SECURITIES & EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
[x] Quarterly Report Under Section 13 or 15 (d) of
the Securities Exchange Act of 1934
For Quarterly Period Ended March 31, 2009
[ ] Transition Report Under Section 13 or 18(d) of the Exchange Act
Commission File Number: 0-17449
PROCYON CORPORATION
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(Exact Name of Small Business Issuer as specified in its charter)
COLORADO 59-3280822
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(State of Incorporation) (IRS Employer Identification Number)
1300 S. Highland Ave. Clearwater, FL 33756
------------------------------------------
(Address of Principal Offices)
(727) 447-2998
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(Issuer's Telephone Number)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES [ X ] NO [ ]
Indicate by check mark whether the registrant has submitted electronically and
posted on its corporate Web site, if any, every Interactive Data File required
to be submitted and posted pursuant to Rule 405 of Regulation S-T (ss.232.405 of
this chapter) during the preceding 12 months (or for such shorterperiod that the
registrant was required to submit and post such files). Yes ____ No ____
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of "large accelerated filer," "accelerated filer" and "smaller
reporting company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer _____ Accelerated filer _____
Non-accelerated filer _____ Smaller reporting company X
(Do not check if a smaller reporting company)__
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes [ ] No [ X ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date: Common stock, no par value;
8,055,388 shares outstanding as of May 14, 2009.
PART I. - FINANCIAL INFORMATION
Item Page
---- ----
ITEM 1. FINANCIAL STATEMENTS 3
Index to Financial Statements
Financial Statements:
Consolidated Balance Sheets 3
Consolidated Statements of Operations 4
Consolidated Statements of Cash Flows 5
Notes to Financial Statements 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 12
ITEM 4. CONTROLS AND PROCEDURES 15
PART II. - OTHER INFORMATION
ITEM 6. EXHIBITS 16
SIGNATURES 16
PROCYON CORPORATION & SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
March 31, 2009 and June 30, 2008
(unaudited) (audited)
March 31, June 30,
2009 2008
----------- ----------
ASSETS
CURRENT ASSETS
Cash $ 314,563 $ 278,878
Certificate of Deposits, and accrued interest 246,473 239,698
Accounts receivable, net of $3,500 and $2,500
allowance for doubtful accounts, respectively 193,505 171,494
Inventories 145,453 184,158
Prepaid expenses 181,512 173,490
Deferred tax asset 79,069 132,484
----------- -----------
TOTAL CURRENT ASSETS 1,160,575 1,180,202
PROPERTY AND EQUIPMENT, NET 541,455 555,229
OTHER ASSETS
Deposits 2,575 1,513
Deferred tax asset 963,213 942,738
----------- -----------
965,788 944,251
TOTAL ASSETS $ 2,667,818 $ 2,679,682
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts Payable $ 61,565 $ 105,314
Accrued Expenses 114,012 118,747
Current Portion of Mortgage Payable 24,060 22,790
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TOTAL CURRENT LIABILITIES 199,637 246,851
LONG-TERM LIABILITIES
Mortgage Payable 429,194 447,042
----------- -----------
TOTAL LONG TERM LIABILITIES 429,194 447,042
STOCKHOLDERS' EQUITY
Preferred stock, 496,000,000 shares authorized,
none issued -- --
Series A Cumulative Convertible Preferred stock,
no par value; 4,000,000 shares authorized; 199,100
shares issued and outstanding 154,950 154,950
Common stock, no par value, 80,000,000 shares
authorized; 8,052,388 shares issued and outstanding 4,416,676 4,416,676
Paid-in Capital 6,000 6,000
Accumulated deficit (2,538,639) (2,591,837)
----------- -----------
TOTAL STOCKHOLDERS' EQUITY 2,038,987 1,985,789
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 2,667,818 $ 2,679,682
=========== ===========
The accompanying notes are an integral part of these financial statements.
