PROCYON CORP - Quarter Report: 2019 December (Form 10-Q)

 

 

UNITED STATES SECURITIES & EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

☒

QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For Quarterly Period Ended December 31, 2019

 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)

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class	Trading Symbol(s)	Name of each exchange on which registered
None	None	None

 

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 every Interactive Data File required to be submitted 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 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 ☐		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; 8,087,388 shares outstanding as of February 8, 2020.

 

 

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 Changes in Stockholders’ Equity	5
Consolidated Statements of Cash Flows	6
Notes to Consolidated Financial Statements	7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	12
ITEM 4. CONTROLS AND PROCEDURES	16
PART II. - OTHER INFORMATION
ITEM 5. OTHER INFORMATION	16
ITEM 6. EXHIBITS	16
SIGNATURES	16

 

 

		(unaudited)				(audited)
ASSETS		December 31,				June 30,
		2019				2019
CURRENT ASSETS
Cash		$	96,630			$	290,287
Certificates of Deposit, plus accrued interest			155,055				153,951
Accounts Receivable, less allowance for doubtful accounts of $6,719 and $6,719, respectively.			631,602				419,630
Inventories			590,827				485,433
Prepaid Expenses			278,754				244,494
TOTAL CURRENT ASSETS			1,752,868				1,593,795
PROPERTY AND EQUIPMENT, NET			471,908				488,460
OTHER ASSETS
Deposits			4,192				4,192
Inventories			171,734				123,204
Intangible Asset			17,000				17,000
ROU Assets - Operating Leases			52,295				-
Deferred Tax Asset, net valuation allowance of $171,381 and $171,381, respectively.			172,359				208,281
			417,580				352,677
TOTAL ASSETS		$	2,642,356			$	2,434,932
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts Payable		$	112,849			$	147,445
Accrued Expenses			336,170				228,490
Lease Liabilities - Operating Leases, Current Portion			45,343				-
TOTAL CURRENT LIABILITIES			494,362				375,935
LONG TERM LIABILITIES
Lease Liability - Operating Leases			12,299				-
TOTAL LONG TERM LIABILITIES			12,299				-
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; 167,100 shares issued and outstanding.			126,860				126,860
Common Stock, no par value, 80,000,000 shares authorized; 8,087,388 shares issued and outstanding.			4,444,766				4,444,766
Paid-in Capital			15,885				15,885
Accumulated Deficit			(2,451,816	)			(2,528,514	)
TOTAL STOCKHOLDERS' EQUITY			2,135,695				2,058,997
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY		$	2,642,356			$	2,434,932

 

		(unaudited)				(unaudited)				(unaudited)				(unaudited)
		Three Months				Three Months				Six Months				Six Months
		Ended				Ended				Ended				Ended
		Dec. 31, 2019				Dec. 31, 2018				Dec. 31, 2019				Dec. 31, 2018
NET SALES		$	1,127,695			$	914,462			$	2,310,992			$	2,005,088
COST OF SALES			325,130				239,891				645,567				544,192
GROSS PROFIT			802,565				674,571				1,665,425				1,460,896
OPERATING EXPENSES
Salaries and Benefits			417,518				373,299				810,707				732,734
Selling, General and Administrative			382,096				374,334				736,737				679,616
			799,614				747,633				1,547,444				1,412,350
INCOME / (LOSS) FROM OPERATIONS			2,951				(73,062	)			117,981				48,546
OTHER INCOME (EXPENSE)
Interest Income			1,186				967				1,577				1,151
			1,186				967				1,577				1,151
INCOME / (LOSS) BEFORE INCOME TAXES			4,137				(72,095	)			119,558				49,697
INCOME TAX (EXPENSE) / BENEFIT			(4,342	)			4,028				(35,922	)			(30,486	)
NET INCOME / (LOSS)			(205	)			(68,067	)			83,636				19,211
Dividend requirements on preferred stock			(4,179	)			(4,178	)			(8,356	)			(8,605	)
Basic net income (loss) available to common shares		$	(4,384	)		$	(72,245	)		$	75,280			$	10,606
Basic net income (loss) per common share		$	(0.00	)		$	(0.01	)		$	0.01			$	0.00
Weighted average number of common shares outstanding			8,077,388				8,077,388				8,077,388				8,077,388
Diluted net income (loss) per common share		$	(0.00	)		$	(0.01	)		$	0.01			$	0.00
Weighted average number of common shares outstanding, diluted			8,077,388				8,077,388				8,319,488				8,319,488

