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 September 30, 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 October 26, 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 17
2
PROCYON CORPORATION & SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
September 30, 2009 and June 30, 2009
(unaudited) (audited)
ASSETS September 30, June 30,
2009 2009
----------- -----------
CURRENT ASSETS
Cash $ 703,329 $ 403,030
Certificates of Deposit, plus accrued interest 53,120 248,796
Accounts Receivable, less allowance for doubtful 198,858 212,725
accounts of $4,700 and $4,200, respectively.
Inventories 118,219 109,498
Prepaid Expenses 188,146 154,109
Deferred Tax Asset 66,533 48,954
----------- -----------
TOTAL CURRENT ASSETS 1,328,205 1,177,112
PROPERTY AND EQUIPMENT, NET 529,077 534,339
OTHER ASSETS
Deposits 2,575 2,575
Deferred Tax Asset 940,054 1,008,213
----------- -----------
942,629 1,010,788
----------- -----------
TOTAL ASSETS $ 2,799,911 $ 2,722,239
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts Payable $ 138,759 $ 135,066
Accrued Expenses 130,225 129,097
Current Portion of Mortgage Payable 24,945 24,498
----------- -----------
TOTAL CURRENT LIABILITIES 293,929 288,661
LONG TERM LIABILITIES
Mortgage Payable 416,919 423,114
----------- -----------
TOTAL LONG TERM LIABILITIES 416,919 423,114
STOCKHOLDERS' EQUITY
Preferred Stock, 496,000,000 shares -- --
authorized, none issued.
Series A Cumulative Convertible Preferred Stock, 154,950 154,950
no par value; 4,000,000 shares authorized;
199,100 shares issued and outstanding.
Common Stock, no par value, 80,000,000 shares 4,416,676 4,416,676
authorized; 8,052,388 shares issued and
outstanding.
Paid-in Capital 6,000 6,000
Accumulated Deficit (2,488,563) (2,567,162)
----------- -----------
TOTAL STOCKHOLDERS' EQUITY $ 2,089,063 $ 2,010,464
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 2,799,911 $ 2,722,239
=========== ===========
The accompanying notes are an integral part of these financial statements.
3
PROCYON CORPORATION & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Ended September 30, 2009 and 2008
(unaudited) (unaudited)
Three Months Three Months
Ended Ended
Sep. 30, 2009 Sep. 30, 2008
------------- -------------
NET SALES $ 671,816 $ 596,237
COST OF SALES 139,018 114,566
----------- -----------
GROSS PROFIT 532,798 481,671
OPERATING EXPENSES
Salaries and Benefits 248,233 182,354
Selling, General and Administrative 205,900 250,386
----------- -----------
454,133 432,740
INCOME FROM OPERATIONS 78,665 48,931
OTHER INCOME (EXPENSE)
Interest Expense (8,250) (8,662)
Interest Income 2,189 2,726
----------- -----------
(6,061) (5,936)
INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES 72,604 42,995
INCOME TAX EXPENSE (29,291) (12,524)
----------- -----------
NET INCOME FROM CONTINUING OPERATIONS 43,313 30,471
DISCONTINUED OPERATIONS
Income (Loss) from Operations of Discontinued Component 56,576 (26,363)
Provision for Income Tax (Expense) Benefit (21,289) 9,921
----------- -----------
NET INCOME (LOSS) FROM DISCONTINUED OPERATIONS 35,287 (16,442)
NET INCOME 78,600 14,029
Dividend requirements on preferred stock (4,978) (4,978)
----------- -----------
Basic net income available to common shares $ 73,622 $ 9,051
=========== ===========
Basic net income per common share
Continuing Operations $ 0.01 $ 0.00
Discontinued Operations $ 0.00 $ (0.00)
----------- -----------
Total Basic Net Income Per Share $ 0.01 $ 0.00
=========== ===========
Weighted average number of common shares outstanding 8,055,388 8,055,388
=========== ===========
Diluted net income per common share
Continuing Operations $ 0.01 $ 0.00
Discontinued Operations $ 0.00 $ (0.00)
----------- -----------
Total Diluted Net Income Per Share $ 0.01 $ 0.00
=========== ===========
Weighted average number of common shares outstanding, basic and diluted 8,254,488 8,420,491
=========== ===========
The accompanying notes are an integral part of these financial statements.
