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Item 7. Management’s Discussion and Analysis

2021-02-26 compared with 2020-02-26 · 190 added, 149 removed, 169 unchanged (67% of the section changed)

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The following discussion addresses our 2020 and 2019 results and year-to-year comparisons between 2020 and 2019.

A discussion of 2017 results and year-to-year comparisons between 2018 and 2017 can be found in our Annual Report on Form 10-K for the fiscal year ended December 31, 2018, filed with the SEC on February 25, 2019, under Part II, Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations.

HealthStream provides workforce development and provider solutions for healthcare organizations—all designed to support 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.

A discussion of year-to-year comparisons between 2019 and 2018 can be found in our Annual Report on Form 10-K for the fiscal year ended December 31, 2019, filed with the SEC on February 26, 2020, under Part II, Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations.

HealthStream provides workforce and provider solutions for healthcare organizations—all designed to support 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, scheduling, 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.

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).

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 of the PX business for

periods prior to the closing of the disposition of the PX business on February 12, 2018 are reflected in the Company’s C onsolidated F inancial S tatements as discontinued operations.

This sale of the PX business resulted in the Company’s divestiture of the patient experience solutions business segment.

Revenues for the year ended December 31, 2019 were $254.1 million, compared to $231.6 million for the year ended December 31, 2018, an increase of 10%.

Operating income decreased by 5% to $14.7 million for 2019, compared to $15.5 million for 2018, and was negatively impacted by the approximately $2.2 million expense associated with the June 2019 stock grant to employees in connection with the contribution of stock by our CEO to the Company to enable such stock grants.

Income from continuing operations increased by 7% to $14.2 million for 2019, compared to $13.3 million for 2018.

Earnings per share (EPS) from continuing operations were $0.44 per share (diluted) for 2019, compared to $0.41 per share (diluted) for 2018.

Net income decreased to $15.8 million for 2019, compared to $32.2 million for 2018, which decrease was primarily driven by the $19.0 million gain, net of tax, recorded on the sale of the PX business in 2018.

Revenues for the year ended December 31, 2020 were $244.8 million, compared to $254.1 million for the year ended December 31, 2019, a decrease of 4% primarily due to a decline of $20.5 million from the legacy resuscitation products partially offset by increases in other workforce and provider revenues, including revenues from recent acquisitions, of $11.2 million.

Gross margins improved to 63.5% during 2020 compared to 59.1% in 2019.

Operating income increased by

7 % to $15.8 million for 2020 , compared to $14.7 million for 2019 .

Income from continuing operations de creased by 1 % to $14.1 million for 2020 , compared to $14.2 million for 2019 .

Earnings per share (EPS) from continuing operations were $0.44 per share (diluted) for both 2020 and 2019 , respectively .

Net income decreased to $14.1 million for 2020 , compared to $15.8 million for 2019 .

Earnings per share were $0.44 per share (diluted) for 2020 , compared to $0.49 per share (diluted) for 2019 .

Revenues from Workforce Solutions grew by 10%, or $18.5 million, and revenues from Provider Solutions grew by 10%, or $4.0 million.

Revenues from Workforce Solutions declined by 5 %, or $11.0 million, and revenues from Provider Solutions grew by 4 %, or $1.7 million.

As of December 31, 2020 , the Company had approximately 4.22 million contracted subscriptions to hStream TM , our Platform-as-a-Service technology.

During 2020, the Company completed four acquisitions for approximately $121.

3 million in cash and made approximately $20.0 million of share repurchases.

As of December 31, 2020 , cash and investment balances approximated $46.5 million, and the Company maintained full availability under its $ 65 .0 million revolving credit facility.

Since the beginning of 2019, we have completed seven acquisitions.

We acquired Providigm in January 2019, and we acquired substantially all the assets of CredentialMyDoc in December 2019.

Moreover, in March 2020, we acquired NurseGrid, in October 2020, we acquired ShiftWizard, and in December 2020, we acquired ANSOS as well as substantially all the assets of myClinicalExchange.

In January 2021, we acquired ComplyALIGN.

For additional information regarding acquisitions, please see Note 8 of the Consolidated Financial Statements and Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, included elsewhere in this report.

IMPACT AND RESPONSE TO COVID-19 PANDEMIC

The COVID-19 pandemic, which spread throughout the world and the United States during 2020 and has resulted in a significant economic downturn, persists despite vaccines beginning to be administered in the United States and abroad.

While the vaccines currently approved for distribution appear promising, uncertainty remains regarding the extent to which the availability of these vaccines will positively impact public health conditions and whether new, potentially more contagious and/or virulent strains of COVID-19 may pose additional public health risks.

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

Our business is focused on providing workforce and provider solutions to healthcare organizations, and as such the pandemic’s adverse impact on healthcare organizations has resulted in an adverse impact on our Company.

Although we believe that COVID-19 did not have a significant negative impact on our revenues or net income during 2020, certain developments related to COVID-19 have negatively impacted, and are expected to continue to negatively impact, our business during 2021 and potentially thereafter, as described below.

In particular, sales cycles have been delayed or postponed such that declines in sales bookings by customers during 2020 will result in a negative impact to revenue and earnings in 2021 and potentially thereafter.

Our operating income for the year ended December 31, 2020 benefited from a temporary reduction of operating expenses related to COVID-19 conditions, but the operating expense reduction itself—despite its positive impact on operating income—is indicative of the negative impact the pandemic is having on new bookings and renewals.

