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 December 31, 2008
[ ] 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
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(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 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 February 9, 2009.
PART I. - FINANCIAL INFORMATION
Item Page
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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 16
PART II. - OTHER INFORMATION
ITEM 6. EXHIBITS 17
SIGNATURES 18
2
PROCYON CORPORATION & SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 2008 and June 30, 2008
(unaudited) (audited)
December 31, June 30,
2008 2008
----------- -----------
ASSETS
CURRENT ASSETS
Cash $ 334,066 $ 278,878
Certificate of Deposits, and accrued interest 244,175 239,698
Accounts receivable, net of $2,500
allowance for doubtful accounts 114,980 171,494
Inventories 195,358 184,158
Prepaid expenses 160,114 173,490
Deferred tax asset 83,224 132,484
----------- -----------
TOTAL CURRENT ASSETS 1,131,917 1,180,202
PROPERTY AND EQUIPMENT, NET 545,762 555,229
OTHER ASSETS
Deposits 2,575 1,513
Deferred tax asset 979,836 942,738
----------- -----------
982,411 944,251
TOTAL ASSETS $ 2,660,090 $ 2,679,682
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts Payable $ 102,296 $ 105,314
Accrued Expenses 88,691 118,747
Current Portion of Mortgage Payable 23,629 22,790
----------- -----------
TOTAL CURRENT LIABILITIES 214,616 246,851
LONG-TERM LIABILITIES
Mortgage Payable 435,343 447,042
----------- -----------
TOTAL LONG TERM LIABILITIES 435,343 447,042
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 (2,567,495) (2,591,837)
----------- -----------
TOTAL STOCKHOLDERS' EQUITY 2,010,131 1,985,789
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 2,660,090 $ 2,679,682
=========== ===========
The accompanying notes are an integral part of these financial statements.
3
PROCYON CORPORATION & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Three & Six Months Ended December 31, 2008 and 2007
(unaudited) (unaudited) (unaudited) (unaudited)
Three Months Three Months Six Months Six Months
Ended Ended Ended Ended
Dec. 31,2008 Dec. 31, 2007 Dec. 31, 2008 Dec. 31, 2007
------------ ------------- ------------- -------------
NET SALES $ 606,480 $ 742,454 $ 1,280,658 $ 1,337,694
COST OF SALES 136,493 177,958 297,506 324,173
----------- ----------- ----------- -----------
GROSS PROFIT 469,987 564,496 983,152 1,013,521
OPERATING EXPENSES
Salaries and Benefits 230,145 241,658 449,032 477,848
Selling, General and Administrative 215,372 194,032 488,066 400,025
----------- ----------- ----------- -----------
445,517 435,690 937,098 877,873
INCOME FROM OPERATIONS 24,470 128,806 46,054 135,648
OTHER INCOME (EXPENSE)
Interest Income 4,088 2,860 7,797 6,555
Interest Expense (8,683) (8,970) (17,346) (17,340)
----------- ----------- ----------- -----------
(4,595) (6,110) (9,549) (10,785)
INCOME BEFORE INCOME TAXES 19,875 122,696 36,505 124,863
INCOME TAX (EXPENSE) BENEFIT (9,560) 28,024 (12,163) 60,921
----------- ----------- ----------- -----------
NET INCOME 10,315 150,720 24,342 185,784
Dividend requirements on preferred stock (4,977) (58) (9,955) (5,155)
----------- ----------- ----------- -----------
Basic net income available to common shares $ 5,338 $ 150,662 $ 14,387 $ 180,629
=========== =========== =========== ===========
Basic net income per common share $ -- $ 0.02 $ -- $ 0.02
Weighted average number of common
shares outstanding 8,055,388 8,053,549 8,055,388 8,052,068
=========== =========== =========== ===========
Diluted net income per common share $ -- $ 0.02 $ -- $ 0.02
Weighted average number of common shares
outstanding, basic and diluted 8,417,446 8,403,742 8,417,446 8,403,742
=========== =========== =========== ===========
The accompanying notes are an integral part of these financial statements.