4
PROCYON CORPORATION & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Three Months Ending September 30, 2009 and 2008
(unaudited) (unaudited)
September 30, September 30,
2009 2008
--------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income $ 78,600 $ 14,028
Adjustments to reconcile net income to net cash used in operating activities:
Depreciation 7,108 8,967
Deferred Income Taxes 50,580 2,602
Allowance for Doubtful Accounts 500
Accrued Interest on Certificates of Deposit 4,031 (1,332)
Decrease (increase) in:
Accounts Receivable 3,468 17,387
Inventory (8,721) (29,150)
Prepaid Expenses (34,038) 13,388
Other Assets -- (1,062)
Increase (decrease) in:
Accounts Payable 13,592 55,299
Accrued Expenses 1,128 (8,048)
--------- ---------
NET CASH PROVIDED BY OPERATING ACTIVITIES 116,248 72,079
CASH FLOW FROM INVESTING ACTIVITIES
Redemption of Certificate of Deposit 191,645 50,416
Purchase of property & equipment (1,846) (8,024)
--------- ---------
NET CASH USED BY INVESTING ACTIVITIES 189,799 42,392
CASH FLOW FROM FINANCING ACTIVITIES
Payments on Mortgage Payable (5,748) (5,333)
--------- ---------
NET CASH USED BY FINANCING ACTIVITIES (5,748) (5,333)
NET CHANGE IN CASH 300,299 109,138
CASH AT BEGINNING OF PERIOD 403,030 278,878
--------- ---------
CASH AT END OF PERIOD $ 703,329 $ 388,016
========= =========
SUPPLEMENTAL DISCLOSURES
Interest Paid $ 8,261 $ 8,671
Taxes Paid $ -- $ --
Non Cash Transaction Disclosure
Marketing Expense paid for by Accounts Receivable $ 9,900 $ --
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, 2009. 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.
CODIFICATION
In September 2009, the FASB issued new accounting guidance, effective for
financial statements issued for interim and annual periods ending after
September 15, 2009, which identifies the FASB Accounting Standards Codification
("Codification") as the authoritative source of GAAP in the United States. Rules
and interpretive releases of the SEC under federal securities laws are also
sources of authoritative GAAP for SEC registrants. Codification is not intended
to change GAAP. The adoption of this new accounting guidance had no impact on
our financial position or results of operations.
STOCK-BASED COMPENSATION
In December 2004, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 123R ("SFAS 123R"), "Share-Based Payment,"
(Topic 718 - Compensation -Stock Compensation in the Accounting Standards
Codification) is effective for small business publicly traded companies, for
interim or annual periods beginning after December 15, 2005. All share-based
payments to employees, including grants of employee stock options, are to be
recognized in the statement of operations based upon their fair values and
rescinds the acceptance of pro forma disclosure.
On September 30, 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 September 30,
2009, no options were granted. Therefore, the adoption of Topic 718 does not
have an impact on our statement of operations for period ending September 30,
2009.
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,
6
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 September
30, 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.
RECLASSIFICATION
We have reclassified $5,971 of accrued interest from accounts receivable to
certificates of deposit on the balance sheet for June 30, 2009.
NOTE B - INVENTORIES
Inventories consisted of the following:
September 30, June 30,
2009 2009
-------- --------
Finished Goods $ 45,282 $ 45,217
Raw Materials $ 72,937 $ 64,281
-------- --------
$118,219 $109,498
======== ========
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 September 30, 2009 no dividends have been declared. Dividends in arrears on
the outstanding preferred shares total $246,349 as of September 30, 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 September 30, 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 September 30, 2009, the Company had consolidated income tax net
operating loss ("NOL") carryforward for federal income tax purposes of
approximately $2,695,000. The federal NOL will expire in various years ending
through the year 2023. The utilization of certain of the loss carryforwards are
limited under Section 382 of the Internal Revenue Code.
