Healthstream Inc: Form 10-Q for the period ended Mar 31, 2025

Special Cautionary Notice Regarding Forward‑Looking Statements

You should read the following discussion and analysis in conjunction with our Condensed Consolidated Financial Statements and related Notes included elsewhere in this Form 10-Q and our audited Consolidated Financial Statements and the Notes thereto for the year ended December 31, 2024, appearing in our Annual Report on Form 10-K that was filed with the Securities and Exchange Commission (“SEC”) on February 28, 2025 (the “2024 Form 10-K”). Statements contained in this 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 set forth above and the risks set forth under the caption Part I, Item 1A. Risk Factors in our 2024 Form 10-K and other disclosures in our 2024 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 Form 10-Q, including our critical accounting policies and estimates as discussed in this Form 10-Q and our 2024 Form 10-K. We undertake no obligation to update or revise any forward-looking statements. You should read this Form 10-Q and the documents that we reference in this Form 10-Q and have filed as exhibits to this Form 10-Q completely and with the understanding that our actual future results may be materially different from what we currently expect.

Business Overview

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

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

Significant financial metrics for the first quarter of 2025 are set forth in the bullets below.

• Revenues of $73.5 million in the first quarter of 2025, up 1.0% from $72.8 million in the first quarter of 2024
• Operating income of $4.4 million in the first quarter of 2025, down 23.1% from $5.7 million in the first quarter of 2024
• Net income of $4.3 million in the first quarter of 2025, down 17.1% from $5.2 million in the first quarter of 2024
• Earnings per share (“EPS”) of $0.14 per share (diluted) in the first quarter of 2025, down from $0.17 per share (diluted) in the first quarter of 2024
• Adjusted EBITDA1 of $16.2 million in the first quarter of 2025, down 5.0% from $17.1 million in the first quarter of 2024

1 Adjusted EBITDA is a non-GAAP financial measure. A reconciliation of adjusted EBITDA to net income and disclosure regarding why we believe adjusted EBITDA provides useful information to investors is included later in this Form 10-Q.

During the first quarter of 2025, we entered into an agreement to sublease a portion of our office space in the Capitol View building in Nashville, Tennessee to optimize our workforce performance to deliver positive results for customers, employees, and shareholders. HealthStream’s corporate headquarters will remain in Nashville in the Capitol View building, while the Company will continue hiring new employees both locally and nationally to support its growth. The sublease commenced in April 2025 and will expire in October 2031. The Company expects to record sublease income, net of initial direct costs, of approximately $2.3 million during the remainder of 2025 and $3.2 million annually thereafter for the remaining term of the lease, as a reduction to lease expense under the caption General and Administrative.

Recent Developments

Macroeconomic conditions in the U.S. that directly or indirectly impact the healthcare industry are challenging in certain respects and may become more challenging based on recent and contemplated changes to various policies and regulations. While healthcare costs continue to grow, government cuts or reimbursement rate reductions to funding for programs and organizations such as Federally Qualified Health Centers and academic medical institutions, the impact of tariffs on goods and services utilized by healthcare provider organizations, as well as uncertainty surrounding potential policy, regulatory, and economic shifts continue to be challenging for our healthcare customers. We believe that these macroeconomic challenges and uncertainties, particularly among healthcare provider organizations with patient populations more dependent on government-funded reimbursement, are causing some delays in purchasing and non-renewals of existing products and services, particularly in relation to elective or non-mandatory products and services.

Additionally, challenges persist in terms of inflationary pressures, ongoing elevated interest rate levels, declining consumer sentiment, and heightened geopolitical tensions, including various ongoing and threatened conflicts abroad and strained global trade relations. We have experienced in certain recent periods, and believe that many of our customers have experienced, increased labor, supply chain, capital, and other expenditures and budgetary pressures associated with such conditions and challenges. These conditions and challenges 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. Additionally, given our focus on customers in the healthcare industry, adverse developments impacting the healthcare industry may adversely impact our business and financial results. In this regard, and as mentioned above, potential reductions in federal and state healthcare spending and reimbursements, including proposed cuts to Medicare and Medicaid, and reductions in insurance coverage to individuals, whether through changes to the Affordable Care Act (“ACA”) or otherwise, as a result of recent political developments or other factors, may adversely impact our business and financial results, although we are unable to fully assess the impact to which we may be impacted by any such developments.

