SECURITIES & EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-QSB
[x] Quarterly Report Under Section 13 or 15 (d) of the
Securities Exchange Act of 1934
For Quarterly Period Ended March 31, 2008
[ ] Transition Report Under Section 13 or 18(d) of the Exchange Act
Commission File Number: 0-17449
PROCYON CORPORATION
-------------------
(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)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15 (d) of the Securities Exchange Act of 1934 during the past 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 shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes [ ] No [ X ]
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date: Common stock, no par value; 8,055,388
shares outstanding as of May 12, 2008.
Transitional Small Business Disclosure Format (check one) Yes [ ] No [x]
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
OR PLAN OF OPERATION 10
ITEM 3. CONTROLS AND PROCEDURES 16
PART II. - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS 15
ITEM 5. OTHER INFORMATION 16
ITEM 6. EXHIBITS 16
SIGNATURES 17
PROCYON CORPORATION & SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
March 31, 2008 and June 30, 2007
(unaudited) (audited)
March 31, June 30,
2008 2007
----------- -----------
ASSETS
CURRENT ASSETS
Cash $ 332,327 $ 422,876
Certificate of Deposit 235,000 --
Accounts receivable, net of $2,500
allowance for doubtful accounts 167,292 224,460
Inventories 179,075 133,892
Prepaid expenses 139,516 129,476
Deferred tax asset 98,677 169,758
----------- -----------
TOTAL CURRENT ASSETS 1,151,887 1,080,462
PROPERTY AND EQUIPMENT, NET 564,169 589,141
OTHER ASSETS
Deposits 1,513 1,515
Deferred tax asset 365,444 231,274
----------- -----------
366,957 232,789
TOTAL ASSETS $ 2,083,013 $ 1,902,392
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts Payable $ 129,783 $ 108,076
Accrued Expenses 87,651 111,316
Current Portion of Mortgage Payable 22,382 21,201
----------- -----------
TOTAL CURRENT LIABILITIES 239,816 240,593
LONG-TERM LIABILITIES
Mortgage Payable 452,686 469,191
----------- -----------
TOTAL LONG TERM LIABILITIES 452,686 469,191
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 154,950 159,750
Common stock, no par value, 80,000,000 shares
authorized; 8,052,388 shares issued and outstanding 4,416,676 4,411,876
Paid-in Capital 6,000 6,000
Accumulated deficit (3,187,115) (3,385,018)
----------- -----------
TOTAL STOCKHOLDERS' EQUITY 1,390,511 1,192,608
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 2,083,013 $ 1,902,392
=========== ===========
The accompanying notes are an integral part of these financial statements.
3
PROCYON CORPORATION & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Ended March 31, 2008 and 2007
Nine Months Ended March 31, 2008 and 2007
(unaudited) (unaudited) (unaudited) (unaudited)
Three Months Three Months Nine Months Nine Months
Ended Ended Ended Ended
Mar. 31, 2008 Mar. 31, 2007 Mar. 31, 2008 Mar. 31, 2007
------------- ------------- ------------- -------------
NET SALES $ 625,514 $ 698,015 $ 1,963,208 $ 1,850,873
COST OF SALES 147,466 149,873 471,639 422,645
----------- ----------- ----------- -----------
GROSS PROFIT 478,048 548,142 1,491,569 1,428,228
OPERATING EXPENSES
Salaries and Benefits 230,563 227,966 708,412 610,491
Selling, General and Administrative 232,922 193,597 632,950 632,005
----------- ----------- ----------- -----------
463,485 421,563 1,341,362 1,242,496
INCOME FROM OPERATIONS 14,563 126,578 150,207 185,732
OTHER INCOME (EXPENSE)
Interest Income 4,166 3,186 10,721 8,320
Interest Expense (8,772) (9,060) (26,112) (24,619)
----------- ----------- ----------- -----------
(4,606) (5,874) (15,391) (16,299)
INCOME BEFORE INCOME TAXES 9,957 120,705 134,816 169,433
INCOME TAX (EXPENSE) BENEFIT 2,169 98,831 63,089 249,625
----------- ----------- ----------- -----------
NET INCOME 12,126 219,536 197,905 419,058
Dividend requirements on preferred stock (4,978) (5,123) (10,133) (15,368)
----------- ----------- ----------- -----------
Basic net income available to common shares $ 7,148 $ 214,413 $ 187,772 $ 403,690
=========== =========== =========== ===========
Basic net income per common share $ 0.00 $ 0.03 $ 0.02 $ 0.05
Weighted average number of common
shares outstanding 8,055,388 8,049,588 8,053,167 8,049,588
=========== =========== =========== ===========
Diluted net income per common share $ 0.00 $ 0.03 $ 0.02 $ 0.05
Weighted average number of common shares
outstanding, basic and diluted 8,428,866 8,322,571 8,428,866 8,322,571
=========== =========== =========== ===========
The accompanying notes are an integral part of these financial statements.
