Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See ~~the~~ definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

As of ~~October 24, 2019,~~April 28, 2020, there were ~~32,378,352~~31,997,499 shares of the registrant’s common stock outstanding.

	September 30,		December 31,			March 31,			December 31,
	2019		2018			2020			2019
ASSETS
Current assets:
Cash and cash equivalents	$	133,914	$	134,321		$	107,425		$	131,538
Marketable securities		38,724		34,497			34,585			41,328
Accounts receivable, net of allowance for doubtful accounts of $824 and $1,161 at September 30, 2019 and December 31, 2018, respectively		25,921		38,124
Accounts receivable, net of allowance for doubtful accounts of $1,004 and $843 at March 31, 2020 and December 31, 2019, respectively							32,301			27,650
Accounts receivable - unbilled		2,333		2,880			2,454			2,726
Prepaid royalties, net of amortization		11,875		13,596			15,100			11,898
Other prepaid expenses and other current assets		10,200		18,016			8,791			9,432
Total current assets		222,967		241,434			200,656			224,572

Property and equipment, net of accumulated depreciation of $18,720 and $20,827 at September 30, 2019 and December 31, 2018, respectively		26,931		15,866
Capitalized software development, net of accumulated amortization of $54,887 and $46,757 at September 30, 2019 and December 31, 2018, respectively		20,701		18,352
Property and equipment, net of accumulated depreciation of $21,155 and $19,291 at March 31, 2020 and December 31, 2019, respectively							24,425			26,065
Capitalized software development, net of accumulated amortization of $60,752 and $57,768 at March 31, 2020 and December 31, 2019, respectively							22,209			21,445
Operating lease right of use assets, net		30,134		—			29,135			29,615
Goodwill		97,538		86,144			123,283			102,196
Customer-related intangibles, net of accumulated amortization of $28,116 and $23,245 at September 30, 2019 and December 31, 2018, respectively		52,099		53,469
Other intangible assets, net of accumulated amortization of $11,958 and $9,663 at September 30, 2019 and December 31, 2018, respectively		6,064		5,909
Customer-related intangibles, net of accumulated amortization of $31,446 and $29,760 at March 31, 2020 and December 31, 2019, respectively							50,904			52,554
Other intangible assets, net of accumulated amortization of $13,651 and $12,735 at March 31, 2020 and December 31, 2019, respectively							8,421			7,527
Deferred tax assets		251		145			269			269
Deferred commissions		15,725		16,470			17,088			17,645
Non-marketable equity investments		6,805		3,376			4,329			6,782
Other assets		982		783			792			874
Total assets	$	480,197	$	441,948		$	481,511		$	489,544

LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Accounts payable and accrued expenses	$	19,930	$	25,037		$	16,366		$	22,938
Accrued royalties		15,204		15,756			13,738			16,736
Deferred revenue		64,565		66,061			72,370			65,511
Total current liabilities		99,699		106,854			102,474			105,185

Deferred tax liabilities		12,872		11,068			11,565			13,183
Deferred revenue, noncurrent		2,052		2,868			1,591			1,918
Operating lease liability, noncurrent		31,338		—			30,108			30,733
Other long term liabilities		343		2,211
Other long-term liabilities							357			357
Commitments and contingencies

Shareholders’ equity:
Common stock, no par value, 75,000 shares authorized; 32,378 and 32,325 shares issued and outstanding at September 30, 2019 and December 31, 2018, respectively		289,424		286,597
Common stock, no par value, 75,000 shares authorized; 32,003 and 32,379 shares issued and outstanding at March 31, 2020 and December 31, 2019, respectively							280,322			290,021
Retained earnings		44,460		32,373			55,235			48,143
Accumulated other comprehensive income (loss)		9		(23	)
Accumulated other comprehensive (loss) income							(141	)		4
Total shareholders’ equity		333,893		318,947			335,416			338,168
Total liabilities and shareholders’ equity	$	480,197	$	441,948		$	481,511		$	489,544

See accompanying ~~Notes~~notes to the unaudited Condensed Consolidated Financial ~~Statements (unaudited).~~Statements.

	Three Months Ended					Nine Months Ended					Three Months Ended
	September 30, 2019		September 30, 2018			September 30, 2019		September 30, 2018			March 31, 2020		March 31, 2019
Revenues, net	$	62,450	$	59,925		$	191,417	$	171,791		$	61,572	$	65,187
Operating costs and expenses:
Cost of revenues (excluding depreciation and amortization)		25,348		25,102			79,015		70,586			20,359		26,861
Product development		7,195		6,600			21,763		19,149			7,468		6,927
Sales and marketing		9,003		8,559			28,343		26,536			9,188		9,521
Other general and administrative expenses		10,007		8,997			30,283		24,769			9,864		9,970
Depreciation and amortization		7,149		6,006			20,629		18,097			7,449		6,539
Total operating costs and expenses		58,702		55,264			180,033		159,137			54,328		59,818

Operating income		3,748		4,661			11,384		12,654			7,244		5,369

Other income (loss), net		853		(548	)		2,528		241
Other income, net												1,706		822

Income from continuing operations before income tax provision		4,601		4,113			13,912		12,895			8,950		6,191
Income tax provision		1,140		1,077			3,270		2,575			1,858		1,411
Income from continuing operations		3,461		3,036			10,642		10,320			7,092		4,780
Discontinued operations:
Loss from discontinued operations before income tax provision		—		—			—		(64	)
Gain on sale of discontinued operations		340		—			1,960		29,490			—		1,620
Income tax provision		89		—			515		10,319			—		426
Income from discontinued operations		251		—			1,445		19,107			—		1,194
Net income	$	3,712	$	3,036		$	12,087	$	29,427		$	7,092	$	5,974

Net income per share – basic:
Net income per share - basic:
Continuing operations	$	0.11	$	0.09		$	0.33	$	0.32		$	0.22	$	0.15
Discontinued operations		—		—			0.04		0.59			—		0.03
Net income per share - basic	$	0.11	$	0.09		$	0.37	$	0.91		$	0.22	$	0.18

Net income per share - diluted:
Continuing operations	$	0.11	$	0.09		$	0.33	$	0.32		$	0.22	$	0.15
Discontinued operations		—		—			0.04		0.59			—		0.03
Net income per share - diluted	$	0.11	$	0.09		$	0.37	$	0.91		$	0.22	$	0.18

Weighted average shares of common stock outstanding:
Basic		32,376		32,322			32,369		32,244			32,334		32,337
Diluted		32,437		32,415			32,416		32,308			32,357		32,377
Dividends declared per share	$	—	$	—		$	—	$	1.00

See accompanying ~~Notes~~notes to the unaudited Condensed Consolidated Financial ~~Statements (unaudited).~~Statements.

	Three Months Ended					Nine Months Ended				Three Months Ended
	September 30, 2019			September 30, 2018		September 30, 2019		September 30, 2018		March 31, 2020			March 31, 2019
Net income	$	3,712		$	3,036	$	12,087	$	29,427	$	7,092		$	5,974

Other comprehensive (loss) income, net of taxes:
Other comprehensive income, net of taxes:
Foreign currency translation adjustments											(44	)		(1	)
Unrealized (loss) gain on marketable securities		(14	)		16		32		21		(101	)		33
Total other comprehensive (loss) income		(14	)		16		32		21		(145	)		32
Comprehensive income	$	3,698		$	3,052	$	12,119	$	29,448	$	6,947		$	6,006

See accompanying ~~Notes~~notes to the unaudited Condensed Consolidated Financial ~~Statements (unaudited).~~Statements.

Nine Months Ended September 30, 2019

Common Stock

Retained

Accumulated Other Comprehensive

Total Shareholders’

Shares

Amount

Earnings

(Loss) Income

Equity

Balance at December 31, 2018

32,325

$
286,597

$
32,373

$
(23
)

$
318,947

Net income

—

—

5,974

—

5,974

Comprehensive income

—

—

—

32

32

Stock based compensation

—

516

—

—

516

Common stock issued under stock plans,
    net of shares withheld for employee taxes

63

(328
)

—

—

(328
)
Balance at March 31, 2019

32,388

$
286,785

$
38,347

$
9

$
325,141

Net income

—

—

2,401

—

2,401

Comprehensive income

—

—

—

14

14

Stock donated to Company (held in treasury)

(86
)

—

—

—

—

Stock based compensation

—

2,558

—

—

2,558

Common stock issued under stock plans,
    net of shares withheld for employee taxes

72

(443
)

—

—

(443
)
Balance at June 30, 2019

32,374

$
288,900

$
40,748

$
23

$
329,671

Net income

—

—

3,712

—

3,712

Comprehensive income

—

—

—

(14
)

(14
)
Stock based compensation

—

569

—

—

569

Common stock issued under stock plans,
    net of shares withheld for employee taxes

4

(45
)

—

—

(45
)
Balance at September 30, 2019

32,378

$
289,424

$
44,460

$
9

$
333,893

~~See accompanying Notes to the Condensed Consolidated Financial Statements (unaudited).~~

~~CONDENSED CONSOLIDATED STATEMENTs~~STATEMENTS OF SHAREHOLDERS' EQUITY (UNAUDITED)

	Nine Months Ended September 30, 2018														Three Months Ended March 31, 2020
	Common Stock					Retained			Accumulated Other Comprehensive			Total Shareholders’			Common Stock						Retained		Accumulated Other Comprehensive			Total Shareholders’
	Shares		Amount			Earnings			(Loss) Income			Equity			Shares			Amount			Earnings		Income (Loss)			Equity
Balance at December 31, 2017		31,908	$	282,666		$	17,542		$	(38	)	$	300,170
Cumulative effect of accounting change							15,132						15,132
Net income		—		—			23,846			—			23,846
Comprehensive income		—		—			—			15			15
Dividends declared on common stock ($1.00 per share)							(32,518	)					(32,518	)
Stock based compensation		—		328						—			328
Common stock issued under stock plans, net of shares withheld for employee taxes		394		2,071			—			—			2,071
Balance at March 31, 2018		32,302	$	285,065		$	24,002		$	(23	)	$	309,044
Balance at December 31, 2019																32,379		$	290,021		$	48,143	$	4		$	338,168
Net income		—		—			2,545			—			2,545			—			—			7,092		—			7,092
Comprehensive loss		—		—			—			(10	)		(10	)		—			—			—		(145	)		(145	)
Stock based compensation		—		427			—			—			427			—			550			—		—			550
Common stock issued under stock plans, net of shares withheld for employee taxes		15		181			—			—			181			62			(373	)		—		—			(373	)
Balance at June 30, 2018		32,317	$	285,673		$	26,547		$	(33	)	$	312,187
Net income		—		—			3,036			—			3,036
Comprehensive income		—		—			—			16			16
Stock based compensation		—		460			—			—			460
Common stock issued under stock plans, net of shares withheld for employee taxes		8		(5	)		—			—			(5	)
Balance at September 30, 2018		32,325	$	286,128		$	29,583		$	(17	)	$	315,694
Repurchase of common stock																(438	)		(9,876	)		—		—			(9,876	)
Balance at March 31, 2020																32,003		$	280,322		$	55,235	$	(141	)	$	335,416

See accompanying ~~Notes~~notes to the unaudited Condensed Consolidated Financial Statements ~~(unaudited)~~.

	Nine Months Ended September 30,						Three Months Ended March 31,
	2019			2018			2020			2019
OPERATING ACTIVITIES:
Net income	$	12,087		$	29,427		$	7,092		$	5,974
Income from discontinued operations		(1,445	)		(19,107	)		—			(1,194	)
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		20,629			18,097			7,449			6,539
Stock based compensation		3,643			1,306			550			516
Amortization of deferred commissions		6,269			5,695			2,159			2,121
Provision for doubtful accounts		99			690			288			2
Deferred income taxes		1,803			661			500			433
Gain on equity method investments		(87	)		(25	)
Loss (gain) on non-marketable equity investments								11			(54	)
Non-cash royalty expense								(3,440	)		—
Change in fair value of non-marketable equity investments		—			1,271			(1,152	)		—
Other		(101	)		(22	)		47			(28	)
Changes in operating assets and liabilities:
Accounts and unbilled receivables		13,624			5,865			(4,573	)		1,387
Prepaid royalties		1,720			1,030			(3,202	)		(2,820	)
Other prepaid expenses and other current assets		4,090			(682	)		735			251
Deferred commissions		(5,524	)		(6,618	)		(1,602	)		(1,382	)
Other assets		(178	)		(4	)		134			(16	)
Accounts payable and accrued expenses		(1,077	)		(10,811	)		(5,775	)		(5,386	)
Accrued royalties		(552	)		2,373			442			3,342
Deferred revenue		(2,453	)		658			6,453			6,400
Net cash provided by continuing operating activities		52,547			29,804
Net cash used in discontinued operating activities		—			(1,003	)
Net cash provided by operating activities		52,547			28,801			6,116			16,085

INVESTING ACTIVITIES:
Business combinations, net of cash acquired		(18,018	)		—			(21,421	)		(18,002	)
Proceeds from sale of discontinued operations		6,035			57,827
Proceeds from maturities of marketable securities		58,637			59,452			20,725			28,337
Purchases of marketable securities		(62,742	)		(57,085	)		(14,130	)		(30,101	)
Proceeds from sale of property and equipment		13			—
Payments to acquire non-marketable equity investments		(3,342	)		(833	)		—			(3,342	)
Payments associated with capitalized software development		(11,179	)		(8,042	)		(4,068	)		(4,933	)
Purchases of property and equipment		(21,451	)		(4,342	)		(1,010	)		(11,338	)
Net cash (used in) provided by continuing investing activities		(52,047	)		46,977
Net cash used in discontinued investing activities		—			(115	)
Net cash (used in) provided by investing activities		(52,047	)		46,862
Net cash used in investing activities								(19,904	)		(39,379	)

FINANCING ACTIVITIES:
Proceeds from exercise of stock options		214			2,582			—			31
Taxes paid related to net settlement of equity awards		(1,030	)		(335	)		(373	)		(359	)
Payments of earn-outs related to acquisitions		(38	)		(38	)		—			(37	)
Repurchase of common stock								(9,876	)		—
Payment of cash dividends		(53	)		(32,357	)		(30	)		(52	)
Net cash used in continuing financing activities		(907	)		(30,148	)
Net cash used in discontinued financing activities		—			—
Net cash used in financing activities		(907	)		(30,148	)		(10,279	)		(417	)

Net (decrease) increase in cash and cash equivalents		(407	)		45,515
Effect of exchange rate changes on cash and cash equivalents								(46	)		—
Net decrease in cash and cash equivalents								(24,113	)		(23,711	)
Cash and cash equivalents at beginning of period		134,321			84,768			131,538			134,321
Cash and cash equivalents at end of period	$	133,914		$	130,283		$	107,425		$	110,610

See accompanying ~~Notes~~notes to the unaudited Condensed Consolidated Financial ~~Statements (unaudited).~~Statements.