3
PROCYON CORPORATION & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Three & Nine Months Ended March 31, 2009 and 2008
(unaudited) (unaudited) (unaudited (unaudited)
Three Months Three Months Nine Months Nine Months
Ended Ended Ended Ended
Mar. 31, 2009 Mar. 31, 2008 Mar. 31, 2009 Mar. 31, 2008
------------- ------------- ------------- -------------
NET SALES $ 698,639 $ 625,514 $ 1,979,297 $ 1,963,208
COST OF SALES 150,553 147,466 448,058 471,639
----------- ----------- ----------- -----------
GROSS PROFIT 548,086 478,048 1,531,239 1,491,569
OPERATING EXPENSES
Salaries and Benefits 253,125 230,563 702,157 708,412
Selling, General and Administrative 240,812 232,922 728,878 632,950
----------- ----------- ----------- -----------
493,937 463,485 1,431,035 1,341,362
INCOME FROM OPERATIONS 54,149 14,563 100,204 150,207
OTHER INCOME (EXPENSE)
Interest Income 3,677 4,166 11,474 10,721
Interest Expense (8,192) (8,772) (25,536) (26,112)
----------- ----------- ----------- -----------
(4,515) (4,606) (14,062) (15,391)
INCOME BEFORE INCOME TAXES 49,634 9,957 86,142 134,816
INCOME TAX (EXPENSE) BENEFIT (20,778) 2,169 (32,941) 63,089
----------- ----------- ----------- -----------
NET INCOME 28,856 12,126 53,201 197,905
Dividend requirements on preferred stock (4,978) (4,978) (14,933) (10,133)
----------- ----------- ----------- -----------
Basic net income available to common shares $ 23,878 $ 7,148 $ 38,268 $ 187,772
=========== =========== =========== ===========
Basic net income per common share $ -- $ -- $ -- $ 0.02
Weighted average number of common 8,055,388 8,055,388 8,055,388 8,053,167
=========== =========== =========== ===========
shares outstanding
Diluted net income per common share $ -- $ -- $ -- $ 0.02
Weighted average number of common shares
outstanding, basic and diluted 8,414,259 8,428,866 8,414,259 8,428,866
=========== =========== =========== ===========
The accompanying notes are an integral part of these financial statements.
4
PROCYON CORPORATION & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Nine Months Ending March 31, 2009 and 2008
(unaudited) (unaudited)
March 31, March 31,
2009 2008
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CASH FLOWS FROM OPERATING ACTIVITIES
Net Income $ 53,201 $ 197,905
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation 25,105 26,883
Deferred Income Taxes 32,940 (63,089)
Accrued Interest on Certificates of Deposit (3,258) --
Allowance for doubtful accounts 1,000 --
Decrease (increase) in:
Accounts Receivable (23,401) 57,168
Inventory 38,705 (45,183)
Prepaid Expenses (8,023) (10,040)
Other Assets (1,062) --
Increase (decrease) in:
Accounts Payable (43,749) 21,707
Accrued Expenses (4,739) (23,665)
--------- ---------
NET CASH PROVIDED BY OPERATING ACTIVITIES 66,719 161,686
CASH FLOW FROM INVESTING ACTIVITIES
Purchase of Certificates of Deposit (51,000) (235,000)
Redemption of Certificate of Deposit 47,874 --
Purchase of property & equipment (11,331) (1,911)
--------- ---------
NET CASH USED BY INVESTING ACTIVITIES (14,457) (236,911)
CASH FLOW FROM FINANCING ACTIVITIES
Payments on Mortgage Payable (16,577) (15,324)
--------- ---------
NET CASH USED BY FINANCING ACTIVITIES (16,577) (15,324)
NET CHANGE IN CASH 35,685 (90,549)
CASH AT BEGINNING OF PERIOD 278,878 422,876
--------- ---------
CASH AT END OF PERIOD $ 314,563 $ 332,327
========= =========
SUPPLEMENTAL DISCLOSURES
Interest Paid $ 25,437 $ 26,112
Taxes Paid $ -- $ --
The accompanying notes are an integral part of these financial statements.
5
Notes to Financial Statements
NOTE A - SUMMARY OF ACCOUNTING POLICIES
The interim financial statements included herein have been prepared by the
Company without audit, pursuant to the rules and regulations of the Securities
and Exchange Commission. Certain information and footnote disclosures normally
included in the financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted as allowed by such
rules and regulations. The Company believes that the disclosures are adequate to
make the information presented not misleading. These financial statements should
be read in conjunction with the Company's audited financial statements dated
June 30, 2008. The results for interim periods are not necessarily indicative of
results that may be expected for any other interim period or for the full year.