4
PROCYON CORPORATION & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Nine Months Ending March 31, 2008 and 2007
(unaudited) (unaudited)
March 31, March 31,
2008 2007
--------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income $ 197,905 $ 419,058
Adjustments to reconcile net income to net cash used in operating activities:
Depreciation 26,883 27,221
Deferred Income Taxes (63,089) (249,624)
Decrease (increase) in:
Accounts Receivable 57,168 (32,634)
Inventory (45,183) 13,267
Prepaid Expenses (10,040) (2,666)
Other Assets -- 4,596
Increase (decrease) in:
Accounts Payable 21,707 (17,778)
Accrued Expenses (23,665) 5,594
--------- ---------
NET CASH PROVIDED BY OPERATING ACTIVITIES 161,686 167,034
CASH FLOW FROM INVESTING ACTIVITIES
Purchase of Certificates of Deposit (235,000) --
Purchase of property & equipment (1,911) (45,990)
--------- ---------
NET CASH USED BY INVESTING ACTIVITIES (236,911) (45,990)
CASH FLOW FROM FINANCING ACTIVITIES
Payments on Mortgage Payable (15,324) (12,749)
--------- ---------
NET CASH USED BY FINANCING ACTIVITIES (15,324) (12,749)
NET CHANGE IN CASH (90,549) 108,295
CASH AT BEGINNING OF PERIOD 422,876 288,377
--------- ---------
CASH AT END OF PERIOD $ 332,327 $ 396,672
========= =========
SUPPLEMENTAL DISCLOSURES
Interest Paid $ 26,112 $ 24,619
Taxes Paid $ -- $ --
NONCASH TRANSACTION DISCLOSURE
Purchase of Office Building Financed by Mortgage $ -- $ 508,000
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,
2007. The results for interim periods are not necessarily indicative of
results that may be expected for any other interim period or for the full
year.
Management of the Company has prepared the accompanying unaudited
condensed financial statements prepared in conformity with generally
accepted accounting principles, which require the use of management
estimates, contain all adjustments (including normal recurring adjustments)
necessary to present fairly the operations and cash flows for the period
presented and to make the financial statements not misleading.
STOCK-BASED COMPENSATION
In December 2004, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 123R ("SFAS 123R"),
"Share-Based Payment," which is a revision of Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation."
SFAS 123R is effective for small business publicly traded companies, for
interim or annual periods beginning after December 15, 2005. It supersedes
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" and amends Statement of Financial Accounting Standards No. 95,
"Statement of Cash Flows." SFAS 123R requires all share-based payments to
employees, including grants of employee stock options, to be recognized in
the statement of operations based upon their fair values and rescinds the
acceptance of pro forma disclosure. SFAS 123R permits two methods of
adoption, a "modified prospective" method and a "modified retrospective"
method. Under the modified prospective method, stock-based compensation
cost is recognized, beginning with the effective date, based on the
requirements of SFAS 123R for all share-based payments granted after the
effective date and for all awards granted prior to the effective date that
remain unvested on the effective date. The modified retrospective method
includes the requirements of the modified prospective method and also
permits restatement of prior periods based on amounts previously reported
in pro forma disclosures pursuant to SFAS 123 for either all periods
presented or for only prior interim periods of the year of adoption. We
adopted the modified prospective method prescribed in SFAS 123R, effective
January 1, 2006.
On March 31, 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.
