ITEM 1. BUSINESS
History and Organization
Procyon Corporation (the "Company" or "Procyon"), a Colorado corporation, was incorporated on March 19, 1987, and was deemed a development stage company until May 1996, when we acquired Amerx Health Care Corp. ("Amerx"), a corporation based in Clearwater, Florida, which was wholly owned by John C. Anderson, our deceased Chief Executive Officer. Amerx develops and markets proprietary medical products used in the treatment of pressure ulcers, dermatitis, inflammation and other skin problems. We formed Sirius Medical Supply, Inc. ("Sirius"), a Florida corporation, in 2000, to operate as a full service mail order medical supply company selling primarily to Medicare customers. Amerx and Sirius are wholly owned subsidiaries of Procyon. Historically, Amerx's products are sold through distributors to healthcare institutions, such as physicians, nursing homes and home health care agencies and to retailers, including national and regional chain stores and pharmacies; while Sirius' products were sold directly to Medicare and Medicaid patients. As previously reported in our current report on Form 8-K, filed on August 3, 2009, we entered into an Asset Purchase Agreement, effective July 31, 2009 with Priority Diabetes Supply, Inc., a Florida corporation, doing business as Diabetes Wellness Supply ("Priority Diabetes"). Pursuant to the Agreement, we sold certain "Purchased Assets," as defined in the Agreement, including Sirius' customer list, to Priority Diabetes. Thus, as of July 31, 2009, Sirius no longer offers testing products to diabetic customers. Management is considering various options for the future direction of Sirius.
Products
Amerx Health Care Corp.
Amerx sells a proprietary line of advanced skin and wound care products made with Oakin(R), proven to promote healing in wound and problematic skin conditions, including the AmeriGel(R) Hydrogel Wound Dressing, Amerigel(R) Hydrogel Saturated Gauze Dressing, AmeriGel(R) Premium Care Lotion, AmeriGel(R) Preventive Barrier Lotion, AmeriGel(R) Saline Wound Wash, and the Amerigel(R) Post Op Surgical Kit. The AmeriGel(R) Hydrogel Wound Dressing and Amerigel(R) Hydrogel Saturated Gauze Dressing are formulated to be used as a wound dressing to manage stages I-IV pressure ulcers, stasis ulcers, diabetic skin ulcers, post surgical incisions, cuts, abrasions, first and second degree burns, and skin irritations. The AmeriGel(R) Premium Care Lotion is a therapeutic skin conditioner containing emollients which restore moisture to fragile skin and alleviate problematic skin conditions. The AmeriGel(R) Barrier Lotion provides barrier protection to shield the skin from excess moisture and reduce harmful effects to the skin from friction and chafing. The AmeriGel(R) Saline Wound Wash is a non-sterile saline solution containing Oakin(R) and is used for wound cleansing.
Amerx holds a Medicare reimbursement code for the sterile Amerigel(R) Hydrogel Saturated Gauze Dressing. This reimbursement code, assigned by the Pricing, Data Analysis and Coding contractor for Medicare and Medicaid ("PDAC"), is on a per pad or per use basis. We believe that this reimbursement code is beneficial to Amerx's business, allowing customers on Medicare to seek coverage for use of the product.
Amerx spent approximately $12,700 towards research and development efforts over the past fiscal year. These efforts were directed towards additional studies aimed at expanding existing markets.
Each Amerx product is based on proprietary formulations, which we protect as trade secret information. Each product is also registered with the Food and Drug Administration and receives a National Drug Code.
Amerx's sales increased by 5% during the year ended June 30, 2009 ("fiscal 2009"). Amerx's growth was impacted by economic factors as well as by PDAC's decision to change requirements for reimbursement. This year, Amerx made continued progress in sales distributed across its entire product line through its continued marketing focus on the benefits of Oakin(R) contained in each of its products. The Amerigel(R) product line continues to gain acceptance within the health care community. Amerx's website, which can be viewed at www.amerigel.com, provides general information about Amerx's products to consumers and health care professionals and is equipped to handle direct sales to the public.
Sirius Medical Supply
In fiscal 2009, Sirius' product offering was directed to the diabetic community and consisted primarily of diabetic supplies, glucose monitors, heating pads, lancets, test strips, syringes and wound care products. After the sale to Priority Diabetes of certain "Purchased Assets," as defined in the Asset Purchase agreement effective July 31, 2009, Sirius will no longer sell diabetic-related products in the Medicare arena. Management determined that due to reduced reimbursement from Medicare and the reinstatement of the CMS Competitive Bidding process with its potential negative impact on Sirius's ability to sustain its customers, we would make a controlled exit from the diabetic supply market. Sirius has a website (www.siriusmedical.com) which previously served new and existing customers. Sirius has not spent any funds on research and development over the past three fiscal years.
Market for Products
The institutional market for Amerx's skin and wound care treatment products is primarily comprised of hospitals, nursing homes, home health care agencies and health care practioners. We believe that AmeriGel(R)products represent a cost effective, efficacious treatment and prevention program for chronic pressure ulcers and other skin problems which are treated in health care institutions. We are continuing to penetrate the health care market including sales to government agencies.
The retail market for Amerx's skin care and wound care products is comprised mainly of national and regional chain stores as well as independent retail pharmacies that sell wound and skin care products to individuals. Amerx saw a 12% increase in the retail market in fiscal 2009, due to national distributors increasing sales of multiple products in our Amerx line.
The market for Sirius's products was primarily comprised of diabetic patients who receive benefits from Medicare or Medicaid, or from their insurance companies. Sirius attracted these customers through advertising, direct marketing and referrals.
Distribution and Sales
Amerx's traditional method of distribution has been through retail and institutional distributors. We expect to continue increasing our distributor base, particularly with distributors capable of introducing Amerx's products in new medical specialty markets, in new geographical areas and to new retail chains. Distributors typically purchase products from Amerx on standard credit terms. Amerx supports its distributors through product literature, advertising and participation at industry trade shows. All existing distributors sell Amerx products on a non-exclusive basis.
We periodically receive inquiries about international market distribution for the AmeriGel(R) product line . These inquiries have been generated by our advertising, market presence and web sites (www.amerxhc.com and www.amerigel.com). We respond to and pursue all such inquiries, while complying with applicable international regulatory guidelines.
Sirius distributed its products directly to consumers by mail order. We had attracted and retained customers through our marketing efforts, which included participating in trade shows, physician education, and customer referral. While the diabetic market contains over 23 million diabetics in the U.S., changes in reimbursement and the re-emergence of competitive bidding influenced management's decision to focus on the Amerx subsidiary.
In fiscal 2009, Amerx generated gross revenues of approximately $2,366,000 and Sirius, $262,000, which constituted 90% and 10%, respectively, of our total gross revenues.
Significant Customers
During fiscal 2009, sales from one customer accounted for approximately 18% of Amerx's sales. The Company has been able to maintain relationships with its distributors and has been able to establish relationships with new distributors each year. Sirius had no significant single customers as it sold only to end users.
Manufacturing
During fiscal 2009, the majority of manufacturing of Amerx's products was completed by a non-affiliated manufacturing facility. This company also performed research and development for Amerx in the past, and we expect that it will perform research and development activities for Amerx in the future on an as needed basis. Amerx does not have a written contract with this manufacturer and there are no minimum purchase requirements. In fiscal 2009, Amerx used a second facility based in Dallas, TX, to manufacture the AmeriGel(R) Saline Wound Wash. If necessary, this manufacturer could aid in manufacturing other AmeriGel(R) products. Amerx believes there are additional companies that could manufacture Amerx's products according to its specifications, if necessary. The Company's manufacturing and packaging activities are performed at a production facility owned and operated by a non-affiliated pharmaceutical manufacturer. The sudden loss or failure of our primary manufacturer could significantly impair Amerx's ability to fulfill customer orders on a short-term basis and therefore, could materially and adversely affect the Company's operations. However, we have maintained a long-term relationship with this manufacturer and do not expect any interruption in its production of Amerigel(R) products in the near term. In addition, the current and projected use of the second manufacturer would help alleviate most short term delays.
Amerx's manufacturing and packaging activities are performed pursuant to current good manufacturing practices ("CGMP") as defined under the United States Federal Food, Drug and Cosmetic Act, as amended (the "FFDC Act"); and the regulations promulgated under the FFDC Act. All manufacturing activities are required to comply with the product specifications, supplies and test methods developed by Amerx specifically for its products, as well as the CGMP.
A single manufacturer furnishes one proprietary ingredient contained in all Amerigel(R) products. Amerx does not have a written contract with this supplier and management believes that, if necessary, an alternative supplier could be secured within a reasonable period of time. The manufacturer generally provides other raw materials and ingredients and we believe there are numerous other sources for these materials and ingredients. However, there can be no assurance that Amerx would be able to timely secure an alternative supplier and the
failure to replace this supplier in a timely manner could materially harm Amerx's operations. We believe that we have a good working relationship with this supplier and do not anticipate any disruption of supplies.
During fiscal 2009, Sirius purchased approximately 83% of its diabetic supplies from a non-affiliated supplier. Effective July 31, 2009 this segment has been discontinued.
Proprietary Rights
In January 1999, the United States Patent and Trademark Office registered the Company's AmeriGel(R)trademark. Amerx also holds a registered Trademark for the principal proprietary ingredient used in all of its currently available products, Oakin(R). Amerx relies on a combination of trademark and trade secret protection and confidentiality agreements to establish and protect its proprietary rights.