The components of the provision for income taxes (benefits) are
attributable to continuing and discontinued operations as follows:
09/30/2009 09/30/2008
---------- ----------
Current
Federal $ 0 $ 0
State 0 0
-------- --------
Deferred Continuing Operations
Federal $ 23,952 $ 11,187
State 5,339 1,337
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$ 29,291 $ 12,524
Deferred - Discontinued Operations
Federal $ 19,236 $ (8,964)
State 2,053 (957)
-------- --------
21,289 (9,921)
-------- --------
Total Income Tax Expense (Benefit) $ 50,580 $ 2,603
======== ========
8
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
NOL and contribution carryforwards $ 64,764 $ 951,472
Allowance for doubtful acounts 1,769 --
--------- ---------
66,533 951,472
Deferred Tax Liabilities
Excess of tax over book depreciation -- (11,418)
--------- ---------
66,533 940,054
--------- ---------
Net Deferred Tax Asset (Liability) $ 66,533 $ 940,054
========= =========
The Change in valuation allowance is as follows:
June 30, 2009 $ --
September 30, 2009 $ --
---------
Change in valuation allowance $ --
=========
Management believes it is more likely than not that it will realize the
benefit of the NOL carryforward, because of its continuing trend of earnings.
Therefore, a valuation allowance in not considered necessary.
Income taxes for the periods ended September 30, 2009 and 2008 differ from
the amounts computed by applying the effective income tax rates of 37.63% and
37.63%, respectively, to income taxes as a result of the following:
Three Months Three Months
Sep 30, 2009 Sep 30, 2008
------------ ------------
Continuing Operations
Expected provision at US statutory rate $ 24,521 $ 14,563
State income tax net of federal benefit 2,618 1,555
Nondeductible & Timing Differences 2,152 1,085
Change in estimates in available NOL carryforwards -- (4,679)
-------- --------
Income Tax Expense (Benefit) $ 29,291 $ 12,524
======== ========
Discontinued Operations
Expected provision at US statutory rate 19,236 (8,964)
Sate income tax net of federal benefit 2,054 (957)
-------- --------
$ 21,289 $ (9,921)
======== ========
9
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
$477,000. The mortgage loan is due in 14 years and interest is fixed at 7.25%.
Interest expense was $8,250 for the three months ended September 30, 2009.
Maturities of long-term debt associated with the mortgage payable are as
follows:
Year Ending June 30,
---------------------------------------------
9 months 2010 $ 18,539
2011 26,335
2012 28,309
2013 30,431
2014 32,712
2015 and thereafter 305,538
------------
441,864
Less current portion 24,945
------------
$ 416,919
============
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 $118,219 and accounts
receivable assets of $198,858. The line of credit is renewable annually in
April. The C.E.O. of the Company personally guaranteed the line of credit to the
10
Company. At September 30, 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 I - RECENTLY ISSUED ACCOUNTING STANDARDS
In June 2009, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 168 ("SFAS 168"), "The FASB
Accounting Standards Codification(TM) and the Hierarchy of Generally Accepted
Accounting Principles, a replacement of FASB Statement No. 162" (Topic 105 -
Generally Accepted Accounting Principles in the Accounting Standards
Codification). The FASB Accounting Standards Codification(TM) ("Codification")
will become the source of authoritative United States generally accepted
accounting principles ("GAAP") recognized by the FASB to be applied by
non-government entities. Rules and interpretive releases of the Securities and
Exchange Commission ("SEC") under authority of federal securities laws are also
sources of authoritative GAAP for SEC registrants. On the effective date of
Topic 105, the Codification will supersede all then-existing non-SEC accounting
and reporting standards. All other non-grand fathered non-SEC accounting
literature not included in the Codification will become non-authoritative. Topic
105 is effective for financial statements issued for interim and annual periods
ending after September 15, 2009, after which the FASB will not issue new
standards in the form of Statements, FASB Staff Positions or Emerging Issues
Task Force Abstracts. Instead, the FASB will issue Accounting Standard Updates,
which the FASB will not consider as authoritative in their own right. Accounting
Standard Updates will serve only to update the Codification, provide background
information about the guidance and provide bases for conclusions on the
change(s) in the Codification.
