PROCYON CORP - Quarter Report: 2011 March (Form 10-Q)

procyon3312011.htm

SECURITIES & EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-Q

[x] Quarterly Report Under Section 13 or 15 (d) of

the Securities Exchange Act of 1934

For Quarterly Period Ended March 31, 2011

[ ] 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
(State of Incorporation)	(IRS Employer Identification Number)

1300 S. Highland Ave. Clearwater, FL 33756

(Address of Principal Offices)

(727) 447-2998

(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 (§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 (Do not check if a smaller reporting company)__	Smaller reporting company X

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [ X ]

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: Common stock, no par value; 8,055,388 shares outstanding as of May 11, 2011.

PART I. - FINANCIAL INFORMATION


Item	Page


ITEM 1. FINANCIAL STATEMENTS	3

Index to Financial Statements

Financial Statements:

Consolidated Balance Sheets	3
Consolidated Statements of Operations	4
Consolidated Statements of Cash Flows	5
Notes to Financial Statements
	6

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS	12


ITEM 4. CONTROLS AND PROCEDURES	15


PART II. - OTHER INFORMATION


ITEM 5. OTHER INFORMATION	16

ITEM 6. EXHIBITS	16

SIGNATURES	17

PROCYON CORPORATION & SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
March 31, 2011 and June 30, 2010

	(unaudited)			(audited)
ASSETS	March 31,			June 30,
	2011			2010
CURRENT ASSETS
Cash	$	731,063		$	827,512
Certificates of Deposit, plus accrued interest		154,583			54,028
Accounts Receivable, less allowance for doubtful accounts of $1,000.		184,968			184,130
Inventories		242,270			188,287
Prepaid Expenses		161,906			116,815
Deferred Tax Asset		88,497			121,391
TOTAL CURRENT ASSETS		1,563,287			1,492,163

PROPERTY AND EQUIPMENT, NET		539,245			513,925

OTHER ASSETS
Deposits		792			1,854
Deferred Tax Asset		794,925			861,945
		795,717			863,799

TOTAL ASSETS	$	2,898,249		$	2,869,887


LIABILITIES AND STOCKHOLDERS' EQUITY

CURRENT LIABILITIES
Accounts Payable	$	144,424		$	184,942
Accrued Expenses		126,294			128,006
Current Portion of Mortgage Payable		30,956			26,335
TOTAL CURRENT LIABILITIES		301,674			339,283

LONG TERM LIABILITIES
Mortgage Payable		323,013			397,367
TOTAL LONG TERM LIABILITIES		323,013			397,367

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; 8,055,388 shares issued and
outstanding.
Paid-in Capital		6,000			6,000
Accumulated Deficit		(2,304,064	)		(2,444,389	)
TOTAL STOCKHOLDERS' EQUITY	$	2,273,562			2,133,237

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY	$	2,898,249		$	2,869,887




The accompanying notes are an integral part of these financial statements.

PROCYON CORPORATION & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Three & Nine Months Ended March 31, 2011 and 2010
	(unaudited)			(unaudited)			(unaudited)			(unaudited)
	Three Months			Three Months			Nine Months			Nine Months
	Ended			Ended			Ended			Ended
	Mar. 31, 2011			Mar. 31, 2010			Mar. 31, 2011			Mar. 31, 2010

NET SALES	$	581,153		$	668,641		$	1,979,632		$	1,889,101

COST OF SALES		129,277			134,059			426,247			382,150

GROSS PROFIT		451,876			534,582			1,553,385			1,506,951

OPERATING EXPENSES
Salaries and Benefits		236,411			233,757			700,836			726,356
Selling, General and Administrative		216,349			199,673			593,252			610,984
		452,760			433,430			1,294,088			1,337,340

INCOME (LOSS) FROM OPERATIONS		(884	)		101,152			259,297			169,611

OTHER INCOME (EXPENSE)
Interest Expense		(6,679	)		(7,846	)		(21,674	)		(24,247	)
Interest Income		756			1,572			2,617			5,262
		(5,923	)		(6,274	)		(19,057	)		(18,985	)

INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME TAXES		(6,807	)		94,878			240,240			150,626

INCOME TAX EXPENSE		(2,841	)		(35,061	)		(99,914	)		(61,786	)

NET INCOME (LOSS) FROM CONTINUING OPERATIONS		(9,648	)		59,817			140,326			88,840

DISCONTINUED OPERATIONS
Income from Operations of Discontinued Component		-			712			-			40,077
Provision for Income Tax Expense		-			(268	)		-			(15,081	)
NET INCOME FROM DISCONTINUED OPERATIONS		-			444			-			24,996

NET INCOME (LOSS)		(9,648	)		60,261			140,326			113,836

Dividend requirements on preferred stock		(4,977	)		(4,977	)		(14,933	)		(14,933	)

