PROCYON CORP - Quarter Report: 2020 September (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 September 30, 2020

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 November 16, 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	13
ITEM 4. CONTROLS AND PROCEDURES	16
PART II. - OTHER INFORMATION
ITEM 5. OTHER INFORMATION	17
ITEM 6. EXHIBITS	18
SIGNATURES	19

                                                    

 

 

		(unaudited)				(audited)
		September 30,				June 30,
		2020				2020
ASSETS
CURRENT ASSETS
Cash		$	673,683			$	665,834
Certificates of Deposit, plus accrued interest			155,275				155,132
Accounts Receivable, less allowance for doubtfull accounts of $9,408 and $9,408 respectively.			473,668				311,043
Inventories			472,179				758,516
Prepaid Expenses			241,443				183,138
TOTAL CURRENT ASSETS			2,016,248				2,073,663
PROPERTY AND EQUIPMENT, NET			448,228				452,855
OTHER ASSETS
Deposits			4,192				4,192
Inventories			265,196				83,812
Intangible Asset			17,000				17,000
ROU Assets - Operating Leases			53,279				30,245
Deferred Tax Asset, Net of Valuation Allowance of $87,981 and $144,620, respectively			162,138				159,874
			501,805				295,123
TOTAL ASSETS		$	2,966,281			$	2,821,641
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts Payable		$	71,707			$	167,459
Lease Liability, Current			27,442				-
PPP Loan			57,028				57,028
Accrued Expenses			255,159				289,466
TOTAL CURRENT LIABILITIES			411,336				513,953
LONG TERM LIABILITIES
Lease Liability - Long Term			28,161				-
PPP Loan			143,972				143,972
TOTAL LONG TERM LIABILITIES			172,133				143,972
TOTAL LIABILITIES			583,469				657,925
COMMITMENTS AND CONTINGENCIES			-				-
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			(2,204,699	)			(2,423,795	)
TOTAL STOCKHOLDERS' EQUITY			2,382,812				2,163,716
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY		$	2,966,281			$	2,821,641

 

		(unaudited)				(unaudited)
		Three Months				Three Months
		Ended				Ended
		Sep. 30, 2020				Sep. 30, 2019
NET SALES		$	1,246,243			$	1,183,297
COST OF SALES			334,320				320,437
GROSS PROFIT			911,923				862,860
OPERATING EXPENSES
Salaries and Benefits			412,254				393,189
Selling, General and Administrative			283,120				354,642
			695,374				747,831
INCOME FROM OPERATIONS			216,549				115,029
OTHER INCOME
Interest Income			283				391
			283				391
INCOME BEFORE INCOME TAXES			216,832				115,420
INCOME TAX (EXPENSE)			2,264				(31,580	)
NET INCOME			219,096				83,840
Dividend requirements on preferred stock			(4,177	)			(4,177	)
Basic net income available to common shares		$	214,919			$	79,663
Basic net income per common share		$	0.03			$	0.01
Weighted average number of common shares outstanding			8,087,388				8,087,388
Diluted net income per common share		$	0.03			$	0.01
Weighted average number of common shares outstanding, diluted			8,319,488				8,319,488

 

																										Total
Three Months Ended September 30, 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 adjustments 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

 

																										Total
Three Months Ended September 30, 2020		Preferred Stock								Common Stock								Paid-In				Accumulated				Stockholders'
		Shares				Amount				Shares				Amount				Capital				Deficit				Equtiy
Balance, June 30, 2020			167,100			$	126,860				8,087,388			$	4,444,766			$	15,885			$	(2,423,795	)		$	2,163,716
Net Income			-				-				-				-				-				219,096				219,096
Balance, September 30, 2020			167,100			$	126,860				8,087,388			$	4,444,766			$	15,885			$	(2,204,699	)		$	2,382,812

 

		(unaudited)				(unaudited)
		September 30,				September 30,
		2020				2019
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income		$	219,096			$	83,840
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation			11,413				13,803
Right of Use Asset Amortization			11,764				10,635
Deferred Income Taxes			54,375				31,580
Valuation Allowance			(56,639	)			-
Accrued Interest on Certificates of Deposit			(143	)			(78	)
Decrease (increase) in:
Accounts Receivable			(162,625	)			(99,154	)
Inventory			104,953				47,502
Prepaid Expenses			(58,305	)			(22,572	)
ROU Asset			(34,798	)			-
Increase (decrease) in:
Accounts Payable			(95,752	)			(31,183	)
Accrued Expenses			(34,307	)			(21,032	)
NET CASH (USED IN) / PROVIDED BY OPERATING ACTIVITIES			(40,968	)			13,341
CASH FLOW FROM INVESTING ACTIVITIES
Purchase of property & equipment			(6,786	)			(3,666	)
NET CASH (USED IN) INVESTING ACTIVITIES			(6,786	)			(3,666	)
CASH FLOW FROM FINANCING ACTIVITIES
Increase in Operating Lease Liability			55,603				(11,381	)
NET CASH PROVIDED BY / (USED IN) FINANCING ACTIVITIES			55,603				(11,381	)
NET CHANGE IN CASH			7,849				(1,706	)
CASH AT BEGINNING OF PERIOD			665,834				290,287
CASH AT END OF PERIOD		$	673,683			$	288,581
SUPPLEMENTAL DISCLOSURES
Interest Paid		$	-			$	-
Taxes Paid		$	-			$	-

 

NONCASH DISCLOSURE

 

During the quarter ended September 30, 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.

 

During the quarter ended September 30, 2020, we increased a Right of Use Asset and corresponding Lease Liability in the amount of $34,798.

 

 

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, 2020. 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 September 30, 2020, there were 65,000 outstanding options to purchase shares of our common stock granted under our prior 2009 Stock Option Plan.

 

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 September 30, 2020.

 

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 September 30, 2020, and 2019, the potential dilutive effects of the preferred stock and stock options were included in the weighted-average shares outstanding.

 

NOTE B - INVENTORIES

 

 

At September 30, 2020 and June 30, 2020, respectively, $265,196 and $83,812 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 September 30, 2020, no dividends have been declared. Dividends in arrears on the outstanding preferred shares total $391,483 as of September 30, 2020.

 

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 September 30, 2020, the Company had consolidated income tax net operating loss ("NOL") carryforwards for federal income tax purposes of approximately $913,000. 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:

 

 

 

The change in the valuation allowance is as follows:

 

 

Management believes it is more likely than not that the tax benefit of approximately $913,000 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 $87,981 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.

 

Income taxes for the three months ended September 30, 2020 and 2019 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 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.

 

During the year ended June 30, 2020, the Company obtained a $201,000 loan from the Paycheck Protection Program as a result of the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) enacted by Congress in response to the COVID-19 pandemic. Under the program, any loan forgiveness would be excluded from the borrower’s taxable income. The Internal Revenue Service published IRS Notice 2020-32, denying a borrower’s ability to deduct the same expenses that qualify for the loan forgiveness. Since Congress intended for the loan forgiveness under the program to be tax-free. This IRS Notice reverses that position and eliminates any benefit intended from the program. The American Institute of Certified Public Accountants and other industry groups have written a letter to Congress to urge Congress to reverse the IRS Notice because it goes against the intention of the CARES Act.

 

 

In addition, the Small Business Administration continues to revise its rules under the program in consultation with the Department of Treasury. Lenders also have urged Congress to take additional actions regarding the program to allow for additional funding and streamlining the forgiveness process for loans under certain amount.

 

As a result of the opposition from businesses on the IRS Notice and the continually changing landscape of the program, the Company considered the expenses that qualify for loan forgiveness as deductible expenses when accounting for its tax provision for the year ended June 30, 2020.

 

NOTE E - LINE OF CREDIT

 

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 September 30, 2020, the Company owed $0 on this line of credit.

 

NOTE F - PAYCHECK PROTECTION PROGRAM LOAN

 

The Company applied for a loan with the Small Business Administration (the "SBA") Paycheck Protection Program ("PPP") of the Coronavirus Aid, Relief and Economic Security Act of 2020 (the "CARES Act") in the amount of $201,000 (the "Loan"). The Loan was funded on April 13, 2020. The Company intends to use the proceeds of the Loan for covered payroll costs, rent and utilities in accordance with the relevant terms and conditions of the CARES Act.

 

The Loan, which is evidenced by a promissory note (the "Note"), has a two-year term, matures on April 13, 2022, and bear interests at a rate of 1.00% per annum. Monthly principal and interest payments, less the amount of any potential forgiveness (discussed below), will commence seven months from the date the Note was signed and funded. The Company did not provide any collateral or guarantees for the Loan, nor did they pay any facility charge to obtain the Loan. The Note provides for customary events of default, including, among others, those relating to failure to make payment, bankruptcy, breaches of representations and material adverse effects. The Company may prepay the principal of the Loan at any time without incurring any prepayment charges.

 

The Loan may be forgiven partially or fully if the Loan proceeds are used for covered payroll costs, rent and utilities, provided that such amounts are incurred during the eight-week period that commenced on April 13, 2020. Any forgiveness of the Loan will be subject to approval by the SBA and will require the Companies to apply for such treatment.

 

Principal payments of $57,028 and $143,972 are due during the year ended June 30, 2021 and 2022, respectively.

 

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. This ASU was updated by ASU 2019-10 issued in November 2019. 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, including 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.

 

 

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. This lease expired in September 2020. As such, the right-of-use asset has been fully amortized and its related lease liability extinguished at September 30, 2020.

 

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.

 

In August 2020, the Company entered into a lease agreement to lease certain office equipment with a lease term of 63 months. The lease renews on a month-to-month basis and contains an option to purchase the equipment at fair market value or return the equipment. Historically, the Company has not exercised the option to purchase at the end of the initial lease term for similar leases and simply returned the equipment at the end of the initial lease term. Initial rent amount was $574 per month. In applying ASC 842, the Company uses a lease term of 63 months and an incremental borrowing rate of 4.25% which was the borrowing rate on the Company’s line of credit with a financial institution.

 

 

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

 

 

Variable lease expense was $12,282 and $11,666 for the three months ended September 30, 2020 and 2019, respectively.

 

Weighted average remaining lease term was 3.4 years and weighted average discount rate was 4.7% at September 30, 2020.

 

NOTE I - CONTINGENCY

 

At the time of release of these financial statements, the United States is experiencing a National Emergency related to persistent health issues. Management is unable to quantify the potential duration and economic impact of mandated closures by our National, State or Local governments.

 

NOTE J - SUBSEQUENT EVENTS

 

We have evaluated subsequent events through November 16, 2020, which is the date the financial statements were available to be issued.