 

																										Total
Six Months Ended December 31, 2019		Preferred Stock								Common Stock								Paid-In				Accumulated				Stockholders'
		Shares				Amount				Shares				Amount				Capital				Deficit				Equtiy
Balance, June 30, 2019			167,100			$	126,860				8,087,388			$	4,444,766			$	15,885			$	(2,528,514	)		$	2,058,997
Cumulative Adjustment from adoption of ASC 842																							(6,938	)			(6,938	)
Net Income			-				-				-				-				-				83,840				83,840
Balance, September 30, 2019			167,100				126,860				8,087,388				4,444,766				15,885				(2,451,612	)		$	2,135,899
Net Income (Loss)			-				-				-				-				-				(204	)			(204	)
Balance, December 31, 2019			167,100			$	126,860				8,087,388			$	4,444,766			$	15,885			$	(2,451,816	)		$	2,135,695

																										Total
Six Months Ended December 31, 2018		Preferred Stock								Common Stock								Paid-In				Accumulated				Stockholders'
		Shares				Amount				Shares				Amount				Capital				Deficit				Equtiy
Balance, June 30, 2018			177,100			$	136,860				8,077,388			$	4,434,766			$	15,885			$	(2,555,738	)		$	2,031,773
Net Income			-				-				-				-				-				87,280				87,280
Balance, September 30, 2018			177,100			$	136,860				8,077,388			$	4,434,766			$	15,885			$	(2,468,458	)		$	2,119,053
Preferred Stock Converted to Common			(10,000	)			(10,000	)			10,000				10,000				-				-				-
Net Income (Loss)			-				-				-				-				-				(68,067	)			(68,067	)
Balance, December 31, 2018			167,100			$	126,860				8,087,388			$	4,444,766			$	15,885			$	(2,536,525	)		$	2,050,986

 

		(unaudited)				(unaudited)
		December 31,				December 31,
		2019				2018
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income / (Loss)		$	83,636			$	19,211
Adjustments to reconcile net income to net cash (used in) / provided by operating activities:
Depreciation			27,703				26,161
Right of Use Asset Amortization			21,425				-
Deferred Income Taxes			35,922				30,486
Decrease (increase) in:
Accounts Receivable			(211,972	)			56,337
Inventory			(153,925	)			(52,478	)
Prepaid Expenses			(34,260	)			(56,577	)
Increase (decrease) in:
Accounts Payable			(34,596	)			102,066
Accrued Expenses			107,682				(49,965	)
NET CASH (USED IN) / PROVIDED BY OPERATING ACTIVITIES			(158,385	)			75,241
CASH FLOW FROM INVESTING ACTIVITIES
Purchase of property & equipment			(11,150	)			(7,581	)
NET CASH (USED IN) INVESTING ACTIVITIES			(11,150	)			(7,581	)
CASH FLOW FROM FINANCING ACTIVITIES
Purchase of CD			(1,105	)			(51,112	)
Redemption of CD			-				50,772
Capital Lease Liability payments			-				(1,894	)
Operating Lease Liability Reduction			(23,017	)			-
NET CASH (USED IN) FINANCING ACTIVITIES			(24,122	)			(2,234	)
NET CHANGE IN CASH			(193,657	)			65,426
CASH AT BEGINNING OF PERIOD			290,287				270,313
CASH AT END OF PERIOD		$	96,630			$	335,739
SUPPLEMENTAL DISCLOSURES
Interest Paid		$	-			$	-
Taxes Paid		$	-			$	-

 

NONCASH DISCLOSURE

During the six months ended December 31, 2019, we established a Right of Use Asset in the amount of $73,719 and corresponding Lease Liability in the amount of $80,659. The cumulative adjustment of $6,938 at July 1, 2019 was made to accumulated deficit pursuant to ASC 842.

 

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

 

 

Notes to Financial Statements

 

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, 2019. 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. Our 2009 Stock Option Plan expired on December 8, 2019.

 

On December 31, 2019, 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, 2019.

 

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, 2019, and 2018, the potential dilutive effects of the preferred stock and stock options were included in the weighted-average shares outstanding.

 

NOTE B - INVENTORIES

 

 

At December 31, 2019 and June 30, 2019, respectively, $171,734 and $123,204 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, 2019, no dividends have been declared. Dividends in arrears on the outstanding preferred shares total $378,952 as of December 31, 2019.

