes provide detailed explanations of accounting policies and specific financial statement items [1. BASIS OF PRESENTATION](index=9&type=section&id=1.%20BASIS%20OF%20PRESENTATION) The interim financial statements are prepared in accordance with US GAAP but do not include all annual disclosures - The financial statements are prepared in accordance with US GAAP for interim information and do not include all footnotes required for complete financial statements[20](index=20&type=chunk) - Operating results for the three and nine months ended September 30, 2020, are **not indicative of the full year**[20](index=20&type=chunk) - The Company divested its Patient Experience (PX) business on February 12, 2018, and its results are classified as **discontinued operations** for the three and nine months ended September 30, 2019[21](index=21&type=chunk) [2. RECENT ACCOUNTING PRONOUNCEMENTS](index=9&type=section&id=2.%20RECENT%20ACCOUNTING%20PRONOUNCEMENTS) The company adopted a new accounting standard for credit losses with an immaterial impact on its financials - The Company adopted ASU 2016-03 (ASC 326) on January 1, 2020, regarding credit losses, with an **immaterial effect** on its financial statements[23](index=23&type=chunk) [3. REVENUE RECOGNITION AND SALES COMMISSIONS](index=9&type=section&id=3.%20REVENUE%20RECOGNITION%20AND%20SALES%20COMMISSIONS) Revenue is primarily generated from subscription services and recognized when control is transferred to the customer - Revenue is recognized when control of promised goods or services is transferred to the customer, following a five-step model[24](index=24&type=chunk) - As of September 30, 2020, **$408 million of revenue** is expected to be recognized from remaining performance obligations, with **45% recognized over the next 12 months**[27](index=27&type=chunk) - Sales commissions are capitalized and amortized over the expected period of benefit, typically the contract term or approximately three years for non-commensurate commissions[28](index=28&type=chunk) - Amortization for the nine months ended September 30, 2020, was **$6.6 million**[28](index=28&type=chunk) Revenues Disaggregated by Source (in thousands) | Business Segments | Three Months Ended Sep 30, 2020 | Three Months Ended Sep 30, 2019 | Nine Months Ended Sep 30, 2020 | Nine Months Ended Sep 30, 2019 | | :---------------- | :------------------------------ | :------------------------------ | :----------------------------- | :----------------------------- | | Subscription services | $58,245 | $58,999 | $174,525 | $181,276 | | Professional services | $2,638 | $3,451 | $8,483 | $10,141 | | Total revenues, net | $60,883 | $62,450 | $183,008 | $191,417 | [4. INCOME TAXES](index=11&type=section&id=4.%20INCOME%20TAXES) The effective tax rate decreased in 2020 primarily due to higher research and development tax credits - The decrease in the effective tax rate for the nine months ended September 30, 2020, is primarily due to **higher research and development tax credits**[31](index=31&type=chunk) Income Tax Provision and Effective Tax Rate (Continuing Operations) | Period | Income Tax Provision (in thousands) | Effective Tax Rate | | :-------------------------------- | :-------------------------------- | :----------------- | | Three Months Ended Sep 30, 2020 | $600 | 19% | | Three Months Ended Sep 30, 2019 | $1,140 | 25% | | Nine Months Ended Sep 30, 2020 | $3,519 | 21% | | Nine Months Ended Sep 30, 2019 | $3,270 | 24% | [5. SHAREHOLDERS' EQUITY](index=11&type=section&id=5.