The accompanying unaudited Condensed Consolidated Financial Statements ~~(unaudited)~~ have been prepared in accordance with accounting principles generally accepted in the United States (“US GAAP”) for interim financial information and with the instructions to Form 10‑Q and Article 10 of Regulation S‑X. Accordingly, Condensed Consolidated Financial Statements do not include all of the information and footnotes required by US GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. All intercompany transactions have been eliminated in consolidation. Operating results for the three ~~and nine~~ months ended ~~September 30, 2019~~March 31, 2020 are not necessarily indicative of the results that may be expected for the year ending December 31, ~~2019.~~2020.

On February 12, 2018, the Company divested its Patient Experience (“PX”) business to Press Ganey Associates, Inc. (“Press Ganey”). The sale of the PX business resulted in the ~~Company’s~~ divestiture of the Company’s patient experience solutions business segment. The Company has classified the ~~results~~gain on sale of its previously owned PX ~~segment~~business as discontinued operations in its Condensed Consolidated Statements of Income ~~and Cash Flows~~ for all periods presented. See Note 810 for additional information.

The Condensed Consolidated Balance Sheet at December 31, ~~2018 has been~~2019 was derived from the audited Consolidated Financial Statements at that date but does not include all of the information and footnotes required by US GAAP for a complete set of financial statements. For further information, refer to the Consolidated Financial Statements and footnotes thereto for the year ended December 31, ~~2018~~2019 (included in the Company's Annual Report on Form 10-K, filed with the Securities and Exchange Commission on February ~~25, 2019)~~26, 2020).

~~In February 2016, the FASB issued ASU 2016-02,~~ ~~Leases (“ASC 842”),~~ which, among other things, requires an entity to recognize a right-of-use asset and a lease liability on the balance sheet for substantially all leases, including operating leases. The Company adopted ASC 842 effective January 1, 2019 utilizing the modified retrospective approach such that prior year financial statements were not recast under the new standard. Adoption of this standard resulted in changes to the Company’s Condensed Consolidated Balance Sheets and accounting policies for leases but did not have an impact on the Condensed Consolidated Statements of Income or Cash Flows. See Note 12 for additional information regarding the new standard and its impact on the Company’s Financial Statements.

In June 2016, the FASB issued ASU 2016-03, Financial Instruments—Credit Losses (“ASC 326”): Measurement of Credit Losses on Financial Instruments, which amends guidance on reporting credit losses for assets held at amortized cost basis and available for sale debt securities. For assets held at amortized cost basis, ASC 326 eliminates the probable initial recognition threshold in current GAAP and, instead, requires an entity to reflect its current estimate of all expected credit losses. The ~~standard will be effective for the first interim period within annual reporting periods beginning after December 15, 2019. The~~ Company ~~will adopt~~adopted this ASU on January 1, 2020, and ~~is currently evaluating~~ the ~~impact that~~effect of adoption ~~of this ASU will have~~ on the Company’s ~~consolidated financial position~~Consolidated Financial Statements and ~~results of operations.~~related disclosures was not material.

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 to in exchange for transferring those goods or services. ~~ASU 2014-09,~~ ~~Revenue from Contracts with Customer~~ (referred to as Accounting Standards Codification (“ASC”) Topic 606 or “ASC 606”) became effective for the Company as of January 1, 2018 and required changes to the Company’s accounting policies for revenue recognition, trade and other receivables, and deferred commissions.

7The following table represents revenues disaggregated by revenue source for the three months ended March 31, 2020 and 2019 (in thousands). Sales taxes are excluded from revenues.

The following table represents our revenues included in continuing operations from contracts with customers disaggregated by revenue source for the three and nine months ended September 30, 2019 and 2018 (in thousands). Sales taxes are excluded from revenues.

Three Months Ended September 30, 2019

Nine Months Ended September 30, 2019

Business Segments

Workforce
Solutions

Provider
Solutions

Consolidated

Workforce
Solutions

Provider
Solutions

Consolidated

Subscription/SaaS services

$
49,339

$
9,660

$
58,999

$
153,035

$
28,241

$
181,276

Professional services

1,684

1,767

3,451

4,704

5,437

10,141

Total revenues, net

$
51,023

$
11,427

$
62,450

$
157,739

$
33,678

$
191,417

Three Months Ended September 30, 2018

Nine Months Ended September 30, 2018

Business Segments

Workforce
Solutions

Provider
Solutions

Consolidated

Workforce
Solutions

Provider
Solutions

Consolidated

Subscription/SaaS services

$
47,639

$
8,521

$
56,160

$
137,083

$
26,221

$
163,304

Professional services

1,489

2,276

3,765

3,960

4,527

8,487

Total revenues, net

$
49,128

$
10,797

$
59,925

$
141,043

$
30,748

$
171,791

Subscription/SaaS services revenues primarily consist of fees in consideration of providing customers access to one or more of our SaaS-based solutions and/or courseware subscriptions, as well as fees related to licensing agreements, all of which include routine customer support and technology enhancements. Revenue is generally recognized over time during the contract term beginning when the service is made available to the customer. ~~Subscription/SaaS contracts are generally non-cancelable, one to five years in length, and billed annually, semi-annually, quarterly, or monthly in advance.~~

Professional services revenues primarily consist of fees for implementation services, custom courseware development, and training. The majority of our professional services contracts are billed in advance based on a fixed price basis, and revenue is recognized over time as the services are performed. For both subscription/SaaS services and professional services, t~~he time between billing the customer and when performance obligations are satisfied is generally not significant.~~

Our contracts with customers often contain multiple performance obligations. For these contracts, the Company accounts for individual performance obligations separately if they are distinct. The contract price, which represents transaction price, 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 subscribers within the contract.~~

We receive payments from customers based on billing schedules established in our contracts. Accounts receivable - unbilled represent contract assets related to our conditional right to consideration for subscription/SaaS and professional services contracts where performance has occurred under the contract. Accounts receivable are primarily comprised of trade receivables that are recorded at the invoice amount, net of an allowance for doubtful accounts, when the right to consideration becomes unconditional.

For the three months ended ~~September 30,~~March 31, 2020 and 2019, ~~and 2018,~~ the Companyrecognized ~~$51,000~~$288,000 and ~~$300,000~~$2,000, respectively, in impairment losses on receivables and contract assets arising from the Company’s contracts with customers.For the nine months ended September 30, 2019 and 2018, the Company recognized $99,000 and $690,000 in impairment losses on receivables and contract assets arising from the Company’s contracts with customers.

Deferred revenue represents contract liabilities that are recorded when cash payments are received or are due in advance of our satisfaction of performance obligations. During the three months ended ~~September 30,~~March 31, 2020 and 2019, ~~and 2018,~~ we recognized ~~$33.8~~revenues of approximately $31.6 million and ~~$32.4~~$31.2 million, ~~of revenue~~respectively, from amounts included in deferred ~~revenues at the beginning of the respective period, respectively. During the nine months ended September 30, 2019 and 2018, we recognized $61.3 million and $59.0 million of~~ revenue ~~from amounts included in deferred revenues~~ at the beginning of the respective periods. As of ~~September 30, 2019, $420~~March 31, 2020, approximately $402 million of revenue is expected to be recognized from remaining performance obligations under ~~contract~~contracts with customers. We expect to recognize revenue ~~with respect~~related to approximately ~~48%~~47% of these remaining performance obligations over the next 12 months, with the remaining amounts recognized thereafter.

Sales commissions earned by our sales force are considered incremental and recoverable costs of obtaining a contract with a customer. The ~~Company’s~~ sales commission ~~plans~~plan for ~~2018 and 2019~~2020 typically ~~include multiple payments, including~~includes two payments; the initial ~~payments~~payment is due in the period a customer contract is obtained and the final payment is due 60 days after product implementation is completed. The sales commission plan for 2019 typically included an initial payment in the period a customer contract was obtained and subsequent payments either 15 or 27 months after the initial ~~payment.~~payment depending on the contract term. Under ASC 606, costs to acquire contracts with customers, such as the initial sales commission payment, are capitalized in the period a customer contract is obtained and are amortized consistent with the transfer of the goods or services to the customer over the expected period of benefit, whereas subsequent sales commission payments which require a substantive performance condition of the employee are expensed ratably through the payment date. Under the 2020 plan, both the initial payment and subsequent payment are capitalized in the period the contract is obtained, whereas under the 2019 plan, only the initial payment was capitalized, and the subsequent payment was expensed ratably through the payment date. The primary change from an accounting perspective under the 2020 plan compared to the 2019 plan is the time between when the contract is obtained and when it is implemented does not result in a substantive performance condition of the employee. The capitalized contract cost is included in Deferred commissions in the accompanying Condensed Consolidated Balance ~~Sheets.~~Sheet. The expected period of benefit is the contract term, except when the capitalized commission is expected to provide economic benefit to the Company for a period longer than the contract term, such as for new customer or incremental sales where renewals are expected and renewal commissions are not commensurate with initial commissions. Non-commensurate commissions are amortized over the greater of the ~~expected period of benefit~~contract term or technological obsolescence ~~period.~~period of approximately three years. The Company recorded amortization of deferred commissions of ~~$2.1~~approximately $2.2 million and ~~$2.0~~$2.1 million for the three months ended ~~September 30,~~March 31, 2020 and 2019, ~~and 2018, respectively, and $6.3 million and $5.7 million for the nine months ended September 30, 2019 and 2018,~~ respectively, which is included in ~~Sales~~sales and marketing expenses in the accompanying Condensed Consolidated Statements of Income.

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

During ~~both~~ the three months ended ~~September 30,~~March 31, 2020 and 2019 ~~and 2018~~, the Company recorded a provision for income taxes from continuing operations of ~~$1.1 million. During the~~ ~~nine months ended September 30, 2019 and 2018, the Company recorded a provision for income taxes from continuing operations of $3.3~~approximately $1.9 million and ~~$2.6~~$1.4 million, respectively. The Company’s effective tax rate for continuing operations for the ~~nine~~three months ended ~~September 30,~~March 31, 2020 and 2019 ~~and 2018~~ was ~~24%~~21% and ~~20%~~23%, respectively. The Company’s effective tax rate primarily reflects the statutory corporate income tax rate, the net effect of state taxes, and the effect of various permanent tax differences. ~~Additionally, during~~During the ~~nine~~three months ended ~~September 30, 2019 and 2018~~,March 31, 2020, the Company recorded a $1.2 million change in 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. The Company recognizes excess tax benefits ~~related to~~and tax deficiencies associated with stock based awards ~~of $130,000 and $692,000, respectively,~~ as a component of ~~the~~its provision for income ~~taxes,~~ ~~which reduced~~taxes. The Company recorded additional income tax expense associated with tax deficiencies of approximately $26,000 during the ~~effective~~three months ended March 31, 2020 and recorded a reduction to income tax ~~rate compared to~~expense for excess tax benefits of approximately $83,000 during the ~~statutory tax rates.~~three months ended March 31, 2019.

~~On February 12, 2018, the Company’s Board of Directors declared a $1.00 per common share special cash dividend, which was paid on April 3, 2018 to shareholders of record on March 6, 2018.~~

The Company has stock awards outstanding under ~~2 stock incentive plans: the Company’s~~its 2016 Omnibus ~~Incentive Plan and 2010 Stock~~ Incentive Plan. The Company accounts for its stock based compensation ~~plans~~plan using the fair-value based method for costs related to ~~stock~~share based payments, including ~~stock options and~~ restricted share units (“RSUs”). During the ~~nine~~three months ended ~~September 30, 2019,~~March 31, 2020, the Company issued ~~96,828~~111,510 RSUs, subject to service-based time vesting, with a ~~weighted average~~ grant date fair value of ~~$27.31~~$22.96 per share, measured based on the closing fair market value of the Company’s stock on the date of grant. During the ~~nine~~three months ended ~~September 30, 2018,~~March 31, 2019, the Company issued ~~83,168~~86,220 RSUs, subject to service-based time vesting, with a weighted average grant date fair value of ~~$24.70~~$27.39 per share, measured based on the closing fair market value of the Company’s stock on the date of grant.

During the three months ended June 30, 2018, the Company issued 70,000 performance-based RSUs, the vesting of which occurs over a five-year period and is contingent upon continued service and achieving certain performance criteria established by the Compensation Committee on an annual basis in increments of 10%, 15%, 20%, 25%, and 30% based on performance in 2018, 2019, 2020, 2021, and 2022, respectively. The performance criteria for 14,000 of these performance-based RSUs will be based on 2020 performance. The measurement date for these 14,000 performance-based RSUs was established during the three months ended March 31, 2020 with a grant date fair value of $22.96 per share, measured based on the closing fair market value of the Company’s stock on the date the performance criteria was established. The performance criteria for 17,500 of these performance-based RSUs was previously established based on performance in 2018 and 2019, as applicable, and the performance criteria for the remaining 38,500 performance-based RSUs has not yet been determined and will be established on an annual basis based on performance in 2021 and 2022, as applicable; therefore, the measurement date for these remaining 38,500 performance-based RSUs cannot be determined until the performance criteria have been established.