Competition
The market for skin and wound care treatment products in which Amerx operates is highly competitive. Competition is based on product efficacy, brand recognition, loyalty, quality, price and availability of shelf space in the retail market. Amerx competes against several well-capitalized companies offering a range of skin treatment products as well as small competitors having a limited number of products. Amerx has successfully established its products efficacy and value within specialized health care markets and will continue to expand this marketplace.
The market for diabetic supplies is also highly competitive. During fiscal 2009, Sirius competed with many large and small companies for market share. We believed that Sirius could compete on the same level with these larger companies as to product offerings. We believed Sirius' success would hinge on customer service rather than product margin.
Order Placement and Backlog
During fiscal 2009, the Company experienced backlogs in the second half of the fiscal year after the Pricing, Data Analysis and Coding contractor for Medicare and Medicaid ("PDAC"), formerly the Statistical Analysis DME Regional Carrier ("SADMERC"), changed its requirements for Medicare and Medicaid reimbursement on short notice. This caused Amerx to rework the production and packaging of the AmeriGel(R) Saturated Gauze Dressing. The work was accomplished by fiscal year end, and the sterile Saturated Gauze Dressing was given a reimbursement code by PDAC in July of 2009. There was no material backlog in orders placed in the previous fiscal year.
Governmental Approvals and Regulations
The production and marketing of our products are subject to regulation for safety, efficacy and quality by numerous governmental authorities in the United States. Amerx's advertising and sales practices are subject to regulation by the Federal Trade Commission (the "FTC"), the FDA and state agencies. The FFDC Act, as amended, the regulations promulgated thereunder, and other federal and state statutes and regulations govern, among other things, the testing, manufacture, safety, effectiveness, labeling, storage, record keeping, approval, advertising and promotion of Amerx's products. The FDA regulates the contents, labeling and advertising of Amerx's products. Amerx may be required to obtain FDA approval for proposed nonprescription products. This procedure involves extensive clinical research, and separate FDA approvals are required at various stages of product development. The approval process requires, among other things,
presentation of substantial evidence to the FDA, based on clinical studies, as to the safety and efficacy of the proposed product. After approval, manufacturers must continue to expend time, money and effort in production and quality control to assure continual compliance with the Current Good Manufacturing Practices (CGMP) regulations.
Sirius' advertising and sales practices were subject to regulation by the FTC, Medicare, and state Medicaid agencies. FDA approvals for its products were obtained by the respective manufacturer. Medicare and Medicaid regulate advertising, sales pricing, and the guidelines under which Sirius operated.
We believe that we and our subsidiaries are in compliance with all applicable laws and regulations relating to our and their operations in all material respects. Compliance with the various provisions of national, state and local laws and regulations has had a material adverse effect upon the capital expenditures, earnings, financial position, liquidity and competitive position of the Company. We have incurred and will continue to incur extra cost in order to remain compliant with the latest regulations promulgated by the SEC, including those regulations promulgated pursuant to the Sarbanes Oxley Act of 2002.
Employees
As of September 1, 2009, the Company and its subsidiaries employ a total of 11 full time employees and 4 part time employees, consisting of 5 management employees, 4 sales-related employees and 6 administrative employees. One employee works under Procyon, thirteen employees work under the Amerx subsidiary, and one employee under Sirius.
ITEM 2.
ITEM 2. PROPERTIES
We currently maintain our offices, and those of Amerx and Sirius, at 1300 South Highland Ave, Clearwater, Florida 33756. Our offices consist of approximately 3,800 square feet of space. We believe the facility is adequate for our current needs. The Company leased this building until July 2006, when it purchased the building from the lessor for $550,000. In addition, at the same time, we closed on a loan provided by Bank of America, N.A. in the amount of $508,000, evidenced by a promissory note. Further, the purchase and loan were secured by a mortgage, also dated July 21, 2006, between the Company and Bank of America. Our Chief Executive Officer personally guaranteed the loan.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
The Company and its subsidiaries are not a party to any pending material legal proceedings nor is our property the subject of a pending legal proceeding.
PART II
ITEM 5.
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
Since October 1996, the Company's Common Stock has been traded on the OTC Bulletin Board, an electronic quotation system used by members of the Financial Industry Regulatory Authority ("FINRA"). The following table sets forth for each period indicated the high and low closing bid prices for the Common Stock, as reported by National Quotation Bureau, LLC. Bid quotations reflect inter-dealer quotations, without retail markups, markdowns or commissions, and do not necessarily reflect actual transactions.
Fiscal 2009 HIGH LOW - ----------- ---- --- First Quarter $ .50 $ .25 Second Quarter $ .40 $ .11 Third Quarter $ .15 $ .09 Fourth Quarter $ .17 $ .06
Fiscal 2008 - ----------- First Quarter $ .70 $ .34 Second Quarter $ .50 $ .35 Third Quarter $ .51 $ .40 Fourth Quarter $ .55 $ .36
As of September 15, 2009, there were approximately 131 record holders of the Company's Common Stock. On September 16, 2009, the closing bid price of the Company's common stock was $.10 and the closing ask price was $.15. On September 15, 2009, the last date on which a sale occurred, the last reported sale price was $.10.
Holders of Common Stock are entitled to receive such dividends if declared by the Company's Board of Directors. We have not declared any dividends on our Common Stock and have no current plans to declare a dividend in the immediate future.
Holders of the Series A Cumulative Convertible Preferred Stock (the "Preferred Stock") are entitled to receive, if declared by the Board of Directors, quarterly dividends at an annual rate of $.10 per share. Dividends accrue without interest, from the date of issuance, and are payable in arrears in cash or common stock, when and if declared by the Board of Directors. No dividends had been declared or paid at June 30, 2009, and dividends, if ever declared, in arrears at such date total $241,371.
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, every holder of preferred stock is entitled to that number of votes equal to the number of shares of common stock into which the preferred stock is convertible. 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. During fiscal 2009, no holders of Preferred Stock voluntarily converted their Preferred shares into shares of Common Stock.
As reflected in the price quotations above, there have been significant price fluctuations in the Company's Common Stock. Factors that may have caused or can cause market prices to fluctuate include the number of shares available in the public float, any purchase or sale of a significant number of shares during a relatively short time period, quarterly fluctuations in results of operations, issuance of additional securities, entrance of such securities into the public float, market conditions specific to the Company's industry and market conditions in general, and the willingness of broker-dealers to effect transactions in low priced securities. In addition, the stock market in general has experienced significant price and volume fluctuations in recent years. These fluctuations, which may be unrelated to a Company's operating performance, have had a substantial effect on the market price for many small capitalization companies such as the Company. Factors such as those cited above, as well as other factors that may be unrelated to the operating performance of the Company, may significantly affect the price of the Common Stock.
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
Safe Harbor Statement under the Private Securities Litigation Reform Act of 1995
This Report on Form 10-K, including Management's Discussion and Analysis or Plan of Operation, 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 and its subsidiaries' 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 Securities 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, manufacturing capabilities, new and unanticipated governmental regulations 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.
Our business in general is subject to certain risks including but not limited to the following:
- we may not be able to produce or obtain, or may have to obtain at excessive prices, the raw materials and finished goods we need; - we may not be able to use any tax loss carryforwards before they expire; - the vendors on whom we rely for manufacturing certain products may go out of business, fail to meet demand or provide shipments on an untimely basis; - competitive pressures may require us to lower our prices on certain products, thereby adversely affecting operational results; - we may not be able to obtain, or obtain at uneconomic expense and protracted time, the regulatory approval of new products; - consumers or distributors may not favorably receive our new or existing products; we may not be able to obtain adequate financing to fund our operations or expansion; - a relatively small group of products may represent a significant portion of our net revenues or net earnings from time to time; if the volume or pricing of any of these products declines, it could have a material adverse effect on our business, financial position and results of operations; - we could experience significantly reduced revenues and profits if Medicare or other government programs change, delay or deny reimbursement claims; - the loss of senior management or other key personnel, or our inability to attract and retain additional senior management or other key personnel, could adversely affect our ability to execute our business plan; - we could become subject to new unanticipated governmental regulations or fail to comply with regulations applicable to our products, which could materially and adversely affect our business, financial position and results of operations; and - legislative or regulatory programs that may influence prices of prescription drugs could have a material adverse effect on our business.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Our financial statements have been prepared in accordance with standards of the Public Company Accounting Oversight Board (United States), which require us 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 this annual report. The estimates used by management are based upon our historical experiences combined with management's understanding of current facts and circumstances. Certain of our accounting policies are considered critical as they are both important to the portrayal of our 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 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. Estimating the credit worthiness of customers and the recoverability of customer accounts requires us to exercise considerable judgment. 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. We base our estimates on our historical collection experience, current trends, credit policy and on the analysis of accounts by aging category.
At June 30, 2009, our allowance for doubtful accounts totaled $4,200.
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 and mailing campaigns. These forms of advertising are expensed when incurred.
Income Tax
Income taxes are accounted for using an asset and liability approach that requires the recognition of deferred tax assets and liabilities for the expected future tax consequences attributable to differences between financial statement carrying amounts of existing assets and liabilities and their respective tax bases. A valuation allowance is provided when it is more likely than not that some portion or all of the deferred tax asset will not be realized. The Company adopted Financial Standards Board Interpretation No. 48, Accounting for Income Taxes ("FIN 48"), an interpretation of SFAS 109, on January 1, 2007.