We have experienced, and expect to continue to experience, delayed and reduced bookings and renewals due to the pandemic.

Given that we sell multiple year subscriptions to our solutions, the revenue impact of lost or delayed sales in a given period generally does not manifest until future periods, just as the revenue we recognize in a given period is generally the result of sales from a prior period.

Since mid-March 2020, our sales organization has been unable to travel and conduct onsite sales meetings with existing or prospective customers, and we have also cancelled tradeshows, which typically provide future sales opportunities.

As a result, operating income benefitted from a $3.6 million reduction in operating expense related to the discontinuance of travel and a $0.8 million reduction in operating expenses related to the cancellation of tradeshows during 2020 compared to 2019.

The extent, timing, and duration of the impacts of the COVID-19 pandemic on our business remain uncertain, and will depend upon, among other things, the length and severity of the pandemic, particularly with respect to the pandemic’s ongoing impact on healthcare organizations.

We continue to closely monitor 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 the safety and well-being of our employees, assisting our customers in this time of need, and mitigating operational and financial impacts to our business.

We intend to continue serving our customers both in their battle to defeat the coronavirus and across the continuum of their other workforce and provider solution needs.

In February 2020, our customers began using our proprietary technology platform to author and deliver COVID-19 training and education courses to their staff as they began to prepare for caring for COVID-19 patients.

In March 2020, we made available to all caregivers, free of charge, a curated library of proprietary content and to our customers, a bundle of cross-training courses to further their staff’s preparation to deliver safe and effective care to COVID-19 patients.

resulted in approximately 3.9 million course completions related to COVID-19 through December 31, 2020, including courses self-authored by customers and proprietary courses, over our technology platform.

Additionally, as previously announced, HealthStream, in partnership with the State of Tennessee Office of the Governor, has been 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 that have been set-up across the state.

This COVID-19 Rapid Response Program continues to be provided free of charge.

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.

We have not established a date to return to non-remote working conditions.

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, the extent to which certain healthcare organizations continue to receive and/or are eligible to utilize governmental funds as the result of federal stimulus and relief measures, and ongoing public health conditions related to the pandemic are important factors that may impact our business.

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, the cost of providing emergency care as the result of treating COVID-19 cases has increased;

however, some healthcare organizations have been able to offset, at least in part, adverse impacts from the pandemic with the benefit of governmental funds received as the result of federal stimulus and relief measure as noted above.

Healthcare organizations are likely to continue to be adversely impacted by the pandemic, particularly if hospitalizations related to COVID-19 show surges similar to those experienced at various times in 2020.

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

pay for our solutions in a timely manner, in full, or at all;

implement solutions they have purchased from us;

renew existing or purchase new products or services from us.

We monitor our cash position and credit exposure by evaluating, among other things, weekly cash receipts, days sales outstanding (DSO), customer requests to modify payment or contract terms, and bankruptcy notices.

We experienced modest increases in DSO during 2020 compared to 2019 as a result of slower payments from customers, while bad debts were not significantly different from pre-pandemic levels.

While we have not experienced any adverse impacts to customer defaults resulting from COVID-19, we are unable to know whether or to what extent future negative trends related to the pandemic may arise or increase over time.

Any deterioration in the collectability (or the timing of payments) of our accounts receivable 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 made available for use.

To the extent our customers delay or fail to implement products they have previously purchased, our financial results will be adversely impacted.

While we have experienced a negative impact from certain implementation delays related to COVID-19, these delays have not been consistent across products or across customers.

Our Provider Solutions business segment has, in some instances, been 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 have also adversely impacted the ability or willingness of some customers to renew their contracts with us, or to renew contracts at the same levels.

For example, renewing customers that have reduced or expect to reduce the number of their staff due to COVID-19 may not have a need to renew their contracts for as many user subscriptions as purchased under their previous contracts.

Pandemic-related conditions have also delayed or otherwise adversely impacted our ability to enter into contracts with new potential customers, as some potential customers have been focused on dealing with the impact and demands that COVID-19 is having on their businesses.

In addition, many existing or potential customers are not currently allowing vendors, including representatives of the Company, on their premises, which has reduced, and will likely continue to reduce, the ability of our sales team to make sales they otherwise would likely make but for the impact of COVID-19.

In addition, our customers’ uncertainties due to COVID-19, combined with the inability to travel and conduct tradeshows, has had, and is likely to continue to have, a negative impact on our sales volumes.

As the pandemic has persisted, we have, however, continued to evolve our sales approach such that our sales representatives are in frequent contact with customers via video conference and other remote means that do not require physical travel or onsite visits to our customers’ facilities.

While COVID-19 has had a negative impact on sales volumes, particularly at times when surges in hospitalizations reach or threaten to outpace the capacity of our customers to respond

while also maintaining their standard operations, sales have continued throughout the pandemic albeit at a reduced bookings volume .

Our business also relies on a network of partners whose solutions we resell or whose solutions are sold and delivered over our platform.

At least one of our partners has declared and emerged from bankruptcy during the pandemic, though such partner’s operations were not discontinued as part of the bankruptcy process.

To the extent that COVID-19 results in ongoing or increased business disruption or adverse impacts to our partners, such disruptions and adverse impacts could adversely impact our business.

Given the uncertainty surrounding the adverse impacts that COVID-19 could have on our business, we took certain expense management measures in 2020, which included:

Foregoing increases to base salaries in 2020, including executive base salaries, though we expect base salary increases to be reinstated in the normal course in 2021.