Total stock based compensation expense ~~recorded~~recognized for the three ~~and nine~~ months ended ~~September 30,~~March 31, 2020 and 2019 ~~and 2018, which is recorded within continuing operations~~ in the Condensed Consolidated Statements of Income is as follows (in thousands):

	Three Months Ended September 30,				Nine Months Ended September 30,				Three Months Ended March 31,
	2019		2018		2019		2018		2020		2019
Cost of revenues (excluding depreciation and amortization)	$	13	$	10	$	684	$	28	$	7	$	1
Product development		77		72		895		217		81		53
Sales and marketing		57		50		575		132		49		56
Other general and administrative		422		327		1,489		929		413		406
Total stock based compensation expense	$	569	$	459	$	3,643	$	1,306	$	550	$	516

~~During June 2019,~~On March 13, 2020, the Company’s ~~Chief Executive Officer, Robert A. Frist, Jr., contributed 78,520~~Board of ~~his personally owned shares~~Directors authorized a share repurchase program to repurchase up to $30.0 million of HealthStream, Inc. common stock (valued at $2.0 million) to the Company, without any consideration paid to him, for the benefit of the Company’s employees. In connection therewith, effective June 26, 2019 the Company approved the award of 78,520 fully vestedoutstanding shares of common ~~stock~~stock. The share repurchase program will terminate on the earlier of March 12, 2021 or when the maximum dollar amount has been expended. Pursuant to ~~approximately 820 employees of~~this authorization, repurchases have been made, and may continue to be made from time to time in the open market through privately negotiated transactions or otherwise, including under a Rule 10b5-1 plan, which permits shares to be repurchased when the Company might otherwise be precluded from doing so under insider trading laws in accordance with specific prearranged terms related to timing, price, and volume (among others), without further direction from the ~~HealthStream, Inc. 2016 Omnibus Incentive Plan. These shares were issued in July 2019. As required by ASC Topic 718,~~ ~~Compensation – Stock Compensation~~,Company. The share repurchase program does not require the Company ~~recognized $2.0 million~~to acquire any amount of ~~stock based compensation expense for these stock awards~~shares and may be suspended or discontinued at any time. Under this program during the ~~three months ended June 30, 2019 based on~~first quarter of 2020, the ~~closing~~Company repurchased 438,142 shares at an aggregate fair ~~market~~ value of $9.9 million, reflecting an average price per share of $22.52 (excluding the ~~Company’s stock on the date~~cost of the Company’s approval of these grants. Total payments related to the employees’ tax obligations to taxing authorities for these stock awards were $0.6 million and are reflected as a financing activity within the Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2019. In addition, the employer taxes and expenses associated with these grants were $0.2 million and were recorded as an expense during June 2019. Mr. Frist contributed an additional 7,852 of his personally owned shares to cover these costs. The receipt of shares from Mr. Frist and in connection with the withholding of shares as set forth above are presented on the Company’s Statement of Shareholders’ Equity in a similar manner as a share repurchase (i.e., reduction of outstanding shares)broker commissions).

Basic earnings per share is computed by dividing the net income available to common shareholders for the period by the weighted average number of common shares outstanding during the period. Diluted earnings per share is computed by dividing the net income available to common shareholders for the period by the weighted average number of potentially dilutive common and common equivalent shares outstanding during the period. Common equivalent shares are composed of incremental common shares issuable upon the exercise of stock options and RSUs subject to vesting. The dilutive effect of common equivalent shares is included in diluted earnings per share by application of the treasury stock method. The total number of common equivalent shares excluded from the calculations of diluted earnings per share, due to their anti-dilutive effect or contingent performance conditions, was ~~54,000~~approximately 106,000 and ~~70,000~~136,000 for the three months ended ~~September 30,~~March 31, 2020 and 2019 ~~and 2018, respectively, and 107,000 and 100,000 for the~~ ~~nine months ended September 30, 2019 and 2018~~, respectively.

The following table sets forth the computation of basic and diluted earnings per share for the three ~~and nine~~ months ended ~~September 30,~~March 31, 2020 and 2019 ~~and 2018~~ (in thousands, except per share data):

	Three Months Ended September 30,				Nine Months Ended September 30,				Three Months Ended March 31,
	2019		2018		2019		2018		2020		2019
Numerator:
Income from continuing operations	$	3,461	$	3,036	$	10,642	$	10,320	$	7,092	$	4,780
Income from discontinued operations		251		—		1,445		19,107		—		1,194
Net income	$	3,712	$	3,036	$	12,087	$	29,427	$	7,092	$	5,974
Denominator:
Weighted-average shares outstanding		32,376		32,322		32,369		32,244		32,334		32,337
Effect of dilutive shares		61		93		47		64		23		40
Weighted-average diluted shares		32,437		32,415		32,416		32,308		32,357		32,377

Net income per share - basic:
Continuing operations	$	0.11	$	0.09	$	0.33	$	0.32	$	0.22	$	0.15
Discontinued operations		—		—		0.04		0.59		—		0.03
Net income per share - basic	$	0.11	$	0.09	$	0.37	$	0.91	$	0.22	$	0.18

Net income per share - diluted:
Continuing operations	$	0.11	$	0.09	$	0.33	$	0.32	$	0.22	$	0.15
Discontinued operations		—		—		0.04		0.59		—		0.03
Net income per share - diluted	$	0.11	$	0.09	$	0.37	$	0.91	$	0.22	$	0.18

At ~~September 30, 2019~~March 31, 2020 and December 31, ~~2018,~~2019, the fair value of marketable securities, which were all classified as available for sale, included the following (in thousands):

	September 30, 2019									March 31, 2020
	Adjusted Cost		Unrealized Gains		Unrealized Losses			Fair Value		Adjusted Cost		Unrealized Gains		Unrealized Losses			Fair Value
Level 2:
Corporate debt securities	$	34,905	$	11	$	(4	)	$	34,912	$	34,686	$	—	$	(101	)	$	34,585
Government-sponsored enterprise debt securities		3,811		1		—			3,812
Total	$	38,716	$	12	$	(4	)	$	38,724	$	34,686	$	—	$	(101	)	$	34,585

	December 31, 2018									December 31, 2019
	Adjusted Cost		Unrealized Gains		Unrealized Losses			Fair Value		Adjusted Cost		Unrealized Gains		Unrealized Losses			Fair Value
Level 2:
Corporate debt securities	$	31,521	$	—	$	(23	)	$	31,498	$	37,325	$	7	$	(5	)	$	37,327
Government-sponsored enterprise debt securities		2,999		—		—			2,999		4,001		—		—			4,001
Total	$	34,520	$	—	$	(23	)	$	34,497	$	41,326	$	7	$	(5	)	$	41,328

The carrying amounts reported in the Condensed Consolidated Balance ~~Sheets~~Sheet approximate the fair value based on quoted market prices or alternative pricing sources and models utilizing market observable inputs. As of ~~September 30, 2019, the Company does not consider any of its marketable securities to be other than temporarily impaired. During the three and nine months ended September 30, 2019 and 2018,~~March 31, 2020, the Company did ~~not reclassify~~0t recognize any ~~items out of accumulated other comprehensive (loss) income to net income.~~allowance for credit impairments on its available for sale debt securities. All investments in marketable securities are classified as current assets on the balance sheet because the underlying securities mature within one year from the balance sheet date.

On February 12, 2018, the Company divested PX to Press Ganey for $65.2 million in cash (after giving effect to the post-closing working capital adjustment), resulting in a gain, net of tax, of $20.4 million, of which $19.0 million was recorded during the year ended December 31, 2018 and $1.4 million was recorded during the nine months ended September 30, 2019. Approximately $6.55 million of the proceeds was held in escrow for a period of time following the closing as a source of recovery for indemnification claims by Press Ganey, of which $6.22 million was released and paid to the Company in April 2019 and the remaining $328,000 was released and paid to the Company in August 2019.

This sale of the PX business resulted in the Company’s divestiture of the Company’s patient experience solutions business segment. The Company has classified the results of the patient experience solutions business segment as discontinued operations in its Condensed Consolidated Statements of Income and Cash Flows for all periods presented.

The financial results of the PX business for the period prior to divestiture during the nine months ended September 30, 2018, are presented in discontinued operations in the Company’s Condensed Consolidated Statement of Income. The following table presents financial results of the PX business (in thousands):

The Company provides services to healthcare organizations and other members within the healthcare industry. The Company’s services are focused on the delivery of workforce development products and services (HealthStream Workforce Solutions) and provider credentialing, privileging, and enrollment products and services (HealthStream Provider Solutions).

As noted above, the sale of the PX business on February 12, 2018 resulted in the Company’s divestiture of the Company’s Patient Experience Solutions segment. Beginning with the first quarter of 2018, the Company classified the results of its Patient Experience segment as discontinued operations in its Condensed Consolidated Statements of Income and Cash Flows for all periods presented. See Note 8 for additional information.

The Company measures segment performance based on operating income before income taxes and prior to the allocation of certain corporate overhead expenses, interest income, interest expense, and depreciation. The Unallocated component below includes corporate functions, such as accounting, human resources, legal, investor relations, administrative, and executive personnel, depreciation, a portion of amortization, and certain other expenses, which are not currently allocated in measuring segment performance.~~The following is the Company’s business segment information for the three and nine months ended September 30, 2019 and 2018 and as of September 30, 2019 and~~On December ~~31, 2018 (in thousands).~~

~~On January 10,~~16, 2019, the Company acquired substantially all the ~~outstanding equity~~assets of ~~Providigm,~~Covenant Technology Group, LLC (“~~Providigm”~~CredentialMyDoc”), a ~~Denver, Colorado based~~Savannah, Georgia-based company focusing on ~~quality assurance~~intuitive, easy to use, and ~~performance improvement~~fast to implement software-as-a-service solution, especially in healthcare, primarily serving skilled nursing facilities. The Company acquired Providigm to add its comprehensive quality management system, known as “abaqis®,” to its product portfolio and gain customers in the skilled nursing market.ambulatory care settings. The consideration paid for ~~Providigm~~CredentialMyDoc consisted of ~~$18.0~~$9.0 million in cash, ~~which the Company funded with cash on hand. In addition, up~~subject to ~~an additional $500,000 in cash may be paid by the Company based on the financial performance of Providigm during an 18-month period following closing.~~a post-closing working capital adjustment. Of the purchase price paid ~~by the Company~~ at closing, ~~$3.65~~$1.1 million is being held in escrow for a period of time following the closing to serve as a source of recovery for the working capital adjustment and certain potential indemnification claims by the Company. The Company incurred $388,000 in transaction costs, of which $63,000 was incurred during the nine months ended September 30, 2019 and $325,000 was incurred during 2018. The transaction costs were recorded in Other general and administrative expense in the Condensed Consolidated Statements of Income for such periods. The results of operations for ~~Providigm~~CredentialMyDoc have been included in the ~~HealthStream Workforce~~Provider Solutions segment of the Company’s Financial Statements from the date of ~~acquisition.~~acquisition.

Cash paid at closing	$	14,368	$	7,920
Cash held in escrow		3,650		1,080
Total consideration paid	$	18,018	$	9,000

The following table summarizes the preliminary fair value of the assets acquired and liabilities assumed as of the date of acquisition (in thousands):

Accounts and unbilled receivable, net	$	960		$	216
Prepaid assets		847
Property and equipment		50
Prepaid and other current assets					3
Operating lease right-of-use assets		1,233			30
Other assets		49
Deferred tax assets		104			71
Goodwill		11,395			4,657
Intangible assets		5,950			4,340
Accounts payable and accrued liabilities		(1,196	)		(7	)
Deferred revenue		(141	)		(280	)
Operating lease liabilities		(1,233	)		(30	)
Net assets acquired	$	18,018		$	9,000

The excess of preliminary purchase price over the preliminary fair values of net tangible and intangible assets is recorded as goodwill. The preliminary fair values of tangible and identifiable intangible assets and liabilities are based on management’s estimates and assumptions. ~~During the three months ended September 30, 2019, the Company updated the composition and valuation of~~The primary intangible assets acquired were customer relationships and ~~recorded a measurement period adjustment increasing goodwill~~developed technology. The fair value estimate for customer relationships intangible asset included significant assumptions in the prospective financial information, such as revenue growth, customer attrition, and ~~decreasing~~EBITDA margin, and the discount rate. The fair value estimate for developed technology intangible ~~assets~~asset included significant assumptions, including the estimate of employee hours that would be needed to recreate the technology. Additionally, these assumptions are forward looking and could be affected by ~~approximately $300,000.~~future economic and market conditions. The preliminary fair values of assets acquired and liabilities assumed continue to be subject to change during the measurement period (up to one year from the acquisition date) as the Company finalizes the valuation of these items. The primary areas of the preliminary purchase price allocation that are not finalized include the composition and valuation of intangible assets and ~~indemnification asset and liability.~~working capital. The goodwill balance is primarily attributed to the assembled workforce, additional market opportunities from offering ~~Providigm’s~~CredentialMyDoc products, and expected synergies from integrating ~~Providigm~~CredentialMyDoc with other products or other combined functional areas within the Company. The goodwill balance is deductible for U.S. income tax purposes. The net tangible assets include deferred revenue, which was adjusted down from a book value at the acquisition date of ~~$266,000~~$595,000 to an estimated fair value of ~~$141,000.~~$280,000. The ~~$125,000~~$315,000 write-down of deferred revenue will result in lower revenues than would have otherwise been recognized for such services. The acquired assets and liabilities include a $750,000 indemnification asset and liability related to tax liabilities. The purchase agreement also contains a provision for up to $500,000 of additional consideration based on the achievement of financial performance targets by Providigm during an 18-month period following the closing date. Management assessed the likelihood of achieving the financial performance targets, which has been included in the preliminary purchase price allocationservices.

The following table sets forth the preliminary components of identifiable intangible assets and their estimated useful lives as of the acquisition date (in thousands):

	Preliminary Fair Value		Useful life	Preliminary Fair value		Useful life
Customer relationships	$	3,500	12 years	$	2,100	9 years
Developed technology		2,200	5 years		2,100	4 years
Trade Name		250	7 years
Total preliminary intangible assets subject to amortization	$	5,950
Non-compete					110	5 years
Trade name					30	3 years
Total intangible assets subject to amortization				$	4,340

The amounts of revenue and operating income (loss) of Providigm included in the Company’s Condensed Consolidated Statements of Income since the date of acquisition of January 10, 2019 for the three and nine months ended September 30, 2019 are as follows (in thousands):

The following unaudited pro forma financial information summarizes the ~~combined~~ results of ~~continuing and discontinued~~ operations of the Company ~~unless otherwise noted,~~ and ~~Providigm~~CredentialMyDoc as though the companies were combined as of January 1, ~~2018~~2019 (in thousands, except per share data):

These unaudited pro forma combined results of operations include certain adjustments arising from the acquisition, such as amortization of intangible assets, depreciation of property and equipment, ~~interest expense related to Providigm’s previously outstanding debt,~~ and fair value adjustments of acquired deferred revenue balances. The unaudited pro forma combined results of operations is for informational purposes only and is not indicative of what the Company’s results of operations would have been had the transaction occurred at the beginning of the earliest period presented or to project the Company’s results of operations in any future period.

On March 9, 2020, the Company acquired all of the outstanding stock of HcT2 Co. dba NurseGrid (“NurseGrid”), a Portland, Oregon-based healthcare technology company offering NurseGrid Mobile and its corollary application for nurse managers, NurseGrid Enterprise for net cash consideration ofapproximately $21.4 million, subject to a post-closing working capital adjustment. The Company accounted for this transaction as a business combination achieved in stages which required the Company to remeasure its previously existing minority ownership interest, which was accounted for as a non-marketable equity investment measured using the fair value alternative, to fair value at the acquisition date based on the total enterprise value, adjusting for a control premium. The fair value of the Company’s interest in NurseGrid was $3.6 million at closing, resulting in a gain of $1.2 million, recorded as a change in fair value of non-marketable equity investments in the Company’s Condensed Consolidated Statement of Income. Additionally, the Company’s previously recorded non-marketable equity investment in NurseGrid was de-recognized from the Company’s Condensed Consolidated Balance Sheet. The financial results of NurseGrid have been included in the Workforce Solutions segment from March 9, 2020.

