Item 1.
Financial Statements
HEALTHSTREAM, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
June 30,
2017
|
|
|
December 31,
2016
|
|
|
|
(Unaudited)
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
54,551
|
|
|
$
|
49,634
|
|
Marketable securities
|
|
|
61,142
|
|
|
|
53,540
|
|
Accounts receivable, net of allowance for doubtful accounts of $1,188 and $863 at June 30,
2017 and December 31, 2016, respectively
|
|
|
37,149
|
|
|
|
44,805
|
|
Accounts receivable
-
unbilled
|
|
|
2,684
|
|
|
|
2,581
|
|
Prepaid royalties, net of amortization
|
|
|
16,954
|
|
|
|
18,183
|
|
Other prepaid expenses and other current assets
|
|
|
9,306
|
|
|
|
8,694
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
181,786
|
|
|
|
177,437
|
|
Property and equipment, net of accumulated depreciation of $23,938 and $20,527 at June 30,
2017 and December 31, 2016, respectively
|
|
|
10,263
|
|
|
|
10,245
|
|
Capitalized software development, net of accumulated amortization of $36,501 and $31,787 at
June 30, 2017 and December 31, 2016, respectively
|
|
|
18,346
|
|
|
|
16,310
|
|
Goodwill
|
|
|
109,765
|
|
|
|
109,765
|
|
Customer-related intangibles, net of accumulated amortization of $14,783 and $11,539 at
June 30, 2017 and December 31, 2016, respectively
|
|
|
63,202
|
|
|
|
66,446
|
|
Other intangible assets, net of accumulated amortization of $6,456 and $4,906 at June 30,
2017 and December 31, 2016, respectively
|
|
|
10,369
|
|
|
|
11,918
|
|
Non-marketable equity investments
|
|
|
3,271
|
|
|
|
3,276
|
|
Other assets
|
|
|
773
|
|
|
|
603
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
397,775
|
|
|
$
|
396,000
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS EQUITY
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable and accrued expenses
|
|
$
|
14,552
|
|
|
$
|
13,267
|
|
Accrued royalties
|
|
|
11,210
|
|
|
|
13,161
|
|
Deferred revenue
|
|
|
67,133
|
|
|
|
68,542
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
92,895
|
|
|
|
94,970
|
|
Deferred tax liabilities
|
|
|
4,446
|
|
|
|
5,968
|
|
Deferred revenue, noncurrent
|
|
|
6,471
|
|
|
|
7,859
|
|
Other long term liabilities
|
|
|
1,339
|
|
|
|
1,095
|
|
Commitments and contingencies
|
|
|
|
|
|
|
|
|
Shareholders equity:
|
|
|
|
|
|
|
|
|
Common stock, no par value, 75,000 shares authorized; 31,887 and 31,748 shares issued and
outstanding at June 30, 2017 and December 31, 2016, respectively
|
|
|
281,570
|
|
|
|
280,813
|
|
Retained earnings
|
|
|
11,090
|
|
|
|
5,346
|
|
Accumulated other comprehensive loss
|
|
|
(36
|
)
|
|
|
(51
|
)
|
|
|
|
|
|
|
|
|
|
Total shareholders equity
|
|
|
292,624
|
|
|
|
286,108
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and shareholders equity
|
|
$
|
397,775
|
|
|
$
|
396,000
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to the unaudited condensed consolidated financial statements.
1
HEALTHSTREAM, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(In thousands, except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
June 30,
2017
|
|
|
June 30,
2016
|
|
|
June 30,
2017
|
|
|
June 30,
2016
|
|
Revenues, net
|
|
$
|
61,481
|
|
|
$
|
54,793
|
|
|
$
|
121,351
|
|
|
$
|
108,871
|
|
Operating costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenues (excluding depreciation and amortization)
|
|
|
26,375
|
|
|
|
22,622
|
|
|
|
52,651
|
|
|
|
45,522
|
|
Product development
|
|
|
7,041
|
|
|
|
7,244
|
|
|
|
13,640
|
|
|
|
14,263
|
|
Sales and marketing
|
|
|
10,159
|
|
|
|
9,001
|
|
|
|
20,993
|
|
|
|
17,558
|
|
Other general and administrative expenses
|
|
|
8,520
|
|
|
|
8,529
|
|
|
|
16,460
|
|
|
|
16,505
|
|
Depreciation and amortization
|
|
|
6,531
|
|
|
|
5,081
|
|
|
|
12,918
|
|
|
|
10,221
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating costs and expenses
|
|
|
58,626
|
|
|
|
52,477
|
|
|
|
116,662
|
|
|
|
104,069
|
|
Operating income
|
|
|
2,855
|
|
|
|
2,316
|
|
|
|
4,689
|
|
|
|
4,802
|
|
Other income, net
|
|
|
165
|
|
|
|
109
|
|
|
|
295
|
|
|
|
127
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income tax provision
|
|
|
3,020
|
|
|
|
2,425
|
|
|
|
4,984
|
|
|
|
4,929
|
|
Income tax provision
|
|
|
754
|
|
|
|
1,022
|
|
|
|
1,432
|
|
|
|
2,026
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
2,266
|
|
|
$
|
1,403
|
|
|
$
|
3,552
|
|
|
$
|
2,903
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.07
|
|
|
$
|
0.04
|
|
|
$
|
0.11
|
|
|
$
|
0.09
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$
|
0.07
|
|
|
$
|
0.04
|
|
|
$
|
0.11
|
|
|
$
|
0.09
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares of common stock outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
31,876
|
|
|
|
31,736
|
|
|
|
31,825
|
|
|
|
31,701
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
32,229
|
|
|
|
32,071
|
|
|
|
32,166
|
|
|
|
32,021
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to the unaudited condensed consolidated financial statements.
2
HEALTHSTREAM, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
June 30,
2017
|
|
|
June 30,
2016
|
|
|
June 30,
2017
|
|
|
June 30,
2016
|
|
Net income
|
|
$
|
2,266
|
|
|
$
|
1,403
|
|
|
$
|
3,552
|
|
|
$
|
2,903
|
|
Other comprehensive income, net of taxes:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized gain on marketable securities
|
|
|
13
|
|
|
|
|
|
|
|
15
|
|
|
|
56
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other comprehensive income
|
|
|
13
|
|
|
|
|
|
|
|
15
|
|
|
|
56
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
$
|
2,279
|
|
|
$
|
1,403
|
|
|
$
|
3,567
|
|
|
$
|
2,959
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to the unaudited condensed consolidated financial statements.
3
HEALTHSTREAM, INC.
CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS EQUITY (UNAUDITED)
SIX MONTHS ENDED JUNE 30, 2017
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock
|
|
|
Retained
|
|
|
Accumulated
Other
Comprehensive
|
|
|
Total
Shareholders
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Earnings
|
|
|
Loss
|
|
|
Equity
|
|
Balance at December 31, 2016
|
|
|
31,748
|
|
|
$
|
280,813
|
|
|
$
|
5,346
|
|
|
$
|
(51
|
)
|
|
$
|
286,108
|
|
Cumulative effect of accounting change
|
|
|
|
|
|
|
|
|
|
|
2,192
|
|
|
|
|
|
|
|
2,192
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
3,552
|
|
|
|
|
|
|
|
3,552
|
|
Comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15
|
|
|
|
15
|
|
Stock based compensation
|
|
|
|
|
|
|
919
|
|
|
|
|
|
|
|
|
|
|
|
919
|
|
Common stock issued under stock plans, net of shares withheld for employee taxes
|
|
|
139
|
|
|
|
(162
|
)
|
|
|
|
|
|
|
|
|
|
|
(162
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at June 30, 2017
|
|
|
31,887
|
|
|
$
|
281,570
|
|
|
$
|
11,090
|
|
|
$
|
(36
|
)
|
|
$
|
292,624
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to the unaudited condensed consolidated financial statements.
