PROCYON CORP - Quarter Report: 2017 December (Form 10-Q)

 

UNITED STATES SECURITIES & EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

[x]	QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	For Quarterly Period Ended December 31, 2017
or
[ ]	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the transition period from              to

 

Commission File Number: 0-17449

 

PROCYON CORPORATION

(Exact Name of Registrant as specified in its charter)

 

COLORADO	59-3280822
(State of Incorporation)	(I.R.S. Employer Identification Number)

 

1300 S. Highland Ave. Clearwater, FL 33756

(Address of Principal Executive Offices)

 

(727) 447-2998

(Registrant’s Telephone Number, Including Area Code)

 

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 ☒ 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, smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and “emerging growth 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 ☒
	Emerging growth company ☐

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). YES ☐ NO ☒

 

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; 8,077,388 shares outstanding as of February 8, 2018.

 

  

 

Item	Page
PART I. - FINANCIAL INFORMATION
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 Consolidated Financial Statements	6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	11
ITEM 4. CONTROLS AND PROCEDURES	14
PART II. - OTHER INFORMATION
ITEM 6. EXHIBITS	15
SIGNATURES	15

 

 

 

		(unaudited)				(audited)
		December 31,				June 30,
		2017				2017
ASSETS
CURRENT ASSETS
Cash		$	71,484			$	173,173
Certificates of Deposit, plus accrued interest			153,089				102,141
Accounts Receivable, less allowance for doubtful accounts of $566 and $1,001 respectively.			314,634				391,539
Inventories			606,217				506,719
Prepaid Expenses			251,638				175,206
TOTAL CURRENT ASSETS			1,397,062				1,348,778
CERTIFICATES OF DEPOSIT, PLUS ACCRUED INTEREST			-				111,669
PROPERTY AND EQUIPMENT, NET			499,681				513,779
OTHER ASSETS
Deposits			4,192				4,192
Inventories			70,655				70,655
Intangible Asset			17,000				17,000
Deferred Tax Asset, net valuation allowance of $108,150 and $0, respectively			258,297				663,738
			350,144				755,585
TOTAL ASSETS		$	2,246,887			$	2,729,811
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts Payable		$	148,459			$	120,584
Capital Lease Liability			1,894				3,788
Accrued Expenses			175,453				315,829
TOTAL CURRENT LIABILITIES			325,806				440,201
CAPITAL LEASE LIABILITY			2,110				2,110
COMMITMENTS AND CONTINGENCIES (NOTE I)			-				-
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; 194,100 shares issued and outstanding.			136,860				136,860
Common Stock, no par value, 80,000,000 shares authorized; 8,077,388 shares issued and outstanding.			4,434,766				4,434,766
Paid-in Capital			15,885				15,885
Accumulated Deficit			(2,668,540	)			(2,300,011	)
TOTAL STOCKHOLDERS' EQUITY			1,918,971				2,287,500
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY		$	2,246,887			$	2,729,811

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		(unaudited)				(unaudited)				(unaudited)				(unaudited)
		Three Months				Three Months				Six Months				Six Months
		Ended				Ended				Ended				Ended
		Dec. 31, 2017				Dec. 31, 2016				Dec. 31, 2017				Dec. 31, 2016
NET SALES		$	1,017,779			$	1,039,835			$	1,848,850			$	1,919,568
COST OF SALES			272,904				312,861				495,732				569,653
GROSS PROFIT			744,875				726,974				1,353,118				1,349,915
OPERATING EXPENSES
Salaries and Benefits			397,645				402,989				729,085				741,253
Selling, General and Administrative			325,807				285,338				587,584				521,128
			723,452				688,327				1,316,669				1,262,381
INCOME / (LOSS) FROM OPERATIONS			21,423				38,647				36,449				87,534
OTHER INCOME (EXPENSE)
Interest Expense			-				(1,081	)			-				(2,811	)
Interest Income			193				396				462				1,166
			193				(685	)			462				(1,645	)
INCOME / (LOSS) BEFORE INCOME TAXES			21,616				37,962				36,911				85,889
INCOME TAX (EXPENSE) / BENEFIT			(398,011	)			(15,634	)			(405,441	)			(34,678	)
NET INCOME / (LOSS)			(376,395	)			22,328				(368,530	)			51,211
Dividend requirements on preferred stock			(4,427	)			(4,853	)			(8,855	)			(9,705	)
Basic net income (loss) available to common shares		$	(380,822	)		$	17,475			$	(377,385	)		$	41,506
Basic net income (loss) per common share		$	(0.05	)		$	0.00			$	(0.05	)		$	0.01
Weighted average number of common shares outstanding			8,077,388				8,060,388				8,077,388				8,060,388
Diluted net income (loss) per common share		$	(0.05	)		$	0.00			$	(0.05	)		$	0.01
Weighted average number of common shares outstanding, diluted			8,077,388				8,264,488				8,077,388				8,274,488