The following table summarizes the preliminary fair value of the assets acquired and liabilities assumed as of the date of acquisition (in thousands):

The following table sets forth the preliminary components of identifiable intangible assets and their estimated useful lives as of the acquisition date (in thousands):

The amounts of revenue and operating loss of NurseGrid included in the Company’s Consolidated Statement of Income since the date of acquisition of March 9, 2020 for the three months ended March 31, 2020 are as follows (in thousands):

The following unaudited pro forma financial information summarizes the results of operations of the Company and NurseGrid as though the companies were combined as of January 1, 2019 (in thousands, except per share data):

These unaudited pro forma combined results of operations include certain adjustments arising from the acquisition, such as amortization of intangible assets, depreciation of property and equipment, interest expense related to NurseGrid’s previously outstanding debt, and fair value adjustments of acquired deferred revenue balances. The unaudited pro forma combined results of operations is for informational purposes only and is not indicative of what the Company’s results of operations would have been had the transaction occurred at the beginning of the earliest period presented or to project the Company’s results of operations in any future period.

The Company provides services to healthcare organizations and other members within the healthcare industry. The Company’s services are focused on the delivery of workforce development products and services (Workforce Solutions) and provider credentialing, privileging, and enrollment products and services (Provider Solutions).

The Company measures segment performance based on operating income before income taxes and prior to the allocation of certain corporate overhead expenses, interest income, interest expense, and depreciation. The Unallocated component below includes corporate functions, such as accounting, human resources, legal, investor relations, information systems, administrative and executive personnel, depreciation, a portion of amortization, and certain other expenses, which are not currently allocated in measuring segment performance.The following is the Company’s business segment information for the three months ended March 31, 2020 and 2019 and as of March 31, 2020 and December 31, 2019 (in thousands).

On February 12, 2018, the Company divested its PX business to Press Ganey for $65.2 million in cash (after giving effect to the post-closing working capital adjustment), resulting in a gain, net of tax, of $20.5 million, of which $19.0 million was recorded during the year ended December 31, 2018 and $1.5 million was recorded during the year ended December 31, 2019. This sale of the PX business resulted in the divestiture of the Company’s patient experience solutions business segment. The Company has classified the gain on sale of its PX business segment as discontinued operations in its Condensed Consolidated Statements of Income for all periods presented.

On December 31, 2018, the Company entered into a Second Amendment to its Revolving Credit Agreement, dated as of November 24, 2014 (as amended, the “Revolving Credit Facility”), with SunTrust Bank (“SunTrust”), which extended the maturity date to November 24, 2020. Under the Revolving Credit Facility, the Company may borrow up to $50.0 million, which includes a $5.0 million swing line sub-facility and a $5.0 million letter of credit sub-facility, as well as an accordion feature that allows the Company to increase the Revolving Credit Facility by a total of up to $25.0 million, subject to securing additional commitments from existing lenders or new lending institutions. The obligations under the Revolving Credit Facility are guaranteed by each of the Company’s subsidiaries. At the Company’s election, the borrowings under the Revolving Credit Facility bear interest at either (1) a rate per annum equal to the highest of SunTrust’s prime rate or 0.5% in excess of the Federal Funds Rate or 1.0% in excess of one-month LIBOR (the “Base Rate”), plus an applicable margin, or (2) the one, two, three, or six month per annum LIBOR for deposits in the applicable currency (the “Eurocurrency Rate”), as selected by the Company, plus an applicable margin. The applicable margin for Eurocurrency Rate loans depends on the Company’s funded debt leverage ratio and varies from 1.50% to 2.00%. The applicable margin for Base Rate loans depends on the Company’s funded debt leverage ratio and varies from 0.50% to 1.50%. Commitment fees and letter of credit fees are also payable under the Revolving Credit Facility. Principal is payable in full at maturity on November 24, 2020, and there are 0 scheduled principal payments prior to maturity.

The Company is required to pay a commitment fee ranging between 20 and 30 basis points per annum of the average daily unused portion of the Revolving Credit Facility, depending on the Company’s funded debt leverage ratio.

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

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

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

As of ~~September 30, 2019,~~March 31, 2020, the Company was in compliance with all covenants. There were 0 balances outstanding on the Revolving Credit Facility as of or during the three ~~and nine~~ months ended ~~September 30, 2019.~~March 31, 2020.

~~Effective January 1, 2019, the Company adopted ASC 842, which requires~~ ~~an entity to recognize a right-of-use (“ROU”) asset and a lease liability on the balance sheet for substantially all leases, including operating leases, using the modified retrospective approach.~~ The Company elected to use the package of practicable expedients allowing companies to not reassess: (1) the lease classification for any expired or existing leases, (2) the treatment of initial direct costs as they related to existing leases, and (3) whether existing contracts are or contain leases. The Company did not elect the use of the hindsight practical expedient but did elect the practical expedient not to separate lease components from non-lease components related to its office space leases.

Upon adoption of ASC 842, the Company had non-cancellable operating leases for office space subject to recognition as ROU assets. Accordingly, on January 1, 2019 the Company recorded $4.8 million in ROU assets and $6.4 million in operating lease liabilities (the difference of $1.6 million related to existing deferred rent liabilities as of December 31, 2018 which had the effect of reducing the ROU asset upon adoption). During 2019, the Company acquired an operating lease as part of its acquisition of Providigm, resulting in a $1.2 million ROU asset and lease liability, and another operating lease for office space commenced for the Company’s new corporate headquarters in Nashville, TN, resulting in a $26.5 million ROU asset and lease liability. As of September 30, 2019, the Company does 0t have any leases that have not yet commenced.

The Company does not have any lease contracts that contain: (1) an option to extend that the Company is reasonably certain to exercise, (2) an option to terminate that the Company is reasonably certain not to exercise, or (3) an option to extend (or not to terminate) in which exercise of the option is controlled by the lessor. Additionally, the Company does not have any leases with residual value guarantees or material restrictive covenants. For leases already commenced, the lease term was determined to be the remaining months in the lease term as of January 1, 2019, the date of adoption. The Company has elected not to recognize leases with initial terms of one year or less on the balance sheet. Lease liabilities and their corresponding right-of-use assets have been recorded based on the present value of the future lease payments over the expected lease term. Most of the Company’s lease agreements contain provisions for escalating rent payments over the terms of the leases.

The Company’s leases do not contain readily determinable implicit discount rates, and as such the Company must use its incremental borrowing rate to discount the future lease payments based on information available at lease commencement. The incremental borrowing rate was estimated by determining the rate of interest that the Company would have to pay to borrow on a collateralized basis over a similar term an amount equal to the lease payments in a similar economic environment.

The Company’s operating lease cost as presented in Other general and administrative expense in the Condensed Consolidated Statement of Income was $1.1 million and $3.8 million for the three and nine months ended September 30, 2019, respectively. Cash paid for amounts included in the measurement of operating lease liabilities was $1.5 million for the nine months ended September 30, 2019. As of September 30, 2019, the weighted-average remaining lease term was 10.8 years, and the weighted-average incremental borrowing rate was 6%.

~~The table below presents the lease-related assets and liabilities recorded on the Condensed Consolidated Balance Sheet as of September 30, 2019 (in thousands).~~

~~The table below presents the maturities of lease liabilities under non-cancellable leases as of September 30, 2019 (in thousands).~~

Non-marketable equity investments where the Company is not able to exercise significant influence over the investee are accounted for using the measurement alternative for equity investments that do not have readily determinable fair values.ASU 2016-01, Financial Instruments – Overall (Subtopic 825-10)~~, became effective for the Company as of January 1, 2018 and~~ requires equity investments (except those accounted for under the equity method of accounting or those that result in consolidation of the investee) to be measured at fair value with changes in fair value recognized in net income. The aggregate carrying amount of all non-marketable equity investments was ~~$5.4~~$3.0 million and ~~$2.1~~$5.4 million as of ~~September 30, 2019~~March 31, 2020 and December 31, ~~2018,~~2019, respectively, which carrying value we evaluate for impairment at each reporting period. During the three months ended March 31, 2020, the Company recorded a $1.2 million upward adjustment to the carrying value of our non-marketable equity investment in NurseGrid due to a change in fair value based on the consideration paid upon our acquisition of NurseGrid on March 9, 2020 (See Note 8). Cumulatively, the Company has recorded ~~$1.3~~$0.1 million in ~~reductions~~downward adjustments to the carrying value of non-marketable equity ~~investments due to~~investments. Such is the combination of cumulative downward adjustments of $1.3 million offset by cumulative upward adjustments of $1.2 million. These adjustments are the result of changes in fair value based on observable prices from orderly transactions for similar investments made in ~~the investee.~~investees. The fair value of non-marketable equity investments is not estimated if there are no identified events or changes in circumstances that may have a significant adverse effect on the fair value of the investment.

In June 2018, a contract with one of our royalty partners expired and was not renewed. However, the contract required continued royalty payments for any subscriptions that extended beyond the contract termination date. Following the contract termination, there was a mutual disagreement related to various elements of this past partnership, and the Company accrued but did not pay royalties to the partner following the contract expiration. During the first quarter of 2020, the Company received a release of liability from the partner associated with this contract, resulting in no royalties to be paid to the partner. The de-recognition of this royalty liability and related expense was recorded as a $3.4 million reduction to cost of revenues in the first quarter of 2020.

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

You should read the following discussion and analysis in conjunction with our Condensed Consolidated Financial Statements and related notes included elsewhere in this report and our audited Consolidated Financial Statements and the notes thereto for the year ended December 31, ~~2018,~~2019, appearing in our Annual Report on Form 10-K that was filed with the Securities and Exchange Commission (“SEC”) on February ~~25, 2019~~26, 2020 (the ~~“2018~~“2019 Form 10-K”). Statements contained in this Quarterly Report on Form 10-Q that are not historical facts are forward-looking statements that the Company intends to be covered by the safe harbor provisions for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995. Statements that are predictive in nature, that depend on or refer to future events or conditions, or that include words such as “anticipates,” “believes,”�� “could,” “estimates,” “expects,” “intends,” “may,” “plans,” “potential,” “predicts,” “projects,” “should,” “will,” “would,” and similar expressions are forward-looking statements.

The Company cautions that forward-looking statements involve known and unknown risks, uncertainties, and other factors that may cause actual results, performance, or achievements to be materially different from any future results, performance, or achievements expressed or implied by the forward-looking statements. Forward-looking statements reflect our current views with respect to future events and are based on assumptions and subject to risks and uncertainties. Given these uncertainties, you should not place undue reliance on these forward-looking statements.

In evaluating any forward-looking statement, you should specifically consider the information regarding forward-looking statements and the information set forth under the caption Part II, Item 1A. Risk Factors in this Quarterly Report and under the caption Part I, Item 1A. Risk Factors in our ~~2018~~2019 Form 10-K and the information regarding forward-looking statements and other disclosures in our ~~2018~~2019 Form 10-K, earnings releases and other filings with the SEC from time to time, as well as other cautionary statements contained elsewhere in this report, including the matters discussed in “Critical Accounting Policies and Estimates.” We undertake no obligation beyond that required by law to update publicly any forward-looking statements for any reason, even if new information becomes available or other events occur in the future. You should read this report and the documents that we reference in this report and have filed as exhibits to this report completely and with the understanding that our actual future results may be materially different from what we currently expect.

HealthStream provides workforce and provider solutions for healthcare organizations—all designed to assess and develop the people that deliver patient care, which, in turn, supports the improvement of business and clinical outcomes. Workforce Solutions products are used by healthcare organizations to meet a broad range of their clinical development, talent management, training, certification, competency assessment, and performance appraisal needs. Provider Solutions products are used by healthcare organizations for provider credentialing, privileging, and enrollment needs. HealthStream’s customers include healthcare organizations, pharmaceutical and medical device companies, and other participants in the healthcare industry. At ~~September 30, 2019,~~March 31, 2020, we had approximately ~~2.78~~3.40 million contracted subscriptions to hStream^TM, our Platform-as-a-Service technology. hStream technology enables healthcare organizations and their respective workforces to easily connect to and gain value from the growing HealthStream ecosystem of applications, tools, and content.

On February 12, 2018, the Company divested its Patient Experience (“PX”) business to Press Ganey for $65.2 million in cash (after giving effect to the post-closing adjustment)~~, resulting in a gain, net of tax, of $20.4 million.~~

. Prior to the disposition of the PX business, our Patient Experience Solutions products provided our customers information about patients’ experiences and how to improve them, workforce engagement, physician relations, and community perceptions of their services. The ~~historical financial results~~gain on sale of the PX business ~~for~~recorded in prior periods ~~prior to the closing of the disposition of the PX business on February 12, 2018~~ are reflected in the Company’s ~~Condensed~~ Consolidated Financial Statements as discontinued operations. This sale of the PX business resulted in the Company’s divestiture of the patient experience solutions business segment.

~~Key~~Significant financial ~~indicators of operations~~metrics for the ~~third~~first quarter of ~~2019~~2020 are set forth in the bullets below.

~~In June 2019,~~On March 9, 2020, the ~~Company’s Chief Executive Officer~~Company acquired all of the outstanding equity of HcT2 Co. dba NurseGrid (“~~CEO”~~NurseGrid”), ~~Robert A. Frist, Jr., contributed 78,520~~a Portland, Oregon-based healthcare technology company offering NurseGrid Mobile and its corollary application for nurse managers, NurseGrid Enterprise, for $25.0 million, subject to a post-closing working capital adjustment. The net cash paid for NurseGrid was approximately $21.4 million after taking into consideration the existing minority non-marketable equity investment in NurseGrid that the Company previously had held since January 31, 2019. The financial results of ~~his personally owned shares~~NurseGrid have been included in the Workforce Solutions segment from the date of ~~common stock (with~~acquisition.

The COVID-19 pandemic has resulted in authorities throughout the United States and the world implementing widespread measures attempting to contain the spread and impact of COVID-19, such as travel bans and restrictions, quarantines, shelter-in-place orders, the promotion of social distancing, and limitations on business activity. These measures and the pandemic have caused a ~~value of $2.0 million)~~significant economic downturn in the United States and globally, resulted in increased unemployment and underemployment levels, and have adversely impacted consumer confidence and spending. Moreover, differing approaches among governmental authorities in the United States regarding whether and how to begin lifting shelter-in-place and business restriction orders have caused additional uncertainty. This pandemic has also led to significant disruption and volatility in financial and capital markets.