6
These options were vested at the time of grant. During the quarter ended
March 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 March 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 March 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:
March 31, June 30,
2008 2007
-------- --------
Finished Goods $ 67,482 $ 36,509
Raw Materials $111,593 $ 97,383
-------- --------
$179,075 $133,892
======== ========
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
7
be cumulative from the date of issuance of the Series A Preferred Stock and
will be payable quarterly in arrears in cash or publicly traded common
stock when and if declared by the Board of Directors. As of March 31, 2008,
no dividends have been declared. Dividends in arrears on the outstanding
preferred shares total $216,484 as of March 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
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.
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 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.
The plan stipulates timing, volume and pricing restrictions among other
things. Procyon has no commitment or obligation to purchase all or any
portion of the authorized shares. All shares purchased are canceled and
returned to the status of authorized but unissued common stock. The plan
does not have an expiration date. As of March 31, 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 March 31, 2008, the Company had consolidated income tax net
operating loss ("NOL") carryforward for federal income tax purposes of
approximately $2,863,000. The federal NOL will expire in various years
ending through the year 2023.
For the nine months ended March 31, 2008 and 2007, the components of
the provision for income taxes (benefits) are attributable to continuing
operations as follows:
Nine Months Nine Months
3/31/08 3/31/07
--------- ---------
Current
Federal $ -- $ --
State -- --
--------- ---------
$ -- $ --
Deferred
Federal $ (53,869) $(213,140)
State (9,220) (36,485)
--------- ---------
$ (63,089) $(249,625)
========= =========
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:
Net operating loss & contribution carryforwards $ 97,736 $ 981,249
Allowance for doubtful accounts 941 --
Less: Valuation allowance -- (607,257)
--------- ---------
98,677 373,992
Deferred tax liability
Excess of tax over book depreciation -- (8,548)
--------- ---------
98,677 365,444
Net deferred tax asset $ 98,677 $ 365,444
========= =========
The change in the valuation allowance is as follows:
June 30, 2007 $(737,284)
March 31, 2008 (607,257)
---------
Change in valuation allowance $(130,027)
=========
The decrease in the valuation allowance is due to an increase in the
expected utilization of net operating loss carry forwards. A valuation
allowance of approximately $607,000 has been provided to reduce the asset
to the net amount of tax benefit management believes it will more likely
than not realize. As time passes, management will be able to better assess
the amount of tax benefit it will realize from using the carryforward.
Income taxes for the nine month periods ended March 31, 2008, and
March 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:
Nine Months Nine Months
3/31/08 3/31/07
--------- ---------
Expected provision (benefit) $ 45,839 $ 59,596
State income taxes net of federal benefits 4,894 6,363
Nondeductible (income) expense 3,525 1,323
Change in estimates 12,680 1,533
Change in valuation allowance (130,027) (318,440)
--------- ---------
$ (63,089) $(249,625)
========= =========
9
NOTE E - MORTGAGE PAYABLE
On July 21, 2006, we entered into a mortgage loan 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 $26,007 for the nine months ended March 31, 2008.
Maturities of long-term debt associated with the mortgage payable are as
follows:
Year Ending June 30,
---------------------------------------
3 months 2008 $ 5,445
2009 22,790
2010 24,498
2011 26,335
2012 28,309
2013 and thereafter 367,691
-----------
475,068
Less current portion 22,382
-----------
$ 452,686
===========
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.
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.
10
"Safe Harbor" Statement under the Private Securities Litigation Reform Act
of 1995
This Report on Form 10-QSB, 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
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-KSB, for the year
ended June 30, 2007, which was filed with the Securities and Exchange
Commission on September 27, 2007. The estimates used by management are
based upon the Company's historical experiences combined with management's
understanding of current facts and circumstances. Certain of the Company's
accounting policies are considered critical as they are both important to
the portrayal of the Company's financial condition and the results of its
operations and require significant or complex judgments on the part of
management. We believe that the following critical accounting policies
affect the more significant judgments and estimates used in the preparation
of our financial statements.