NOTE J - DISCONTINUED OPERATIONS
As previously reported in our current report on Form 8-K, filed on August
3, 2009, we entered into an Asset Purchase Agreement, effective July 31, 2009
with Priority Diabetes Supply, Inc., a Florida corporation, doing business as
Diabetes Wellness Supply ("Priority Diabetes"). Pursuant to the Agreement, we
sold certain "Purchased Assets," as defined in the Agreement, including Sirius'
customer list, to Priority Diabetes. Thus, as of July 31, 2009, Sirius no longer
offers testing products to diabetic customers. Management is considering various
options for the future direction of Sirius. The sale to date generated a gain of
$80,000, recognized in the income (loss) from operations of discontinued
components in the statement of operations. After a hundred and eighty day
period, an adjusting payment will be made, based on the results of the
production of the patient list that was sold. The agreement also contains a
noncompete period of two years, prohibiting Sirius from engaging in the business
of the sale of diabetic testing supply products.
11
As a result of the sale, the results of the Sirius subsidiary, which had
previously been presented as a separate reporting segment, are included in
discontinued operations in the Company's consolidated financial statements of
operations, no other assets or liabilities were sold in this sale. All prior
period information has been reclassified to be consistent with the current
period presentation.
The following amounts related to the Sirius subsidiary were derived from
historical financial information and have been segregated from continuing
operations and reported as discontinued operations.
2009 2008
-------- --------
Revenues $ 17,753 $ 77,940
Cost of Sales 13,990 46,446
Salaries and Benefits 5,951 36,533
Selling, General and Administrative 21,907 22,307
-------- --------
Loss from Operations (24,095) (27,346)
Interest Income 671 983
Gain on Sale of Disclosed Assets 80,000 0
-------- --------
Income (Loss) from Discontinued Operations 56,576 (26,363)
Income Tax Benefit (21,289) 9,921
-------- --------
Income (Loss) from Discontinued Operations,
net of income taxes $ 35,287 $(16,442)
======== ========
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,"
"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
12
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 on form 10-K, for the year ended June 30, 2009, which
was filed with the Securities and Exchange Commission on September 28, 2009. 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.
Codification
In September 2009, the FASB issued new accounting guidance, effective for
financial statements issued for interim and annual periods ending after
September 15, 2009, which identifies the FASB Accounting Standards Codification
("Codification") as the authoritative source of GAAP in the United States. Rules
and interpretive releases of the SEC under federal securities laws are also
sources of authoritative GAAP for SEC registrants. Codification is not intended
to change GAAP. The adoption of this new accounting guidance had no impact on
our financial position or results of operations.
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 September 30, 2009, our allowance for
doubtful accounts totaled $4,700.
13
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"). (Topic 740 - Income Tax in the Accounting Standards Codification) 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
September 30, 2009. Because the recover ability of deferred tax assets is
directly dependent upon future operating results, actual recover ability 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.
Stock Based Compensation
In December 2004, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 123R ("SFAS 123R"), "Share-Based Payment,"
(Topic 718 - Compensation -Stock Compensation in the Accounting Standards
Codification) is effective for small business publicly traded companies, for
interim or annual periods beginning after December 15, 2005. All share-based
payments to employees, including grants of employee stock options, are to be
recognized in the statement of operations based upon their fair values and
rescinds the acceptance of pro forma disclosure.
Recent Developments
Effective July 31, 2009, Sirius entered into an Asset Purchase Agreement
with Priority Diabetes Supply, Inc. Under the terms of the Agreement Sirius sold
certain "Purchased Assets," as defined in the Asset Purchase agreement, to
Priority Diabetes, consisting primarily of Sirius' list of diabetic customers.
As of August 1, 2009, Sirius no longer markets diabetic testing products.
Management is considering various alternatives for Sirius' future business
operations.
14
In December 2008, PDAC (formerly SADMERC), issued change requirements for
products to be eligible for Medicare and Medicaid reimbursement. All amorphous
hydrogels and all hydrogel gauze dressings require sterility for reimbursement
as of January 1, 2009. Amerx re-evaluated the process for manufacturing, the
cost of changing manufacturing methods, new packaging and testing cost. Amerx
moved forward and was able to provide its customers with a new "sterile" form of
the Saturated Gauze Dressing. This new "sterile" form of Saturated Gauze
Dressing was approved for reimbursement by PDAC in July of 2009.