Key Financial Metrics

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

• Revenues, net. Revenues, net, reflect income generated by the sales of goods and services related to our operations. Revenues, net, were $73.5 million for the three months ended March 31, 2025, compared to $72.8 million for the three months ended March 31, 2024. Management utilizes revenue in connection with managing our business and believes that this metric provides useful information to investors as a key indicator of the growth and success of our products.
• Net Income. Net income represents revenues, net, less all expenses. Net income was $4.3 million for the three months ended March 31, 2025, compared to $5.2 million for the three months ended March 31, 2024. Management utilizes net income in connection with managing our business, including with regard to our capital deployment strategies.
• Adjusted EBITDA. Adjusted EBITDA, calculated as set forth below under “Reconciliation of Non-GAAP Financial Measures,” is utilized by our management in connection with managing our business and provides useful information to investors because adjusted EBITDA reflects net income adjusted for certain GAAP accounting, non-cash, and/or non-operating items, as more specifically set forth below, which may not 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 operations. Additionally, certain short-term cash incentive bonuses and performance-based equity award grants are based, in whole or in part, on the achievement of adjusted EBITDA (as defined in applicable bonus and equity grant documentation) targets. Adjusted EBITDA was $16.2 million for the three months ended March 31, 2025, compared to $17.1 million for the three months ended March 31, 2024.
• Capital Expenditures. Capital expenditures represent cash payments incurred for purchases of property and equipment and during the development phase for projects to develop software and content. Capital expenditures were $8.8 million for the three months ended March 31, 2025, respectively, compared to $7.8 million for the three months ended March 31, 2024. Management utilizes this metric in connection with managing the allocation of capitalized expenditures in which the Company invests related to the development of its products and believes that this metric is a key indicator of investment in products relative to their current and expected performance.

Critical Accounting Policies and Estimates

See Notes to the Consolidated Financial Statements in our 2024 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 changes in our critical accounting policies and estimates from those reported in our 2024 Form 10-K.

Three Months Ended March 31, 2025 Compared to Three Months Ended March 31, 2024

Revenues, net. Revenues increased $0.7 million, or 1%, to $73.5 million for the three months ended March 31, 2025 from $72.8 million for the three months ended March 31, 2024. Subscription revenues increased $0.6 million, or 1%, and professional services revenues increased by $0.1 million compared to the first quarter of 2024. Compared to the three months ended March 31, 2024, revenues for the three months ended March 31, 2025 were negatively impacted by several factors, including a $1.7 million reduction from attrition in legacy applications, a $0.9 million reduction in perpetual license sales, and a $0.6 million reduction from customer bankruptcies that occurred in 2024. These reductions to revenue were more than offset by $3.9 million of revenue growth across our portfolio of solutions.

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

Cost of Revenues (excluding Depreciation and Amortization). Cost of revenues increased $0.9 million, or 4%, to $25.5 million for the three months ended March 31, 2025, from $24.6 million for the three months ended March 31, 2024. Cost of revenues as a percentage of revenues were 35% and 34% for the three months ended March 31, 2025 and 2024, respectively. The increase in amount is primarily associated with investments in several areas of our business, primarily in our platform and SaaS applications, resulting in higher costs for software and cloud hosting as well as an increase in labor costs, partially offset by a decrease in royalties.

Product Development. Product development expenses was $12.0 million for both the three months ended March 31, 2025 and 2024. Product development expenses as a percentage of revenues were 16% and 17% for the three months ended March 31, 2025 and 2024, respectively.

Sales and Marketing. Sales and marketing expenses, including personnel costs, increased $0.3 million, or 3%, to $12.1 million for the three months ended March 31, 2025, from $11.8 million for the three months ended March 31, 2024. Sales and marketing expenses were 17% and 16% of revenues for the three months ended March 31, 2025 and 2024. The increase in amount is primarily due to higher labor costs and sales commissions.

General and Administrative. General and administrative expenses increased $0.4 million, or 4%, to $8.7 million for the three months ended March 31, 2025, from $8.3 million for the three months ended March 31, 2024. General and administrative expenses were 12% and 11% of revenues for the three months ended March 31, 2025 and 2024, respectively. The increase in amount is primarily due to an increase in labor costs and software expenses, partially offset by a decrease in facilities costs associated with satellite offices.

Depreciation and Amortization. Depreciation and amortization expense increased $0.5 million, or 4%, to $10.8 million for the three months ended March 31, 2025, from $10.3 million for the three months ended March 31, 2024. This increase in amount is primarily a result of an increase in amortization associated with capitalized software.

