HEALTHSTREAM INC (HSTM)

Item 7. 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 HealthStream’s Consolidated Financial Statements and related notes thereto included elsewhere in this report. This discussion contains forward-looking statements that involve risks and uncertainties. HealthStream’s actual results may differ significantly from the results discussed and those anticipated in these forward-looking statements as a result of many factors, including, but not limited to, the risks described under Risk Factors and elsewhere in this report, as well as additional risks or uncertainties not presently known to us or that we currently deem immaterial.

The following discussion addresses our 2024 and 2023 results and year-to-year comparisons between 2024 and 2023. A discussion of year-to-year comparisons between 2023 and 2022 can be found in our Annual Report on Form 10-K for the fiscal year ended December 31, 2023, filed with the SEC on February 26, 2024, under Part II, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

OVERVIEW

HealthStream provides primarily SaaS based applications for healthcare organizations—all designed to improve business and clinical outcomes by supporting the people who deliver patient care. We are focused on helping individuals and organizations in healthcare meet their ongoing learning, clinical development, credentialing, and scheduling needs. We also provide our solutions to nursing schools and nursing students.

Our business is managed and organized around our single platform strategy, also referred to as our One HealthStream approach. At the center of this single platform strategy is our hStream technology platform. By enabling our applications through hStream, we believe that stand-alone applications, which already provide a powerful value proposition on their own, are beginning to leverage each other to more efficiently and effectively empower our customers to manage their businesses and improve their outcomes. Further, the Company’s internal structure and executive leadership are likewise shaped by the organizing principle of a single platform, including with regard to technology, operations, accounting, internal reporting (including the nature of information reviewed by our key decision makers), organizational structure, compensation, performance assessment, and resource allocation. Ongoing progress towards One HealthStream is exemplified by our recent refinement and adoption of a standardized, enterprise-wide implementation, onboarding, and customer success operational model.

Our solutions are powered by our hStream technology platform that enables activity across HealthStream's diverse ecosystem of applications. These underlying solutions are comprised primarily of SaaS, subscription-based applications that are used by healthcare organizations to meet a broad range of their workforce development needs around learning, clinical development, credentialing, and scheduling. Our solutions are also utilized by nursing schools as they prepare the healthcare workforce of tomorrow and by nursing students as they prepare to enter that workforce. Our numerous content libraries allow customers to subscribe to a wide array of courseware, which includes content from leading healthcare and nursing associations, medical and healthcare publishers, and other ecosystem partners. Our scheduling solutions provide organizations with the tools to visualize and manage real-time clinical staff scheduling to enable them to optimize their workforce, reduce costs, and improve care. Our flagship credentialing, privileging, and enrollment solution, CredentialStream, provides customers an intuitive, modern user experience with a continual stream of enhancements, evidence-based content, and curated data, all of which provides healthcare organizations with tools to support the provider lifecycle management from recruiting, application submission, verification of licensure and other credentials, privileging, appointments by credentialing committees, enrollment, network, management, onboarding, and performance evaluations of providers.

As HealthStream's business continues to evolve, we remain solely dedicated to the healthcare market and our primary customers continue to be healthcare organizations across the continuum of care and other participants in the healthcare industry, such as nursing schools and nursing students.

Revenues for the year ended December 31, 2024 were $291.6 million, compared to $279.1 million for the year ended December 31, 2023, an increase of 5%. The contributions to growth were $12.4 million in subscription revenues and were $0.2 million in professional services revenues. Subscription revenue increases resulted from growth in several products, including CredentialStream, ShiftWizard, and Competency Suite, but were partially offset by declines in our legacy credentialing, scheduling, and quality management solutions. Operating income increased by 33% to $21.3 million for 2024, compared to $16.0 million for 2023. Net income increased to $20.0 million for 2024, compared to $15.2 million for 2023. Earnings per share were $0.66 per share (diluted) for 2024, compared to $0.50 per share (diluted) for 2023. The Company paid $3.4 million and $3.1 million in cash dividends in 2024 and 2023, respectively. As of December 31, 2024, cash, cash equivalents, and marketable securities balances were $97.2 million, and the Company maintained full availability under its $50.0 million revolving credit facility.

Since the beginning of 2024, we completed two acquisitions. In October 2024 and November 2024, we acquired substantially all of the assets of Total Clinical Placement System (d/b/a TCPS) (TCPS) and The Clinical Hub, Inc. (d/b/a The Clinical Hub) (The Clinical Hub), respectively. For additional information regarding acquisitions, please see Note 8 of the Consolidated Financial Statements included elsewhere in this report.

28

Table of Contents

RECENT DEVELOPMENTS

Macroeconomic conditions in the U.S. have been challenging in recent periods in certain respects, including as the result of inflationary pressures, ongoing elevated interest rate levels, which, despite recent declines, remain elevated, and uncertain geopolitical conditions. In this regard, we have experienced in certain recent periods, and believe that many of our customers have experienced, increased labor, supply chain, capital, and other expenditures associated with inflationary conditions. These conditions impacting the U.S. economy and our customers in the healthcare industry have adversely affected, and may continue to adversely impact, our business and results of operations. In addition, given our focus on customers in the healthcare industry, adverse developments impacting such customers, including downward pressure on federal and state governmental spending, may adversely impact our business and financial results.

CRITICAL ACCOUNTING ESTIMATES

Preparation of our Consolidated Financial Statements requires us to make estimates and assumptions affecting the reported amounts of assets and liabilities at the date of the financial statements, reported amounts of revenues and expenses during the reporting period, and related disclosures. In the Notes to our Consolidated Financial Statements, we describe our significant accounting policies used in preparing the Consolidated Financial Statements. Our policies are evaluated on an ongoing basis and are drawn from historical experience and other assumptions that we believe to be reasonable under the circumstances. Actual results could differ under different assumptions or conditions. Our management has identified the following critical accounting policies for the areas that are materially impacted by estimates and assumptions.

Revenue Recognition

Revenues are recognized when or as control of the promised goods or services is transferred to the customer in an amount that reflects the consideration the Company expects to be entitled in exchange for transferring those goods or services. Our contracts with customers often contain promises for multiple goods and services. For these contracts, the Company accounts for the promised goods and services in its contracts as separate performance obligations if they are distinct. The contract price, which represents transaction price when the contract reflects a fixed fee arrangement, or management’s estimate of variable consideration including application of the constraint when the contract does not have a fixed fee, is allocated to the separate performance obligations on a relative standalone selling price basis. We generally determine standalone selling prices based on the standard list price for each product, taking into consideration certain factors, including contract length and the number of subscriptions or licenses purchased within the contract. Judgment is required in determining whether performance obligations are distinct, standalone selling prices, and the amount of variable consideration to reflect as transaction price.

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 reverse. Management evaluates all available evidence, both positive and negative, to determine whether, based on the weight of that evidence, a valuation allowance is needed. We assess the realizability of our 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. As of December 31, 2024, the Company established a valuation allowance of $1.9 million for the portion of its deferred tax assets that are not more likely than not expected to be realized, compared to a valuation allowance of $2.0 million as of December 31, 2023.

29

Table of Contents

RESULTS OF OPERATIONS

Revenues and Expense Components

The following descriptions of the components of revenues and expenses apply to the comparison of results of operations.

Revenues, net. The products and services generating revenues are increasingly oriented around and drive value in relation to our hStream technology platform. Subscription or software licensing services primarily consist of the provision of services through our platform, learning management application, a variety of training and development tools and content subscriptions, our applications that help facilitate provider credentialing, privileging, and enrollment administration, and staff scheduling applications. Professional services primarily consist of training, implementation and onboarding, and consulting services to serve professionals that work within healthcare organizations.

Cost of Revenues (excluding depreciation and amortization). Cost of revenues (excluding depreciation and amortization) consist primarily of salaries and employee benefits, stock-based compensation, employee travel and lodging, materials, contract labor, hosting costs, third party software licensing costs, and other direct expenses associated with revenues, as well as royalties paid by us to ecosystem partners. Personnel costs within cost of revenues are associated with individuals that facilitate product delivery, provide services, handle customer support calls or inquiries, manage the technology infrastructure for our applications, manage content, and provide training or implementation services.

Product Development. Product development consists primarily of salaries and employee benefits, contract labor, stock-based compensation, employee travel and lodging, costs associated with the development of new software and feature enhancements, new products, third party software licensing costs, and costs associated with maintaining and developing our products. Personnel costs within product development include our systems teams, application development, quality assurance teams, product managers, and other personnel associated with software and product development.

Sales and Marketing. Sales and marketing consist primarily of salaries and employee benefits, commissions and amortization of deferred commissions, stock-based compensation, employee travel and lodging, third party software licensing costs, advertising, trade shows, customer conferences, promotions, and related marketing costs. Personnel costs within sales and marketing include our sales teams and marketing personnel.

General and Administrative Expenses. General and administrative expenses consist primarily of salaries and employee benefits, stock-based compensation, employee travel and lodging, facility expenses, office expenses, fees for professional services, business development and acquisition-related costs, third party software licensing costs, provision for credit losses, and other operational expenses. Personnel costs within general and administrative expenses include individuals associated with normal corporate functions, including accounting, legal, business development, human resources, administrative, internal information systems, and executive management.

Depreciation and Amortization. Depreciation and amortization consist of fixed asset depreciation, amortization of intangibles considered to have definite lives, and amortization of capitalized software development.

Interest Income. Interest income consists of interest earned on cash, cash equivalents, and marketable securities.

Other (Expense) Income, Net. The primary components of other (expense) income are interest expense, the income or loss attributed to equity method investments, fair value adjustments related to non-marketable equity investments, foreign currency gains and losses, and sublease income.

30

Table of Contents

2024 Compared to 2023

Revenues, net. Revenues increased approximately $12.6 million, or 5%, to $291.6 million for 2024 from $279.1 million for 2023. Subscription revenues increased $12.4 million, or 5%, and professional services revenues increased by $0.2 million, or 2%. Subscription revenue increases resulted from growth in several products, including CredentialStream, ShiftWizard, and Competency Suite, but were partially offset by declines in our legacy credentialing, scheduling, and quality management solutions.

A comparison of revenues by revenue source is as follows (in thousands):

Cost of Revenues (excluding depreciation and amortization). Cost of revenues increased $2.9 million, or 3%, to $97.9 million for 2024 from $95.0 million for 2023. Cost of revenues as a percentage of revenues were 34% of revenues for both 2024 and 2023. The increase in expense is primarily associated with higher costs for third-party software, cloud hosting, and royalties, partially offset by a decrease in severance costs incurred in connection with the Company's previously disclosed restructuring under a single platform strategy in 2023.

Product Development. Product development expenses increased $3.4 million, or 7%, to $48.9 million for 2024 from $45.5 million for 2023. Product development expenses as a percentage of revenues were 17% and 16% of revenues for 2024 and 2023, respectively. The increase is primarily due to increases in labor and benefits.

Sales and Marketing. Sales and marketing expenses increased $1.5 million, or 3%, to $47.2 million for 2024 from $45.7 million for 2023. Sales and marketing expenses as a percentage of revenues were 16% of revenues for both 2024 and 2023. The increase in expense is primarily due to increased sales commissions, general marketing expenses, software expenses, and travel, which were partially offset by a decrease in labor and benefits.

General and Administrative Expenses. General and administrative expenses decreased $0.6 million, or 1%, to $35.1 million for 2024 from $35.7 million for 2023. General and administrative expenses as a percentage of revenues were 12% and 13% of revenues for 2024 and 2023, respectively. The decrease is primarily due to decreases in labor and benefits, professional service fees, facilities costs, and telecom expenses, which were partially offset by an increase in bad debt expense primarily related to customer bankruptcies during the second and fourth quarters of 2024.

Depreciation and Amortization. Depreciation and amortization increased $0.1 million, or 1%, to $41.2 million for 2024 from $41.1 million for 2023. The increase resulted from higher amortization of capitalized software, partially offset by lower depreciation expense.

Interest Income. Interest income was $3.8 million for 2024 compared to $2.4 million for 2023. The increase resulted from higher cash, cash equivalent, and marketable securities balances on which the interest was earned.

Other (Expense) Income, Net. Other (expense) income, net was an expense of $0.3 million for 2024 compared to income of $0.1 million for 2023. Other expense for 2024 consisted primarily of interest expense, losses attributable to equity method investments, and foreign currency losses, partially offset by sublease income. Other income for 2023 consisted of a $0.4 million gain recognized upon the settlement and release of escrowed proceeds related to a prior sale of a non-marketable equity investment coupled with sublease income, partially offset by interest expense and losses attributed to equity method investments.

Income Tax Provision. The Company recorded a provision for income taxes of $4.8 million and $3.3 million for 2024 and 2023, respectively. The Company’s effective tax rate was 19% for 2024 compared to 18% for 2023. The Company's effective tax rate primarily reflects the statutory corporate income tax rate, the net effect of state taxes, foreign income taxes, the effect of various permanent tax differences, and research & experimentation tax credits.

31

Table of Contents

Net Income. Net income increased $4.8 million, or 32%, to $20.0 million for 2024 compared to $15.2 million for 2023 as a result of the factors mentioned above. The increase in net income for 2024 compared to 2023 was driven by an increase in revenue as well as from revenue increasing at a higher rate than expenses. Earnings per diluted share were $0.66 per share (diluted) for 2024, compared to $0.50 per share (diluted) for 2023.

Adjusted EBITDA increased 9% to $66.8 million for 2024 compared to $61.3 million for 2023. The increase resulted from the factors mentioned above. Adjusted EBITDA is a non-GAAP financial measure which we define as net income excluding the impact of the deferred revenue write-downs associated with fair value accounting for acquired businesses and before interest, income taxes, stock-based compensation, depreciation and amortization, and changes in fair value of, including gains (losses) on the sale of, non-marketable equity investments. See "Reconciliation of Non-GAAP Financial Measures" below for a reconciliation of this calculation to the most comparable measure under U.S. GAAP and information regarding why this non-GAAP financial measure provides useful information to investors.

Key Business Metrics

Our management utilizes the following key financial and non-financial metrics in connection with managing our business.

32

Table of Contents

Reconciliation of Non-GAAP Financial Measures

This Annual Report on Form 10-K presents adjusted EBITDA, which is a non-GAAP financial measure used by management in analyzing our financial results and ongoing operational performance.