Basic net income (loss) available to common shares	$	(14,625	)	$	55,284		$	125,393		$	98,903

Basic net income per common share
Continuing Operations	$	(0.00	)	$	0.01		$	0.02		$	0.01
Discontinued Operations	$	-		$	-		$	-		$	-
Total Basic Net Income Per Share	$	(0.00	)	$	0.01		$	0.02		$	0.01

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	$	(0.00	)	$	0.01		$	0.02		$	0.01
Discontinued Operations	$	-		$	-		$	-		$	-
Total Diluted Net Income Per Share	$	(0.00	)	$	0.01		$	0.02		$	0.01

Weighted average number of common shares outstanding, diluted		8,254,488			8,254,488			8,254,488			8,254,488



The accompanying notes are an integral part of these financial statements.

PROCYON CORPORATION & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Nine Months Ending March 31, 2011 and 2010

	(unaudited)			(unaudited)
	March 31,			March 31,
	2011			2010

CASH FLOWS FROM OPERATING ACTIVITIES

Net Income	$	140,326		$	113,836
Adjustments to reconcile net income to net cash used in operating activities:
Depreciation		25,918			21,973
Deferred Income Taxes		99,914			76,867
Allowance for Doubtful Accounts		-			(3,200	)
Accrued Interest on Certificates of Deposit		685			5,407
Decrease (increase) in:
Accounts Receivable		(838	)		17,389
Inventory		(53,983	)		(26,529	)
Prepaid Expenses		(45,092	)		8,071
Other Assets		1,062			-
Increase (decrease) in:
Accounts Payable		(40,518	)		(35,120	)
Accrued Expenses		(1,712	)		(8,598	)
NET CASH PROVIDED BY OPERATING ACTIVITIES		125,762			170,096

CASH FLOW FROM INVESTING ACTIVITIES

Purchase of Certificate of Deposit		(101,240	)		-
Redemption of Certificate of Deposit		-			189,659
Purchase of property & equipment		(51,238	)		(8,573	)
NET CASH PROVIDED (USED) BY INVESTING ACTIVITIES		(152,478	)		181,086

CASH FLOW FROM FINANCING ACTIVITIES

Payments on Mortgage Payable		(69,733	)		(17,830	)
NET CASH USED BY FINANCING ACTIVITIES		(69,733	)		(17,830	)

NET CHANGE IN CASH		(96,449	)		333,352

CASH AT BEGINNING OF PERIOD		827,512			403,030

CASH AT END OF PERIOD	$	731,063		$	736,382

SUPPLEMENTAL DISCLOSURES

Interest Paid	$	21,654		$	24,189
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.

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, 2010. 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

Stock based compensation is accounted for in accordance with Topic 718 - Compensation -Stock Compensation in the Accounting Standards Codification. Pursuant to Topic 718, 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. Topic 718 rescinds the acceptance of pro forma disclosure. In December 2009, our shareholders approved the adoption of a new stock option plan, providing the Company a continued means of offering stock-based compensation.

On March 31, 2011, there were no outstanding options to purchase shares of our common stock. The previously reported 65,000 options outstanding, expired in November 2010. Therefore, the adoption of Topic 718 does not have a material impact on our statement of operations for period ending March 31, 2011.

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, 2011 and 2010.

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.

EARNINGS PER SHARE

Basic earnings per share (EPS) is computed by dividing income available to common stockholders by the weighted-average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution that would occur if dilutive securities such as stock options and other contracts to issue Common Stock were exercised or converted into Common Stock or resulted in the issuance of Common Stock that then shared in earnings. We use the treasury stock method to compute potential common shares from stock options and the as-if-converted method to compute potential common shares from Preferred Stock.

For the three months ended March 31, 2011, in which net losses occurred, all potential common shares were excluded from diluted EPS because the effect of including such shares would be anti-dilutive.

SUBSEQUENT EVENTS

We have evaluated subsequent events through May 12, 2011, which is the date the financial statements were available to be issued.

NOTE B - INVENTORIES

Inventories consisted of the following:
	March 31,		June 30,
	2011		2010

Finished Goods	$	130,420	$	83,311
Raw Materials	$	111,850	$	104,976
	$	242,270	$	188,287

NOTE C - STOCKHOLDERS’ EQUITY

During January 1995, the Company's Board of Directors authorized the issuance of up to 4,000,000 shares of Series A Cumulative Convertible Preferred Stock (“Series A Preferred Stock”). The preferred stockholders are entitled to receive, as and if declared by the board of directors, quarterly dividends at an annual rate of $.10 per share of Series A Preferred Stock per annum. Dividends will accrue without interest and will be cumulative from the date of issuance of the Series A Preferred Stock and will be payable quarterly in arrears in cash or publicly traded common stock when and if declared by the Board of Directors. As of March 31, 2011, no dividends have been declared. Dividends in arrears on the outstanding preferred shares total $276,214 as of March 31, 2011.

