Electromed, Inc. 10-K

Item 5. Market For Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities. Market Information Our common stock is listed on the NYSE American under the symbol “ELMD”. As of August 21, 2020, there were 65 registered holders of our common stock. Dividends We have never paid cash dividends on any of our common stock. We currently intend to retain any earnings for use in operations and do not anticipate paying cash dividends in the foreseeable future. The agreement governing our credit facility restricts our ability to pay dividends. Recent Sales of Unregistered Equity Securities None. Purchases of Equity Securities by the Company and Affiliated Purchasers None. Item 6. Selected Financial Data. As a smaller reporting company, we are not required to provide disclosure pursuant to this item. Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations. The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our financial statements and the accompanying notes included elsewhere in this Annual Report on Form 10-K. The forward-looking statements include statements that reflect management’s good faith beliefs, plans, objectives, goals, expectations, anticipations and intentions with respect to our future development plans, capital resources and requirements, results of operations, and future business performance. Our actual results could differ materially from those anticipated in the forward-looking statements included in this discussion as a result of certain factors, including, but not limited to, those discussed in the section entitled “Information Regarding Forward-Looking Statements” immediately preceding Part I of this Annual Report on Form 10-K. 12 Overview Electromed develops and provides innovative airway clearance products applying HFCWO technologies in pulmonary care for patients of all ages. We manufacture, market and sell products that provide HFCWO, including the SmartVest System and related products, to patients with compromised pulmonary function. The SmartVest SQL is smaller, quieter and lighter than our previous product (the SV2100), with enhanced programmability and ease of use. Our products are sold in both the home health care market and the institutional market for use by patients in hospitals, which we refer to as “institutional sales.” The SmartVest SQL has been sold in the domestic home care market since 2014. In 2017, we launched the SmartVest SQL with SmartVest Connect™ wireless technology. The SmartVest System is often eligible for reimbursement from major private insurance providers, health maintenance organizations (“HMOs”), state Medicaid systems, and the federal Medicare system, which is an important consideration for patients considering an HFCWO course of therapy. For domestic sales, the SmartVest System may be reimbursed under the Medicare-assigned billing code for HFCWO devices if the patient has cystic fibrosis, bronchiectasis (including chronic bronchitis or chronic obstructive pulmonary disease that has resulted in a diagnosis of bronchiectasis), or any one of certain enumerated neuromuscular diseases, and can demonstrate that another less expensive physical or mechanical treatment did not adequately mobilize retained secretions. Private payers consider a variety of sources, including Medicare, as guidelines in setting their coverage policies and payment amounts. We employ a direct-to-patient and provider model, through which we obtain patient referrals from clinicians, manage insurance claims on behalf of our patients and their clinicians, deliver our solutions to patients and train them on proper use in their homes. This model allows us to directly approach patients and clinicians, whereby we disintermediate the traditional durable medical equipment channel and capture both the manufacturer and distributor margins. Our key growth strategies for the fiscal 2021 include: ● focus on increasing referrals in the largest, fastest growing segments: adult pulmonology/bronchiectasis; ● increase sales productivity through deeper clinic penetration and market share growth; ● enhance patient and provider support to provide best-in-class customer care; ● expand and promulgate the body of clinical evidence to increase utilization of SmartVest for patients with bronchiectasis; ● continue to develop innovative device features that appeal to patients; and ● grow institutional market share to support home care growth. Critical Accounting Policies and Estimates During the preparation of our financial statements, we are required to make estimates, assumptions and judgments that affect reported amounts. Those estimates and assumptions affect our reported amounts of assets and liabilities, our disclosure of contingent assets and liabilities, and our reported revenues and expenses. We update these estimates, assumptions and judgments as appropriate, which in most cases is at least quarterly. We use our technical accounting knowledge, cumulative business experience, judgment and other factors in the selection and application of our accounting policies. While we believe the estimates, assumptions and judgments we use in preparing our financial statements are appropriate, they are subject to factors and uncertainties regarding their outcome and therefore, actual results may materially differ from these estimates. The following is a summary of our primary critical accounting policies and estimates. See also Note 1 to the Financial Statements, included in Part II, Item 8, of this Annual Report on Form 10-K. COVID-19 Pandemic and CARES Act Funding In March 2020, the World Health Organization designated COVID-19 as a global pandemic. The impact of the COVID-19 pandemic on our business remains uncertain and its effects on our operational and financial performance will depend in part on future developments, which cannot be reasonably estimated at this time. Such future developments include, but are not limited to, the duration, scope and severity of the COVID-19 pandemic in geographic areas in which we operate or in which our patients live, actions taken to contain or mitigate its impact, the impact on governmental healthcare programs and budgets, the development of treatments or vaccines, and the resumption of widespread economic activity. Due to the inherent uncertainty of the unprecedented and evolving situation, we are unable to predict with confidence the likely impact of the COVID-19 pandemic on our future operations. 