Management of the Company has prepared the accompanying unaudited condensed
financial statements prepared in conformity with generally accepted accounting
principles, which require the use of management estimates, contain all
adjustments (including normal recurring adjustments) necessary to present fairly
the operations and cash flows for the period presented and to make the financial
statements not misleading.
STOCK-BASED COMPENSATION
In December 2004, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 123R ("SFAS 123R"), "Share-Based Payment,"
which is a revision of Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation." SFAS 123R is effective for small
business publicly traded companies, for interim or annual periods beginning
after December 15, 2005. It supersedes Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees" and amends Statement of Financial
Accounting Standards No. 95, "Statement of Cash Flows." SFAS 123R requires all
share-based payments to employees, including grants of employee stock options,
to be recognized in the statement of operations based upon their fair values and
rescinds the acceptance of pro forma disclosure. SFAS 123R permits two methods
of adoption, a "modified prospective" method and a "modified retrospective"
method. Under the modified prospective method, stock-based compensation cost is
recognized, beginning with the effective date, based on the requirements of SFAS
123R for all share-based payments granted after the effective date and for all
awards granted prior to the effective date that remain unvested on the effective
date. The modified retrospective method includes the requirements of the
modified prospective method and also permits restatement of prior periods based
on amounts previously reported in pro forma disclosures pursuant to SFAS 123 for
either all periods presented or for only prior interim periods of the year of
adoption. We adopted the modified prospective method prescribed in SFAS 123R,
effective January 1, 2006.
On March 31, 2009, there were outstanding options to purchase 300,000
shares of our common stock at exercise prices ranging from $0.16 to $0.21 per
share and expiration dates between December 2009 and November 2010. These
options were vested at the time of grant. During the quarter ended March 31,
2009, no options were granted. Therefore, the adoption of SFAS 123R does not
have an impact on our statement of operations for period ending March 31, 2009.
6
The fair value of a stock option is determined using the Black-Scholes
option-pricing model, which values options based on the stock price at the grant
date, the expected life of the option, the estimated volatility of the stock,
the expected dividend payments, and the risk-free interest rate over the life of
the option. There were no options granted during the quarters ended March 31,
2009 and 2008.
The Black-Scholes option valuation model was developed for estimating the
fair value of traded options that have no vesting restrictions and are fully
transferable. Because option valuation models require the use of subjective
assumptions, changes in these assumptions can materially affect the fair value
of the options. Our options do not have the characteristics of traded options,
therefore, the option valuation models do not necessarily provide a reliable
measure of the fair value of our options.
NOTE B - INVENTORIES
Inventories consisted of the following:
March 31, June 30,
2009 2008
--------- --------
Finished Goods $ 68,138 $109,561
Raw Materials $ 77,315 $ 74,597
-------- --------
$145,453 $184,158
======== ========
NOTE C - STOCKHOLDERS' EQUITY
During January 1995, the Company's Board of Directors authorized the
issuance of up to 4,000,000 shares of Series A Cumulative Convertible Preferred
Stock ("Series A Preferred Stock"). The preferred stockholders are entitled to
receive, as and if declared by the board of directors, quarterly dividends at an
annual rate of $.10 per share of Series A Preferred Stock per annum. Dividends
will accrue without interest and will be cumulative from the date of issuance of
the Series A Preferred Stock and will be payable quarterly in arrears in cash or
publicly traded common stock when and if declared by the Board of Directors. As
of March 31, 2009 no dividends have been declared. Dividends in arrears on the
outstanding preferred shares total $236,394 as of March 31, 2009
Holders of the Preferred Stock have the right to convert their shares of
Preferred Stock into an equal number of shares of Common Stock of the Company.
In addition, Preferred Stock holders have the right to vote the number of shares
into which their shares are convertible into Common Stock. Such preferred shares
will automatically convert into one share of Common Stock at the close of a
public offering of Common Stock by the Company provided the Company receives
gross proceeds of at least $1,000,000, and the initial offering price of the
Common Stock sold in such offering is equal to or in excess of $1 per share. The
Company is obligated to reserve an adequate number of shares of its common stock
to satisfy the conversion of all the outstanding Series A Preferred Stock. There
were no shares converted during the reporting period.