%20SHAREHOLDERS'%20EQUITY) The company executed a share repurchase program and recorded stock-based compensation expenses - The Company authorized a **$30.0 million share repurchase program** on March 13, 2020, expiring March 12, 2021[34](index=34&type=chunk) - During the nine months ended September 30, 2020, **762,843 shares were repurchased for $16.3 million** at an average price of $21.42 per share[34](index=34&type=chunk) - In June 2019, the CEO contributed 78,520 shares (valued at $2.0 million) to the Company for employee benefit, resulting in **$2.0 million of stock-based compensation expense**[35](index=35&type=chunk)[36](index=36&type=chunk) Stock-Based Compensation Expense (in thousands) | Expense Category | Three Months Ended Sep 30, 2020 | Three Months Ended Sep 30, 2019 | Nine Months Ended Sep 30, 2020 | Nine Months Ended Sep 30, 2019 | | :-------------------------------- | :------------------------------ | :------------------------------ | :----------------------------- | :----------------------------- | | Cost of revenues | $16 | $13 | $39 | $684 | | Product development | $92 | $77 | $266 | $895 | | Sales and marketing | $60 | $57 | $170 | $575 | | Other general and administrative | $389 | $422 | $1,190 | $1,489 | | Total stock based compensation expense | $557 | $569 | $1,665 | $3,643 | [6. EARNINGS PER SHARE](index=12&type=section&id=6.%20EARNINGS%20PER%20SHARE) Diluted earnings per share from continuing operations decreased for the third quarter but increased year-to-date - Common equivalent shares excluded from diluted EPS calculations due to anti-dilutive effect or contingent performance conditions were **115,000** and **54,000** for the three months ended September 30, 2020 and 2019, respectively[37](index=37&type=chunk) Net Income Per Share (in thousands, except per share data) | Item | Three Months Ended Sep 30, 2020 | Three Months Ended Sep 30, 2019 | Nine Months Ended Sep 30, 2020 | Nine Months Ended Sep 30, 2019 | | :-------------------------------- | :------------------------------ | :------------------------------ | :----------------------------- | :----------------------------- | | Net income per share - basic (Continuing operations) | $0.08 | $0.11 | $0.41 | $0.33 | | Net income per share - diluted (Continuing operations) | $0.08 | $0.11 | $0.41 | $0.33 | | Weighted-average diluted shares | 31,981 | 32,437 | 32,121 | 32,416 | [7. MARKETABLE SECURITIES](index=13&type=section&id=7.%20MARKETABLE%20SECURITIES) The company's marketable securities portfolio consists primarily of time deposits and corporate debt securities - All marketable securities are classified as **current assets** as they mature within one year from the balance sheet date[39](index=39&type=chunk) Marketable Securities (Available for Sale, in thousands) | Item | September 30, 2020 Fair Value | December 31, 2019 Fair Value | | :-------------------------------- | :---------------------------- | :--------------------------- | | Time deposits | $15,000 | $0 | | Corporate debt securities | $32,666 | $37,327 | | Government-sponsored enterprise debt securities | $0 | $4,001 | | Total marketable securities | $42,666 | $41,328 | [8. BUSINESS COMBINATIONS](index=13&type=section&id=8.%20BUSINESS%20COMBINATIONS) The company completed two acquisitions, CredentialMyDoc and NurseGrid, to expand its solution offerings - On December 16, 2019, the Company acquired CredentialMyDoc for **$9.0 million in cash**, adding a provider credentialing and enrollment SaaS solution to its Provider Solutions segment[40](index=40&type=chunk) - On March 9, 2020, the Company acquired NurseGrid for approximately **$21.5 million net cash**, integrating its nurse scheduling and management applications into the Workforce Solutions segment[44](index=44&type=chunk) - A **$1.2 million gain** was recognized from remeasuring the Company's existing minority interest in NurseGrid[44](index=44&type=chunk) CredentialMyDoc Acquisition Summary (in thousands) | Item | Amount | | :-------------------------------- | :------- | | Total consideration paid | $8,995 | | Goodwill | $4,661 | | Intangible assets | $4,340 | | Deferred revenue write-down | $311 | NurseGrid Acquisition Summary (in thousands) | Item | Amount | | :-------------------------------- | :------- | | Net consideration paid | $25,077 | | Goodwill | $21,085 | | Intangible assets | $1,845 | | Deferred revenue write-down | $79 | [9. BUSINESS SEGMENTS](index=16&type=section&id=9.