HealthStream(HSTM) - 2022 Q2 - Quarterly Report

PART I. FINANCIAL INFORMATION Presents HealthStream, Inc.'s unaudited condensed consolidated financial statements and management's discussion and analysis Item 1. Financial Statements Presents HealthStream, Inc.'s unaudited condensed consolidated financial statements and related notes Condensed Consolidated Balance Sheets (Unaudited) Presents HealthStream, Inc.'s unaudited condensed consolidated balance sheets as of June 30, 2022, and December 31, 2021 | ASSETS (in thousands) | June 30, 2022 | December 31, 2021 | | :-------------------- | :------------ | :---------------- | | Cash and cash equivalents | $37,216 | $46,905 | | Total current assets | $95,333 | $106,845 | | Total assets | $477,704 | $486,753 | | LIABILITIES AND SHAREHOLDERS' EQUITY (in thousands) | | | | Total current liabilities | $104,914 | $100,350 | | Total shareholders' equity | $326,732 | $339,019 | | Total liabilities and shareholders' equity | $477,704 | $486,753 | Condensed Consolidated Statements of Income (Unaudited) Details the unaudited condensed consolidated statements of income for the three and six months ended June 30, 2022 and 2021 | (in thousands, except per share data) | Three Months Ended June 30, 2022 | Three Months Ended June 30, 2021 | Six Months Ended June 30, 2022 | Six Months Ended June 30, 2021 | | :------------------------------------ | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Revenues, net | $65,638 | $64,816 | $131,005 | $128,284 | | Total operating costs and expenses | $62,685 | $61,385 | $124,016 | $121,553 | | Operating income | $2,953 | $3,431 | $6,989 | $6,731 | | Net income | $3,083 | $2,441 | $5,976 | $4,732 | | Net income per share (Diluted) | $0.10 | $0.08 | $0.19 | $0.15 | Condensed Consolidated Statements of Comprehensive Income (Unaudited) Outlines the unaudited condensed consolidated statements of comprehensive income for the three and six months ended June 30, 2022 and 2021 | (in thousands) | Three Months Ended June 30, 2022 | Three Months Ended June 30, 2021 | Six Months Ended June 30, 2022 | Six Months Ended June 30, 2021 | | :------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Net income | $3,083 | $2,441 | $5,976 | $4,732 | | Total other comprehensive (loss) income | $(780) | $351 | $(508) | $585 | | Comprehensive income | $2,303 | $2,792 | $5,468 | $5,317 | Condensed Consolidated Statement of Shareholders' Equity (Unaudited) Presents the unaudited condensed consolidated statement of shareholders' equity for the six months ended June 30, 2022 and 2021 | (in thousands) | Balance at Dec 31, 2021 | Net Income (H1 2022) | Repurchase of Common Stock (H1 2022) | Issuance of Common Stock in Acquisition (H1 2022) | Balance at June 30, 2022 | | :------------- | :---------------------- | :------------------- | :----------------------------------- | :----------------------------------------------- | :----------------------- | | Common Stock Amount | $270,791 | — | $(19,889) (Q1) / $(3,143) (Q2) | $4,084 | $253,036 | | Retained Earnings | $68,122 | $2,893 (Q1) / $3,083 (Q2) | — | — | $74,098 | | Total Shareholders' Equity | $339,019 | $2,893 (Q1) / $3,083 (Q2) | $(19,889) (Q1) / $(3,143) (Q2) | $4,084 | $326,732 | Condensed Consolidated Statements of Cash Flows (Unaudited) Details the unaudited condensed consolidated statements of cash flows for the six months ended June 30, 2022 and 2021 | (in thousands) | Six Months Ended June 30, 2022 | Six Months Ended June 30, 2021 | | :------------- | :----------------------------- | :----------------------------- | | Net cash provided by operating activities | $27,981 | $24,324 | | Net cash used in investing activities | $(13,980) | $(10,639) | | Net cash used in financing activities | $(23,635) | $(411) | | Net (decrease) increase in cash and cash equivalents | $(9,689) | $13,226 | | Cash and cash equivalents at end of period | $37,216 | $49,792 | Notes to Condensed Consolidated Financial Statements (Unaudited) Provides essential details and explanations for the unaudited condensed consolidated financial statements 1. BASIS OF PRESENTATION The unaudited condensed consolidated