In order to better assess the Company’s financial results, management believes that net income before interest, income taxes, stock-based compensation, depreciation and amortization, and changes in fair value of, including gains (losses) on the sale of, non-marketable equity investments ("adjusted EBITDA"), is a useful measure for evaluating the operating performance of the Company because adjusted EBITDA reflects net income adjusted for certain GAAP accounting, non-cash, and/or non-operating items which may not, in any such case, fully reflect the underlying operating performance of our business. In addition, as discussed below, for periods ended on or prior to December 31, 2023, adjusted EBITDA excludes the impact of deferred revenue write-downs associated with fair value accounting for acquired businesses. We believe that adjusted EBITDA is useful to investors to assess the Company’s ongoing operating performance and to compare the Company’s operating performance between periods. Additionally, certain short-term cash incentive bonuses and performance-based equity awards are based on the achievement of adjusted EBITDA (as defined in applicable bonus and equity grant documentation) targets.

As previously disclosed, prior to the Company early adopting ASU 2021-08, Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers, effective January 1, 2022, following the completion of any acquisition by the Company, the Company was required to record the acquired deferred revenue at fair value as defined in GAAP, which typically resulted in a write-down of the acquired deferred revenue. In connection therewith, management determined that including an adjustment in the definition of adjusted EBITDA for the impact of the deferred revenue write-downs associated with fair value accounting for businesses acquired prior to the January 1, 2022 effective date of the Company's adoption of ASU 2021-08 (the "Pre-2022 Acquisitions") provided useful information to investors because the deferred revenue write-down recognized in periods after any such Pre-2022 Acquisitions could, given the nature of this non-cash accounting impact, cause our GAAP financial results during such periods to not fully reflect our underlying operating performance. Following the adoption of ASU 2021-08, contracts acquired in an acquisition completed on or after January 1, 2022 have been measured as if the Company had originated the contract (rather than the contract being measured at fair value) such that, for such acquisitions, the Company no longer records deferred revenue write-downs associated with acquired businesses. With respect to periods ended on or prior to December 31, 2023, the Company has included an adjustment in the calculation of adjusted EBITDA for the impact of deferred revenue write-downs associated with the Pre-2022 Acquisitions consistent with this prior accounting standard, given the ongoing impact of such deferred revenue on the Company's financial results under GAAP over this time period. With respect to periods beginning on or after January 1, 2024, the Company no longer recognizes any deferred revenue write-downs associated with the Pre-2022 Acquisitions under GAAP, and accordingly such deferred revenue write-downs are not an adjustment in connection with the calculation of adjusted EBITDA for periods on and after January 1, 2024.

Adjusted EBITDA is a non-GAAP financial measure and should not be considered as a measure of financial performance under GAAP. Because adjusted EBITDA is not a measurement determined in accordance with GAAP, adjusted EBITDA is susceptible to varying calculations. Accordingly, adjusted EBITDA, as presented, may not be comparable to other similarly titled measures of other companies and has limitations as an analytical tool.

A reconciliation of adjusted EBITDA to the most directly comparable GAAP measure, net income, is set forth below (in thousands).

33

Table of Contents

Liquidity and Capital Resources

Net cash provided by operating activities was $57.7 million during 2024, compared to $64.0 million during 2023, a decrease of 10%. The decrease in net cash provided by operating activities is primarily due to a $6.1 million increase in income tax payments and higher cash disbursements at the end of 2024 as compared to the end of 2023, while cash receipts increased modestly compared to the prior year. Our days sales outstanding (DSO) was 40 days and 46 days for 2024 and 2023, respectively. The Company calculates DSO by dividing the average accounts receivable balance (excluding unbilled and other receivables) by average daily revenues for the year. The Company’s 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, income tax payments, and general corporate expenses.

Net cash used in investing activities was $34.0 million during 2024, compared to $56.6 million during 2023. During 2024, the Company spent $1.3 million for the acquisitions of TCPS and The Clinical Hub, invested in marketable securities of $74.4 million, made payments for capitalized software development of $26.7 million, and purchased property and equipment of $1.4 million. These uses of cash were partially offset by $69.2 million in maturities of marketable securities. During 2023, the Company spent $6.6 million for the acquisition of eeds (note: the eeds was acquisition was consummated on December 31, 2022, but was funded in January 2023 such that the purchase price for eeds impacted net cash used in investing activities during the year ended December 31, 2023), invested in marketable securities of $50.3 million, made payments for capitalized software development of $25.8 million, and purchased property and equipment of $2.2 million. These uses of cash were partially offset by $28.3 million in maturities of marketable securities.

Cash used in financing activities was $4.5 million during 2024, compared to $13.0 million during 2023. The primary uses of cash in financing activities during 2024 included $3.4 million for the payment of cash dividends and $1.1 million for payments of payroll taxes related to stock-based compensation. During 2023, the primary use of cash in financing activities included $8.9 million for repurchases of common stock, $3.1 million for the payment of cash dividend, and $0.9 million for payments of payroll taxes related to stock-based compensation.

On October 6, 2023, the Company entered into a new revolving credit facility, which amended and replaced our prior revolving credit facility. There currently are no outstanding borrowings under the new revolving credit facility. For additional information regarding the new revolving credit facility, see Note 12 to the Consolidated Financial Statements included herein.

Our balance sheet reflected positive working capital of $37.4 million at December 31, 2024, compared to $11.8 million at December 31, 2023. The increase in working capital was primarily due to increases in cash, cash equivalents, and marketable securities. The Company’s primary source of liquidity was $97.2 million of cash, cash equivalents, and marketable securities as of December 31, 2024. The Company also has up to $50.0 million of availability under our Revolving Credit Facility, subject to certain covenants and minimum liquidity requirements.

On September 13, 2023, the Company announced a share repurchase program approved by the Company’s Board of Directors under which the Company was authorized to purchase up to $10.0 million of its common stock. Pursuant to this authorization, repurchases could be made in the open market, including under a Rule 10b5-1 plan, through privately negotiated transactions, or otherwise. Under this program, during 2023, the Company repurchased 404,188 shares of common stock at an aggregate fair value of $8.9 million, reflecting an average price per share of $22.07 (excluding the cost of broker commissions). The share repurchase program expired according to its terms on March 31, 2024, and no repurchases occurred during 2024.

Pursuant to the dividend policy approved by our Board on February 20, 2023, the Board of Directors authorized the following quarterly dividend payments during 2024:

On February 24, 2025, as previously disclosed, our Board of Directors approved a quarterly dividend at a rate of $0.031 per share, which represented an increase of 11% compared to the quarterly dividend per share in 2024 as set forth above. This quarterly dividend shall be payable on March 21, 2025 to the holders of record of all of the issued and outstanding shares of common stock as of the close of business on March 10, 2025.

The dividend policy and the declaration and payment of each quarterly cash dividend will be subject to our Board’s continuing determination that the policy and the declaration of dividends thereunder are in the best interests of our stockholders and are in compliance with applicable law and our credit agreement. Our Board retains the power to modify, suspend, or cancel the dividend policy in any manner and at any time that our Board may deem necessary or appropriate.

34

Table of Contents

The Company's contractual obligations arising in the normal course of business primarily consist of operating lease obligations and purchase obligations. The amounts included as contractual obligations represent the non-cancelable portion of agreements or the minimum cancellation fee. As further discussed in Note 13 to the Company's Consolidated Financial Statements, as of December 31, 2024, we had operating lease obligations of approximately $24.6 million, of which $3.9 million is expected to be paid within 12 months. The Company's purchase obligations that represent non-cancelable contractual obligations primarily relate to information technology assets and our revolving credit facility, which facility is described further in Note 12 to the Company's Consolidated Financial Statements. As of December 31, 2024, the Company had purchase obligations of $10.1 million, with $5.5 million expected to be paid within 12 months. We believe that our existing cash, 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, effect any share repurchases we may elect to make, pay our quarterly cash dividends, and fund capital expenditures for at least the next 12 months and for the foreseeable future thereafter.

The Company’s 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, debt, or a combination thereof. 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. The revolving credit facility contains financial covenants and availability calculations designed to set a maximum leverage ratio of outstanding debt to consolidated EBITDA (as defined in our credit facility) and an interest coverage ratio of consolidated EBITDA to interest expense. Therefore, the maximum borrowings against the revolving credit facility would be dependent on the covenant values at the time of borrowing. As of December 31, 2024, the Company was in 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 be assured that if we need additional financing, 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.

Recent Accounting Pronouncements

In November 2023, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2023-07, Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures. The new guidance requires disclosures of significant reportable segment expenses that are regularly provided to the CODM and other segment items on an interim and annual basis. Entities with a single reportable segment will also be required to apply the disclosure requirements in ASU 2023-07 on an interim and annual basis. The ASU is effective for annual periods beginning after December 15, 2023, and interim periods within fiscal years beginning after December 15, 2024. The Company adopted this standard effective January 1, 2024 using a retrospective method. For further information, refer to the Business Segments section of Note 1 - Summary of Significant Accounting Policies.

In December 2023, the FASB issued ASU 2023-09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures, which requires public entities to provide disclosure of disaggregated information in the entity’s tax rate reconciliation, as well as disclosure of income taxes paid disaggregated by jurisdiction. The ASU is effective for fiscal years beginning after December 15, 2024. The Company is currently evaluating the impact of adopting ASU 2023-09; however, it is not expected to have a material impact on the Company's financial statements.

In November 2024, the FASB issued ASU 2024-03, “Income Statement – Reporting Comprehensive Income – Expense Disaggregation Disclosures: Disaggregation of Income Statement Expenses,” which requires disclosure of disaggregated information about specific categories underlying certain income statement expense line items in the footnotes to the financial statements for both annual and interim periods. This ASU is effective for fiscal years beginning after December 15, 2026, and interim reporting periods beginning after December 15, 2027. Early adoption is permitted. The Company is currently evaluating the impact of the adoption of this standard.

35

Table of Contents

Item 7. 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 HealthStream’s Consolidated Financial Statements and related notes thereto included elsewhere in this report. This discussion contains forward-looking statements that involve risks and uncertainties. HealthStream’s actual results may differ significantly from the results discussed and those anticipated in these forward-looking statements as a result of many factors, including, but not limited to, the risks described under Risk Factors and elsewhere in this report, as well as additional risks or uncertainties not presently known to us or that we currently deem immaterial.

The following discussion addresses our 2023 and 2022 results and year-to-year comparisons between 2023 and 2022. A discussion of year-to-year comparisons between 2022 and 2021 can be found in our Annual Report on Form 10-K for the fiscal year ended December 31, 2022, filed with the SEC on February 28, 2023, under Part II, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

OVERVIEW

HealthStream provides primarily SaaS based applications for healthcare organizations—all designed to improve business and clinical outcomes by supporting the people who deliver patient care. We are focused on helping individuals and organizations in healthcare meet their ongoing learning, clinical development, credentialing, and scheduling needs. We also provide our solutions to nursing schools and nursing students.

Our business is managed and organized around our single platform strategy, also referred to as our One HealthStream approach. At the center of this single platform strategy is our hStream technology platform. By enabling our applications through hStream, we believe that stand-alone applications, which already provide a powerful value proposition on their own, are beginning to leverage each other to more efficiently and effectively empower our customers to manage their businesses and improve their outcomes. Further, the Company’s internal structure and executive leadership are likewise shaped by the organizing principle of a single platform, including with regard to technology, operations, accounting, internal reporting (including the nature of information reviewed by our key decision makers), organizational structure, compensation, performance assessment, and resource allocation.

28

Table of Contents

All of our solutions are powered by our hStream technology platform that enables activity across HealthStream's diverse ecosystem of applications. Our underlying solutions are comprised primarily of SaaS, subscription-based applications that are used by healthcare organizations to meet a broad range of their workforce development needs around learning, clinical development, credentialing, and scheduling. Our solutions are also utilized by nursing schools as they prepare the healthcare workforce of tomorrow and by nursing students as they prepare to enter that workforce. Our numerous content libraries allow customers to subscribe to a wide array of courseware, which includes content from leading healthcare and nursing associations, medical and healthcare publishers, and other content providers. Our scheduling solutions provide organizations with the tools to visualize and manage real-time clinical staff scheduling to enable them to optimize their workforce, reduce costs, and improve care. Our flagship credentialing, privileging, and enrollment solution, CredentialStream, provides customers an intuitive, modern user experience with a continual stream of enhancements, evidence-based content, and curated data, all of which provides healthcare organizations with tools to support the provider lifecycle management from recruiting, application submission, verification of licensure and other credentials, privileging, appointments by credentialing committees, enrollment, network, management, onboarding, and performance evaluations of providers.

As HealthStream's business continues to evolve, we remain solely dedicated to the healthcare market and our primary customers continue to be healthcare organizations across the continuum of care and other participants in the healthcare industry, such as nursing schools and nursing students.

Revenues for the year ended December 31, 2023 were $279.1 million, compared to $266.8 million for the year ended December 31, 2022, an increase of 5%. Revenues were positively impacted from recent acquisitions (detailed below) in the amount of $3.1 million and growth in several product categories. The contributions from growth in subscription revenues and recent acquisitions more than offset the decline of $1.7 million from professional services revenues. Gross margins improved to 65.9% during 2023, compared to 65.8% in 2022. Operating income increased by 29% to $16.0 million for 2023, compared to $12.4 million for 2022. Net income increased to $15.2 million for 2023, compared to $12.1 million for 2022. Earnings per share were $0.50 per share (diluted) for 2023, compared to $0.39 per share (diluted) for 2022. As of December 31, 2023, the Company had approximately 5.79 million contracted subscriptions to hStream, our Platform-as-a-Service technology which characterizes our single platform approach, compared to 5.54 million contract subscriptions at December 31, 2022. During 2023, the Company deployed capital to fund the acquisition of eeds that was completed during 2022 for a purchase price equal to approximately $6.6 million in cash. The purchase consideration paid for eeds was included in accrued liabilities in the Company's Consolidated Balance Sheet as of December 31, 2022 and was paid January 2023. The Company also repurchased approximately $8.9 million of common stock under its share repurchase programs, incurred $1.1 million of severance charges associated with the elimination of 33 job roles as part of the consolidation of HealthStream's business under a single platform strategy, and paid $3.1 million in cash dividends. As of December 31, 2023, cash and investment balances approximated $71.1 million, and the Company maintained full availability under its $50.0 million revolving credit facility.

Since the beginning of 2022, we completed two acquisitions. We acquired CloudCME in May 2022 and substantially all of the assets of eeds in December 2022. For additional information regarding acquisitions, please see Note 8 of the Consolidated Financial Statements included elsewhere in this report.