RECENTLY ISSUED ACCOUNTING STANDARDS
In June 2009, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 168 ("SFAS 168"), "The FASB
Accounting Standards Codification(TM) and the Hierarchy of Generally Accepted
Accounting Principles, a replacement of FASB Statement No. 162" (Topic 105 -
Generally Accepted Accounting Principles in the Accounting Standards
Codification). The FASB Accounting Standards Codification(TM) ("Codification")
will become the source of authoritative United States generally accepted
accounting principles ("GAAP") recognized by the FASB to be applied by
non-government entities. Rules and interpretive releases of the Securities and
Exchange Commission ("SEC") under authority of federal securities laws are also
sources of authoritative GAAP for SEC registrants. On the effective date of
Topic 105, the Codification will supersede all then-existing non-SEC accounting
and reporting standards. All other non-grand fathered non-SEC accounting
literature not included in the Codification will become non-authoritative. Topic
105 is effective for financial statements issued for interim and annual periods
ending after September 15, 2009, after which the FASB will not issue new
standards in the form of Statements, FASB Staff Positions or Emerging Issues
Task Force Abstracts. Instead, the FASB will issue Accounting Standard Updates,
which the FASB will not consider as authoritative in their own right. Accounting
Standard Updates will serve only to update the Codification, provide background
information about the guidance and provide bases for conclusions on the
change(s) in the Codification.
FINANCIAL CONDITION
As of September 30, 2009 the Company's principal sources of liquid assets
included cash of $703,329, inventories of $118,219, and net accounts receivable
of $198,858. The company also has $53,120 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 $1,034,276, and long-term debt of $416,919 at
September 30, 2009.
During the three months ended September 30, 2009, cash increased from
$403,030 as of June 30, 2009, to $703,329. Operating activities provided cash of
$116,248 during the period, consisting primarily of net income of $78,600. Cash
generated by investing activities was $189,799 as compared to $42,392 for the
corresponding period in 2008.
The Company recorded a current deferred tax asset of $66,533, and
non-current deferred tax asset of $940,054, at September 30, 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.
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RESULTS OF OPERATIONS
Comparison of the three ended September 30, 2009 and 2008.
Net sales during the quarter ended September 30, 2009, were $671,816, as
compared to $596,237 in the quarter ended September 30, 2008, an increase of
$75,579, or approximately 13%. Our net sales for the three months ended
September 30, 2009 increased from corresponding prior periods primarily because
of an increase in skin and wound care product sales.
Gross profit during the quarter ended September 30, 2009, was $532,798, as
compared to $481,671 during the quarter ended September 30, 2008, an increase of
$51,127, or approximately 11%. As a percentage of net sales, gross profit was
approximately 79% in the quarter ended September 30, 2009, and approximately 81%
in the corresponding quarter in 2008.
Operating expenses during the quarter ended September 30, 2009, were
$454,133, consisting of $248,233 in salaries and benefits, and $205,900 in
selling, general and administrative expenses. This compares to operating
expenses during the quarter ended September 30, 2008, of $432,740, consisting of
$182,354 in salaries and benefits, and $250,386 in selling, general and
administrative expenses. Expenses for the quarter ended September 30, 2009,
increased by approximately $21,393, or approximately 5% 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.
Operating profit increased by $29,734 (approximately 61%) to $78,665 for
the quarter ended September 30, 2009, as compared to $48,931 in the comparable
quarter of the prior year. Net Income from continuing operations was $43,313
during the quarter ended September 30, 2009, as compared to $30,471 during the
quarter ended September 30, 2008, an increase of 42%. The increase in net income
was primarily attributable to growth in sales as Amerx penetrates new markets.
Amerx continues efforts to increase market share for its products.
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 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.
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(b) Changes in Internal Controls Over Financial Reporting
As previously reported, our annual assessment of the internal controls over
financial reporting as of June 30, 2009 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 first fiscal quarter of 2010, the Company continued 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
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
November 6, 2009 By: /s/ REGINA W. ANDERSON
---------------- --------------------------
Date Regina W. Anderson, Chief Executive Officer
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