7
The Board of Directors of the Company approved a plan on December 8, 2007
to repurchase shares of Procyon Corporation's outstanding common stock. The
repurchase plan authorizes management to repurchase from time to time up to 10%
of the total outstanding shares of common stock as of December 8, 2007, subject
to applicable SEC regulations and compliance with the Company's trading window
policies. The Board's authorization is based on its belief that Procyon's common
stock is underpriced at times given the Company's working capital, liquidity,
assets, book value and future prospects. The shares may be repurchased from time
to time in the open market, through block purchases or in privately negotiated
transactions depending upon market conditions and other factors, in accordance
with SEC Rule 10b-18. Procyon has no commitment or obligation to purchase all or
any portion of the authorized shares. All shares purchased are canceled and
returned to the status of authorized but unissued common stock. The plan does
not have an expiration date. As of March 31, 2009, no shares of common stock had
been repurchased by the Company pursuant to its repurchase plan.
NOTE D - INCOME TAXES AND AVAILABLE CARRYFORWARD
As of March 31, 2009, the Company had consolidated income tax net operating
loss ("NOL") carryforward for federal income tax purposes of approximately
$2,790,000. The federal NOL will expire in various years ending through the year
2023.
The components of the provision for income taxes (benefits) are
attributable to continuing operations as follows:
Nine Months Nine Months
3/31/09 3/31/08
----------- -----------
Current
Federal $ -- $ --
State -- --
-------- --------
$ -- $ --
Deferred
Federal $ 28,126 $(53,869)
State 4,815 (9,220)
-------- --------
$ 32,941 $(63,089)
======== ========
Deferred income taxes reflect the net tax effects of the temporary
differences between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes. Significant
components of the Company's deferred tax assets and liabilities are as follows:
Current Non-Current
--------- -----------
Deferred tax assets:
Net operating loss & contribution carryforwards $ 77,751 $ 973,801
Allowance for doubtful accounts 1,318 --
Less: Valuation allowance -- --
--------- ---------
79,069 973,801
Deferred tax liability
Excess of tax over book depreciation -- (10,588)
--------- ---------
79,069 963,213
Net deferred tax asset $ 79,069 $ 963,213
========= =========
8
The change in the valuation allowance is as follows:
June 30, 2008 $ --
------
March 31, 2009 --
------
Change in valuation allowance $ --
======
Management believes it is more likely than not it will realize the benefit
of the NOL carryforward, because of its continuing trend of earnings. Therefore,
a valuation allowance is not considered necessary.
Income taxes for the nine month periods ended March 31, 2009, and March 31,
2008, differ from the amounts computed by applying the effective income tax
rates of 37.63% and 37.63%, respectively, to income before income taxes as a
result of the following:
Nine Months Nine Months
03/31/09 03/31/08
----------- -----------
Expected provision (benefit) $ 29,288 $ 45,839
State income taxes net of federal benefits 3,127 4,894
Nondeductible (income) expense 3,662 3,525
Change in estimates (3,136) 12,680
Change in valuation allowance -- (130,027)
--------- ---------
$ 32,941 $ (63,089)
========= =========
NOTE E - MORTGAGE PAYABLE
On July 21, 2006, we entered into a mortgage loan, guaranteed by our C.E.O.
Regina W. Anderson, for $508,000 with the Bank of America for the purchase of
our corporate office building which has a net book value of approximately
$512,000. The mortgage loan is due in 15 years and interest is fixed at 7.25%.
Interest expense was $25,536 for the nine months ended March 31, 2009.
9
Maturities of long-term debt associated with the mortgage payable are as
follows:
Year Ending June 30,
--------------------------------------
3 months 2009 $ 5,853
2010 24,498
2011 26,335
2012 28,309
2013 30,431
2014 and thereafter 337,828
--------
453,254
Less current portion 24,060
--------
$429,194
========
NOTE F - LINE OF CREDIT
The Company has a $250,000, due-on-demand line of credit with a financial
institution, collateralized by the Company's inventory of $145,453 and accounts
receivable assets of $193,505. The line of credit is renewable annually in
April. The C.E.O. of the Company personally guaranteed the line of credit to the
Company. At March 31, 2009, the Company owed $0 on the line of credit. The line
of credit extends terms of cash advances at a variable rate set equal to the
banks prime rate at the time of advance. The interest rate can fluctuate
according to the banks changes in its published prime rate.