RECENT DEVELOPMENTS

Macroeconomic conditions in the U.S. continue to be challenging in various respects, including as the result of ongoing inflationary pressures, elevated interest rate levels, challenging labor market conditions, and uncertain geopolitical conditions. In this regard, we have experienced, and believe that many of our customers have experienced, increased labor, supply chain, capital, and other expenditures associated with current inflationary pressures. These conditions impacting the U.S. economy and our customers in the healthcare industry have adversely affected, and may continue to adversely impact, our business and results of operations.

While the COVID-19 pandemic continues to cause some level of uncertainty, including with regard to the pandemic's various and unpredictable impacts on our healthcare customers and, in turn, our business, the impact of the pandemic itself on public health and economic conditions has significantly lessened and normalized to the point of reaching an endemic stage. As our business is focused on providing solutions to healthcare organizations, we continue to closely monitor any developments related to COVID-19 and remain prepared to modify our operating approaches to address COVID 19-related developments or other public health related events as they may arise.

29

Table of Contents

CRITICAL ACCOUNTING ESTIMATES

Preparation of our Consolidated Financial Statements requires us to make estimates and assumptions affecting the reported amounts of assets and liabilities at the date of the financial statements, reported amounts of revenues and expenses during the reporting period, and related disclosures. In the Notes to our Consolidated Financial Statements, we describe our significant accounting policies used in preparing the Consolidated Financial Statements. Our policies are evaluated on an ongoing basis and are drawn from historical experience and other assumptions that we believe to be reasonable under the circumstances. Actual results could differ under different assumptions or conditions. Our management has identified the following critical accounting policies for the areas that are materially impacted by estimates and assumptions.

Revenue Recognition

Revenues are recognized when or as control of the promised goods or services is transferred to the customer in an amount that reflects the consideration the Company expects to be entitled in exchange for transferring those goods or services. Our contracts with customers often contain promises for multiple goods and services. For these contracts, the Company accounts for the promised goods and services in its contracts as separate performance obligations if they are distinct. The contract price, which represents transaction price when the contract reflects a fixed fee arrangement, or management’s estimate of variable consideration including application of the constraint when the contract does not have a fixed fee, is allocated to the separate performance obligations on a relative standalone selling price basis. We generally determine standalone selling prices based on the standard list price for each product, taking into consideration certain factors, including contract length and the number of subscriptions or licenses purchased within the contract. Judgment is required in determining whether performance obligations are distinct, standalone selling prices, and the amount of variable consideration to reflect as transaction price.

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 evaluates all available evidence, both positive and negative, to determine whether, based on the weight of that evidence, a valuation allowance is needed. We assess the realizability of our 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. As of December 31, 2023, the Company established a valuation allowance of $2.0 million for the portion of its deferred tax assets that are not more likely than not expected to be realized, compared to a valuation allowance of $1.9 million as of December 31, 2022.

Goodwill

Goodwill represents the excess of purchase price in a business combination over the fair value of the net identifiable assets acquired. We evaluate 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 it 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 its reporting unit 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 during the fourth quarter each year. The cash flow estimates and discount rates incorporate management’s best estimates, using appropriate and customary assumptions and projections at the date of evaluation. For 2023, our qualitative assessment indicated that the fair value of our reporting unit substantially exceeded the carrying value such that a quantitative assessment was not necessary.

30

Table of Contents

RESULTS OF OPERATIONS

Revenues and Expense Components

The following descriptions of the components of revenues and expenses apply to the comparison of results of operations.

Revenues, net. The products and services generating revenues are increasingly oriented around and drive value in relation to our hStream technology platform and consist primarily of the following products and services: provision of services through our platform, learning management applications, a variety of training and development content subscriptions, staff scheduling software solutions, competency tools, training, implementation and onboarding, consulting services to serve professionals that work within healthcare organizations, and our applications that help facilitate provider credentialing, privileging, and enrollment administration for healthcare organizations.

Cost of Revenues (excluding depreciation and amortization). Cost of revenues (excluding depreciation and amortization) consist primarily of salaries and employee benefits, stock-based compensation, employee travel and lodging, materials, contract labor, hosting costs, third party software licensing costs, and other direct expenses associated with revenues, as well as royalties paid by us to content providers. Personnel costs within cost of revenues are associated with individuals that facilitate product delivery, provide services, handle customer support calls or inquiries, manage the technology infrastructure for our applications, manage content, and provide training or implementation services.

Product Development. Product development consists primarily of salaries and employee benefits, contract labor, stock-based compensation, employee travel and lodging, costs associated with the development of new software and feature enhancements, new products, third party software licensing costs, and costs associated with maintaining and developing our products. Personnel costs within product development include our systems teams, application development, quality assurance teams, product managers, and other personnel associated with software and product development.

Sales and Marketing. Sales and marketing consist primarily of salaries and employee benefits, commissions, stock-based compensation, employee travel and lodging, third party software licensing costs, advertising, trade shows, customer conferences, promotions, and related marketing costs. Personnel costs within sales and marketing include our sales teams and marketing personnel.

Other General and Administrative Expenses. Other general and administrative expenses consist primarily of salaries and employee benefits, stock-based compensation, employee travel and lodging, facility expenses, office expenses, fees for professional services, business development and acquisition-related costs, third party software licensing costs, and other operational expenses. Personnel costs within general and administrative expenses include individuals associated with normal corporate functions, including accounting, legal, business development, human resources, administrative, internal information systems, and executive management.

Depreciation and Amortization. Depreciation and amortization consist of fixed asset depreciation, amortization of intangibles considered to have definite lives, and amortization of capitalized software development.

Other Income (Loss), Net. The primary component of other income is interest income related to interest earned on cash and cash equivalents and investments in marketable securities. The primary component of other expense is interest expense related to our revolving credit facility. In addition, the income or loss attributed to equity method investments and fair value adjustments related to non-marketable equity investments is included in this category, along with foreign currency gains and losses.

31

Table of Contents

2023 Compared to 2022

Revenues, net. Revenues increased approximately $12.2 million, or 5%, to $279.1 million for 2023 from $266.8 million for 2022. The revenue growth was attributable to growth in several product categories, including contribution of $3.1 million, or 1%, from our recent acquisitions. Subscription revenues increased $14.0 million, or 6%, but were partially offset by $1.7 million of declines from professional services revenues.

A comparison of revenues by revenue source is as follows (in thousands):

Cost of Revenues (excluding depreciation and amortization). Cost of revenues increased $3.9 million, or 4%, to $95.0 million for 2023 from $91.1 million for 2022. Cost of revenues as a percentage of revenues were 34% of revenues for both 2023 and 2022. The increase in expense is primarily associated with higher costs for third-party software, cloud hosting, and royalties.

Product Development. Product development expenses increased $1.2 million, or 3%, to $45.5 million for 2023 from $44.3 million for 2022. Product development expenses as a percentage of revenues were 16% and 17% of revenues for 2023 and 2022, respectively. The increase in expense is primarily due to increased personnel costs, including severance costs associated with the previously disclosed elimination of 33 job roles as part of the consolidation of HealthStream's business under a single platform strategy, partially offset by an increase in labor capitalized for internally developed software.

Sales and Marketing. Sales and marketing expenses, including personnel costs, increased $1.6 million, or 4%, to $45.7 million for 2023 from $44.1 million for 2022. Sales and marketing expenses as a percentage of revenues were 16% and 17% of revenues for 2023 and 2022, respectively. The increase in expense is primarily due to increased personnel costs, including severance costs as noted above, sales commissions, and travel costs, which were partially offset by a decrease in marketing expenses.

Other General and Administrative Expenses. Other general and administrative expenses decreased $1.2 million, or 3%, to $35.7 million for 2023 from $36.9 million for 2022. Other general and administrative expenses as a percentage of revenues were 13% and 14% of revenues for 2023 and 2022, respectively. The decrease is primarily due to lower software expenses, employee recruitment and onboarding expenses, telecom expenses, and personnel costs, which were partially offset by an increase in bad debt expense.

Depreciation and Amortization. Depreciation and amortization increased $3.2 million, or 8%, to $41.1 million for 2023 from $37.9 million for 2022. The increase resulted from higher amortization of capitalized software, partially offset by lower depreciation expense.

Other Income (Loss), Net. Other income (loss), net was income of $2.5 million for 2023 compared to $3.1 million for 2022. Other income for 2023 consisted of interest income earned on cash and investments during the year ended December 31, 2023 as well as an additional $0.4 million gain recognized upon the settlement and release of escrowed proceeds related to a prior sale of a non-marketable equity investment. Other income for 2022 consisted of the $2.7 million gain recorded upon the sale of a non-marketable equity investment during the year ended December 31, 2022 as well as the $0.9 million gain recorded due to the change in fair value of our previously held minority interest in CloudCME that was remeasured upon acquiring the remaining ownership interest of CloudCME during the year ended December 31, 2022, partially offset by losses attributed to equity method investments.

Income Tax Provision. The Company recorded a provision for income taxes of $3.3 million and $3.5 million for 2023 and 2022, respectively. The Company’s effective tax rate was 18% for 2023 compared to 22% for 2022. The Company's effective tax rate primarily reflects the statutory corporate income tax rate, the net effect of state taxes, foreign income taxes, and the effect of various permanent tax differences. During the year ended December 31, 2023, the Company recorded discrete tax benefits of $0.4 million, which consisted of tax benefits in the amount of $0.9 million resulting primarily from changes in apportionment rules in Tennessee upon the enactment of the Tennessee Works Tax Act and stock-based awards in the amount of $0.1 million, partially offset by $0.2 million of discrete tax expense related to reserves for uncertain tax positions and $0.4 million of discrete tax expense associated with merging VerityStream into HealthStream. During the year ended December 31, 2022, the Company recorded discrete tax expense of $0.6 million, which included tax expense related to uncertain tax positions and changes in state tax rates.

32

Table of Contents

Net Income. Net income increased $3.1 million, or 26%, to $15.2 million for 2023 compared to $12.1 million for 2022. Earnings per diluted share were $0.50 per share (diluted) for 2023, compared to $0.39 per share (diluted) for 2022.

Adjusted EBITDA increased 15% to $61.3 million for 2023 compared to $53.4 million for 2022. The increase resulted from the factors mentioned above. Adjusted EBITDA is a non-GAAP financial measure which we define as net income excluding the impact of the deferred revenue write-downs associated with fair value accounting for acquired businesses and before interest, income taxes, stock-based compensation, depreciation and amortization, and changes in fair value of, including gains (losses) on the sale of, non-marketable equity investments. See "Reconciliation of Non-GAAP Financial Measures" below for a reconciliation of this calculation to the most comparable measure under U.S. GAAP and information regarding why this non-GAAP financial measure provides useful information to investors.

Key Business Metrics

Our management utilizes the following key financial and non-financial metrics in connection with managing our business.

33

Table of Contents

Reconciliation of Non-GAAP Financial Measures

This Annual Report on Form 10-K presents adjusted EBITDA, which is a non-GAAP financial measure used by management in analyzing our financial results and ongoing operational performance.

In order to better assess the Company’s financial results, management believes that net income excluding the impact of the deferred revenue write-downs associated with fair value accounting for acquired businesses (as discussed in greater detail below) and before interest, income taxes, stock-based compensation, depreciation and amortization, changes in fair value of, including gains (losses) on the sale of, non-marketable equity investments, and the de-recognition of non-cash expense resulting form the paid-time off expense reduction in the first quarter if 2021 (adjusted EBITDA), is a useful measure for evaluating the operating performance of the Company because adjusted EBITDA reflects net income adjusted for certain GAAP accounting, non-cash, and/or non-operating items which we believe, in any such case, are not fully reflective of the underlying operating performance of our business. We also believe that adjusted EBITDA is useful to investors to assess the Company’s ongoing operating performance and to compare the Company’s operating performance between periods. Additionally, short-term cash incentive bonuses and certain performance-based equity awards are based on the achievement of adjusted EBITDA (as defined in applicable bonus and equity grant documentation) targets.

As noted above, the definition of adjusted EBITDA includes an adjustment for the impact of the deferred revenue write-downs associated with fair value accounting for acquired businesses. Prior to the Company early adopting ASU 2021-08 effective January 1, 2022, following the completion of any acquisition by the Company, the Company was required to record the acquired deferred revenue at fair value as defined in GAAP, which typically resulted in a write-down of the acquired deferred revenue. When the Company was required to record a write-down of deferred revenue, it resulted in lower recognized revenue, operating income, and net income in subsequent periods. Revenue for any such acquired business was deferred and was typically recognized over a one-to-two year period following the completion of any particular acquisition, so our GAAP revenues for this one-to-two year period would not reflect the full amount of revenues that would have been reported if the acquired deferred revenue was not written down to fair value. Management believes that including an adjustment in the definition of adjusted EBITDA for the impact of the deferred write-downs associated with fair value accounting for businesses acquired prior to the January 1, 2022 effective date of the Company's adoption of ASU 2021-08 provides useful information to investors because the deferred revenue write-down recognized in periods after an acquisition may, given the nature of this non-cash accounting impact, cause our GAAP financial results during such periods to not fully reflect our underlying operating performance and thus adjusting for this amount may assist in comparing the Company’s results of operations between periods. Following the adoption of ASU 2021-08, contracts acquired in an acquisition completed on or after January 1, 2022 are measured as if the Company had originated the contract (rather than the contract being measured at fair value) such that, for such acquisitions, the Company no longer records deferred revenue write-downs associated with acquired businesses (for acquisitions completed prior to January 1, 2022, the Company continues to record deferred revenue write-downs associated with fair value accounting for periods on and after January 1, 2022 consistent with this prior standard). Through December 31, 2023, the Company continued to include an adjustment in the definition of adjusted EBITDA for the impact of deferred revenue write-downs from business acquired prior to January 1, 2022 given the impact of such deferred revenue on our financial results.

Adjusted EBITDA is a non-GAAP financial measure and should not be considered as a measure of financial performance under GAAP. Because adjusted EBITDA is not a measurement determined in accordance with GAAP, adjusted EBITDA is susceptible to varying calculations. Accordingly, adjusted EBITDA, as presented, may not be comparable to other similarly titled measures of other companies and has limitations as an analytical tool.

This non-GAAP financial measure should not be considered as a substitute for, or superior to, measures of financial performance which are prepared in accordance with U.S. GAAP.