4
PROCYON CORPORATION & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Six Months Ending December 31, 2008 and 2007
(unaudited) (unaudited)
December 31, December 31,
2008 2007
--------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income $ 24,342 $ 185,784
Adjustments to reconcile net income to net cash used in operating activities:
Depreciation 17,491 17,917
Deferred Income Taxes 12,162 (60,920)
Accrued Interest on Certificates of Deposit (960) --
Decrease (increase) in:
Accounts Receivable 56,124 28,980
Inventory (11,201) (48,096)
Prepaid Expenses 13,376 22,763
Other Assets (1,062) --
Increase (decrease) in:
Accounts Payable (3,019) 23,887
Accrued Expenses (30,056) (32,884)
--------- ---------
NET CASH PROVIDED BY OPERATING ACTIVITIES 77,197 137,431
CASH FLOW FROM INVESTING ACTIVITIES
Purchase of Certificates of Deposit (51,000) (185,000)
Redemption of Certificate of Deposit 47,874 --
Purchase of property & equipment (8,024) --
--------- ---------
NET CASH USED BY INVESTING ACTIVITIES (11,150) (185,000)
CASH FLOW FROM FINANCING ACTIVITIES
Payments on Mortgage Payable (10,859) (10,091)
--------- ---------
NET CASH USED BY FINANCING ACTIVITIES (10,859) (10,091)
NET CHANGE IN CASH 55,188 (57,660)
CASH AT BEGINNING OF PERIOD 278,878 422,876
--------- ---------
CASH AT END OF PERIOD $ 334,066 $ 365,216
========= =========
SUPPLEMENTAL DISCLOSURES
Interest Paid $ 17,150 $ 17,340
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 December 31, 2008, 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
6
ended December 31, 2008, no options were granted. Therefore, the adoption
of SFAS 123R does not have an impact on our statement of operations for
period ending December 31, 2008.
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 December 31, 2008 and 2007.
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:
December 31, June 30,
2008 2008
-------- --------
Finished Goods $105,562 $109,561
Raw Materials $ 89,796 $ 74,597
-------- --------
$195,358 $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 December 31,
2008 no dividends have been declared. Dividends in arrears on the
outstanding preferred shares total $231,416 as of December 31, 2008
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
7
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.
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 December 31, 2008, 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 December 31, 2008, the Company had consolidated income tax net
operating loss ("NOL") carryforward for federal income tax purposes of
approximately $2,849,000. 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:
Six Months Six Months
12/31/08 12/31/07
-------- --------
Current
Federal $ -- $ --
State -- --
-------- --------
$ -- $ --
Deferred
Federal $ 11,717 $(52,017)
State 445 (8,904)
-------- --------
$ 12,162 $(60,921)
======== ========
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:
8
Current Non-Current
--------- -----------
Deferred tax assets:
Net operating loss & contribution carryforwards $ 82,283 $ 990,096
Allowance for doubtful accounts 941 --
Less: Valuation allowance -- --
--------- ---------
83,224 990,096
Deferred tax liability
Excess of tax over book depreciation -- (10,260)
--------- ---------
83,224 979,836
Net deferred tax asset $ 83,224 $ 979,836
========= =========
The change in the valuation allowance is as follows:
June 30, 2008 $ --
December 31, 2008 --
---------
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 six month periods ended December 31, 2008, and
December 31, 2007, 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:
Six Months Six Months
12/31/08 12/31/07
--------- ---------
Expected provision (benefit) $ 12,481 $ 43,190
State income taxes net of federal benefits 1,333 4,612
Nondeductible (income) expense 2,140 2,946
Change in estimates (3,792) 9,812
Change in valuation allowance -- (121,481)
--------- ---------
$ 12,162 $ (60,921)
========= =========
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. The mortgage loan is due in 15
years and interest is fixed at 7.25%. Interest expense was $17,150 for the
six months ended December 31, 2008.
9
Maturities of long-term debt associated with the mortgage payable are as
follows:
Year Ending June 30,
-------------------------------------------------
6 months 2009 $ 11,601
2010 24,498
2011 26,335
2012 28,309
2013 30,431
2014 and thereafter 337,798
------------
458,972
Less current portion 23,629
------------
$ 435,343
============
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
$195,358 and accounts receivable assets of $114,980. 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 December 31, 2008, 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:
10
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.
Each separately managed segment offers different products requiring different
marketing and distribution strategies. Segments information for the six months
ended December 31, 2008 and 2007 is as follows:
Wound Care Diabetic
Dec. 30, Products Products Other Consolidated
-------- -------- -------- ----- ------------
Revenues 2008 $1,139,151 $141,507 $ - $1,280,658
2007 1,186,133 151,561 - 1,337,694
Gross Profit 2008 924,726 58,426 - 983,152
2007 950,159 63,362 - 1,013,521
Identifiable Assets 2008 606,639 183,405 1,870,046 2,660,090
2007 653,033 174,085 1,241,964 2,069,082
Property and Equipment
Additions 2008 - - 8,024 8,024
2007 - - - -
Depreciation 2008 4,320 241 12,930 17,491
2007 4,889 272 12,756 17,917
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.