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		(unaudited)				(unaudited)
		December 31,				December 31,
		2017				2016
CASH FLOWS FROM OPERATING ACTIVITIES
Net (Loss) / Income		$	(368,530	)		$	51,211
Adjustments to reconcile net (loss) / income to net cash provided by (used in) operating activities:
Depreciation			23,472				22,421
Deferred Income Taxes			405,441				34,678
Decrease (increase) in:
Accounts Receivable			76,905				229,773
Other Receivables			-				75,000
Inventory			(99,498	)			183,928
Prepaid Expenses			(76,432	)			(66,393	)
Increase (decrease) in:
Accounts Payable			27,877				(235,003	)
Accrued Expenses			(140,375	)			(147,088	)
NET CASH (USED IN) / PROVIDED BY OPERATING ACTIVITIES			(151,140	)			148,527
CASH FLOW FROM INVESTING ACTIVITIES
Purchase of property & equipment			(9,376	)			(6,162	)
NET CASH (USED IN) INVESTING ACTIVITIES			(9,376	)			(6,162	)
CASH FLOW FROM FINANCING ACTIVITIES
Redemption of CD			60,721				79,194
Capital Lease Liability payments			(1,894	)			(1,894	)
Repayment of Line of Credit			-				(125,000	)
NET CASH PROVIDED BY / (USED IN) FINANCING ACTIVITIES			58,827				(47,700	)
NET CHANGE IN CASH			(101,689	)			94,665
CASH AT BEGINNING OF PERIOD			173,173				59,173
CASH AT END OF PERIOD		$	71,484			$	153,838
SUPPLEMENTAL DISCLOSURES
Interest Paid		$	-			$	2,811
Taxes Paid		$	-			$	-

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NOTE A - SUMMARY OF ACCOUNTING POLICIES

 

The interim consolidated 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 consolidated financial statements should be read in conjunction with the Company's audited consolidated financial statements dated June 30, 2017. 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 consolidated 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 December 31, 2017, there were 65,000 outstanding options to purchase shares of our common stock.

 

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 quarter ended December 31, 2017.

 

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 six months ended December 31, 2017, the potential dilutive effects of the preferred stock and stock options were excluded in the weighted-average shares outstanding, as the shares would have an anti-dilutive effect on the loss from continuing operations.

 

 

NOTE B - INVENTORIES

 

 

At December 31, 2017 and June 30, 2017, $70,655 of our inventory was considered non-current as it will not be used within a one year period.

 

 

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, 2017, no dividends have been declared. Dividends in arrears on the outstanding preferred shares total $366,281 as of December 31, 2017.

 

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. So long as any share of Series A Preferred Stock is outstanding, the Company is prohibited from declaring dividends or other distributions related to its Common Stock or purchasing, redeeming or otherwise acquiring any of the Common Stock.

 

 

 

NOTE D - INCOME TAXES AND AVAILABLE CARRYFORWARD

 

As of December 31, 2017, the Company had consolidated income tax net operating loss ("NOL") carryforwards for federal income tax purposes of approximately $1,695,000. The NOL will expire in various years ending through the year 2035. The utilization of certain loss carryforwards are limited under Section 382 of the Internal Revenue Code.

 

The components of the provision for income tax expense attributable to continuing operations are as follows:

 

 

 

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:

 

 

 

Management believes it is more likely than not that the tax benefit of approximately $338,000 of NOL carryforwards will not be realized because management estimates that they will expire prior to their utilization. Therefore, management provided a valuation allowance of $108,150 against its deferred tax asset. Management will continue to evaluate its operating results each reporting period and assess whether it will be able to utilize all available NOL carryforwards before expiration.