A reconciliation of adjusted EBITDA to the most directly comparable GAAP measure (net income) for the years ended December 31, 2023 and 2022, is set forth below (in thousands).

34

Table of Contents

Liquidity and Capital Resources

Net cash provided by operating activities was $64.0 million during 2023, compared to $51.2 million during 2022, an increase of 25%. The increase resulted from improved operating results, including efficiencies realized after the previously disclosed elimination of 33 jobs roles as part of the consolidation of HealthStream's business under a single platform strategy, and higher cash collections compared to the prior year. The number of days sales outstanding (DSO) was 46 days for both 2023 and 2022. The Company calculates DSO by dividing the average accounts receivable balance (excluding unbilled and other receivables) by average daily revenues for the year. The Company’s 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, income tax payments, and general corporate expenses.

Net cash used in investing activities was $56.6 million during 2023, compared to $28.4 million during 2022. During 2023, the Company spent $6.6 million for the acquisition of substantially all of the assets of eeds (note: the eeds was acquisition was consummated on December 31, 2022, but was funded in January 2023 such that the purchase price for eeds impacted net cash used in investing activities during the year ended December 31, 2023), invested in marketable securities of $50.3 million, made payments for capitalized software development of $25.8 million, and purchased property and equipment of $2.2 million. These uses of cash were partially offset by $28.3 million in maturities of marketable securities. During 2022, the Company paid $3.9 million in cash (plus shares issued by the Company in a private placement), net of cash acquired, for the acquisition of CloudCME, and on a net basis paid $0.1 million upon settling post-closing adjustments related to the ComplyALIGN and Rievent acquisitions which closed during 2021 (resulting in a net cash outflow of $4.0 million), invested in marketable securities of $13.5 million, made payments for capitalized software development of $23.3 million, and purchased property and equipment of $1.8 million. These uses of cash were partially offset by $10.6 million in maturities of marketable securities and $3.5 million in proceeds from the sale of non-marketable equity investments.

Cash used in financing activities was $13.0 million during 2023, compared to $23.7 million during 2022. The primary uses of cash in financing activities during 2023 included $8.9 million for repurchases of common stock, $3.1 million for the payment of cash dividends, $0.9 million for payments of payroll taxes related to stock-based compensation, and $0.1 million associated with the renewal of the revolving credit facility loan agreement. During 2022, the primary use of cash in financing activities included $23.1 million for repurchases of common stock and $0.6 million for payments of payroll taxes related to stock-based compensation.

On October 6, 2023, the Company entered into a new revolving credit facility, which amended and replaced our prior revolving credit facility. There currently are no outstanding borrowings under the new revolving credit facility. For additional information regarding the new revolving credit facility, see Note 12 to the Consolidated Financial Statements included herein.

Our balance sheet reflected positive working capital of $11.8 million at December 31, 2023, compared to negative working capital of $2.8 million at December 31, 2022. The increase in working capital was primarily due to increases in cash and cash equivalents and marketable securities. The Company’s primary source of liquidity was $71.1 million of cash and cash equivalents and marketable securities as of December 31, 2023. The Company also has a $50.0 million revolving credit facility loan agreement, all of which was available at December 31, 2023.

On November 30, 2021, the Company announced a share repurchase program approved by the Company’s Board under which the Company was authorized to purchase up to $20.0 million of its common stock. This share repurchase program concluded on March 8, 2022, when the maximum dollar amount authorized under the program was expended. During 2022, the Company repurchased 649,739 shares of common stock pursuant to this share repurchase program at an aggregate fair value of $14.9 million, reflecting an average price per share of $22.92 (excluding the cost of broker commissions).

On March 14, 2022, the Board approved an expansion of the Company's share repurchase program by authorizing the repurchase of up to an additional $10.0 million of the Company's outstanding shares of common stock. The share repurchase program expired on March 13, 2023, and no repurchases occurred during 2023. Under this program, the Company repurchased a total of 402,050 shares at an aggregate fair value of $8.1 million, based on an average price per share of $20.19 (excluding the cost of broker commissions), during 2022.

On September 13, 2023, the Company announced a share repurchase program approved by the Company’s Board of Directors under which the Company is authorized to purchase up to $10.0 million of its common stock. Pursuant to this authorization, repurchases may be made in the open market, including under a Rule 10b5-1 plan, through privately negotiated transactions, or otherwise. In addition, any repurchases under the authorization will be subject to prevailing market conditions, liquidity and cash flow considerations, applicable securities laws requirements (including under Rule 10b-18 and Rule 10b5-1 of the Securities Exchange Act of 1934, as applicable), and other factors.
Under this program, during 2023, the Company repurchased 404,188 shares of common stock at an aggregate fair value of $8.9 million, reflecting an average price per share of $22.07 (excluding the cost of broker commissions). The share repurchase program is scheduled to terminate on the earlier of March 31, 2024 or when the maximum dollar amount has been expended. This share repurchase program may be suspended or discontinued at any time.

35

Table of Contents

On February 20, 2023, our Board approved a quarterly dividend policy. The Board of Directors authorized the following quarterly dividend payments during 2023 pursuant to this policy:

On February 19, 2024, as previously disclosed, our board of directors approved a quarterly dividend at a rate of $0.028 per share, which represented an increase of 12% compared to the quarterly dividend per share payable in 2023 as set forth above. This quarterly dividend shall be payable on March 22, 2024 to the holders of record of all of the issued and outstanding shares of common stock as of the close of business on March 11, 2024.

The dividend policy and the declaration and payment of each quarterly cash dividend will be subject to our Board’s continuing determination that the policy and the declaration of dividends thereunder are in the best interests of our stockholders and are in compliance with applicable law and our credit agreement. Our Board retains the power to modify, suspend, or cancel the dividend policy in any manner and at any time that our Board may deem necessary or appropriate.

The Company's contractual obligations arising in the normal course of business primarily consist of operating lease obligations and purchase obligations. The amounts included as contractual obligations represent the non-cancelable portion of agreements or the minimum cancellation fee. As further discussed in Note 13 to the Company's Consolidated Financial Statements, as of December 31, 2023, we had operating lease obligations of approximately $29.0 million, of which $4.3 million is expected to be paid within 12 months. The Company's purchase obligations that represent non-cancelable contractual obligations primarily relate to information technology assets and our revolving credit facility, which facility is described further in Note 12 to the Company's Consolidated Financial Statements. As of December 31, 2023, the Company had purchase obligations of $9.2 million, with $6.5 million expected to be paid within 12 months. 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, effect any share repurchases we may elect to make, pay our quarterly cash dividends, and fund capital expenditures for at least the next 12 months and for the foreseeable future thereafter.

The Company’s 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. The revolving credit facility contains financial covenants and availability calculations designed to set a maximum leverage ratio of outstanding debt to consolidated EBITDA (as defined in our credit facility) and an interest coverage ratio of consolidated EBITDA to interest expense. Therefore, the maximum borrowings against the revolving credit facility would be dependent on the covenant values at the time of borrowing. As of December 31, 2023, the Company was in 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 be assured that if we need additional financing, 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.

Recent Accounting Pronouncements

In November 2023, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2023-07, Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures. The new guidance requires disclosures of significant reportable segment expenses that are regularly provided to the CODM and other segment items on an interim and annual basis. Entities with a single reportable segment will also be required to apply the disclosure requirements in ASU 2023-07 on an interim and annual basis. The ASU will be effective for annual periods beginning after December 15, 2023, and interim periods within fiscal years beginning after December 15, 2024. Early adoption of the ASU is permitted and should be applied retrospectively to all prior periods presented in the financial statements. The Company is currently evaluating the impact of adopting ASU 2023-07 and expects to adopt this ASU for the year ending December 31, 2024.

In December 2023, the FASB issued ASU 2023-09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures, which requires public entities to provide disclosure of disaggregated information in the entity’s tax rate reconciliation, as well as disclosure of income taxes paid disaggregated by jurisdiction. The ASU is effective for fiscal years beginning after December 15, 2024, with early adoption permitted. The Company is currently evaluating the impact of adopting ASU 2023-09.

36

Table of Contents

Item 7. 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 HealthStream’s Consolidated Financial Statements and related notes thereto included elsewhere in this report. This discussion contains forward-looking statements that involve risks and uncertainties. HealthStream’s actual results may differ significantly from the results discussed and those anticipated in these forward-looking statements as a result of many factors, including but not limited to the risks described under Risk Factors and elsewhere in this report, as well as additional risks or uncertainties not presently known to us or that we currently deem immaterial.

The following discussion addresses our 2022 and 2021 results and year-to-year comparisons between 2022 and 2021. A discussion of year-to-year comparisons between 2021 and 2020 can be found in our Annual Report on Form 10-K for the fiscal year ended December 31, 2021, filed with the SEC on February 28, 2022, under Part II, Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations.

OVERVIEW

HealthStream provides primarily SaaS based applications for healthcare organizations—all designed to improve business and clinical outcomes by supporting the people who deliver patient care. We are focused on helping healthcare organizations meet their ongoing clinical development, talent management, training, education, assessment, competency management, safety and compliance, scheduling, and provider credentialing, privileging, and enrollment needs.

Our business is managed and organized around our single platform strategy, also referred to as our One HealthStream approach. At the center of this single platform strategy is our hStream technology platform. By enabling our applications through a common technology platform known as hStream, we believe that stand-alone applications, which already provide a powerful value proposition on their own, are beginning to leverage each other to more efficiently and effectively empower our customers to manage their businesses and improve their outcomes.

The Company’s operations and executive leadership are shaped by the organizing principle of a single platform. Through this principle, we endeavor to recognize operational efficiencies, simplify our branding, and delayer our management structure. For example, HealthStream is in the process of discontinuing the use of the separate brand “VerityStream,” which has been used synonymously with the Provider Solutions segment. Consistent with our One HealthStream approach, all branding and contracting are being consolidated at the enterprise-level for the full array of the Company’s offerings. Additionally, HealthStream’s Credentialing and Scheduling have been merged into a newly formed solutions group combining both into what will be referred to as “Enterprise Applications” solutions.

We believe that organizing HealthStream’s business under a single platform strategy will result in certain operational efficiencies across the Company, including as a result of a reduction of 33 job roles during the first quarter of 2023, many of which job roles were duplicative as a result of several areas of consolidation. We expect to incur, partially in the first quarter and partially in the second quarter of 2023, approximately $0.8 million of severance charges in the aggregate as a result of such job reductions. We also expect to realize other operational efficiencies as a result of this strategy through new departmental-level consolidations, a matrix management model across all solutions, and a reduction of several infrastructure expenses.

To provide executive-level leadership of our One HealthStream approach, updates in the Company’s management team have been made as well. Michael J. Sousa has been promoted to Executive Vice President, Enterprise Applications, having most recently served as Senior Vice President, HealthStream and President, VerityStream. Additionally, Scott McQuigg has been named Senior Vice President, Digital & Network Development, having most recently served as Senior Vice President & General Manager, Scheduling Solutions. In his new role, Mr. McQuigg is focused on, among other things, advancing the Company’s business-to-professional channel.

28

Table of Contents

Through the year ended December 31, 2022, HealthStream’s products, services, and operations were organized and managed under two business segments – Workforce Solutions and Provider Solutions. As indicated in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021, and in subsequent Quarterly Reports on Form 10-Q, we have been in the process of more completely unifying our Company under a single platform strategy that will serve as the foundation for the entire enterprise.

In January 2023, our efforts to streamline the Company around a consolidated, enterprise approach reached an inflection point such that Workforce Solutions and Provider Solutions are no longer separate operating or separate reportable segments. The Company’s business is now organized and managed through this consolidated, enterprise approach, including with regard to technology, operations, accounting, internal reporting (including the nature of information reviewed by our key decision makers), organizational structure, compensation, performance assessment, and resource allocation.

For 2023 and future results, a one reportable segment reporting approach will be applicable, such that the Company intends to present financial information on a single segment basis beginning with the Quarterly Report on Form 10-Q to be filed for the three months ending March 31, 2023. However, for purposes of reporting 2022 and prior period results, the two reportable segment paradigm of Workforce Solutions and Provider Solutions remains applicable, and as such this Annual Report on Form 10-K presents separate segment-level information for these two business segments.

Unrelated to the streamlining and consolidation efforts discussed above, the Company’s President and Chief Operating Officer, J. Edward (“Eddie”) Pearson will resign from his current role effective June 30, 2023. After that point, he plans to continue serving the Company as an Executive-in-Residence. In this role, he will focus on mentoring, coaching, and teaching the Company’s employees. During his 16-year tenure with the Company, Mr. Pearson has overseen all manner of operations.

The Company’s Board of Directors has approved a dividend policy under which the Company intends to pay a quarterly cash dividend on our common stock, at an initial rate of $0.025 per share per fiscal quarter. Under the new dividend policy, the Board of Directors declared the first quarterly dividend of $0.025 per share, which will be payable on April 28, 2023 to holders of record of all of the issued and outstanding shares of common stock as of the close of business on April 17, 2023. This marks the first quarterly cash dividend policy adopted by the Company.

As HealthStream's business continues to evolve, we remain solely dedicated to the healthcare market and our primary customers continue to be healthcare organizations and other participants in the healthcare industry. Beginning in 2023, we now serve the healthcare market and our customers as a single platform company, consistent with the single segment presentation approach noted above.

Revenues for the year ended December 31, 2022 were $266.8 million, compared to $256.7 million for the year ended December 31, 2021, an increase of 4%. Revenues were positively impacted from recent acquisitions (detailed below) in the amount of $3.9 million, net of deferred revenue write-downs where applicable, coupled with growth in other workforce and provider revenues of $9.6 million. The contributions from recent acquisitions and growth in other revenues more than offset the decline of $3.4 million from the legacy resuscitation products. Gross margins improved to 65.8% during 2022, compared to 64.5% in 2021. Operating income increased by 55% to $12.4 million for 2022, compared to $8.1 million for 2021. Net income increased to $12.1 million for 2022, compared to $5.8 million for 2021. Earnings per share were $0.39 per share (diluted) for 2022, compared to $0.18 per share (diluted) for 2021. Revenues from Workforce Solutions increased by 4%, or $8.1 million, and revenues from Provider Solutions grew by 4%, or $2.0 million. As of December 31, 2022, the Company had approximately 5.54 million contracted subscriptions to hStream, our Platform-as-a-Service technology which characterizes our single platform approach, compared to 5.04 million contract subscriptions at December 31, 2021. During 2022, the Company deployed capital to fund one acquisition, CloudCME, for a purchase price equal to approximately $4.0 million in cash and $4.1 million in shares of HealthStream's common stock issued through a private placement at closing. The purchase consideration paid for the second acquisition completed during 2022, eeds, was included in accrued liabilities in the Consolidated Balance Sheet as of December 31, 2022 as the result of the fact that the purchase price consideration was transferred in January 2023. The Company also repurchased approximately $23.0 million of common stock under its share repurchase programs. As of December 31, 2022, cash and investment balances approximated $53.9 million, and the Company maintained full availability under its $65.0 million revolving credit facility.

