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, 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 shorter period 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 February 9, 2010.
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 17
PART II. - OTHER INFORMATION
ITEM 5. Submission of Matters to a Vote of Security Holders 17
ITEM 6. EXHIBITS 19
SIGNATURES 19
PROCYON CORPORATION & SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 2009 and June 30, 2009
(unaudited) (audited)
December 31, June 30,
2009 2009
----------- -----------
ASSETS
CURRENT ASSETS
Cash $ 723,794 $ 403,030
Certificate of Deposits, and accrued interest 53,166 248,796
Accounts receivable, less allowance for doubtful
accounts of $1,000 and $4,200, respectively. 126,005 212,725
Inventories 143,098 109,498
Prepaid expenses 146,627 154,109
Deferred tax asset 100,182 48,954
----------- -----------
TOTAL CURRENT ASSETS 1,292,872 1,177,112
PROPERTY AND EQUIPMENT, NET 528,414 534,339
OTHER ASSETS
Deposits 2,575 2,575
Deferred tax asset 915,447 1,008,213
----------- -----------
918,022 1,010,788
TOTAL ASSETS $ 2,739,308 $ 2,722,239
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts Payable $ 131,956 $ 135,066
Accrued Expenses 107,394 129,097
Current Portion of Mortgage Payable 25,400 24,498
----------- -----------
TOTAL CURRENT LIABILITIES 264,750 288,661
LONG-TERM LIABILITIES
Mortgage Payable 410,520 423,114
----------- -----------
TOTAL LONG TERM LIABILITIES 410,520 423,114
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 (2,513,588) (2,567,162)
----------- -----------
TOTAL STOCKHOLDERS' EQUITY 2,064,038 2,010,464
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 2,739,308 $ 2,722,239
=========== ===========
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, 2009 and 2008
(unaudited) (unaudited) (unaudited) (unaudited)
Three Months Three Months Six Months Six Months
Ended Ended Ended Ended
Dec. 31, 2009 Dec. 31, 2008 Dec. 31, 2009 Dec. 31, 2008
------------- ------------- ------------- -------------
NET SALES $ 548,644 $ 542,914 $ 1,220,460 $ 1,139,151
COST OF SALES 109,073 99,859 248,091 214,426
----------- ----------- ----------- -----------
GROSS PROFIT 439,571 443,055 972,369 924,725
OPERATING EXPENSES
Salaries and Benefits 244,365 192,563 492,599 374,916
Selling, General and Administrative 205,411 201,661 411,311 452,047
----------- ----------- ----------- -----------
449,776 394,224 903,910 826,963
INCOME (LOSS) FROM OPERATIONS (10,205) 48,831 68,459 97,762
OTHER INCOME (EXPENSE)
Interest Income 1,500 3,035 3,689 5,761
Interest Expense (8,150) (8,683) (16,400) (17,346)
----------- ----------- ----------- -----------
(6,650) (5,648) (12,711) (11,585)
INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME TAXES (16,855) 43,183 55,748 86,177
INCOME TAX (EXPENSE) BENEFIT 2,565 (18,331) (26,725) (30,854)
----------- ----------- ----------- -----------
NET INCOME (LOSS) FROM CONTINUING OPERATIONS (14,290) 24,852 29,023 55,323
DISCONTINUED OPERATIONS
Income (Loss) from Operations of Discontinued Component (17,211) (23,309) 39,365 (49,673)
Provision for Income Tax (Expense) Benefit 6,477 8,771 (14,813) 18,692
----------- ----------- ----------- -----------
NET INCOME (LOSS) FROM DISCONTINUED OPERATIONS (10,734) (14,538) 24,552 (30,981)
NET INCOME (LOSS) (25,024) 10,314 53,575 24,342
Dividend requirements on preferred stock (4,977) (4,977) (9,955) (9,955)
----------- ----------- ----------- -----------
Basic net income (loss) available to common shares $ (30,001) $ 5,337 $ 43,620 $ 14,387
=========== =========== =========== ===========
Basic net income per common share
Continuing Operations $ -- $ -- $ -- $ --
Discontinued Operations $ -- $ -- $ -- $ --
Total Basic Net Income Per Share
Weighted average number of common shares outstanding 8,055,388 8,055,388 8,055,388 8,055,388
=========== =========== =========== ===========
Diluted net income per common share
Continuing Operations $ -- $ -- $ -- $ --
Discontinued Operations $ -- $ -- $ -- $ --
Total Diluted Net Income Per Share
Weighted average number of common shares
outstanding, basic and diluted 8,254,488 8,417,446 8,254,488 8,417,446
=========== =========== =========== ===========
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, 2009 and 2008
(unaudited) (unaudited)
December 31, December 31,
2009 2008
--------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income $ 53,575 $ 24,342
Adjustments to reconcile net income to net cash used in operating activities:
Depreciation 14,498 17,491
Deferred Income Taxes 41,538 12,162
Allowance for Doubtful Accounts (3,200) --
