HEALTHSTREAM INC

1. OVERVIEW AND BASIS OF PRESENTATION

Company Overview

HealthStream provides primarily Software-as-a-Service ("SaaS") based applications for healthcare organizations—all designed to improve business and clinical outcomes by supporting the people who deliver patient care. The Company is focused on helping individuals and organizations in healthcare meet their ongoing learning, clinical development, credentialing, and scheduling needs. The Company also provides its solutions to nursing schools and nursing students.

The Company is organized and operated according to its One HealthStream approach, with its hStream technology platform at the center of that approach. Increasingly, SaaS-based applications in the Company's diverse ecosystem of solutions utilize the Company's proprietary hStream technology platform to enhance the value proposition for customers by creating interoperability with and among other applications. As used in this Quarterly Report on Form10-Q (“Form10-Q”), “HealthStream,” “Company,” “we,” “us,” and “our” mean HealthStream, Inc. and its subsidiaries, unless the context indicates otherwise.

Basis of Presentation

The accompanying unaudited Condensed Consolidated Financial Statements have been prepared in accordance with accounting principles generally accepted in the United States (“US GAAP”) for interim financial information and with the instructions to Form10‑Q and Article10 of Regulation S‑X. Accordingly, condensed consolidated financial statements donot include all of the information and footnotes required by US GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. All intercompany transactions have been eliminated in consolidation. Operating results for thethree andsix months ended* June 30, 2024* arenot necessarily indicative of the results that* maybe expected for the year ending December 31, 2024.*

The Condensed Consolidated Balance Sheet at* December31,* 2023 was derived from the audited Consolidated Financial Statements at that date but doesnot include all of the information and footnotes required by US GAAP for a complete set of financial statements. For further information, refer to the Consolidated Financial Statements and Notes thereto for the year ended* December31,* 2023 (included in the Company's Annual Report on Form10-K, filed with the Securities and Exchange Commission on* February 26, 2024).*

2. RECENT ACCOUNTING PRONOUNCEMENTS

In* November 2023,the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU")2023-07, Segment Reporting (Topic280): Improvements to Reportable Segment Disclosures*. The new guidance requires disclosures of significant reportable segment expenses that are regularly provided to the chief operating decision maker and other segment items on an interim and annual basis. Entities with a single reportable segment will also be required to apply the disclosure requirements in ASU2023-07 on an interim and annual basis. ASU2023-07 will be effective for the Company for annual periods beginning after* December 15, 2023and interim periods within fiscal years beginning after December 15, 2024.The Company is currently evaluating the impact of adopting ASU2023*-07.

In* December 2023,FASB issued ASU2023*-09, Income Taxes (Topic740*): Improvements to Income Tax Disclosures*, which requires public entities to provide disclosure of disaggregated information in the entity’s tax rate reconciliation, as well as disclosure of income taxes paid disaggregated by jurisdiction. ASU2023-09 is effective for fiscal years beginning after* December 15, 2024,with early adoption permitted. The Company is currently evaluating the impact of adopting ASU2023*-09.

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3. REVENUE RECOGNITION AND SALES COMMISSIONS

Revenue Recognition

Revenues are recognized when control of the promised goods or services is transferred to the customer in an amount that reflects the consideration the Company expects to be entitled in exchange for transferring those goods or services. Revenue is recognized based on the followingfive step model:

The following table represents revenues disaggregated by revenue source (in thousands). Sales taxes are excluded from revenues.

For thethree months ended* June 30, 2024and2023*, the Company recognized $1.6 million and $0.2 million in impairment losses on receivables and contract assets arising from the Company's contracts with customers, respectively. For thesix months ended* June 30, 2024and2023,* the Company recognized $1.8 million and $0.4 million in impairment losses on receivables and contract assets arising from the Company's contracts with customers, respectively.

During thethree months ended* June 30, 2024* and2023, the Company recognized revenues of $47.2 million and $43.6 million, respectively, from amounts included in deferred revenue at the beginning of the respective periods. During thesix months ended* June 30, 2024and2023,* the Company recognized revenues of $65.2 million and $62.1 million, respectively, from amounts included in deferred revenue at the beginning of the respective periods. As of* June 30, 2024*, approximately $538 million of revenue is expected to be recognized from remaining performance obligations under contracts with customers. The Company expects to recognize revenue related to approximately 43% of these remaining performance obligations over the next 12 months, with the remaining amounts recognized thereafter.

Sales Commissions

Sales commissions earned by the Company's sales employees are considered incremental and recoverable costs of obtaining a contract with a customer. The Company recorded amortization of deferred commissions of $3.0 million and $2.8 million for thethree months ended* June 30, 2024* and2023, respectively, and $6.0 million and $5.5 million for thesix months ended* June 30, 2024and2023,* respectively, which is included in sales and marketing expenses in the accompanying Condensed Consolidated Statements of Income.