Revenue Recognition
The Company recognizes revenue in accordance with Securities and Exchange Commission Staff Accounting Bulletin No. 104, "Revenue Recognition, corrected copy." which requires that four basic criteria must be met before revenue can be recognized: (1) persuasive evidence of an arrangement exists; (2) delivery has
occurred or services have been rendered; (3) the seller's price to the buyer is fixed or determinable; and, (4) collectibility is reasonably assured. We recognize revenue related to product sales upon the shipment of such orders to customers, provided that the risk of loss has passed to the customer and we have received and verified any written documentation required to bill Medicare, other third-party payers and customers. We record revenue at the amounts expected to be collected from Medicare, other third-party payers and directly from customers. We delay recognizing revenue for shipments where the Company has not received the required documentation, until the period when such documentation is received.
Medicare reimbursements are based upon government-established reimbursement prices. The reimbursements that Medicare pays us is subject to review by government regulators. Medicare reimburses at 80% of the government-determined reimbursement prices and we bill the remaining balance to either third-party payers, such as insurance companies, or directly to the customers.
Stock Based Compensation
Effective January 1, 2006, we adopted Statement of Financial Accounting Standards No. 123(R) ("SFAS 123R"), "Share-Based Payment". SFAS 123R requires all share-based payments to employees, including grants of employee stock options, to be recognized in the statement of operations based upon their fair values and rescinds the acceptance of pro forma disclosure. SFAS 123R permits two methods of adoption, a "modified prospective" method and a "modified retrospective" method. Under the modified prospective method, stock-based compensation cost is recognized, beginning with the effective date, based on the requirements of SFAS 123R for all share-based payments granted after the effective date and for all awards granted prior to the effective date that remain unvested on the effective date. The modified retrospective method includes the requirements of the modified prospective method and also permits restatement of prior periods based on amounts previously reported in pro forma disclosures pursuant to SFAS 123 for either all periods presented or for only prior interim periods of the year of adoption. We adopted the modified prospective method prescribed in SFAS 123R, effective January 1, 2006.
Recent Accounting Pronouncements
In May 2009, the FASB issued Statement of Financial Accounting Standards No. 165, "Subsequent Events" (SFAS 165). Under SFAS 165, requires companies to evaluate events and transactions that occur after the balance sheet date but before the date the financial statements are issued, or available to be issued in the case of non-public entities. SFAS 165 requires entities to recognize in the financial statements the effect of all events or transactions that provide additional evidence of conditions that existed at the balance sheet date, including the estimates inherent in the financial preparation process. Entities shall not recognize the impact of events or transactions that provide evidence about conditions that did not exist at the balance sheet date but arose after that date. SFAS 165, also requires entities to disclose the date through which subsequent events have been evaluated. SFAS 165 is effective for interim and annual reporting periods ending after June 15, 2009. We adopted the provisions of SFAS 165 for the year ended June 30, 2009, as required, the adoption did not have a material impact on our financial statements. We have evaluated subsequent events from the balance sheet date through August 28, 2009, and determined there are no material transactions to disclose, other then those reported in Note O - Subsequent Events.
In June, 2009, the FASB issued Statement of Financial Accounting Standards No. 168 (SFAS 168) "Accounting Standards CodificationTM and the Hierarchy of Generally Accepted Accounting Principles" - a replacement of FASB Statement No. 162. SFAS 168 establishes the FASB Accounting Standards CodificationTM as the source of authoritative accounting principles recognized by the FASB to be applied by nongovernmental entities in the preparation of financial statements in conformity with US GAAP. FAS 168 will be effective for financial statements
issued for interim and annual periods ending after September 15, 2009, for most entities. On the effective date, all non-SEC accounting and reporting standards will be superseded. We will adopt SFAS 168 for the quarterly period ended September 30, 2009, as required, and adoption is not expected to have a material impact on our consolidated financial statements.
General
Our continuing operations and revenues consist of the operations of and revenues generated by Amerx, our wholly-owned subsidiary. Amerx's wound care and skin care products, marketed under the trademark AmeriGel(R), are formulated to enhance the quality of skin and wound care and to lower the treatment cost for those who suffer from various skin conditions and wounds. During fiscal 2009 and up through July 31, 2009, Sirius marketed and distributed diabetic supplies via mail order primarily to Medicare patients.
Amerx markets Amerigel(R) wound care products to institutional customers such as hospitals, wound care clinics, skilled nursing facilities and home health agencies; to retail customers through direct sales, internet sales and through independent and retail chain drug stores; and to physicians and other health care practitioners.
Amerx's skin care products are distributed to institutions and to retail stores through national, regional and local distributors as well as through direct sales and internet sales. As Amerx grows, more focus is being placed on distributor sales over direct sales.
Recent Developments
Effective July 31, 2009, Sirius entered into an Asset Purchase Agreement with Priority Diabetes Supply, Inc. Under the terms of the Agreement Sirius sold certain "Purchased Assets," as defined in the Asset Purchase agreement, to Priority Diabetes, consisting primarily of Sirius' list of diabetic customers. As of August 1, 2009, Sirius no longer markets diabetic testing products. Management is considering various alternatives for Sirius' future business operations.
In December 2008, PDAC (formerly SADMERC), issued change requirements for products to be eligible for Medicare and Medicaid reimbursement. All amorphous hydrogels and all hydrogel gauze dressings require sterility for reimbursement as of January 1, 2009. Amerx re-evaluated the process for manufacturing, the cost of changing manufacturing methods, new packaging and testing cost. Amerx moved forward and was able to provide its customers with a new "sterile" form of the Saturated Gauze Dressing. This new "sterile" form of Saturated Gauze Dressing was approved for reimbursement by PDAC in July of 2009.
Future Expectations
Amerx expects to further penetrate the health care market through its participation in industry trade shows, advertisements in trade journals, development of additional distributor relationships and by opening new geographical territories (including international markets). Amerx management seeks to develop additional markets as the Amerigel product line gains broader acceptance in markets involved in advanced wound and skin care.
Sirius, after selling its "Purchased Assets," as defined in the Asset Purchase agreement, effective July 31, 2009, is in the process of considering various alternatives for the continuation of its business. Pursuant to the terms of the Asset Purchase Agreement, Sirius will not be involved in the diabetic testing supply business for at least the next two years.
Results of Operations
Comparison of Fiscal 2009 and 2008.
As previously reported in our current report on Form 8-K, filed on August 3, 2009, we entered into an Asset Purchase Agreement, effective July 31, 2009 with Priority Diabetes Supply, Inc., a Florida corporation, doing business as Diabetes Wellness Supply ("Priority Diabetes"). Pursuant to the Agreement, we sold certain "Purchased Assets," as defined in the Agreement, including Sirius' customer list, to Priority Diabetes. Terms of the sale stipulate that, Sirius no longer offers testing products to diabetic customers. Management is considering other options for Sirius to conduct business in the future. The results of operations for fiscal 2009 and 2008 are being reported to reflect continuing operations for Procyon and Amerx, with discontinued operation of Sirius.
Net sales during fiscal 2009 were approximately $2,366,000 as compared to approximately $2,254,000 in fiscal 2008, an increase of approximately $112,000, or 5%. Amerx sales were impacted by the general economic conditions effect on the health care market. Increases were seen in quarterly sales for three of the four quarters when compared to the same quarters of the previous year resulting in an overall sales increase of 5%. Increased marketing and regulatory costs have negatively impacted net income from continuing operations. Amerx hopes to capture more of the health care market in fiscal 2010, as well as increase the penetration of new markets including government contracts and international markets.
Cost of sales increased to approximately $452,000 in fiscal 2009, as compared to approximately $451,000 in fiscal 2008, or approximately less then 1%. Cost of sales in fiscal 2009, as a percentage of net sales, decreased by approximately 1% over the previous year. Amerx's costs have remained relatively consistent over the past year with only a slight increase in some of its ingredient and packaging costs.
Gross profit increased to approximately $1,914,000 during fiscal 2009, as compared to approximately $1,804,000 during fiscal 2008; an increase of about $110,000, or 6%. As a percentage of net sales, gross profit was 81% in fiscal 2009, as compared to 80% in fiscal 2008.
Operating expenses during fiscal 2009 were approximately $1,753,000, consisting of approximately $813,000 in salaries and benefits and $940,000 in selling, general and administrative expenses. This represents an increase in expenses of approximately $191,000 in fiscal 2009, as compared to expenses in fiscal 2008. Operating expenses in fiscal 2008 consisted of $788,000 in salaries and benefits and $774,000 in selling, general and administrative expenses. Selling, general and administrative expenses increased, including increases in marketing, legal, consulting fees and accounting fees. As a percentage of net sales, operating expenses during fiscal 2009 increased to 74% as compared to 69% during fiscal 2008; as net sales increased $112,000 for the year on a $191,000 increase in expenses.
Income from operations decreased to approximately $161,000 in 2009, as compared to approximately $242,000 in fiscal 2008. Net income (after dividend requirements for Preferred Shares) was approximately $5,000 during fiscal 2009, compared to a net income of approximately $778,000 during fiscal 2008. The Company also recorded approximately $674,000 of income tax benefit in arriving at net income available to common shares in fiscal 2008.