Accrued Interest on Certificates of Deposit 5,971 (960)
Decrease (increase) in:
Accounts Receivable 89,920 56,124
Inventory (33,600) (11,201)
Prepaid Expenses 7,482 13,376
Other Assets -- (1,062)
Increase (decrease) in:
Accounts Payable (3,111) (3,019)
Accrued Expenses (21,703) (30,056)
--------- ---------
NET CASH PROVIDED BY OPERATING ACTIVITIES 151,370 77,197
CASH FLOW FROM INVESTING ACTIVITIES
Purchase of Certificates of Deposit -- (51,000)
Redemption of Certificate of Deposit 189,659 47,874
Purchase of property & equipment (8,573) (8,024)
--------- ---------
NET CASH PROVIDED (USED) BY INVESTING ACTIVITIES 181,086 (11,150)
CASH FLOW FROM FINANCING ACTIVITIES
Payments on Mortgage Payable (11,692) (10,859)
--------- ---------
NET CASH USED BY FINANCING ACTIVITIES (11,692) (10,859)
NET CHANGE IN CASH 320,764 55,188
CASH AT BEGINNING OF PERIOD 403,030 278,878
--------- ---------
CASH AT END OF PERIOD $ 723,794 $ 334,066
========= =========
SUPPLEMENTAL DISCLOSURES
Interest Paid $ 16,323 $ 17,150
Taxes Paid $ -- $ --
Non Cash Transaction Disclosure
Marketing Expense paid for by Accounts Rececivable
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 ("GAAP") 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,
except for rules and interpretive releases of the SEC, which will continue to be
sources of authoritative U.S. GAAP for SEC registrants. Codification is not
intended to change GAAP. We believe that the adoption of this new accounting
guidance has not had, and will not have any 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. The Company adopted a new stock
option plan, providing the Company a continued means of offering stock-based
compensation.
On December 31, 2009, there were outstanding options to purchase 65,000
shares of our common stock at exercise price of $0.16 per share and expiration
date of November 2010. These options were vested at the time of grant. During
the quarter ended December 31, 2009, no options were granted. Therefore, the
adoption of Topic 718 does not have an impact on our statement of operations for
period ending December 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 December 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.
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:
December 31, June 30,
2009 2009
-------- --------
Finished Goods $ 60,321 $ 45,217
Raw Materials $ 82,777 $ 64,281
-------- --------
$143,098 $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 December 31, 2009, no dividends have been declared. Dividends in arrears on
the outstanding preferred shares total $251,326 as of December 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 December 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 December 31, 2009, the Company had consolidated income tax net
operating loss ("NOL") carryforward for federal income tax purposes of
approximately $2,728,000. 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:
Six Months Six Months
12/31/2009 12/31/2008
---------- ----------
Current
Federal $ 0 $ 0
State 0 0
-------- --------
Deferred Continuing Operations
Federal $ 22,819 $ 28,606
State 3,906 2,248
-------- --------
$ 26,725 $ 30,854
Deferred - Discontinued Operations
Federal $ 12,648 $(16,889)
State 2,165 (1,803)
-------- --------
14,813 (18,692)
-------- --------
Total Income Tax Expense (Benefit) $ 41,538 $ 12,162
======== ========
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 $ 99,806 $ 927,921
Allowance for doubtful acounts 376 --
--------- ---------
100,182 927,921
Deferred Tax Liabilities
Excess of tax over book depreciation -- (12,474)
--------- ---------
100,182 915,447
--------- ---------
Net Deferred Tax Asset (Liability) $ 100,182 $ 915,447
========= =========
The Change in valuation allowance is as follows:
June 30, 2009 $ --
December 31, 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 December 31, 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:
Six Months Six Months
Dec 31, 2009 Dec 31, 2008
------------ ------------
Continuing Operations
Expected provision at US statutory rate $ 19,539 $ 29,370
State income tax net of federal benefit 2,086 3,136
Nondeductible & Timing Differences 3,675 3,459
Change in estimates in available NOL carryforwards 1,425 (5,111)
-------- --------
Income Tax Expense (Benefit) $ 26,725 $ 30,854
======== ========
Discontinued Operations
Expected provision at US statutory rate 13,384 (16,889)
Sate income tax net of federal benefit 1,429 (1,803)
-------- --------
$ 14,813 $(18,692)
======== ========
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
$469,000. The mortgage loan is due in 14 years and interest is fixed at 7.25%.
