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| HSTM > SEC Filings for HSTM > Form 10-K on 27-Mar-2009 | All Recent SEC Filings |
27-Mar-2009
Annual Report
2008 was $2.9 million compared to $4.1 million for 2007. Net income includes an
income tax benefit of approximately $375,000 in 2008 and $2.0 million in 2007
associated with the recognition of a portion of the Company's deferred tax
assets. Diluted earnings per share were $0.13 for 2008 compared to $0.18 for
2007. Revenues from HealthStream Learning grew by $5.4 million, and revenues
from HealthStream Research grew by $2.3 million. We had approximately 1,732,000
fully implemented subscribers on our Internet-based HLC platform at December 31,
2008, representing over 1,900 hospitals in the United States. During 2008, we
renewed approximately 474,000 HLC subscribers, representing a 91% renewal rate
for the subscribers up for renewal, and a 100% renewal rate based on the annual
contract value up for renewal. As of December 31, 2008 our cash and investment
balances approximated $4.1 million and we maintained full availability under our
$15.0 million revolving credit facility.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Revenue Recognition
We recognize revenues from our Internet-based learning products and courseware
subscriptions based on a per person subscription basis, and in some cases on a
per license basis. Our fees are based on the size of the facilities' or
organizations' employee user population and the service offerings to which they
subscribe. Revenue is recognized ratably over the service period of the
underlying contract.
Revenues from survey and research services are recognized when survey results
are delivered to customers via either Internet-based reporting throughout the
survey period or by providing final survey results once all services are
complete. Revenues for survey and reporting services, which are provided through
the use of Internet-based reporting methodologies, are recognized using the
proportional performance method, consistent with SEC Staff Accounting Bulletin
No. 104, "Revenue Recognition," reflecting recognition throughout the service
period which corresponds with the survey cycle and reporting access by the
customer, which typically ranges from one to five months. Revenues for survey
and reporting services, which include delivery of survey results to the customer
when all services are completed, are recognized upon completion. All other
revenues are recognized as the related services are performed or products are
delivered to the customer. Revenues for these services can be subject to
seasonal factors based on customers' requirements that can impact the timing,
frequency, and volume of survey cycles.
Revenues from professional services include content maintenance, consulting, and
implementation services. Fees are based on the time and efforts involved, and
revenue is recognized upon completion of performance milestones using the
proportional performance method.
We offer training services for clients to facilitate integration of our
Internet-based products. Fees for training are based on the time and efforts of
the personnel involved. Basic online training is generally included in the
initial contract; however, incremental training is fee based and revenues are
generally recognized upon completion of training services.
We recognize revenue from live event development services using a proportional
performance method based on completion of performance milestones. Revenues from
content maintenance and development services are recognized using a percentage
of completion method based on labor hours, which correspond to the completion of
performance milestones and deliverables. Sales of products and services to
pharmaceutical and medical device companies can be subject to seasonal factors
as a result of meeting and conference dates for such companies.
Revenues associated with online training are recognized over the term of the
subscription period or over the historical usage period, if usage typically
differs from the subscription period. All other service revenues are recognized
as the related services are performed or products are delivered.
We expect to continue to generate revenues by marketing our Internet-based
products and our survey and research services through healthcare organizations
and to a lesser extent, through pharmaceutical and medical device companies. We
expect that the portion of our revenues related to services provided via our
Internet-based learning products will increase in absolute dollar amounts. The
percentage of total revenues from our Internet-based subscription products has
declined compared to historical periods, whereas revenues from our survey and
research services are not Internet-based. Specifically, we will seek to generate
revenues from healthcare workers by marketing to their employers or sponsoring
organizations. The fees we charge for courseware resulting from this marketing
is typically paid by either the employer or sponsoring organization.
Accounting for Income Taxes
The Company accounts for income taxes using the liability method in accordance
with SFAS No. 109, "Accounting for Income Taxes." The Company has significant
net operating loss carryforwards (NOLs) which may be available to reduce future
tax expense. These NOLs are subject to annual limitations under the Internal
Revenue Code Section 382, which could result in the expiration of certain
portions of the Company's NOLs before they are fully utilized. Prior to the 4th
quarter of 2007, the Company maintained a full valuation allowance against its
deferred tax assets, and taxable income was offset through the use of net
operating loss carryforwards. Management periodically assesses the realizability
of its deferred tax assets. At December 31, 2007 management concluded that it is
more likely than not that approximately $2.0 million would be realized. Further,
at December 31, 2008 management concluded that it is more likely than not that
approximately $2.4 million of the Company's deferred tax assets will be realized
in future periods. The Company continues to maintain a valuation allowance of
approximately $12.1 million for the remaining portion of its deferred tax
assets, which primarily consist of net operating loss carryforwards.