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.

The Board of Directors of the Company approved a plan on December 8, 2007 to repurchase shares of Procyon Corporation's outstanding common stock. The repurchase plan authorizes management to repurchase from time to time up to 10% of the total outstanding shares of common stock as of December 8, 2007, subject to applicable SEC regulations and compliance with the Company's trading window policies. The Board's authorization is based on its belief that Procyon's common stock is underpriced at times given the Company's working capital, liquidity, assets, book value and future prospects. The shares may be repurchased from time to time in the open market, through block purchases or in privately negotiated transactions depending upon market conditions and other factors, in accordance with SEC Rule 10b-18. Procyon has no commitment or obligation to purchase all or any portion of the authorized shares. All shares purchased are canceled and returned to the status of authorized but unissued common stock. The plan does not have an expiration date. As of March 31, 2011, 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, 2011, the Company had consolidated income tax net operating loss ("NOL") carryforward for federal income tax purposes of approximately $2,359,000. The federal NOL will expire in various years ending through the year 2019. The benefits of NOL carryforward for the nine months ended March 31, 2011 and 2010 were $99,914 and $76,867, respectively.

The components of the provision for income taxes (benefits) attributable to continuing and discontinued operations are as follows:

	Nine Months 3/31/2011		Nine Months 3/31/2010
Current
Federal	$	0	$	0
State		0		0
	$	0	$	0

Deferred Continuing Operations
Federal	$	85,311	$	52,036
State		14,603		9,750
	$	99,914	$	61,786
Deferred - Discontinued Operations
Federal	$	-	$	13,626
State		-		1,455
	$	-	$	15,081

Total Income Tax Expense	$	99,914	$	76,867

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	$	88,873		$	798,860
	Allowance for doubtful accounts		(376	)		-
	Excess of tax over book depreciation		-			(3,935	)
			88,497			794,925

Net Deferred Tax Asset		$	88,497		$	794,925

The Change in valuation allowance is as follows:


June 30, 2010	$	-
March 31, 2011	$	-
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 March 31, 2011 and 2010 differ from the amounts computed by applying the effective income tax rates of 37.63%, to income taxes as a result of the following:

	Nine Months Mar. 31, 2011		Nine Months Mar. 31, 2010
Continuing Operations
Expected provision at US statutory rate	$	81,682	$	51,213
State income tax net of federal benefit		8,721		5,468
Nondeductible & timing differences		2,474		2,686
Change in estimates in available NOL carryforwards		7,038		2,419
Income Tax Expense	$	99,914	$	61,786
Discontinued Operations
Expected provision at US statutory rate	$	-		13,626
State income tax net of federal benefit		-		1,455
Income Tax Expense	$	-	$	15,081

The earliest tax year still subject to examination by a major taxing jurisdiction is fiscal year end June 30, 2007.

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 $483,000. The mortgage loan is due in July 2021 and interest is fixed at 7.25%. Interest expense was $21,674 for the nine months ended March 31, 2011. As of September 21, 2010, the interest rate on the mortgage was adjusted to 6.85% for the remainder of the term of the loan.

Maturities of long-term debt associated with the mortgage payable are as follows:

Year Ending June 30,

3 months 2011	$	7,799

2012		31,276

2013		33,312

2014		35,569

2015		38,120

2016 and thereafter		207,893
		353,969
Less current portion		30,956
	$	323,013

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 $242,270 and accounts receivable assets of $184,968. The line of credit is renewable annually in April. The C.E.O. of the Company personally guaranteed the line of credit to the Company. At March 31, 2011, 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 prime rate at the time of advance. The interest rate can fluctuate according to the changes in its published prime rate.

NOTE G - RELATED PARTY TRANSACTIONS

Our Chief Executive Officer, Regina W. Anderson, guaranteed a loan for the Company in the amount of $508,000, issued in connection with our purchase of our office building in July 2006, as well as the $250,000 line of credit.

NOTE H - DISCONTINUED OPERATIONS

As previously reported, 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 income (loss) from operations of discontinued components in the statements of operations. The completion of the 180 day price adjustment period resulted in no new payments. The agreement also contains a non-compete period of two years, prohibiting Sirius from engaging in the business of the sale of diabetic testing supply products.

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.

	Nine Months 3/31/2011		Nine Months 3/31/2010

Revenues	$	-	$	17,753

Cost of Sales		-		14,215

Salaries and Benefits		-		6,470

Selling, General and Administrative		-		38,985

Loss from Operations		-		(41,919	)

Interest Income		-		1,996

Gain on Sale of Disclosed Assets		-		80,000

Income from Discontinued Operations		-		40,077

Income Tax Benefit		-		(15,081	)

Income from Discontinued Operations, net of income taxes	$	-	$	24,996

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 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, 2010, which was filed with the Securities and Exchange Commission on September 28, 2010. 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, 2011 our allowance for doubtful accounts totaled $1,000.