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4. INCOME TAXES

Income taxes are accounted for using the asset and liability method, whereby deferred tax assets and liabilities are determined based on the temporary differences between the financial statement and tax bases of assets and liabilities measured at tax rates that will be in effect for the year in which the differences are expected to affect taxable income.

The Company computes its interim period provision for income taxes by applying the estimated annual effective tax rate to year-to-date pretax income or loss and adjusts the provision for discrete tax items recorded in the period. During thethree months ended* June 30, 2024* and2023, the Company recorded a provision for income taxes of $1.1 million and $0.4 million, respectively. During thesix months ended* June 30, 2024and2023,* the Company recorded a provision for income taxes of $2.4 million and $0.9 million, respectively.

The Company’s effective tax rate was 21% and 12% for thesix months ended* June 30, 2024and2023*, respectively. The Company’s effective tax rate primarily reflects the statutory corporate income tax rate, the net effect of state taxes, foreign income taxes, the effect of various permanent tax differences, and recognition of discrete tax items. The Company recognizes excess tax benefits and tax deficiencies associated with stock-based awards as a component of its provision for income taxes. During thesix months ended* June 30, 2024*, the Company recorded discrete tax expense of $14,000, which consisted primarily of discrete tax expense of $0.2 million related to reserves for uncertain tax positions, partially offset by a $0.1 million discrete tax benefit associated with stock-based awards. During thesix months ended* June 30, 2023*, the Company recorded discrete tax benefits of $0.5 million, which consisted primarily of tax benefits associated with changes in state apportionment rules in Tennessee upon the enactment of the Tennessee Works Tax Act in the amount of $0.6 million, and stock-based awards, in the amount of $0.1 million. This tax benefit for thesix months ended* June 30, 2023*was partially offset by $0.2 million of discrete tax expense related to reserves for uncertain tax positions.

5. SHAREHOLDERS’** EQUITY**

Dividends on Common Stock

During thesix months ended* June 30, 2024,*the Company's Board of Directors (“Board”) declared the following quarterly dividends under the Company's dividend policy:

Additionally, on* July 22, 2024,the Board declared a quarterly cash dividend of $0.028 per share, payable on August 16, 2024 to holders of record on August 5, 2024.*

Stock-Based Compensation

The Company has stock awards outstanding under its2016 Omnibus Incentive Plan and2022 Omnibus Incentive Plan. The Company accounts for its stock-based compensation plans using the fair-value based method for costs related to share-based payments, including restricted share units (“RSUs”) and stock options. During thesix months ended* June 30, 2024*, the Company issued 69,784 RSUs subject to service-based time vesting, with a weighted average grant date fair value of $26.92 per share, measured based on the closing fair market value of the Company's stock on the date of the grant. During thesix months ended* June 30, 2023*, the Company issued 72,923 RSUs subject to service-based time vesting, with a weighted average grant date fair value of $25.36 per share, measured based on the closing fair market value of the Company’s stock on the date of grant.

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During thesix months ended* June 30, 2023,the Company granted 138,000 performance-based RSUs, the vesting of which occurs over afive-year period in increments of 15%,20%,20%,20%, and 25% and is contingent upon continued service and achieving certain performance criteria established by the compensation committee of the Board (the “Compensation Committee”) on an annual basis based on performance in2023,* 2024, 2025, 2026, and2027, respectively. The performance criteria for thesecond-year tranche, or 27,600 of these performance-based RSUs, is based on2024 adjusted EBITDA. The measurement date for these 27,600 performance-based RSUs was established during thesix months ended* June 30, 2024with a weighted average grant date fair value of $26.79 per share, measured based on the closing fair market value of the Company's stock on the date the performance criteria was established. The performance criteria for the remaining 89,700 performance-based RSUs hasnot* yet been determined and will be established on an annual basis in2025, 2026, and2027, as applicable; therefore, the measurement date for these remaining 89,700 performance-based RSUs cannot be determined until the performance criteria have been established.

During thesix months ended* June 30, 2022,the Company approved the grant of 91,042 performance-based RSUs, the vesting of which occurs over afive-year period in increments of 15%,20%,20%,20%, and 25% and is contingent upon continued service and achieving certain performance criteria established by the Compensation Committee on an annual basis based on performance in2022,* 2023, 2024, 2025, and2026, respectively. The performance criteria and measurement date for thethird-year tranche, or 18,211 of these performance-based RSUs, is based on2024 adjusted EBITDA and was established during thesix months ended* June 30, 2024with a grant date fair value of $26.79 per share, measured based on the closing fair market value of the Company's stock on the date the performance criteria was established. The performance criteria for the remaining 40,967 performance-based RSUs hasnot* yet been determined and will be established on an annual basis in2025 and2026, as applicable; therefore, the measurement date for these remaining 40,967 performance-based RSUs cannot be determined until the performance criteria have been established.