Product Development Costs
We account for web site development costs in accordance with Emerging Issues
Task Force (EITF) Issue No. 00-2 "Accounting for Web Site Development Costs" and
for capitalized software feature enhancements in accordance with Statement of
Position (SOP) 98-1 "Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use," which provide guidance on when to capitalize versus
expense costs incurred to develop internal use software or web sites. We
capitalize costs incurred during the development phase for such projects when
such costs are material. Maintenance and operating costs are expensed as
incurred.
Product development costs primarily include our costs to initially develop and
maintain software feature enhancements and content for our Internet-based
learning products. Once planning is completed and development begins, we
capitalize internal costs and payments to third parties associated with the cost
of software feature enhancement development or content where the life expectancy
is greater than one year and the anticipated cash flows from such software
feature enhancements or content are expected to exceed the cost of the related
asset. During 2008 and 2007, we capitalized approximately $75,000 and $300,000,
respectively, related to development of content by third parties. Such amounts
are included in the accompanying consolidated balance sheets under the caption
"prepaid development fees" and "other assets." During 2008 and 2007, we
capitalized approximately $1.0 million and $2.6 million, respectively, for
development of software feature enhancements, primarily by third parties. Such
amounts are included in the accompanying balance sheets under the caption
"capitalized software feature enhancements." A significant portion of these
capitalized costs were associated with the development of the new version of our
Internet-based HLC platform, a new competency assessment product, and a new
reporting system for our survey and research platform. We amortize content and
software feature enhancements over their expected life, which is generally one
to four years. Capitalized content and software feature enhancements are subject
to a periodic impairment review in accordance with our impairment review policy.
In connection with product development, our significant estimates involve the
assessment of the development period for new products, as well as the expected
useful life of costs associated with new products, software feature enhancements
and content. Once capitalized, software feature enhancements and content
development costs are subject to the policies and estimates described below
regarding goodwill, intangibles and other long-lived assets.
Product development costs also include our systems team, which manages our
efforts associated with product development and maintenance, database
management, quality assurance and security. This team is responsible for new
internal product development, integration of external new products, and
continued enhancements and regularly scheduled maintenance to our learning and
research platform products. Personnel who are responsible for our overall
product portfolio as well as prioritization of new product development are also
included in product development costs.
Goodwill, intangibles and other long-lived assets
We account for goodwill, intangibles and other long-lived assets in accordance
with SFAS No. 142, "Goodwill and Intangible Assets," and SFAS No. 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets." We measure for
impairment at the reporting unit level using a discounted cash flow model to
determine the estimated fair value of the reporting units. Our discounted cash
flow model contains 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 test whenever events or changes in facts or circumstances
indicate that impairment may exist and also during the fourth quarter each year.
Allowance for Doubtful Accounts
We estimate the allowance for doubtful accounts using both a specific and
non-specific identification method. Management's evaluation includes reviewing
past due accounts on a case-by case basis, and determining whether an account
should be reserved, based on the facts and circumstances surrounding each
potentially uncollectible account. An allowance is also maintained for accounts
not specifically identified that may become uncollectible in the future.
Uncollectible accounts are written-off in the period management believes it has
exhausted every opportunity to collect payment from the customer. Bad debt
expense is recorded when events or circumstances indicate an additional
allowance is necessary based on our specific and non-specific identification
approach.
Accrual for Service Credits
Due to the complexity of our hosted applications, variability in customer
utilization patterns, changes in technology, and potential software defects, our
hosted learning management applications could experience periodic downtime. In
addition, we have specific contractual obligations that can result in penalties
to us associated with system performance and other commitments. We maintain an
accrual which is intended to provide for customer concessions due to customers
experiencing inconveniences or operation disruption resulting from downtime or
performance of our applications, or our failure to meet certain contractual
obligations to customers. Our accrual for service credits totaled approximately
$345,000 as of December 31, 2008.
Stock Based Compensation
We began recognizing compensation expense using a fair-value based method for
costs related to share based payments including stock options on January 1,
2006. Measurement of such compensation expense requires significant estimation
and assumptions; however we believe that the Black Scholes option pricing model
we use for calculating the fair value of our stock based compensation plans
provides a reasonable measurement methodology using a framework that is widely
adopted.