NOTE G - RELATED PARTY TRANSACTIONS
Our Chief Executive Officer, Regina W. Anderson, guaranteed a loan for the
Company in the amount of $508,000, issued in connection with our purchase of our
office building in July 2006, as well as the $250,000 line of credit.
NOTE H - SEGMENT INFORMATION
The Company operates in the following two business segments:
1. Sale of skin and wound care products through Amerx. The marketing of these
products is targeted primarily to diabetic patients who have difficulties
providing proper care and treatment of wounds due to their diabetic
condition and physicians who recommend the products to their patients.
2. Sale of diabetic supplies - Sirius provides meters, test strips, monitors,
syringes, etc. primarily to diabetic patients. The Company is then
reimbursed by Medicare and/or patients' secondary insurance.
10
Each separately managed segment offers different products requiring
different marketing and distribution strategies. Segments information for the
nine months ended March 31, 2009 and 2008 is as follows:
Wound Care Diabetic
Mar. 31, Products Products Other Consolidated
-------- -------- -------- ----- ------------
Revenues 2009 $1,772,676 $ 206,621 $ - $1,979,297
2008 1,728,661 234,547 - 1,963,208
Gross Profit 2009 1,444,328 86,911 - 1,531,239
2008 1,392,443 99,126 - 1,491,569
Identifiable Assets 2009 616,663 199,295 1,851,860 2,667,818
2008 624,535 209,706 1,248,772 2,083,013
Property and Equipment
Additions 2009 1,654 - 9,677 11,331
2008 1,261 - 650 1,911
Depreciation 2009 6,193 273 18,639 25,105
2008 7,329 407 19,147 26,883
Geographical Information
The Company operates and sells its products to its customers primarily
within the United States. All assets are located within the United States.
NOTE I - RECENTLY ISSUED ACCOUNTING STANDARDS
In September 2006, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 157, "Fair Value Measurements," which defines fair value, establishes a
framework in generally accepted accounting principles for measuring fair value
and expands disclosures about fair value measurements. This standard only
applies when other standards require or permit the fair value measurement of
assets and liabilities. It does not increase the use of fair value measurement.
SFAS No. 157 is effective for fiscal years beginning after November 15, 2007,
except as it relates to nonrecurring fair value measurements of nonfinancial
assets and liabilities for which the standard is effective for fiscal years
beginning after November 15, 2008. The Company is evaluating the impact on its
consolidated financial statements as a result of the adoption of SFAS No. 157
with respect to financial assets and liabilities.
In February 2007, the FASB issued Statement of Financial Accounting
Standard ("SFAS") No. 159, "The Fair Value Option for Financial Assets and
Financial Liabilities Including an Amendment of FASB Statement No. 115." This
standard permits entities to choose to measure eligible items at fair value at
specified election dates and report unrealized gains and losses on items, for
which the fair value option has been elected, in earnings at each subsequent
reporting date. SFAS No. 159 is effective for fiscal years beginning after
November 15, 2007. The Company is evaluating the impact on its consolidated
financial statements as a result of the adoption of SFAS No. 159.
In May 2008, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 162, "The Hierarchy of
Generally Accepted Accounting Principles" ("SFAS 162"). SFAS 162 is intended to
improve financial reporting by identifying a consistent framework, or hierarchy,
for selecting accounting principles to be used in preparing financial statements
that are presented in conformity with generally accepted accounting principles
in the United States for non-governmental entities. SFAS 162 is effective 60
days following approval by the U.S. Securities and Exchange Commission ("SEC")
of the Public Company Accounting Oversight Board's amendments to AU Section 411,
"The Meaning of Present Fairly in Conformity with Generally Accepted Accounting
Principles." The Company does not expect SFAS 162 to have a material impact on
the preparation of its financial statements.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
General
The following discussion and analysis should be read in conjunction with
the unaudited Condensed Financial Statements and Notes thereto appearing
elsewhere in this report.