Our business is focused on providing workforce and provider solutions to healthcare organizations, such that an adverse impact on healthcare organizations is likely to result in an adverse impact on our Company. Though COVID-19 did not have a significant impact on our first quarter financial results, developments related to the ~~Company for the benefit of HealthStream employees, without any consideration paid~~COVID-19 have negatively impacted, and are expected to ~~Mr. Frist. In connection therewith, the Company approved the grant of the same number of shares under its 2016 Omnibus Incentive Plan~~continue to approximately 820 of its employees. These shares were issued in July 2019. Mr. Frist also contributed an additional 7,852 of his personally owned shares to cover the Company’s costs associated with such grants, such as administrative expenses and employer payroll taxes. Together, these grants resulted in the Company recognizing approximately $2.0 million stock based compensation expense and $0.2 million payroll tax expensenegatively impact, our financial results beginning in the second quarter of ~~2019.~~2020. The ~~only shareholder who was diluted from these transactions was Mr. Frist. See Note 5~~extent, timing, and duration of such impacts on our business remain uncertain, and will depend upon, among other things, the length and severity of the COVID-19 pandemic, particularly with respect to ~~the Condensed Consolidated Financial Statements, included within this report, for additional information.~~its impact on healthcare organizations.

~~On January 10, 2019, the Company acquired the outstanding equity of Providigm, LLC (“Providigm”), a Denver-based company~~We are closely monitoring developments related to COVID-19 that may have an adverse impact on our operational and financial performance. We also continue to take actions focused on ~~quality assurance~~the safety and ~~performance improvement~~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.

We have focused efforts of providing COVID-19 courses, free of charge, to all caregivers in support of their preparation to provide safe and effective care to COVID-19 patients. Additionally, as previously announced, HealthStream, in partnership with the State of Tennessee Office of the Governor, is providing its COVID-19 Rapid Response Program, which includes training bundles and its workforce platform, along with other workforce resources to support the state’s efforts to rapidly train new, returning, and current caregivers who are volunteering to work in Alternate Healthcare Facilities being set-up across the state. This COVID-19 Rapid Response Program is being provided free of charge for 90 days.

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, and the entire workforce continues to work remotely to date.

Many healthcare organizations have been, and will likely continue to be, substantially adversely impacted by the COVID-19 pandemic. The period of time over which this adverse impact continues and whether conditions continue to deteriorate are important factors that may impact our business. The pandemic has resulted in a significant reduction of revenue generating services for many healthcare organizations, such as elective surgeries and other elective procedures, while, in some cases, their cost of providing emergency care as the result of treating COVID-19 patients has increased. Adverse COVID-19 impacts such as these are resulting, and will likely continue to result, in healthcare ~~primarily serving skilled nursing facilities, for $18.0 million~~organizations curtailing operations, furloughing employees, eliminating positions, and even, in ~~cash.~~ some instances, declaring bankruptcy.

In ~~addition, up~~light of adverse developments with respect to ~~an additional $500,000~~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” or “DSO”, customer requests to modify payment or contract terms, and bankruptcy notices. Since March, each of

these areas has begun to show signs of adverse impacts, though we are unable to quantify the impacts of such negative trends or know whether or to what extent such trends may increase over time. Any deterioration in ~~cash~~the collectability (or the timing of payments) of our accounts receivable will 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 implemented. To the extent our customers delay or fail to implement products they have previously purchased, our financial results will be adversely impacted. Implementation delays driven by our customers are increasing as their focus becomes redirected to addressing COVID-19. Our Provider Solutions business segment may be ~~paid by the Company contingent upon the performance of Providigm during an 18-month period following closing. The results of operations for Providigm have been included in the HealthStream~~more sensitive to implementation delays than our Workforce Solutions segment as the result of complexities associated with implementing certain of the solutions offered through that business segment.

Conditions related to the pandemic may also adversely impact the ability or willingness of our customers to renew their contracts with us, to renew contracts on comparable terms, or to expand the quantity and type of solutions they purchase from us. Pandemic-related conditions are also delaying or otherwise adversely impacting our ability to enter into contracts with new potential customers, as such potential customers may be focused on the dealing with the impact and demands COVID-19 is having on their business. In this regard, many of our customers are not currently allowing vendors, including representatives of the Company, on their premises, which is reducing the ability of our sales team to make sales they otherwise would likely make but for the impact of COVID-19.

Given the uncertainty surrounding the adverse impact that COVID-19 may have on our business, we have taken certain expense management measures. These include:

As mentioned above, we are continuing to monitor developments regarding the COVID-19 pandemic and may undertake further expense management initiatives if we deem necessary.

Our management utilizes the following financial ~~statements from the date~~and non-financial metrics in connection with managing our business. These performance indicators include measurements of ~~acquisition. See Note 10 to the Condensed Consolidated Financial Statements, included within this report, for additional information.~~gross margin, adjusted EBITDA, and hStream subscriptions.

The Company’s Condensed Consolidated Financial Statements are prepared in accordance with US GAAP. These accounting principles require us to make certain estimates, judgments, and assumptions during the preparation of our financial statements. We believe the estimates, judgments, and assumptions upon which we rely are reasonable based upon information available to us at the time they are made. These estimates, judgments, and assumptions can affect the reported amounts of assets and liabilities as of the date of the financial statements, as well as the reported amounts of revenues and expenses during the periods presented. To the extent there are material differences between these estimates, judgments, or assumptions and actual results, our financial statements will be affected.

The accounting policies and estimates that we believe are the most critical in fully understanding and evaluating our reported financial results include the following:

In many cases, the accounting treatment of a particular transaction is specifically dictated by US GAAP and does not require management’s judgment in its application. There are also areas where management’s judgment in selecting among available alternatives would not produce a materially different result. See Notes to the Consolidated Financial Statements in our ~~2018~~2019 Form 10-K and the Notes to the Condensed Consolidated Financial Statements herein which contain additional information regarding our accounting policies and other disclosures required by US GAAP. There have been no ~~material~~ changes in our critical accounting policies and estimates from those reported in our ~~2018~~2019 Form 10-K. Note 2 in the Notes to Condensed Consolidated Financial Statements summarizes new accounting guidance issued by the Financial Accounting Standards Board (“FASB”) that has been recently adopted by the Company, or not yet adopted by the Company, and our evaluation of such accounting guidance and the anticipated impact of such guidance (if known) on the Company.

Three Months Ended ~~September 30, 2019~~March 31, 2020 Compared to Three Months Ended ~~September 30, 2018~~March 31, 2019

Revenues, net. Revenues ~~increased $2.6~~decreased approximately $3.6 million, or 4%6%, to ~~$62.5~~$61.6 million for the three months ended ~~September 30, 2019~~March 31, 2020 from ~~$59.9~~$65.2 million for the three months ended ~~September 30, 2018.~~March 31, 2019.

	Three Months Ended September 30,									Three Months Ended March 31,
Revenues by Business Segment:	2019			2018			Percentage Change			2020			2019			Percentage Change
Workforce Solutions	$	51,023		$	49,128			4	%	$	49,824		$	54,295			-8	%
Provider Solutions		11,427			10,797			6	%		11,748			10,892			8	%
Total revenues, net	$	62,450		$	59,925			4	%	$	61,572		$	65,187			-6	%

% of Revenues
Workforce Solutions		82	%		82	%					81	%		83	%
Provider Solutions		18	%		18	%					19	%		17	%

Revenues for ~~HealthStream~~ Workforce Solutions ~~increased $1.9~~decreased $4.5 million, or 4%8%, to ~~$51.0~~$49.8 million for the three months ended ~~September 30, 2019~~March 31, 2020 from ~~$49.1~~$54.3 million for the three months ended ~~September 30, 2018.~~March 31, 2019. Revenue ~~growth of $1.9 million included a $1.6 million increase in revenue from our platform and content subscriptions, which was offset by a reduction in revenue~~ from our legacy resuscitation ~~products. Legacy~~products declined by $6.1 million, while revenue from other workforce solutions products increased by $1.6 million. Revenues from legacy resuscitation products were ~~$13.4~~$11.2 million in the ~~third~~first quarter of ~~2019,~~2020, compared to ~~$15.0~~$17.3 million in the ~~third~~first quarter of ~~2018. The~~2019. Revenues from NurseGrid acquisition, ~~of Providigm,~~ which was completed ~~in January 2019, also added $1.9 million of revenue~~on March 9, 2020, were not material to the ~~third~~first quarter of ~~2019.~~2020.

Revenues for ~~HealthStream~~ Provider Solutions increased ~~$630,000,~~$0.8 million, or 6%8%, to ~~$11.4~~$11.7 million for the three months ended ~~September 30, 2019~~March 31, 2020 from ~~$10.8~~$10.9 million for the three months ended ~~September 30, 2018.~~March 31, 2019. Revenue growth of $0.8 million was primarily ~~a result of~~attributable to new ~~Verity~~VerityStream subscriptions and professional services for client implementations, ~~but was partially offset by a reduction~~along with $0.4 million of revenues from the Covenant Technology Group, LLC (referred to above as “CredentialMyDoc”) acquisition, which occurred in ~~other professional services from Morrisey Associates, Inc., which we acquired in August 2016.~~December 2019.

Cost of Revenues (excluding ~~depreciation~~Depreciation and ~~amortization)~~Amortization). Cost of revenues ~~increased $246,000,~~decreased $6.5 million, or 1%24%, to ~~$25.3~~$20.4 million for the three months ended ~~September 30, 2019~~March 31, 2020 from ~~$25.1~~$26.9 million for the three months ended ~~September 30, 2018.~~March 31, 2019. Cost of revenues as a percentage of revenues was ~~41%~~33% and ~~42%~~41% for the three months ended ~~September 30,~~March 31, 2020 and 2019, ~~and 2018,~~ respectively.

Cost of revenues for ~~HealthStream~~ Workforce Solutions decreased ~~$294,000~~$6.8 million to ~~$21.5~~$16.5 million for the three months ended March 31, 2020 and approximated ~~42%~~33% and ~~44%~~43% of revenues for ~~HealthStream~~ Workforce Solutions for the three months ended ~~September 30,~~March 31, 2020 and 2019, ~~and 2018,~~ respectively. The decrease is primarily associated with a ~~reduction~~$3.4 million favorable contractual adjustment that resulted in ~~royalties resulting~~a decrease to royalty expense upon the resolution of a mutual disagreement relating to various elements of a past partnership. In addition, cost of revenues for Workforce Solutions benefited from lower ~~revenue from our~~royalty expense associated with the decline in the legacy resuscitation ~~products, but was partially offset by higher personnel costs primarily from the Providigm acquisition.~~revenues. Cost of revenues for ~~HealthStream~~ Provider Solutions increased ~~$540,000~~$0.3 million to ~~$3.8~~$3.9 million ~~and approximated 33% and 30% of HealthStream Provider Solutions revenues~~ for the three months ended ~~September 30, 2019~~March 31, 2020 and ~~2018, respectively.~~approximated 33% of Provider Solutions revenues for both the three months ended March 31, 2020 and 2019. The increase is primarily associated with ~~higher~~increases in implementation and customer support personnel ~~costs due to additions to staffing.~~over the prior year period.

Product Development. Product development expenses increased ~~$595,000,~~$0.6 million, or 9%8%, to ~~$7.2~~$7.5 million for the three months ended ~~September 30, 2019~~March 31, 2020 from ~~$6.6~~$6.9 million for the three months ended ~~September 30, 2018.~~March 31, 2019. Product development expenses as a percentage of revenues were 12% and 11% for the three months ended ~~September 30,~~March 31, 2020 and 2019, ~~and 2018,~~ respectively.

Product development expenses for ~~HealthStream~~ Workforce Solutions increased ~~$485,000~~$60,000 to ~~$5.8~~$5.9 million for the three months ended March 31, 2020 and approximated 12% and 11% of revenues for ~~HealthStream~~ Workforce Solutions for ~~both~~ the three months ended ~~September 30,~~March 31, 2020 and 2019, respectively. Product development expenses for Provider Solutions increased $0.5 million to $1.6 million for the three months ended March 31, 2020 and ~~2018.~~approximated 14% and 10% of revenues for Provider Solutions for the three months ended March 31, 2020 and 2019, respectively. The increase in product development expenses is primarily due to personnel additions over the Providigm acquisition and higher personnel costs. Product development expenses for HealthStream Provider Solutions increased $110,000 to $1.4 million and approximated 12% of revenues for HealthStream Provider Solutions for both the three months ended September 30, 2019 and 2018. Theprior year period as well as an increase ~~is primarily a result of lower capitalized software development~~in contract labor associated with ~~the Verity product.~~software development.

Sales and Marketing. Sales and marketing expenses, including personnel costs, ~~increased $444,000,~~decreased $0.3 million, or 5%3%, to ~~$9.0~~$9.2 million for the three months ended ~~September 30, 2019~~March 31, 2020 from ~~$8.6~~$9.5 million for the three months ended ~~September 30, 2018.~~March 31, 2019. Sales and marketing expenses were ~~14%~~15% of revenues for both the three months ended ~~September 30, 2019~~March 31, 2020 and ~~2018.~~2019.

Sales and marketing expenses for ~~HealthStream~~ Workforce Solutions ~~increased $410,000~~decreased $0.5 million to ~~$7.3~~$7.4 million for the three months ended March 31, 2020 and approximated 15% and 14% of revenues for ~~HealthStream~~ Workforce Solutions for ~~both~~ the three months ended ~~September 30,~~March 31, 2020 and 2019, ~~and 2018.~~respectively. The ~~increase~~decrease in amount is primarily due to ~~higher personnel costs and~~lower sales commissions, consistent with the ~~Providigm acquisition.~~decreases in revenues, as well as lower marketing expenses. Sales and marketing expenses for ~~HealthStream~~ Provider Solutions increased ~~$8,000~~$0.2 million to ~~$1.4~~$1.6 million for the three months ended March 31, 2020 and approximated 13% of revenues for ~~HealthStream~~ Provider Solutions for both the three months ended ~~September 30, 2019~~March 31, 2020 and ~~2018.~~2019. The increase in amount is primarily due to higher sales commissions, consistent with the increase in revenues. The unallocated corporate portion of sales and marketing expenses ~~increased $26,000~~decreased $16,000 to ~~$271,000~~$0.2 million for the three months ended March 31, 2020 compared to the prior year period.

Other General and Administrative Expenses. Other general and administrative expenses ~~increased $1.0~~decreased $0.1 million, or ~~11%~~1%, to $9.9 million for the three months ended March 31, 2020 from $10.0 million for the three months ended ~~September 30, 2019 from $9.0 million for the three months ended September 30, 2018.~~March 31, 2019. Other general and administrative expenses as a percentage of revenues were 16% and 15% of revenues for the three months ended ~~September 30,~~March 31, 2020 and 2019, ~~and 2018,~~ respectively.