As of December 31, 2008, we had a stock option plan and an employee stock
purchase plan which qualified as stock based compensation plans. On February 9,
2009, the Company terminated the employee stock purchase plan and deregistered
the unsold and unissued shares remaining in the plan. During the years ended
December 31, 2008, 2007, and 2006, we recorded $771,560, $742,344 and $682,068
of stock based compensation expense, respectively. We typically grant stock
options to our management group on an annual basis, or when new members of the
management group begin their employment. We grant stock options to members of
our board of directors in conjunction with our annual shareholders meeting, or
as new members are added on a pro rata basis based on the time elapsed since our
annual shareholders' meeting. We expect to continue this practice for the
foreseeable future; however, we may adjust the size of the annual grant. As of
December 31, 2008, total future compensation cost related to non-vested awards
not yet recognized was $1,192,503 net of estimated forfeitures, with a weighted
average expense recognition period of 2.5 years. Future compensation expense
recognition for new option grants will vary depending on the timing and size of
new awards granted, changes in the market price or volatility of our common
stock, changes in risk-free interest rates, or if actual forfeitures vary
significantly from our estimates.
Nonmonetary Exchange of Content Rights and Deferred Service Credits
During 2007 and 2006, we recorded content rights and deferred service credits in
connection with a nonmonetary exchange with one of our customers. In order to
account for this transaction, we estimated the fair value of the related assets
and service credits, assessed whether the value assigned to the content was
recoverable, and amortized the related assets over their estimated useful lives.
Our future operating results will be impacted by the customer's utilization of
the service credits. Revenues for services provided in exchange for service
credits will be recognized in accordance with our revenue recognition policies.
BUSINESS COMBINATION
The Jackson Organization, Research Consultants, Inc. On March 12, 2007, the
Company acquired all of the issued and outstanding common stock of TJO for
approximately $12.6 million, consisting of approximately $11.5 million in cash
and 252,616 shares of HealthStream common stock. The Company incurred
approximately $690,000 of direct, incremental expenses associated with the
acquisition of TJO. TJO provides healthcare organizations with quality and
satisfaction surveys, data analyses of survey results, and other research-based
measurement tools. This acquisition was accounted for using the purchase method
of accounting. TJO's results of operations have been included in the Company's
results in the HealthStream Research business unit from the date of the
acquisition.
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. Revenues for our HealthStream Learning business segment primarily
consist of the following products and services: provision of services through
our Internet-based HLC, authoring tools, a variety of courseware subscriptions
(add-on courseware), implementation and consulting services, maintenance of
third party content, content development, online sales training courses
(RepDirect™), HospitalDirect®, and a variety of other educational activities for
physicians, nurses and other professionals within healthcare organizations.
Revenues for our HealthStream Research business segment consist of quality and
satisfaction surveys, data analyses of survey results, and other research-based
measurement tools focused on patients, physicians, employees, and other members
of the community.
Cost of Revenues (excluding depreciation and amortization). Cost of revenues
(excluding depreciation and amortization) consists primarily of salaries and
employee benefits, stock based compensation, employee travel and lodging,
materials, outsourced phone survey support, contract labor, hosting costs, and
other direct expenses associated with revenues as well as royalties paid by us
to content providers based on a percentage of revenues. Personnel costs within
cost of revenues are associated with individuals that facilitate product
delivery, provide services, conduct, process and manage phone and paper-based
surveys, handle customer support calls or inquiries, manage the technology
infrastructure for our hosted applications, manage content and survey services,
coordinate content maintenance services, and provide training or implementation
services.
Product Development. Product development expenses consist primarily of salaries
and employee benefits, stock based compensation, content acquisition costs
before technological feasibility is achieved, costs associated with the
development of content and expenditures associated with maintaining, developing
and operating our training, delivery and administration platforms. In addition,
product development expenses are associated with the development of new software
feature enhancements and new products. Personnel costs within product
development include our systems, application development, and quality assurance
teams, product managers, and other personnel associated with content and product
development.
Sales and Marketing Expenses. Sales and marketing expenses consist primarily of
salaries, commissions and employee benefits, stock based compensation, employee
travel and lodging, advertising, trade shows, promotions, and related marketing
costs. During the past several years, we have hosted a national customer
conference in Nashville known as "The Summit," of which a significant portion of
the costs are included in sales and marketing expenses. Personnel costs within
sales and marketing include our Learning and Research sales teams, strategic
account management, consultants, and marketing personnel, as well as our account
management group.
Depreciation and Amortization. Depreciation and amortization consist of fixed
asset depreciation, amortization of intangibles considered to have definite
lives, amortization of content development fees, and amortization of capitalized
software feature enhancements.
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 costs, office expenses, fees
for professional services, and other operational expenses. Personnel costs
within general and administrative expenses include individuals associated with
normal corporate functions (accounting, legal, human resources, administrative,
internal information systems, and executive management) as well as personnel who
maintain our accreditation status with various organizations.
Other Income/Expense. The primary component of other income is interest income
related to interest earned on cash, cash equivalents and investments in
marketable securities. The primary component of other expense is interest
expense related to a promissory note, capital leases and our revolving credit
facility.