Interest expense was $16,400 for the six months ended December 31, 2009.
Maturities of long-term debt associated with the mortgage payable are as
follows:
Year Ending June 30,
-----------------------------------------------
6 months 2010 $ 12,471
2011 26,335
2012 28,309
2013 30,431
2014 32,712
2015 and thereafter 305,662
---------
435,920
Less current portion 25,400
---------
$ 410,520
=========
10
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 $143,098 and accounts
receivable assets of $126,005. 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, 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")
became 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. The completion of the 180 day period,
resulted in no new payments. 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.
Six Months Six Months
12/31/2009 12/31/2008
---------- ----------
Revenues $ 17,753 $ 141,507
Cost of Sales 14,215 83,080
Salaries and Benefits 6,455 74,116
Selling, General and Administrative 39,036 36,019
--------- ---------
Loss from Operations (41,953) (51,708)
Interest Income 1,318 2,035
Gain on Sale of Disclosed Assets 80,000 0
--------- ---------
Income (Loss) from Discontinued Operations 39,365 (49,673)
Income Tax Benefit (14,813) 18,692
--------- ---------
Income (Loss) from Discontinued Operations,
net of income taxes $ 24,552 $ (30,981)
========= =========
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,
12
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 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,
except for rules and interpretive releases of the SEC, which will continue to be
sources of authoritative U.S. GAAP for SEC registrants. Codification is not
intended to change GAAP. We believe that the adoption of this new accounting
guidance has not had, and will not have any 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 December 31, 2009, our allowance for
doubtful accounts totaled $1,000.
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
December 31, 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
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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.
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 December 31, 2009 the Company's principal sources of liquid assets
included cash of $723,794, inventories of $143,098, and net accounts receivable
of $126,005. The company also has $53,166 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 $1,028,122, and long-term debt of $410,520 at
December 31, 2009.
During the six months ended December 31, 2009, cash increased from $403,030
as of June 30, 2009, to $723,794. Operating activities provided cash of $151,371
during the period, consisting primarily of a decrease in accounts receivable of
$90,190. Cash generated by investing activities was $181,086 as compared to cash
used of $11,150 for the corresponding period in 2008.
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The Company recorded a current deferred tax asset of $100,182, and
non-current deferred tax asset of $915,447, at December 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 six months ended December 31, 2009 and 2008.
Net sales during the quarter ended December 31, 2009, were $548,644, as
compared to $542,914 in the quarter ended December 31, 2008, an increase of
$5,730, or approximately 1%. Net Sales during the six months ended December 31,
2009, were $1,220,460, as compared to $1,139,151 in the six months ended
December 31, 2008, an increase of $81,309, or approximately 7%. Our net sales
for the three and six months ended December 31, 2009 increased from
corresponding prior periods primarily because of an increase in skin and wound
care product sales.