%20BUSINESS%20SEGMENTS) The company operates through Workforce Solutions and Provider Solutions segments, with the former generating most revenue - The Company operates in two business segments: **Workforce Solutions** (workforce development) and **Provider Solutions** (credentialing, privileging, enrollment)[48](index=48&type=chunk) Business Segment Performance (in thousands) | Item | Three Months Ended Sep 30, 2020 | Three Months Ended Sep 30, 2019 | Nine Months Ended Sep 30, 2020 | Nine Months Ended Sep 30, 2019 | | :-------------------------------- | :------------------------------ | :------------------------------ | :----------------------------- | :----------------------------- | | **Revenues, net:** | | | | | | Workforce Solutions | $49,197 | $51,023 | $147,909 | $157,739 | | Provider Solutions | $11,686 | $11,427 | $35,099 | $33,678 | | Total revenues, net | $60,883 | $62,450 | $183,008 | $191,417 | | **Operating income from continuing operations:** | | | | | | Workforce Solutions | $9,758 | $10,274 | $33,575 | $30,694 | | Provider Solutions | $913 | $1,385 | $3,382 | $4,206 | | Unallocated | $(7,537) | $(7,911) | $(22,276) | $(23,516) | | Total operating income from continuing operations | $3,134 | $3,748 | $14,681 | $11,384 | Segment Assets (in thousands) | Segment | September 30, 2020 | December 31, 2019 | | :---------------- | :------------------- | :------------------ | | Workforce Solutions | $139,602 | $118,382 | | Provider Solutions | $140,655 | $148,398 | | Unallocated | $196,300 | $222,764 | | Total assets | $476,557 | $489,544 | [10. DISCONTINUED OPERATIONS](index=17&type=section&id=10.%20DISCONTINUED%20OPERATIONS) The company reported no discontinued operations in 2020 following the 2018 divestiture of its PX business - The Company divested its Patient Experience (PX) business on February 12, 2018, for **$65.2 million cash**, resulting in a **$20.5 million gain** (net of tax)[52](index=52&type=chunk) - No discontinued operations were reported for the three and nine months ended September 30, 2020[52](index=52&type=chunk) [11. DEBT](index=17&type=section&id=11.%20DEBT) The company maintained a revolving credit facility with no outstanding balance and was in compliance with all covenants - The Company has a Revolving Credit Facility with a **$50.0 million borrowing capacity**, maturing November 24, 2020, used for working capital, acquisitions, and stock repurchases[53](index=53&type=chunk)[54](index=54&type=chunk) - As of September 30, 2020, the Company was in compliance with all debt covenants and had **no outstanding balances** on the Revolving Credit Facility[56](index=56&type=chunk) [12. NON-MARKETABLE EQUITY INVESTMENTS](index=18&type=section&id=12.%20NON-MARKETABLE%20EQUITY%20INVESTMENTS) The fair value of non-marketable equity investments was adjusted upward due to the NurseGrid acquisition - Non-marketable equity investments are measured at fair value, with changes recognized in net income, and the aggregate carrying amount was **$3.9 million** at September 30, 2020[58](index=58&type=chunk) - A **$1.2 million upward adjustment** was recorded for the non-marketable equity investment in NurseGrid due to a change in fair value upon its acquisition[58](index=58&type=chunk) [13. CONTRACTUAL ADJUSTMENT](index=18&type=section&id=13.%20CONTRACTUAL%20ADJUSTMENT) A contractual adjustment reduced cost of revenues following the resolution of a royalty dispute - A **$3.4 million reduction** to cost of revenues was recorded in Q1 2020 due to the de-recognition of a royalty liability following the resolution of a dispute with a former royalty partner[59](index=59&type=chunk) [14. SUBSEQUENT EVENTS](index=18&type=section&id=14.%20SUBSEQUENT%20EVENTS) The company acquired ShiftWizard and amended its credit facility after the reporting period ended - On October 12, 2020, the Company acquired ShiftWizard, Inc for **$32.0 million in cash**, a SaaS-based workforce management solution[60](index=60&type=chunk) - On October 28, 2020, the Revolving Credit Facility was amended to increase capacity to **$65.0 million** and extend maturity to October 28, 2023[61](index=61&type=chunk) [Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations](index=19&type=section&id=Item%202.