Limiting hiring to critical positions, though we expect hiring to return to at or near pre-pandemic levels in 2021.

For a period of time during 2020, limiting the Company’s match to the 401(k) Plan to the previously approved 1% level, rather than providing for a greater match as we did in the prior two years.

Restricting employee business travel.

Cancelling tradeshows and other events where large gatherings may occur.

Requesting key vendors of ours to allow payment term extension without penalty.

Evaluating iterative reductions to our capital expenditures to be deployed on an as-needed basis.

These expense management measures contributed to the decrease in our operating expenses, which declined by approximately $5.6 million (prior to giving effect to the actions noted in the paragraph below) during 2020 compared to 2019.

Additionally, we are continuing to monitor developments regarding the COVID-19 pandemic and may undertake further expense management initiatives in 2021 if we deem necessary.

The Company’s financial performance during the pandemic has remained solid, partly due to the above expense control measures.

While we believe these expense control measures have been prudent in light of conditions that have been impacting our business, we also intend to continue striking a balance to ensure that our operations are financially stable for the future and that we continue to achieve our growth objectives.

In particular, our employees are vitally important to our success and have made numerous contributions during these unprecedented times.

Although we forewent salary increases for 2020, and limited the Company’s 401(k) match to one percent for a period of time during 2020 following the onset of the pandemic as noted above, during the third quarter of 2020 we elected to provide our employees, excluding executive officers, with a supplemental payroll payment and an increase of our 401(k) match from one percent to two percent for all employees.

The supplemental payroll payment approximated the dollar amount of salary increases that were foregone in 2020 as noted above.

The impact of these two items reduced 2020 operating income by approximately $2.1 million.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

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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, is allocated to the separate performance obligations on a relative standalone selling price basis.

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.

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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, 2019, the Company established a valuation allowance of $64,000 for the portion of its deferred tax assets that are not more likely than not expected to be realized.

As of December 31, 2020, the Company established a valuation allowance of $0.6 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 $64,000 as of December 31, 2019.

Software Development Costs

Capitalized software development includes costs to develop, acquire, and maintain our products and applications, including our SaaS-based workforce development and provider solutions platform products, which are accounted for as internal use software.

Capitalized software development includes costs to develop, acquire, and maintain our products and applications, including our SaaS-based workforce and provider solutions products, which are accounted for as internal use software.

For internal use software development, once planning is completed and the software development process begins, internal costs and payments to third parties associated with the software development efforts are capitalized when the life expectancy is greater than one year and the anticipated cash flows are expected to exceed the cost of the related asset.

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We measure any impairment using observable market values or discounted future cash flows from the related long-lived assets.

The cash flow estimates and discount rates incorporate management’s best estimates, using appropriate and customary assumptions and projections at the date of evaluation.

The cash flow estimates and discount

rates incorporate management’s best estimates, using appropriate and customary assumptions and projections at the date of evaluation.

Allowance for Doubtful Accounts

The Company estimates its allowance for doubtful accounts to include accounts that may become uncollectible in the future, along with using a specific identification method in which management considers the facts and circumstances surrounding each potentially uncollectible receivable.

The Company estimates its allowance for doubtful accounts based on its historical collection experience, a review in each period of the status of the then-outstanding accounts receivable, and external market factors.

Uncollectible receivables are written-off in the period management believes it has exhausted its ability to collect payment from the customer.

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Revenues for our Workforce Solutions business segment primarily consist of the following products and services:

provision of services through our SaaS-based platform, authoring tools, a variety of content subscriptions, competency and performance appraisal tools, implementation and consulting services, content development, training, and a variety of other educational activities to serve professionals that work within healthcare organizations.

provision of services through our hStream TM platform, learning management applications, a variety of training and development content subscriptions, staff scheduling software solutions, competency and performance appraisal tools, and training, implementation 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, call center, and enrollment administration for healthcare organizations.

Cost of Revenues (excluding depreciation and amortization).

Cost of revenues (excluding depreciation and amortization) consists primarily of salaries and employee benefits, stock based compensation, employee travel and lodging, materials, contract labor, hosting costs, and other direct expenses associated with revenues, as well as royalties paid by us to content providers based on a percentage of revenues.

Personnel costs within cost of revenues are associated with individuals that facilitate product delivery, provide services, handle customer support calls or inquiries, manage the technology infrastructure for our applications, manage content, and provide training or implementation services.

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

Other Income (Expense), Net.

Other Income, Net.

The primary component of other income is interest income related to interest earned on cash, cash equivalents, and investments in marketable securities.

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Revenues, net.

Revenues increased approximately $22.5 million, or 10%, to $254.1 million for 2019 from $231.6 million for 2018.

Revenues decreased approximately $9.3 million, or 4%, to $244.8 million for 2020 from $254.1 million for 2019.

A comparison of revenues by business segment is as follows (in thousands):

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Provider Solutions

Revenues for Workforce Solutions, which are primarily subscription-based, increased $18.5 million, or 10%, to $208.6 million for 2019 from $190.1 million for 2018.

Revenues in 2019 were positively impacted by higher revenues from our legacy resuscitation products, which were $58.9 million for 2019 compared to $54.6 million for 2018, and growth in platform and content subscriptions.

The acquisition of Providigm, LLC in January 2019 also added $6.9 million of revenue to 2019.

Revenues for Workforce Solutions, which are primarily subscription-based, decreased $11.0 million, or 5%, to $197.6 million in 2020 from $208.6 million in 2019.