2008 Compared to 2007
Revenues. Revenues increased approximately $7.7 million, or 17.4%, to
$51.6 million for 2008 from $43.9 million for 2007. Revenues for 2008 consisted
of $32.8 million, or 63.6% of total revenue, for HealthStream Learning and
$18.8 million, or 36.4% of total revenue, for HealthStream Research. In 2007,
revenues consisted of $27.5 million, or 62.5% of total revenue, for HealthStream
Learning and $16.5 million, or 37.5% of total revenue, for HealthStream
Research. HealthStream Research revenues include the results of TJO commencing
with its acquisition on March 12, 2007.
Revenues for HealthStream Learning increased approximately $5.4 million, or
19.6%, during 2008. Of this increase, $6.4 million was derived from our
Internet-based subscription learning products, which includes revenue increases
from the HLC of $3.6 million and from courseware subscriptions and online
training services of $2.8 million. Revenues from our Internet-based subscription
products collectively increased 29% over the prior year and approximated
$28.7 million for 2008. In addition, revenues associated with implementation,
development, and consulting services increased $935,000 over the prior year.
These increases in revenues were partially offset by a decline in revenues from
live events, study guides, and association activities, which collectively
declined $1.9 million compared to the prior year. Our Internet-based HLC
subscriber base increased approximately 12% during 2008, from approximately
1,541,000 fully implemented subscribers at the end of 2007 to approximately
1,732,000 fully implemented subscribers at the end of 2008.
Revenues for HealthStream Research increased $2.3 million, or 13.8%, during
2008, primarily resulting from the impact of the March 2007 acquisition of TJO.
TJO revenues during 2007, prior to our acquisition and not included in our
results for 2007, approximated $2.6 million. The change in revenues was also
impacted by the non-renewal of a significant contract during 2008, which
accounted for approximately 4% of HealthStream Research revenues during 2007.
Revenues from our patient and community survey instruments, which have more
recurring and predictable survey cycles, accounted for 70.9% of our Research
revenues during 2008 up from 63.5% during 2007.
Cost of Revenues (excluding depreciation and amortization). Cost of revenues
(excluding depreciation and amortization) increased approximately $3.5 million,
or 21.6%, to $19.7 million for 2008 from $16.2 million for 2007. Cost of
revenues as a percentage of revenue approximated 38.1% and 36.8% of revenues for
2008 and 2007, respectively.
Cost of revenues for HealthStream Learning increased $1.3 million and
approximated 32.3% and 33.8% of revenues for 2008 and 2007, respectively. This
expense increase primarily resulted from increased royalties paid by us
associated with an increase in courseware subscription revenues, as well as
increased personnel and related expenses, but was partially offset by lower
costs associated with live events, study guides and association projects.
Cost of revenues for HealthStream Research increased $2.2 million and
approximated 48.2% and 41.8% of revenues for 2008 and 2007, respectively. The
primary expense increase resulted from the full year impact of personnel
expenses associated with the TJO acquisition. The expense increase as a
percentage of revenues primarily resulted from the increase in patient and
community surveys over the prior year, which have higher fulfillment costs. In
addition, lower revenues from other survey products that have lower fulfillment
costs contributed to this percentage increase over the prior year.
Gross Margin (excluding depreciation and amortization). Gross margin (which we
define as revenues less cost of revenues divided by revenues) was 61.9% for
2008, down from 63.2% for 2007. Gross margins for HealthStream Learning were
67.7% and 66.2% for 2008 and 2007, respectively. This improvement resulted from
the favorable change in revenue mix and related cost of revenues discussed
above. Gross margins for HealthStream Research were 51.8% and 58.2% for 2008 and
2007, respectively. This decrease resulted from unfavorable changes in revenue
mix and cost of revenues discussed above.
Product Development. Product development expenses increased approximately
$1.4 million, or 31.6%, to $5.7 million for 2008 from $4.3 million for 2007.
Product development expenses as a percentage of revenues was 11.0% and 9.8% of
revenues for 2008 and 2007, respectively. Product development expenses for
HealthStream Learning increased $966,000 and approximated 14.1% and 13.4% of
revenues for 2008 and 2007, respectively. The increase in amount resulted from
additional personnel and contract labor associated with maintenance and support
of our learning platform products. Product development expenses for HealthStream
Research increased $520,000 and approximated 5.5% and 3.1% of revenues for 2008
and 2007, respectively. This expense increase is primarily due to additional
personnel to support our administrative platforms and a reassignment of
personnel from general and administrative tasks to product development when
compared to the prior year.
Sales and Marketing. Sales and marketing expenses increased approximately
$1.6 million, or 17.5%, to $10.8 million for 2008 from $9.2 million for 2007.
This increase is associated with additional personnel and related expenses
. . .
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