4
HEALTHSTREAM, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30,
|
|
|
|
2017
|
|
|
2016
|
|
OPERATING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
3,552
|
|
|
$
|
2,903
|
|
Adjustments to reconcile net income to net cash provided by operating activities:
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
12,918
|
|
|
|
10,221
|
|
Stock based compensation expense
|
|
|
919
|
|
|
|
1,004
|
|
Provision for doubtful accounts
|
|
|
523
|
|
|
|
240
|
|
Deferred income taxes
|
|
|
416
|
|
|
|
932
|
|
Loss on non-marketable equity investments
|
|
|
5
|
|
|
|
76
|
|
Other
|
|
|
264
|
|
|
|
607
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts and unbilled receivables
|
|
|
7,029
|
|
|
|
(5,722
|
)
|
Prepaid royalties
|
|
|
1,228
|
|
|
|
794
|
|
Other prepaid expenses and other current assets
|
|
|
(610
|
)
|
|
|
(1,123
|
)
|
Other assets
|
|
|
(170
|
)
|
|
|
552
|
|
Accounts payable and accrued expenses
|
|
|
1,717
|
|
|
|
(2,806
|
)
|
Accrued royalties
|
|
|
(1,951
|
)
|
|
|
(919
|
)
|
Deferred revenue
|
|
|
(2,796
|
)
|
|
|
(6,474
|
)
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
23,044
|
|
|
|
285
|
|
|
|
|
|
|
|
|
|
|
INVESTING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Business combinations, net of cash acquired
|
|
|
|
|
|
|
(3,141
|
)
|
Proceeds from sale of long-lived assets
|
|
|
|
|
|
|
975
|
|
Proceeds from maturities of marketable securities
|
|
|
41,010
|
|
|
|
65,639
|
|
Purchases of marketable securities
|
|
|
(48,861
|
)
|
|
|
(71,220
|
)
|
Payments associated with capitalized software development
|
|
|
(6,238
|
)
|
|
|
(4,303
|
)
|
Purchases of property and equipment
|
|
|
(3,876
|
)
|
|
|
(3,234
|
)
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(17,965
|
)
|
|
|
(15,284
|
)
|
|
|
|
|
|
|
|
|
|
FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Proceeds from exercise of stock options
|
|
|
230
|
|
|
|
94
|
|
Taxes paid related to net settlement of equity awards
|
|
|
(392
|
)
|
|
|
(302
|
)
|
|
|
|
|
|
|
|
|
|
Net cash used in financing activities
|
|
|
(162
|
)
|
|
|
(208
|
)
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents
|
|
|
4,917
|
|
|
|
(15,207
|
)
|
Cash and cash equivalents at beginning of period
|
|
|
49,634
|
|
|
|
82,010
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period
|
|
$
|
54,551
|
|
|
$
|
66,803
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to the unaudited condensed consolidated financial statements.
5
HEALTHSTREAM, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying unaudited
condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (US GAAP) for interim financial information and with the instructions to Form
10-Q
and Article 10 of Regulation
S-X.
Accordingly, condensed consolidated financial statements do not include all of the information and footnotes required by US GAAP
for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. All intercompany transactions have been eliminated in
consolidation. Operating results for the three and six month periods ended June 30, 2017 are not necessarily indicative of the results that may be expected for the year ending December 31, 2017.
The condensed consolidated balance sheet at December 31, 2016 has been derived from the audited consolidated financial statements at that date (certain
amounts in the 2016 balance sheet have been reclassified to conform to the 2017 presentation) but does not include all of the information and footnotes required by US GAAP for complete financial statements. For further information, refer to the
consolidated financial statements and footnotes thereto for the year ended December 31, 2016 (included in the Companys Annual Report on Form 10-K, filed with the Securities and Exchange Commission on February 27, 2017).
2. RECENT ACCOUNTING PRONOUNCEMENTS
Accounting
Standards Recently Adopted
The Company has adopted the Financial Accounting Standards Board (FASB) Accounting Standards Update
(ASU) ASU 2016-09,
Improvements to Employee Share-Based Payment Accounting,
effective January 1, 2017. As a result of the adoption, the Company recorded an adjustment to retained earnings of approximately $2.2 million to
recognize deferred tax assets associated with previous excess tax benefits on stock based compensation that had not been previously recognized because the related tax deduction had not reduced income taxes payable. The Company elected to continue to
estimate expected forfeitures rather than account for them as they occur, and to prospectively reflect the presentation of excess tax benefits on the statement of cash flows as an operating activity. In addition, effective January 1, 2017,
excess tax benefits or deficiencies from equity based awards is reflected in the statement of income as a component of the provision for income taxes.
In
January 2017, the FASB issued ASU 2017-04,
Simplifying the Test for Goodwill Impairment,
which simplifies the measurement of goodwill by eliminating Step 2 from the goodwill impairment test. With the elimination of Step 2, entities will
measure goodwill for impairment by comparing the fair value of the reporting unit with its carrying amount. An impairment charge should be recognized for the amount by which the carrying amount exceeds the reporting units fair value, only to
the extent of the carrying value of goodwill allocated to that reporting unit. The Company elected to early adopt ASU 2017-04 effective January 1, 2017 and is required to apply the new guidance on a prospective basis. The adoption is not
expected to have a material effect on the Companys consolidated financial statements. The Company anticipates the new guidance will make the goodwill impairment evaluation process more efficient and cost effective.
Accounting Standards Not Yet Adopted
In May 2014,
the FASB issued ASU 2014-09,
Revenue from Contracts with Customers (Topic 606)
, which supersedes the revenue recognition requirements in Topic 605,
Revenue Recognition
, and most industry-specific revenue recognition guidance throughout
the Industry Topics of the Accounting Standards Codification. The updated guidance states that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which
the entity expects to be entitled in exchange for those goods or services. The guidance also provides for additional disclosures with respect to revenues and cash flows arising from contracts with customers. The standard will be effective for the
first interim period within annual reporting periods beginning after December 15, 2017, and the Company currently anticipates adopting the standard using the modified retrospective approach effective January 1, 2018. The Company is in the
process of implementing the standard, and has identified several key provisions that may result in changes to current accounting policies, systems and processes, and internal controls, including but not limited to the following: 1) Determining the
relative selling price for software-as-a-service agreements, software licenses, software maintenance, and professional services in order to assign value to the separate performance obligations within a contract. Certain existing right to use
arrangements are recognized over time because VSOE cannot be established, but may result in earlier revenue recognition under the new standard; 2) Capitalizing costs to acquire contracts, such as sales commissions, is not a current accounting
policy; therefore we expect historical sales commissions, which have been expensed as incurred, will need to be evaluated for capitalization; and 3) Ensuring the Companys financial systems can record, calculate, summarize, and report the
necessary information required by the standard, which will require additional investments in technology and resources. The Company is not currently able to quantify the financial impact of the Companys adoption of this accounting standard on
its future consolidated financial statements, but does anticipate adjustments to retained earnings upon adoption.
6
HEALTHSTREAM, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
2. RECENT ACCOUNTING PRONOUNCEMENTS (continued)
In February 2016, the FASB issued ASU 2016-02,
Leases (Topic 842),
which requires lessees to recognize
assets and liabilities for most leases. The recognition, measurement and presentation of expenses and cash flows arising from a lease by a lessee is not expected to significantly change under such guidance; however, the Company is currently
reviewing this standard to determine the method of adoption and to assess the impact on its future consolidated financial statements. The standard will be effective for the first interim period within annual reporting periods beginning after
December 15, 2018, and early adoption is permitted.
In March 2016, the FASB issued ASU 2016-01,
Financial Instruments Overall (Sub Topic
825-10)
, which addresses certain aspects of the recognition, measurement, presentation, and disclosure of financial instruments. The guidance will, among other things, require equity method investments (except those accounted for under the
equity method of accounting or those that result in consolidation of the investee) to be measured at fair value with changes in fair value recognized in net income. The standard will be effective for the first interim period within annual reporting
periods beginning after December 15, 2017, and early adoption is permitted for only limited aspects of such guidance. The Company is currently reviewing this standard to determine the method of adoption and to assess the impact on its future
consolidated financial statements.
3. INCOME TAXES
Income taxes are accounted for using the asset and liability method, whereby deferred tax assets and liabilities are determined based on the temporary
differences between the financial statement and tax bases of assets and liabilities measured at tax rates that will be in effect for the year in which the differences are expected to affect taxable income.
