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quarter of 2015, HealthStream, Inc. ( HealthStream or the Company ) changed its reportable operating segments, as further described in Notes 1 and 8 to the Consolidated Financial Statements included in Exhibit 99.2 to this
Current Report on Form 8-K ( Form 8-K ). The Company formed a new business segment, HealthStream Provider Solutions, in addition to the Company s other two pre-existing business segments,
HealthStream Workforce Solutions and HealthStream Patient Experience Solutions. HealthStream Provider Solutions reflects the combination of two previously acquired businesses, HealthLine Systems, LLC, which was acquired in March 2015, and Sy.Med
Development, Inc. ( Sy.Med ), which was acquired in October 2012.
The information included in this Form 8-K updates the historical information
included in Part II, Items 7 and 8 of the Company s Annual Report on Form 10-K for the year ended December 31, 2014, filed with the Securities and Exchange Commission on February 27, 2015 ( Form 10-K ) to recast historical
reportable operating segment results to conform to the 2015 presentation by including Sy.Med within the HealthStream Provider Solutions segment rather than the HealthStream Workforce Solutions segment. The change in the Company s reportable
segments as described above did not have any impact on the Company s previously reported Consolidated Balance Sheets, Consolidated Statements of Income, Consolidated Statements of Comprehensive Income, Consolidated Statements of
Shareholders Equity, or Consolidated Statement of Cash Flows included in the Form 10-K. All updates to the historical information included in Part II, Items 7 and 8 of the Form 10-K reflected in this Form 8-K relate solely to the change in the
Company s business segments as noted above, and this Form 8-K does not update or modify any other disclosures in the Form 10-K. Except as noted above, this Form 8-K does not provide any update or discussion of any developments, activities,
trends, or risks related to the Company subsequent to the filing of the Form 10-K. For more recent information regarding the Company since the filing of the Form 10-K on February 27, 2015, please refer to subsequent filings of the Company under
the Securities Exchange Act of 1934.
The Items from the Form 10-K included in this Form 8-K contain forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended, Section 21E of the Securities Exchange Act of 1934, as amended, and the Private Securities Litigation Reform Act of 1995, as amended. Such forward-looking statements include, among
others, those statements including the words expects, anticipates, intends, believes, may, will, should, continue and similar language or the negative of
such terms or other comparable terminology. These forward-looking statements involve known and unknown risks, uncertainties and other factors that could cause our results and performance to be materially different from any results or performance
expressed or implied by these forward-looking statements, including, but not limited to, the risk factors included in Part 1, Item 1A of the Form 10-K. We undertake no obligation to revise or update any forward-looking statements, or to make
any other forward-looking statements, whether as a result of new information, future events, or otherwise.
Management s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion of the financial
condition and results of operations of HealthStream should be read in conjunction with Selected Financial Data contained in the Form 10-K, and HealthStream s Consolidated Financial Statements and related notes thereto included in
and those anticipated in these forward-looking statements as a result of many factors, including but not limited to those described under Part I, Item 1A. Risk Factors in the Form 10-K
and elsewhere in the Form 10-K and in this Form 8-K.
We provide subscription-based workforce patient experience, and provider solutions for healthcare organizations all designed to assess and develop the
people that deliver patient care which, in turn, supports the improvement of business and clinical outcomes. Our workforce products are used by healthcare organizations to meet a broad range of their training, certification, competency assessment,
performance appraisal, and development needs. Our patient experience products provide our customers information about patients experiences and how to improve them, workforce engagement, physician relations, and community perceptions of their
services. Our provider products are used by healthcare organizations for provider credentialing, privileging, call center and enrollment needs. HealthStream s customers include healthcare organizations, pharmaceutical and medical device
companies, and other participants in the healthcare industry.