13 The COVID-19 pandemic has created significant volatility, uncertainty and economic disruption and has negatively impacted business in our industry starting in March 2020. In particular, certain healthcare facilities and clinics restricted access to their clinicians, reducing patient consultations and treatments, or closed temporarily due to the COVID-19 pandemic, which reduced homecare referrals and resulted in institutional orders being postponed. We believe that these and other responses by healthcare systems have had a negative impact on our operating results and cash flows during the fourth quarter of fiscal 2020. As we exited the fourth quarter of fiscal 2020, home care referral levels returned to near prior year levels as government restrictions began to ease and patients began re-engaging with our clinicians. Institutional revenue has been negatively impacted as hospitals and long-term care facilities have adjusted their operating protocols and procurement management since the onset of the COVID-19 pandemic. We expect the impact on our business will continue to lessen during fiscal 2021 and continue to do so in subsequent periods; however, if COVID-19 rates increase and federal, state and local restrictions on commerce, stay-at-home orders or other restrictions on businesses are reinstated, such measures could have a material adverse effect on our business. We believe that the COVID-19 pandemic’s adverse impact on our operating results, cash flows and financial condition will be primarily driven by: the severity and duration of the pandemic; its impact on the U.S. healthcare system and economy; and the timing, scope and effectiveness of U.S. governmental responses to the COVID-19 pandemic. While we have not yet experienced adverse impacts on our supply chain, it is possible the COVID-19 pandemic could have an adverse impact on our supply chain in the future, including impacts associated with preventive and precautionary measures that other businesses and the governments are taking. A reduction or interruption in any of our manufacturing processes could have a material adverse effect on our business. In response to the negative impacts of the COVID-19 pandemic on our business, in April 2020 we initiated cost-containment measures, which included reducing discretionary and variable spend, such as travel, and the use of contractors, consultants, temporary help and employee furloughs in our manufacturing and general and administrative functions due to lower near-term demand for our products. Employee furloughs continued through the end of July 2020, at which time we returned to full employment in both our manufacturing and general and administrative functions. We have also taken measures to ensure the safety of our employees and to comply with applicable governmental orders. We consider our business to be essential under applicable orders due primarily to our role in manufacturing and supplying needed medical devices to patients with respiratory related issues. In response to the COVID-19 pandemic and the U.S. federal government’s declaration of a public health emergency, the CMS implemented a number of temporary rule changes and waivers to allow prescribers to best treat patients during the period of the public health emergency. These waivers are retroactively effective to March 1, 2020. Clinical indications and documentation typically required will not be enforced for respiratory related products including the SmartVest System (solely with respect to Medicare patients). The minimum documentation now requires a valid order and documentation of a respiratory related diagnosis. Face-to-face and in-person requirements for respiratory devices are being waived during such period, which is currently scheduled to expire in October 2020. On April 10, 2020, we received a stimulus payment in the amount of approximately $913,000 under the Provider Relief Fund established pursuant to the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”), which is intended to offset losses in revenue and expenses Medicare fee-for-service providers incurred due to the impacts of the COVID-19 pandemic. We are a Medicare fee-for-service provider, and incurred revenue losses subsequent to receipt of the funds in excess of the amount of the stimulus payment, and recognized the full amount as income during fiscal 2020. Revenue Recognition and Allowance for Doubtful Accounts We measure revenue based on consideration specified in the contract with a customer, adjusted for any applicable estimates of variable consideration and other factors affecting the transaction price, including noncash consideration, consideration paid or payable to customers and significant financing components. Revenue from all customers is recognized when a performance obligation is satisfied by transferring control of a distinct good or service to a customer. 