During the three months ended June 30, 2017 and 2016, the Company recorded a provision for income taxes of approximately $754,000 and $1.0 million,
respectively. During the six months ended June 30, 2017 and 2016, the Company recorded a provision for income taxes of approximately $1.4 million and $2.0 million, respectively. The Companys effective tax rate for the six months ended
June 30, 2017 and 2016 was 28.7% and 41.1%, respectively. During the six months ended June 30, 2017, the Company recorded excess tax benefits of approximately $419,000 as a component of the provision for income taxes. The Companys
effective tax rate primarily reflects the statutory corporate income tax rate, the net effect of state taxes, and the effect of various permanent tax differences.
4. STOCK BASED COMPENSATION
The Company has stock awards
outstanding under three stock incentive plans, the Companys 2016 Omnibus Incentive Plan, the 2010 Stock Incentive Plan, and the 2000 Stock Incentive Plan, as amended. The Company accounts for its stock based compensation plans using the
fair-value based method for costs related to share-based payments, including stock options and restricted share units (RSUs). During the six months ended June 30, 2017, the Company issued 86,727 RSUs, subject to service-based
vesting, with a weighted average grant date fair value of $23.54 per share, measured based on the closing fair market value of the Companys stock on the date of grant. During the six months ended June 30, 2016, the Company issued 103,210
RSUs, subject to service-based vesting, with a weighted average grant date fair value of $20.20 per share, measured based on the closing fair market value of the Companys stock on the date of grant.
Total stock based compensation expense recorded for the three and six months ended June 30, 2017 and 2016, which is recorded in the condensed
consolidated statements of income, is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30,
|
|
|
Six Months Ended
June 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
Cost of revenues (excluding depreciation and amortization)
|
|
$
|
30
|
|
|
$
|
35
|
|
|
$
|
63
|
|
|
$
|
76
|
|
Product development
|
|
|
75
|
|
|
|
70
|
|
|
|
145
|
|
|
|
127
|
|
Sales and marketing
|
|
|
73
|
|
|
|
65
|
|
|
|
137
|
|
|
|
127
|
|
Other general and administrative
|
|
|
300
|
|
|
|
335
|
|
|
|
574
|
|
|
|
674
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stock based compensation expense
|
|
$
|
478
|
|
|
$
|
505
|
|
|
$
|
919
|
|
|
$
|
1,004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7
HEALTHSTREAM, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
5. 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 30,500 and 21,250 for the three months ended June 30, 2017 and 2016, respectively, and approximately 87,000 and 53,000 for the six months ended June 30,
2017 and 2016, respectively.
The following table sets forth the computation of basic and diluted earnings per share for the three and six months ended
June 30, 2017 and 2016 (in thousands, except per share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30,
|
|
|
Six Months Ended
June 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
2,266
|
|
|
$
|
1,403
|
|
|
$
|
3,552
|
|
|
$
|
2,903
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average shares outstanding
|
|
|
31,876
|
|
|
|
31,736
|
|
|
|
31,825
|
|
|
|
31,701
|
|
Effect of dilutive shares
|
|
|
353
|
|
|
|
335
|
|
|
|
341
|
|
|
|
320
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average diluted shares
|
|
|
32,229
|
|
|
|
32,071
|
|
|
|
32,166
|
|
|
|
32,021
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share
|
|
$
|
0.07
|
|
|
$
|
0.04
|
|
|
$
|
0.11
|
|
|
$
|
0.09
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share
|
|
$
|
0.07
|
|
|
$
|
0.04
|
|
|
$
|
0.11
|
|
|
$
|
0.09
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6. MARKETABLE SECURITIES
At June 30, 2017 and December 31, 2016, the fair value of marketable securities, which were all classified as available for sale, included the
following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2017
|
|
|
|
|
|
|
Adjusted Cost
|
|
|
Unrealized
Gains
|
|
|
Unrealized
Losses
|
|
|
Fair Value
|
|
Level 2:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate debt securities
|
|
$
|
51,081
|
|
|
$
|
1
|
|
|
$
|
(35
|
)
|
|
$
|
51,047
|
|
Government-sponsored enterprise debt securities
|
|
|
10,097
|
|
|
|
|
|
|
|
(2
|
)
|
|
|
10,095
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
61,178
|
|
|
$
|
1
|
|
|
$
|
(37
|
)
|
|
$
|
61,142
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
|
|
|
|
|
Adjusted Cost
|
|
|
Unrealized
Gains
|
|
|
Unrealized
Losses
|
|
|
Fair Value
|
|
Level 2:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate debt securities
|
|
$
|
44,486
|
|
|
$
|
|
|
|
$
|
(50
|
)
|
|
$
|
44,436
|
|
Government-sponsored enterprise debt securities
|
|
|
9,105
|
|
|
|
1
|
|
|
|
(2
|
)
|
|
|
9,104
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
53,591
|
|
|
$
|
1
|
|
|
$
|
(52
|
)
|
|
$
|
53,540
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The carrying amounts reported in the condensed consolidated balance sheet approximate the fair value based on quoted market
prices or alternative pricing sources and models utilizing market observable inputs. As of June 30, 2017, the Company does not consider any of its marketable securities to be other than temporarily impaired. During the six months ended
June 30, 2017 and 2016, the Company did not reclassify any items out of accumulated other comprehensive income to net income. All investments in marketable securities are classified as a current asset on the balance sheet because the underlying
securities mature within one year from the balance sheet date.
8
HEALTHSTREAM, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
7. BUSINESS COMBINATION
Morrisey Associates, Inc.
On August 8, 2016,
Echo, Inc. (Echo), a wholly owned subsidiary of the Company, acquired all of the outstanding stock of Morrisey Associates, Inc. (MAI), a Chicago, Illinois based company that provides credentialing and privileging software to
healthcare organizations. The acquisition of MAI allows the Company to expand its credentialing and privileging product offerings and solutions to healthcare organizations. The consideration paid for MAI consisted of approximately $48.0 million in
cash, which the Company funded with cash on hand, and was not subject to any post-closing working capital or similar adjustment. The Company incurred approximately $953,000 in transaction costs, all of which were incurred during the year ended
December 31, 2016. The transaction costs were recorded in other general and administrative expenses in the condensed consolidated statements of income. The results of operations for MAI have been included in the Companys consolidated
financial statements from the date of acquisition, and are also included in the HealthStream Provider Solutions segment.
A summary of the purchase price
is as follows (in thousands):
|
|
|
|
|
Cash paid at closing
|
|
$
|
44,120
|
|
Cash held in escrow
|
|
|
3,880
|
|
|
|
|
|
|
Total consideration paid
|
|
$
|
48,000
|
|
The following table summarizes the fair value of the assets acquired and liabilities assumed as of the date of acquisition (in
thousands):
|
|
|
|
|
Accounts receivable, net
|
|
$
|
3,402
|
|
Prepaid royalties and other prepaid assets
|
|
|
187
|
|
Property and equipment
|
|
|
75
|
|
Deferred tax assets
|
|
|
1,507
|
|
Goodwill
|
|
|
20,467
|
|
Intangible assets
|
|
|
27,400
|
|
Accounts payable and accrued liabilities
|
|
|
(1,031
|
)
|
Deferred revenue
|
|
|
(4,007
|
)
|
|
|
|
|
|
Net assets acquired
|
|
$
|
48,000
|
|
|
|
|
|
|
The excess purchase price over the fair values of net tangible and intangible assets was recorded as goodwill. The fair values
of tangible and identifiable intangible assets, deferred revenue, and other liabilities assumed were based on managements estimates and assumptions. The goodwill balance was primarily attributed to the assembled workforce, additional market
opportunities from offering MAIs products, and expected synergies from integrating MAI with other products or other combined functional areas within the Company. The goodwill balance will be deductible for U.S. income tax purposes. The net
tangible assets include deferred revenue, which was adjusted down from a book value at the acquisition date of $8.8 million to an estimated fair value of $4.0 million. The $4.8 million write-down of deferred revenue will result in lower revenues
than would have otherwise been recognized for such services.