 

During the six months ended December 31, 2017, the Company revised its estimated annual effective rate to reflect a change in the federal statutory rate from 35% to 21%, resulting from legislation that was enacted on December 22, 2017. The rate change is administratively effective at the beginning of our fiscal year, using a blended rate for the annual period. As a result, the blended statutory tax rate for the year is 28.06%. As a result, income tax expense reported for the first six months was adjusted to reflect the effects of the change in the tax law and resulted in an increase in income tax expense of $282,782 for the six months ended December 31, 2017 from application of the newly enacted rates to existing deferred balances.

 

The accounting for the effects of the rate change on deferred tax balances is complete and no provisional amounts were recorded for this item.

 

Income taxes for the six months ended December 31, 2017 and 2016 differ from the amounts computed by applying the effective income tax rate of 32.01% and 37.63%, respectively, to income before income taxes as a result of the following:

 

 

The earliest tax year still subject to examination by a major taxing jurisdiction is fiscal year end June 30, 2015.

 

 

The Company performed a review of its uncertain tax positions in accordance with Accounting Standards Codification ASC 740-10 "Uncertainty in Income Taxes". In this regard, an uncertain tax position represents the Company's expected treatment of a tax position taken in a filed tax return, or planned to be taken in a future tax return, that has not been reflected in measuring income tax expense for financial reporting purposes. As a result of this review, the Company concluded that at this time there are no uncertain tax positions, and there has been no cumulative effect on retained earnings.

 

 

NOTE E - 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 $676,872 and net accounts receivable assets of $314,634. The line of credit is renewable annually in April. Our Chairman of the Board personally guaranteed the line of credit to the Company. At December 31, 2017 and June 30, 2017, 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 F - RELATED PARTY TRANSACTIONS

 

Our Chairman of the Board , Regina W. Anderson, guarantees a $250,000 line of credit for the Company.

 

 

NOTE G - SUBSEQUENT EVENTS

 

We have evaluated subsequent events through February 12, 2018, which is the date the financial statements were available to be issued.

 

 

NOTE H - RECENT ACCOUNTING PRONOUNCEMENTS

 

In May 2017, the FASB issued ASU No. 2017-09, Compensation-Stock Compensation (Topic 718): Scope of Modification Accounting, which clarifies when to account for a change to the terms or conditions of a share-based payment award as a modification. Under the new guidance, modification accounting is required only if the fair value, the vesting conditions, or the classification of the award (as equity or liability) changes as a result of the change in terms or conditions. It is effective prospectively for the annual period ending June 30, 2019 and interim periods within that annual period. Early adoption is permitted. The Company is currently evaluating the effect that ASU No. 2017-09 will have on its consolidated financial statements and related disclosures.

 

In February 2016, the FASB issued ASU No. 2016-02, Leases, related to the recognition of lease assets and lease liabilities. The new guidance requires lessees to recognize almost all leases on their balance sheet as a right-of-use asset and a lease liability, other than leases that meet the definition of a short- term lease, and requires expanded disclosures about leasing arrangements. The recognition, measurement, and presentation of expenses and cash flows arising from a lease by a lessee have not significantly changed from the current guidance. Lessor accounting is similar to the current guidance, but updated to align with certain changes to the lessee model and the new revenue recognition standard. The new guidance is effective for the Company on July 1, 2019, with early adoption permitted. The Company is currently evaluating the impact that ASU No. 2016-02 will have on its consolidated financial statements and related disclosures.

 

On November 20, 2015, FASB issued Accounting Standards Update (ASU) No. 2015-17, Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes. Under the ASU, all deferred tax assets and liabilities, as well any valuation allowances, will be netted and presented in a classified balance sheet as one noncurrent amount. ASU No. 2015-17 becomes effective for public entities for annual periods beginning after December 15, 2016, and for interim periods within those annual periods. The Company applied this standard on a retrospective basis and the balance sheet at June 30, 2017, has been adjusted to conform to this new presentation by combining the current deferred tax asset of $242,841 to the non-current deferred tax asset of $420,897, resulting in a non-current deferred asset of $663,738.

 

 

On May 28, 2014, the FASB completed its Revenue Recognition project by issuing Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers (Topic 606). The new guidance establishes the principles to report useful information to users of financial statements about the nature, timing, and uncertainty of revenue from contracts with customers. The new guidance on revenue recognition is effective for annual reporting periods beginning after December 15, 2017, including interim reporting periods within that reporting period.

 

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