14 Individual promised goods and services in a contract are considered a performance obligation and accounted for separately if the individual good or service is distinct (i.e., the customer can benefit from the good or service on its own or with other resources that are readily available to the customer and the good or service is separately identifiable from other promises in the arrangement). If an arrangement includes multiple performance obligations, the consideration is allocated between the performance obligations in proportion to their estimated standalone selling price, unless discounts or variable consideration is attributable to one or more but not all the performance obligations. Costs related to products delivered are recognized in the period incurred, unless criteria for capitalization of costs under Accounting Standards Codification (“ASC”) 340-40, “Other Assets and Deferred Costs,” or other applicable guidance are met. We include shipping and handling fees in net revenues. Shipping and handling costs associated with the shipment of SmartVest Systems after control has transferred to a customer are accounted for as a fulfillment cost and are included in cost of revenues. Accounts receivable are also net of an allowance for doubtful accounts, which are accounts from which payment is not expected to be received. Management determines the allowance for doubtful accounts by regularly evaluating individual customer receivables and considering a customer’s financial condition and credit history. Receivables are written off when deemed uncollectible. Recoveries of receivables previously written off are recorded when received. We request that customers return previously sold units that are no longer in use to us in order to limit the possibility that such units would be resold by unauthorized parties or used by individuals without a prescription. The customer is under no obligation to return the product; however, we do reclaim the majority of previously sold units upon the discontinuance of patient usage. We are certified to recondition and resell returned SmartVest units. Returned units are typically reconditioned and resold and continue to be used for demonstration equipment and warranty replacement parts. Valuation of Long-Lived and Intangible Assets Long-lived assets, primarily property and equipment and finite-life intangible assets, are evaluated for impairment whenever events or changes in circumstances indicate the carrying value of an asset may not be recoverable. In evaluating recoverability, the following factors, among others, are considered: a significant change in the circumstances used to determine the amortization period, an adverse change in legal factors or in the business climate, a transition to a new product or service strategy, a significant change in customer base, and a realization of failed marketing efforts. The recoverability of an asset or asset group is measured by a comparison of the unamortized balance of the asset or asset group to future undiscounted cash flows. If we believe the unamortized balance is unrecoverable, we would recognize an impairment charge necessary to reduce the unamortized balance to the estimated fair value of the asset group. The amount of such impairment would be charged to operations at the time of determination. Property and equipment are stated at cost less accumulated depreciation. We use the straight-line method for depreciating property and equipment over their estimated useful lives, which range from 3 to 39 years. Our finite-life intangibles consist of patents and trademarks and their carrying costs include the original cost of obtaining the patents, periodic renewal fees, and other costs associated with maintaining and defending patent and trademark rights. Patents and trademarks are amortized over their estimated useful lives, generally 15 and 12 years, respectively, using the straight-line method. Allowance for Excess and Slow-Moving Inventory An allowance for potentially slow-moving or excess inventories is made based on our analysis of inventory levels on hand and comparing it to expected future production requirements, sales forecasts and current estimated market values. Warranty Reserve We provide a warranty on the SmartVest System that covers the cost of replacement parts and labor, or a new SmartVest System in the event we determine a full replacement is necessary. For home care SmartVest Systems initially purchased and currently located in the U.S. and Canada, we provide a lifetime warranty to the individual patient for whom the SmartVest System is prescribed. For sales to institutions within the U.S., and for all international sales, except Canadian home care, we provide a three-year warranty. We estimate, based upon a review of historical warranty claim experience, the costs that may be incurred under our warranty policies and record a liability in the amount of such estimate at the time a product is sold. The warranty cost is based on future product performance and durability and is estimated largely based on historical experience. We estimate the average useful life of our products is approximately five years. Factors that affect our warranty liability include the number of units sold, historical and anticipated rates of warranty claims, the product’s useful life, and cost per claim. At our discretion, based upon the cost to either repair or replace a product, we have occasionally replaced such products covered under warranty with a new or refurbished model. We periodically assess the adequacy of our recorded warranty liability and make adjustments to the accrual as claims data and historical experience warrant. 