HEALTHSTREAM INC (HSTM) FY 2022 MD&A

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

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

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

OVERVIEW

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

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

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

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

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

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

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

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

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

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

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

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

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

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COVID-19 PANDEMIC; CURRENT ECONOMIC CONDITIONS

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

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

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

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

CRITICAL ACCOUNTING ESTIMATES

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

Revenue Recognition

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

Accounting for Income Taxes

The Company accounts for income taxes using the asset and liability method, whereby deferred tax assets and liabilities are determined based on the temporary differences between the financial statement and tax bases of assets and liabilities measured at tax rates that will be in effect for the year in which the differences are expected to affect taxable income. Management evaluates all available evidence, both positive and negative, to determine whether, based on the weight of that evidence, a valuation allowance is needed. We assess the realizability of our deferred tax assets, and to the extent that we believe a recovery is not likely, we establish a valuation allowance to reduce the deferred tax asset to the amount we estimate will be recoverable. As of December 31, 2022, the Company established a valuation allowance of $1.9 million for the portion of its deferred tax assets that are not more likely than not expected to be realized, compared to a valuation allowance of $2.0 million as of December 31, 2021.

Goodwill

Goodwill represents the excess of purchase price in a business combination over the fair value of the net identifiable assets acquired. We evaluate goodwill for impairment at the reporting unit level by assessing whether it is more likely than not that the fair value of a reporting unit exceeds its carrying value. If this assessment concludes that it is more likely than not that the fair value of a reporting unit exceeds its carrying value, then goodwill is not considered impaired and no further impairment testing is required. Conversely, if the assessment concludes that it is more likely than not that the fair value of a reporting unit is less than its carrying value, a goodwill impairment test is performed to compare the fair value of the reporting unit to its carrying value. The Company determines fair value of the reporting units using both income and market-based models. Our models contain significant assumptions and accounting estimates about discount rates, future cash flows, and terminal values that could materially affect our operating results or financial position if they were to change significantly in the future and could result in an impairment. We perform our goodwill impairment assessment whenever events or changes in facts or circumstances indicate that impairment may exist and during the fourth quarter each year. The cash flow estimates and discount rates incorporate management’s best estimates, using appropriate and customary assumptions and projections at the date of evaluation. For 2022, our qualitative assessment indicated that the fair value of our reporting units substantially exceeded their carrying values such that a quantitative assessment was not necessary.

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RESULTS OF OPERATIONS

Revenues and Expense Components

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

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

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

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

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

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

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

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

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

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2022 Compared to 2021

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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Key Business Metrics

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

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

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Reconciliation of Non-GAAP Financial Measures

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

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

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

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

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

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

Liquidity and Capital Resources

Net cash provided by operating activities was $51.2 million during 2022, compared to $42.4 million during 2021, an increase of 21%. The increase resulted from higher cash collections compared to the prior year. The number of days sales outstanding (DSO) was 46 days for 2022 compared to 50 days for 2021. The Company calculates DSO by dividing the average accounts receivable balance (excluding unbilled and other receivables) by average daily revenues for the year. The Company’s primary sources of cash were receipts generated from the sales of our products and services. The primary uses of cash to fund operations included personnel expenses, sales commissions, royalty payments, payments for contract labor and other direct expenses associated with delivery of our products and services, and general corporate expenses.

Net cash used in investing activities was $28.4 million during 2022, compared to $25.7 million during 2021. During 2022, the Company paid $3.9 million in cash (plus shares issued by the Company in a private placement), net of cash acquired, for the acquisition of CloudCME (note: the eeds was acquisition was consummated on December 31, 2022, but was funded in January 2023 such that the purchase price for eeds did not impact net cash used in investing activities during the year ended December 31, 2022), and on a net basis paid $0.1 million upon settling post-closing adjustments related to the ComplyALIGN and Rievent acquisitions which closed during 2021 (resulting in a net cash outflow of $4.0 million), invested in marketable securities of $13.5 million, made payments for capitalized software development of $23.3 million, and purchased property and equipment of $1.8 million. These uses of cash were partially offset by $10.6 million in maturities of marketable securities and $3.5 million in proceeds from the sale of non-marketable equity investments. During 2021, the Company acquired two businesses, ComplyALIGN and Rievent, for a combined $5.9 million in cash, and on a net basis received $1.2 million of proceeds upon settling post-closing adjustments related to the ANSOS and ShiftWizard acquisitions which closed during 2020 (resulting in a net cash outflow of $4.7 million), invested in marketable securities of $5.2 million, made payments for capitalized software development of $21.9 million, purchased property and equipment of $3.4 million, and invested $1.8 million in non-marketable equity investments. These uses of cash were partially offset by $9.9 million in maturities of marketable securities and $1.4 million in proceeds from the sale of non-marketable equity investments.

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

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

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

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

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

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

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

The Company’s growth strategy includes acquiring businesses that provide complementary products and services. It is anticipated that future acquisitions, if any, would be effected through cash consideration, stock consideration, or a combination of both. The issuance of our stock as consideration for an acquisition or to raise additional capital could have a dilutive effect on earnings per share and could adversely affect our stock price. The revolving credit facility contains financial covenants and availability calculations designed to set a maximum leverage ratio of outstanding debt to consolidated EBITDA (as defined in our credit facility) and an interest coverage ratio of consolidated EBITDA to interest expense. Therefore, the maximum borrowings against the revolving credit facility would be dependent on the covenant values at the time of borrowing. As of December 31, 2022, the Company was in compliance with all covenants. There can be no assurance that amounts available for borrowing under our revolving credit facility will be sufficient to consummate any possible acquisitions, and we cannot be assured that if we need additional financing, it will be available on terms favorable to us or at all. Failure to generate sufficient cash flow from operations or raise additional capital when required in sufficient amounts and on terms acceptable to us could harm our business, financial condition, and results of operations.

Recent Accounting Pronouncements

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

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