The following table sets forth the components of identifiable intangible assets and their
estimated useful lives as of the acquisition date (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Fair value
|
|
|
Useful life
|
|
Customer relationships
|
|
$
|
21,400
|
|
|
|
13 years
|
|
Developed technology
|
|
|
5,400
|
|
|
|
5 years
|
|
Trade name
|
|
|
600
|
|
|
|
6 years
|
|
|
|
|
|
|
|
|
|
|
Total intangible assets subject to amortization
|
|
$
|
27,400
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9
HEALTHSTREAM, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
7. BUSINESS COMBINATION (continued)
The following unaudited pro forma financial information summarizes the combined results of operations of the
Company and MAI as though the companies were combined as of January 1, 2015 (in thousands, except per share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30,
|
|
|
Six Months Ended
June 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
Total revenues
|
|
$
|
61,930
|
|
|
$
|
58,205
|
|
|
$
|
122,515
|
|
|
$
|
115,691
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
2,603
|
|
|
$
|
1,735
|
|
|
$
|
4,357
|
|
|
$
|
3,488
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share
|
|
$
|
0.08
|
|
|
$
|
0.06
|
|
|
$
|
0.14
|
|
|
$
|
0.11
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share
|
|
$
|
0.08
|
|
|
$
|
0.05
|
|
|
$
|
0.14
|
|
|
$
|
0.11
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
These unaudited pro forma combined results of operations include certain adjustments arising from the acquisition such as
adjustment for amortization of intangible assets, depreciation of property and equipment, and fair value adjustments of acquired deferred revenue balances. The unaudited pro forma combined results of operations is for informational purposes only and
is not indicative of what the Companys results of operations would have been had the transaction occurred at the beginning of the period presented or to project the Companys results of operations in any future period.
The unaudited pro forma financial information for the three and six months ended June 30, 2017 and 2016 combines the historical results of the Company
and MAI for the three and six months ended June 30, 2017 and 2016, taking into account the pro forma adjustments listed above.
8. BUSINESS
SEGMENTS
The Company provides services to healthcare organizations and other members within the healthcare industry. The Companys services are
focused on the delivery of workforce development products and services (HealthStream Workforce Solutions), survey and research services (HealthStream Patient Experience Solutions), and provider credentialing, privileging, and enrollment products and
services (HealthStream Provider Solutions).
The Company measures segment performance based on operating income before income taxes and prior to the
allocation of certain corporate overhead expenses, interest income, interest expense, and depreciation. The Unallocated component below includes corporate functions, such as accounting, human resources, legal, investor relations, administrative, and
executive personnel, depreciation, a portion of amortization, and certain other expenses, which are not currently allocated in measuring segment performance. The following is the Companys business segment information as of and for the three
and six months ended June 30, 2017 and 2016 (in thousands).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30,
|
|
|
Six Months Ended
June 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
Revenues, net:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Workforce Solutions
|
|
$
|
44,256
|
|
|
$
|
40,157
|
|
|
$
|
87,958
|
|
|
$
|
81,473
|
|
Patient Experience Solutions
|
|
|
8,562
|
|
|
|
8,968
|
|
|
|
16,464
|
|
|
|
16,932
|
|
Provider Solutions
|
|
|
8,663
|
|
|
|
5,668
|
|
|
|
16,929
|
|
|
|
10,466
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues, net
|
|
$
|
61,481
|
|
|
$
|
54,793
|
|
|
$
|
121,351
|
|
|
$
|
108,871
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30,
|
|
|
Six Months Ended
June 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
Operating income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Workforce Solutions
|
|
$
|
8,563
|
|
|
$
|
9,242
|
|
|
$
|
17,308
|
|
|
$
|
19,647
|
|
Patient Experience Solutions
|
|
|
328
|
|
|
|
(134
|
)
|
|
|
71
|
|
|
|
(791
|
)
|
Provider Solutions
|
|
|
523
|
|
|
|
445
|
|
|
|
(77
|
)
|
|
|
279
|
|
Unallocated
|
|
|
(6,559
|
)
|
|
|
(7,237
|
)
|
|
|
(12,613
|
)
|
|
|
(14,333
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating income
|
|
$
|
2,855
|
|
|
$
|
2,316
|
|
|
$
|
4,689
|
|
|
$
|
4,802
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10
HEALTHSTREAM, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
8. BUSINESS SEGMENTS (continued)
|
|
|
|
|
|
|
|
|
|
|
June 30,
2017
|
|
|
December 31,
2016
|
|
Segment assets *
|
|
|
|
|
|
|
|
|
Workforce Solutions
|
|
$
|
89,136
|
|
|
$
|
96,323
|
|
Patient Experience Solutions
|
|
|
35,116
|
|
|
|
35,988
|
|
Provider Solutions
|
|
|
150,046
|
|
|
|
155,011
|
|
Unallocated
|
|
|
123,477
|
|
|
|
108,678
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
397,775
|
|
|
$
|
396,000
|
|
|
|
|
|
|
|
|
|
|
*
|
Segment assets include accounts and unbilled receivables, prepaid and other current assets, other assets, capitalized software development, certain property and equipment, and intangible assets. Cash and cash
equivalents and marketable securities are not allocated to individual segments, and are included within Unallocated. A significant portion of property and equipment assets are included within Unallocated.
|
9. DEBT
Revolving Credit Facility
The Company maintains a Loan Agreement (the Revolving Credit Facility) with SunTrust Bank (SunTrust) in the aggregate principal amount
of $50.0 million, which matures on November 24, 2017. Under the Revolving Credit Facility, the Company may borrow up to $50.0 million, which includes a $5.0 million swing line subfacility and a $5.0 million letter of credit subfacility, 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 obligations under the
Revolving Credit Facility are guaranteed by each of the Companys subsidiaries. At the Companys election, the borrowings under the Revolving Credit Facility bear interest at either (1) a rate per annum equal to the highest of
SunTrusts prime rate or 0.5% in excess of the Federal Funds Rate or 1.0% in excess of one-month LIBOR (the Base Rate), plus an applicable margin, or (2) the one, two, three, or six month per annum LIBOR for deposits in the
applicable currency (the Eurocurrency Rate), as selected by the Company, plus an applicable margin. The applicable margin for Eurocurrency Rate loans depends on the Companys funded debt leverage ratio and varies from 1.50% to
2.00%. The applicable margin for Base Rate loans depends on the Companys funded debt leverage ratio and varies from 0.50% to 1.50%. Commitment fees and letter of credit fees are also payable under the Revolving Credit Facility. Principal is
payable in full at maturity on November 24, 2017, and there are no scheduled principal payments prior to maturity. The Company is required to pay a commitment fee ranging between 20 and 30 basis points per annum of the average daily unused
portion of the Revolving Credit Facility, depending on the Companys funded debt leverage ratio.
The purpose of the Revolving Credit Facility is for
general working capital needs, permitted acquisitions (as defined in the Loan Agreement), and for stock repurchase and/or redemption transactions that the Company may authorize.
The Revolving Credit Facility contains certain covenants that, among other things, restrict additional indebtedness, liens and encumbrances, changes to the
character of the Companys 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.
In addition, the Revolving Credit Facility requires the Company to meet certain financial tests, including, without limitation:
|
|
|
a funded debt leverage ratio (consolidated debt/consolidated EBITDA) of not greater than 3.0 to 1.0; and
|
|
|
|
an interest coverage ratio (consolidated EBITDA/consolidated interest expense) of not less than 3.0 to 1.0.
|
As of June 30, 2017, the Company was in material compliance with all covenants. There were no balances outstanding on the Revolving Credit Facility as of
or during the three or six months ended June 30, 2017.
11
Item 2.
|
Managements Discussion and Analysis of Financial Condition and Results of Operations
|
Special
Cautionary Notice Regarding
Forward-Looking
Statements
You should read the following discussion and analysis
in conjunction with our condensed consolidated financial statements and related notes included elsewhere in this report and our audited consolidated financial statements and the notes thereto for the year ended December 31, 2016, appearing in
our Annual Report on Form 10-K that was filed with the Securities and Exchange Commission (SEC) on February 27, 2017 (the 2016 Form 10-K). Statements contained in this Quarterly Report on Form 10-Q that are not
historical facts are forward-looking statements that the Company intends to be covered by the safe harbor provisions for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995. Statements that are predictive in
nature, that depend on or refer to future events or conditions, or that include words such as anticipates, believes, could, estimates, expects, intends, may,
plans, potential, predicts, projects, should, will, would, and similar expressions are forward-looking statements.
The Company cautions that forward-looking statements involve known and unknown risks, uncertainties, and other factors that may cause actual results,
performance, or achievements to be materially different from any future results, performance, or achievements expressed or implied by the forward-looking statements. Forward-looking statements reflect our current views with respect to future events
and are based on assumptions and subject to risks and uncertainties. Given these uncertainties, you should not place undue reliance on these forward-looking statements.