%20Management's%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) Management discusses the company's financial performance, operational results, and the significant impact of COVID-19 [Special Cautionary Notice Regarding Forward‑Looking Statements](index=19&type=section&id=Special%20Cautionary%20Notice%20Regarding%20Forward%E2%80%91Looking%20Statements) This report includes forward-looking statements that are subject to various risks and uncertainties - The report contains forward-looking statements subject to known and unknown risks, uncertainties, and other factors that may cause **actual results to differ materially**[63](index=63&type=chunk)[64](index=64&type=chunk) [Business Overview](index=19&type=section&id=Business%20Overview) HealthStream provides workforce and provider solutions to healthcare organizations, with revenues declining in Q3 2020 - HealthStream provides workforce and provider solutions for healthcare organizations, focusing on clinical development, talent management, credentialing, privileging, and enrollment[66](index=66&type=chunk) - As of September 30, 2020, the company had approximately **3.82 million contracted subscriptions** to hStream, its Platform-as-a-Service technology[66](index=66&type=chunk) Significant Financial Metrics for Q3 2020 (in millions, except EPS) | Metric | Q3 2020 | Q3 2019 | Change | | :-------------------------------- | :------ | :------ | :----- | | Revenues | $60.9 | $62.5 | -3% | | Operating income | $3.1 | $3.7 | -16% | | Income from continuing operations | $2.6 | $3.5 | -24% | | EPS from continuing operations (diluted) | $0.08 | $0.11 | -27% | | Adjusted EBITDA from continuing operations | $11.1 | $11.5 | -3% | [Impact of and Response to COVID-19 Pandemic](index=20&type=section&id=Impact%20of%20and%20Response%20to%20COVID-19%20Pandemic) The COVID-19 pandemic negatively impacted bookings and renewals but led to operational expense savings - The COVID-19 pandemic has caused a significant economic downturn, impacting healthcare organizations and leading to **delayed/reduced bookings and renewals** for HealthStream[71](index=71&type=chunk)[72](index=72&type=chunk)[73](index=73&type=chunk) - Operating income for the nine months ended September 30, 2020, benefited from a **$2.2 million reduction in travel expenses** and a **$0.2 million reduction from cancelled tradeshows** due to COVID-19[73](index=73&type=chunk) - The Company provided free COVID-19 training and resources, resulting in approximately **3.0 million course completions** through September 30, 2020[76](index=76&type=chunk) - Cash receipts decreased, and **Days Sales Outstanding (DSO) increased from 40 days in Q3 2019 to 43 days in Q3 2020**, partly due to COVID-19 and a decline in legacy resuscitation sales[79](index=79&type=chunk) - Expense management measures contributed to a **$3.4 million decrease in operating expenses** for the nine months ended September 30, 2020[83](index=83&type=chunk)[84](index=84&type=chunk)[85](index=85&type=chunk) - In Q3 2020, the Company provided a supplemental payroll payment and increased the 401(k) match, **reducing operating income by approximately $1.9 million**[86](index=86&type=chunk) [Key Business Metrics](index=22&type=section&id=Key%20Business%20Metrics) The company tracks operating income, adjusted EBITDA, and hStream subscriptions to measure performance Key Business Metrics (in millions) | Metric | Three Months Ended Sep 30, 2020 | Three Months Ended Sep 30, 2019 | Nine Months Ended Sep 30, 2020 | Nine Months Ended Sep 30, 2019 | | :-------------------------------- | :------------------------------ | :------------------------------ | :----------------------------- | :----------------------------- | | Operating Income | $3.1 | $3.7 | $14.7 | $11.4 | | Adjusted EBITDA from continuing operations | $11.1 | $11.5 | $34.9 | $35.7 | | hStream Subscriptions (at period end) | 3.82 million | 2.78 million | 3.82 million | 2.78 million | [Critical Accounting Policies and Estimates](index=22&type=section&id=Critical%20Accounting%20Policies%20and%20Estimates) The company's critical accounting policies and estimates have not materially changed from the 