Interest Income. Interest income was $0.9 million for both the three months ended March 31, 2025 and 2024.

Other Expense, Net. Other expense, net was $0.1 million for both the three months ended March 31, 2025 and 2024.

Income Tax Provision. The Company recorded a provision for income taxes of $0.9 million for the three months ended March 31, 2025, compared to $1.3 million for the three months ended March 31, 2024. The Company’s effective tax rate was 17% for the three months ended March 31, 2025, compared to 20% for the three months ended March 31, 2024. The Company’s effective tax rate primarily reflects the statutory corporate income tax rate, the net effect of state taxes, foreign income taxes, the effect of various permanent tax differences, and recognition of discrete tax items.

Net Income. Net income was $4.3 million and $5.2 million for the three months ended March 31, 2025 and 2024, respectively. EPS was $0.14 per share (diluted) and $0.17 per share (diluted) for the three months ended March 31, 2025 and 2024, respectively.

Adjusted EBITDA was $16.2 million for the three months ended March 31, 2025, compared to $17.1 million for the three months ended March 31, 2024. See “Reconciliation of Non-GAAP Financial Measures” below for our reconciliation of adjusted EBITDA to the most directly comparable measure under US GAAP and disclosure regarding why we believe adjusted EBITDA provides useful information to investors.

Reconciliation of Non-GAAP Financial Measures

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

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

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

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

Liquidity and Capital Resources

Net cash provided by operating activities increased by $6.2 million to $27.1 million during the three months ended March 31, 2025, from $20.9 million during the three months ended March 31, 2024. The increase in net cash provided by operating activities is primarily due to strong cash receipts from customers during the quarter, resulting in a reduction to our days sales outstanding ("DSO"). Our DSO was 37 days for the first quarter of 2025 compared to 46 days for the first quarter of 2024. 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, income tax payments, and general corporate expenses.

Net cash used in investing activities was $7.2 million for the three months ended March 31, 2025, compared to $7.1 million for the three months ended March 31, 2024. During the three months ended March 31, 2025, the Company invested in marketable securities of $9.2 million, made payments for capitalized software development of $7.8 million, purchased property and equipment of $1.1 million, and purchased an investment of $0.5 million. These uses of cash were partially offset by $11.3 million in maturities of marketable securities. During the three months ended March 31, 2024, the Company invested in marketable securities of $14.1 million, made payments for capitalized software development of $7.0 million, and purchased property and equipment of $0.7 million. These uses of cash were partially offset by $14.0 million in maturities of marketable securities and $0.8 million received upon the settlement and release of escrowed proceeds related to a prior sale of a non-marketable equity investment.

Net cash used in financing activities was $2.0 million for the three months ended March 31, 2025, compared to $1.7 million for the three months ended March 31, 2024. The uses of cash for the three months ended March 31, 2025 included $1.1 million for the payment of employee payroll taxes in relation to the vesting of restricted share units and $0.9 million for the payment of cash dividends. The uses of cash for the three months ended March 31, 2024 included $0.9 million for the payment of employee payroll taxes in related to the vesting of restricted share units and $0.8 million for the payment of cash dividends.

Our balance sheet reflects working capital of $43.9 million at March 31, 2025, compared to $37.4 million at December 31, 2024. The increase in working capital is primarily a result of an increase in cash and cash equivalents. The Company’s primary source of liquidity as of March 31, 2025 was $77.3 million of cash and cash equivalents and $36.0 million of marketable securities.

The Company also has a $50.0 million revolving credit facility, the availability of which is subject to certain covenants and minimum liquidity requirements. There currently are no outstanding borrowings under the revolving credit facility. The revolving credit facility expires on October 6, 2026, unless earlier renewed or amended. For additional information regarding our revolving credit facility, see Note 8 to the Condensed Consolidated Financial Statements included herein.

On February 20, 2023, we announced that our Board approved a quarterly dividend policy, under which we have paid dividends on a quarterly basis since our adoption of this policy. On February 24, 2025, the Board approved a quarterly cash dividend under this policy of $0.031 per share, which was paid on March 21, 2025 to holders of record of our common stock on March 10, 2025. In addition, on May 5, 2025, the Board approved a quarterly cash dividend under this policy of $0.031 per share, which will be payable on May 30, 2025 to holders of record of our common stock on May 19, 2025.