As of June 30, 2009, the Company had deferred tax asset of $1,057,167, consisting primarily of the tax benefit of net operating loss carryforward. The decrease in the valuation allowance is due to an increase in expected
utilization of net operating loss carryforwards. Management believes it is more likely than not that it will realize the benefit of the NOL carryforward, because of its continuing trend of earnings. Therefore, a valuation allowance is not considered necessary.
Liquidity and Capital Resources
Historically, we have financed our operations through a combination of revenues from operations, shareholder loans, and the public sales of equity. As of June 30, 2009, our principal sources of liquidity included inventories of approximately $109,000, net accounts receivable of approximately $219,000, cash of approximately $403,000, and certificates of deposit of approximately $243,000. We had working capital of approximately $888,000 at June 30, 2009.
Operating activities provided cash of approximately $161,000 during fiscal 2009, and approximately $118,000 during fiscal 2008, consisting primarily usage of prepaid expenses of approximately $75,000 in fiscal 2009 and a net profit of approximately $793,000 in fiscal 2008. Cash used in investing activities during fiscal 2009 and 2008 was approximately $14,000 and $242,000, respectively. This was primarily due to investing in Certificates of Deposit in the amount of $239,698. Cash used by financing activities during fiscal 2009 was approximately $22,000, and $21,000 during fiscal 2008.
During fiscal 2009, no holders of Preferred Stock converted their shares to Common Stock.
Commitments of Capital Expenditures
At June 30, 2009, the Company had no commitments for capital expenditures.
Off-Balance Sheet Arrangements
During fiscal years 2009 and 2008, we did not have any relationships or arrangements with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Consolidated financial statements as of June 30, 2009, and 2008 were audited by Ferlita, Walsh & Gonzalez, P.A., the Company's independent auditors, as indicated in their report included appearing at page.
Page
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets
Consolidated Statements of Operations
Consolidated Statements of Stockholders' Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
None.
ITEM 9A.
ITEM 9A. CONTROLS AND PROCEDURES.
Management of the Company, with the participation of the Chief Executive Officer and 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 Officer and Chief Financial Officer, concluded that, as of the date of this report, the Company's disclosure controls and procedures were 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.
Our management, including our Chief Executive Officer and our Chief Financial Officer, does not expect that our disclosure controls and procedures or our internal controls over financial reporting will, in all instances, prevent all errors and all fraud. A control system, no matter how well conceived or operated, can only provide reasonable, not absolute, assurance that the objectives of the control system are met. While our control systems provide a reasonable assurance level, the design of our control systems reflects the fact that there are resource constraints, and the benefits of such controls were considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the financial reports of the Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple errors or mistakes. Additionally, a control can be circumvented by the individual act of some person, by collusion of two or more persons, or by management's override of a specific control. The design of any system of controls is also based in part on certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.
(a) Management's annual report on internal control over financial reporting. Our management is responsible for establishing and maintaining adequate internal control over financial reporting for the Company. The Company's internal control system was designed to provide reasonable assurance to the Company's management and board of directors regarding the preparation and fair presentation of published financial statements.
All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation.
The Company's management assessed the effectiveness of the Company's internal control over financial reporting as of June 30, 2009. In making this assessment, it used the criteria set forth by the Committee of Sponsoring
Organizations of the Treadway Commission ("COSO") in Internal Control--Integrated Framework, Guidance for Smaller Public Companies. Based on our assessment based on those criteria we believe that, as of June 30, 2009, the Company's internal control over financial reporting is not effective to detect the inappropriate application of Generally Accepted Accounting Principles "(GAAP") rules as more fully described below. This was due to deficiencies that existed in the design or operation of our internal controls over financial reporting that adversely affected our internal controls and that may be considered to be material weaknesses.
The matters involving internal controls and procedures that the Company's management considered to be material weaknesses under the standards of the Public Company Accounting Oversight Board were: 1) inadequate segregation of duties consistent with control objectives; (2) insufficient written policies and procedures for accounting and financial reporting with respect to the requirements and application of GAAP and SEC disclosure requirements; (3) inadequate internal and external control over the calculation of deferred tax assets and liabilities and requisite knowledge to properly compute the deferred tax assets and liabilities; (4) ineffective controls over period end financial disclosure and reporting processes and (5) insufficient board and audit committee composition to provide oversight of the financial statement process.
Management believes that the material weaknesses set forth above did not have an effect on the Company's financial results reported herein.
The Company is committed to improving our internal control environment and financial organization. As part of this commitment, we will increase our personnel resources and technical accounting expertise within the accounting function through outside assistance from accounting experts and increase our segregation of duties within the company within the limits of our existing personnel. We will also institute policies and procedures to increase our internal controls and quality of financial reporting within our personnel. We will have the board of directors more involved during the year regarding Company operations, annual and quarterly risk assessments, strategic planning, and financial oversight and reporting. We will strengthen the expertise of the board by adding members that have financial and business expertise in our industry. We will add more members to the audit committee and require the audit committee members to understand the Sarbanes-Oxley rules and requirements and take responsibility for implementing stronger internal control policies and procedures.
We will monitor and evaluate the effectiveness of our internal controls and procedures over financial reporting on an ongoing basis and are committed to taking further action and implementing additional improvements as necessary and as funds allow.
This annual report does not include an attestation report of the Company's registered public accounting firm regarding internal control over financial reporting. Management's report was not subject to attestation by the company's registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission that permit the Company to provide only management's report in this annual report.
(b) Attestation report of the registered public accounting firm. Not applicable.
(c) Changes in internal control. The Company has retained consultants to assist the company in developing and documenting its internal controls over financial reporting. As part of that process, we have documented and instituted a number of controls to benefit our financial reporting. However, that process is not complete and has resulted in the above identified material weaknesses. The Company is continuing to work on remediating those control weaknesses as previously described and will continue to do that during the subsequent fiscal year.
PART III
ITEM 10.
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE.
Directors and Executive Officers
Capacities in Director NAME Age Which Served Since - ---- --- ------------ -----
Regina W. Anderson 62 Chief Executive Officer, and 2005 Chairman of the Board Chester L. Wallack 68 Director 1995 Fred W. Suggs, Jr. 62 Director 1995 Alan B. Crane* 59 Director 1995 Jeffery S. Slowgrove 52 Director 1999 James B. Anderson 39 Chief Financial Officer; President, Sirius Medical Supply, Inc. 2006 Justice W. Anderson 32 Vice President - Sales and Marketing; President, Amerx Health Care Corp. 2006 Michael T. Foley 71 Director 2006
* Mr. Crane resigned as Director and member of the Ethics Committee on July 14, 2009.
Regina Anderson. Ms. Anderson has served as Chairman of the Board of Directors since September 2005, and as our Chief Executive Officer since November 2005. Ms. Anderson has 28 years experience in the medical field and 22 years of management experience. Ms. Anderson worked at Health South Rehabilitation Hospital for ten years as Outpatient Director, in charge of the main outpatient center plus four satellite offices. As Outpatient Director, she was responsible for budgets involving over thirty thousand outpatient visits per year; marketing of multiple outpatient specialty programs; and staffing with thirty employees reporting directly to her. Prior to her work at HealthSouth, she worked as the lead clinician at Clearwater Rehabilitation Center. Regina was Vice-President of Operations at Stuffit Direct Marketing Company from 1980 through 1989. She was in charge of franchise sales and training; coupon processing/production as well as coordination among thirteen franchise offices. Regina was co-owner and President of Foxy's T-Shirt Shops and Le Shirt Company from 1978-1980. Foxy's had five locations. She worked as a Speech Language Pathologist with Morton Plant Hospital from 1970 through 1976. Regina received her Masters Degree from Kansas State University in 1970.
Chester L. Wallack. Mr. Wallack has served as a director since 1995. He has served as Chief Executive Officer of Felton West, Inc., a real estate development and construction company in Dover, Delaware, since 1990. Mr. Wallack is a retired United States Air Force officer having served as a pilot and in various management capacities. He graduated from the University of Kansas with a B.S. degree in Industrial Management and from Southern Illinois University with an M.B.A. degree in Finance.
Fred W. Suggs, Jr. Mr. Suggs has served on our Board of Directors since 1995. He has been a practicing attorney since 1975. He is a partner in the Greenville, South Carolina office of Ogletree, Deakins, Nash, Smoak & Stewart, specializing in labor and employment law. He has been certified as a specialist
in labor and unemployment law by the South Carolina Supreme Court and is a frequent lecturer on labor and employment law issues. Mr. Suggs graduated from Kansas State University with a B.S. degree and he received his J.D. degree from the University of Alabama.
Alan B. Crane. Mr. Crane has served on our board since 1995 and is a partner in Crane Farms, a farming partnership in Larned, Kansas. In 1994, Mr. Crane was appointed by the governor of Kansas to the Kansas Water Authority to oversee project expenditures. He received a B.S. degree from Kansas State University.Mr. Crane resigned as Director and member of the Ethics Committee on July 14, 2009.
Jeffery Slowgrove. Mr Slowgrove has served as a director since 1999. Since 1998, Mr. Slowgrove has been the President of JSS Management Consulting, Inc., a consulting firm in Palm Harbor, Florida, providing funding for start up organizations and advice on the business and management issues facing companies during early rapid growth and expansion phases. He co-founded IMR Global Corp. in 1988 and has served as a director since its inception. From 1988 to 1998, he also served as Treasurer of IMR Global Corp., which is a public company providing applications software-outsourcing solutions for the information technology departments of large businesses. He received a B.B.A. from the University of Michigan.