Since the beginning of 2021, we have completed four acquisitions. We acquired ComplyALIGN in January 2021 and substantially all of the assets of Rievent in December 2021. In May 2022, we acquired the remaining ownership interest of CloudCME, and in December 2022 we acquired substantially all of the assets of eeds. For additional information regarding acquisitions, please see Note 8 of the Consolidated Financial Statements included elsewhere in this report.

29

Table of Contents

COVID-19 PANDEMIC; CURRENT ECONOMIC CONDITIONS

The COVID-19 pandemic persists and continues to cause uncertainty and potential economic volatility, including with regard to the pandemic’s various and unpredictable impacts on our healthcare customers and our business. However, the impact of the pandemic itself on public health and economic conditions appears to have significantly lessened and normalized since its height in 2020 and 2021, potentially to the point of reaching an endemic stage.

Our business is focused on providing solutions to healthcare organizations, and as such the pandemic’s adverse impact on healthcare organizations resulted in an adverse impact on our Company. We believe that certain developments related to the pandemic negatively impacted our business in 2021 and to a lesser extent in 2022. In particular, sales cycles were delayed or postponed such that declines in sales bookings by customers since the beginning of the pandemic resulted in a negative impact to revenue and earnings in 2022, and will likely continue to result in a negative impact (to a lesser extent) to revenue and earnings in 2023 and potentially thereafter. Earlier in the pandemic, such impacts on our healthcare organization customers were more frequently associated with the need to focus on providing critical care to pandemic victims and the negative economic impact many of our healthcare organization customers experienced from being forced to temporarily reduce or discontinue services, like elective surgeries, from which they derive revenue. More recently, such impacts on healthcare customers appear to be associated with the cessation of or significant reduction in governmental funds such customers have received or anticipate receiving as the result of federal stimulus and relief measures that have been or will likely soon be reduced or discontinued, including the Public Health Emergency Fund, the Paycheck Protection Program, and the Provider Relief Fund.

We continue to closely monitor developments related to the pandemic that may have an adverse impact on our operational and financial performance. We remain prepared to modify our operating approaches to address further pandemic-related developments as they may arise.

Macroeconomic conditions in the U.S. continue to be challenging in various respects, including as the result of ongoing inflationary pressures, elevated interest rate levels, disruptions to global supply networks, and challenging labor market conditions. In this regard, we have experienced, and believe that some of our customers have experienced, increased labor, supply chain, capital, and other expenditures associated with current inflationary pressures and labor market conditions. These conditions impacting the U.S. economy and our customers in the healthcare industry have adversely affected, and may continue to adversely impact, our business and results of operations

CRITICAL ACCOUNTING ESTIMATES

Preparation of our Consolidated Financial Statements requires us to make estimates and assumptions affecting the reported amounts of assets and liabilities at the date of the financial statements, reported amounts of revenues and expenses during the reporting period, and related disclosures. In the Notes to our Consolidated Financial Statements, we describe our significant accounting policies used in preparing the Consolidated Financial Statements. Our policies are evaluated on an ongoing basis and are drawn from historical experience and other assumptions that we believe to be reasonable under the circumstances. Actual results could differ under different assumptions or conditions. Our management has identified the following critical accounting policies for the areas that are materially impacted by estimates and assumptions.

Revenue Recognition

Revenues are recognized when control of the promised goods or services is transferred to the customer in an amount that reflects the consideration the Company expects to be entitled in exchange for transferring those goods or services. Our contracts with customers often contain promises for multiple goods and services. For these contracts, the Company accounts for the promised goods and services in its contracts as separate performance obligations if they are distinct. The contract price, which represents transaction price when the contract reflects a fixed fee arrangement, or management’s estimate of variable consideration including application of the constraint when the contract does not have a fixed fee, is allocated to the separate performance obligations on a relative standalone selling price basis. We generally determine standalone selling prices based on the standard list price for each product, taking into consideration certain factors, including contract length and the number of subscriptions within the contract. Judgment is required in determining whether performance obligations are distinct, standalone selling prices, and the amount of variable consideration to reflect as transaction price.

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 evaluates all available evidence, both positive and negative, to determine whether, based on the weight of that evidence, a valuation allowance is needed. We assess the realizability of our 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. As of December 31, 2022, the Company established a valuation allowance of $1.9 million for the portion of its deferred tax assets that are not more likely than not expected to be realized, compared to a valuation allowance of $2.0 million as of December 31, 2021.

Goodwill

Goodwill represents the excess of purchase price in a business combination over the fair value of the net identifiable assets acquired. We evaluate 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 it 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 during the fourth quarter each year. The cash flow estimates and discount rates incorporate management’s best estimates, using appropriate and customary assumptions and projections at the date of evaluation. For 2022, our qualitative assessment indicated that the fair value of our reporting units substantially exceeded their carrying values such that a quantitative assessment was not necessary.

30

Table of Contents

RESULTS OF OPERATIONS

Revenues and Expense Components

The following descriptions of the components of revenues and expenses apply to the comparison of results of operations.

Revenues, net. Revenues for our Workforce Solutions business segment primarily consist of the following products and services: provision of services through our platform, learning management applications, a variety of training and development content subscriptions, staff scheduling software solutions, competency tools, training, implementation and onboarding, and consulting services to serve professionals that work within healthcare organizations. Revenues for our Provider Solutions business segment are generated from our proprietary software and SaaS-based applications to help facilitate provider credentialing, privileging, and enrollment administration for healthcare organizations.

The products and services generating revenues are increasingly oriented around and derive value in relation to our hStream technology platform. Their descriptions are otherwise expected to remain generally consistent during 2023 despite the elimination of Workforce Solutions and Providers Solutions as separate reporting segments for reportable periods beginning as of January 2023.

Cost of Revenues (excluding depreciation and amortization). Cost of revenues (excluding depreciation and amortization) consist primarily of salaries and employee benefits, stock-based compensation, employee travel and lodging, materials, contract labor, hosting costs, third party software licensing costs, and other direct expenses associated with revenues, as well as royalties paid by us to content providers. Personnel costs within cost of revenues are associated with individuals that facilitate product delivery, provide services, handle customer support calls or inquiries, manage the technology infrastructure for our applications, manage content, and provide training or implementation services.

Product Development. Product development consists primarily of salaries and employee benefits, contract labor, stock-based compensation, employee travel and lodging, costs associated with the development of new software feature enhancements, new products, third party software licensing costs, and costs associated with maintaining and developing our products. Personnel costs within product development include our systems teams, application development, quality assurance teams, product managers, and other personnel associated with software and product development.

Sales and Marketing. Sales and marketing consist primarily of salaries and employee benefits, commissions, stock-based compensation, employee travel and lodging, third party software licensing costs, advertising, trade shows, customer conferences, promotions, and related marketing costs. Personnel costs within sales and marketing include our sales teams and marketing personnel.

Other General and Administrative Expenses. Other general and administrative expenses consist primarily of salaries and employee benefits, stock-based compensation, employee travel and lodging, facility expenses, office expenses, fees for professional services, business development and acquisition-related costs, third party software licensing costs, and other operational expenses. Personnel costs within general and administrative expenses include individuals associated with normal corporate functions (accounting, legal, business development, human resources, administrative, internal information systems, and executive management).

Depreciation and Amortization. Depreciation and amortization consist of fixed asset depreciation, amortization of intangibles considered to have definite lives, and amortization of capitalized software development.

Other Income (Loss), Net. The primary components of other income is interest income related to interest earned on cash and cash equivalents and investments in marketable securities. The primary component of other expense is interest expense related to our revolving credit facility. In addition, the income or loss attributed to equity method investments and fair value adjustments related to non-marketable equity investments is included in this category.

31

Table of Contents

2022 Compared to 2021

Revenues, net. Revenues increased approximately $10.1 million, or 4%, to $266.8 million for 2022 from $256.7 million for 2021. At December 31, 2022, the Company had 5.54 million contracted subscriptions to hStream, our Platform-as-a-Service technology which characterizes our single platform approach, as compared to 5.04 million contracted subscriptions at December 31, 2021. A comparison of revenues by business segment is as follows (in thousands):

Revenues for Workforce Solutions, which are primarily subscription-based, increased $8.1 million, or 4%, to $213.6 million in 2022 from $205.4 million in 2021. Revenues from recent acquisitions contributed to the year-over-year growth of approximately $3.9 million, net of deferred revenue write-downs, while growth from other solutions accounted for an additional $7.6 million compared to last year. Partially offsetting this revenue growth were reductions from our legacy resuscitation products, which were $0.1 million for 2022 compared to $3.5 million for 2021, a decrease of $3.4 million.

Revenues for Provider Solutions increased $2.0 million, or 4%, to $53.2 million for 2022 from $51.3 million for 2021. Revenue growth in 2022 was primarily attributable to new subscription revenues but was partially offset by lower revenues from professional services.

Cost of Revenues (excluding depreciation and amortization). Cost of revenues increased $0.1 million to $91.1 million for 2022 from $91.0 million for 2021. Cost of revenues as a percentage of revenues was 34% and 35% of revenues for 2022 and 2021, respectively

Cost of revenues for Workforce Solutions decreased $1.6 million to $72.5 million and approximated 34% and 36% of revenues for Workforce Solutions for 2022 and 2021, respectively. The decrease is primarily attributable to a lower royalties payable by us related to legacy resuscitation products, consistent with the reduction in these revenues, and lower stock-based compensation in 2022 compared to 2021, which is due to the stock awards granted during the three months ended December 31, 2021 in connection with the contribution of stock by our chief executive officer to enable such grants. The decrease was partially offset by higher cloud hosting costs and expenses associated with recent acquisitions. Cost of revenues for Provider Solutions increased $1.7 million to $18.6 million and approximated 35% and 33% of Provider Solutions revenues for 2022 and 2021, respectively. The increase is primarily associated with an increase in personnel costs, cloud hosting, and software costs, partially offset by lower stock-based compensation related to stock awards granted during the three months ended December 31, 2021 as noted above.

Product Development. Product development expenses increased $2.6 million, or 6%, to $44.3 million for 2022 from $41.7 million for 2021. Product development expenses as a percentage of revenues were 17% and 16% of revenues for 2022 and 2021, respectively.

Product development expenses for Workforce Solutions increased $1.9 million to $37.3 million and approximated 17% of revenues for Workforce Solutions for both 2022 and 2021. The increase in amount is primarily due to an increase in personnel costs, partially related to recent acquisitions, and contract labor, but was partially offset by an increase in labor capitalized for internally developed software and lower stock-based compensation related to stock awards granted during the three months ended December 31, 2021 as noted above. Product development expenses for Provider Solutions increased $0.7 million to $7.0 million and approximated 13% and 12% of revenues for Provider Solutions for 2022 and 2021, respectively. The increase is primarily due to an increase in personnel costs, but was partially offset by an increase in labor capitalized for internally developed software.

Sales and Marketing. Sales and marketing expenses, including personnel costs, increased $4.7 million, or 12%, to $44.1 million for 2022 from $39.5 million for 2021. Sales and marketing expenses were 17% and 15% of revenues for 2022 and 2021, respectively.

32

Table of Contents

Sales and marketing expenses for Workforce Solutions increased $4.5 million to $35.9 million and approximated 17% and 15% of revenues for Workforce Solutions for 2022 and 2021, respectively. The increase is primarily associated with increases in personnel and related costs, sales commissions, software costs, and travel, but was partially offset by lower stock-based compensation as a result of the stock awards granted during the three months ended December 31, 2021 as noted above. Sales and marketing expenses for Provider Solutions increased $0.5 million to $7.2 million and approximated 14% and 13% of revenues for Provider Solutions for 2022 and 2021, respectively. The increase in amount is primarily due to increases in personnel costs, software costs, and travel expenses. The unallocated corporate portion of sales and marketing expenses decreased $0.3 million to $1.0 million for 2022 compared to 2021 due to reductions in personnel costs.

Other General and Administrative Expenses. Other general and administrative expenses decreased $2.8 million, or 7%, to $36.9 million for 2022 from $39.7 million for 2021. Other general and administrative expenses as a percentage of revenues were 14% and 15% of revenues for 2022 and 2021, respectively.

Other general and administrative expenses for Workforce Solutions decreased $3.5 million to $8.6 million and approximated 4% and 6% of revenues for Workforce Solutions for 2022 and 2021, respectively. The decrease is primarily associated with lower transition service costs associated with prior acquisitions, including with regard to the end of our transition services agreement with Change Healthcare, which related to our acquisition of the Scheduling and Capacity Management products from Change Healthcare which was consummated during 2020, reductions in facilities costs associated with closing certain leased satellite offices, and a decrease in contract labor. Other general and administrative expenses for Provider Solutions increased $0.3 million to $3.9 million and approximated 7% of revenues for Provider Solutions for both 2022 and 2021. The increase in amount is primarily due to increases in personnel costs. The unallocated corporate portion of other general and administrative expenses increased $0.4 million to $24.4 million for 2022 from $24.0 million for 2021. The increase is primarily due to increased personnel costs, software expenses, and employee recruitment expenses over the prior year.

Depreciation and Amortization. Depreciation and amortization increased $1.1 million, or 3%, to $37.9 million for 2022 from $36.8 million for 2021. The increase resulted from higher amortization of capitalized software.

Other Income (Loss), Net. Other income (loss), net was income of $3.1 million for 2022 compared to a loss of $0.3 million for 2021. The increase is primarily a result of the $2.7 million gain recorded upon the sale of a non-marketable equity investment during the year ended December 31, 2022 as well as the $0.9 million gain recorded due to the change in fair value of our previously held minority interest in CloudCME that was remeasured upon acquiring the remaining ownership interest of CloudCME during the year ended December 31, 2022.