Revenues for the year ended December 31, 2014 were approximately $170.7 million
compared to $132.3 million for the year ended December 31, 2013, an increase of 29.0%. Operating income increased by 11.7% to $16.4 million for 2014, compared to $14.7 million for 2013. Net income increased by 23.4% to $10.4 million for 2014,
compared to $8.4 million for 2013. Earnings per share (EPS) were $0.37 per share (diluted) for 2014 compared to $0.30 per share (diluted) for 2013. Revenues from HealthStream Workforce Solutions grew by 34.3%, or $34.3 million, revenues from
HealthStream Patient Experience Solutions grew by 12.1%, or $3.4 million, and revenues from HealthStream Provider Solutions grew by 17.9%, or $690,000. We had approximately 4.28 million total subscribers, of which approximately
4.15 million were fully implemented subscribers on our SaaS-based platform at December 31, 2014. Annualized revenue per implemented subscriber increased to $34.43 per subscriber at the end of 2014, up from $32.41 per subscriber at the end
of 2013, representing a 6.2% increase. As of December 31, 2014 our cash and investment balances approximated $121.0 million, and we maintained full availability under our $50.0 million revolving credit facility.
On February 12, 2015, the
Company entered into a definitive agreement to acquire all of the stock of HealthLine Systems, Inc. ( HealthLine Systems ), a San Diego, California based company that specializes in healthcare credentialing, privileging, and quality
management software services. The acquisition of HealthLine Systems will enable the Company to provide a comprehensive, SaaS-based solution set for healthcare provider credentialing, privileging, and enrollment in support of HealthStream s
approach to talent management for healthcare organizations. The consideration to be paid for HealthLine Systems consists of approximately $88.0 million in cash, subject to a post-closing working capital adjustment. The closing of the transaction is
anticipated to occur in the first quarter of 2015 and is subject to customary closing conditions, including the expiration or early termination of the waiting period applicable to the transaction under the Hart-Scott-Rodino Antitrust Improvements
Act of 1976, as amended.
Following the closing of the transaction, the Company intends to combine HealthLine Systems with its Sy.Med business. Both
HealthLine Systems and Sy.Med will continue to operate at their current locations in San Diego, California and Brentwood, Tennessee, respectively. In addition, Michael Sousa, Senior Vice President of Business Development, has been selected to serve
as President for this business unit following the closing of the acquisition.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
We recognize revenues from our
subscription-based workforce products and courseware subscriptions based on a per person subscription basis, and in some cases on a per license basis. Fees are based on the size of the facilities or organizations employee user population
and the service offerings to which they subscribe. Subscription-based revenue is recognized ratably over the service period of the underlying contract. All other service revenues are recognized as the related services are performed or products are
Revenues derived from the license of installed software products are recognized upon shipment or installation of the software when vendor
specific objective evidence (VSOE) of fair value for the software license can be established. Software support and maintenance revenues are recognized ratably over the term of the related agreement.
Revenues from patient experience services are recognized when survey results are delivered to customers via either Internet-based reporting throughout the
survey period or by providing final survey results once all services are complete. A significant portion of revenues for survey and reporting services that are provided through the use of Internet-based reporting methodologies are recognized using
the proportional performance method, reflecting recognition throughout the service period which corresponds with the survey cycle and reporting access by the customer, which typically ranges from one to five months. If survey results are delivered
to the customer after all services have been completed, then the corresponding revenues are recognized in full in the period such results are provided to the customer. Coaching and consulting revenues are generally recognized using the proportional
performance method as these services are performed throughout the contract term. All other revenues are recognized as the related services are performed or products are delivered to the customer. Revenues for these services can be subject to
seasonal factors based on customers requirements that can impact the timing, frequency, and volume of survey cycles.
Revenues from professional
services include content maintenance, consulting, and implementation services. Fees are based on the time and efforts involved, and revenue is recognized upon completion of performance milestones using the proportional performance method.
We offer training services for clients to facilitate integration of our SaaS-based products. Fees for training are based on the time and efforts of the
personnel involved. Basic online training is generally included in the initial contract; however, incremental training is fee based and revenues are generally recognized upon completion of training services.
Accounting for Income Taxes
The Company accounts for
income taxes 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. Management periodically assesses the realizability of its deferred tax assets, and to the extent that we believe a recovery is not likely, we establish a
valuation allowance to reduce the deferred tax asset to the amount we estimate will be recoverable. The Company maintains a valuation allowance of approximately $0.4 million for the portion of its deferred tax assets that are not more likely than
not expected to be realized.