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

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

On May 8, 2025, the Company’s Board of Directors approved a new share repurchase program for the Company’s common stock, under which the Company may repurchase up to $25 million of outstanding shares of common stock. Pursuant to the authorization, repurchases may be made from time to time in the open market, including under a Rule 10b5-1 plan, through privately negotiated transactions, or otherwise. In addition, any repurchases under the authorization will be subject to prevailing market conditions, liquidity and cash flow considerations, applicable securities laws requirements (including under Rule 10b-18 and Rule 10b5-1 of the Securities Exchange Act of 1934, as applicable), and other factors. The share repurchase program will terminate on the earlier of May 31, 2026 or when the maximum dollar amount has been expended. The share repurchase program does not require the Company to acquire any amount of shares and may be suspended or discontinued at any time.

We believe that our existing cash, cash equivalents, marketable securities, cash generated from operations, and available borrowings under our revolving credit facility will be sufficient to meet anticipated working capital needs, new product development, pay our quarterly dividends, effect any share repurchases we may elect to make under our share repurchase program as described above, and fund capital expenditures for at least the next 12 months and for the foreseeable future thereafter.

The Company’s growth strategy includes acquiring businesses 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, debt, or a combination thereof. The issuance of our stock as consideration for an acquisition or to raise additional capital could have a dilutive effect on earnings per share and could adversely affect our stock price. Our 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 our new revolving credit facility would be dependent on the covenant calculations at the time of borrowing. As of March 31, 2025, we were in compliance with all covenants under our revolving credit facility. 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 provide assurance 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.

The Company is exposed to market risk from changes in interest rates, foreign currency risk, and investment risk. We do not have any commodity price risk.

Interest Rate Risk

As of March 31, 2025, and during the 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, which were $113.3 million at March 31, 2025. Assuming a hypothetical 10% decrease in interest rates for invested balances, interest income from cash and investments would decrease on an annualized basis by $0.4 million.

Foreign Currency Risk

We have foreign currency risks related to our revenue and operating expenses denominated in currencies other than the US dollar, including Canadian dollar, New Zealand dollar, and Australian dollar. Increases or decreases in our foreign-denominated revenue from movements in foreign exchange rates are often partially offset by the corresponding increases or decreases in our foreign-denominated operating expenses.

To the extent that our international operations grow, our risks associated with fluctuation in currency rates will become greater, and we will continue to assess our approach to managing this risk. In addition, currency fluctuations or a weakening US dollar can increase the costs of our international operations. To date, we have not entered into any foreign currency hedging contracts although we may do so in the future.

Investment Risk

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.

We have an investment portfolio that includes strategic investments in privately held companies, which primarily include early-stage companies. We primarily invest in healthcare technology companies that we believe can help expand our ecosystem. We may continue to make these types of strategic investments as opportunities arise that we find attractive. We may experience additional volatility to our Condensed Consolidated Financial Statements due to changes in market prices, observable price changes, and impairments to our strategic investments. These changes could be material based on market conditions and events.

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.

Evaluation of Controls and Procedures

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 Form 10-Q. 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.

Changes in Internal Control over Financial Reporting

There was no change in HealthStream’s internal control over financial reporting that occurred during the first quarter of 2025 that has materially affected, or that is reasonably likely to materially affect, HealthStream’s internal control over financial reporting.

There have been no material changes to the risk factors previously disclosed in Part I, Item 1A of the 2024 Form 10-K, except as set forth below.

Risks Related to Our Business Model

We have been impacted, and may continue to be adversely impacted, by unfavorable conditions and uncertainty impacting the healthcare industry and the U.S. economy more generally.

Macroeconomic conditions in the U.S. continue to be challenging in certain respects, driven by, among other things, persistent inflationary pressures, elevated interest rate levels, ongoing policy-related uncertainty, declining consumer sentiment, heightened geopolitical tensions, including as a result of ongoing conflicts abroad and strained global trade relations. Additional challenges related to macroeconomic conditions in the U.S. that are impacting or may impact healthcare more directly include current or potential policy and regulatory decisions to reduce government funding for certain healthcare provider organizations or programs, tariff-related policies that impact goods and services on which healthcare organizations rely, and uncertainty around potential reduction to payment rates, including through cuts to Medicaid or other payment programs, and potential loss of insurance coverage by individuals. These conditions, have, among other things, limited our ability to forecast future demand for our products and services, contributed to increased volatility in customer demand, and could constrain future access to capital for ourselves, our suppliers, customers, and partners. Moreover, while inflation has decreased in comparison to recent periods, we have experienced, and believe that many of our customers have experienced, increased labor, supply chain, capital, and other expenditures associated with inflationary conditions.