This Report on Form 10-Q, including Management's Discussion and Analysis of
Financial Condition and Results of Operation, contains forward-looking
statements. When used in this report, the words "may," "will," "expect,"
11
"anticipate," "continue," "estimate," "project," "intend," "hope," "believe" and
similar expressions, variations of these words or the negative of those words,
and, any statement regarding possible or assumed future results of operations of
the Company's business, the markets for its products, anticipated expenditures,
regulatory developments or competition, or other statements regarding matters
that are not historical facts, are intended to identify forward-looking
statements within the meaning of Section 27A of the Securities Act of 1933 and
Section 21E of the Securities Exchange Act of 1934 regarding events, conditions
and financial trends including, without limitation, business conditions in the
skin and wound care market, diabetic market and the general economy, competitive
factors, changes in product mix, production delays, manufacturing capabilities,
and other risks or uncertainties detailed in other of the Company's Securities
and Exchange Commission filings. Such statements are based on management's
current expectations and are subject to risks, uncertainties and assumptions.
Should one or more of these risks or uncertainties materialize, or should
underlying assumptions prove incorrect, the Company's actual plan of operations,
business strategy, operating results and financial position could differ
materially from those expressed in, or implied by, such forward-looking
statements.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The Company's condensed financial statements have been prepared in
accordance with standards of the Public Company Accounting Oversight Board
(United States), which require the Company to make estimates and judgments that
affect the reported amounts of assets, liabilities, revenues and expenses, and
the related disclosures. A summary of those significant accounting policies can
be found in the Notes to the Consolidated Financial Statements included in the
Company's annual report or 10-K, for the year ended June 30, 2008, which was
filed with the Securities and Exchange Commission on September 9, 2008. The
estimates used by management are based upon the Company's historical experiences
combined with management's understanding of current facts and circumstances.
Certain of the Company's accounting policies are considered critical as they are
both important to the portrayal of the Company's financial condition and the
results of its operations and require significant or complex judgments on the
part of management. We believe that the following critical accounting policies
affect the more significant judgments and estimates used in the preparation of
our financial statements.
Accounts Receivable Allowance
Accounts receivable allowance reflects a reserve that reduces our customer
accounts and receivable to the net amount estimated to be collectible. The
valuation of accounts receivable is based upon the credit-worthiness of
customers and third-party payers as well as historical collection experience.
Allowances for doubtful accounts are recorded as a selling, general and
administrative expense for estimated amounts expected to be uncollectible from
third-party payers and customers. The Company bases its estimates on its
historical collection experience, current trends, credit policy and on the
analysis of accounts by aging category. At March 31, 2009, our allowance for
doubtful accounts totaled $3,500.
12
Advertising and Marketing
The Company uses several forms of advertising, including sponsorships to
agencies who represent the professionals in their respective fields. The Company
expenses these sponsorships over the term of the advertising arrangements, on a
straight line basis. Other forms of advertising used by the Company include
professional journal advertisements and mailing campaigns. These forms of
advertising are expensed when incurred.
Deferred Income Taxes
Deferred income taxes are recognized for the expected tax consequences in
future years for differences between the tax bases of assets and liabilities and
their financial reporting amounts, based upon exacted tax laws and statutory tax
rates applicable to the periods in which the differences are expected to affect
taxable income. The Company accounts for income taxes under Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS
109"). A valuation allowance is used to reduce deferred tax assets to the net
amount expected to be recovered in future periods. The estimates for deferred
tax assets and the corresponding valuation allowance require us to exercise
complex judgments. We periodically review and adjust those estimates based upon
the most current information available. We did not have a valuation allowance as
of March 31, 2009. Because the recoverability of deferred tax assets is directly
dependent upon future operating results, actual recoverability of deferred tax
assets may differ materially from our estimates.
Revenue Recognition
The Company recognizes revenue in accordance with Securities and Exchange
Commission Staff Accounting Bulletin No. 104, "Revenue Recognition, corrected
copy." which requires that four basic criteria must be met before revenue can be
recognized: (1) persuasive evidence of an arrangement exists; (2) delivery has
occurred or services have been rendered; (3) the seller's price to the buyer is
fixed or determinable; and, (4) collectibility is reasonably assured.
The Company recognizes revenue related to product sales upon the shipment
of such orders to customers, provided that the risk of loss has passed to the
customer and the Company has received and verified any written documentation
required to bill Medicare, other third-party payers and customers. The Company
records revenue at the amounts expected to be collected from Medicare, other
third-party payers and directly from customers. The Company delays recognizing
revenue for shipments where the Company has not received the required
documentation, until the period when such documentation is received.