financial statements adhere to US GAAP for interim reporting, with necessary adjustments - The unaudited Condensed Consolidated Financial Statements are prepared in accordance with US GAAP for interim financial information, with all adjustments considered necessary for fair presentation[16] - Operating results for the three and six months ended June 30, 2022, are not necessarily indicative of the results expected for the full year ending December 31, 2022[16] 2. RECENT ACCOUNTING PRONOUNCEMENTS The Company early adopted ASU 2021-08 on January 1, 2022, changing accounting for contract assets and liabilities in business combinations - The Company early adopted ASU 2021-08, Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers, on January 1, 2022[18] - The new guidance requires contract assets and liabilities acquired in a business combination to be recognized and measured as if the acquirer had originated the contracts, differing from previous fair value measurement[18] - The impact of the new standard will depend on the magnitude of future acquisitions but has not had a material impact to date[18] 3. REVENUE RECOGNITION AND SALES COMMISSIONS Revenue is recognized upon transfer of control, disaggregated by segment, with subscription services as primary source - Revenue is recognized when control of promised goods or services is transferred to the customer, following a five-step model[19][22] Revenues by Business Segments (in thousands) | Business Segments (in thousands) | Three Months Ended June 30, 2022 | Three Months Ended June 30, 2021 | Six Months Ended June 30, 2022 | Six Months Ended June 30, 2021 | | :------------------------------- | :------------------------------- | :------------------------------- | :------------------------------- | :------------------------------- | | Workforce Solutions | | | | | | Subscription services | $50,971 | $50,740 | $101,524 | $100,511 | | Professional services | $1,503 | $1,418 | $2,989 | $2,894 | | Provider Solutions | | | | | | Subscription services | $11,500 | $10,905 | $23,022 | $21,502 | | Professional services | $1,664 | $1,753 | $3,470 | $3,377 | | Total revenues, net | $65,638 | $64,816 | $131,005 | $128,284 | - Approximately $455 million of revenue is expected to be recognized from remaining performance obligations, with about 46% expected within the next 12 months[25] - Sales commissions are capitalized and amortized over the expected period of benefit, typically the contract term or approximately three years for non-commensurate commissions[26] 4. INCOME TAXES Income taxes use the asset and liability method; the effective tax rate for H1 2022 was 19%, down from 28% due to a tax benefit Income Tax Provision (in thousands) | Income Tax Provision (in thousands) | Three Months Ended June 30, 2022 | Three Months Ended June 30, 2021 | Six Months Ended June 30, 2022 | Six Months Ended June 30, 2021 | | :-------------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Income tax provision | $549 | $925 | $1,415 | $1,847 | | Effective tax rate | 15% | 27% | 19% | 28% | - The effective tax rate for the six months ended June 30, 2022, was 19%, compared to 28% for the same period in 2021[28] - The lower effective tax rate in 2022 was primarily due to a $0.2 million tax benefit associated with a non-taxable gain from the change in fair value of the minority interest in CloudCME, LLC[28] 5. SHAREHOLDERS' EQUITY The company manages stock awards and compensation, completing a $20.0 million share repurchase and expanding another by $10.0 million Stock-Based Compensation Expense (in thousands) | Stock-Based Compensation Expense (in thousands) | Three Months Ended June 30, 2022 | Three Months Ended June 30, 2021 | Six Months Ended June 30, 2022 | Six Months Ended June 30, 2021 | | :------------------------------------------ | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Total stock-based compensation expense | $917 | $782 | $1,691 | $1,398 | - The Company completed a $20.0 million share repurchase program on March 8, 2022, repurchasing 853,023 shares at an average price of $23.45[33] - An additional $10.0 million share repurchase program