We sell our products and services to large, mid-sized, and small healthcare organizations whose businesses fluctuate based on general economic and business conditions. As such, our operating results may vary based on the level of demand for our solutions by healthcare organizations and the impact of changes in our industry or the economy on us or our clients. For example, we have recently experienced a decrease in demand for certain of our solutions, such as health equity and belonging content, that may be viewed as a more elective type of offering by some of our customers. In addition, a portion of our revenue is attributable to the number of users of our products at each of our clients, which in turn is influenced by the employment and hiring patterns of our clients and potential clients. To the extent that economic uncertainty or weak economic conditions cause our clients and potential clients to freeze or reduce their headcount or operations, demand for our products may be negatively affected. Moreover, current economic conditions and uncertainty have resulted in and may continue to result in overall reductions in spending by some healthcare providers as well as pressure from some clients and potential clients for extended payment terms. If current economic conditions deteriorate, our clients and potential clients may elect to decrease their budgets for our solutions by deferring or reconsidering purchases or could file for bankruptcy, which has occurred from time to time. Such budget decreases or bankruptcy filings would limit our ability to grow our business and negatively affect our operating results.

Economic, regulatory, policy, or other recent developments that adversely or disproportionately impact the healthcare industry may reduce spending on information technology by healthcare organizations and otherwise adversely affect our customer base and our financial results. Healthcare organizations continue to face persistent labor shortages, elevated wage and operating costs, and ongoing uncertainty regarding reimbursement levels. Furthermore, the margins of many healthcare providers are modest, and potential decreases in reimbursement for healthcare costs – whether due to federal or state budgetary constraints, deficit reduction initiatives, reduction or elimination of programs such the 340B Drug Pricing Program, reduction of insurance coverage readily available to individuals, or changes to Medicare and/or Medicaid policy – may reduce the overall solvency of our customers or cause further deterioration in their financial or business condition.

In addition, the U.S. government has recently imposed tariffs on certain foreign goods and has raised the possibility of imposing significant additional tariff increases or expanding the tariffs to capture other countries and types of foreign goods. Trade policies and tariffs affecting imported medical equipment, technology components, and other healthcare-related infrastructure have the potential to increase costs for healthcare organizations, which may reduce demand for our products and adversely impact financial results.

Moreover, budget pressures at the federal and state levels have had and may continue to have a negative impact on spending for many health and human services programs, including Medicare and Medicaid, which represent significant payor sources for our customers. Federal budget initiatives in 2025 include potential significant reductions to the U.S. Department of Health and Human Services (“HHS”) and significant proposals such as the restructuring of Medicaid financing. Alteration or elimination of the ACA and the related insurance coverage available to individuals in connection with the ACA is also under consideration. We anticipate that federal and state budget deficits combined with growing governmental healthcare expenditures will continue to place pressure on governmental healthcare programs. Any actual or potential reductions in government healthcare spending or reduction to readily available health insurance coverage for individuals could result in reduced demand for our products or heightened pricing pressure.

Further, there is ongoing uncertainty regarding the federal budget and federal spending levels, including the possible impacts of a failure to increase the “debt ceiling” and any possible U.S. governmental default on its debt. Additionally, the current presidential administration has implemented the "Department of Government Efficiency" ("DOGE"), an advisory commission focused on restructuring and streamlining government agencies and reducing or eliminating regulations and federal government programs and other expenditures, which has also given rise to separate efforts at the state level to reduce government spending. In March 2025, in accordance with the DOGE Workforce Optimization Initiative, HHS announced a significant agency restructuring, reducing the HHS workforce and consolidating divisions of the agency. Pressures on and uncertainty surrounding the U.S. federal and state annual appropriations, holds on congressionally authorized spending, or interruptions in the distribution of governmental funds, could adversely affect our financial results due to the reliance of many of our customers on payments from third-party healthcare payors, including Medicare, Medicaid, and other government-sponsored programs.

We believe that conditions and uncertainties impacting the healthcare industry and our healthcare customers as described above have adversely affected, and may continue to adversely impact, our business and results of operations, including by lengthening sales cycles, increasing pricing sensitivity, and delaying investment decisions among our customers and potential customers. Moreover, if economic or conditions impacting the healthcare industry or U.S. economy significantly deteriorate, our results of operations, financial position, and/or cash flows could be materially and adversely affected.