James B. Anderson. Mr. Anderson has served as our Chief Financial Officer since June 2005. In addition, from September 22, 2005, until that position was filled by Regina Anderson on November 1,2005, Mr. Anderson served as Interim Chief Executive Officer. On June 28, 2005, Mr. Anderson was appointed to serve as the President of Sirius Medical Supply, Inc. Since 1993, Mr. Anderson has been involved with Amerx Health Care Corporation as its Chief Information Officer until 2005, when he was appoint VP of Operations. In 1996, Mr. Anderson became involved with Procyon Corporation after its merger and has since performed the duties of Vice President of Operations. Prior to Mr. Anderson's work with the Company, he was involved with importing and exporting to Russia and Direct Mail Marketing. He received a B.S. from the University of South Florida. Mr. Anderson is the son of John C. Anderson, our late President, Chief Executive Officer and Chairman of the Board, the son of Regina Anderson, the Company's Chairman of the Board and Chief Executive Officer, and the brother of Justice W. Anderson, our Vice President of Sales & Marketing and the President of Amerx Health Care Corporation. Mr. Anderson is the son-in-law of our deceased former director, Richard T. Thompson.
Justice W. Anderson. Since June 28, 2005, Mr. Anderson has served as our Vice President of Sales and Marketing and the President of Amerx Health Care Corporation. Since January of 2001, Mr. Anderson has been Vice President of Sales for Amerx Health Care Corp. He also serves on the board of the American Academy of Podiatric Practice Management. From August 2000 to January 2001 he served as Senior Sales Representative, and as a sales representative from May 2000 to August 2000. He received a B.A. degree from the University of Florida. Mr. Anderson is the son of John C. Anderson, our late President, Chief Executive Officer and Chairman of the Board, the son of Regina Anderson, the Company's Chairman of the Board and Chief Executive Officer and the brother of James B. Anderson, our Chief Financial Officer and the President of Sirius Medical Supply, Inc.
Michael T. Foley. Mr. Foley is currently a Vice President and Director of Suwannee Lumber Company, manufacturers of various lumber grades, garden mulch and potting soil. From 1997 to 2003, Mr. Foley served as President and CEO of Gypsum Products, Inc. of Largo, FL. From 1972 to 1996 Mr. Foley served in various capacities at Florida Forest Products, Inc. including President, Chairman and CEO. Prior to his association with these building material suppliers, Mr. Foley worked for International Paper in pulp and newsprint sales. Michael received his Bachelor of Business Administration degree from the University of Notre Dame in 1960 and subsequently served on that university's National Alumni Board. He obtained his MBA from the University of Florida in 1965. Mr. Foley has been a member of the Pinellas County Committee of 100 and
was appointed by Governor Lawton Chiles to the State of Florida Community Health Purchasing Alliance (CHPA) Board. Mr. Foley is also a retired Captain in the U.S. Naval Reserve.
Compliance with Section 16(a) of the Exchange Act
Under the securities laws of the United States, our directors, executive officers, and any persons holding more than ten percent of our Common Stock are required to report their initial ownership of the Company's Common Stock and any subsequent changes in that ownership to the Securities and Exchange Commission and the Company. Specific due dates for these reports have been established and we are required to disclose any failure to file, or late filing, of such reports. Based solely on our review of the reports and amendments thereto furnished to the Company and written representations that no other reports were required to be filed in fiscal 2009, our officers, directors and beneficial owners of more than ten percent of its Common Stock complied with all Section 16(a) filing requirements.
Committees of the Board
The Board of Directors has delegated certain of its authority to a Compensation Committee. The Compensation Committee is composed of Messrs. Wallack, Slowgrove and Suggs. No member of the Compensation Committee is a former or current officer or employee of the Company.
The primary function of the Compensation Committee is to review and make recommendations to the Board with respect to the compensation, including bonuses, of the Company's officers and to administer the Company's Option Plan. The Board of Director's adopted a Compensation Committee Charter during the 2008 fiscal year.
The Company formed an Audit Committee in July 2004, composed solely of Mr. Slowgrove. Richard T. Thompson joined the Audit Committee as its Chairman in March, 2006. Mr. Slowgrove resigned from the Audit Committee effective March 31, 2006. In October 2006, we determined that our remaining Audit Committee member, Mr. Thompson, did not meet the definition of independence for purposes of audit committee service as contained in the applicable rules of The Nasdaq Stock Market, Inc. ("Nasdaq"). In addition, Mr. Thompson had been unable to serve on the Audit Committee because of health-related concerns. On October 19, 2006, Mr. Thompson died. In December 2006, the Board nominated Michael T. Foley as director and Audit Committee member and Chair. The Board believes that Mr. Foley is independent pursuant to Nasdaq rules and also meets the requirements of an audit committee financial expert. In addition, we have determined that Mr. Foley is also independent within the meaning of SEC Rule 10A-3(b)(1). The function of the Audit Committee is to review and approve the scope of audit procedures employed and to review and approve the audit reports rendered by the Company's independent auditors and to approve the audit fees charged by the independent auditors. In addition, pursuant to the Sarbanes-Oxley Act of 2002 and rules promulgated thereunder, the Audit Committee is responsible for, among other things, pre-approving all audit and non-audit services performed by the independent auditors, approving the engagement of the auditors and receiving certain reports from the independent auditors prior to the filing of the audit report. The Audit Committee reports to the Board of Directors with respect to such matters and recommends the selection of independent auditors. The Audit Committee adopted a charter in October 2006.
The Company also formed an Ethics Committee from the board members. The members include Suggs and Crane. Mr. Crane resigned from the committee on July 14, 2009.
Option Awards
Number of Number of Securities Securities Underlying Underlying Unexercised Unexercised Option Options Options Exercise Option (#) (#) Price Expiration Name Exercisable Unexercisable ($) Date - ---- ----------- ------------- --- ----
Regina W. Anderson, - - - - Chief Executive Officer and Chairman of the Board of Directors
Justice W. Anderson, 50,000 (1) - $ .2125 12/2009 President, Amerx 10,000 (1) - $ .1594 11/2010 Health Care Corp.
James B Anderson, 25,000 - $ .2125 12/2009 Chief Financial 5,000 - $ .1594 11/2010 Officer and VP Operations (Amerx)
(1) As trustee of the John C. Anderson Trust in accordance with Mr. Anderson's will.
Compensation of Directors
No employee of the Company receives any additional compensation for his services as a director. No non-employee director receives any compensation for his service; however, the Board of Directors has authorized payment of reasonable travel or other out-of-pocket expenses incurred by non-management directors in attending meetings of the Board of Directors. The Board of Directors may consider alternative director compensation arrangements from time to time.
Stock Option Plan
The Company's 1998 Omnibus Stock Option Plan (the "1998 Plan") is designed as a comprehensive benefit plan that gives the Company the ability to offer a variety of equity based incentives and awards to persons who are key to the Company's growth, development and financial success. The 1998 Plan permits the grant of awards to directors, employees and consultants of the Company and its subsidiaries. The 1998 Plan provides for the grant of incentive stock options ("Incentive Stock Options") within the meaning of the Code, non-qualified stock options, restricted shares, performance units, performance shares, dividend equivalent, share appreciation rights ("SARs") and other forms of awards, including deferrals of earned awards, (collectively, the "Awards"). Employees and non-employees to whom an offer of employment has been extended, directors and consultants of the Company are all eligible participants for all Awards, except that Incentive Stock Options may be granted only to employees.
The 1998 Plan is administered by the Compensation Committee of the Board of Directors, which construes and interprets the 1998 Plan, determines the terms and conditions of the Awards granted under the 1998 Plan, including the individuals who are to granted Awards, the exercise price, if any, the number of shares subject to an Award and the vesting and duration of Awards, subject to any restrictions contained in the 1998 Plan.
The maximum number of shares of Common Stock reserved and available for Awards under the 1998 Plan is 1,000,000 and the Compensation Committee may limit the number of shares that may be awarded in the form of restricted stock Awards.
The exercise price of Incentive Stock Options granted under the 1998 Plan must be at least equal to the fair market value of the Common Stock of the Company on the date of grant, and must be 110% of fair market value when granted to an employee who owns shares representing more than 10% of the voting power of all classes of stock of the Company. The exercise price of non-qualified stock options granted under the 1998 Plan can not be less than 85% (100% as amended, effective for options granted December 31, 2007) of the fair market value of the Common Stock on the date of grant. The term of all options granted under the 1998 Plan may not exceed ten years, except the term of Incentive Stock Options granted to a 10% or more stockholder, may not exceed five years. The 1998 Plan may be amended or terminated by the Board of Directors, but no such action may impair the rights of a participant under a previously granted option.
The 1998 Plan provides for the award of SARs and Performance Units and Performance Shares. A SAR is an incentive Award that permits the holder to receive (per share covered thereby) the amount by which the fair market value of a share of Common Stock on the date of exercise exceeds the fair market value of such share on the date the SAR was granted or at such date as the Compensation Committee designates. The Compensation Committee may grant SARs independently, in addition to, or in tandem (such that the exercise of the SAR or related stock option will result in forfeiture of the right to exercise the related stock option or SAR for an equivalent number of shares) with a stock option Award. A Performance Unit or Performance Share is an incentive Award whereby the Company commits to make a distribution depending on the attainment of a performance objective and condition established by the Committee and the base value of the Performance Unit or Performance Share.