2019 Form 10-K - Critical accounting policies include revenue recognition, accounting for income taxes, software development costs, goodwill/intangibles/other long-lived assets, and allowance for doubtful accounts[94](index=94&type=chunk) - There have been **no material changes** in critical accounting policies and estimates from those reported in the 2019 Form 10-K[89](index=89&type=chunk) [Three Months Ended September 30, 2020 Compared to Three Months Ended September 30, 2019](index=23&type=section&id=Three%20Months%20Ended%20September%2030%2C%202020%20Compared%20to%20Three%20Months%20Ended%20September%2030%2C%202019) Q3 2020 saw a decline in revenue and net income, driven by lower Workforce Solutions sales and higher expenses - Workforce Solutions revenue decreased primarily due to a **$3.7 million decline in legacy resuscitation products**, partially offset by a $2.6 million increase in platform and content subscriptions[90](index=90&type=chunk) - Provider Solutions revenue increased mainly due to **$0.4 million from the CredentialMyDoc acquisition**[91](index=91&type=chunk) - The **24% decrease in income from continuing operations** was driven by a $1.5 million expense (net of tax) for supplemental payroll and increased 401k match[103](index=103&type=chunk) Revenue Comparison (Three Months Ended September 30, in thousands) | Business Segment | 2020 | 2019 | Change | | :---------------- | :--- | :--- | :----- | | Workforce Solutions | $49,197 | $51,023 | -4% | | Provider Solutions | $11,686 | $11,427 | +2% | | Total revenues, net | $60,883 | $62,450 | -3% | Key Financial Changes (Three Months Ended September 30, in thousands) | Item | 2020 | 2019 | Change | | :-------------------------------- | :--- | :--- | :----- | | Cost of Revenues | $23,302 | $25,348 | -8% | | Product Development | $8,192 | $7,195 | +14% | | Sales and Marketing | $8,863 | $9,003 | -2% | | Other General and Administrative | $9,986 | $10,007 | -0.2% | | Depreciation and Amortization | $7,406 | $7,149 | +4% | | Other Income, Net | $100 | $853 | -85% | | Income Tax Provision | $600 | $1,140 | -47% | | Income from Continuing Operations | $2,634 | $3,461 | -24% | | Net Income | $2,634 | $3,712 | -29% | | Adjusted EBITDA from continuing operations | $11,135 | $11,481 | -3% | [Nine Months Ended September 30, 2020 Compared to Nine Months Ended September 30, 2019](index=25&type=section&id=Nine%20Months%20Ended%20September%2030%2C%202020%20Compared%20to%20Nine%20Months%20Ended%20September%2030%2C%202019) Year-to-date revenue declined, but income from continuing operations grew due to significantly lower cost of revenues - Workforce Solutions revenue decreased due to a **$14.7 million decline in legacy resuscitation products**, partially offset by a $6.2 million increase in platform and content subscriptions[107](index=107&type=chunk) - Cost of revenues decreased significantly due to lower royalty expense from legacy resuscitation and a **$3.4 million contractual adjustment**[109](index=109&type=chunk)[110](index=110&type=chunk) - Sales and marketing expenses decreased due to lower sales commissions, **reduced travel/tradeshow expenses from COVID-19**, and general marketing declines[114](index=114&type=chunk) Revenue Comparison (Nine Months Ended September 30, in thousands) | Business Segment | 2020 | 2019 | Change | | :---------------- | :--- | :--- | :----- | | Workforce Solutions | $147,909 | $157,739 | -6% | | Provider Solutions | $35,099 | $33,678 | +4% | | Total revenues, net | $183,008 | $191,417 | -4% | Key Financial Changes (Nine Months Ended September 30, in thousands) | Item | 2020 | 2019 | Change | | :-------------------------------- | :--- | :--- | :----- | | Cost of Revenues | $66,596 | $79,015 | -16% | | Product Development | $23,491 | $21,763 | +8% | | Sales and Marketing | $26,286 | $28,343 | -7% | | Other General and Administrative | $29,949 | $30,283 | -1% | | Depreciation and Amortization | $22,005 | $20,629 | +7% | | Other Income, Net | $2,006 | $2,528 | -21% | | Income Tax Provision | $3,519 | $3,270 | +8% | | Income from Continuing Operations | $13,168 | $10,642 | +24% | | Net Income | $13,168 | $12,087 | +9% | | Adjusted EBITDA from continuing operations | $34,893 | $35,723 | -2% | [Discontinued Operations](index=26&type=section&id=Discontinued%20Operations) No discontinued operations were reported in 2020 following the 2018 divestiture of the PX business - The Company's PX business was divested in February 2018, resulting in a **$20.5 million gain**[125](index=125&type=chunk) - No discontinued operations were reported for the three and nine months ended September 30, 2020[126](index=126&type=chunk) [Other Developments](index=27&type=section&id=Other%20Developments) The company is transitioning away from legacy resuscitation products toward new, higher-margin offerings - Revenues from legacy resuscitation products (HeartCode and RQI) under agreements with Laerdal **decreased to $9.7 million in Q3 2020** and are expected to be zero by Q1 2021[127](index=127&type=chunk) - A new agreement with RQI Partners provides a fee for delivering HeartCode/RQI via HealthStream Learning Center, but it is **not expected to supplant legacy agreement revenues**[128](index=128&type=chunk) - The Company launched the American Red Cross Resuscitation Suite in January 2019 and is developing broader simulation-based offerings, aiming for **higher margin opportunities**[129](index=129&type=chunk) [Reconciliation of Non-GAAP Financial Measures](index=27&type=section&id=Reconciliation%20of%20Non-GAAP%20Financial%20Measures) This section reconciles GAAP net income to the non-GAAP measure of Adjusted EBITDA - Adjusted EBITDA and Adjusted EBITDA from continuing operations are non-GAAP measures used by management to assess financial results, excluding non-cash and non-operating items[130](index=130&type=chunk)[131](index=131&type=chunk) Reconciliation of Adjusted EBITDA (in thousands) | Item | Three Months Ended Sep 30, 2020 | Three Months Ended Sep 30, 2019 | Nine Months Ended Sep 30, 2020 | Nine Months Ended Sep 30, 2019 | | :-------------------------------- | :------------------------------ | :------------------------------ | :----------------------------- | :----------------------------- | | GAAP income from continuing operations | $2,634 | $3,461 | $13,168 | $10,642 | | Adjusted EBITDA from continuing operations | $11,135 | $11,481 | $34,893 | $35,723 | | GAAP net income | $2,634 | $3,712 | $13,168 | $12,087 | | Adjusted EBITDA | $11,135 | $11,821 | $34,893 | $37,683 | [Liquidity and Capital Resources](index=28&type=section&id=Liquidity%20and%20Capital%20Resources) The company maintains strong liquidity despite a decrease in operating cash flow, driven by acquisitions and share repurchases - Net cash provided by operating activities **decreased by $21.8 million to $30.8 million** for the nine months ended September 30, 2020, primarily due to declining legacy resuscitation sales and lower new sales[135](index=135&type=chunk) - Working capital decreased to **$104.1 million** at September 30, 2020, from $119.4 million at December 31, 2019, mainly due to the NurseGrid acquisition and share repurchases[139](index=139&type=chunk) - As of September 30, 2020, liquidity included **$107.0 million in cash and cash equivalents**, $42.7 million in marketable securities, and an available $50.0 million revolving credit facility[139](index=139&type=chunk) - The Company repurchased **762,843 shares for $16.3 million** under its $30.0 million share repurchase program during the first nine months of 2020[140](index=140&type=chunk) - Management believes existing liquidity and cash generation will be **sufficient for anticipated needs** for at least the next 12 months[141](index=141&type=chunk) [Item 3. Quantitative and Qualitative Disclosures about Market Risk](index=29&type=section&id=Item%203.