Other general and administrative expenses for ~~HealthStream~~ Workforce Solutions increased ~~$733,000~~$0.6 million to ~~$3.4~~$3.9 million for the three months ended March 31, 2020 and approximated 7%8% and 5%6% of ~~HealthStream~~ Workforce Solutions revenues for the three months ended ~~September 30,~~March 31, 2020 and 2019, ~~and 2018,~~ respectively. The increase is primarily due to higher ~~personnel~~software costs ~~the Providigm acquisition and, software~~as well as an increase in bad debt expense. Other general and administrative expenses for ~~HealthStream~~ Provider Solutions ~~increased $66,000~~decreased $0.1 million to ~~$960,000~~$0.8 million for the three months ended March 31, 2020 and approximated 8%7% and 9% of ~~HealthStream~~ Provider Solutions revenues for ~~both~~ the three months ended ~~September 30,~~March 31, 2020 and 2019, ~~and 2018.~~respectively. The decrease is due to a reduction in bad debt expense. The unallocated corporate portion of other general and administrative expenses ~~increased $211,000~~decreased $0.6 million to ~~$5.7~~$5.2 million for the three months ended March 31, 2020 compared to the prior year period primarily due to ~~higher personnel~~reductions in contract labor and software costs.

Depreciation and Amortization. Depreciation and amortization was ~~$7.1~~$7.4 million and ~~$6.0~~$6.5 million for the three months ended ~~September 30,~~March 31, 2020 and 2019, ~~and 2018,~~ respectively. ~~The~~This increase ~~resulted from an increase in~~is primarily a result of amortization associated with capitalized software and depreciation of property and equipment ~~primarily related to~~associated with the relocation of our ~~new~~ corporate ~~headquarters, as well as amortization of capitalized software and intangible assets.~~offices in 2019.

Other Income, ~~(Loss),~~ Net. Other income, ~~(loss),~~ net was ~~income of $853,000~~$1.7 million for the three months ended ~~September 30, 2019~~March 31, 2020 compared to ~~loss of $548,000~~$0.8 million for the three months ended ~~September 30, 2018.~~March 31, 2019. The increase ~~is due~~resulted from a $1.2 million gain associated with the change in fair value of the non-marketable equity investment in NurseGrid prior to the ~~$1.3 million decline in the carrying value~~acquisition of ~~non-marketable equity investments recorded in the three months ended September 30, 2018.~~NurseGrid on March 9, 2020.

Income Tax Provision. The Company recorded a provision for income taxes from continuing operations of ~~$1.1~~$1.9 million for ~~both~~ the three months ended ~~September 30, 2019 and 2018.~~March 31, 2020 compared to $1.4 million for the three months ended March 31, 2019. The Company’s effective tax rate was ~~25% and 26%~~21% for the three months ended ~~September 30, 2019~~March 31, 2020 compared to 23% for the three months ended March 31, 2019. During the three months ended March 31, 2020, the Company recorded a $1.2 million change in 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. The Company recorded an increase to the provision for income taxes associated with tax deficiencies resulting from stock based awards of $26,000 during the three months ended March 31, 2020 and ~~2018, respectively.~~recognized excess tax deductions of $83,000 resulting from stock based awards during the three months ended March 31, 2019.

Income from Continuing Operations. Income from continuing operations was ~~$3.5~~$7.1 million ~~in the third quarter of 2019, up from $3.0 million in the third quarter of 2018. Earnings per diluted share from continuing operations were $0.11 and $0.09 per share~~ for the three months ended ~~September 30,~~March 31, 2020, up 48% from $4.8 million for the three months ended March 31, 2019, and ~~2018, respectively.~~EPS from continuing operations was $0.22 per share (diluted) and $0.15 per share (diluted) for the three months ended March 31, 2020 and 2019, respectively, both of which were positively impacted in the amount of $2.6 million, or $0.08 per share, from the favorable adjustment to cost of revenues referenced above.

Income from Discontinued Operations.Income from discontinued operations was ~~$251,000 for the three months ended September 30, 2019 compared to~~ zero for the three months ended ~~September 30, 2018.~~March 31, 2020 compared to $1.2 million for the three months ended March 31, 2019. The $1.2 million gain, net of tax, recorded during the three months ended March 31, 2019 was the result of a release of escrow funds to us in connection with the PX disposition. Refer to Note 10 in the Notes to the Condensed Consolidated Financial Statements for further information.

Net Income. Net income ~~increased $676,000, or 22%, to $3.7~~was approximately $7.1 million and $6.0 million for the three months ended ~~September 30,~~March 31, 2020 and 2019, ~~from $3.0 million~~respectively. EPS was $0.22 per share (diluted) and $0.18 per share (diluted) for the three months ended ~~September 30, 2018. Earnings per diluted share were $0.11~~March 31, 2020 and ~~$0.09 per share for the three months ended September 30,~~ 2019, ~~and 2018,~~ respectively.

Adjusted EBITDA (a non-GAAP financial measure which we define as net income before interest, income taxes, stock based compensation, depreciation and amortization, and changes in fair value of non-marketable equity investments) from continuing operations ~~increased 3% to $11.5 million for the three months ended September 30, 2019 compared to $11.1 million for the three months ended September 30, 2018.~~

~~Adjusted EBITDA increased $676,000~~decreased 6% to $11.8 million for the three months ended ~~September 30, 2019 compared to $11.1~~March 31, 2020 from $12.5 million for the three months ended ~~September 30, 2018.~~March 31, 2019.

Adjusted EBITDA (from continuing and discontinued operations) was $11.8 million for the three months ended March 31, 2020 compared to $14.1 million for the three months ended March 31, 2019. See “Reconciliation of Non-GAAP Financial Measures” below for our reconciliation of Adjusted EBITDA from continuing operations and ~~Adjusted~~adjusted EBITDA to the most directly comparable measures under US ~~GAAP.~~

~~Nine Months Ended September 30, 2019 Compared~~GAAP and disclosure regarding why we believe these non-GAAP financial measures provide useful information to ~~Nine Months Ended September 30, 2018~~

~~Revenues, net.~~ ~~Revenues increased $19.6 million, or 11%, to $191.4 million for the nine months ended September 30, 2019 from $171.8 million for the nine months ended September 30, 2018.~~

Revenues for HealthStream Workforce Solutions increased $16.7 million, or 12%, to $157.7 million for the nine months ended September 30, 2019 from $141.0 million for the nine months ended September 30, 2018. Revenue growth in 2019 was positively impacted by higher revenues from our legacy resuscitation products, which were $46.3 million in the first nine months of 2019 compared to $40.5 million in the first nine months of 2018, and growth in our platform and content subscriptions. The acquisition of Providigm in January 2019 also added $5.2 million of revenue to the first nine months of 2019.

Revenues for HealthStream Provider Solutions increased $2.9 million, or 10%, to $33.7 million for the nine months ended September 30, 2019 from $30.8 million for the nine months ended September 30, 2018. Revenue growth in 2019 was primarily a result of new Verity subscriptions and professional services for client implementations.

~~Cost of Revenues (excluding depreciation and amortization).~~ Cost of revenues increased $8.4 million, or 12%, to $79.0 million for the nine months ended September 30, 2019 from $70.6 million for the nine months ended September 30, 2018. Cost of revenues as a percentage of revenues was 41% for both the nine months ended September 30, 2019 and 2018.

Cost of revenues for HealthStream Workforce Solutions increased $6.9 million to $67.6 million and approximated 43% of revenues for HealthStream Workforce Solutions for both the nine months ended September 30, 2019 and 2018. The increase is primarily associated with increased royalties paid by us resulting from growth in courseware subscription revenues, higher personnel costs, the Providigm acquisition, and stock based compensation related to the stock awards granted during the three months ended June 30, 2019. Cost of revenues for HealthStream Provider Solutions increased $1.5 million to $11.4 million and approximated 34% and 32% of HealthStream Provider Solutions revenues for the nine months ended September 30, 2019 and 2018, respectively. The increase is primarily due to increased personnel costs over the prior year period.

~~Product Development.~~ Product development expenses increased $2.7 million, or 14%, to $21.8 million for the nine months ended September 30, 2019 from $19.1 million for the nine months ended September 30, 2018. Product development expenses as a percentage of revenues were 11% of revenues for both the nine months ended September 30, 2019 and 2018.

Product development expenses for HealthStream Workforce Solutions increased $2.6 million to $18.0 million and approximated 11% of revenues for HealthStream Workforce Solutions for both the nine months ended September 30, 2019 and 2018. The increase is primarily due to higher personnel costs, the Providigm acquisition and stock based compensation related to the stock awards granted during the three months ended June 30, 2019. Product development expenses for HealthStream Provider Solutions increased $96,000 to $3.8 million and approximated 11% and 12% of revenues for HealthStream Provider Solutions for the nine months ended September 30, 2019 and 2018, respectively.

~~Sales and Marketing.~~ Sales and marketing expenses, including personnel costs, increased $1.8 million, or 7%, to $28.3 million for the nine months ended September 30, 2019 from $26.5 million for the nine months ended September 30, 2018. Sales and marketing expenses were 15% of revenues for both the nine months ended September 30, 2019 and 2018.

Sales and marketing expenses for HealthStream Workforce Solutions increased $1.7 million to $23.1 million and approximated 15% of revenues for HealthStream Workforce Solutions for both the nine months ended September 30, 2019 and 2018. The increase is primarily due to higher sales commissions, consistent with the increase in revenues, stock based compensation related to the stock awards granted during the three months ended June 30, 2019, and the Providigm acquisition. Sales and marketing expenses for HealthStream Provider Solutions increased $180,000 to $4.4 million and approximated 13% and 14% of revenues for HealthStream Provider Solutions for the nine months ended September 30, 2019 and 2018, respectively. The increase in amount is primarily associated with the higher personnel and related costs. The unallocated portion of sales and marketing expenses decreased $93,000 to $810,000 compared to the prior year period primarily due to lower personnel costs.

~~Other General and Administrative Expenses.~~ Other general and administrative expenses increased $5.5 million, or 22%, to $30.3 million for the nine months ended September 30, 2019 from $24.8 million for the nine months ended September 30, 2018. Other general and administrative expenses as a percentage of revenues were 16% and 14% of revenues for the nine months ended September 30, 2019 and 2018, respectively.

Other general and administrative expenses for HealthStream Workforce Solutions increased $3.3 million to $10.2 million and approximated 6% and 5% of revenues for HealthStream Workforce Solutions for the nine months ended September 30, 2019 and 2018, respectively. The increase is primarily due to ~~higher personnel costs primarily from the Providigm acquisition, increased software expenses, and higher facilities costs~~. Other general and administrative expenses for HealthStream Provider Solutions decreased $750,000 to $2.7 million and approximated 8% and 11% of revenues for HealthStream Provider Solutions for the nine months ended September 30, 2019 and 2018, respectively. The decrease is primarily associated with lower contract labor expense compared to the prior year period. The unallocated corporate portion of other general and administrative expenses increased $3.0 million to $17.4 million compared to the first nine months of 2018 primarily due to increases in software expenses as well as increases to personnel and related costs over the prior year period.

~~Depreciation and Amortization.~~ Depreciation and amortization increased $2.5 million, or 14%, to $20.6 million for the nine months ended September 30, 2019 from $18.1 million for the nine months ended September 30, 2018. The increase resulted from an increase in amortization of capitalized software as well as depreciation of property and equipment, primarily related to our new corporate headquarters.

~~Other Income, Net. Other income, net was $2.5 million for the nine months ended September 30, 2019 compared to $241,000 for the nine months ended September 30, 2018. This increase is due to the~~ $1.3 million decline in the carrying value of non-marketable equity investments recorded in the three months ended September 30, 2018 coupled with higher interested income from cash and investments in marketable securities.

~~Income Tax Provision.~~ The Company recorded a provision for income taxes of $3.3 million and $2.6 million for the nine months ended September 30, 2019 and 2018, respectively. The Company’s effective tax rate was 24% for the nine months ended September 30, 2019 compared to 20% for the nine months ended September 30, 2018. During the nine months ended September 30, 2019 and 2018, the Company recorded excess tax benefits from stock based awards of $130,000 and $692,000, respectively, as a component of the provision for income taxes, which reduced the effective tax rate compared to the statutory tax rates.

~~Income from Continuing Operations.~~ Income from continuing operations was $10.6 million for the nine months ended September 30, 2019 compared to $10.3 million for the nine months ended September 30, 2018. Earnings per diluted share from continuing operations were $0.33 and $0.32 per share for the nine months ended September 30, 2019 and 2018, respectively.

~~Income from Discontinued Operations.~~ Income from discontinued operations was $1.4 million for the nine months ended September 30, 2019 compared to $19.1 million for the nine months ended September 30, 2018. Income from discontinued operations during the nine months ended September 30, 2019 was the result of the release of escrow funds related to the sale of the PX business. The gain, net of tax, of $19.1 million recognized by the Company during the nine months ended September 30, 2018 related to the sale of the PX business which occurred on February 12, 2018.

~~Net Income.~~ Net income decreased to $12.1 million for the nine months ended September 30, 2019 from $29.4 million for the nine months ended September 30, 2018. Earnings per diluted share were $0.37 per share and $0.91 per share for the nine months ended September 30, 2019 and 2018, respectively. This decrease in net income and EPS (diluted) was attributable to the gain from the sale of the PX business which was primarily recorded during the nine months ended September 30, 2018.

~~Adjusted EBITDA from continuing operations increased 11% to $35.7 million for the nine months ended September 30, 2019 compared to $32.1 million for the nine months ended September 30, 2018.~~

Adjusted EBITDA decreased $23.9 million to $37.7 million for the nine months ended September 30, 2019 compared to $61.6 million for the nine months ended September 30, 2018. This decrease resulted from the factors mentioned above. See Reconciliation of Non-GAAP Financial Measures below for our reconciliation of this calculation to measures under US GAAP.investors.

On February 12, 2018, the Company divested its PX business to Press Ganey for $65.2 million in cash (after giving effect to the post-closing working capital adjustment). This sale of the PX business resulted in the divestiture of our patient experience solutions business segment. We recorded a gain on sale, net of tax, of ~~$20.4~~$20.5 million, of which $19.0 million was recorded during the year ended December 31, 2018 and ~~$1.4~~$1.5 million was recorded during the ~~nine months~~year ended ~~September 30,~~December 31, 2019. With the proceeds of this sale, our Board of Directors declared a $1.00 per common share special cash dividend, which was paid on April 3, 2018 to shareholders of record on March 6, 2018.