Revenues in 2020 were negatively impacted by lower revenues from our legacy resuscitation products, which were $38.4 million for 2020 compared to $58.9 million for 2019, a decrease of $20.5 million.

Other workforce revenues, including revenues from acquisitions during 2020, increased by $9.4 million, or 6%, and included growth in platform and content subscriptions of $7.1 million, or 5%.

Revenues from acquisitions during 2020 were approximately $2.3 million, net of deferred revenue write-downs.

At December 31, 2020, the Company had 4.22 million contracted subscriptions to hStream TM , our Platform-as-a-Service technology, as compared to 3.15 million contracted subscriptions at December 31, 2019.

Revenues for Provider Solutions increased $1.7 million, or 4%, to $47.2 million for 2020 from $45.5 million for 2019.

Revenue growth in 2019 was primarily a result of new VerityStream subscriptions and professional services for client implementations.

Revenue growth in 2019 was primarily attributable to revenues from the CredentialMyDoc acquisition completed in December 2019.

Cost of Revenues (excluding depreciation and amortization).

Cost of revenues increased $7.9 million, or 8 %, to $103.9 million for 2019 from $96.0 million for 2018 .

Cost of revenues as a percentage of revenues was 41% of revenues for both 2019 and 2018 .

Cost of revenues for Workforce Solutions increased $6.2 million to $88.6 million and approximated 42% and 43% of revenues for Workforce Solutions for 2019 and 2018, respectively.

The increase in expense primarily resulted from increased royalties paid by us resulting from growth in content subscription revenues, additions to personnel during 2019, operating expenses associated with the Providigm business acquired in January 2019, and stock based compensation related to the stock awards granted during the three months ended June 30, 2019 in connection with the contribution of stock by our chief executive officer to enable such grants.

Cost of revenues for Provider Solutions increased $1.7 million to $15.3 million and approximated 34% and 33% of Provider Solutions revenues for 2019 and 2018, respectively.

The increase is primarily associated with additions to personnel and increased hosting costs.

Cost of revenues decreased $14.6 million, or 14%, to $89.3 million for 2020 from $103.9 million for 2019.

Cost of revenues as a percentage of revenues was 36% and 41% of revenues for 2020 and 2019, respectively

Cost of revenues for Workforce Solutions decreased $15.1 million to $73.5 million and approximated 37% and 42% of revenues for Workforce Solutions for 2020 and 2019, respectively.

The decrease is primarily associated with the lower royalty expense associated with the decline in the legacy resuscitation revenues along with the favorable $3.4 million contractual adjustment that resulted in a decrease to royalty expense upon the resolution of a mutual disagreement relating to various elements of a past partnership recorded in the first quarter of 2020.

These declines in cost of revenues were partially offset by an increase in personnel associated with the 2020 acquisitions.

Cost of revenues for Provider Solutions increased $0.5 million to $15.8 million and approximated 34% of Provider Solutions revenues for both 2020 and 2019.

The increase is primarily associated with additions to personnel and increased contract labor costs, partially offset by a reduction in travel and entertainment costs resulting from the COVID-19 pandemic conditions as set forth above.

Product Development.

Product development expenses increased $3.2 million, or 11%, to $32.3 million for 2020 from $29.1 million for 2019.

Product development expenses as a percentage of revenues were 11% of revenues for both 2019 and 2018.

Product development expenses for Workforce Solutions increased $3.0 million to $23.9 million and approximated 11% of revenues for Workforce Solutions for both 2019 and 2018.

The increase is primarily due to additions to personnel during 2019, the Providigm acquisition, and stock based compensation related to the stock awards granted during the three months ended June 30, 2019 as noted above.

Product development expenses as a percentage of revenues were 13% and 11% of revenues for 2020 and 2019, respectively.

Product development expenses for Workforce Solutions increased $1.6 million to $25.5 million and approximated 13% and 11% of revenues for Workforce Solutions for 2020 and 2019, respectively.

The increase is primarily due to an increase in personnel associated with the 2020 acquisitions, partially offset by a decrease in travel and entertainment costs resulting from the COVID-19 pandemic conditions as set forth above.

Product development expenses for Provider Solutions increased $1.6 million to $6.8 million and approximated 14% and 11% of revenues for Provider Solutions for 2020 and 2019, respectively.

The increase is primarily due to additions to personnel during 2019 as well as stock based compensation related to the stock awards granted during the three months ended June 30, 2019 as noted above.

The increase is primarily due to increased personnel and contract labor over 2019.

Sales and Marketing.

Sales and marketing expenses, including personnel costs, increased $2.2 million, or 6%, to $37.9 million for 2019 from $35.7 million for 2018.

Sales and marketing expenses were 15% of revenues for both 2019 and 2018.

Sales and marketing expenses for Workforce Solutions increased $2.2 million to $30.6 million and approximated 15% of revenues for Workforce Solutions for both 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 as noted above, and sales and marketing expense associated with the Providigm business acquired in January 2019.

Sales and marketing expenses for Provider Solutions increased $0.1 million to $6.2 million and approximated 14% and 15% of revenues for Provider Solutions for 2019 and 2018, respectively.

The increase in expense is primarily due to higher marketing expenses.

The unallocated corporate portion of sales and marketing expenses decreased by $48,000 to $1.1 million for 2019.

Sales and marketing expenses, including personnel costs, decreased $2.6 million, or 7%, to $35.3 million for 2020 from $37.9 million for 2019.