Gross profit during the quarter ended December 31, 2009, was $439,571, as
compared to $443,055 during the quarter ended December 31, 2008, a decrease of
$3,484, or approximately 1%. Gross profit during the six months ended December
31, 2009, was $972,369, as compared to $924,725 during the six months ended
December 31, 2008, an increase of $47,644 or 5%. As a percentage of net sales,
gross profit was approximately 80% in the quarter ended December 31, 2009, and
approximately 82% in the corresponding quarter in 2008. As a percentage of net
sales, gross profit was approximately 80% in the six months ended December 31,
2009, and approximately 81% in the corresponding six months in 2008.
Operating expenses during the quarter ended December 31, 2009, were
$449,776, consisting of $244,365 in salaries and benefits, and $205,411 in
selling, general and administrative expenses. This compares to operating
expenses during the quarter ended December 31, 2008, of $394,224, consisting of
$192,563 in salaries and benefits, and $201,661 in selling, general and
administrative expenses. Expenses for the quarter ended December 31, 2009,
increased by approximately $55,552, or approximately 14% compared to the
corresponding quarter in 2008. The increase in continuing operation expenses was
mostly attributable to salaries and benefits transferring from officer
compensation that was previously booked under Sirius operations. Operating
expenses during the six months ended December 31, 2009, were $903,910,
consisting of $492,599 in salaries and benefits, and $411,311 in selling,
general and administrative expenses. This compares to operating expenses during
the six months ended December 31, 2008 of $826,963, consisting of $ 374,916 in
salaries and benefits, and $452,047 in selling, general and administrative
expenses. Expenses for the six months ended December 31, 2009 increased by
approximately $76,947, or approximately 9% compared to the corresponding period
in 2008. Increases in the salaries and benefits for the current period was due
to transfer of Sirius officer compensation and increased commissions from
increased sales in fiscal 2009.
Operating profit decreased by $59,036 (approximately 120%) to a loss of
$10,205 for the quarter ended December 31, 2009, as compared to $48,831 in the
comparable quarter of the prior year. Net loss from continuing operations before
income taxes was $16,855 during the quarter ended December 31, 2009, as compared
to a net income from continuing operations before income taxes of $43,183 during
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the quarter ended December 31, 2008, a decrease of 139%. The decrease in net
income from continuing operations before income taxes in both the three and six
months periods was primarily attributable to increases in salaries and benefits,
secondary to officer compensation previously booked under discontinued
operations.
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.
(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 second 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 5. Submission of Matters to a Vote of Security Holders.
We held our annual meeting for fiscal 2010 on Tuesday, December 8, 2009, at 4:00
p.m. EST. The following matters were considered and approved by the
shareholders:
A. The following eight directors were elected to hold office for one-year terms
or until their successors are elected and qualified:
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Votes
Votes Against Total
For or Withheld Voted
------------------------------------------
Regina W. Anderson 5,205,658 185,422 5,391,080
James B. Anderson 5,205,658 185,422 5,391,080
Justice W. Anderson 5,205,658 185,422 5,391,080
Michael T. Foley 5,205,658 185,422 5,391,080
Paul L. Guilbaud 5,205,658 185,422 5,391,080
Jeffrey S. Slowgrove 5,205,658 185,422 5,391,080
Fred W. Suggs 5,205,658 185,422 5,391,080
Chester L. Wallack 5,166,982 224,098 5,391,080
B. To ratify appointment of Ferlita, Walsh & Gonzalez, P.A. as our independent
certified public accountants for the 2010 fiscal year.
Votes For 5,287,712
Votes Against 67,322
Votes Abstaining 36,046
=========
Total Voted 5,391,080
C. To ratify the Board of Director's proposal to adopt the 2009 Stock Option
Plan.
Votes For 4,353,949.00
Votes Against 66,200.00
Votes Abstaining 10,000.00
============
Total Voted 4,430,149.00
Subsequent to the tabulation of votes for nominees for the Board of
Directors at our Annual Shareholder's Meeting on December 8, 2009, with votes in
sufficient number having been voted in favor of the appointment of Paul Guilbaud
for service on the Board of Directors, Mr. Guilbaud withdrew his acceptance to
serve on the Board of Directors, citing potential conflicts of interest in
connection with a company with which he recently became involved. The Board of
Directors currently consists of seven directors.
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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
February 16, 2010 By:/s/ REGINA W. ANDERSON
----------------- ----------------------
Date Regina W. Anderson, Chief Executive
Officer
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