UNITED STATES SECURITIES & EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q10-Q/A

 or

Commission File Number: 0-17449

PROCYON CORPORATION

(Exact Name of Registrant as specified in its charter)

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:

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.

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,June 18, 2020.

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

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

PROCYON CORPORATION & SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY

For the Six Months Ended December 31, 2019 and 2018

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

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

General

You should read the following discussion and analysis in conjunction with the unaudited Condensed Financial Statements and Notes thereto appearing elsewhere in this report.

This Report on Form 10-Q, including Management's Discussion and Analysis of Financial Condition and Results of Operations, contains forward-looking statements. When used in this report, the words "may," "will," "expect," "anticipate," "continue," "estimate," "project," "intend," "hope," "believe" and similar expressions, variations of these words or the negative of those words, and, any statement regarding possible or assumed future results of operations of the Company's business, the markets for its products, anticipated expenditures, regulatory developments or competition, or other statements regarding matters that are not historical facts, are intended to identify forward-looking statements within the meaning of Section 27A of the SecuritiesSarbanes-Oxley Act of 1933 and Section 21E of the Securities Exchange Act of 1934 regarding events, conditions and financial trends including, without limitation, business conditions in the skin and wound care market and the general economy, competitive factors, changes in product mix, production delays, product recalls, manufacturing capabilities, and other risks or uncertainties detailed in other of the Company's Securities and Exchange Commission filings. Such statements are based on management's current expectations and are subject to risks, uncertainties and assumptions. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, the Company's actual plan of operations, business strategy, operating results and financial position could differ materially from those expressed in, or implied by, such forward-looking statements.

Recent Developments

In fiscal 2019, the Company continued expanding its sales channel designed to reduce inventory costs while increasing access to AMERX full line of products, through existing markets. Amerx grew its Wound Care product line with the addition of Retention Tape and additional Bordered Foam sizes. The Helix Collagen line grew with the addition of a 7" x 7" Matrix pad.

In fiscal 2020, AMERX’s Extremit-Ease Compression Garment line expand with the introduction of a Tan version of the garment and matching liner. Extremit-Ease continues to gain momentum in the wound care, edema and lymphedema markets with plans to further expand the line in Fiscal 2020. The Amerx brand of wound care products expanded in Fiscal 2020 with new offerings in sizes available, for both the Amerx Foam and Calcium Alginate products.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

The Company's condensed consolidated financial statements have been prepared in accordance with standards of the Public Company Accounting Oversight Board (United States), which require the Company to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and the related disclosures. A summary of those significant accounting policies can be found in the Notes to the Consolidated Financial Statements included in the Company's annual report on form 10-K, for the year ended June 30, 2019, which was filed with the Securities and Exchange Commission on September 30, 2019. The estimates used by management are based upon the Company's historical experiences combined with management's understanding of current facts and circumstances. Certain of the Company's accounting policies are considered critical as they are both important to the portrayal of the Company's financial condition and the results of its operations and require significant or complex judgments on the part of management. We believe that the following critical accounting policies affect the more significant judgments and estimates used in the preparation of our consolidated financial statements.

Accounts Receivable Allowance

Accounts receivable allowance reflects a reserve that reduces our customer accounts and receivable to the net amount estimated to be collectible. The valuation of accounts receivable is based upon the credit-worthiness of customers and third-party payers as well as historical collection experience. Allowances for doubtful accounts are recorded as a selling, general and administrative expense for estimated amounts expected to be uncollectible from third-party payers and customers. The Company bases its estimates on its historical collection experience, current trends, credit policy and on the analysis of accounts by aging category. At December 31, 2019, and June 30, 2019, our allowance for doubtful accounts totaled $6,719 and $6,719, respectively.

Advertising and Marketing

The Company uses several forms of advertising, including sponsorships to agencies who represent the professionals in their respective fields. The Company expenses these sponsorships over the term of the advertising arrangements on a straight line basis. Other forms of advertising used by the Company include professional journal advertisements, distributor catalogs, website and mailing campaigns. These forms of advertising are expensed when incurred.

Deferred Income Taxes

Deferred income taxes are recognized for the expected tax consequences in future years for differences between the tax bases of assets and liabilities and their financial reporting amounts, based upon enacted tax laws and statutory tax rates applicable to the periods in which the differences are expected to affect taxable income. The Company accounts for income taxes under Topic 740 - Income Tax in the Accounting Standards Codification. A valuation allowance is used to reduce deferred tax assets to the net amount expected to be recovered in future periods. The estimates for deferred tax assets and the corresponding valuation allowance require us to exercise complex judgments. We periodically review and adjust those estimates based upon the most current information available. The Company had a valuation allowance of $171,381 as of December 31, 2019 and June 30, 2019 and a deferred tax asset of $343,740 for the same corresponding periods. Because the recoverability of deferred tax assets is directly dependent upon future operating results, actual recoverability of deferred tax assets may differ materially from our estimates.

Revenue Recognition

The Company recognizes revenue in accordance with the Financial Accounting Standards Board's (FASB) release of Accounting Standards Update (ASU) 2014-09, Revenue from Contracts with Customers (Topic 606) which requires that five basic criteria must be met before revenue can be recognized: (1) identify the contract with a customer; (2) identify the performance obligations in the contract; (3) determine the transaction price; (4) allocate the transaction price to the performance obligations in the contract, and (5) recognize revenue when (or as) the entity satisfies a performance obligation.