Income Tax Provision. The Company recorded a provision for income taxes of $3.5 million and $1.9 million for 2022 and 2021, respectively. The Company’s effective tax rate was 22% for 2022 compared to 25% for 2021. The Company's effective tax rate primarily reflects the statutory corporate income tax rate, the net effect of state taxes, foreign income taxes, and the effect of various permanent tax differences. During the year ended December 31, 2022, the Company recorded discrete tax expense of $0.6 million, which included tax expense related to uncertain tax positions and changes in state tax rates. During the year ended December 31, 2021, the Company recorded discrete tax expense of $0.5 million, which included changes in state tax rates enacted during the period and lower research and development tax credits recognized than previously estimated.

Net Income. Net income increased $6.2 million, or 107%, to $12.1 million for 2022 compared to $5.8 million for 2021. Earnings per diluted share were $0.39 per share (diluted) for 2022, compared to $0.18 per share (diluted) for 2021.

Adjusted EBITDA increased 1% to $53.4 million for 2022 compared to $52.7 million for 2021. The increase resulted from the factors mentioned above. Adjusted EBITDA is a non-GAAP financial measure which we define as net income excluding the impact of the deferred revenue write-downs associated with fair value accounting for acquired businesses and before interest, income taxes, stock-based compensation, depreciation and amortization, changes in fair value of, including gains (losses) on the sale of, non-marketable equity investments, and the de-recognition of non-cash expense resulting from the PTO expense reduction in the first quarter of 2021. See "Reconciliation of Non-GAAP Financial Measures" below for a reconciliation of this calculation to the most comparable measure under U.S. GAAP and information regarding why this non-GAAP financial measure provides useful information to investors.

33

Table of Contents

Key Business Metrics

Our management utilizes the following key financial and non-financial metrics in connection with managing our business.

Our management no longer considers operating income to be a key business metric, taking into account that, among other things, management believes that revenue and adjusted EBITDA (as highlighted above) rather than operating income are the most important financial metrics in connection with managing our business, that the Company no longer provides guidance in its earnings releases regarding operating income, and that the Company no longer utilizes operating income as a metric in connection with the Company’s short-term cash incentive bonus awards or performance-based equity awards payable to the Company’s executive officers and other employees.

34

Table of Contents

Reconciliation of Non-GAAP Financial Measures

This report presents adjusted EBITDA, which is a non-GAAP financial measure used by management in analyzing our financial results and ongoing operational performance.

In order to better assess the Company’s financial results, management believes that net income excluding the impact of the deferred revenue write-downs associated with fair value accounting for acquired businesses and before interest, income taxes, stock-based compensation, depreciation and amortization, changes in fair value of, including gains (losses) on the sale of, non-marketable equity investments, and the de-recognition of non-cash expense resulting from the paid time off expense reduction in the first quarter of 2021 (adjusted EBITDA) is a useful measure for evaluating the operating performance of the Company because adjusted EBITDA reflects net income adjusted for certain GAAP accounting, non-cash, and/or non-operating items which may not, in any such case, fully reflect the underlying operating performance of our business. We also believe that adjusted EBITDA is useful to investors to assess the Company’s ongoing operating performance and to compare the Company’s operating performance between periods. Additionally, short-term cash incentive bonuses and certain performance-based equity awards are based on the achievement of adjusted EBITDA (as defined in applicable bonus and equity grant documentation) targets.

As noted above, the definition of adjusted EBITDA includes an adjustment for the impact of the deferred revenue write-downs associated with fair value accounting for acquired businesses. Prior to the Company early adopting ASU 2021-08 effective January 1, 2022, following the completion of any acquisition by the Company, the Company was required to record the acquired deferred revenue at fair value as defined in GAAP, which typically resulted in a write-down of the acquired deferred revenue. When the Company was required to record a write-down of deferred revenue, it resulted in lower recognized revenue, operating income, and net income in subsequent periods. Revenue for any such acquired business was deferred and was typically recognized over a one-to-two year period following the completion of any particular acquisition, so our GAAP revenues for this one-to-two year period would not reflect the full amount of revenues that would have been reported if the acquired deferred revenue was not written down to fair value. Management believes that including an adjustment in the definition of adjusted EBITDA for the impact of the deferred write-downs associated with fair value accounting for businesses acquired prior to the January 1, 2022 effective date of the Company's adoption of ASU 2021-08 provides useful information to investors because the deferred revenue write-down recognized in periods after an acquisition may, given the nature of this non-cash accounting impact, cause our GAAP financial results during such periods to not fully reflect our underlying operating performance and thus adjusting for this amount may assist in comparing the Company’s results of operations between periods. Following the adoption of ASU 2021-08, contracts acquired in an acquisition completed on or after January 1, 2022 are measured as if the Company had originated the contract (rather than the contract being measured at fair value) such that, for such acquisitions, the Company no longer records deferred revenue write-downs associated with acquired businesses (for acquisitions completed prior to January 1, 2022, the Company continues to record deferred revenue write-downs associated with fair value accounting for periods on and after January 1, 2022 consistent with past practice). At the current time, the Company intends to continue to include an adjustment in the definition of adjusted EBITDA for the impact of deferred revenue write-downs from business acquired prior to January 1, 2022 given the ongoing impact of such deferred revenue on our financial results.

Adjusted EBITDA is a non-GAAP financial measure and should not be considered as a measure of financial performance under GAAP. Because adjusted EBITDA is not a measurement determined in accordance with GAAP, adjusted EBITDA is susceptible to varying calculations. Accordingly, adjusted EBITDA, as presented, may not be comparable to other similarly titled measures of other companies and has limitations as an analytical tool.

This non-GAAP financial measure should not be considered as a substitute for, or superior to, measures of financial performance which are prepared in accordance with U.S. GAAP.

35

Table of Contents

A reconciliation of adjusted EBITDA to the most directly comparable GAAP measure (net income) for the years ended December 31, 2022 and 2021, is set forth below (in thousands).

Liquidity and Capital Resources

Net cash provided by operating activities was $51.2 million during 2022, compared to $42.4 million during 2021, an increase of 21%. The increase resulted from higher cash collections compared to the prior year. The number of days sales outstanding (DSO) was 46 days for 2022 compared to 50 days for 2021. The Company calculates DSO by dividing the average accounts receivable balance (excluding unbilled and other receivables) by average daily revenues for the year. The Company’s 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 $28.4 million during 2022, compared to $25.7 million during 2021. During 2022, the Company paid $3.9 million in cash (plus shares issued by the Company in a private placement), net of cash acquired, for the acquisition of CloudCME (note: the eeds was acquisition was consummated on December 31, 2022, but was funded in January 2023 such that the purchase price for eeds did not impact net cash used in investing activities during the year ended December 31, 2022), and on a net basis paid $0.1 million upon settling post-closing adjustments related to the ComplyALIGN and Rievent acquisitions which closed during 2021 (resulting in a net cash outflow of $4.0 million), invested in marketable securities of $13.5 million, made payments for capitalized software development of $23.3 million, and purchased property and equipment of $1.8 million. These uses of cash were partially offset by $10.6 million in maturities of marketable securities and $3.5 million in proceeds from the sale of non-marketable equity investments. During 2021, the Company acquired two businesses, ComplyALIGN and Rievent, for a combined $5.9 million in cash, and on a net basis received $1.2 million of proceeds upon settling post-closing adjustments related to the ANSOS and ShiftWizard acquisitions which closed during 2020 (resulting in a net cash outflow of $4.7 million), invested in marketable securities of $5.2 million, made payments for capitalized software development of $21.9 million, purchased property and equipment of $3.4 million, and invested $1.8 million in non-marketable equity investments. These uses of cash were partially offset by $9.9 million in maturities of marketable securities and $1.4 million in proceeds from the sale of non-marketable equity investments.

Cash used in financing activities was $23.7 million during 2022, compared to $6.2 million during 2021. The primary uses of cash in financing activities during 2022 included $23.1 million for repurchases of common stock and $0.6 million for payments of payroll taxes related to stock-based compensation. During 2021, the primary use of cash in financing activities included $5.0 million for repurchases of common stock and $1.2 million for payments of payroll taxes related to stock-based compensation.

Our balance sheet reflected negative working capital of $2.8 million at December 31, 2022, compared to positive working capital of $6.5 million at December 31, 2021. The decrease in working capital was primarily due to increases in current deferred revenue, accrued liabilities (including $6.6 million for the acquisition of eeds), and accounts payable. The Company’s primary source of liquidity was $53.9 million of cash and cash equivalents and marketable securities as of December 31, 2022. The Company also has a $65.0 million revolving credit facility loan agreement, all of which was available at December 31, 2022. For additional information regarding our revolving credit facility, see Note 13 to the Company’s Consolidated Financial Statements included elsewhere in this report.

36

Table of Contents

On November 30, 2021, the Company announced a share repurchase program authorized by the Company’s Board of Directors under which the Company may purchase up to $20.0 million of its common stock. This share repurchase program concluded on March 8, 2022, when the maximum dollar amount authorized under the program was expended. Under this program, the Company repurchased a total of 853,023 shares through open market purchases at an aggregate value of $20.0 million, reflecting an average price per share of $23.45 (excluding the cost of broker commissions). During 2022 the Company repurchased 649,739 shares of common stock pursuant to this share repurchase program at an aggregate fair value of $14.9 million, reflecting an average price per share of $22.92 (excluding the cost of broker commissions).

On March 14, 2022, the Company announced an expansion of the share repurchase program authorized by the Company’s Board of Directors under which the Company may purchase up to an additional $10.0 million of its common stock. Pursuant to this authorization, repurchases may be made in the open market, including under a Rule 10b5-1 plan, through privately negotiated transactions, or otherwise. Under this program, during 2022 the Company repurchased 402,050 shares of common stock at an aggregate fair value of $8.1 million, reflecting an average price per share of $20.19 (excluding the cost of broker commissions). In addition, any future repurchases under the authorization will be subject to prevailing market conditions, liquidity and cash flow considerations, applicable securities laws requirements (including under Rule 10b-18 and Rule 10b5-1 of the Securities Exchange Act of 1934, as applicable), and other factors. The share repurchase program is scheduled to terminate on the earlier of March 13, 2023 or when the maximum dollar amount has been expended.

On February 20, 2023, we announced that our board of directors approved a dividend policy under which we intend to pay quarterly cash dividends on our common stock, at an initial rate of $0.025 per share per fiscal quarter. We also announced that our board has declared the initial quarterly dividend under the new policy in the amount of $0.025 per share, which will be payable on April 28, 2023 to the holders of record of all of the issued and outstanding shares of common stock as of the close of business on April 17, 2023.

The dividend policy and the declaration and payment of each quarterly cash dividend will be subject to our board’s continuing determination that the policy and the declaration of dividends thereunder are in the best interests of our stockholders and are in compliance with applicable law and our credit agreement. Our board retains the power to modify, suspend, or cancel the dividend policy in any manner and at any time that our board may deem necessary or appropriate

The Company's contractual obligations arising in the normal course of business primarily consist of operating lease obligations and purchase obligations. The amounts included as contractual obligations represent the non-cancelable portion of agreements or the minimum cancellation fee. As further discussed in Note 14 to the Company's Consolidated Financial Statements, as of December 31, 2022, we had operating lease obligations of approximately $33.4 million, of which $4.3 million is expected to be paid within 12 months. The Company's purchase obligations that represent non-cancelable contractual obligations primarily relate to information technology assets and our revolving credit facility, which facility is described further in Note 13 to the Company's Consolidated Financial Statements. As of December 31, 2022, the Company had purchase obligations of $7.0 million, with $4.0 million expected to be paid within 12 months. 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, effect any share repurchases we may elect to make, pay our quarterly cash dividend as noted above, and capital expenditures for at least the next 12 months and for the foreseeable future thereafter.

The Company’s 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. The revolving credit facility contains financial covenants and availability calculations designed to set a maximum leverage ratio of outstanding debt to consolidated EBITDA (as defined in our credit facility) and an interest coverage ratio of consolidated EBITDA to interest expense. Therefore, the maximum borrowings against the revolving credit facility would be dependent on the covenant values at the time of borrowing. As of December 31, 2022, the Company was in 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 be assured that if we need additional financing, 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.

Recent Accounting Pronouncements

In October 2021, the Financial Accounting Standards Board issued Accounting Standards Update ("ASU") 2021-08, Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers. The new guidance requires contract assets and contract liabilities acquired in a business combination to be recognized and measured by the acquirer on the acquisition date in accordance with Accounting Standards Codification 606, Revenue from Contracts with Customers, as if it had originated the contracts. This approach differs from the previous requirement to measure contract assets and contract liabilities acquired in a business combination at fair value. The standard is effective for the first interim period within annual reporting periods beginning after December 15, 2022 and early adoption is permitted. The Company early adopted this ASU on January 1, 2022 and the impact of the new standard is dependent on the magnitude of future acquisitions but has not had a material impact to date. The standard does not impact contract assets or liabilities from business combinations that occurred prior to the adoption date.

37

Table of Contents

Item 7. 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 HealthStream’s Consolidated Financial Statements and related notes thereto included elsewhere in this report. This discussion contains forward-looking statements that involve risks and uncertainties. HealthStream’s actual results may differ significantly from the results discussed and those anticipated in these forward-looking statements as a result of many factors, including but not limited to the risks described under Risk Factors and elsewhere in this report, as well as additional risks or uncertainties not presently known to us or that we currently deem immaterial.

The following discussion addresses our 2021 and 2020 results and year-to-year comparisons between 2021 and 2020. A discussion of year-to-year comparisons between 2020 and 2019 can be found in our Annual Report on Form 10-K for the fiscal year ended December 31, 2020, filed with the SEC on February 26, 2021, under Part II, Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations.

OVERVIEW

HealthStream provides primarily SaaS based applications for healthcare organizations—all designed to improve business and clinical outcomes by supporting the people who deliver patient care.

We are in the process of more completely unifying the Company under a single platform strategy that will serve as the foundation for the entire enterprise. By enabling our applications through a common technology platform known as hStream, we believe that stand-alone applications, which already provide a powerful value proposition, will begin to leverage each other to more efficiently and effectively empower our customers to manage their businesses and improve their outcomes. As we continue to achieve this goal of orienting multiple applications in relation to a single technology platform, distinctions between our current reporting segments of Workforce Solutions and Provider Solutions may become less applicable, or even obsolete, in terms of how we operate and report on the Company's business. At the current time, what we characterize and report on as Workforce Solutions products are used by healthcare organizations to meet a broad range of their clinical development, learning and performance, certification, scheduling, safety and compliance, and competency assessment needs. Provider Solutions products are used by healthcare organizations for provider credentialing, privileging, and enrollment needs. HealthStream’s primary customers include healthcare organizations and other participants in the healthcare industry.