%20Quantitative%20and%20Qualitative%20Disclosures%20about%20Market%20Risk) The company's primary market risk exposure is to interest rate fluctuations affecting its investment income - The Company is exposed to market risk from changes in interest rates but has **no material foreign currency exchange rate or commodity price risk**[143](index=143&type=chunk) - As of September 30, 2020, the Company had no outstanding debt, and a hypothetical **10% decrease in interest rates** would reduce annualized interest income by **$41,000**[143](index=143&type=chunk) - The Company's investment policy focuses on **highly rated securities** to minimize principal loss, with limits on credit exposure per issuer and average portfolio maturity[144](index=144&type=chunk) [Item 4. Controls and Procedures](index=30&type=section&id=Item%204.%20Controls%20and%20Procedures) Management concluded that the company's disclosure controls and internal controls over financial reporting were effective [Evaluation of Controls and Procedures](index=30&type=section&id=Evaluation%20of%20Controls%20and%20Procedures) The CEO and CFO have confirmed the effectiveness of the company's disclosure controls and procedures - The CEO and CFO concluded that HealthStream's disclosure controls and procedures were **effective** as of September 30, 2020[146](index=146&type=chunk) [Changes in Internal Control over Financial Reporting](index=30&type=section&id=Changes%20in%20Internal%20Control%20over%20Financial%20Reporting) No material changes were made to internal controls over financial reporting during the third quarter of 2020 - There were **no material changes** in HealthStream's internal control over financial reporting during the third quarter of 2020[147](index=147&type=chunk) [PART II ‑ OTHER INFORMATION](index=31&type=section&id=Part%20II%20%E2%80%91%20Other%20Information) This part provides supplementary information, including risk factors, share repurchase details, and filed exhibits [Item 1A. Risk Factors](index=31&type=section&id=Item%201A.%20Risk%20Factors) The COVID-19 pandemic poses significant risks to the company's business, operations, and financial results - The COVID-19 pandemic has adversely impacted the business, leading to reduced elective procedures for healthcare customers, potential inability of customers to pay, and **delays in contract renewals and new sales**[150](index=150&type=chunk)[151](index=151&type=chunk)[152](index=152&type=chunk) - Customer unwillingness to allow vendor visits and cancellation of tradeshows have **negatively impacted sales opportunities**[152](index=152&type=chunk) - Delays in product implementation by customers or the Company due to COVID-19 could **adversely affect financial results**[152](index=152&type=chunk) - Operating as a prolonged remote workforce due to COVID-19 could **decrease productivity, increase security risks**, and impair business management and employee attraction/retention[154](index=154&type=chunk) - Significant uncertainties remain regarding the severity and duration of the pandemic, which could **materially affect the business**[155](index=155&type=chunk)[156](index=156&type=chunk)[157](index=157&type=chunk) [Item 2. Unregistered Sales of Equity Securities and Use of Proceeds](index=32&type=section&id=Item%202.%20Unregistered%20Sales%20of%20Equity%20Securities%20and%20Use%20of%20Proceeds) The company provides details on its active share repurchase program and activity during the third quarter - The Board of Directors authorized a **$30.0 million share repurchase program** on March 13, 2020, set to terminate by March 12, 2021[158](index=158&type=chunk) Share Repurchase Program Activity (Three Months Ended September 30, 2020) | Period | Total number of shares purchased | Average price paid per share | | :-------------------------------- | :----------------------------- | :--------------------------- | | Month 3 (September 1 - September 30) | 318,902 | $19.87 | | Total | 318,902 | $19.87 | Cumulative Repurchases (Nine Months Ended September 30, 2020) | Item | Amount | | :-------------------------------- | :------- | | Total shares repurchased | 762,843 | | Aggregate fair value | $16.3 million | | Average price per share | $21.42 | | Maximum dollar value remaining | $13,663,393 | [Item 6. Exhibits](index=33&type=section&id=Item%206.%20Exhibits) This section lists all exhibits filed with the Form 10-Q, including certifications and XBRL documents - Exhibits include certifications from the CEO and Principal Financial Officer (31.1, 31.2, 32.1, 32.2) and Inline XBRL documents (101.1 INS, SCH, CAL, DEF, LAB, PRE, 104)[162](index=162&type=chunk) [SIGNATURE](index=34&type=section&id=SIGNATURE) This section contains the official signature block confirming the report's submission by the registrant - The report was signed by Scott A. Roberts, Chief Financial Officer, on behalf of HealthStream, Inc on **October 29, 2020**[164](index=164&type=chunk)[165](index=165&type=chunk)[166](index=166&type=chunk)