Software Development Costs
Software development includes our costs to develop and maintain our products and applications, including our SaaS-based workforce development platform products
and our survey reporting applications. Once planning is completed and development begins, we capitalize internal costs and payments to third parties associated with the development efforts where the life expectancy is greater than one year and the
anticipated cash flows are expected to exceed the cost of the related asset. During 2014 and 2013, we capitalized approximately $5.7 million and $4.3 million, respectively, for software development. Such amounts are included in the accompanying
consolidated balance sheets under the caption capitalized software development. We amortize capitalized software development costs over their expected life, which is generally three to five years. Capitalized software development costs
are subject to a periodic impairment review in accordance with our impairment review policy.
In connection with software development, our significant
estimates involve the assessment of the development period for new products, as well as the expected useful life of underlying software or product created. Once capitalized, software development costs are subject to the policies and estimates
described below regarding goodwill, intangibles and other long-lived assets.
Goodwill, Intangibles and Other Long-lived Assets
The Company evaluates goodwill for impairment at the reporting unit level by assessing whether it is more likely than not that the fair value of a reporting
unit exceeds its carrying value. If this assessment concludes that is more likely than not that the fair value of a reporting unit exceeds its carrying value, then goodwill is not considered impaired and no further impairment testing is required.
Conversely, if the assessment concludes that it is more likely than not that the fair value of a reporting unit is less than its carrying value, a goodwill impairment test is performed to compare the fair value of the reporting unit to its carrying
value. The Company determines fair value of the reporting units using both income and market based models. Our models contain significant assumptions and accounting estimates about discount rates, future cash flows and terminal values that could
materially affect our operating results or financial position if they were to change significantly in the future and could result in an impairment. We perform our goodwill impairment assessment whenever events or changes in facts or circumstances
indicate that impairment may exist and also during the fourth quarter each year. Intangible assets and other long-lived assets are also reviewed for events or changes in facts and circumstances, both internally and externally, which may indicate an
present. We measure any impairment using observable market values or discounted future cash flows from the related long-lived assets. The cash flow estimates and discount rates incorporate
management s best estimates, using appropriate and customary assumptions and projections at the date of evaluation.
Allowance for Doubtful
We estimate the allowance for doubtful accounts using both a specific and non-specific identification method. Management s evaluation
includes reviewing past due accounts on a case-by-case basis, and determining whether an account should be reserved, based on the facts and circumstances surrounding each potentially uncollectible account. An allowance is also maintained for
accounts not specifically identified that may become uncollectible in the future. Uncollectible accounts are written-off in the period management believes it has exhausted every opportunity to collect payment from the customer. Bad debt expense is
recorded when events or circumstances indicate an additional allowance is necessary based on our specific and non-specific identification approach. Our allowance for doubtful accounts totaled approximately $331,000 as of December 31, 2014.
Stock Based Compensation
We recognize compensation
expense using a fair-value based method for costs related to share based payments including stock options and restricted share units. Measurement of such compensation expense requires significant estimation and assumptions; however, we believe that
the Black Scholes option pricing model we use for calculating the fair value of our stock based compensation plans provides a reasonable measurement methodology using a framework that is widely adopted.
As of December 31, 2014, we had two stock incentive plans which qualified as stock based compensation plans. During the years ended December 31,
2014, 2013, and 2012, we recorded approximately $1.6 million, $1.5 million, and $1.1 million of stock based compensation expense, respectively. We have historically granted stock options or restricted share units to our management group on an annual
basis, or when new members of the management group begin their employment. We have historically granted stock options or restricted share units to non-employee members of our board of directors in conjunction with our annual shareholders meeting, or
as new members are added on a pro rata basis based on the time elapsed since our annual shareholders meeting. We expect to continue providing equity based awards to our management group and our board of directors for the foreseeable future. As
of December 31, 2014, total future compensation cost related to non-vested awards not yet recognized was approximately $2.7 million net of estimated forfeitures, with a weighted average expense recognition period of 2.4 years. Future
compensation expense recognition for new equity based award grants will vary depending on the timing and size of new awards granted, changes in the market price or volatility of our common stock, changes in risk-free interest rates, or if actual
forfeitures vary significantly from our estimates.
RESULTS OF OPERATIONS