28

Table of Contents

Revenues for the year ended December 31, 2021 were $256.7 million, compared to $244.8 million for the year ended December 31, 2020, an increase of 5%. Revenues were positively impacted from recent acquisitions (detailed below) of $27.2 million, net of deferred revenue write-downs, and growth in other workforce and provider revenues of $19.6 million. The contributions from recent acquisitions and growth in other revenues more than offset the decline of $34.9 million from the legacy resuscitation products. Gross margins improved to 64.5% during 2021 compared to 63.5% in 2020. Operating income decreased by 49% to $8.1 million for 2021, compared to $15.8 million for 2020. Net income decreased to $5.8 million for 2021, compared to $14.1 million for 2020. Earnings per share were $0.18 per share (diluted) for 2021, compared to $0.44 per share (diluted) for 2020. Revenues from Workforce Solutions increased by 4%, or $7.9 million, and revenues from Provider Solutions grew by 9%, or $4.0 million. As of December 31, 2021, the Company had approximately 5.04 million contracted subscriptions to hStream, our emerging technology platform. During 2021, the Company deployed capital to fund two acquisitions for approximately $6.0 million in cash and made approximately $5.1 million of share repurchases. As of December 31, 2021, cash and investment balances approximated $51.9 million, and the Company maintained full availability under its $65.0 million revolving credit facility.

Since the beginning of 2020, we have completed six acquisitions. We acquired NurseGrid in March 2020, we acquired ShiftWizard in October 2020, and in December 2020, we acquired ANSOS and substantially all of the assets of myClinicalExchange. In January 2021, we acquired ComplyALIGN and substantially all the assets of Rievent in December 2021. For additional information regarding acquisitions, please see Note 8 of the Consolidated Financial Statements included elsewhere in this report.

IMPACT AND RESPONSE TO COVID-19 PANDEMIC

The COVID-19 pandemic persists and continues to cause uncertainty and potential economic volatility, including with regard to the pandemic’s various and unpredictable impacts on our healthcare customers and our business.

Our business is focused on providing solutions to healthcare organizations, and as such the pandemic’s adverse impact on healthcare organizations has resulted in an adverse impact on our Company. We believe that certain developments related to the pandemic negatively impacted our business in 2021, and are expected to continue to negatively impact our business during 2022 and potentially thereafter, as described below. In particular, sales cycles have been delayed or postponed such that declines in sales bookings by customers since the beginning of the pandemic will result in a negative impact to revenue and earnings in 2022 and potentially thereafter.

Similar to the year ended December 31, 2020, our operating income for the year ended December 31, 2021 benefited from a temporary reduction of operating expenses related to the pandemic, but the operating expense reduction itself—despite its positive impact on our operating results—is indicative of the negative impact the pandemic is having on new bookings and renewals. We have experienced, and expect to continue to experience, delayed and reduced bookings and renewals due to the pandemic. Given that we sell multiple year subscriptions to our solutions, the revenue impact of lost or delayed sales in a given period generally does not manifest until future periods, just as the revenue we recognize in a given period is generally the result of sales from a prior period. Since mid-March 2020, our sales organization has had limited opportunities to travel and conduct onsite sales meetings with existing or prospective customers, and we have also cancelled tradeshows, which typically provide future sales opportunities.

When travel restrictions lessen and travel resumes at a more normal level, we expect operating expenses associated with travel to have a negative impact on our operating results, and we do not expect revenue generated from such activities to begin offsetting such increases to operating expenses at the same time we incur such expenses. However, the uncertain trajectory of the pandemic may impact when and to what extent normal operating expenses, including expenses related to sales travel and in-person tradeshows, increases or remains abated.

We continue to closely monitor developments related to the pandemic that may have an adverse impact on our operational and financial performance. We also continue to take actions focused on the safety and well-being of our employees, assisting our customers in this time of need, and mitigating operational and financial impacts to our business. We intend to continue serving our customers both in their battle to defeat the coronavirus and across the continuum of their other workforce and provider solution needs.

29

Table of Contents

Additionally, to promote the safety and well-being of our employees, we required our entire workforce to begin working remotely from home beginning March 16, 2020. Beginning December 1, 2021, we allowed employees who demonstrated proof of vaccination the option to work in our offices at their discretion, but a large majority of our workforce continues to work remotely. In 2021, we also adopted a hybrid work policy that allows employees the choice of whether to work in an office or remotely, and we expect this policy to govern our work after the pandemic ends.

Many healthcare organizations have been, and may continue to be, substantially adversely impacted by the pandemic. The period of time over which this adverse impact continues, the extent to which certain healthcare organizations continue to receive and/or are eligible to utilize governmental funds as the result of federal stimulus and relief measures, and ongoing public health conditions related to the pandemic are important factors that may impact our business.

In light of adverse developments with respect to healthcare organizations as noted above, we are continuing to monitor the ability or willingness of our customers to:

We monitor our cash position and credit exposure by evaluating, among other things, weekly cash receipts, days sales outstanding (DSO), customer requests to modify payment or contract terms, and bankruptcy notices. We experienced modest decreases in DSO during 2021 compared to 2020 as a result of faster payments from customers, and bad debts were not significantly different from pre-pandemic levels. However, while we have not experienced any adverse impacts to customer defaults resulting from COVID-19, we are unable to know whether or to what extent future negative trends related to the pandemic may arise or increase over time. Any deterioration in the collectability (or the timing of payments) of our accounts receivable could adversely impact our financial results.

The timing of implementation of our services is also relevant to our business because our software solutions do not result in revenue recognition until they are made available for use. To the extent our customers delay or fail to implement products they have previously purchased, our financial results will be adversely impacted. While we have experienced a negative impact from certain implementation delays related to COVID-19, these delays have not been consistent across products or across customers. In fact, we have become more efficient in implementing certain products during the pandemic, particularly with regard to products focused on workforce development solutions such as hStream and the HealthStream Learning Center. In contrast, solutions like CredentialStream that require greater change management efforts on the part of our customers have, in some instances, been more sensitive to implementation delays.

The U.S. economy has recently experienced various disruptions, including inflationary pressures, significant disruptions to global supply networks, and challenging labor market conditions. In this regard, we have recently experienced, and believe that some of our customers have experienced, increased labor, supply chain, capital, and other expenditures associated with current inflationary pressures. We may be unable to fully offset the impact of these increased expenditures, which may adversely impact our business and results of operations.

Conditions related to the pandemic have caused, and may continue to cause, some customers to delay purchasing decisions they otherwise would have made. Such conditions also adversely impacted the ability or willingness of some customers to renew their contracts with us or to renew contracts at the same levels. Pandemic-related conditions have also delayed or otherwise adversely impacted our ability to enter into contracts with new potential customers, as some potential customers have been focused on dealing with the impact and demands that the pandemic is having on their businesses. In addition, the limitations noted above on onsite sales meetings and in-person trade shows, as well as our customers’ ongoing uncertainties due to the pandemic, have reduced, and may continue to reduce, the ability of our sales team to make sales they otherwise would likely make but for the impact of the pandemic. As the pandemic has persisted, we have, however, continued to evolve our sales approach such that our sales representatives are in frequent contact with customers via video conference and other remote means that do not require physical travel or onsite visits to our customers’ facilities. The timing and extent of the resumption of in-person activities will be dependent on the prevalence and severity of future COVID-19 outbreaks, including with regard to new variants of COVID-19 that may emerge.

Given the uncertainty surrounding the adverse impacts that the pandemic could have on our business, we took certain expense management measures in 2020 as previously disclosed. For the year ended December 31, 2021, we generally discontinued these expense management measures taking into account the improved economic environment and current conditions related to the pandemic, provided that certain expenses such as those associated with travel and tradeshows remain significantly lower than pre-pandemic levels due to limitations on our ability to engage in such activities at the same levels as prior to the pandemic. We are continuing to monitor developments related to the pandemic and will continue to make such expense management adjustments as we deem necessary.

30

Table of Contents

CRITICAL ACCOUNTING ESTIMATES

Preparation of our Consolidated Financial Statements requires us to make estimates and assumptions affecting the reported amounts of assets and liabilities at the date of the financial statements, reported amounts of revenues and expenses during the reporting period, and related disclosures. In the Notes to our Consolidated Financial Statements, we describe our significant accounting policies used in preparing the Consolidated Financial Statements. Our policies are evaluated on an ongoing basis and are drawn from historical experience and other assumptions that we believe to be reasonable under the circumstances. Actual results could differ under different assumptions or conditions. Our management has identified the following critical accounting policies for the areas that are materially impacted by estimates and assumptions.

Revenue Recognition

Revenues are recognized when control of the promised goods or services is transferred to the customer in an amount that reflects the consideration the Company expects to be entitled in exchange for transferring those goods or services. Our contracts with customers often contain promises for multiple goods and services. For these contracts, the Company accounts for the promised goods and services in its contracts as separate performance obligations if they are distinct. The contract price, which represents transaction price when the contract reflects a fixed fee arrangement, or management’s estimate of variable consideration including application of the constraint when the contract does not have a fixed fee, is allocated to the separate performance obligations on a relative standalone selling price basis. We generally determine standalone selling prices based on the standard list price for each product, taking into consideration certain factors, including contract length and the number of subscriptions within the contract. Judgment is required in determining whether performance obligations are distinct, standalone selling prices, and the amount of variable consideration to reflect as transaction price.

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 evaluates all available evidence, both positive and negative, to determine whether, based on the weight of that evidence, a valuation allowance is needed. We assess the realizability of our 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. As of December 31, 2021, the Company established a valuation allowance of $2.0 million for the portion of its deferred tax assets that are not more likely than not expected to be realized, compared to a valuation allowance of $0.6 million as of December 31, 2020.

Goodwill

Goodwill represents the excess of purchase price in a business combination over the fair value of the net identifiable assets acquired. We evaluate 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 it 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 during the fourth quarter each year. The cash flow estimates and discount rates incorporate management’s best estimates, using appropriate and customary assumptions and projections at the date of evaluation. For 2021, our qualitative assessment indicated that the fair value of our reporting units substantially exceeded their carrying values such that a quantitative assessment was not necessary.

31

Table of Contents

RESULTS OF OPERATIONS

Revenues and Expense Components

The following descriptions of the components of revenues and expenses apply to the comparison of results of operations.

Revenues, net. Revenues for our Workforce Solutions business segment primarily consist of the following products and services: provision of services through our platform, learning management applications, a variety of training and development content subscriptions, staff scheduling software solutions, competency tools, training, implementation and onboarding, and consulting services to serve professionals that work within healthcare organizations. Revenues for our Provider Solutions business segment are generated from our proprietary software and SaaS-based applications to help facilitate provider credentialing, privileging, and enrollment administration for healthcare organizations.

Cost of Revenues (excluding depreciation and amortization). Cost of revenues (excluding depreciation and amortization) consist primarily of salaries and employee benefits, stock-based compensation, employee travel and lodging, materials, contract labor, hosting costs, third party software licensing costs, and other direct expenses associated with revenues, as well as royalties paid by us to content providers. Personnel costs within cost of revenues are associated with individuals that facilitate product delivery, provide services, handle customer support calls or inquiries, manage the technology infrastructure for our applications, manage content, and provide training or implementation services.

Product Development. Product development consists primarily of salaries and employee benefits, contract labor, stock-based compensation, costs associated with the development of new software feature enhancements, new products, third party software licensing costs, and costs associated with maintaining and developing our products. Personnel costs within product development include our systems teams, application development, quality assurance teams, product managers, and other personnel associated with software and product development.

Sales and Marketing. Sales and marketing consist primarily of salaries and employee benefits, commissions, stock-based compensation, employee travel and lodging, third party software licensing costs, advertising, trade shows, customer conferences, promotions, and related marketing costs. Personnel costs within sales and marketing include our sales teams and marketing personnel.

Other General and Administrative Expenses. Other general and administrative expenses consist primarily of salaries and employee benefits, stock-based compensation, employee travel and lodging, facility expenses, office expenses, fees for professional services, business development and acquisition-related costs, third party software licensing costs, and other operational expenses. Personnel costs within general and administrative expenses include individuals associated with normal corporate functions (accounting, legal, business development, human resources, administrative, internal information systems, and executive management).

Depreciation and Amortization. Depreciation and amortization consist of fixed asset depreciation, amortization of intangibles considered to have definite lives, and amortization of capitalized software development.

Other (Loss) Income, Net. The primary components of other income is interest income related to interest earned on cash and cash equivalents and investments in marketable securities. The primary component of other expense is interest expense related to our revolving credit facility. In addition, the income or loss attributed to equity method investments and fair value adjustments related to non-marketable equity investments is included in this category.

32

Table of Contents

2021 Compared to 2020

Revenues, net. Revenues increased approximately $11.9 million, or 5%, to $256.7 million for 2021 from $244.8 million for 2020. At December 31, 2021, the Company had 5.04 million contracted subscriptions to hStream, our emerging technology platform, as compared to 4.22 million contracted subscriptions at December 31, 2020. A comparison of revenues by business segment is as follows (in thousands):

Revenues for Workforce Solutions, which are primarily subscription-based, increased $7.9 million, or 4%, to $205.4 million in 2021 from $197.6 million in 2020. Revenues from recent acquisitions contributed to the year-over-year growth of approximately $27.2 million, net of deferred revenue write-downs, while growth from other solutions accounted for an additional $15.6 million compared to last year. Partially offsetting this revenue growth were reductions from our legacy resuscitation products, which were $3.5 million for 2021 compared to $38.4 million for 2020, a decrease of $34.9 million.

Revenues for Provider Solutions increased $4.0 million, or 9%, to $51.3 million for 2021 from $47.2 million for 2020. Revenue growth in 2021 was primarily attributable to new subscription revenues.