was approved on March 14, 2022, under which 402,050 shares were repurchased for $8.1 million during the six months ended June 30, 2022[34][109] 6. EARNINGS PER SHARE Basic and diluted EPS are calculated based on net income and weighted average shares, with diluted EPS increasing for Q2 and H1 2022 Net Income Per Share (Diluted) | Net Income Per Share (Diluted) | Three Months Ended June 30, 2022 | Three Months Ended June 30, 2021 | Six Months Ended June 30, 2022 | Six Months Ended June 30, 2021 | | :----------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Diluted EPS | $0.10 | $0.08 | $0.19 | $0.15 | | Weighted average diluted shares (in thousands) | 30,512 | 31,616 | 30,744 | 31,571 | - Approximately 228,000 and 223,000 common equivalent shares were excluded from diluted EPS calculations for the three and six months ended June 30, 2022, respectively, due to their anti-dilutive effect or contingent performance conditions[35] 7. MARKETABLE SECURITIES Marketable securities, primarily corporate debt, decreased from $5.041 million to $2.000 million and are all current assets Marketable Securities (Fair Value, in thousands) | Marketable Securities (Fair Value, in thousands) | June 30, 2022 | December 31, 2021 | | :--------------------------------------- | :------------ | :---------------- | | Corporate debt securities | $2,000 | $5,041 | | Total | $2,000 | $5,041 | - All investments in marketable securities are classified as current assets because they mature within one year from the balance sheet date[38] 8. BUSINESS COMBINATION HealthStream acquired the remaining 82% of CloudCME, LLC for $4.0 million cash and $4.1 million stock, resulting in $5.6 million goodwill - On May 18, 2022, HealthStream acquired the remaining 82% ownership interest of CloudCME, LLC for approximately $4.0 million in cash and $4.1 million in common stock[39] - The acquisition resulted in the establishment of $5.6 million in goodwill and $5.1 million in intangible assets[39] - The results of operations for CloudCME are included in the Company's Consolidated Financial Statements from the date of acquisition and are part of the Workforce Solutions segment[39] 9. BUSINESS SEGMENTS HealthStream operates in Workforce Solutions and Provider Solutions segments, with performance measured by operating income before specific corporate allocations - The Company provides services through two business segments: Workforce Solutions and Provider Solutions[40] - Workforce Solutions focuses on clinical development, learning, and compliance, while Provider Solutions addresses credentialing, privileging, and enrollment needs[40] Revenues by Business Segment (in thousands) | Revenues by Business Segment (in thousands) | Three Months Ended June 30, 2022 | Three Months Ended June 30, 2021 | Six Months Ended June 30, 2022 | Six Months Ended June 30, 2021 | | :---------------------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Workforce Solutions | $52,474 | $52,158 | $104,513 | $103,405 | | Provider Solutions | $13,164 | $12,658 | $26,492 | $24,879 | | Total revenues, net | $65,638 | $64,816 | $131,005 | $128,284 | Operating Income by Business Segment (in thousands) | Operating Income by Business Segment (in thousands) | Three Months Ended June 30, 2022 | Three Months Ended June 30, 2021 | Six Months Ended June 30, 2022 | Six Months Ended June 30, 2021 | | :------------------------------------------ | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Workforce Solutions | $8,767 | $9,222 | $18,153 | $18,249 | | Provider Solutions | $1,702 | $2,166 | $4,013 | $4,221 | | Unallocated | $(7,516) | $(7,957) | $(15,177) | $(15,739) | | Total operating income | $2,953 | $3,431 | $6,989 | $6,731 | 10. DEBT The company maintains a $65.0 million revolving credit facility for working capital and acquisitions, with no outstanding balance as of June 30, 2022 - The Company has a $65.0 million Revolving Credit Facility with Truist Bank, with a maturity date of October 28, 2023[45] - The facility is intended for general working capital needs, permitted acquisitions, and stock repurchase/redemption transactions[47] - As of June 30, 