In evaluating any forward-looking statement, you should specifically consider the information regarding forward-looking statements and the information set
forth under the caption Part I, Item 1A. Risk Factors in our 2016 Form 10-K and the information regarding forward-looking statements and other disclosures in our 2016 Form 10-K, earnings releases and other filings with the SEC from time to
time, as well as other cautionary statements contained elsewhere in this report, including the matters discussed in Critical Accounting Policies and Estimates. We undertake no obligation beyond that required by law to update publicly any
forward-looking statements for any reason, even if new information becomes available or other events occur in the future. You should read this report and the documents that we reference in this report and have filed as exhibits to this report
completely and with the understanding that our actual future results may be materially different from what we currently expect.
Overview
HealthStream provides workforce, patient experience, and provider solutions for healthcare organizationsall 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. HealthStreams customers include healthcare organizations, pharmaceutical and medical device
companies, and other participants in the healthcare industry.
Key financial indicators for the second quarter of 2017 include:
|
|
|
Revenues of $61.5 million in the second quarter of 2017, up 12% from $54.8 million in the second quarter of 2016
|
|
|
|
Operating income of $2.9 million in the second quarter of 2017, up 23% from $2.3 million in the second quarter of 2016
|
|
|
|
Net income of $2.3 million in the second quarter of 2017, up 62% from $1.4 million in the second quarter of 2016, and earnings per share (EPS) of $0.07 per share (diluted) in the second quarter of 2017, compared to
$0.04 per share (diluted) in the second quarter of 2016
|
|
|
|
Adjusted EBITDA
(1)
of $9.9 million in the second quarter of 2017, up 25% from $7.9 million in the second quarter of 2016
|
(1)
|
Adjusted EBITDA is a non-GAAP financial measure. A reconciliation of Adjusted EBITDA to net income, and disclosure regarding why we believe that Adjusted EBITDA provides useful information to investors, is included
later in this report.
|
Business Combination
We acquired Morrisey Associates, Inc. (MAI), a Chicago, Illinois based company which provides credentialing and privileging software to healthcare
professionals, in August 2016. The results of operations for MAI have been included in our condensed consolidated financial statements from the date of acquisition, and are also included in the HealthStream Provider Solutions segment. The purchase
price for MAI was approximately $48 million, payable in cash at closing. For additional information regarding this business combination, please see Note 7 in the Notes to Condensed Consolidated Financial Statements.
12
Critical Accounting Policies and Estimates
The Companys condensed consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States
(US GAAP). These accounting principles require us to make certain estimates, judgments and assumptions during the preparation of our financial statements. We believe the estimates, judgments and assumptions upon which we rely are
reasonable based upon information available to us at the time they are made. These estimates, judgments and assumptions can affect the reported amounts of assets and liabilities as of the date of the financial statements, as well as the reported
amounts of revenues and expenses during the periods presented. To the extent there are material differences between these estimates, judgments or assumptions and actual results, our financial statements will be affected.
The accounting policies and estimates that we believe are the most critical in fully understanding and evaluating our reported financial results include the
following:
|
|
|
Accounting for income taxes
|
|
|
|
Software development costs
|
|
|
|
Goodwill, intangibles, and other long-lived assets
|
|
|
|
Allowance for doubtful accounts
|
|
|
|
Stock based compensation
|
In many cases, the accounting treatment of a particular transaction is specifically
dictated by US GAAP and does not require managements judgment in its application. There are also areas where managements judgment in selecting among available alternatives would not produce a materially different result. See Notes
to Consolidated Financial Statements in our 2016 Form 10-K, which contains additional information regarding our accounting policies and other disclosures required by US GAAP. There have been no changes in our critical accounting policies and
estimates from those reported in our 2016 Form 10-K.
In addition, Note 2 in the Notes to Condensed Consolidated Financial Statements summarizes new
accounting guidance issued by FASB that has been recently adopted by the Company, or not yet adopted by the Company, and our evaluation of such accounting guidance and the anticipated impact of such guidance (if known) on the Company.
Three Months Ended June 30, 2017 Compared to Three Months Ended June 30, 2016
Revenues, net.
Revenues increased approximately $6.7 million, or 12%, to $61.5 million for the three months ended June 30, 2017 from $54.8 million
for the three months ended June 30, 2016. A comparison of revenues by business segment is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
Percentage
Change
|
|
Revenues by Business Segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
Workforce Solutions
|
|
$
|
44,256
|
|
|
$
|
40,157
|
|
|
|
10
|
%
|
Patient Experience Solutions
|
|
|
8,562
|
|
|
|
8,968
|
|
|
|
-5
|
%
|
Provider Solutions
|
|
|
8,663
|
|
|
|
5,668
|
|
|
|
53
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues, net
|
|
$
|
61,481
|
|
|
$
|
54,793
|
|
|
|
12
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% of Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
Workforce Solutions
|
|
|
72
|
%
|
|
|
73
|
%
|
|
|
|
|
Patient Experience Solutions
|
|
|
14
|
%
|
|
|
17
|
%
|
|
|
|
|
Provider Solutions
|
|
|
14
|
%
|
|
|
10
|
%
|
|
|
|
|
Revenues for HealthStream Workforce Solutions, which are primarily subscription-based, increased approximately $4.1 million,
or 10%, over the second quarter of 2016. Revenues in 2017 were positively influenced by growth in courseware subscriptions and our enterprise applications, but were partially offset by an expected decline of $2.0 million in revenues from ICD-10
readiness training products, which approximated $231,000 for the second quarter of 2017, compared to $2.2 million for the second quarter of 2016. Our Workforce Solutions annualized revenue per implemented subscriber metric increased by 7%, to $38.16
per subscriber for the second quarter of 2017 compared to $35.70 per subscriber for the second quarter of 2016. Our implemented subscriber base increased by 3% over the prior year second quarter to 4.48 million implemented subscribers at
June 30, 2017 compared to 4.34 million implemented subscribers at June 30, 2016. Additionally, we had a 2% increase in total subscribers over the prior year second quarter, with 4.59 million total subscribers at June 30,
2017 compared to 4.51 million total subscribers at June 30, 2016.
13
Revenues for HealthStream Patient Experience Solutions decreased by $406,000, or 5%, compared to the second
quarter of 2016. Revenues from Patient Insights surveys, our survey research product that generates recurring revenues, decreased by $140,000, or 2%, compared to the prior year period. Revenues from these products were impacted by increased
adoption of our e-survey products and lower volumes of phone based surveys. Our e-survey products have both lower revenue and cost per survey than our traditional phone survey products. Revenues from other products, including surveys conducted on
annual or bi-annual cycles and consulting/coaching services, collectively decreased by $266,000, or 12%, compared to the prior year second quarter due to the timing of engagements compared to the prior year period.
Revenues for HealthStream Provider Solutions increased approximately $3.0 million, or 53%, over the second quarter of 2016. Approximately $2.6 million of the
increase resulted from the MAI acquisition which was consummated on August 8, 2016.
Cost of Revenues (excluding depreciation and amortization). Cost
of revenues increased approximately $3.8 million, or 17%, to $26.4 million for the three months ended June 30, 2017 from $22.6 million for the three months ended June 30, 2016. Cost of revenues as a percentage of revenues was 43% and 41%
for the three months ended June 30, 2017 and 2016, respectively.
Cost of revenues for HealthStream Workforce Solutions increased approximately $2.8
million to $18.4 million and approximated 42% and 39% of revenues for HealthStream Workforce Solutions for the three months ended June 30, 2017 and 2016, respectively. The increase in amount and as a percentage of revenues is primarily
associated with increased royalties paid by us resulting from growth in courseware subscription revenues and additions to personnel over the prior year period. Cost of revenues for HealthStream Patient Experience Solutions decreased approximately
$545,000 to $5.2 million and approximated 60% and 64% of revenues for HealthStream Patient Experience Solutions for the three months ended June 30, 2017 and 2016, respectively. The decrease in both amount and as a percentage of revenue is
primarily the result of lower costs associated with declines in phone based survey volume compared to the prior year second quarter. Cost of revenues for HealthStream Provider Solutions increased approximately $1.5 million to $2.8 million and
approximated 32% and 23% of HealthStream Provider Solutions revenues for the three months ended June 30, 2017 and 2016, respectively. The increase in both amount and as a percentage of revenue is primarily associated with the MAI acquisition
and additions to personnel over the prior year period.