Upon termination of services of a non-employee director or consultant, all options issuable, but not yet granted, to such persons for services rendered shall be granted and all options shall remain exercisable for the original option term. Options granted to an employee are exercisable for specified periods of time ranging from one month to one year following an employee's termination depending on the circumstances of the termination, except that options granted to an employee terminated for cause shall not be exercisable to any extent after termination. An unexercised option is exercisable only to the extent that it was exercisable on the date of termination.
The 1998 Plan provides that, in the event the Company enters into an agreement providing for the merger of the Company into another corporation, an exchange of shares with another corporation, the reorganization of the Company or the sale of substantially all of the Company's assets, unvested stock options become immediately vested and exercisable. Upon the consummation of the merger, exchange, reorganization or sale of assets, the successor corporation must assume all Awards or substitute another Award on substantially identical terms to the outstanding Award. Effective December 31, 2007, the Company enacted certain amendments to the plan to make it compliant with the recent regulations that were issued concerning deferred compensation in Section 409A, IRC. These amendments did not have any material effect on the finacial reporting of the Company.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS, MANAGEMENT AND RELATED STOCKHOLDER MATTERS.
The following table sets forth certain information regarding beneficial ownership of our Common Stock as of September 2, 2009 by (i) each person known by the Company to own beneficially more than 5% of the outstanding Common Stock, (ii) each director or director nominee, and (iii) all executive officers and directors as a group. Each person has sole voting and sole investment or dispositive power with respect to the shares shown except as noted. As to the Company's preferred stock, as of September 2, 2009, no officer or director of the company owned any preferred shares. In addition, no individual shareholder beneficially owned more than 5% of the Company's preferred shares.
Common Shareholdings on September 2, 2009
Number of Percent of Name and Address(5) Shares Class
Regina W. Anderson 72,500 * Chester L. Wallack (l) 120,000(3) 1.5 Fred W. Suggs (l) 160,000(3) 2.0 Alan B. Crane 80,000(3) 1.0 Jeffery S. Slowgrove 536,200(4) 6.7 James B. Anderson 111,000(7) 1.4 Justice W. Anderson(6) 3,483,500(3) 43.3 Michael T. Foley(1)(2) 210,000(8) 2.6 All directors and officers as a group (eight persons) 4,838,200 59.0% RMS Limited Partnership, 50 W. Liberty St, 1,600,000 19.9% Suite 650, Reno, NV 89501
*Less than 1%
(1) Member of the Compensation Committee. (2) Member of the Audit Committee. (3) Includes 60,000 shares subject to currently exercisable options or options which will become exercisable within 60 days. (4) Includes 10,000 shares of subject to currently exercisable options or options which will become exercisable within 60 days. (5) Except as noted above, the address for all persons listed is 1300 S. Highland Ave, Clearwater, Florida 33756 (6) Mr. Anderson beneficially owns 3,350,500 shares of common stock and 60,000 currently exercisable options to purchase shares of common stock as Trustee of the John C. Anderson Trust in accordance with Mr. Anderson's will. He also owns of record 73,000 shares of common stock. (7) Includes 30,000 shares subject to currently exercisable options and 10,000 shares in joint name with his wife. (8) Includes 5,000 shares in joint name with his wife.
Regina W. Anderson, our Chairman and Chief Executive Officer, personally guaranteed the loan we secured from Bank of America, N.A., in the amount of $508,000, to purchase our office building in July 2006 as well as the $250,000 line of credit. Mr. Slowgrove, a director, acted as a consultant to the Company for portions of fiscal 2008, but not fiscal 2009, at a total compensation to him of approximately $6,250.
Director Independence.
We have determined that the following directors are independent within applicable Nasdaq rules: Messrs. Wallack, Suggs, Crane, Slowgrove and Foley. We considered the fact that Mr. Slowgrove acted as a consultant to the Company for portions of fiscal 2008, at a total compensation to him of approximately $6,250. Regina, James and Justice Anderson are not independent as they are executive officers of the Company and its subsidiaries. Accordingly, our Board of Directors is composed of a majority of independent directors. Our Compensation Committee and Audit Committee are composed entirely of independent directors pursuant to applicable Nasdaq rules. In addition, Mr. Foley, also meets the definition of independence under SEC Rule 10A-3.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
Audit Fees. In fiscal 2009, the Company paid to its independent accountants $49,756 in fees related directly to the audit and review of the Company's financial statements. In fiscal 2008, the Company paid to its independent accountants $32,629 in fees related directly to the audit and review of the Company's financial statements.
Audit-Related Fees. The Company's independent accountants performed no other audit-related services for the Company during fiscal 2008 and 2009, other than the audit services described above.
Tax Fees: In fiscal 2009, the Company paid to its independent accountants $2,868 in fees related directly to tax preparations. In fiscal 2008, the Company paid to its independent accountants $2,490 in fees related directly to tax preparations.
All Other Fees: The Company's independent accountants performed no other services for the Company during fiscal 2008 and 2009, other than the audit and tax services described above.
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES.
(a) Exhibits
1. The financial statements filed herewith are listed in the Index to Financial Statements included in Item 7.
Exhibit No. Document ----------- --------
* 3.1 Articles of Incorporation + 3.1.1 Articles of Amendment to Articles of Incorporation * 3.2 Bylaws + 4.1 Designation of Series A Preferred Stock # 10.1 1998 Omnibus Stock Option Plan - 10.1 Office Lease dated September 23, 2003 / 10.2 Promissory Note dated July 21, 2006 / 10.3 Mortgage dated July 21, 2006
+ 10.4 Loan and Security Agreement, dated as of January 1, 1995, by and between the Company and Amerx Health Care Corp., including Promissory Notes issued there under. o 10.5 Agreement and Plan of Exchange, dated January 31, 1996, by and between the Company and Amerx. **10.6 Asset Purchase Agreement between Sirius Medical Supply, Inc. and Priority Diabetes Supply, Inc., effective July 31, 2009. ++14.1 Code of Ethics for Senior Financial Officers. x 31.1 Certification of Regina W. Anderson pursuant to Exchange Act Rule 13a-14(a)/15d-14(a) x 31.2 Certification of James B. Anderson pursuant to Exchange Act Rule 13a-14(a)/15d-14(a) x 32.1 Certification Pursuant to 18 U.S.C. ss. 1350, as Adopted Pursuant to Section906 of the Sarbanes-Oxley Act Of 2002 - ---------- * Incorporated by reference to the Company's Registration Statement on Form S-1, S.E.C. File No.33-13273. + Incorporated by reference to the Company's Form 10-KSB for the fiscal year ended June 30, 1995. o Incorporated by reference to the Company's Form 8-K filed on or about February 2, 1996. # Incorporated by reference to the Company's Schedule 14A filed on or about November 17, 1998. / Incorporated by reference to the Company's Form 8-K filed on or about August 8, 2006 - Incorporated by reference to the Company's Form 10-QSB for the period ending September 30, 2003 ++ Incorporated by reference to the Company's Schedule 14A filed on or about October 15, 2004 ** Incorporated by reference to the Company's Form 8-K filed on or about August 3, 2009. x Filed herewith.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, there unto duly authorized.
PROCYON CORPORATION
By: /s/ Regina W. Anderson -------------------------- Regina W. Anderson, Chief Executive Officer
Date: September 28, 2009
Pursuant to the requirements of the Securities Exchange Act of 1934, the following persons on behalf of the registrant and in the capacities and on the dates indicated have signed this report below.
Signature Title Date - --------- ----- ----
/s/ Regina W. Anderson Chief Executive Officer, September 28, 2009 Regina W. Anderson President
/s/ James B. Anderson Chief Financial Officer, September 28, 2009 James B. Anderson President (Sirius) and Director
/s/ Justice W. Anderson President (Amerx) and Director September 28, 2009 Justice W. Anderson
/s/ Michael T. Foley Director September 28, 2009 Michael T. Foley
/s/ Jeffery S. Slowgrove Director September 28, 2009 Jeffery S. Slowgrove
/s/ Fred W. Suggs, Jr. Director September 28, 2009 Fred W. Suggs, Jr.
/s/ Chester L. Wallack Director September 28, 2009 Chester L. Wallack
PROCYON CORPORATION AND SUBSIDIARIES CONSOLIDATED FINANCIAL STATEMENTS Years Ended June 30, 2009 and 2008
Page No.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
FINANCIAL STATEMENTS
Consolidated Balance Sheets
Consolidated Statements of Operations
Consolidated Statements of Stockholders' Equity
Consolidated Statements of Cash Flows
Notes to Financial Statements
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Shareholders of Procyon Corporation and Subsidiaries
We have audited the accompanying consolidated balance sheets of Procyon Corporation and Subsidiaries as of June 30, 2009 and 2008 and the related statements of operations, stockholders' equity, and cash flows for each of the years in the two-year period ended June 30, 2009. Procyon Corporation and Subsidiaries' management is responsible for these financial statements. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of internal control over financial reporting. Our audit includes consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purposes of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Procyon Corporation and Subsidiaries as of June 30, 2009 and 2008 and the results of its operations and its cash flows for each of the years in the two-year period ended June 30, 2009, in conformity with accounting principles generally accepted in the United States of America.