Sales and marketing expenses were 14% and 15% of revenues for 2020 and 2019, respectively.

Sales and marketing expenses for Workforce Solutions decreased $2.7 million to $28.0 million and approximated 14% and 15% of revenues for Workforce Solutions for 2020 and 2019, respectively.

The decrease is primarily due to lower sales commissions, consistent with the decreases in revenues, decreases in travel and entertainment expenses as well as tradeshow expenses as a result of the COVID-19 pandemic conditions as set forth above, and declines in general

marketing expenses , but were partially offset by increases to personnel associated with the 2020 acquisitions .

Sales and marketing expenses for Provider Solutions increased $62,000 to $6.2 million and approximated 13% and 14% of revenues for Provider Solutions for 2020 and 2019 , respectively.

The unallocated corporate portion of sales and marketing expenses were approximate ly $1.1 million for both 2020 and 2019.

Other General and Administrative Expenses.

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Other general and administrative expenses for Workforce Solutions increased $1.7 million to $16.1 million and approximated 8% and 7% of revenues for Workforce Solutions for 2020 and 2019, respectively.

The increase is primarily due to higher personnel costs, increased software expenses, higher facilities expense, and the Providigm acquisition.

The increase is primarily due to the 2020 acquisitions and increases in technology infrastructure expenses.

Other general and administrative expenses for Provider Solutions decreased $0.3 million to $3.4 million and approximated 7% and 8% of revenues for Provider Solutions for 2020 and 2019, respectively.

The decrease is primarily due to a reduction in contract labor and a reduction in facilities expense.

The unallocated corporate portion of other general and administrative expenses increased approximately $2.5 million to $22.6 million over 2018, primarily due to increases to personnel, software expense, other administrative costs, and stock based compensation related to the stock awards granted during the three months ended June 30, 2019 as noted above.

The decrease is primarily due to a reduction in professional services and compensation expenses.

The unallocated corporate portion of other general and administrative expenses approximated $22.5 million in both 2020 and 2019.

The mix of costs was influenced by an increase in acquisition-related expenses and other professional service expenses but was almost entirely offset by reductions in contract labor, share based compensation, office expenses, and travel.

Depreciation and Amortization.

Depreciation and amortization increased $2.3 million, or 8%, to $30.2 million for 2020 from $27.9 million for 2019.

The increase resulted from higher depreciation of property and equipment related to the relocation to our new corporate headquarters, higher amortization of capitalized software development, and amortization of intangibles following our acquisitions of Providigm and CredentialMyDoc in January 2019 and December 2019, respectively.

The increase resulted from higher amortization of capitalized software and intangibles resulting from our recent acquisitions.

Other Income, Net .

Other income, net was $2.0 million for 2020 compared to $3.2 million for 2019.

The increase is due to the $1.3 million decline in the carrying value of non-marketable equity investments recorded in 2018 coupled with higher interest income from cash and investments in marketable securities.

The decrease is due to lower interest income due to reductions in bond yields and bank deposit interest rates partially offset by the $1.2 million gain associated with the change in fair value of the non-marketable equity investment in NurseGrid prior to the acquisition of NurseGrid on March 9, 2020.

Income Tax Provision.

The Company recorded a provision for income taxes of $3.7 million for 2019 compared to $3.3 million for 2018.

The Company’s effective tax rate was 21% for 2019 compared to 20% for 2018.

The increase in income tax expense during 2019 is primarily attributable to the increase in pre-tax income in 2019.

The Company recorded a provision for income taxes from continuing operations of $3.7 million for both 2020 and 2019.

The Company’s effective tax rate was 21% for both 2020 and 2019.

Income from Continuing Operations.

Income from continuing operations was $14.1 million for 2020 compared to $14.2 million for 2019.

Earnings per diluted share from continuing operations were $0.44 and $0.41 per share for 2019 and 2018, respectively.

Earnings per diluted share from continuing operations were $0.44 for both 2020 and 2019.

Income from Discontinued Operations .

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 $1.6 million in 2019 and $19.0 million in 2018.

Net income decreased approximately $16.4 million, or 51%, to $15.8 million for 2019 compared to $32.2 million for 2018.

The decrease resulted primarily from the gain on the sale of the PX business in 2018 as noted above.

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 no gain in 2020 and a gain, net of tax, of $1.6 million in 2019.

Net income decreased $1.7 million, or 11%, to $14.1 million for 2020 compared to $15.8 million for 2019.

Earnings per diluted share were $0.44 per share for 2020, compared to $0.49 per share for 2019.

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 13% to $46.9 million for 2019 compared to $41.5 million for 2018.

Adjusted EBITDA (a non-GAAP financial measure which we define as net income excluding the impact of the deferred revenue write-downs associated with fair value accounting for acquired businesses and before interest, income taxes, stock based compensation, depreciation and amortization, changes in fair value of non-marketable equity investments, and the de-recognition of non-cash royalty expense resulting from our resolution of a mutual disagreement related to various elements of a past partnership which resulted in a reduction to cost of sales in the first quarter of 2020) from continuing operations decreased 2% to $46.0 million for 2020 compared to $47.2 million for 2019.

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 in investors.

Adjusted EBITDA decreased 7% to $46.0 million for 2020 compared to $49.2 million for 2019.

The decrease resulted primarily from the gain on the sale of the PX business in 2019 as noted above.