We have classified the ~~results~~gain on sale of our PX business segment as discontinued operations in our Condensed Consolidated Statements of Income ~~and Cash Flows~~ for all periods presented. See Note 810 to our Condensed Consolidated Financial Statements included in this report for additional information.

Our legacy agreements with Laerdal (the “Legacy Agreements”) for the HeartCode and Resuscitation Quality Improvement (“RQI”) products expired pursuant to their terms on December 31, 2018. Revenues associated with sales of HeartCode and RQI products pursuant to the Legacy Agreements have been significant in recent years, although margins on such products have been lower than HealthStream’s average margin. ~~In 2018, revenue~~Revenue generated by HeartCode and RQI products pursuant to the Legacy Agreements was $58.9 million and $54.6 ~~million.~~million in 2019 and 2018, respectively. During the ~~nine~~three months ended ~~September 30, 2019,~~March 31, 2020, as noted above we recorded revenue of ~~$46.3~~$11.2 million related to HeartCode and RQI products under the Legacy Agreements compared to $40.5 million for the nine months ended September 30, 2018. In addition, during the three months ended September 30, 2019, as noted above, we recorded revenue of $13.4 million related to HeartCode and RQI products under the Legacy Agreements compared to $15.0$17.3 million for the three months ended ~~September 30, 2018. We~~March 31, 2019. For the remainder of 2020, we expect quarterly revenue from ~~HeartCode and RQI~~these products generated pursuant to the Legacy Agreements to continue to decline sequentially each quarter ~~through~~as follows: approximately $10.5 million in the ~~remainder of 2019~~second quarter, approximately $8.5 million in the third quarter, and ~~throughout 2020 and that revenue to be generated from such products during~~approximately $6.0 million in the fourth ~~quarter of 2019 to approximate $12.6 million.~~quarter. We also continue to expect revenue from HeartCode and RQI products sold pursuant to the Legacy Agreements to be approximately zero in the first quarter of 2021.

On December 6, 2018, we announced a new agreement with RQI Partners, a joint venture between Laerdal and the American Heart Association. This agreement with RQI Partners was not an extension or renewal of the expired Legacy Agreements with Laerdal and should not be construed as such. Under our agreement with RQI Partners, HealthStream will neither market nor sell HeartCode or RQI. Our RQI Partners agreement provides for continuity of service for customers that desire to purchase HeartCode or RQI from RQI Partners after December 31, 2018 and receive it via the HealthStream Learning Center. RQI Partners will remit a fee to us when new sales of HeartCode and RQI are delivered via the HealthStream Learning Center. This fee will not be sufficient to supplant the revenue runout associated with the Legacy Agreements, and no material revenues have been recognized under this agreement ~~as of September 30, 2019.~~through March 31, 2020.

We remain actively engaged in efforts to broaden the scope and utilization of our simulation-related offerings to include a range of clinical competencies that extend beyond resuscitation, and we intend to bring to market a broadened scope of simulation-based offerings, including resuscitation programs. On January 17, 2019, as part of a seven-year collaboration agreement with the American Red Cross, which spans to 2026, we announced the launch of the American Red Cross Resuscitation Suite. We ~~have now begun~~are actively engaged in efforts to market, sell, and deliver our new resuscitation offering, which includes the American Red Cross Resuscitation Suite and validation of skills through a technology enabled Innosonian ~~skills. Several~~manikin. A growing number of customers have been implemented ~~and we recognized a de minimis amount of revenue from~~on our new resuscitation offering ~~during~~and we believe that the ~~nine months ended September 30, 2019.~~solution is gaining acceptance in the market. We believe our efforts to market, sell, and deliver the American Red Cross Resuscitation Suite, along with efforts to bring additional simulation-related offerings to market, have the potential to give rise to additional and higher margin opportunities than those that existed under the Legacy Agreements. However, there is no assurance that we will be successful in these efforts, and to the extent that new simulation-based or other solutions do not generate revenue and/or earnings in a manner that supplants the impact of the Legacy Agreements, our revenue and results of operations may be adversely affected.

This report presents adjusted EBITDA from continuing operations and adjusted EBITDA, 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 before interest, income taxes, ~~stock based~~share-based compensation, depreciation and amortization, ~~and~~ changes in fair value of non-marketable equity investments, 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 costs of revenues in the first quarter of 2020 as described above. (“adjusted EBITDA”) is a useful measure for evaluating the operating performance of the Company because adjusted EBITDA reflects net income adjusted for certain non-cash and non-operating items. 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 ~~results of operations of the PX business that we no longer own and the~~ gain on sale in connection with the sale of ~~such~~the PX business in February 2018 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. 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 and may be different from non-GAAP financial measures used by other companies and have limitations as analytical tools.

A reconciliation of adjusted EBITDA and adjusted EBITDA from continuing operations to the most directly comparable GAAP measures is set forth below (in thousands).

	Three Months Ended September 30,						Nine Months Ended September 30,						Three Months Ended March 31,
	2019			2018			2019			2018			2020			2019
GAAP income from continuing operations	$	3,461		$	3,036		$	10,642		$	10,320		$	7,092		$	4,780
Interest income		(864	)		(736	)		(2,538	)		(1,586	)		(594	)		(790	)
Interest expense		26			32			77			98			25			21
Income tax provision		1,140			1,077			3,270			2,575			1,858			1,411
Stock based compensation expense		569			459			3,643			1,306			550			516
Depreciation and amortization		7,149			6,006			20,629			18,097			7,449			6,539
Change in fair value of non-marketable equity investments		—			1,271			—			1,271			(1,152	)		—
Non-cash royalty expense														(3,440	)		—
Adjusted EBITDA from continuing operations	$	11,481		$	11,145		$	35,723		$	32,081		$	11,788		$	12,477

GAAP net income	$	3,712		$	3,036		$	12,087		$	29,427		$	7,092		$	5,974
Interest income		(864	)		(736	)		(2,538	)		(1,586	)		(594	)		(790	)
Interest expense		26			32			77			98			25			21
Income tax provision		1,229			1,077			3,785			12,894			1,858			1,837
Stock based compensation expense		569			459			3,643			1,215			550			516
Depreciation and amortization		7,149			6,006			20,629			18,279			7,449			6,539
Change in fair value of non-marketable equity investments		—			1,271			—			1,271			(1,152	)		—
Non-cash royalty expense														(3,440	)		—
Adjusted EBITDA	$	11,821		$	11,145		$	37,683		$	61,598		$	11,788		$	14,097

Net cash provided by operating activities ~~from continuing operations increased~~decreased by ~~$22.7~~$10.0 million ~~or 76%~~ to ~~$52.5~~$6.1 million during the ~~nine~~three months ended ~~September 30, 2019~~March 31, 2020 from ~~$29.8~~$16.1 million during the ~~nine~~three months ended ~~September 30, 2018. The~~March 31, 2019. Such decrease was primarily driven by an increase in accounts receivable balances and payments of accrued royalties. Our DSO was 44 days for the first quarter of 2020 compared to 52 days for the first quarter of 2019 and 39 days for the fourth quarter of 2019. We believe that developments related to the COVID-19 pandemic have contributed to an increase in DSO in the first quarter of 2020 compared to the prior year period primarily resulted from changes in receivables, prepaid expenses and other current assets, and current liabilities. The number of days sales outstanding (“DSO”) was 40 days for the thirdfourth quarter of 2019, ~~compared~~and this trend may continue if negative economic conditions arising from the pandemic persist or continue to ~~46 days for the third quarter of 2018. The decrease in DSO primarily relates to improved collections as compared to the prior year period.~~deteriorate. The Company calculates DSO by dividing the average accounts receivable balance for the quarter by average daily revenues for the quarter. 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 ~~from continuing operations~~ was ~~$52.1~~approximately $19.9 million for the ~~nine~~three months ended ~~September 30, 2019~~March 31, 2020 compared to ~~net cash provided by investing activities from continuing operations of $47.0~~$39.4 million for the ~~nine~~three months ended ~~September 30, 2018.~~March 31, 2019. During the ~~nine~~three months ended ~~September 30, 2019,~~March 31, 2020, the Company ~~acquired Providigm for $18.0~~spent $21.4 million to acquire NurseGrid, invested in marketable securities of ~~$62.7 million, purchased property and equipment of $21.5~~$14.1 million, made payments for capitalized software development of ~~$11.2~~$4.1 million, and purchased property and equipment of $1.0 million. These uses of cash were partially offset by $20.7 million in maturities of marketable securities. During the three months ended March 31, 2019, the Company spent $18.0 million to acquire Providigm, invested in marketable securities of $30.1 million, purchased property and equipment of $11.3 million, made payments for capitalized software development of $4.9 million, and invested $3.3 million in ~~non-marketable equity~~cost method investments. These uses of cash were partially offset by ~~$58.6~~$28.3 million in maturities of marketable securities and $6.0 million in proceeds from the sale of its PX business segment. During the nine months ended September 30, 2018, the Company divested its PX business segment, receiving proceeds from the sale of $57.8 million and had maturities of marketable securities of $59.5 million. These sources of cash were partially offset by purchases of $4.3 million of property and equipment, $8.0 million for capitalized software development, $0.9 million in non-marketable equity investments and $57.1 million for investments in marketable securities.

Net cash used in financing activities ~~from continuing operations~~ was ~~$907,000 for the nine months ended September 30, 2019 compared to $30.1~~approximately $10.3 million for the ~~nine~~three months ended ~~September 30, 2018. For~~March 31, 2020 compared to $0.4 million for the ~~nine~~three months ended ~~September 30, 2019 and 2018, the~~March 31, 2019. The uses of cash for the three months ended March 31, 2020 primarily included $9.9 million for common stock repurchases, $0.4 million for the payment of employee payroll taxes in relation to the vesting of restricted share units, ~~(“RSU”)~~ and ~~stock awards~~$30,000 of $1.0 million and $335,000, respectively. In this regard, the Company net-share settled the employee RSUs by withholding shares with value equivalent to the employee’s minimum statutory obligation for the applicable income and other employment taxes.cash dividend payments. The uses of cash for ~~both~~ the ~~nine~~three months ended ~~September 30,~~March 31, 2019 included $0.4 million for the payment of employee payroll taxes in relation to the vesting of restricted share units, $52,000 of cash dividends payments, and ~~2018 also included $38,000~~$37,000 of earn-out payments ~~of earn-outs~~ related to prior ~~acquisitions in both periods and also included cash dividend~~

~~payments of $53,000 and $32.4 million, respectively.~~acquisitions. The source of cash from financing activities for ~~both~~ the ~~nine~~three months ended ~~September 30,~~March 31, 2019 ~~and 2018~~ was from the exercise of stock options of ~~$214,000 and $2.6 million, respectively.~~$31,000.

Our balance sheet reflects positive working capital of ~~$123.3~~$98.2 million at ~~September 30, 2019~~March 31, 2020 compared to ~~$134.6~~$119.4 million at December 31, ~~2018.~~2019. The decrease in working capital is primarily a result of the reduction in cash to fund the acquisition of ~~Providigm in January 2019.~~NurseGrid and share repurchases. The Company’s primary source of liquidity as of ~~September 30, 2019~~March 31, 2020 was ~~$133.9~~$107.4 million of cash and cash equivalents and ~~$38.7~~$34.6 million of marketable securities. The Company also has a $50.0 million revolving credit facility, all of which was available for additional borrowing at ~~September 30, 2019.~~ March 31, 2020. The revolving credit facility expires on November 24, 2020, unless earlier renewed or amended.

On March 13, 2020, we announced a share repurchase program authorized by our Board of Directors under which we may purchase up to $30,000,000 of our common stock. Pursuant to this authorization, repurchases have been made, and may continue to be made from time to time, in the open market through privately negotiated transactions or otherwise, including under a Rule 10b5-1 plan, which permits shares to be repurchased when the Company might otherwise be precluded from doing so under insider trading laws in accordance with specific prearranged terms related to timing, price, and volume (among others), without further direction from the Company. Under this program, during the first quarter of 2020, we repurchased 438,142 shares at an aggregate fair value of $9.9 million, reflecting an average price per share of $22.52 (excluding the cost of broker commissions). We may continue to make repurchases under this share repurchase program based on 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 will terminate on the earlier of March 12, 2021 or when the maximum dollar amount has been expended.

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, any additional repurchases under our share repurchase program, and capital expenditures for at least the next 12 months. If the impact of COVID-19 persists longer than expected or causes economic conditions to further deteriorate, we are prepared to curtail or discontinue new product development and/or repurchases under the share repurchase authorization as we deem in the best interest of shareholders and the Company.

In addition, the Company’s growth strategy includes acquiring businesses or making strategic investments in businesses that complement or enhance our business. It is anticipated that future acquisitions or strategic investments, if any, would be effected through cash consideration, stock consideration, or a combination of both. The issuance of our stock as consideration for an acquisition or to raise additional capital could have a dilutive effect on earnings per share and could adversely affect our stock price. Our revolving credit facility contains financial covenants and availability calculations designed to set a maximum leverage ratio of outstanding debt to adjusted EBITDA and an interest coverage ratio of adjusted EBITDA to interest ~~expense (the definition of adjusted EBITDA in our revolving credit facility differs in certain respects from the definition of Adjusted EBITDA set forth herein).~~expense. Therefore, the maximum borrowings against our revolving credit facility would be dependent on the covenant calculations at the time of borrowing. As of ~~September 30, 2019~~March 31, 2020, we were 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 assure you that if we need additional financing that it will be available on terms favorable to us, or at all. Failure to generate sufficient cash flow from operations or raise additional capital when required in sufficient amounts and on terms acceptable to us could harm our business, financial condition, and results of operations. Moreover, the COVID-19 pandemic has resulted in, and may continue to result in, significant disruptions of financial and capital markets, which could impair our ability to access additional capital if needed.

The Company is exposed to market risk from changes in interest rates. We do not have any material foreign currency exchange rate risk or commodity price risk. As of ~~September 30, 2019~~March 31, 2020 and during the ~~nine~~three months then ended, the Company had no outstanding debt. We may become subject to interest rate market risk associated with any future borrowings under our revolving credit facility. The interest rate under the revolving credit facility varies depending on the interest rate option selected by the Company plus a margin determined in accordance with a pricing grid. We are also exposed to market risk with respect to our cash and investment balances, ~~of $172.6~~which approximated $142.0 million at ~~September 30, 2019.~~March 31, 2020. Assuming a hypothetical 10% decrease in interest rates for invested balances, interest income from cash and investments would decrease on an annualized basis by ~~$375,000.~~approximately $228,000.

The Company’s investment policy and strategy is focused on investing in highly rated securities, with the objective of minimizing the potential risk of principal loss. The Company’s policy limits the amount of credit exposure to any single issuer and sets limits on the average portfolio maturity.