11
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.
"Safe Harbor" Statement under the Private Securities Litigation Reform Act
of 1995
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," "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
12
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 on 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
December 31, 2008, our allowance for doubtful accounts totaled $2,500.
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
13
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 December
31, 2008. 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, "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
14
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 December 31, 2008, the Company's principal sources of liquid
assets included cash of $334,066, inventories of $195,358, and net accounts
receivable of $114,980. The company also has $244,175 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
$917,301, and long-term debt of $435,343 at December 31, 2008.
During the six months ended December 31, 2008, cash increased from
$278,878 as of June 30, 2008, to $334,066. Operating activities provided
cash of $77,197 during the period, consisting primarily of collection of
accounts receivable of $56,124. Cash used by financing activities was
$10,859 as compared to cash used by financing activities of $10,091 for the
corresponding period in 2007.
The Company recorded a current deferred tax asset of $83,224, and
non-current deferred tax asset of $979,836, at December 31, 2008. 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 six months ended December 31, 2008 and 2007.
Net sales during the quarter ended December 31, 2008, were $606,480,
as compared to $742,454 in the quarter ended December 31, 2007, a decrease
of $135,974, or approximately 18%. Net sales during the six months ended
December 31, 2008, were $1,280,658, as compared to $1,337,694 in the six
months ended December 31, 2007, a decrease of $57,036, or approximately 4%.
Our net sales for the three and six months ended December 31, 2008
decreased from corresponding prior periods primarily because of the general
adverse economic conditions in the United States. Sales also decreased in
the second quarter because we notified our customers in the previous
corresponding period of a coming price increase that took effect January 1,
2008. Sales from our Sirius subsidiary have leveled off, as we continue to
find ways to reach Sirius' intended market. We believe there is great
potential for Sirius as the number of diagnosed diabetics continues to
increase.
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Gross profit during the quarter ended December 31, 2008, was $469,987,
as compared to $564,496 during the quarter ended December 31, 2007, a
decrease of $94,509, or approximately 17%. As a percentage of net sales,
gross profit was approximately 77% in the quarter ended December 31, 2008,
and approximately 76% in the corresponding quarter in 2007. Gross profit
during the six months ended December 31, 2008, was $983,152, as compared to
$1,013,521 during the six months ended December 31, 2007, a decrease of
$30,369, or approximately 3%. As a percentage of net sales, gross profit
was approximately 77% in the six months ended December 31, 2008, and
approximately 76% in the corresponding six months in 2007.
Operating expenses during the quarter ended December 31, 2008, were
$445,517, consisting of $230,145 in salaries and benefits, and $215,372 in
selling, general and administrative expenses. This compares to operating
expenses during the quarter ended December 31, 2007 of $435,690, consisting
of $241,658 in salaries and benefits, and $194,032 in selling, general and
administrative expenses. Expenses for the quarter ended December 31, 2008,
increased by approximately $9,827, or approximately 2% compared to the
corresponding quarter in 2007. Decreases in the salaries and benefits for
the current period was due to a decrease in staffing and decreased
commissions from decreased sales in fiscal 2009. Selling, general and
administrative cost increased for the six months ended December 31, 2008,
compared to the six months ended December 31, 2007 by $88,041. Operating
expenses during the six months ended December 31, 2008, were $937,098,
consisting of $449,032 in salaries and benefits, and $488,066 in selling,
general and administrative expenses. This compares to operating expenses
during the six months ended December 31, 2007 of $877,873, consisting of
$477,848 in salaries and benefits, and $400,025 in selling, general and
administrative expenses. Expenses for the six months ended December 31,
2008, increased by approximately $59,225, or approximately 7% compared to
the corresponding period in 2007.
Operating profit decreased by $104,336 (approximately 81%) to $24,470
for the quarter ended December 31, 2008, as compared to $128,806 in the
comparable quarter of the prior year. Net income (before dividend
requirements for Preferred Shares) was $10,315 during the quarter ended
December 31, 2008, as compared to $150,720 during the quarter ended
December 31, 2007, a decrease of 93%. The decrease in net income was
primarily attributable to a decrease in sales, an increase in expenses, and
loss of the benefit of a large income tax benefit as compared to the
previous period. 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
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
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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 second 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 allows for.
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
February 12, 2009 By: /s/ REGINA W. ANDERSON
----------------- ---------------------------------
Date Regina W. Anderson, Chief Executive
Officer
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