15 Share-Based Compensation Share-based payment awards consist of options issued to employees. Expense for options is estimated using the Black-Scholes pricing model at the date of grant. The portion of the award that is ultimately expected to vest is recognized on a straight-line basis over the requisite service or vesting period of the award and adjusted upon completion of the vesting period. In determining the fair value of our share-based payment awards, we make various assumptions using the Black-Scholes pricing model, including expected risk-free interest rate, stock price volatility, life and forfeitures. See Note 8 to the Financial Statements included in Part II, Item 8, of this Annual Report on Form 10-K for a description of these assumptions. Results of Operations Fiscal Year Ended June 30, 2020 Compared to Fiscal Year Ended June 30, 2019 Revenues Revenue for the twelve-month periods are summarized in the table below (dollar amounts in thousands). Twelve Months Ended June 30, 2020 2019 Increase (Decrease) Total Revenue $ 32,471 $ 31,300 $ 1,171 3.7 % Home Care Revenue 29,323 28,949 374 1.3 % Institutional Revenue 2,000 1,604 396 24.7 % Home Care Distributor Revenue 430 — 430 — International Revenue 718 747 (29 ) (3.9 %) Home Care Revenue. Our home care revenue increased by 1.3%, or approximately $374,000, for fiscal 2020, compared to fiscal 2019. Home care revenue increased year-over-year predominantly due to a greater percentage of approved referrals and a higher average allowable based on payer mix, which was partially offset by a lower level of referrals as compared to the prior year. The decline in fiscal 2020 referrals was due to a significant decrease in referrals that occurred during the three months ended June 30, 2020 driven by the COVID-19 pandemic. As we exited fiscal 2020, referrals began to come back to pre-COVID-19 levels. Home care referrals benefited from a temporary rule changes and waivers to allow prescribers to best treat patients during the period of the public health emergency. These waivers are retroactively effective to March 1, 2020. Clinical indications and documentation typically required will not be enforced for respiratory related products including the SmartVest System (solely with respect to Medicare patients). The minimum documentation now requires a valid order and documentation of a respiratory related diagnosis. Face-to-face and in-person requirements for respiratory devices are being waived during such period, which is currently scheduled to expire in October 2020. Institutional Revenue. Institutional revenue increased by 24.7%, or approximately $396,000, in fiscal 2020 compared to fiscal 2019. Institutional revenue includes sales to group purchasing organization (“GPO”) members, rental companies and other institutions. The increases in institutional revenue was primarily due to a higher selling price per device and an increase in the number of devices sold as compared to the prior year. Since the onset of the COVID-19 pandemic, institutional revenue has been negatively impacted as hospitals and long-term care facilities have adjusted their operating protocols and procurement management. 16 Home Care Distributor Revenue. Home care distributor revenue was approximately $430,000 for fiscal 2020. We began selling to home medical equipment distributors during fiscal 2020, who in turn sell our SmartVest System in the U.S. home care market. International Revenue. International revenue was approximately $718,000 in fiscal 2020 compared to $747,000 in fiscal 2019. International revenue growth is not a focus for us, and our corporate resources are only focused on supporting and maintaining our current distributors. Gross Profit Gross profit increased to approximately $25,200,000 during fiscal 2020, or 77.6% of net revenues, from approximately $23,848,000, or 76.2% of net revenues, during fiscal 2019. The increase in gross profit was primarily related to increases in domestic home care, institutional revenue and home care distributor revenue. The increase in gross profit as a percentage of net revenue was driven by a higher average allowable due to payer mix compared to the prior fiscal year. We believe as we continue to grow revenue we will be able to leverage manufacturing costs, although there can be fluctuations on a short-term basis related to average reimbursement based on the mix of referrals during any given period. Factors such as diagnoses that are not assured of reimbursement, insurance programs with lower allowable reimbursement amounts (for example, state Medicaid programs), and whether an individual patient meets prerequisite medical criteria for reimbursement, may have an effect on average reimbursement received on a short-term basis. Operating Expenses Selling, General and Administrative Expenses. Selling, general and administrative (“SG&A”) expenses for fiscal 2020 were approximately $19,945,000, compared to approximately $20,435,000 for the prior year, a decrease of approximately $490,000, or 2.4%. SG&A payroll and compensation-related expenses decreased by approximately $687,000, or 5.2%, to approximately $12,461,000. The decrease was due to eliminating certain sales roles during the latter part of fiscal 2019, a lower number of administrative roles and lower share-based compensation expense. Professional and legal fees increased by approximately $487,000 to approximately $2,002,000 in fiscal 2020, compared to approximately $1,524,000 in fiscal 2019. These fees are primarily for services related to legal costs, shareowner services