The Company calculates Medicare reimbursements based upon
government-established reimbursement prices. The reimbursements that Medicare
pays the Company are subject to review by government regulators. Medicare
reimburses at 80% of the government-determined reimbursement prices and the
Company bills the remaining balance to either third-party payers, such as
insurance companies, or directly to the customers.
Stock Based Compensation
In December 2004, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 123R ("SFAS 123R"), "Share-Based Payment,"
which is a revision of Statement of Financial Accounting Standards No. 123,
13
"Accounting for Stock-Based Compensation." SFAS 123R is effective for small
business publicly traded companies, for interim or annual periods beginning
after December 15, 2005. It supersedes Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees" and amends Statement of Financial
Accounting Standards No. 95, "Statement of Cash Flows." SFAS 123R requires all
share-based payments to employees, including grants of employee stock options,
to be recognized in the statement of operations based upon their fair values and
rescinds the acceptance of pro forma disclosure. SFAS 123R permits two methods
of adoption, a "modified prospective" method and a "modified retrospective"
method. Under the modified prospective method, stock-based compensation cost is
recognized, beginning with the effective date, based on the requirements of SFAS
123R for all share-based payments granted after the effective date and for all
awards granted prior to the effective date that remain unvested on the effective
date. The modified retrospective method includes the requirements of the
modified prospective method and also permits restatement of prior periods based
on amounts previously reported in pro forma disclosures pursuant to SFAS 123 for
either all periods presented or for only prior interim periods of the year of
adoption. We adopted the modified prospective method prescribed in SFAS 123R,
effective January 1, 2006.
FINANCIAL CONDITION
As of March 31, 2009 the Company's principal sources of liquid assets
included cash of $314,563, inventories of $145,453, and net accounts receivable
of $193,505. The company also has $246,473 in short term Certificate of
Deposits, to take advantage of higher interest rates relative to money market
rates. The Company had net working capital of $960,938, and long-term debt of
$429,194 at March 31, 2009.
During the nine months ended March 31, 2009, cash increased from $278,878
as of June 30, 2008, to $314,563. Operating activities provided cash of $66,719
during the period, consisting primarily of a reduction of accounts payable of
$43,749, but also due to a decrease in inventory and decrease in deferred income
tax. Cash used by financing activities was $16,577 as compared to cash used by
financing activities of $15,324 for the corresponding period in 2008.
The Company recorded a current deferred tax asset of $79,069, and
non-current deferred tax asset of $963,213, at March 31, 2009. Because the
recoverability of deferred tax assets is directly dependent upon future
operating results, actual recoverability of deferred tax assets may differ
materially from our estimates.
RESULTS OF OPERATIONS
Comparison of the three and nine months ended March 31, 2009 and 2008.
Net sales during the quarter ended March 31, 2009, were $698,639, as
compared to $625,514 in the quarter ended March 31, 2008, an increase of
$73,125, or approximately 12%. Net sales during the nine months ended March 31,
2009, were $1,979,297, as compared to $1,963,208 in the nine months ended March
31, 2008, an increase of $16,089, or approximately 1%. Our net sales for the
three and nine months ended March 31, 2009 increased from corresponding prior
periods primarily because of an increase in skin and wound care product sales.
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Gross profit during the quarter ended March 31, 2009, was $548,086, as
compared to $478,048 during the quarter ended March 31, 2008, an increase of
$70,038, or approximately 15%. As a percentage of net sales, gross profit was
approximately 78% in the quarter ended March 31, 2009, and approximately 76% in
the corresponding quarter in 2008. Gross profit during the nine months ended
March 31, 2009, was $1,531,239, as compared to $1,491,569 during the nine months
ended March 31, 2008, an increase of $39,670, or approximately 3%. As a
percentage of net sales, gross profit was approximately 77% in the nine months
ended March 31, 2009, and approximately 76% in the corresponding nine months in
2008.