The above market risk discussion and the estimated amounts presented are forward‑looking statements of market risk assuming the occurrence of certain adverse market conditions. Actual results in the future may differ materially from those projected as a result of actual developments in the market.

HealthStream’s chief executive officer and principal financial officer have reviewed and evaluated the effectiveness of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) promulgated under the Securities Exchange Act of 1934 (the “Exchange Act”)) as of the end of the period covered by this Quarterly Report. Based on that evaluation, the chief executive officer and principal financial officer have concluded that HealthStream’s disclosure controls and procedures were effective to ensure that the information required to be disclosed by the Company in the reports the Company files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and the information required to be disclosed in the reports the Company files or submits under the Exchange Act was accumulated and communicated to the Company’s management, including its chief executive officer and principal financial officer, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.

There was no change in HealthStream’s internal control over financial reporting that occurred during the ~~third~~first quarter of ~~2019~~2020 that has materially affected, or that is reasonably likely to materially affect, HealthStream’s internal control over financial reporting.

The following supplements the Company’s risk factors previously disclosed in the 2019 Form 10-K by adding the following risk factor that takes into account developments with respect to COVID-19 since the filing of the 2019 Form 10-K. Except as set forth below, there have been no material changes with regard to the risk factors previously disclosed in the 2019 Form 10-K.

The coronavirus pandemic is significantly affecting our business, and may have material adverse impacts on our business, financial condition, results of operations, and/or cash flows.

The COVID-19 pandemic has resulted in authorities throughout the United States and the world implementing widespread measures attempting to contain the spread and impact of COVID-19, such as travel bans and restrictions, quarantines, shelter-in-place orders, the promotion of social distancing, and limitations on business activity. These measures and the pandemic have caused a significant economic downturn in the United States and globally, resulted in increased unemployment and underemployment levels, and adversely impacted consumer confidence and spending. This pandemic has also led to significant disruption and volatility in financial and capital markets.

Our business is focused on providing workforce and provider solutions to healthcare organizations. Many healthcare organizations have been, and will likely continue to be, substantially adversely impacted by the COVID-19 pandemic which has resulted in a substantial reduction in the number of elective surgeries, physician office visits, and other healthcare procedures due to restrictive measures, including quarantines and shelter-in-place orders, as well as general concerns related to the risk of contracting COVID-19 from interacting with the healthcare system. Moreover, some healthcare organizations, such as ambulatory surgery centers, have been forced to reduce or close their operations due to the impact of the pandemic. Additionally, adverse conditions related to the pandemic are causing, and could continue to cause, certain of our customers to be unable to pay for our products and services in a timely and fulsome manner, or unable to pay at all, which will likely have an adverse impact on our financial results. Moreover, our “days sales outstanding” have increased as the result of the COVID-19 pandemic, , and to the extent this trend continues, or our customers are unable to pay due to bankruptcy or the deterioration of their business as the result of COVID-19, our bad debt may increase and future revenue generating opportunities with those customers may be limited.

Conditions related to the pandemic may also adversely impact the ability or willingness of our customers to renew their contracts with us (or to renew contracts on comparable terms) and to expand the quantity and type of solutions they purchase from us. The COVID-19 pandemic has begun to, and will likely continue to, adversely impact our ability to enter into contracts with new potential customers. Customers may also be unwilling or unable to pay the same prices for our products and solutions than they have paid in the past, which could negatively impact our results and growth. Many of our customers are not currently allowing vendors, including ourselves, on their premises, which is reducing the ability of our sales team to make sales they otherwise would likely make but for the impact of COVID-19. Additionally, we do not recognize revenue until a software product is implemented and “live” for a customer to use. To the extent our customers delay or fail to implement products they have previously purchased, or to the extent we are unable to fulfill our own implementation backlogs due to COVID-19, which certain of our customers are doing, our financial results will likely suffer, as may our future prospects.

Our business also relies on a network of partners whose solutions we resell or whose solutions are sold and delivered over our platform. To the extent COVID-19 results in business disruption or adverse impacts to our partners, such disruptions and adverse impacts could adversely impact our business as well.

At the time of filing, due to COVID-19 our entire workforce is working remotely from home consistent with stay-at-home or shelter-in-place regulations. While we have not observed a disruption to productivity to date, operating on a prolonged basis as a remote workforce could result in decreases in productivity, increased security risks, impair our ability to manage our business, and harm our ability to attract, retain, and onboard employees.

There continue to be significant uncertainties associated with the COVID-19 pandemic, including with respect to the severity and duration of the pandemic, actions that may be taken by governmental authorities and private businesses to mitigate against the impact of the pandemic, and the ongoing impact of COVID-19 on economic activity and unemployment and underemployment levels. Moreover, COVID-19 developments continue to evolve quickly, and additional developments may occur which we are unable to predict.

Developments related to COVID-19 could have a material adverse effect on our business, financial condition, results of operations, and/or cash flows, particularly if negative conditions impacting healthcare organizations persist for a significant period of time or continue to deteriorate. In addition, the impact of COVID-19 may exacerbate other risks discussed in Part I, Item 1A. Risk Factors in our Annual Report on Form 10-K, any of which could have a material effect on us.

On March 13, 2020, the Company announced a share repurchase program authorized by the Company’s Board of Directors under which the Company may purchase up to $30,000,000 of its common stock. Pursuant to this authorization, repurchases have been made and may continue to be made, in the open market through privately negotiated transactions or otherwise, including under a Rule 105b-1 plan, which permits shares to be repurchased when the Company might otherwise be precluded from doing so under insider trading laws in accordance with specific prearranged terms related to timing, price, and volume (among others), without further direction from the Company. 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 will terminate on the earlier of March 12, 2021 or when the maximum dollar amount has been expended. The table below sets forth activity under the stock repurchase plan for the three months ended March 31, 2020.

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

Tennessee	62-1443555
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

500 11thAvenue North, Suite 1000,
Nashville, Tennessee	37203
(Address of principal executive offices)	(Zip Code)


Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock (Par Value $0.00)	HSTM	Nasdaq


		Page Number

Part I.	Financial Information	1

Item 1.	Financial Statements	1

	Condensed Consolidated Balance Sheets (Unaudited) – ~~September 30, 2019~~March 31, 2020 and December 31, ~~2018~~2019	1

	Condensed Consolidated Statements of Income (Unaudited) – Three Months ended March 31, 2020 and ~~Nine Months Ended September 30, 2019 and 2018~~2019	2

	Condensed Consolidated Statements of Comprehensive Income (Unaudited) – Three Months ended March 31, 2020 and ~~Nine Months Ended September 30, 2019 and 2018~~2019	3

	Condensed Consolidated ~~Statements~~Statement of Shareholders' Equity (Unaudited) – Three Months ended March 31, 2020 and ~~Nine Months Ended September 30, 2019 and 2018~~2019	4

	Condensed Consolidated Statements of Cash Flows (Unaudited) – ~~Nine~~Three Months ~~Ended September 30, 2019~~ended March 31, 2020 and ~~2018~~2019	65

	Notes to Condensed Consolidated Financial Statements (Unaudited)	76

Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	1715

Item 3.	Quantitative and Qualitative Disclosures about Market Risk	2523

Item 4.	Controls and Procedures	2524

Part II.	Other Information	25

Item 1A.	Risk Factors	25

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	26

Item 6.	Exhibits	26

	~~Signature~~SIGNATURE	27

Cash paid at closing	$	25,485
Cash acquired		(4,064	)
Net consideration paid		21,421
Fair value of existing equity interest in NurseGrid		3,594
Total purchase price	$	25,015

	Three Months Ended March 31,
	2020		2019
Total revenues	$	61,644	$	65,375
Income from continuing operations	$	6,515	$	3,876
Net income	$	6,515	$	5,071
Net income per share - basic	$	0.20	$	0.16
Net income per share - diluted	$	0.20	$	0.16

Large accelerated filer	☒	Accelerated filer	☐
Non-accelerated filer	☐	Smaller reporting company	☐
Emerging growth company	☐

	Nine Months Ended September 30, 2019
	Common Stock						Retained		Accumulated Other Comprehensive			Total Shareholders’
	Shares			Amount			Earnings		(Loss) Income			Equity
Balance at December 31, 2018		32,325		$	286,597		$	32,373	$	(23	)	$	318,947
Net income		—			—			5,974		—			5,974
Comprehensive income		—			—			—		32			32
Stock based compensation		—			516			—		—			516
Common stock issued under stock plans, net of shares withheld for employee taxes		63			(328	)		—		—			(328	)
Balance at March 31, 2019		32,388		$	286,785		$	38,347	$	9		$	325,141
Net income		—			—			2,401		—			2,401
Comprehensive income		—			—			—		14			14
Stock donated to Company (held in treasury)		(86	)		—			—		—			—
Stock based compensation		—			2,558			—		—			2,558
Common stock issued under stock plans, net of shares withheld for employee taxes		72			(443	)		—		—			(443	)
Balance at June 30, 2019		32,374		$	288,900		$	40,748	$	23		$	329,671
Net income		—			—			3,712		—			3,712
Comprehensive income		—			—			—		(14	)		(14	)
Stock based compensation		—			569			—		—			569
Common stock issued under stock plans, net of shares withheld for employee taxes		4			(45	)		—		—			(45	)
Balance at September 30, 2019		32,378		$	289,424		$	44,460	$	9		$	333,893

	Three Months Ended March 31, 2019
	Common Stock					Retained		Accumulated Other Comprehensive			Total Shareholders’
	Shares		Amount			Earnings		(Loss) Income			Equity
Balance at December 31, 2018		32,325	$	286,597		$	32,373	$	(23	)	$	318,947
Net income		—		—			5,974		—			5,974
Comprehensive income		—		—			—		32			32
Stock based compensation		—		516			—		—			516
Common stock issued under stock plans, net of shares withheld for employee taxes		63		(328	)		—		—			(328	)
Balance at March 31, 2019		32,388	$	286,785		$	38,347	$	9		$	325,141

	Three Months Ended March 31, 2020						Three Months Ended March 31, 2019
Business Segments	Workforce Solutions		Provider Solutions		Consolidated		Workforce Solutions		Provider Solutions		Consolidated
Subscription services	$	48,717	$	9,627	$	58,344	$	52,805	$	9,080	$	61,885
Professional services		1,107		2,121		3,228		1,490		1,812		3,302
Total revenues, net	$	49,824	$	11,748	$	61,572	$	54,295	$	10,892	$	65,187

	Three Months Ended September 30, 2019						Nine Months Ended September 30, 2019
Business Segments	Workforce Solutions		Provider Solutions		Consolidated		Workforce Solutions		Provider Solutions		Consolidated
Subscription/SaaS services	$	49,339	$	9,660	$	58,999	$	153,035	$	28,241	$	181,276
Professional services		1,684		1,767		3,451		4,704		5,437		10,141
Total revenues, net	$	51,023	$	11,427	$	62,450	$	157,739	$	33,678	$	191,417

	Three Months Ended September 30, 2018						Nine Months Ended September 30, 2018
Business Segments	Workforce Solutions		Provider Solutions		Consolidated		Workforce Solutions		Provider Solutions		Consolidated
Subscription/SaaS services	$	47,639	$	8,521	$	56,160	$	137,083	$	26,221	$	163,304
Professional services		1,489		2,276		3,765		3,960		4,527		8,487
Total revenues, net	$	49,128	$	10,797	$	59,925	$	141,043	$	30,748	$	171,791

	Three Months Ended September 30,						Nine Months Ended September 30,
Revenues, net:	2019			2018			2019			2018
Workforce Solutions	$	51,023		$	49,128		$	157,739		$	141,043
Provider Solutions		11,427			10,797			33,678			30,748
Total revenues, net	$	62,450		$	59,925		$	191,417		$	171,791
Operating income from continuing operations:
Workforce Solutions	$	10,274		$	10,013		$	30,694		$	29,074
Provider Solutions		1,385			1,684			4,206			2,973
Unallocated		(7,911	)		(7,036	)		(23,516	)		(19,393	)
Total operating income from continuing operations	$	3,748		$	4,661		$	11,384		$	12,654

Segment assets *	September 30, 2019		December 31, 2018
Workforce Solutions	$	117,890	$	104,668
Provider Solutions		138,468		145,637
Unallocated		223,839		191,643
Total assets	$	480,197	$	441,948

Assets	Classification
Operating lease right-of-use assets	Operating lease right of use assets, net	$	30,134
Total leased assets		$	30,134
Liabilities
Operating lease liabilities, current	Accounts payable and accrued expenses	$	2,495
Operating lease liabilities, noncurrent	Operating lease liability, noncurrent		31,338
Total operating lease liabilities		$	33,833

2019		936
2020		4,705
2021		4,505
2022		4,124
2023		3,979
Thereafter		28,655
Total undiscounted lease payments		46,904
Less imputed interest		13,071
Total lease liabilities	$	33,833

Period	(a) Total number of shares (or units) purchased		(b) Average price paid per share (or unit)⁽²⁾		(c) Total number of shares (or units) purchased as part of publicly announced plans or programs		(d) Maximum number (or approximate dollar value) of shares (or units) that may yet be purchased under the plans or programs
Month #1 (January 1 - January 31)⁽¹⁾		—	$	—		—	$	—
Month #2 (February 1 - February 29)⁽¹⁾		—		—		—		—
Month #3 (March 1 - March 31)		438,142		22.52		438,142		20,132,659
Total		438,142	$	22.52		438,142	$	20,132,659
(1) The stock repurchase plan was not in place during this period.
(2) The weighted average price paid per share of common stock does not include the cost of broker commissions.


10.18^		HealthStream, Inc. 2020 Executive and Corporate Management Cash Incentive Bonus Plan

10.19^		HealthStream, Inc. 2020 Provider Solutions Cash Incentive Bonus Plan

31.1		Certification of the Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

31.2		Certification of the Principal Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

32.1		Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

32.2		Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

101.1 INS		XBRL Instance Document – The ~~instance~~instant document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.

101.1 SCH		XBRL Taxonomy Extension Schema

101.1 CAL		XBRL Taxonomy Extension Calculation Linkbase

101.1 DEF		XBRL Taxonomy Extension Definition Linkbase

101.1 LAB		XBRL Taxonomy Extension Label Linkbase

101.1 PRE		XBRL Taxonomy Extension Presentation Linkbase

104		The cover page from the Company’s Quarterly Report on Form 10-Q for the quarter ended ~~September 30, 2019,~~March 31, 2020, has been formatted in Inline ~~XBRL.~~XBRL

^		Management contract or compensatory plan or arrangement

	HEALTHSTREAM, INC.

~~October 28, 2019~~April 30, 2020	By:	/s/ Scott A. Roberts
		Scott A. Roberts
		Chief Financial Officer