Total stock-based compensation expense recognized in the Condensed Consolidated Statements of Income is as follows (in thousands):

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6. EARNINGS PER SHARE

Basic earnings per share is computed by dividing the net income available to common shareholders for the period by the weighted average number of common shares outstanding during the period. Diluted earnings per share is computed by dividing the net income available to common shareholders for the period by the weighted average number of potentially dilutive common and common equivalent shares outstanding during the period. Common equivalent shares are composed of incremental common shares issuable upon the exercise of stock options and RSUs subject to vesting. The dilutive effect of common equivalent shares is included in diluted earnings per share by application of the treasury stock method. The total number of common equivalent shares excluded from the calculations of diluted earnings per share, due to their anti-dilutive effect or contingent performance conditions, was approximately 155,000 and 225,000 for thethree months ended* June 30, 2024* and2023, respectively, and 166,000 and 246,000 for thesix months ended* June 30, 2024and2023,* respectively.

The following table sets forth the computation of basic and diluted earnings per share (in thousands, except per share data):

7. MARKETABLE SECURITIES

The fair value of marketable securities, which were all classified as available for sale and which the Company doesnot intend to sell nor will the Company be required to sell prior to recovery of their amortized cost basis, included the following (in thousands):

The carrying amounts reported in the Condensed Consolidated Balance Sheets approximate fair value based on quoted market prices or alternative pricing sources and models utilizing market observable inputs. As of* June 30, 2024*, the Company didnot recognize any allowance for credit impairments on its available for sale securities. All investments in marketable securities are classified as current assets on the Condensed Consolidated Balance Sheets because the underlying securities mature withinone year from the balance sheet date.

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8. DEBT

Revolving Credit Facility

On* October 6, 2023,the Company entered into an Amended and Restated Revolving Credit Agreement (“Revolving Credit Facility”), amending the Revolving Credit Facility dated as of November 24, 2014,as amended, with certain lenders party thereto from time to time, and Truist, as Administrative Agent for the lenders. Under the Revolving Credit Facility, the Company mayborrow up to $50.0 million, which includes a $5.0 million swingline sub-facility and a $5.0 million letter of credit sub-facility, as well as an accordion feature that allows the Company to increase the Revolving Credit Facility by a total of up to $25.0 million, subject to securing additional commitments from existing lenders or new lending institutions. The Revolving Credit Facility has a maturity date of October 6, 2026.*

The Company's obligations under the Revolving Credit Facility are unsecured. In addition, if the Company forms or acquires any domestic subsidiaries, the loans and other obligations under the Revolving Credit Facility will be guaranteed by such domestic subsidiaries.

At the Company’s election, the borrowings under the Revolving Credit Facility, other than the swingline loans, bear interest at either (1) a base rate defined as the highest of (a) the rate which the Administrative Agent announces from time to time as its prime lending rate, as in effect from time to time, or (b) the Federal Funds Rate, as in effect from time to time, plusone-half ofone percent (0.50%) per annum (any changes in such rates to be effective as of the date of any change in such rate), plus in each case an applicable margin that varies with the company’s funded debt leverage ratio; or (2) a term secured overnight financing rate (“SOFR”) defined as the greater of (a)(i) the forward-looking term rate based on SOFR determined as of the reference time for such interest period with a term equivalent to such interest period plus (ii) a term SOFR adjustment equal to 0.10% per annum and (b) zero, plus, in each case, an applicable margin that varies with the Company’s consolidated total leverage ratio. The Company’s borrowings under the swingline loans bear interest at the base rate plus the applicable margin. The initial applicable margin for base rate loans is 0.50% and the initial applicable margin SOFR loans is 1.50%. The applicable margins will be adjusted quarterly, in each casetwo (2) business days after the Administrative Agent's receipt of the Company's quarterly financial statements. The Company is also required to pay a commitment fee accruing on the unused revolving commitment, which fee initially is 20 basis points per annum and a letter of credit fee, accruing at a rate per annum equal to the applicable margin for SOFR loans then in effect on the daily average amount of such lender’s letter of credit exposure.

Principal is payable in full at maturity on* October 6, 2026,and there areno* scheduled principal payments prior to maturity. Interest on base rate loans and swingline loans is payable quarterly in arrears, and interest on SOFR loans is payable at the end of each interest period, and in the case of interest periods longer thanthree months, on each day which occurs everythree months after the initial date of such interest period.

The purpose of the Revolving Credit Facility is for general working capital needs, permitted acquisitions (as defined in the Amended and Restated Revolving Credit Agreement), and for stock repurchase and/or redemption transactions that the Company* may*authorize.

In addition, the Revolving Credit Facility required the Company to meet certain financial tests, including, without limitation:

In addition, the Revolving Credit Facility contains certain customary affirmative and negative covenants that, among other things, restrict additional indebtedness, liens and encumbrances, changes to the character of the Company’s business, acquisitions, asset dispositions, mergers and consolidations, sale or discount of receivables, creation or acquisitions of additional subsidiaries, and other matters customarily restricted in such agreements.

As of* June 30, 2024*, the Company was in compliance with all covenants. There wereno balances outstanding on the Revolving Credit Facility as of or during thethree andsix months ended* June 30, 2024*.