Operating expenses during the quarter ended March 31, 2009, were $493,937,
consisting of $253,125 in salaries and benefits, and $240,812 in selling,
general and administrative expenses. This compares to operating expenses during
the quarter ended March 31, 2008, of $463,485, consisting of $230,563 in
salaries and benefits, and $232,922 in selling, general and administrative
expenses. Expenses for the quarter ended March 31, 2009, increased by
approximately $30,452, or approximately 7% compared to the corresponding quarter
in 2008. Increases in the salaries and benefits for the current period was due
to a increase in staffing and increased commissions from increased sales in
fiscal 2009. Selling, general and administrative cost increased for the nine
months ended March 31, 2009, compared to the nine months ended March 31, 2008 by
$95,928. Operating expenses during the nine months ended March 31, 2009, were
$1,431,035, consisting of $702,157 in salaries and benefits, and $728,878 in
selling, general and administrative expenses. This compares to operating
expenses during the nine months ended March 31, 2008 of $1,341,362, consisting
of $708,412 in salaries and benefits, and $632,950 in selling, general and
administrative expenses. Expenses for the nine months ended March 31, 2009,
increased by approximately $89,673, or approximately 7% compared to the
corresponding period in 2008.
Operating profit increased by $39,586 (approximately 271%) to $54,149 for
the quarter ended March 31, 2009, as compared to $14,563 in the comparable
quarter of the prior year. Net income (before dividend requirements for
Preferred Shares) was $28,856 during the quarter ended March 31, 2009, as
compared to $12,126 during the quarter ended March 31, 2008, an increase of
138%. Operating profit decreased by $50,003 (approximately 33%) to $100,204 for
the nine months ended March 31, 2009, as compared to $150,207 in the comparable
period of the prior year. Net income (before dividend requirements for Preferred
Shares) was $53,201 during the nine months ended March 31, 2009, as compared to
$197,905 during the nine months ended March 31, 2008, a decrease of $144,704 or
73%. The decrease in net income was primarily attributable to a decrease of the
income tax benefit. Amerx continues efforts to increase market share for its
products. Sirius continues efforts to penetrate the aging diabetic market. We
also believe that sales will continue to increase if the Company finds new
markets for both its products and services.
ITEM 4. CONTROLS AND PROCEDURES
(a) Evaluation of Disclosure Controls and Procedures
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Management of the Company, with the participation of the Chief Executive
Officer and Chief Financial Officer, has conducted an evaluation of the
effectiveness of the Company's disclosure controls and procedures pursuant to
Rule 13a-15 under the Securities Exchange Act of 1934 as of the end of the
period covered by this report. Based on that evaluation, management, including
the Chief Executive and Chief Financial Officer, has concluded that, as of the
end of the period covered by this report, the Company's disclosure controls and
procedures were effective in reaching a reasonable level of assurance that: (a)
all material information relating to the Company required to be disclosed in
this report has been made known to management in a timely manner and (b)
information was recorded, processed, summarized and reported within the time
periods specified in the SEC's rules and regulations.
(b) Changes in Internal Controls Over Financial Reporting
As previously reported, our annual assessment of the internal controls over
financial reporting revealed several areas that we consider to be material
weaknesses: (1) inadequate segregation of duties consistent with control
objectives; (2) insufficient written policies and procedures for accounting and
financial reporting with respect to the requirements and application of GAAP and
SEC disclosure requirements; (3) inadequate internal and external control over
the calculation of deferred tax assets and liabilities and requisite knowledge
to properly compute the deferred tax assets and liabilities; (4) ineffective
controls over period end financial disclosure and reporting processes and (5)
insufficient board and audit committee composition to provide oversight of the
financial statement process.
During the third fiscal quarter of 2009, the Company continues to address
changes needed to improve board oversight of the financial statement process. We
have instituted some changes in segregation of duties as current staffing
permits and improved our process of communication with our Board of Directors.
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS
(A) EXHIBITS
31.1 Certification of Regina W. Anderson pursuant to Exchange Act
Rule 13a-14(a)/15d-14(a)
31.2 Certification of James B. Anderson pursuant to Exchange Act
Rule 13a-14(a)/15d-14(a)
32.1 Certification Pursuant to 18 U.S.C.ss.1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act Of 2002
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SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, there unto
duly authorized.
PROCYON CORPORATION
May 14, 2009 By:/s/ REGINA W. ANDERSON
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Date Regina W. Anderson, Chief Executive Officer
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