Financial Data and Key Metrics Changes - Revenues for Q3 2020 decreased by 3% or $1.6 million to $60.9 million compared to the prior year [24] - Operating income fell by 16% to $3.1 million, while income from continuing operations dropped by 24% to $2.6 million [24] - Adjusted EBITDA from continuing operations decreased by 3% to $11.1 million [24] - Gross margin improved to 61.7% from 59.4% in the prior year, attributed to a favorable revenue mix [26] Business Line Data and Key Metrics Changes - Workforce Solutions segment revenues totaled $49.2 million, down 4% or $1.8 million year-over-year [25] - Revenues from legacy resuscitation products declined by $3.7 million, while revenues from other workforce products increased by $1.9 million or 5% [25] - Provider Solutions segment revenues grew by 2% to $11.7 million, primarily due to the acquisition of CredentialMyDoc [25] Market Data and Key Metrics Changes - The pandemic has led to a significant increase in COVID-19 cases, impacting healthcare organizations and consequently the company's business [7][10] - Nearly three-fourths of hospital executives reported concerns about financial viability without effective treatment or vaccine for COVID-19 [13] Company Strategy and Development Direction - The company announced the acquisition of ShiftWizard, enhancing its portfolio in workforce management solutions [5][32] - The strategy includes transitioning sales and marketing efforts to higher-margin products and platforms, such as the Red Cross Resuscitation Suite and VerityStream [15][17] - The company aims to leverage data across its applications to enhance service delivery and operational efficiency [56] Management's Comments on Operating Environment and Future Outlook - Management noted that while sales have slowed, they have not stopped, with customers adapting to virtual sales and implementation [12] - The company expects continued impacts from COVID-19 on sales volumes and purchasing decisions, particularly in the fourth quarter [36] - There is cautious optimism regarding future sales activities, with a focus on maintaining operational stability [37] Other Important Information - The company ended the quarter with approximately $150 million in cash and investments, maintaining a solid balance sheet with no debt [40] - A share repurchase program of up to $30 million was authorized, with $16.3 million repurchased through Q3 [31] Q&A Session Summary Question: Can you provide insights on sales cycle activity and demand environment? - Management indicated that while there has been a deferral in some elective product purchases, the sales pipeline remains strong with new sales in the Red Cross resuscitation suite [48] Question: What is the outlook for gross margins? - Management attributed gross margin fluctuations to revenue mix and noted that supplemental payroll payments impacted costs [50][51] Question: How do you envision integrating ShiftWizard with existing platforms? - The company plans to leverage the strengths of NurseGrid and ShiftWizard to enhance scheduling capabilities and connect them through the hStream platform [56] Question: What are the trends in contract renewals and pricing? - Pricing remains steady, with bundling services providing additional value, while unit pricing for core products is competitive [68] Question: How is employment trending among clients? - There has been a return of furloughed employees, with growth observed in certain healthcare sectors, indicating a positive employment trend [69]