/s/ FERLITA, WALSH & GONZALEZ, P.A. - ----------------------------------- FERLITA, WALSH & GONZALEZ, P.A. Certified Public Accountants Tampa, Florida
August 28, 2009
F - 1
PROCYON CORPORATION AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business Activity
Procyon Corporation has two wholly-owned subsidiaries, Amerx Health Care Corp. (Amerx) and Sirius Medical Supply, Inc. (Sirius). Amerx manufactures and markets wound and skin care products primarily in the United States whereas Sirius markets diabetic supplies primarily to Medicare patients in the United States. As previously reported on our form 8-K, in July 2009, we sold certain "Purchased Assets" as defined in the Asset Purchase agreement included the customer list of Sirius to Priority Diabetes Supply, Inc., a Florida corporation, doing business as Diabetes Wellness Supply ("Priority Diabetes"). Thus, as of July 31, 2009, Sirius no longer offers testing products to diabetic customers. Management is considering various options for the future direction of Sirius. See footnote O for further details.
Principles of Consolidation
The consolidated financial statements include the accounts of Procyon Corporation and its wholly-owned subsidiaries, Amerx and Sirius. All material inter-company accounts and transactions are eliminated.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Revenue Recognition
The Company recognizes revenue in accordance with Securities and Exchange Commission Staff Accounting Bulletin No. 104, "Revenue Recognition, corrected copy," which requires that four basic criteria must be met before revenue can be recognized: (1) persuasive evidence of an arrangement exists; (2) delivery has occurred or services have been rendered; (3) the seller's price to the buyer is fixed or determinable; and, (4) collectibility is reasonably assured.
The Company recognizes revenue related to product sales to customers who have placed orders upon shipment of such orders, provided that risk of loss has passed to the customer and the Company has received and verified any written documentation required to bill Medicare, other third-party payers, and customers. The Company records revenue at the amounts expected to be collected from Medicare, other third-party payers, and directly from customers. Revenue recognition is delayed for product shipments for which the Company has not yet received the required written forms, until the period in which those documents are collected and verified.
Revenue related to Medicare reimbursement is calculated based on government-determined reimbursement prices for Medicare-covered items. The reimbursements that Medicare pays the Company are subject to review by appropriate government regulators. Medicare reimburses at 80% of the government-determined reimbursement prices for reimbursable supplies, and the Company bills the remaining balance to either third-party payers or directly to customers.
F - 6
Accounts Receivable and Concentration of Credit Risk
Amerx grants credit to customers, most of whom are national pharmaceutical distributors, drug stores nationwide and physicians. Amerx wholesales its products to national pharmaceutical distributors and drug stores at a sales term of 2/10, net 30. Amerx has a written return policy with its customers. Each return request is reviewed by management for approval. Sales to physicians are at contracted rates and standard payment term is 2/10 net 30 days.
Sirius grants credit to patients who are eligible for Medicare coverage. Sales are at standard payment term of 30 days.
Accounts receivable are generally due from Medicare, private insurance companies, and customers. The collection process is time consuming, complex and typically involves the submission of claims to multiple payers whose payment of claims may be contingent upon the payment of another payer. In accordance with applicable regulatory requirements, the Company makes reasonable and appropriate efforts to collect accounts receivable, including deductible and copayment amounts, in a consistent manner for all payer classes. The valuation of accounts receivable is based upon the credit-worthiness of customers and third-party payers as well as historical collection experience. Estimating the credit worthiness of customers and recoverability of customer accounts requires us to exercise considerable judgment. 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 and write-off experience, current trends, credit policy, and on analysis of accounts receivable by aging category. As of June 30, 2009, accounts receivable allowance was $4,200, or approximately 2% of gross accounts receivable.
Inventories
Inventories are valued at the lower of average cost or market determined by the first-in, first-out method.
Property and Equipment
Property and equipment are stated at cost. Depreciation is computed on a straight-line basis over their estimated useful lives. Leased equipment is recorded at it's fair market value at the beginning of the lease term and is depreciated over the life of the equipment. Depreciation on leased equipment is included in depreciation expense.
Cash and Cash Equivalents
For the purpose of the Statements of Cash Flows, the Company considers cash-on-hand, demand deposits in banks and highly liquid investments purchased with an original maturity of three months or less to be cash equivalents.
F - 7
Concentration of Credit Risk
The Company maintained its cash in three financial institutions. The Federal Deposit Insurance Corporation insures up to $250,000 per legal entity per financial institution. At June 30, 2009, our uninsured cash balance was $0.
Shipping and Handling Costs
Shipping and handling costs incurred were approximately $76,000 and $78,000 for the years ended June 30, 2009, and 2008, respectively, and were included in selling, general and administrative expenses.
Advertising and Marketing
The company records advertising and marketing expenses in the periods in which they are incurred. During the years ended June 30, 2009 and 2008, approximately $466,000 and $397,000, of advertising and marketing costs were included in selling, general and administrative expenses for each respective year.
Income Taxes
Income taxes are accounted for using an asset and liability approach that requires the recognition of deferred tax assets and liabilities for the expected future tax consequences attributable to differences between financial statement carrying amounts of existing assets and liabilities and their respective tax bases. A valuation allowance is provided when it is more likely than not that some portion or all of the deferred tax asset will not be realized. The Company adopted Financial Standards Board Interpretation No. 48, Accounting for Income Taxes ("FIN 48"), an interpretation of SFAS 109, on January 1, 2007.
Net Income Per Share
The Company computes net income per share in accordance with SFAS No. 128, "Earnings per Share" (SFAS 128). SFAS 128 requires presentation of both basic and diluted earnings per shares (EPS) on the face of the income statement. Basic EPS is computed by dividing net income available to common shareholders (numerator) by the weighted average number of common shares outstanding (denominator) during the period. Diluted EPS gives effect to all dilutive potential common shares outstanding during the period including stock options, using the treasury stock method, and convertible preferred stock, using the if-converted method. In computing diluted EPS, the average stock price for the period is used in determining the number of shares assumed to be purchased from the exercise of stock options. Diluted EPS excludes all dilutive potential common shares if their effect is anti-dilutive.
Fair Value of Financial Instruments
The carrying value of cash, accounts receivable, prepaid expenses, deposits, inventory, accounts payable, accrued expenses and notes payable approximate fair value.
Considerable judgement is required in interpreting market data to develop the estimates of fair value, and accordingly, the estimates are not necessarily indicative of the amounts that the Company could realize in a current market exchange.
F - 8
Stock Based Compensation
In December 1998, the Company adopted a 1998 Omnibus Stock Option Plan that provides for the granting of equity-based incentive and other awards to employees and directors of the Company, its subsidiaries and selected consultants. The Plan is administered by the Compensation Committee of the Board of Directors. Any employee, directors who are not employees of the Corporation or a subsidiary, and consultants who are not employees or directors of the Corporation are eligible to participate in the Plan. The maximum number of shares of common stock issuable on exercise of options or other awards granted under the Plan is 1,000,000. Non-qualified options granted must have an exercise price not less than 85% (100% as amended, effective for options granted December 31, 2007) of the fair market value of the underlying shares of common stock. Incentive options must have an exercise price not less than 100% of the fair market value of the underlying shares of common stock. The term of the options cannot be more than ten years. Awards may be granted in the form of restricted stock. Awards can also be granted in the form of stock appreciation rights. A stock appreciation right entitles the participant to receive from the Company an amount equal to the positive difference between the fair market value of common stock on the date of exercise of the stock appreciation right and the grant price. No stock appreciation rights have been issued to date.
Additional information with respect to the Plan's stock option activity is as follows:
Weighted Number of Average Shares Exercise Price ------ -------------- Outstanding at June 30, 2007 300,000 $0.20 Granted - - Exercised - - Expired - - ------- --------- Outstanding at June 30, 2008 300,000 $0.20 Granted - - Exercised - - Expired - - Outstanding at June 30, 2009 300,000 $0.20 ======= ===== Options exercisable at June 30, 2008 300,000 $0.20 ======= ===== Options exercisable at June 30, 2009 300,000 $0.20 ======= =====
The following table summarizes information about stock options outstanding at June 30, 2009:
Stock Options Outstanding --------------------------------- Weighted Average Number of Remaining Weighted Range of Shares Contractual Life Average Exercise Prices Outstanding In Years Exercise Price --------------- ----------- -------- --------------
$0.15 - $0.20 65,000 1.39 $0.16
$0.20 - $0.25 235,000 0.51 $0.21 ------- 300,000 0.70 $0.20 =======
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Effective January 1, 2006, we adopted Statement of Financial Accounting Standards No. 123(R) ("SFAS 123R"), "Share-Based Payment". SFAS 123R requires all share-based payments to employees, including grants of employee stock options, to be recognized in the statement of operations based upon their fair values and rescinds the acceptance of pro forma disclosure. SFAS 123R permits two methods of adoption, a "modified prospective" method and a "modified retrospective" method. Under the modified prospective method, stock-based compensation cost is recognized, beginning with the effective date, based on the requirements of SFAS 123R for all share-based payments granted after the effective date and for all awards granted prior to the effective date that remain unvested on the effective date. The modified retrospective method includes the requirements of the modified prospective method and also permits restatement of prior periods based on amounts previously reported in pro forma disclosures pursuant to SFAS 123 for either all periods presented or for only prior interim periods of the year of adoption. We adopted the modified prospective method prescribed in SFAS 123R, effective January 1, 2006.