See Reconciliation of Non-GAAP Financial Measures below for our reconciliation of this calculation to measures under US GAAP.

See Reconciliation of Non-GAAP Financial Measures below for a reconciliation of this calculation to the most comparable measure under US GAAP and information regarding why this non-GAAP financial measure provides useful information to investors.

KEY BUSINESS METRICS

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

Operating Income.

Operating income represents the amount of profit realized from our operations and is calculated as the difference between revenues, net and operating costs and expenses.

Operating income was $15.8 million for the year ended December 31, 2020, compared to $14.7 million for the year ended December 31, 2019.

Management utilizes operating income in connection with managing our business as a key indicator of profitability.

We also believe that operating income is useful to investors as a key measure

of our profitability .

For 2020, and f or several previous years, executive bonuses have been based on the achievement of operating income targets as well.

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 non-operating items, as more specifically set forth below, which may not fully reflect the underlying operating performance of our business.

Management further believes that adjusted EBITDA from continuing operations is a useful measure for evaluating the operating performance of the Company because such measure excludes the gain on sale in connection with the sale of the PX business in February 2018 included in our results of operations during the year ended December 31, 2019, and thus reflects the Company’s ongoing business operations and assists in comparing the Company’s results of operations between periods.

We 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 from continuing operations was $46.0 million for the year ended December 31, 2020, compared to $47.2 million for the year ended December 31, 2019.

hStream Subscriptions.

hStream subscriptions are determined as the number of subscriptions under contract for hStream, our Platform-as-a-Service technology that enables healthcare organizations and their respective workforces to easily connect to and gain value from the growing HealthStream ecosystem of applications, tools, and content.

Our management utilizes hStream subscriptions in connection with managing our business and believes this metric provides useful information to investors as a measure of our progress in growing the value of our customer base.

At December 31, 2020, we had approximately 4.22 million contracted subscriptions to hStream compared to 3.15 million as of December 31, 2019.

Other Developments

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.

Our legacy agreements with Laerdal (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.

Revenue generated by HeartCode and RQI products pursuant to the Legacy Agreements was $38.4 million and $58.9 million in 2020 and 2019, respectively.

In 2020, we expect the revenue from these products generated pursuant to the Legacy Agreements to be approximately $36 million, with quarterly revenues in 2020 anticipated to be as follows:

approximately $11.0 million in the first quarter, approximately $10.5 million in the second quarter, approximately $8.5 million in the third quarter, and approximately $6.0 million in the fourth 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.

We do not expect any revenue from HeartCode and RQI products sold pursuant to the Legacy Agreements in 2021.

On December 6, 2018, we announced a new agreement with RQI Partners, a joint venture between Laerdal and the American Heart Association.

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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 through December 31, 2019.

RQI Partners will remit a fee to us when sales of HeartCode and RQI are delivered via the HealthStream Learning Center.

These fees will not be sufficient to supplant the revenue runout associated with the Legacy Agreements.

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.

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A growing number of customers have been implemented on our new resuscitation offering and the solution is gaining acceptance in the market.

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.

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, are giving rise to additional and higher margin opportunities than those that existed under the Legacy Agreements, and the American Red Cross Resuscitation Suite outperformed our sales expectations in 2020, despite headwinds from COVID-19.

Although revenue and earnings from our current simulation-related offerings in 2021 are not expected to equal the revenue and earnings contribution from the Legacy Agreements in 2020, we believe that the revenue and/or earnings achievable from our current and new simulation-based offerings has the potential over time to exceed what we were able to achieve under the Legacy Agreements, though there is no assurance that we will meet or exceed our performance under the Legacy Agreements, or (even if this occurs) the timeframe over which this may occur.

Reconciliation of Non-GAAP Financial Measures

This report contains certain non-GAAP financial measures, including non-GAAP net income, non-GAAP operating income, adjusted EBITDA from continuing operations, and adjusted EBITDA, which are 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 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 non-cash and/or non-operating items.

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

In order to better assess the Company’s financial results, management believes that net income excluding the impact of the deferred revenue write-downs associated with fair value accounting for acquired businesses and before interest, income taxes, stock based compensation, depreciation and amortization, changes in fair value of non-marketable equity investments, the de-recognition of non-cash royalty expense resulting from our resolution of a mutual disagreement related to various elements of a past partnership which resulted in a reduction to cost of sales in the first quarter of 2020 (adjusted EBITDA) is a useful measure for evaluating the operating performance of the Company because adjusted EBITDA reflects net income adjusted for certain GAAP accounting, non-cash, and/or non-operating items which may not, in any such case, fully reflect the underlying operating performance of our business.

Management also believes that adjusted EBITDA from continuing operations is a useful measure for evaluating the operating performance of the Company because such measure excludes the results of operations of the PX business that we no longer own and the gain on sale in connection with the sale of such 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.

The Company has revised its definition of adjusted EBITDA and adjusted EBITDA from continuing operations to adjust for the impact of the deferred revenue write-downs associated with fair value accounting for acquired businesses and has made this update for the calculation of such non-GAAP financial measures for all periods presented herein.

Following the completion of any acquisition by the Company, the Company must record the acquired deferred revenue at fair value as defined in GAAP, which may result in a write-down of deferred revenue.

If the Company is required to record a write-down of deferred revenue, it may result in lower recognized revenue, operating income, and net income in subsequent periods.

Revenue for any such acquired business is deferred and is typically recognized over a one-to-two year period following the completion of any particular acquisition, so our GAAP revenues for this one-to-two year period will not reflect the full amount of revenues that would have been reported if the acquired deferred revenue was not written down to fair value.