Accounts Receivable Allowance
Accounts receivable allowance reflects a reserve that reduces our
customer accounts and receivable to the net amount estimated to be
collectible. The valuation of accounts receivable is based upon the
credit-worthiness of customers and third-party payers as well as historical
collection experience. Allowances for doubtful accounts are recorded as a
selling, general and administrative expense for estimated amounts expected
to be uncollectible from third-party payers and customers. The Company
bases its estimates on its historical collection experience, current
trends, credit policy and on the analysis of accounts by aging category. At
March 31, 2008, our allowance for doubtful accounts totaled $2,500.
11
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"). We maintain a valuation
allowance 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. In accordance with SFAS 109 and based upon a
review at March 31, 2008, of our utilization of deferred tax assets, we
maintained a valuation allowance of $607,257. 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.
12
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.
Financial Condition
As of March 31, 2008, the Company's principal sources of liquid assets
included cash of $332,327, inventories of $179,075, and net accounts
receivable of $167,292. The company also invested $235,000 in short term
Certificates of Deposit, to take advantage of higher interest rates
relative to money market rates. The Company had net working capital of
$912,071, and long-term debt of $452,686 at March 31, 2008.
During the nine months ended March 31, 2008, cash decreased from
$422,876 as of June 30, 2007, to $332,327. Operating activities provided
cash of $161,686 during the period, consisting primarily of net income of
$197,905. Cash used by financing activities was $15,324 as compared to cash
used by financing activities of $12,749 for the corresponding period in
2007.
The Company recorded a current deferred tax asset of $98,677, and
non-current deferred tax asset of $365,444, at March 31, 2008. A valuation
allowance of approximately $607,000 has been recorded to reduce the asset
to the net amount of expected tax benefit management believes it will more
likely than not realize. 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.
13
Results of Operations
Comparison of the three and nine months ended March 31, 2008 and 2007.
Net sales during the quarter ended March 31, 2008, were $625,514, as
compared to $698,015 in the quarter ended March 31, 2007, a decrease of
$72,501, or approximately 10%. Net sales during the nine months ended March
31, 2008, were $1,963,208, as compared to $1,850,873 in the nine months
ended March 31, 2007, an increase of $112,335, or approximately 6%. Our net
sales for the nine months ended March 31, 2008, increased in the second
quarter as a result of notifying customers of a price increase that took
effect January 1, 2008. It is believed that third quarter sales decreased
as a result of distributors adjusting inventory levels, as well as
customers increasing inventory levels in the second quarter to take
advantage of the former, lower pricing levels. 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.
Gross profit during the quarter ended March 31, 2008, was $478,048, as
compared to $548,142 during the quarter ended March 31, 2007, a decrease of
$70,094, or approximately 13%. As a percentage of net sales, gross profit
was approximately 76% in the quarter ended March 31, 2008, and
approximately 79% in the corresponding quarter in 2007. Gross profit during
the nine months ended March 31, 2008, was $1,491,569, as compared to
$1,428,228 during the nine months ended March 31, 2007, an increase of
$63,341, or approximately 4%. As a percentage of net sales, gross profit
was approximately 76% in the nine months ended March 31, 2008, and
approximately 77% in the corresponding nine months in 2007.
Operating expenses during the quarter ended March 31, 2008, were
$463,485, consisting of $230,563 in salaries and benefits, and $232,922 in
selling, general and administrative expenses. This compares to operating
expenses during the quarter ended March 31, 2007, of $421,563, consisting
of $227,966 in salaries and benefits, and $193,597 in selling, general and
administrative expenses. Expenses for the quarter ended March 31, 2008,
increased by $41,922, or approximately 10% compared to the corresponding
quarter in 2007. Increases in the salaries and benefits for the current
nine month period was due to an increase in staffing and increased
commissions from increased sales in fiscal 2008. Selling, general and
administrative cost remained steady for the nine months ended March 31,
2008, compared to the nine months ended March 31, 2007, increasing by $945.
Operating expenses during the nine months ended March 31, 2008, were
$1,341,362, consisting of $708,412 in salaries and benefits, and $632,950
in selling, general and administrative expenses. This compares to operating
expenses during the nine months ended March 31, 2007 of $1,242,496,
consisting of $610,491 in salaries and benefits, and $632,005 in selling,
general and administrative expenses. Expenses for the nine months ended
March 31, 2008, increased by $98,866, or approximately 8% compared to the
corresponding period in 2007, due primarily to increased expenditures in
marketing.