 

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, 2019, the Company had consolidated income tax net operating loss ("NOL") carryforwards for federal income tax purposes of approximately $1,353,000. 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 $618,000 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 $171,381 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.

 

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 three months ended December 31, 2019 and 2018 differ from the amounts computed by applying the effective income tax rate of 25.35%, 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, 2017.

 

The Company performed a review for 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

 

In fiscal 2018, the Company held a $250,000, due-on-demand line of credit with a financial institution. The line of credit was not renewed in April 2018.

 

In fiscal 2019, the Company entered into a new line of credit with a limit of $250,000 from a different financial institution. The line of credit is collateralized by all accounts and general intangibles, matures on October 9, 2020, accrues interest at the prime rate and is guaranteed by Justice Anderson, President and Chief Executive Officer. At December 31, 2019, the Company owed $0 on this line of credit.

 

NOTE F - SUBSEQUENT EVENTS

 

We have evaluated subsequent events through February 18, 2020, which is the date the financial statements were available to be issued.

 

NOTE G - RECENT ACCOUNTING PRONOUNCEMENTS

 

On June 16, 2016, the FASB issued Accounting Standards Update 2016-13, Financial Instruments - Credit Losses (Topic 326) (the "ASU"), which introduces new guidance for the accounting for credit losses on instruments within its scope. Given the breadth of that scope, the new ASU will impact both financial services and non-financial services entities. The guidance in this ASU is effective for public entities that meet the definition of an SEC filer for fiscal years beginning after December 15, 2019, and interim periods within those years. Early adoption is permitted in annual periods beginning after December 15, 2018. Based on management's current understanding of this standard along with the underlying substance of our operations, management believes it will not have a material impact on our consolidated financial statements.

 

In February 2016, the FASB issued ASU 2016-02, Leases, which aims to make leasing activities more transparent and comparable and requires substantially all leases be recognized by lessees on their balance sheet as a right-of-use asset and corresponding lease liability, including leases currently accounted for as operating leases. The new guidelines are contained in Accounting Standards Codification ASC Topic 842 - Leases ("ASC 842"). This ASU is effective for all interim and annual reporting periods beginning after December 15, 2018, with early adoption permitted. The Company applied this standard retrospectively on July 1, 2019 through a cumulative effect adjustment recognized as of July 1, 2019. In applying this standard, the Company elects to apply all practical expedients to not reassess the following:

 

1.

Whether a pre-existing contract is or contain a lease

2.

Whether a pre-existing lease should be classified as an operating or finance lease, and

3.

Whether the initial direct costs capitalized for a pre-existing lease under the previously lease accounting standard ASC Topic 840 qualify for capitalization

 

As a result, the Company recorded its right-of-use assets and corresponding lease liabilities on its balance sheet beginning July 1, 2019.

 

Other recent accounting pronouncements issued by the FASB, the AICPA and the SEC did not or are not believed by management to have a material effect, if any, on the Company's financial statements.

 

 

NOTE H - RIGHT-OF-USE ASSETS AND LEASE LIABILITIES

 

Operating leases

 

In June 2015, the Company entered into a lease agreement to lease certain office equipment with a lease term of 63 months. The lease contains a renewal option to extend the term for successive one year periods. The Company is not reasonably certain that it will renew the lease when it expires. Initial rent amount was $1,079 per month, with increases each year no more than 3%. In applying ASC 842, the Company uses a lease term of 63 months and an incremental borrowing rate of 5.5% which was the borrowing rate on the Company’s line of credit with a financial institution with all accounts and general intangibles.

 

In February 2018, the Company entered in a lease agreement to lease warehouse space with a lease term of 39 months. The Company pays no rent for the first three months of the lease, pays $2,936 per month for the next 12 months, $3,024 per month for the next 8 months, $3,019 per month for the next 4 months, and $3,109 for the last 12 months. In applying ASC 842, the Company uses a lease term of 39 months and an incremental borrowing rate of 5.5% which was the borrowing rate on the Company’s line of credit with a financial institution with all accounts and general intangibles.

 

The following is information related to the Company’s right-of-use assets and liabilities for its operating leases:

 

 

Variable lease expense was $11,666, for the three months ended December 31, 2019, respectively.

 

Weighted average remaining lease term was 1.23 years and weighted average discount rate was 5.5% at December 31, 2019.