Management believes that including an adjustment in the definition of adjusted EBITDA and adjusted EBITDA from continuing operations for the impact of the deferred write-downs associated with fair value accounting for acquired businesses provides useful information to investors because the deferred revenue write-down recognized in periods after an acquisition may, given the nature of this non-cash accounting impact, cause our GAAP financial results during such periods to not fully reflect our underlying operating performance and thus adjusting for this amount may assist in comparing the Company’s results of operations between periods.

Adjusted EBITDA and adjusted EBITDA from continuing operations are non-GAAP financial measures and should not be considered as measures of financial performance under GAAP.

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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.

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.

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

GAAP income from continuing operations

Deferred revenue write-down

Interest income

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Change in fair value of non-marketable equity investments

Non-cash royalty expense

Adjusted EBITDA from continuing operations

GAAP net income

Deferred revenue write-down

Interest income

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Change in fair value of non-marketable equity investments

Non-cash royalty expense

Adjusted EBITDA

FINANCIAL OUTLOOK FOR 2020

The Company provides projections and other forward-looking information in this Financial Outlook for 2020 section within Management’s Discussion and Analysis of Financial Condition and Results of Operations.

This section contains many forward-looking statements, particularly relating to the Company’s future financial performance.

These forward-looking statements are estimates based on information currently available to the Company, are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995, and are subject to the precautionary statements set forth in the introduction in Part I of this Annual Report on Form 10-K and the risks and uncertainties described in Item 1A, Risk Factors and elsewhere in this report, as well as additional risks or uncertainties not presently known by us, or that we currently deem immaterial.

Actual results are likely to differ, and in the past have differed, materially from those forecast by the Company, depending on the outcome of various factors, including, but not limited to, those set forth in Item 1A, Risk Factors.

We are providing 2020 financial guidance as set forth below:

Full-Year 2020 Guidance

Workforce Solutions

Provider Solutions

Operating Income

Capital Expenditures

Annual Effective Income Tax Rate

Our 2020 Workforce Solutions revenue guidance includes anticipated revenues of approximately $36.0 million from our legacy resuscitation products, representing a decline of $23.0 million from 2019.

We expect the quarterly revenues from the legacy products to be as follows:

approximately $11.0 million in first quarter, approximately $10.5 million in second quarter, approximately $8.5 million in third quarter, approximately $6.0 million in fourth quarter, and approximately zero thereafter.

Our Provider Solutions revenue guidance includes approximately $1.5 million from the recently acquired CredentialMyDoc business.

Our operating income guidance of $12.0 million to $14.5 million is impacted by the anticipated reduction in legacy resuscitation revenues noted above coupled with an anticipated operating loss of $1.0 million related to the CredentialMyDoc acquisition.

Also included in operating income guidance is a one-time favorable contractual adjustment of $3.4 million to royalties expense resulting from our resolution of a mutual disagreement relating to various elements of a past partnership, which adjustment will be recorded in the first quarter of 2020.

SELECTED QUARTERLY OPERATING RESULTS

The following tables set forth selected statements of income data for each of the four quarters in the periods ended December 31, 2019 and December 31, 2018, respectively.

The information for each quarter has been prepared on the same basis as the audited statements included in other parts of this report and, in our opinion, includes all adjustments, consisting of only normal recurring adjustments, necessary for a fair presentation of the results of operations for these periods.

You should read this information in conjunction with HealthStream’s Consolidated Financial Statements and related notes thereto included elsewhere in this report.

The operating results for any quarter are not necessarily indicative of the results to be expected in the future.

Revenues from our subscription-based products are recognized ratably over the subscription term.

Quarter Ended

September 30,

(In thousands, except per share data)

STATEMENT OF INCOME DATA:

Revenues, net

Total operating costs and expenses

Operating income

Income from continuing operations

Income from discontinued operations

Net income per share - diluted (1) :

Continuing operations

Discontinued operations

Net income per share - diluted

Weighted average shares of common stock outstanding - diluted

Quarter Ended

September 30,

(In thousands, except per share data)

STATEMENT OF INCOME DATA:

Revenues, net

Total operating costs and expenses

Operating income

Income from continuing operations

Income (loss) from discontinued operations

Net income per share - diluted (1) :

Continuing operations

Discontinued operations

Net income per share - diluted

Weighted average shares of common stock outstanding - diluted

(1) – Due to the nature of interim earnings per share calculations, the sum of quarterly earnings per share amounts may not equal the reported earnings per share for the full year.

Liquidity and Capital Resources

Net cash provided by operating activities from continuing operations was $65.7 million during 2019 compared to $44.3 million during 2018, an increase of 48%.

The number of days sales outstanding (DSO) was 47 days for 2019 compared to 59 days for 2018.

Net cash provided by operating activities from continuing operations was $35.9 million during 2020 compared to $65.7 million during 2019, a decrease of 45%.

The decrease resulted from lower cash receipts compared to the prior year, primarily resulting from the reduction in legacy resuscitation revenues.

The number of days sales outstanding (DSO) was 51 days for 2020 compared to 47 days for 2019, which increase was partially due to the increase in accounts receivable balances from acquisitions completed in the fourth quarter of 2020.

The Company calculates DSO by dividing the average accounts receivable balance (excluding unbilled and other receivables) by average daily revenues for the year.

The improvement in DSO resulted from improved collections during the year.