Stock Based Compensation

Stock based compensation is accounted for in accordance with Topic 718 - Compensation - Stock Compensation in the Accounting Standards Codification. All share-based payments to employees, including grants of employee stock options, are to be recognized in the statement of operations based upon their fair values. Topic 718 rescinds the acceptance of pro forma disclosure.

FINANCIAL CONDITION

As of December 31, 2019 the Company's principal sources of liquid assets included cash of $96,630, inventories of $762,561, and net accounts receivable of $631,602. The Company also has $155,055 in Certificate of Deposits. The Company had net working capital of $1,258,506, and long-term debt of $12,299, at December 31, 2019.

During the six months ended December 31, 2019 cash decreased from $290,287 as of June 30, 2019, to $96,630. Operating activities used cash of $158,385 during the period. Investing and Financing activities used cash of $11,150 and $24,122, respectively during the period.

The Company reflected a net non-current deferred tax asset of $172,359, at December 31, 2019. Because the recoverability of deferred tax assets is directly dependent upon future operating results, actual recoverability of deferred tax assets may differ materially from our estimates.

RESULTS OF OPERATIONS

Comparison of the three and six months ended December 31, 2019 and 2018.

Net sales during the quarter ended December 31, 2019, were $1,127,695 as compared to the previous year's quarter net sales of $914,462, an increase of $213,233, or approximately 23%. We believe increased sales were driven by expansion of our distribution network partners, expansion into new markets and new customer sales of both existing and new products. Net sales during the six months ended December 31, 2019, were $2,310,992 as compared to the previous year's period net sales of $2,005,088, an increase of $305,904, or approximately 15%. We believe increased sales were driven by expansion of our distribution network partners, expansion into new markets and new customer sales of both existing and new products.

Gross profit during the quarter ended December 31, 2019, was $802,565 as compared to $674,571 during the quarter ended December 31, 2018, an increase of $127,994 or 19%. As a percentage of net sales, gross profit was approximately 71% in the quarter ended December 31, 2019, and approximately 74% in the corresponding quarter in 2018. Gross profit during the six months ended December 31, 2019, was $1,665,425 as compared to $1,460,896 during the six months ended December 31, 2018, an increase of $204,529 or 14%. As a percentage of net sales, gross profit was approximately 72% in the six months ended December 31, 2019, and approximately 73% in the corresponding period in 2018.

Operating expenses during the quarter ended December 31, 2019 were $799,614, consisting of $417,518 in salaries and benefits and $382,096 in selling, general and administrative expenses. This compares to operating expenses during the quarter ended December 31, 2018 of $747,633, consisting of $373,299 in salaries and benefits; and $374,334 in selling, general and administrative expenses. Expenses for the quarter ended December 31, 2019, increased by $51,981 or approximately 7% compared to the corresponding quarter in 2018. Salaries and Benefits increased as a result of new hires, increased salaries and commissions based on higher sales. Operating expenses also increased due to increases in marketing expenses and implementation costs associated with installing our new Enterprise Resource Planning (ERP) system software. Operating expenses during the six months ended December 31, 2019 were $1,547,444, consisting of $810,707 in salaries and benefits and $736,737 in selling, general and administrative expenses. This compares to operating expenses during the six months ended December 31, 2018 of $1,412,350, consisting of $732,734 in salaries and benefits; and $679,616 in selling, general and administrative expenses. Expenses for the six months ended December 31, 2019, increased by $135,094 or approximately 10% compared to the corresponding period in 2018. Salaries and Benefits increased as a result of new hires, increased salaries and commissions based on higher sales. Operating expenses also increased due to increases in marketing expenses and implementation costs associated with installing our new ERP system software.

Operating profit increased by $76,013 to an operating profit of $2,951 for the quarter ended December 31, 2019, as compared to an operating loss of $73,062 in the comparable quarter of the prior year. The increase in net income for the three month period, of the comparable quarter of the prior year before income taxes was primarily attributable to the increase in sales. Operating profit increased by $69,435 to an operating profit of $117,981 for the six months ended December 31, 2019, as compared to an operating income of $48,546 in the comparable period of the prior year. The increase in net income for the six month period, of the comparable period of the prior year before income taxes was primarily attributable to the increases in sales.

ITEM 4. CONTROLS AND PROCEDURES

Management of the Company, with the participationOf 2002, of the Chief Executive Officer andOfficer.

Exhibit 31.2 Certification Pursuant to 18 U.S.C.§1350, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act Of 2002, of the Chief Financial Officer, has conducted an evaluation of the effectiveness of the Company's disclosure controls and procedures pursuant to Rule 13a-15 under the Securities Exchange Act of 1934 as of the end of the period covered by this report. Based on that evaluation, management, including the Chief Executive and Chief Financial Officer, has concluded that, as of the end of the period covered by this report, the Company's disclosure controls and procedures were not effective in ensuring that all material information relating to the Company required to be disclosed in this report has been made known to management in a timely manner and ensuring that this information is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and regulations, because of the identification of a material weakness in our internal controls over financial reporting, identified below, which we view as an integral part of our disclosure controls and procedures.Officer.

As previously reported, our annual assessment of the internal controls over financial reporting as of June 30, 2019 revealed a deficiency that we consider to be a material weakness: inadequate segregation of duties consistent with control objectives.

During fiscal 2020, the Company will continue to address changes needed to improve segregation of duties consistent with control objectives. We have added staff to grow sales. We 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 segregation of duties consistent with control objectives.

PART II. OTHER INFORMATION

ITEM 5. OTHER INFORMATION

ITEM 6. EXHIBITS

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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