and reporting requirements, information technology (“IT”) technical support, and consulting fees for enhancing our market development strategy. The increase in professional fees were primarily in legal, consulting and shareowner services. Recruiting fees were approximately $430,000 in fiscal 2020, representing an increase of approximately $174,000, or 68.0%, as compared to the prior year. The increase in recruiting fees was due primarily to hiring a greater number of employees in sales and administrative roles as compared to the prior year. Travel, meals and entertainment expenses were approximately $1,944,000 for fiscal 2020 compared to $2,341,000 in the prior year, a decrease of approximately $397,000, or 17.0%. The decrease was due primarily to eliminating certain sales roles during fiscal 2019 and a lower level of travel due to the COVID-19 pandemic during the three months ended June 30, 2020. Depreciation and amortization expense was approximately $397,000 for fiscal 2020 compared to $537,000 in the prior year, a decrease of approximately $140,000, or 26.1%. The decrease was due primarily to our decision to terminate the lease of a property used for office space on June 30, 2019, which required us to accelerate the amortization of the leasehold improvement assets associated with the property in the amount of approximately $151,000 during the prior fiscal year. Research and Development Expenses. R&D expenses were approximately $1,050,000 and $583,000, or 3.2% and 1.9% of net revenues, for fiscal 2020 and 2019, respectively. As a percentage of sales, we expect spending on R&D expenses to increase slightly during the fiscal year ended June 30, 2021 as compared with fiscal 2020 with engineering resources focusing on next generation product enhancements. Certain expenses related to our innovation investments are not always captured in R&D expenses. These expenses may be included in cost of revenue as in the case of depreciation of tooling, or for SG&A, in the case of professional fees or higher labor expense, as we improve our internal processes or enhance our customer service. 17 Government Stimulus Income. In fiscal 2020, we recorded $913,000 of government stimulus income related to general distribution funds received from the Provider Relief Fund established by the CARES Act for Medicare fee-for-service providers due to lost revenues resulting from the COVID-19 pandemic. Interest Income, net Net interest income was approximately $121,000 during fiscal 2020 compared to net interest income of $91,000 during the prior fiscal year. Increases in net interest income was primarily driven by the payoff of our term loan of approximately $1,103,000 on December 18, 2018. Income Tax Expense During fiscal 2020, we recorded a current income tax expense of $1,078,000. Estimated income tax expense during fiscal 2020 includes a current tax expense of $1,204,000 and a deferred benefit of $126,000. Estimated income tax expense for fiscal 2020 includes a discrete current tax benefit of approximately $358,000 related to the excess tax benefit of non-qualified stock options exercised. In fiscal 2019, we recorded a current income tax expense of $940,000. Estimated income tax expense during fiscal 2019 includes a current tax expense of $1,205,000 and a deferred benefit of $265,000. Estimated income tax expense for fiscal 2019 includes a discrete deferred tax expense of approximately $157,000 related to unexercised fully vested stock options that expired and a discrete current tax benefit of approximately $14,000 related to the excess tax benefit of non-qualified stock options exercised. The effective tax rates were 20.6% and 32.3% for fiscal 2020 and 2019, respectively. The effective tax rates differ from the statutory federal rate due to the effect of state income taxes, R&D tax credits, the domestic production activities deduction and other permanent items that are non-deductible for tax purposes relative to the amount of taxable income. Net Income Net income for fiscal 2020 was approximately $4,161,000, compared to net income of approximately $1,980,000 in fiscal 2019. The year-over-year increase in net income was driven primarily by an increase in gross profit on higher revenue, government stimulus income related to the COVID-19 pandemic and lower payroll and compensation expenses, which was partially offset by an increase in investments in R&D and higher professional fees. Fiscal 2020 net income also benefited by a discrete current tax benefit of approximately $358,000 related to the excess tax benefit of non-qualified stock options exercised. Liquidity and Capital Resources Cash Flows and Sources of Liquidity Cash Flows from Operating Activities For fiscal 2020, our net cash provided by operating activities was approximately $4,196,000. Cash flows from operating activities consisted of net income of approximately $4,161,000, non-cash expenses of approximately $1,517,000, a decrease in contract assets of $93,000 and a decrease in prepaid expenses and other assets of $78,000. These cash flows from operating activities were partially offset by an increase in inventory of $449,000, a decrease in accounts payable and other current liabilities of approximately $472,000, a decrease in income taxes payable of $289,000, an increase in income taxes receivable of $262,000 and an increase in accounts receivable of $181,000. 