2022, there were no outstanding balances on the Revolving Credit Facility, and the Company was in compliance with all covenants, including funded debt leverage and interest coverage ratios[49] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Discusses HealthStream's financial condition and results, covering business overview, COVID-19 impact, key metrics, and liquidity Special Cautionary Notice Regarding Forward‑Looking Statements Provides a cautionary notice on forward-looking statements, advising investors to consider risks from the 2021 Form 10-K - Forward-looking statements involve known and unknown risks, uncertainties, and other factors that may cause actual results to differ materially[51] - Investors should not place undue reliance on forward-looking statements and should consider the risks set forth in the 2021 Form 10-K[51][52] Business Overview HealthStream provides SaaS-based applications to healthcare organizations, unifying them under the hStream platform to improve outcomes - HealthStream provides primarily SaaS-based applications for healthcare organizations to improve business and clinical outcomes[53] - The company is unifying its applications under a single technology platform, hStream, to leverage each other more efficiently[54] Significant Financial Metrics (Q2 YoY) | Significant Financial Metrics (Q2 YoY) | Q2 2022 | Q2 2021 | Change | % Change | | :------------------------------------ | :------ | :------ | :----- | :------- | | Revenues | $65.6M | $64.8M | +$0.8M | +1% | | Operating income | $3.0M | $3.4M | -$0.4M | -14% | | Net income | $3.1M | $2.4M | +$0.7M | +26% | | Diluted EPS | $0.10 | $0.08 | +$0.02 | +25% | | Adjusted EBITDA | $13.1M | $14.5M | -$1.4M | -10% | COVID-19 Pandemic and Other Recent Developments COVID-19 continues to cause staffing challenges and delayed sales, impacting H1 2022 revenue and posing economic challenges - The COVID-19 pandemic continues to cause staffing challenges for healthcare customers, including labor shortages and increased costs, leading to delayed sales for certain elective products[57] - Delayed bookings from the height of the pandemic negatively impacted revenue growth in the first half of 2022, but increased bookings in H1 2022 are expected to benefit revenue in the latter half of 2022[58] - Current U.S. economic challenges, including recessionary concerns, inflation, and supply chain disruptions, are increasing labor, supply chain, and capital expenditures for the company and its customers[59] Key Business Metrics Management tracks net revenues, operating income, Adjusted EBITDA, and hStream subscriptions, showing significant year-over-year growth Key Business Metrics (in millions) | Key Business Metrics (in millions) | Q2 2022 | Q2 2021 | H1 2022 | H1 2021 | | :--------------------------------- | :------ | :------ | :------ | :------ | | Revenues, net | $65.6 | $64.8 | $131.0 | $128.3 | | Operating Income | $3.0 | $3.4 | $7.0 | $6.7 | | Adjusted EBITDA | $13.1 | $14.5 | $27.1 | $28.1 | - hStream subscriptions increased to approximately 5.30 million at June 30, 2022, from 4.52 million at June 30, 2021, indicating growth in the value of the customer base[60][61] Critical Accounting Policies and Estimates The company's financial statements rely on estimates for revenue recognition, income taxes, and goodwill, with no material changes - Critical accounting policies and estimates include revenue recognition, accounting for income taxes, and goodwill[63][69] - There have been no changes in the Company's critical accounting policies and estimates from those reported in its 2021 Form 10-K[63] Three Months Ended June 30, 2022 Compared to Three Months Ended June 30, 2021 Q2 2022 revenues increased 1% to $65.6 million, operating income decreased 14%, and net income rose 26% to $3.1 million, boosted by an acquisition gain Revenues by Business Segment (in thousands) | Revenues by Business Segment (in thousands) | Q2 2022 | Q2 2021 | Change | % Change | | :---------------------------------------- | :------ | :------ | :----- | :------- | | Workforce Solutions | $52,474 | $52,158 | $316 | 1% | | Provider Solutions | $13,164 | $12,658 | $506 | 4% | | Total revenues, net | $65,638 | $64,816 | $822 | 1% | - Workforce Solutions revenue growth was partially offset by a $0.9 million decline from the legacy resuscitation business and lower installed software license sales from the legacy Scheduling application suite[65] - Cost of revenues decreased 2% to $22.2 million, primarily due to lower royalties payable for legacy resuscitation products[67][68] - Sales and marketing expenses increased 15% to $10.9 million, driven by increases in personnel expenses, contract labor, marketing, travel, and sales commissions[73][74] - Net income increased 26% to $3.1 million, and diluted EPS rose to $0.10, primarily due to a $0.9 million gain from the change in fair value of the minority interest in CloudCME[78][80] Six Months Ended June 30, 2022 Compared to Six Months Ended June 30, 2021 H1 2022 revenues increased 2% to $131.0 million, operating income rose 4% to $7.0 million, and net income grew 26% to $6.0 million Revenues by Business Segment (in thousands) | Revenues by Business Segment (in thousands) | H1 2022 | H1 2021 | Change | % Change | | :---------------------------------------- | :------ | :------ | :----- | :------- | | Workforce Solutions | $104,513 | $103,405 | $1,108 | 1% | | Provider Solutions | $26,492 | $24,879 | $1,613 | 6% | | Total revenues, net | $131,005 | $128,284 | $2,721 | 2% | - Workforce Solutions revenue growth was driven by recent acquisitions and other solutions, offsetting an expected $2.6 million decline in legacy resuscitation products[83] - Cost of revenues decreased 3% to $44.2 million, primarily due to lower royalties for legacy resuscitation products in Workforce Solutions[85][86] - Sales and marketing expenses increased 15% to $21.3 million, driven by higher personnel costs, sales commissions, travel, and marketing expenses[89][90] - Net income increased 26% to $6.0 million, and diluted EPS rose to $0.19, largely due to the $0.9 million gain from the CloudCME acquisition and a lower income tax provision[94][95][96] - Adjusted EBITDA decreased 4% to $27.1 million for the six months ended June 30, 2022[97] Reconciliation of Non-GAAP Financial Measures Reconciles Adjusted EBITDA, a non-GAAP measure, to GAAP net income, used to assess operating performance by excluding specific items - Adjusted EBITDA is a non-GAAP financial measure used by management to evaluate the Company's operating performance, excluding certain GAAP accounting, non-cash, and non-operating items[98][99] - The definition of Adjusted EBITDA includes an adjustment for deferred revenue write-downs associated with fair value accounting for businesses acquired prior to January 1, 2022, to provide a more comparable view of operating performance[100] Adjusted EBITDA Reconciliation (in thousands) | Adjusted EBITDA Reconciliation (in thousands) | Three Months Ended June 30, 2022 | Three Months Ended June 30, 2021 | Six Months Ended June 30, 2022 | Six Months Ended June 30, 2021 | | :------------------------------------------ | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | GAAP net income | $3,083 | $2,441 | $5,976 | $4,732 | | Deferred revenue write-down | $83 | $1,231 | $177 | $2,852 | | Interest income | $(16) | $(22) | $(31) | $(40) | | Interest expense | $33 | $33 | $65 | $65 | | Income tax provision | $549 | $925 | $1,415 | $1,847 | | Stock-based compensation expense | $917 | $782 | $1,691 | $1,398 | | Depreciation and amortization | $9,420 | $9,149 | $18,742 | $18,302 | | Change in fair value of non-marketable equity investments | $(943) | — | $(943) | — | | Non-cash paid time off expense | — | — | — | $(1,011) | | Adjusted EBITDA | $13,126 | $14,539 | $27,092 | $28,145 | Liquidity and Capital Resources Net cash from operations increased to $28.0 million, while investing and financing activities used $14.0 million and $23.6 million respectively, with $37.2 million cash on hand - Net cash provided by operating activities increased by $3.7 million to $28.0 million for the six months ended June 30, 2022, primarily due to lower royalties paid[104] - Net cash used in investing activities was $14.0 million, including $4.0 million for business combinations (CloudCME) and $11.8 million for capitalized software development[105] - Net cash used in financing activities was approximately $23.6 million, primarily due to $23.1 million for repurchases of common stock[106] - Working capital decreased to negative $9.6 million at June 30, 2022, from positive $6.5 million at December 31, 2021, mainly due to cash reduction for acquisitions and repurchases, and an increase in deferred revenue[107] - The Company believes its existing cash and cash equivalents ($37.2 million), marketable securities ($2.0 million), cash from operations, and available borrowings under its $65.0 million revolving credit facility will be sufficient to meet anticipated working capital needs and capital expenditures for the foreseeable future[107][110] Item 3. Quantitative and Qualitative Disclosures about Market Risk HealthStream faces market risks from interest rates, foreign currency fluctuations, and strategic investments, with no outstanding debt as of June 30, 2022 - The Company is exposed to market risk from changes in interest rates, foreign currency risk (Canadian dollar, New Zealand dollar, and Australian dollar), and investment risk[113][115] - As of June 30, 2022, the Company had no outstanding debt, but future borrowings under its revolving credit facility would be subject to variable interest rates[114] - The Company's investment portfolio includes strategic investments in privately held early-stage healthcare technology companies, which may introduce volatility to its Consolidated Financial Statements[118] Item 4. Controls and Procedures The CEO and CFO confirmed the effectiveness of disclosure controls and procedures as of June 30, 2022, with no material changes to internal control - The Chief Executive Officer and Principal Financial Officer concluded that HealthStream's disclosure controls and procedures were effective as of June 30, 2022[120] - There was no change in HealthStream's internal control over financial reporting during the second quarter of 2022 that materially affected, or is reasonably likely to materially affect, internal control over financial reporting[121] PART II. OTHER INFORMATION Provides other information, including risk factors, unregistered sales of equity securities, and a list of exhibits Item 1A. Risk Factors No material changes have occurred to the risk factors previously disclosed in the 2021 Form 10-K - There have been no material changes to the risk factors previously disclosed in the 2021 Form 10-K[122] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds HealthStream issued 208,567 common shares for $4.1 million in a private placement and repurchased 402,050 shares for $8.1 million - In connection with the CloudCME acquisition, the Company issued 208,567 shares of common stock, valued at $4.1 million, in a private placement[123] - During the first six months of 2022, the Company repurchased 402,050 shares for $8.1 million under an expanded $10.0 million share repurchase program[124] Share Repurchase Activity (Q2 2022) | Share Repurchase Activity (Q2 2022) | Total Shares Purchased | Average Price Paid per Share | Maximum Dollar Value Remaining | | :---------------------------------- | :--------------------- | :--------------------------- | :----------------------------- | | Month 1 (April 1 - April 30) | 126,765 | $19.88 | $2,500,020 | | Month 2 (May 1 - May 31) | 26,722 | $18.98 | $1,992,953 | | Month 3 (June 1 - June 30) | 5,916 | $18.98 | $1,880,642 | | Total (Q2) | 159,403 | $19.70 | $1,880,642 | Item 6. Exhibits Lists exhibits filed with the Form 10-Q, including the 2022 Omnibus Incentive Plan and CEO/CFO certifications - Exhibits include the HealthStream, Inc. 2022 Omnibus Incentive Plan, certifications of the Chief Executive Officer and Principal Financial Officer pursuant to the Sarbanes-Oxley Act, and Inline XBRL documents[127] SIGNATURE The report was signed on behalf of HealthStream, Inc. by Scott A. Roberts, Chief Financial Officer, on July 28, 2022 - The report was signed on behalf of HealthStream, Inc. by Scott A. Roberts, Chief Financial Officer, on July 28, 2022[131]