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 enacted 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 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 March 31, 2011. 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

Stock based compensation is accounted for in accordance with Topic 718 - Compensation - Stock Compensation in the Accounting Standards Codification. 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. Topic 718 rescinds the acceptance of pro forma disclosure.

Disposition of Assets of Subsidiary

As previously reported, effective July 31, 2009, our wholly-owned subsidiary, Sirius Medical Supply Co. (“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 July 31, 2009, Sirius no longer markets diabetic testing products. Management is considering various alternatives for Sirius' future business operations.

FINANCIAL CONDITION

As of March 31, 2011 the Company's principal sources of liquid assets included cash of $731,063, inventories of $242,270, and net accounts receivable of $184,968. The company also has $154,583 in short term Certificate of Deposits. The Company had net working capital of $1,261,613, and long-term debt of $323,013 at March 31, 2011.

During the nine months ended March 31, 2011, cash decreased from $827,512 as of June 30, 2010, to $731,063. Operating activities provided cash of $125,762 during the period, consisting primarily of net income of $140,326. Cash used by investing activities was $152,478 as compared to cash provided of $181,086 for the corresponding period in 2010.

The Company recorded a current deferred tax asset of $88,497, and non-current deferred tax asset of $794,925, at March 31, 2011. Because the recoverability of deferred tax assets is directly dependent upon future operating results, actual recoverability of deferred tax assets may differ materially from our estimates.

RESULTS OF OPERATIONS

Comparison of the three and nine months ended March 31, 2011 and 2010.

Net sales during the quarter ended March 31, 2011, were $581,153, as compared to $668,641 in the quarter ended March 31, 2010, a decrease of $87,488, or approximately 13%. Net sales during the nine months ended March 31, 2011, were $1,979,632, as compared to $1,889,101 in the nine months ended March 31, 2010, an increase of $90,531, or approximately 5%. We believe that sales for the three month period decreased when compared to the previous year, largely due to customers increasing inventory last quarter to delay the January 1st price increase. We believe that sales for the nine month period increased over the previous corresponding period due largely to expansion of our customer base, and our current customers increasing the scope of our products they dispense in their office.

Gross profit during the quarter ended March 31, 2011, was $451,876, as compared to $534,582 during the quarter ended March 31, 2010, a decrease of $82,706, or approximately 15%. As a percentage of net sales, gross profit was approximately 78% in the quarter ended March 31, 2011, and approximately 80% in the corresponding quarter in 2010. Gross profit during the nine months ended March 31, 2011, was $1,553,385, as compared to $1,506,951 during the nine months ended March 31, 2010, an increase of $46,434, or approximately 3%. As a percentage of net sales, gross profit was approximately 78% in the nine months ended March 31, 2011, and approximately 80% in the corresponding nine months in 2010.

Operating expenses during the quarter ended March 31, 2011, were $452,760, consisting of $236,411 in salaries and benefits, and $216,349 in selling, general and administrative expenses. This compares to operating expenses during the quarter ended March 31, 2010, of $433,430, consisting of $233,757 in salaries and benefits, and $199,673 in selling, general and administrative expenses. Expenses for the quarter ended March 31, 2011, increased by $19,330, or approximately 4% compared to the corresponding quarter in 2010.

Operating profit decreased by $102,036 to a loss of $884 for the quarter ended March 31, 2011, as compared to a profit of $101,152 in the comparable quarter of the prior year. Net loss from continuing operations before income taxes was $6,807 during the quarter ended March 31, 2011, as compared to net profit from continuing operations before income taxes of $94,878 during the quarter ended March 31, 2010. We believe that the decrease in net income from continuing operations before income taxes in the three month period was primarily attributable to the reduction of third quarter sales that followed our price increases. Sales in the third quarter were lower as customers increased inventory levels prior to the price increases on January 1, 2011.

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 not 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, because of the identification of certain material weaknesses in our internal control over financial reporting which are identified below, which we view as an integral part of our disclosure controls and procedures.

(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, 2010 revealed several deficiencies 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 fiscal 2011, the Company has continued to address changes needed to improve board oversight of the financial statement process and the deferred tax asset calculation. We have also instituted some changes in segregation of duties as current staffing permits. By the end of the third fiscal quarter we feel we have remedied our deficiencies in the calculation of the deferred tax asset. We expect to further address the continuing material weaknesses on an on-going basis.

PART II. OTHER INFORMATION

ITEM 5. Other Information.

None.

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.§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

Date: May 16, 2011	By:	/s/ REGINA W. ANDERSON
		Regina W. Anderson, Chief Executive Officer
		Title