18 Cash Flows from Investing Activities For fiscal 2020, cash used in investing activities was approximately $977,000. Cash used in investing activities primarily consisted of approximately $844,000 in expenditures for property and equipment and $133,000 in payments for patent and trademark costs. Cash Flows from Financing Activities For fiscal 2020, cash used in financing activities was approximately $548,000, consisting of $628,000 for taxes paid on behalf of employees for stock options that were exercised on a net basis, which was partially offset by $80,000 of proceeds received from stock options exercised. Adequacy of Capital Resources Our primary working capital requirements relate to adding employees to our sales force and support functions, continuing R&D efforts, and supporting general corporate needs, including financing equipment purchases and other capital expenditures incurred in the ordinary course of business. Based on our current operational performance, we believe our working capital of approximately $25,036,000 and available borrowings under our existing credit facility will provide adequate liquidity for fiscal 2021. Effective December 18, 2019, we renewed our credit facility, which provides us with a revolving line of credit. Interest on borrowings on the line of credit accrues at the prime rate (3.25% at June 30, 2020) less 1.00% and is payable monthly. There was no outstanding principal balance on the line of credit as of June 30, 2020 or June 30, 2019. The amount eligible for borrowing on the line of credit is limited to the lesser of $2,500,000 or 57.00% of eligible accounts receivable, and the line of credit expires on December 18, 2020, if not renewed. At June 30, 2020, the maximum $2,500,000 was available under the line of credit. Payment obligations under the line of credit are secured by a security interest in substantially all of our tangible and intangible assets. The documents governing our line of credit contain certain financial and nonfinancial covenants that include a minimum tangible net worth of not less than $10,125,000 and restrictions on our ability to incur certain additional indebtedness or pay dividends. Any failure to comply with these covenants in the future may result in an event of default, which if not cured or waived, could result in the lender accelerating the maturity of our indebtedness, preventing access to additional funds under the line of credit, requiring prepayment of outstanding indebtedness, or refusing to renew the line of credit. If the maturity of the indebtedness is accelerated or the line of credit is not renewed, sufficient cash resources to satisfy the debt obligations may not be available and we may not be able to continue operations as planned. If we are unable to repay such indebtedness, the lender could foreclose on these assets. During fiscal 2020 and 2019, we spent approximately $844,000 and $1,331,000, respectively, on property and equipment. We currently expect to finance planned equipment purchases with cash flows from operations or borrowings under our credit facility. We may need to incur additional debt if we have an unforeseen need for additional capital equipment or if our operating performance does not generate adequate cash flows. Off-Balance Sheet Arrangements We have no off-balance sheet arrangements. New Accounting Pronouncements In February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-02, “Leases (Topic 842)” (“ASU 2016-02”). This standard requires the recognition of all lease transactions on the balance sheet as a lease liability and a right-of-use asset (as defined in ASU 2016-02). ASU 2016-02 to Topic 842 – Leases (“ASC 842”) became effective on July 1, 2019 and was applied retrospectively to all periods presented. We applied the practical expedient to calculate the present value of the fixed payments without having to perform an allocation to lease and non-lease components. 19 Impact on Previously Reported Results: The following table presents a recast of selected unaudited statement of operations line items after giving effect to the adoption of ASC 842: For the twelve months ended June 30, 2019 As Previously Reported Effect of Adoption As Adjusted Net revenues $ 31,299,750 $ — $ 31,299,750 Cost of revenues 7,451,806 — 7,451,806 Gross profit 23,847,944 — 23,847,944 Operating expenses Selling, general and administrative 20,446,122 (11,112 ) 20,435,010 Research and development 583,311 — 583,311 Total operating expenses 21,029,433 (11,112 ) 21,018,321 Operating income 2,818,511 11,112 2,829,623 Interest income, net 90,707 — 90,707 Net income before income taxes 2,909,218 11,112 2,920,330 Income tax expense 940,000 — 940,000 Net income $ 1,969,218 $ 11,112 $ 1,980,330 Income per share: Basic $ 0.24 $ 0.00 $ 0.24 Diluted $ 0.23 $ 0.00 $ 0.23 The following table presents a recast of selected unaudited balance sheet line items after giving effect to the adoption of ASC 842: June 30, 2019 As Previously Reported Effect of Adoption As Adjusted Assets Other assets $ — $ 45,044 $ 45,044 Liabilities and Shareholder’s Equity Current maturities of other long-term liabilities — 30,320 30,320 Other long-term liabilities — 14,737 14,737 Retained earnings 9,522,076 (12 ) 9,522,064 The following table presents a recast of selected unaudited statement of cash flow line items after giving effect to the adoption of ASC 842: For the Twelve months ended June 30, 2019 As Previously Reported Effect of Adoption As Adjusted Cash Flow from Operating Activities Net income $ 1,969,218 $ 11,112 $ 1,980,330 Changes in operating assets and liabilities: Prepaid expenses and other assets 404,234 187,223 591,457 Accounts payable and accrued liabilities (2,564 ) (198,335 ) (200,899 ) 20 Item 7A. Quantitative and Qualitative Disclosures About Market Risk. As a smaller reporting company, we are not required to provide disclosure pursuant to this item. 21