Cost of Revenues (excluding depreciation and amortization). Cost of revenues increased $1.7 million, or 2%, to $91.0 million for 2021 from $89.3 million for 2020. Cost of revenues as a percentage of revenues was 35% and 36% of revenues for 2021 and 2020, respectively

Cost of revenues for Workforce Solutions increased $0.7 million to $74.1 million and approximated 36% and 37% of revenues for Workforce Solutions for 2021 and 2020, respectively. The increase in amount is primarily associated with increased expenses related to recent acquisitions, the one-time contractual adjustment to cost of revenues in the amount of $3.4 million recorded during the first quarter of 2020, an increase in software expense classified as cost of revenues, and stock-based compensation related to the stock awards granted during the three months ended December 31, 2021 in connection with the contribution of stock by our chief executive officer to enable such grants. These increases in cost of revenues were partially offset by lower royalty expense associated with the decline in the legacy resuscitation revenues. Cost of revenues for Provider Solutions increased $1.0 million to $16.9 million and approximated 33% and 34% of Provider Solutions revenues for 2021 and 2020, respectively. The increase in amount is primarily associated with an increase in software expense classified as cost of revenues as well as an increase in personnel expenses.

Product Development. Product development expenses increased $9.4 million, or 29%, to $41.7 million for 2021 from $32.3 million for 2020. Product development expenses as a percentage of revenues were 16% and 13% of revenues for 2021 and 2020, respectively.

Product development expenses for Workforce Solutions increased $9.9 million to $35.4 million and approximated 17% and 13% of revenues for Workforce Solutions for 2021 and 2020, respectively. The increase is primarily due to an increase in personnel associated with the recent acquisitions, increased product development efforts across other workforce solutions, and stock-based compensation related to stock awards granted during the three months ended December 31, 2021 as noted above. Product development expenses for Provider Solutions decreased $0.5 million to $6.3 million and approximated 12% and 14% of revenues for Provider Solutions for 2021 and 2020, respectively. The decrease is primarily due to an increase in labor capitalized for internally developed software related to additional product investments across the VerityStream product suite.

Sales and Marketing. Sales and marketing expenses, including personnel costs, increased $4.2 million, or 12%, to $39.5 million for 2021 from $35.3 million for 2020. Sales and marketing expenses were 15% and 14% of revenues for 2021 and 2020, respectively.

33

Table of Contents

Sales and marketing expenses for Workforce Solutions increased $3.5 million to $31.5 million and approximated 15% and 14% of revenues for Workforce Solutions for 2021 and 2020, respectively. The increase is primarily due to increases in personnel associated with recent acquisitions, stock-based compensation related to stock awards granted during the three months ended December 31, 2021 as noted above, and marketing expenses, but was partially offset by lower sales commissions associated with the decline in legacy resuscitation revenues and decreases in travel and entertainment expenses as a result of the COVID-19 pandemic. Sales and marketing expenses for Provider Solutions increased $0.5 million to $6.7 million and approximated 13% of revenues for Provider Solutions for both 2021 and 2020. The increase in amount is primarily due to increases in general marketing expenses and stock-based compensation related to stock awards granted during the three months ended December 31, 2021 as noted above. The unallocated corporate portion of sales and marketing expenses increased $0.2 million to $1.3 million for 2021 compared to 2020 due to increases in investor relation expenses.

Other General and Administrative Expenses. Other general and administrative expenses decreased $2.2 million, or 5%, to $39.7 million for 2021 from $41.9 million for 2020. Other general and administrative expenses as a percentage of revenues were 15% and 17% of revenues for 2021 and 2020, respectively.

Other general and administrative expenses for Workforce Solutions decreased $4.0 million to $12.1 million and approximated 6% and 8% of revenues for Workforce Solutions for 2021 and 2020, respectively. The decrease is primarily associated with a decrease in software expense classified as general and administrative expenses, partially offset by expenses associated with recent acquisitions and stock-based compensation related to stock awards granted during the three months ended December 31, 2021 as noted above. Other general and administrative expenses for Provider Solutions increased $0.2 million to $3.6 million and approximated 7% of revenues for Provider Solutions for both 2021 and 2020. The increase in amount is primarily due to increases in personnel expenses and stock-based compensation related to stock awards granted during the three months ended December 31, 2021 as noted above, partially offset by a decrease in software expense classified as general and administrative expenses. The unallocated corporate portion of other general and administrative expenses increased $1.6 million to $24.0 for 2021 from $22.5 for 2020. The increase is primarily due to increased personnel expenses over the prior year and stock-based compensation related to stock awards granted during the three months ended December 31, 2021 as noted above, partially offset by a reduction in acquisition-related expenses.

Depreciation and Amortization. Depreciation and amortization increased $6.6 million, or 22%, to $36.8 million for 2021 from $30.2 million for 2020. The increase resulted from higher amortization of capitalized software and intangibles resulting from our recent acquisitions.

Other (Loss) Income, Net. Other (loss) income, net was a loss of $0.3 million for 2021 compared to income of $2.0 million for 2020. The decrease is driven by the $1.2 million gain associated with the change in fair value of the non-marketable equity investment in NurseGrid prior to the acquisition of NurseGrid on March 9, 2020, coupled with lower interest income due to reductions in bond yields and bank interest rates.

Income Tax Provision. The Company recorded a provision for income taxes of $1.9 million and $3.7 million for 2021 and 2020, respectively. The Company’s effective tax rate was 25% for 2021 compared to 21% for 2020. The Company's effective tax rate primarily reflects the statutory corporate income tax rate, the net effect of state taxes, foreign income taxes, and the effect of various permanent tax differences. During the year ended December 31, 2021, the Company recorded discrete tax expense of $0.5 million, which included changes in state tax rates enacted during the period and lower research and development tax credits recognized than previously estimated. During the year ended December 31, 2020, the Company recorded a $1.2 million change in the fair value of non-marketable equity investments as a result of the NurseGrid acquisition, which is not a taxable transaction, resulting in a tax benefit of $0.3 million, and recognized tax benefits from higher research and development tax credits than previously estimated.

Net Income. Net income decreased $8.3 million, or 59%, to $5.8 million for 2021 compared to $14.1 million for 2020. Earnings per diluted share were $0.18 per share (diluted) for 2021, compared to $0.44 per share (diluted) for 2020.

Adjusted EBITDA increased 15% to $52.7 million for 2021 compared to $46.0 million for 2020. The increase resulted from the factors mentioned above. Adjusted EBITDA is a non-GAAP financial measure which we define as net income excluding the impact of the deferred revenue write-downs associated with fair value accounting for acquired businesses and before interest, income taxes, stock-based compensation, depreciation and amortization, changes in fair value of non-marketable equity investments, the de-recognition of non-cash expense resulting from the PTO expense reduction in the first quarter of 2021 and the de-recognition of non-cash royalty expense resulting from our resolution of a mutual disagreement related to various elements of a past partnership which resulted in a reduction to cost of sales in the first quarter of 2020. See "Reconciliation of Non-GAAP Financial Measures" below for a reconciliation of this calculation to the most comparable measure under U.S. GAAP and information regarding why this non-GAAP financial measure provides useful information to investors.

34

Table of Contents

Key Business Metrics

Our management utilizes the following financial and non-financial metrics in connection with managing our business.

35

Table of Contents

Reconciliation of Non-GAAP Financial Measures

This report presents adjusted EBITDA and adjusted EBITDA from continuing operations, both of which are non-GAAP financial measures used by management in analyzing our financial results and ongoing operational performance.

In order to better assess the Company’s financial results, management believes that net income excluding the impact of the deferred revenue write-downs associated with fair value accounting for acquired businesses and before interest, income taxes, stock-based compensation, depreciation and amortization, changes in fair value of non-marketable equity investments, the de-recognition of non-cash expense resulting from the paid time off expense reduction in the first quarter of 2021, and the resolution of a mutual disagreement related to various elements of a past partnership which resulted in a reduction to cost of sales in the first quarter of 2020 (adjusted EBITDA) is a useful measure for evaluating the operating performance of the Company because adjusted EBITDA reflects net income adjusted for certain GAAP accounting, non-cash, and/or non-operating items which may not, in any such case, fully reflect the underlying operating performance of our business. Management also believes that adjusted EBITDA from continuing operations is a useful measure for evaluating the operating performance of the Company because such measure excludes the gain on sale in connection with the sale of the PX business in February 2018 included in our results of operations during the year ended December 31, 2019, and thus reflects the Company’s ongoing business operations and assists in comparing the Company’s results of operations between periods. We also believe that adjusted EBITDA and adjusted EBITDA from continuing operations are useful to many investors to assess the Company’s ongoing results from current operations. In addition, beginning in 2021, executive bonuses are based on the achievement of adjusted EBITDA targets.

As noted above, the definition of adjusted EBITDA and adjusted EBITDA from continuing operations includes an adjustment for the impact of the deferred revenue write-downs associated with fair value accounting for acquired businesses. Following the completion of any acquisition by the Company, the Company must record the acquired deferred revenue at fair value as defined in GAAP, which may result in a write-down of deferred revenue. 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. Revenue for any such acquired business is deferred and is typically recognized over a one-to-two year period following the completion of any particular acquisition, so our GAAP revenues 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. Management believes that including an adjustment in the definition of adjusted EBITDA and adjusted EBITDA from continuing operations for the impact of the deferred write-downs associated with fair value accounting for acquired businesses provides useful information to investors because the deferred revenue write-down recognized in periods after an acquisition may, given the nature of this non-cash accounting impact, cause our GAAP financial results during such periods to not fully reflect our underlying operating performance and thus adjusting for this amount may assist in comparing the Company’s results of operations between periods.

Adjusted EBITDA and adjusted EBITDA from continuing operations are non-GAAP financial measures and should not be considered as measures of financial performance under GAAP. Because adjusted EBITDA and adjusted EBITDA from continuing operations are not measurements determined in accordance with GAAP, such non-GAAP financial measures are susceptible to varying calculations. Accordingly, adjusted EBITDA and adjusted EBITDA from continuing operations, as presented, may not be comparable to other similarly titled measures of other companies.

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.

36

Table of Contents

A reconciliation of adjusted EBITDA and adjusted EBITDA from continuing operations to the most directly comparable GAAP measures for the years ended December 31, 2021, December 31, 2020, and December 31, 2019, is set forth below (in thousands).

Liquidity and Capital Resources

Net cash provided by operating activities was $42.4 million during 2021 compared to $35.9 million during 2020, an increase of 18%. The increase resulted from higher cash collections compared to the prior year. The number of days sales outstanding (DSO) was 50 days for 2021 compared to 51 days for 2020. The Company calculates DSO by dividing the average accounts receivable balance (excluding unbilled and other receivables) by average daily revenues for the year. The Company’s 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 $25.7 million during 2021 compared to $110.4 million during 2020. During 2021, the Company acquired two businesses, ComplyALIGN, and Rievent, for a combined $5.9 million in cash and on a net basis received $1.2 million of proceeds upon settling post-closing adjustments related to the ANSOS and ShiftWizard acquisitions which closed during 2020 for a net cash outflow of $4.7 million, invested in marketable securities of $5.2 million, made payments for capitalized software development of $21.9 million, purchased property and equipment of $3.4 million, and invested $1.8 million in non-marketable equity investments. These uses of cash were partially offset by $9.9 million in maturities of marketable securities and $1.4 million in proceeds from the sale of non-marketable equity investments. During 2020, the Company acquired four businesses, NurseGrid, ShiftWizard, ANSOS, and myClinicalExchange, for a combined $121.3 million in cash, invested in marketable securities of $61.2 million, purchased property and equipment of $2.0 million, made payments for capitalized software development of $16.8 million, and invested $1.3 million in non-marketable equity investments. These uses of cash were partially offset by $92.2 million in sales and maturities of marketable securities.

Cash used in financing activities was $6.2 million during 2021 compared to $20.5 million during 2020. The primary uses of cash in financing activities during 2021 included $5.0 million for repurchases of common stock and $1.2 million for payments of payroll taxes from stock-based compensation. During 2020, the primary use of cash in financing activities included $20.0 million for repurchases of common stock and $0.4 million for payments of payroll taxes from stock-based compensation.

37

Table of Contents

Our balance sheet reflects positive working capital of $6.5 million at December 31, 2021 compared to negative working capital of $4.7 million at December 31, 2020. The increase in working capital was primarily due to an increase in cash and marketable securities and a reduction in accounts payable, accrued liabilities, and current deferred revenue. The Company’s primary source of liquidity is $51.9 million of cash and cash equivalents and marketable securities. The Company also has a $65.0 million revolving credit facility loan agreement, all of which was available at December 31, 2021. For additional information regarding our revolving credit facility, see Note 14 to the Company’s Consolidated Financial Statements included elsewhere in this report.

The Company's contractual obligations arising in the normal course of business primarily consist of operating lease obligations and purchase obligations. The amounts included as contractual obligations represent the non-cancelable portion of agreements or the minimum cancellation fee. As further discussed in Note 15 to the Company's Consolidated Financial Statements, as of December 31, 2021, we had operating lease obligations of approximately $38.0 million, of which $4.5 million is expected to be paid within 12 months. The Company's purchase obligations that represent non-cancelable contractual obligations primarily relate to information technology assets and our revolving credit facility, which facility is described further in Note 14 to the Company's Consolidated Financial Statements. As of December 31, 2021, the Company had purchase obligations of $2.6 million, with $1.7 million expected to be paid within 12 months. 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 and for the foreseeable future thereafter.

The Company’s growth strategy includes acquiring businesses that provide complementary products and services. It is anticipated that future acquisitions, if any, would be affected 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. The revolving credit facility contains financial covenants and availability calculations designed to set a maximum leverage ratio of outstanding debt to consolidated EBITDA (as defined in our credit facility) and an interest coverage ratio of consolidated EBITDA to interest expense. Therefore, the maximum borrowings against the revolving credit facility would be dependent on the covenant values at the time of borrowing. As of December 31, 2021, the Company was in 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 be assured that if we need additional financing, 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.

Recent Accounting Pronouncements

In October 2021, the Financial Accounting Standards Board issued Accounting Standards Update ("ASU") 2021-08, Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers. The new guidance requires contract assets and contract liabilities acquired in a business combination to be recognized and measured by the acquirer on the acquisition date in accordance with Accounting Standards Codification 606, Revenue from Contracts with Customers, as if it had originated the contracts. This approach differs from the current requirement to measure contract assets and contract liabilities acquired in a business combination at fair value. The standard will be effective for the first interim period within annual reporting periods beginning after December 15, 2022 and early adoption is permitted. The Company will early adopt this ASU on January 1, 2022 and the adoption impact of the new standard will depend on the magnitude of future acquisitions. The standard will not impact contract assets or liabilities from business combinations occurring prior to the adoption date.

38

Table of Contents