Operating profit decreased by $112,015 (approximately 88%) to $14,563
for the quarter ended March 31, 2008, as compared to $126,578 in the
comparable quarter of the prior year. Net income (before dividend
requirements for Preferred Shares) was $12,126 during the quarter ended
March 31, 2008, as compared to $219,536 during the quarter ended March 31,
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2007, a decrease of 94%. The decrease in net income was primarily
attributable to a decrease in sales, combined with a decrease in income tax
benefit as compared to the previous period. The current deferred tax asset
calculation is based on a three year projection verses a two year
projection utilized in previously reported quarters. The three year
projection is currently utilized to reflect the Company's increased fiscal
stability as reported for the past twenty quarters. 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 as the Company finds new markets for both its products
and services.
NOTE F - RECENTLY ISSUED ACCOUNTING STANDARDS
In September 2006, the Financial Accounting Standards Board ("FASB")
issued SFAS No. 157, "Fair Value Measurements," which defines fair value,
establishes a framework in generally accepted accounting principles for
measuring fair value and expands disclosures about fair value measurements.
This standard only applies when other standards require or permit the fair
value measurement of assets and liabilities. It does not increase the use
of fair value measurement. SFAS No. 157 is effective for fiscal years
beginning after November 15, 2007, except as it relates to nonrecurring
fair value measurements of nonfinancial assets and liabilities for which
the standard is effective for fiscal years beginning after November 15,
2008. The Company is evaluating the impact on its consolidated financial
statements as a result of the adoption of SFAS No. 157 with respect to
financial assets and liabilities.
In February 2007, the FASB issued Statement of Financial Accounting
Standard ("SFAS") No. 159, "The Fair Value Option for Financial Assets and
Financial Liabilities Including an Amendment of FASB Statement No. 115."
This standard permits entities to choose to measure eligible items at fair
value at specified election dates and report unrealized gains and losses on
items, for which the fair value option has been elected, in earnings at
each subsequent reporting date. SFAS No. 159 is effective for fiscal years
beginning after November 15, 2007. The Company is evaluating the impact on
its consolidated financial statements as a result of the adoption of SFAS
No. 159.
ITEM 3. 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 ensuring
that 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 ensuring that this information is 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
During the third fiscal quarter of 2008, the Company did not institute
any significant changes in its internal control over financial reporting
that materially affected or is reasonably likely to materially affect, the
Company's internal control over financial reporting.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None.
ITEM 5. OTHER INFORMATION
On May 6, 2008, the Company announced that the recently published
"Podiatry Management 25th Annual Survey" of podiatrists placed Amerigel(R)
at the top of two lists regarding physician recommended treatment products.
According to the Annual Survey, Amerigel(R) was ranked as the #1
topical dressing of choice following matrixectomy for the 5th consecutive
year. Amerigel(R) Wound Dressing represented a definitive lead over other
topical dressings recommended for post-matrixectomy treatment with 45% of
the respondents reporting it as their first choice for treatment, a 17%
increase over the previous year's percentage. Amerigel(R) was named the
treatment of choice by more podiatrists than all the other name brands that
were included in the survey combined.
Amerigel(R) Wound Dressing was also ranked as the #1 product
recommended for non-graft treatment of wounds and ulcers for the second
straight year. Twenty-three percent of the respondents reported that they
recommended Amerigel(R) for non-graft wound/ulcer treatments, an 8%
increase over the previous year's response.
ITEM 6. EXHIBITS
(A) EXHIBITS
31.1 Certification of Regina W. Anderson pursuant to Exchange Act Rule
13a-14(a)/15d-14(a)
31.2 Certification of James B. Anderson pursuant to Exchange Act Rule
13a-14(a)/15d-14(a)
32.1 Certification Pursuant to 18 U.S.C.ss.1350, as Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act Of 2002
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SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, there unto duly
authorized.
PROCYON CORPORATION
May 14, 2008 By: /s/ REGINA W. ANDERSON
------------ ----------------------
Date Regina W. Anderson,
Chief Executive Officer
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