Product Development.
Product development expenses decreased approximately $204,000, or 3%,
to $7.0 million for the three months ended June 30, 2017 from $7.2 million for the three months ended June 30, 2016. Product development expenses as a percentage of revenues were 12% and 13% for the three months ended June 30, 2017
and 2016, respectively.
Product development expenses for HealthStream Workforce Solutions decreased approximately $155,000 and approximated 11% and 13%
of revenues for HealthStream Workforce Solutions for the three months ended June 30, 2017 and 2016, respectively. The decrease in both amount and as a percentage of revenues is primarily due to lower outsourced labor expenses. Product
development expenses for HealthStream Patient Experience Solutions decreased approximately $412,000 and approximated 10% and 15% of revenues for HealthStream Patient Experience Solutions for the three months ended June 30, 2017 and 2016,
respectively. The decrease in both amount and as a percentage of revenue is primarily due to higher labor capitalization for internal software development. Product development expenses for HealthStream Provider Solutions increased approximately
$363,000 and approximated 13% and 14% of revenues for HealthStream Provider Solutions for the three months ended June 30, 2017 and 2016, respectively. The increase in amount is primarily associated with the MAI acquisition and additions to
personnel over the prior year period.
Sales and Marketing.
Sales and marketing expenses, including personnel costs, increased approximately $1.2
million, or 13%, to $10.2 million for the three months ended June 30, 2017 from $9.0 million for the three months ended June 30, 2016. Sales and marketing expenses were 17% and 16% of revenues for the three months ended June 30, 2017
and 2016, respectively.
Sales and marketing expenses for HealthStream Workforce Solutions increased approximately $1.1 million and approximated 18% and
17% of revenues for HealthStream Workforce Solutions for the three months ended June 30, 2017 and 2016, respectively. The increase in amount and as a percentage of revenues is primarily due to additions to personnel, higher sales commissions,
and increased marketing spending. Sales and marketing expenses for HealthStream Patient Experience Solutions increased approximately $33,000 and approximated 13% and 12% of revenues for HealthStream Patient Experience Solutions for the three months
ended June 30, 2017 and 2016, respectively. The increase in both amount and as a percentage of revenues is primarily due to higher sales commissions. Sales and marketing expenses for HealthStream Provider Solutions decreased approximately
$35,000 and approximated 12% and 18% of revenues for HealthStream Provider Solutions for the three months ended June 30, 2017 and 2016, respectively.
Other General and Administrative Expenses.
Other general and administrative expenses remained consistent at approximately $8.5 million for both the
three months ended June 30, 2017 and 2016. Other general and administrative expenses as a percentage of revenues were 14% and 16% of revenues for the three months ended June 30, 2017 and 2016, respectively.
14
Other general and administrative expenses for HealthStream Workforce Solutions increased approximately $410,000
and approximated 5% and 4% of HealthStream Workforce Solutions revenues for the three months ended June 30, 2017 and 2016, respectively. The increase in amount and as a percentage of revenues is primarily due to higher facility costs and
increases in other general expenses. Other general and administrative expenses for HealthStream Patient Experience Solutions decreased approximately $15,000 and approximated 9% and 8% of HealthStream Patient Experience Solutions revenues for the
three months ended June 30, 2017 and 2016, respectively. Other general and administrative expenses for HealthStream Provider Solutions increased approximately $308,000 and approximated 14% and 16% of HealthStream Provider Solutions revenues for
the three months ended June 30, 2017 and 2016, respectively. The increase in amount and as a percentage of revenues is primarily associated with the MAI acquisition and higher bad debt expense. The unallocated corporate portion of other general
and administrative expenses decreased approximately $713,000 compared to the prior year second quarter primarily due to lower professional services associated with the implementation of a new financial systems platform during the prior year period
and reductions of other general expenses.
Depreciation and Amortization.
Depreciation and amortization increased approximately $1.5 million, or
29%, to $6.5 million for the three months ended June 30, 2017 from $5.1 million for the three months ended June 31, 2016. The increase primarily resulted from amortization of capitalized software development, amortization of intangible
assets from the MAI acquisition, and depreciation expense associated with capital expenditures.
Other Income, Net
. Other income, net was
approximately $165,000 for the three months ended June 30, 2017 compared to $109,000 for the three months ended June 30, 2016. This increase is primarily a result of interest income from investments in marketable securities.
Income Tax Provision.
The Company recorded a provision for income taxes of approximately $754,000 for the three months ended June 30, 2017
compared to $1.0 million for the three months ended June 30, 2016. The Companys effective tax rate was 25% for the three months ended June 30, 2017 compared to 42% for the three months ended June 30, 2016. The decrease in the
effective tax rate was primarily influenced by excess tax benefits from stock-based awards, higher research and development tax credits, and lower state taxes.
Net Income.
Net income increased approximately $863,000, or 62%, to $2.3 million for the three months ended June 30, 2017 from $1.4 million for
the three months ended June 30, 2016. Earnings per diluted share were $0.07 and $0.04 per share for the three months ended June 30, 2017 and 2016, respectively.
Adjusted EBITDA (which we define as net income before interest, income taxes, stock based compensation, and depreciation and amortization) increased
approximately $2.0 million, or 25%, to $9.9 million for the three months ended June 30, 2017 compared to $7.9 million for the three months ended June 30, 2016. See Reconciliation of Non-GAAP Financial Measures below for our reconciliation
of this calculation to measures under US GAAP.
Six Months Ended June 30, 2017 Compared to Six Months Ended June 30, 2016
Revenues, net.
Revenues increased approximately $12.5 million, or 11%, to $121.4 million for the six months ended June 30, 2017 from $108.9
million for the six months ended June 30, 2016. A comparison of revenues by business segment is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
Percentage
Change
|
|
Revenues by Business Segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
Workforce Solutions
|
|
$
|
87,958
|
|
|
$
|
81,474
|
|
|
|
8
|
%
|
Patient Experience Solutions
|
|
|
16,464
|
|
|
|
16,931
|
|
|
|
-3
|
%
|
Provider Solutions
|
|
|
16,929
|
|
|
|
10,466
|
|
|
|
62
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues, net
|
|
$
|
121,351
|
|
|
$
|
108,871
|
|
|
|
11
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% of Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
Workforce Solutions
|
|
|
72
|
%
|
|
|
75
|
%
|
|
|
|
|
Patient Experience Solutions
|
|
|
14
|
%
|
|
|
16
|
%
|
|
|
|
|
Provider Solutions
|
|
|
14
|
%
|
|
|
9
|
%
|
|
|
|
|
Revenues for HealthStream Workforce Solutions, which are primarily subscription-based, increased approximately $6.5 million,
or 8%, over the first six months of 2016. Revenues in 2017 were positively influenced by growth in courseware subscriptions and our enterprise applications, but were partially offset by an expected decline in ICD-10 readiness revenues. Revenues from
ICD-10 readiness products declined by $5.3 million to $785,000 in the first six months of 2017 compared to $6.1 million in the first six months of 2016.
15
Revenues for HealthStream Patient Experience Solutions decreased approximately $467,000, or 3%, compared to the
first six months of 2016. Revenues from Patient Insights surveys, our survey research product that generates recurring revenues, decreased by approximately $127,000, or 1%, compared to the first six months of 2016. Revenues from other
products, including surveys conducted on annual or bi-annual cycles and consulting/coaching services, collectively decreased by $340,000, or 10%, compared to the first six months of 2016 due to the timing of engagements compared to the prior year
period.
Revenues for HealthStream Provider Solutions increased approximately $6.5 million, or 62%, over the first six months of 2016. Approximately $5.0
million of the increase resulted primarily from the MAI acquisition, which was consummated on August 8, 2016. The remaining increase in revenue of $1.5 million primarily resulted from the acquisition of HealthLine Systems, LLC, which was
consummated on March 16, 2015, and thus had a more significant impact on revenues during the six months ended June 30, 2017 than the prior year period.
Cost of Revenues (excluding depreciation and amortization)
. Cost of revenues increased approximately $7.1 million, or 16%, to $52.7 million for the six
months ended June 30, 2017 from $45.5 million for the six months ended June 30, 2016. Cost of revenues as a percentage of revenues was approximately 43% and 42% for the six months ended June 30, 2017 and 2016, respectively.
Cost of revenues for HealthStream Workforce Solutions increased approximately $5.0 million to $36.8 million and approximated 42% and 39% of revenues for
HealthStream Workforce Solutions for the six months ended June 30, 2017 and 2016, respectively. The increase in amount is primarily associated with increased royalties paid by us resulting from growth in courseware subscription revenues and
additions to personnel. Cost of revenues for HealthStream Patient Experience Solutions decreased approximately $1.0 million to $10.3 million and approximated 62% and 66% of revenues for HealthStream Patient Experience Solutions for the six months
ended June 30, 2017 and 2016, respectively. The decrease in both amount and as a percentage of revenue is primarily the result of lower costs associated with declines in phone based survey volume compared to the prior year period. Cost of
revenues for HealthStream Provider Solutions increased approximately $3.1 million to $5.6 million and approximated 33% and 23% of HealthStream Provider Solutions revenues for the six months ended June 30, 2017 and 2016, respectively. The
increase in amount and as a percentage of revenue is primarily the result of the MAI acquisition and additions to personnel.
Product Development.
Product development expenses decreased approximately $622,000, or 4%, to $13.6 million for the six months ended June 30, 2017 from $14.3 million for the six months ended June 30, 2016. Product development expenses as a percentage of
revenues were approximately 11% and 13% of revenues for the six months ended June 30, 2017 and 2016, respectively.
Product development expenses for
HealthStream Workforce Solutions decreased approximately $397,000 to $9.7 million and approximated 11% and 12% of revenues for HealthStream Workforce Solutions for the six months ended June 30, 2017 and 2016, respectively. The decrease in
amount and as a percentage of revenues is primarily due to lower outsourced labor expenses. Product development expenses for HealthStream Patient Experience Solutions decreased approximately $774,000 to $1.7 million and approximated 10% and 15% of
revenues for HealthStream Patient Experience Solutions for the six months ended June 30, 2017 and 2016, respectively. The decrease in both amount and as a percentage of revenue is primarily due to higher labor capitalization for internal
software development. Product development expenses for HealthStream Provider Solutions increased approximately $549,000 to $2.2 million and approximated 13% and 16% of revenues for HealthStream Provider Solutions for the six months ended
June 30, 2017 and 2016, respectively. The increase in amount is primarily associated with the MAI acquisition and additions to personnel over the prior year period.
Sales and Marketing.
Sales and marketing expenses, including personnel costs, increased approximately $3.4 million, or 20%, to $21.0 million for the
six months ended June 30, 2017 from $17.6 million for the six months ended June 30, 2016. Sales and marketing expenses were approximately 17% and 16% of revenues for the six months ended June 30, 2017 and 2016, respectively.
Sales and marketing expenses for HealthStream Workforce Solutions increased approximately $2.4 million to $15.4 million and approximated 17% and 16% of
revenues for HealthStream Workforce Solutions for the six months ended June 30, 2017 and 2016, respectively. The increase in amount and as a percentage of revenues is primarily due to additions to personnel and higher sales commissions compared
to the prior year period. Sales and marketing expenses for HealthStream Patient Experience Solutions increased approximately $360,000 to $2.4 million and approximated 14% and 12% of revenues for HealthStream Patient Experience Solutions for the six
months ended June 30, 2017 and 2016, respectively. The increase in both amount and as a percentage of revenues is primarily due to higher sales commissions and increased marketing spending compared to the prior year period. Sales and marketing
expenses for HealthStream Provider Solutions increased approximately $649,000 to $2.6 million and approximated 16% and 19% of revenues for HealthStream Provider Solutions for the six months ended June 30, 2017 and 2016, respectively. The
increase in amount is primarily associated with the MAI acquisition and higher sales commissions.
16
Other General and Administrative Expenses.
Other general and administrative expenses remained consistent
at $16.5 million for both the six months ended June 30, 2017 and June 30, 2016. Other general and administrative expenses as a percentage of revenues were approximately 14% and 15% of revenues for the six months ended June 30, 2017
and 2016, respectively.
Other general and administrative expenses for HealthStream Workforce Solutions increased approximately $919,000 to $3.9 million
and approximated 4% of revenues for HealthStream Workforce Solutions for both the six months ended June 30, 2017 and 2016. The increase in amount is primarily due to higher facility costs and increases in technology infrastructure investments
and other general expenses. Other general and administrative expenses for HealthStream Patient Experience Solutions decreased approximately $22,000 to $1.4 million and approximated 8% of revenues for HealthStream Patient Experience Solutions for
both the six months ended June 30, 2017 and 2016. Other general and administrative expenses for HealthStream Provider Solutions increased approximately $947,000 to $2.6 million and approximated 15% and 16% of revenues for HealthStream Provider
Solutions for the six months ended June 30, 2017 and 2016, respectively. The increase in amount is primarily associated with the MAI acquisition and higher bad debt expense compared to the prior year period. The unallocated corporate portion of
other general and administrative expenses decreased approximately $1.9 million compared to the first six months of 2016 primarily due to lower professional services associated with the implementation of a new financial systems platform during the
prior year period and reductions of other general expenses.
Depreciation and Amortization.
Depreciation and amortization increased approximately
$2.7 million, or 26%, to $12.9 million for the six months ended June 30, 2017 from $10.2 million for the six months ended June 30, 2016. The increase primarily resulted from amortization of capitalized software development, amortization of
intangible assets from the MAI acquisition, and depreciation expense associated with capital expenditures.
Other Income (Expense), Net
. Other
income (expense), net was income of approximately $295,000 for the six months ended June 30, 2017 compared to income of $127,000 for the six months ended June 30, 2016. This increase is primarily a result of interest income from
investments in marketable securities.
Income Tax Provision.
The Company recorded a provision for income taxes of approximately $1.4 million for
the six months ended June 30, 2017 compared to $2.0 million for the six months ended June 30, 2016. The Companys effective tax rate was approximately 29% for the six months ended June 30, 2017 compared to approximately 41% for
the six months ended June 30, 2016. The decrease in the effective tax rate was primarily influenced by excess tax benefits from stock-based awards, as well as higher research and development tax credits, and lower state taxes.
Net Income.
Net income increased approximately $649,000, or 22%, to $3.6 million for the six months ended June 30, 2017 compared to $2.9 million
for the six months ended June 30, 2016. Earnings per diluted share were $0.11 per share and $0.09 per share for the six months ended June 30, 2017 and 2016, respectively.
Adjusted EBITDA (which we define as net income before interest, income taxes, stock based compensation, and depreciation and amortization) increased
approximately $2.6 million, or 16%, to $18.5 million for the six months ended June 30, 2017 compared to $15.9 million for the six months ended June 30, 2016. This increase resulted from the factors mentioned above. See Reconciliation of
Non-GAAP Financial Measures below for our reconciliation of this calculation to measures under US GAAP.
Other Developments
As previously announced, Laerdal Medical A/S, a Norwegian company (Laerdal), provided notice that, upon the December 31, 2018 expiration of
our existing agreements with Laerdal regarding the HeartCode and Resuscitation Quality Improvement (RQI) products, Laerdal does not intend to continue these existing agreements or enter into new agreements with HealthStream in relation
to such products. Our Joint Marketing and Licensing Agreements with Laerdal for HeartCode and for RQI, respectively, remain unaltered and continue in effect through December 31, 2018. Up to that expiration date, we retain the right to offer
HeartCode and RQI licenses that extend through December 31, 2020. We retain exclusivity of RQI sales to our existing customer network through the agreement expiration date of December 31, 2018 and are prohibited from selling substantially
similar products to HeartCode and RQI during that time.
Revenues associated with the sales of HeartCode and RQI products have been significant in recent
years, although margins on such products have been lower than HealthStreams average margin. We are actively engaged in efforts to broaden the scope and utilization of our simulation-related offerings to include a range of clinical competencies
that extend beyond resuscitation, and integrate with our platform in ways that HeartCode and RQI never have. We intend to bring to market a broadened scope of simulation-based offerings, includingfollowing the December 31, 2018 expiration
date of our agreements with Laerdal
17
resuscitation programs. We believe these efforts have the potential to give rise to additional and higher margin opportunities than currently exist under the Laerdal agreements for HeartCode and
RQI. However, there is no assurance that we will be successful in these efforts, and to the extent that new simulation-based or other solutions do not generate revenue and/or earnings following the December 31, 2018 expiration date in a manner
that supplants the impact of these agreements with Laerdal, our revenue and results of operations following this expiration date may be adversely affected.