The Company’s primary sources of cash were receipts generated from the sales of our products and services.

The primary uses of cash to fund operations included personnel expenses, sales commissions, royalty payments, payments for contract labor and other direct expenses associated with delivery of our products and services, and general corporate expenses.

Net cash used in investing activities was approximately $67.5 million during 2019, while $36.7 million of cash was provided by investing activities during 2018.

During 2019, the Company acquired two businesses, Providigm and CredentialMyDoc,

for a combined $27.0 million, invested in marketable securities of $ 87.3 million, purchased property and equipment of $2 2.0 million, made payments for capitalized software development of $ 14.5 million, and invested $3.

3 million in non-marketable equity investments.

These uses of cash were partially offset by $ 80 .6 million in maturities of marketable securities and $6.

1 million in proceeds from the sale of its PX business segment.

During 2018 , the Company received net proceeds from the sale of the PX business of $44.0 million and had maturities of marketable securities of $69.0 million.

These sources of cash were partially offset by $57.1 million in purchases of marketable securities, $11.3 million spent for capitalized software development, $7.2 million for purchases of property and equipment, and $ 0.

8 million in non-marketable equity investments.

Net cash used in investing activities was approximately $110.4 million during 2020 compared to $67.5 million during 2019.

During 2020, the Company acquired four businesses, NurseGrid, ShiftWizard, ANSOS, and myClinicalExchange, for a combined $121.3 million in cash, invested in marketable securities of $61.2 million, made payments for capitalized software development of $16.8 million, purchased property and equipment of $2.0 million, and invested $1.3 million in non-marketable equity investments.

These uses of cash were partially offset by $92.2 million in sales and maturities of marketable securities.

During 2019, the Company acquired two businesses, Providigm and CredentialMyDoc, for a combined $27.0 million in cash, invested in marketable securities of $87.3 million, purchased property and equipment of $22.0 million, made payments for capitalized software development of $14.5 million, and invested $3.3 million in non-marketable equity investments.

These uses of cash were partially offset by $80.6 million in maturities of marketable securities and $6.1 million in proceeds from the sale of its PX business segment.

Cash used in financing activities was $20.5 million during 2020 compared to $0.9 million during 2019.

The primary uses of cash during 2019 were $1.0 million for payments of payroll taxes from stock based compensation, $58,000 for payments of cash dividends, and $38,000 for payment of an earn-out related to a prior acquisition.

During 2019, the primary source of cash from financing activities resulted from $0.2 million from the exercise of employee stock options.

During 2018, the primary uses of cash were $32.4 million for payments of cash dividends, $0.3 million for payments of payroll taxes from stock based compensation, $100,000 for payment of debt issue costs, and $38,000 for payment of an earn-out related to a prior acquisition.

The primary uses of cash in financing activities during 2020 included $20.0 million for repurchases of common stock and $0.4 million for payments of payroll taxes from stock based compensation.

During 2019, the primary use of cash in financing activities was $1.0 million for payments of payroll taxes from stock based compensation.

During 2019, the primary source of cash from financing activities resulted from $0.2 million from the exercise of employee stock options.

Our balance sheet reflects positive working capital of $119.4 million at December 31, 2019 compared to $134.6 million at December 31, 2018.

The decrease in working capital was primarily due to a reduction in accounts receivable from the prior year.

Our balance sheet reflects negative working capital of $4.7 million at December 31, 2020 compared to positive working capital of $119.4 million at December 31, 2019.

The decrease in working capital was primarily due to a reduction in cash and marketable securities to fund acquisitions and share repurchases.

The Company’s primary source of liquidity is $46.5 million of cash and cash equivalents and marketable securities.

The Company also has a $65.0 million revolving credit facility loan agreement, all of which was available at December 31, 2020.

For additional information regarding our revolving credit facility, see Note 14 to the Company’s Consolidated Financial Statements included elsewhere in this report.

For additional information regarding our

revolving credit facility, see Note 1 4 to the Company’s C onsolidated F inancial S tatements included elsewhere in this report.

We believe that our existing cash and cash equivalents, marketable securities, cash generated from operations, and available borrowings under our revolving credit facility will be sufficient to meet anticipated working capital needs, new product development, and capital expenditures for at least the next 12 months.

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Payments due by period

Operating leases

Purchase obligations

Refer to Note 15 to the Company’s Consolidated Financial Statements included elsewhere in this report for additional information regarding operating leases.

Represents non-cancelable contractual obligations primarily related to information technology assets and our revolving credit facility, which is described further in Note 14 to the Company’s Consolidated Financial Statements included elsewhere in this report.

Operating (a)

Purchase obligations (b)

Refer to Note 15 to the Company’s Consolidated Financial Statements included elsewhere in this report for additional information regarding the Company’s operating leases.

Represents non-cancelable contractual obligations primarily related to information technology assets and our revolving credit facility, which facility is described further in Note 14 to the Company’s Consolidated Financial Statements included elsewhere in this report.

The amounts included above represent the non-cancelable portion of agreements or the minimum cancellation fee.

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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 Company adopt ed this ASU on January 1, 2020 , and t he effect of adoption on the Company’s consolidated financial statements and related disclosures is not expected to be material.

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 prior GAAP and, instead, requires an entity to reflect its current estimate of all expected credit losses.

The Company adopted this ASU on January 1, 2020, and the effect of adoption on the Company’s Consolidated Financial Statements and related disclosures was not material.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis