PCYN 10-Q Quarter ended Dec. 31, 2015

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 December 31, 2015

[ ] 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 ☒ 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 ☒

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange 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; 8,060,388 shares outstanding as of February 10, 2016.

PART I. - FINANCIAL INFORMATION

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PROCYON CORPORATION & SUBSIDIARIES

December 31, 2015 and June 30, 2015

The accompanying notes are an integral part of these financial statements

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

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Notes to Financial Statements

NOTE A - SUMMARY OF ACCOUNTING POLICIES

The interim c onsolidated financial statements included h erein have been prepared b y the Company without audit, pursuant to the rules and re g ulations of the Securities and E x c han g e Commission. Certain information and footnote disclosures normally included in the financial statements prepared in accordance with g enerally accepted accounting principles (“GAAP”) have been condensed or omitted as a llow e d by such rules and re g ulations. The Company believes that the disclosures are adequate to make the information presented not misl ea ding. T hese consolidated f inancial statements should b e read in conjunction w ith the Compan y ’s a udited consolidated financial statements dated J u ne 30, 2015. The results for interim p eriods are not necessarily indicative of results that may be e x pected for any other interim period or for the full y ear.

Mana g ement of the Company has p repared the accompan y ing unaudited condensed consolidated financial statements prepared in conformity with g enerally accepted a ccounting principles, w hich r equire the use of mana g ement 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 misleadin g .

STOCK- B ASED COMPENSAT I ON

Stock based compensation is accounted for in accordance w ith Topic 718 - Com p e n s a t io n -Stock Compensation in the Accounting Standards Codification. Pursuant to Top i c 718, all share-based payments to employees, including g rants of employee stock options, are to be recogni z ed in the statement of operations based upon their fair values. Top i c 7 1 8 rescinds the acceptance of pro forma disclosure. In December 2009, our s h a r eho l de rs approved the adoption of a new stock option plan, providing the Company a c ontinued means of offering stock-based compensation.

On December 31, 2015, there were no outs t an d i n g op ti o ns to purchase shares of ou r common stock. Therefore, the adoption of Topic 718 does not have a material impact on our st a t e m e n t o f op erations for period ending December 31, 2015.

The fair value of a stock option is determined using the B lack-Scholes option-pricing model, which values options based on the stock p rice at the g rant date, the e x pected life of the option, the estimated volatility of the stock, the e x pected d ividend pa y ments, and the risk-free interest rate ov e r the life of the option. Th ere were no options g ranted during the quarters ended December 31, 2015 and 2014.

The B lack-Scholes option valuation model was developed for estimating the fair value of traded options that have no v esting restrictions and are fully transferable. Be cause option valuation models require the use of subjective assumptions, chan g es in these assumptions can materially affect the fair value of the options. Our options do not have the characteristics of traded options, theref o re, th e option valuation models do not n ecessarily provide a reliable measure of the fair value of our options.

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EARNINGS PER SHARE

Basic e arnin g s per share (EPS) is computed by dividing income available to common stockholders by the wei g hted-avera g e number of common shares outstanding for the p eriod. D iluted EPS reflects the potential dilution that would occur if d il utive securities such as stock options a nd other contracts to issue Common Stock were exercised or converted into Common Stock or resulted in the issuance of Common Sto c k t hat t hen s hared in earnin g s. We use the treasury stock method to compute p otential common shares from stock options and the as-if-converted method to compute potential common shares from Preferred Stock.

F or the three and six months ended December 31, 2 015, the p otential d ilutive e ffects of the preferred stock was included in the wei g hted-avera g e shares outstandin g

NOTE B- OTHER RECEIVABLES

Other receivables are the r esult of the Company selling a notification and clearance it held that was n ot being utili z e d .

NOTE C - INVENTORIES

NOTE D - STOCKHOLDERS’ EQUITY

During J anuary 1995, the Compan y ' s B oard o f Directors authori z ed 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 w ill accrue without interest and will be cumulative from the date of issuance of the Series A Preferred Sto c k a nd will be pa y a ble quarterly in arrears in cash or publicly traded common stock when and if declared by the B oard of Directors. As of December 31 , 2015, no dividends have been declared. Dividends in arrears on the outstanding preferred shares total $361,036 as of December 31, 2015.

Holders of the Preferred Stock have the ri g ht to convert their shares of Preferred Stock into an equal number of shares o f Common Stock of the Compan y . In addition, Preferred Stock holders have the ri g ht 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 p rice of the Common Stock sold in such offering is equal to or in excess of $1 per share. The Company is obli g ated to reserve an adequate number of shares of its common stock to satisfy the conversion o f 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.

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NOTE E - INCOME TAXES AND AVAILABLE CARRYFORWARD

As of December 31, 2015, the Company had consolidated income tax net operating loss ("NOL") carryforward for federal income tax purposes of approximately $1,701,000. The NOL will expire in various years ending through the year 2035. The utilization of certain of the loss carryforwards are limited under Section 382 of the Internal Revenue Code.

The components of the provision for income tax benefits (expense) attributable to continuing and discontinued 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:

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Mana g ement b e li e v e s i t i s more likely than not that it will re ali z e the benefit of the NOL carr y forward, because of its previous trend of earnings. Therefore, a valuation allowance is not considered necessary at this time.

I ncome ta x es for the periods ended D ecember 31, 2015 a nd 2 014 differ from the amounts computed by appl y ing the effective income tax rates of 37.63%, to income ta x es 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, 2012.

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The Company made a review of its uncertain tax positions in accordance with applicable standards of the Financial Accounting Standards Board ("FASB"). 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 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 $528,742 and net receivables of $372,107. The line of credit is renewable annually in April. Our Chief Executive Officer personally guaranteed the line of credit to the Company. At December 31, 2015 and June 30, 2015, the Company owed $55,000 and $80,000, respectively, 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, guarantees a $250,000 line of credit for the Company.

NOTE H - CONTINGENCIES

The Company is currently involved with two voluntary product recalls initiated November 10, 2014 and March 9, 2015 respectively. Total recall costs incurred through December 31, 2015 were $199,718, of which $13,470 occurred in the quarter ending December 31, 2015. Future recall costs are expected, but cannot be accrued at this point because they are not able to be reasonably estimated.

NOTE I - SUBSEQUENT EVENTS

We have evaluated subsequent events through February 11, 2016, which is the date the financial statements were available to be issued.

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General

You should read the following d iscussion and anal y sis in c onjunction with the unaudi t e d C ondensed F inancial Statements and Notes thereto appearing elsewhere in this report.

This Report o n F orm 10-Q, including Mana g ement’s Discussion and Analysis of F inancial Condition and Results of Operations, contains forward-looking statements. W hen used in this r e por t , the words “may,” “will,” “expect,” “anticipate,” “continue,” “estimate,” “project,” “i n t e nd,” “hope,” “believe” and similar e x pressions, variations of these words or the ne g ative of those words, and, any statement re g arding p ossible o r assumed f uture results of operations of the Company ' s business, the markets for its products, anticipated e x p enditures, re g ulatory developments or competition, or o t h e r st a t e ments re g arding matters that are not historical facts, are intended to identify forward-looking statements within the meaning o f Section 27A o f the Securities Act of 1933 a nd Section 21E of the Securities E x c han g e A ct of 1934 re g arding events, conditions and financial trends inc lud i n g, without limitation, b usiness conditions in the skin and wound care market and the g eneral e conomy, competitive factors, chan g es in product mi x , production delays, produ c t r eca ll s, manufacturing capabilities, and other risks or uncertainties detailed in other of the Company ' s Securities and E x chan g e Commission filin g s. Such statements are based on management’s current e x pectations and a r e subject to risks, uncertainties a nd assumptions. Should one or more of these risks or uncertainties materialize, or should u nderlying assumptions prove incorrect, the Company ' s ac t u a l p lan of operations, business strategy, operating results a nd financial position c ould differ materially from those e x pressed in, or implied by, such forward-looking statements.

Recent Developments

The Company is currently involved with two voluntary produ c t r ecalls initiated November 10, 2014 and March 9 , 2015 respectivel y . The o ri g inal r eca l l f rom J uly 21, 2014, has been closed. The Company is currently resolving these issues. The Company i s un a b le to determine at this time whether o r n ot there w ill be a long term adverse material effect to our financial operations from the voluntary recalls. The short term effects of the voluntary recalls have b een documented showing increased le g al fees, research and d evelopment fees, p osta g e, delivery costs, back ordered product and increased cost of g oods from replacement of r ecalled products. The cost incurred b y the Company related to the recalls as of December 31, 2015 was $199,718. A n accrual was made to account for a ctual e x penses incurred following the December 31, 2015 p eriod end in the amount o f $ 3,329, however, no further accrual can be made f or future e x penses as these e x p enses cannot be reasonably calculated. Amerx is a ctively addressing all concerns surrounding the recalls and is working directly with the F DA to ensure full compliance moving forward.

Amerx recently completed its lar g est wound care product e x pansion plans since the compan y ’s inception to include Calcium Al g inate, F oam, H y drocolloid and B ordered Gauze Dressin g s. This product expansion under the Amerx brand a llows the company to offer a comprehensive line of advanced wound care products to its current customer base while providing n ew o pportunities for the company to g ro w i n to new and lar g er segments of the advanced wound care market. According to a recently published market research r eport “Advanced Wound Care Market by T y p e (Dressin g s, Therapy Devices, A ctive Wound Care), Application (Surgical Wounds, U lcers), End User (In- Patient F acilit y , Out-Patient F ac ilit y ), and Geography - Global F orecast to 2020”, by Markets and Markets, this market is expected to reach $14.9 billion by 2020 and is e stimated to g row at a Compound Annual Growth Rate of 7.0% from 2015 to 2020.

CR I T I CAL ACCOUNT I NG PO LI C I ES AND EST I MATES

The Compan y ' s c o ndensed consolidated financial statements h ave been prepared in acc o rdance with standards of the Public Company Accounting Oversi g ht B oard (United States), which require the Company to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and e x penses, and the related disclosures. A summary of those si g nificant accounting p olicies can be foun d in the Notes to the Consolidated F inancial Statements included in the Compan y ' s annual report on form 10-K, for the y ear ended J une 3 0 , 20 15, which was filed with the Securities and E x chan g e Commission on September 28, 2015. The estimates used by mana g ement are based upon the Compan y ' s historical e x periences combined with management’s understanding of current facts and c i rc umst a n ce s . Certain o f the Compan y ' s accounting policies a re considered critical as they a re both importa n t t o th e portrayal of the Compan y ' s financial condition and the results of its operations and require si g nificant or c o m p l e x jud g ments on the part of mana g ement. W e believe that the following critical accounting policies affect the more si g nificant judgments and estimates used in the preparation of our consolidated financial statements.

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Accounts Receivable Allowance

Accounts r eceivable allowance reflects a reserve that reduces our customer a ccounts and receivable to the net amount estimated to be collectible. The valuation o f accounts receivable is based upon the c redit-worthiness of customers and third-party p a y ers as well as historical c ollection e x p erience. Allowances for doubtful accounts are recorded as a sellin g , ge neral and a dministrative e x pense for estimated amounts e x pected to be uncollectible from third-party p a y ers and customers. The Company bases its estimates on its h istorical collection e xperience, current trends, credit policy and on the anal y sis of accounts by ag ing cate g or y . At D ecember 31, 2015, a nd June 30, 2015, our allowance for doubtful accounts totaled $2,883 and $14,405, respectively.

Advertising and Marketing

The Company uses several forms of advertisin g , including sponsorships to ag encies who r e pr e sent the professionals in their respective fields. T he Company e x p enses these sponsorships over the term of the advertising arrangements on a strai g ht line basis. Other f orms of a dvertising used by the Company include professional journal advertisements, d istributor catalogs, website and mailing campaigns. Th ese forms of advertising are e x pensed when incurred.

Deferred I ncome Taxes

Deferred income ta x es are reco g ni z ed for the e x pected tax c onsequences in fu t ur e y ears 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 p eriods in which the differences are e x pected to affect ta x able income. The Company accounts for income ta x es under T opic 740 - I ncome Tax in the Accounting Standards Codification. A v a l u a t ion allowance is used to reduce deferred tax assets to the net amount e x pected to be recovered in fu t ur e periods. The estimates for deferred tax assets and the corresponding v a l u a ti o n a llowance require us to e x ercise complex jud g ments. W e periodically r eview and adjust those estimates based upon the most c urrent i n f ormation available. We did not have a valuation allowance as of December 3 1, 2015. B ecause the recoverability of deferred tax assets is directly d ependent upon future operating results, actual recoverability of deferred tax assets may differ materially from our estimates.

Revenue Reco g nition

The Company reco g ni z e s r evenue in accordance with Securities and E x chan g e Commission Staff Accounting B ulletin No. 104, " Revenue Reco g nition, c orrected cop y ," which requires that four basic criteria must be met before revenue can be reco g ni z ed: (1) persuasive evidence of an arran g ement e x ists; (2) del iv e ry has occurred or services have been re n d e r ed; ( 3) the seller ' s price to the buyer is fi x ed or determinable; and, ( 4) collectibility is reasonably assured.

Stock B ased Compensation

Stock based compensation is account e d for in accordance w ith Topic 718 - Compensation - Stock Compensation in the Accounting Standards Codification. All share-based pa y ments to emplo y ees, including g rants of emplo y ee 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.

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FINANCIAL CONDITION

As December 31, 2015 the Compan y ' s principal sources o f liquid assets included cash of $26 2,468 , inventories of $ 528, 742 and net receivables of $372,107. The Company also has $151,789 in short term Certificate of Deposits. The Company had net working capital o f $ 1,356,156, a nd no lon g -term debt at December 31, 2015.

During the s i x months ended December 31, 2015 c ash increased from $204,227 as of J une 30, 2015, to $262,468. Operating activities provided cash of $117,372 during the period. The chan g e is p r imarily the result of increased net income.

The Company reflected a current deferred tax asset of $ 179 ,86 5 , and non-current d eferred tax asset of $465,003, at December 31, 2015. B ecause the recoverability of deferred tax a ssets is directly dependent upon f uture operating results, actual recoverability of deferred tax assets may differ materially from our estimates.

RESU L TS OF OPERAT I ONS

Comparison of the three and six months ended December 31, 2015 and 2014.

Gross Sales during the q uarter ended December 31, 2015, we re $795,541 a s c ompared to the previous y ear’s g ross s a l e s o f $735,871, an increase o f $59,670, or appro x imately 8%. Gross Sales during the six months e nded December 31, 2015, were $1,650,583 as compared to the previous y e ar’s gross sales of $ 1,354,824, an increase of $295,759, or appro x imately 22%. Sales have been on the rise predominately fr o m ou r core product sales, new product lines and international sales.

Gross profit during the quarter ended December 3 1, 2015, was $523,091 as compared to $545,257 during the q uarter ended D ecember 31, 2014, a decrease of $22,166 or 4%. As a percenta g e of net sales, g ross profit was appro x imately 66% in the quarter ended December 31, 2015, and appro x imately 74% in the corresponding quarter in 2014. Gross profit during the six months e nded December 31, 2015, w as $1,147,198 as compared to $1,021,933 during the six months e nd e d D ec emb e r 31, 2014, an increase of $125,265 or 12%. As a percenta g e of net sales, g ross profit was appro x imately 70% in the six months ended December 31, 2 015, a nd appro x imately 75% in the corresponding six months in 2014. W e e x pect g ross profit as a percenta g e of sales to continue to decrease sli g htly as sales from the new product lines and international sales continue to increase relative to other products.

Operating e x penses during t h e qu a r t e r ended December 31, 2015, were $587,314 consisting of $333,924 in salaries and benefits and $253,390 in sellin g , ge neral and administrative e x penses. This compares to operating e x penses d uring the quarter ended D ecember 31, 2014, of $570,435 consisting of $298,304 in salaries and benefits; and $272,131 in sellin g , g eneral and administrative e x p enses. E x penses f o r the quarter ended December 31, 2015, increased by $16,879 or appro x imately 3% compared to the corresponding quarter in 2014. Salaries and benefits e x penses increased for the quarter primarily due to commissions paid on increased sales and addition of sales staff. Sellin g , g eneral and administrative e x penses decreased from the corresponding period wi t h d ecreases in various operational e x penses. Operating e x penses during the six m onths ended D ecember 31, 2015, were $1,143,323 consisting of $642,684 in salaries and benefits and $500,639 in sellin g , g eneral and administrative e x penses. This compares to operating e x p ens e s dur i n g the six months ended D ecember 31, 2014, of $1,095,577 consisting of $594,293 in salaries and benefits; and $501,284 in sellin g , g eneral and administrative e x penses. E x penses for the six months ended December 31, 2015, increased by $47,746 or appro x imately 4% compared to the corresponding quarter in 2014. Salaries and benefits e x penses increased for the six months primarily due to commissions paid on increased sales and additional sales staff. Selling, ge neral a nd administrative e x penses remained relatively constant between corresponding periods.

Operating profit decreased by $39,045 to an operating loss of $64,223 for the q uarter ended December 31, 2015, as compared to an operating loss of $25,178 in the comparable quarter o f the prior y ear. I ncome before income taxes was $ 235,218 during the quarter ended December 31, 2015, as compared to n et loss of $24,454 during the quarter ended December 31, 2014. Operating profit increased by $77,519 to an operating profit of $3,875 for the six months ended December 31, 2015, as compared to an operating loss of $73,644 in the comparable six months of the prior year. Income before income taxes was $299,501 during the six months ended December 31, 2015, as compared to net loss of $72,239 d uring the six months ended December 31, 2014. The increase in net income before income taxes was primarily attributable to the sale of the notification and clearance.

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(a) Evaluation of Disclosure Controls and Procedures

Mana g ement of the Compan y , w i t h the participation of the Chief E x ecutive Officer a nd Chief F inancial Off i cer, has conducted an evaluation of the effectiveness of the Compan y ' s disclosure c ontrols and p rocedu r e s pursuant to Rule 1 3a-15 under the Securities E x chan g e Act of 1934 a s of the end of the period covered by this report. B ased o n that evaluation, mana g ement, including the Chief E x ecutive and Chief F inancial Officer, has concluded that, as of the end of the period covered by this report, the Compan y ' 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 mana g e ment in a tim ely manner and e nsuring that this information is recorded, processed, summari z ed and reported within the time p e riods specified in the SEC’s rules and re g ulations, because of the identification of a certain material weakness in our internal c o n t r ols over financial reporting which is identified below, which we view as an integral part of our disclosure controls and procedures.

(b) Chan g e s in I nternal Controls Over F inancial Reporting

As previously reported, our annual assessment of the int e rn a l controls over financial reporting as of J une 30, 2 015 revealed a deficiency that w e consider to be a m a t erial weakness: inadequate se g regation of d uties consistent with control objectives

During fiscal 2016, the Company will continue to address chan g es n eeded to improve se g re g ation of d uties consistent with control objectives. W e h ave added staff to g row sales. W e expect that increased sales will enable us to add support staff, specifically in the accounting and shipping departments. A secondary effect of adding more staff will address needed improvements in segre g ation of duties consistent with control objectives.

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The matters reported in “Recent Developments” in I tem 2 of Part 1 are incorporated herein by this reference..

(A) EXHIBITS

* Furnished, not filed

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.

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