Reconciliation of Non-GAAP Financial Measures
This
report contains certain non-GAAP financial measures, including non-GAAP net income, non-GAAP operating income, and adjusted EBITDA, which are used by management in analyzing its financial results and ongoing operational performance. These non-GAAP
financial measures should not be considered as a substitute for, or superior to, measures of financial performance which are prepared in accordance with US GAAP and may be different from non-GAAP financial measures used by other companies.
In order to better assess the Companys financial results, management believes that adjusted EBITDA is an appropriate measure for evaluating the
operating performance of the Company and provides useful information to investors because adjusted EBITDA reflects net income adjusted for certain non-cash and non-operating items. We believe that adjusted EBITDA is also used by many investors and
securities analysts to assess the Companys results from current operations. Adjusted EBITDA is a non-GAAP financial measure and should not be considered as a measure of financial performance under US GAAP. Because adjusted EBITDA is not a
measurement determined in accordance with US GAAP, it is susceptible to varying calculations. Accordingly, adjusted EBITDA, as presented, may not be comparable to other similarly titled measures of other companies.
The Company understands that although adjusted EBITDA is frequently used by investors and securities analysts in their evaluation of companies, this measure
has limitations as an analytical tool and you should not consider it in isolation or as a substitute for an analysis of the Companys results as reported under US GAAP.
In recent years, including the August 2016 acquisition of MAI, the Company has acquired businesses whose net tangible assets include deferred revenue. In
accordance with GAAP reporting requirements, following the completion of any such acquisition, the Company may record a write-down of deferred revenue to fair value as defined in GAAP. If the Company is required to record a write-down of deferred
revenue, it may result in lower recognized revenue, operating income, and net income in subsequent periods.
In connection therewith, this report presents
below non-GAAP operating income and non-GAAP net income, which in each case reflects the corresponding GAAP figures adjusted to exclude the impact of the deferred revenue write-down associated with fair value accounting for acquired businesses as
referenced above. Management believes that the presentation of these non-GAAP financial measures assists investors in understanding the Companys performance between periods by excluding the impact of this deferred revenue write-down and
provides a useful measure of the ongoing performance of the Company. As is typical for our business offerings, revenue for the acquired business is deferred and typically recognized over a one-to-two year period following the completion of any
particular acquisition, so our GAAP revenues (and, thus, our GAAP operating income and net income) for this one-to-two year period will not reflect the full amount of revenues that would have been reported if the acquired deferred revenue was not
written down to fair value. A reconciliation of these non-GAAP financial measures to the corresponding GAAP measures is set forth below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30,
|
|
|
Six Months Ended
June 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
GAAP net income
|
|
$
|
2,266
|
|
|
$
|
1,403
|
|
|
$
|
3,552
|
|
|
$
|
2,903
|
|
Interest income
|
|
|
(202
|
)
|
|
|
(167
|
)
|
|
|
(362
|
)
|
|
|
(265
|
)
|
Interest expense
|
|
|
37
|
|
|
|
25
|
|
|
|
62
|
|
|
|
51
|
|
Income tax provision
|
|
|
754
|
|
|
|
1,022
|
|
|
|
1,432
|
|
|
|
2,026
|
|
Stock based compensation expense
|
|
|
478
|
|
|
|
505
|
|
|
|
919
|
|
|
|
1,004
|
|
Depreciation and amortization
|
|
|
6,531
|
|
|
|
5,081
|
|
|
|
12,918
|
|
|
|
10,221
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted EBITDA
|
|
$
|
9,864
|
|
|
$
|
7,869
|
|
|
$
|
18,521
|
|
|
$
|
15,940
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GAAP operating income
|
|
$
|
2,855
|
|
|
$
|
2,316
|
|
|
$
|
4,689
|
|
|
$
|
4,802
|
|
Adjustment for deferred revenue write-down
|
|
|
548
|
|
|
|
439
|
|
|
|
1,392
|
|
|
|
1,394
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-GAAP operating income
|
|
$
|
3,403
|
|
|
$
|
2,755
|
|
|
$
|
6,081
|
|
|
$
|
6,196
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GAAP net income
|
|
$
|
2,266
|
|
|
$
|
1,403
|
|
|
$
|
3,552
|
|
|
$
|
2,903
|
|
Adjustment for deferred revenue write-down, net of tax
|
|
|
411
|
|
|
|
254
|
|
|
|
992
|
|
|
|
822
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-GAAP net income
|
|
$
|
2,677
|
|
|
$
|
1,657
|
|
|
$
|
4,544
|
|
|
$
|
3,725
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
18
Liquidity and Capital Resources
Net cash provided by operating activities increased by $22.8 million to $23.0 million during the six months ended June 30, 2017, from $285,000 during the
six months ended June 30, 2016. The number of days sales outstanding (DSO) was 57 days for the second quarter of 2017 compared to 62 days for the second quarter of 2016. The decrease in DSO primarily relates to lower accounts
receivable balances resulting from improved collections in the Workforce Development Solutions and Provider Solutions segment as compared to the prior year period. The Company calculates DSO by dividing the average accounts receivable balance for
the quarter by average daily revenues for the quarter. The Companys primary sources of cash were receipts generated from the sales of our products and services. The primary uses of cash to fund operations included personnel expenses, sales
commissions, royalty payments, payments for contract labor and other direct expenses associated with delivery of our products and services, and general corporate expenses.
Net cash used in investing activities was approximately $18.0 million and $15.3 million for the six months ended June 30, 2017 and 2016, respectively.
During the six months ended June 30, 2017, the Company purchased $3.9 million of property and equipment, spent $6.2 million for capitalized software development, and invested $48.9 million in marketable securities. These uses of cash were
partially offset by maturities of marketable securities of $41.0 million. During the six months ended June 30, 2016, the Company utilized $3.1 million (net of cash acquired) for acquisitions, purchased $71.2 million of marketable securities,
purchased $3.2 million of property and equipment, and spent $4.3 million for capitalized software development. These uses of cash were partially offset by maturities of marketable securities of $65.6 million and the sale of long-lived assets of
$975,000.
Net cash used in financing activities was approximately $162,000 and $208,000 for the six months ended June 30, 2017 and 2016,
respectively. The sources of cash from financing activities for both the six months ended June 30, 2017 and 2016 resulted from the exercise of employee stock options. The uses of cash for both 2017 and 2016 resulted from the payment of employee
payroll taxes in relation to the vesting of RSUs. The Company net-share settled the employee RSUs by withholding shares with value equivalent to the employees minimum statutory obligation for the applicable income and other employment taxes.
Our balance sheet reflects positive working capital of $88.9 million at June 30, 2017 compared to $82.5 million at December 31, 2016. The
Companys primary source of liquidity is $115.7 million of cash and cash equivalents and marketable securities. The Company also has a $50.0 million revolving credit facility, all of which was available for additional borrowing at June 30,
2017.
We believe that our existing cash and cash equivalents, marketable securities, cash generated from operations, and available borrowings under our
revolving credit facility will be sufficient to meet anticipated working capital needs, new product development and capital expenditures for at least the next 12 months.
The Companys growth strategy includes acquiring businesses that provide complementary products and services. It is anticipated that future acquisitions,
if any, would be effected through cash consideration, stock consideration, or a combination of both. The issuance of our stock as consideration for an acquisition or to raise additional capital could have a dilutive effect on earnings per share and
could adversely affect our stock price. Our revolving credit facility contains financial covenants and availability calculations designed to set a maximum leverage ratio of outstanding debt to adjusted EBITDA and an interest coverage ratio of
adjusted EBITDA to interest expense. Therefore, the maximum borrowings against our revolving credit facility would be dependent on the covenant values at the time of borrowing. As of June 30, 2017, we were in material compliance with all
covenants. There can be no assurance that amounts available for borrowing under our revolving credit facility will be sufficient to consummate any possible acquisitions, and we cannot assure you that if we need additional financing that it will be
available on terms favorable to us, or at all. Failure to generate sufficient cash flow from operations or raise additional capital when required in sufficient amounts and on terms acceptable to us could harm our business, financial condition and
results of operations.
19