On June 30, 2009, there were outstanding options to purchase 300,000 shares of our common stock at exercise prices ranging from $0.16 to $0.21 per share and expiration dates between December 2009 and November 2010. These options were vested at the time of grant. During the year ended June 30, 2009, no options were granted. Therefore, the adoption of SFAS 123R does not have an impact on the statement of operations for period ending June 30, 2009.
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.
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.
There were no options granted during fiscal years ended June 30, 2009 and 2008. Had there been options issued during the fiscal years ended June 30, 2009 and 2008, the fair value of the options would have been determined using the Black-Scholes option-pricing model, which values options based on the stock price at the grant date, the expected dividend payments, and the risk-free interest rate over the life of the option.
Equity instruments issued to non-employees in exchange for goods, fees and services are accounted for under the fair value-based method of SFAS No. 123(R).
Segment Reporting
In previous years, the Company reported certain financial information on its two operating segments, sale of skin and wound care products and sales of diabetic supplies. As a result of the sale of its diabetic supply segment, it is no longer an operating segment. See note O - SUBSEQUENT EVENTS - DISCONTINUED OPERATIONS for further details.
Reclassification
Certain information in the 2008 financial statements have been reclassified to conform to the 2009 financial statement presentations.
F - 10
NOTE B - INVENTORIES
Inventories consisted of the following:
June 30, 2009 June 30, 2008 ------------- -------------
Finished Goods $ 45,217 $109,561 Raw Materials 64,281 74,597 -------- -------- $109,498 $184,158 ======== ========
NOTE C - PROPERTY AND EQUIPMENT
Property and equipment consisted of the following:
As of June 30, 2009 Capitalized Owned Leases Total ------------------------------------------
Office Equipment $ 86,731 $ 26,928 $ 113,659
Furniture and Fixtures 20,726 20,726
Software 19,471 19,471
Leasehold improvements 21,614 21,614
Production Equipment 34,118 34,118
Building 474,168 474,168
Land 64,547 64,547 ------------------------------------------
721,375 26,928 748,303
Less accumulated depreciation (187,036) (26,928) (213,964) ------------------------------------------
$ 534,339 $ 0 $ 534,339 ==========================================
As of June 30, 2008 Capitalized Owned Leases Total ------------------------------------------
Office Equipment $ 83,246 $ 26,928 $ 110,354
Furniture and Fixtures 20,726 20,726
Software 19,471 19,471
Leasehold Improvements 13,587 13,587
Production Equipment 34,118 34,118
Building 474,168 474,168
Land 64,547 64,547 ------------------------------------------
710,043 26,928 736,971
Less accumulated depreciation (154,975) (26,767) (181,742) ------------------------------------------
$ 555,068 $ 161 $ 555,229 ==========================================
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NOTE D - RELATED PARTY TRANSACTIONS
Mr. Slowgrove, a director, acted as a consultant to the Company for portions of fiscal 2008, and was paid compensation of $6,250. Our Chief Executive Officer, Regina W. Anderson, guaranteed a loan to us in the amount of $508,000, issued in connection with our purchase of our office building in July 2006, as well as the $250,000 line of credit.
NOTE E - MORTGAGE PAYABLE
On July 21, 2006, we entered into a mortgage loan, guaranteed by our C.E.O. Regina W. Anderson, for $508,000 with the Bank of America for the purchase of our corporate office building. The mortgage loan is due in 15 years and interest is fixed at 7.25%. Interest expense was $ 33,795 for the fiscal year end June 30, 2009.
Maturities of long-term debt associated with the mortgage payable are as follows:
Year Ending June 30, ---------------------------------------------------
2010 $ 24,498
2011 26,335
2012 28,309
2013 30,431
2014 32,712
2015 and thereafter 305,327 -----------
447,612
Less current portion 24,498 -----------
$ 423,114 ===========
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 $109,498 and accounts receivable assets of $218,697. The line of credit is renewable annually in April. The C.E.O. of the Company personally guaranteed the line of credit to the Company. At June 30, 2009, the Company owed $0 on the line of credit. Interest expense for the years ended June 30, 2009 was $0. The line of credit extends terms of cash advances at a variable rate set equal to the banks prime rate at the time of advance. The interest rate can fluctuate according to the banks changes in its published prime rate.
F - 12
NOTE G - COMMITMENTS AND CONTINGENCIES
The Company leases certain equipment under various operating leases expiring through year 2011. The minimum lease payments due under the equipment lease agreements for fiscal years ended June 30 is as follow:
2010 $ 11,458 2011 9,447 --------- $ 20,905 =========
NOTE H - 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. The preferred stockholders are entitled to receive, if declared by the board of directors, quarterly dividends at an annual rate of $.10 per share of Series A Cumulative Convertible Preferred Stock per annum. Dividends accrue without interest and are cumulative from the date of issuance of the Series A Cumulative Convertible Preferred Stock and are payable quarterly in arrears in cash or publicly traded common stock when and if declared by the board of directors. As of June 30, 2009, no dividends have been declared. Dividends in arrears on the outstanding preferred shares total $241,371 or approximately $1.21 per share as of June 30, 2009. The preferred stockholders have the right to convert each share of Series A Cumulative Convertible Preferred Stock into one share of the Company's common stock at any time without additional consideration. Each share of Series A Cumulative Convertible Preferred Stock is subject to mandatory conversion into one share of common stock of the Company, effective as of the close of a public offering of the Company's common stock provided, however, that the offering must provide a minimum of $1 million in gross proceeds to the Company and the initial offering price of such common stock must be at least $1 per share. In addition to the rights described above, the holders of the Series A Cumulative Convertible Preferred Stock have voting rights equal to the common stockholders based upon the number of shares of common stock into which the Series A Cumulative Convertible Preferred Stock is convertible. The Company is obligated to reserve an adequate number of shares of its common stock to satisfy the conversion of all of the outstanding Series A Cumulative Convertible Preferred stock.
F - 13
The components of the provision for income taxes (benefits) are attributable to continuing operations as follows:
2009 2008 --------- --------- Current Federal $ -- $ -- State -- --
Deferred Federal 15,417 (575,651) State 2,638 (98,540) --------- --------- $ 18,055 $(674,191) ========= =========
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:
Current Non-Current ------- -----------
Deferred tax assets: NOL and contribution carryforwards $ 47,374 $ 1,019,068 Allowance for doubtful accounts 1,580 -- ----------- ----------- 48,954 1,019,068
Deferred tax (liabilities): Excess of tax over book depreciation -- (10,855) ----------- ----------- 48,954 1,008,213
Net deferred tax asset (liability) $ 48,954 $ 1,008,213 =========== ===========
The change in the valuation allowance is as follow:
June 30, 2008 $ -- June 30, 2009 -- ---------
Decrease in valuation allowance $ -- =========
Management believes it is more likely than not that it will realize the benefit of the NOL carryforward, because of its continuing trend of earnings. Therefore, a valuation allowance is not considered necessary.
Income taxes for the years ended June 30, 2009 and 2008 differ from the amounts computed by applying the effective income tax rates of 37.63% and 37.63%, respectively, to income before income taxes as a result of the following:
2009 2008 --------- ---------
Expected provision at US statutory rate $ 14,543 $ 40,465 State income tax net of federal benefit 1,553 4,320 Nondeductibles 5,200 4,372 Change in estimates in available NOL carryforwards (3,241) 13,936 Change in valuation allowance -- (737,284) --------- ---------
Income tax expense / (benefit) $ 18,055 $(674,191) ========= =========
The Company's tax years 2005 through 2008 remain open to examination by taxing jurisdictions.
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NOTE K - CONCENTRATION OF SUPPLY RISK
The Company's manufacturing and packaging activities are performed at a production facility owned and operated by a non-affiliated pharmaceutical manufacturer. At the present time, the manufacturer is the major source of the Company's wound care products. The sudden loss or failure of this manufacturer could significantly impair Amerx's ability to fulfill customer orders on a short-term basis and therefore, could materially and adversely affect the Company's operations. However, the Company has maintained a long-term relationship with this manufacturer and does not expect a discontinuance of its wound care products from the manufacturer in the near term.
During the year, Sirius purchased approximately 83% of its diabetic supplies from a non-affiliated supplier. As of July 31, 2009, Sirius is considered a discontinued segment.
NOTE L - MAJOR CUSTOMERS
During the year ended June 30, 2009, sales from one customer accounted for approximately 18% of Amerx's sales. The loss of this single customer would have a material adverse effect on our financial condition or the results of our operations. During the year ended June 30, 2008, one customer accounted for 11% of Amerx's sales.
NOTE M - RESEARCH AND DEVELOPMENT
Amerx spent approximately $12,700 towards research and development efforts over the past fiscal year. These efforts were directed towards additional studies aimed at expanding existing markets.
NOTE N - RECENT ACCOUNTING PRONOUNCEMENTS
In May 2009, the FASB issued Statement of Financial Accounting Standards No. 165, "Subsequent Events" (SFAS 165). Under SFAS 165, requires companies to evaluate events and transactions that occur after the balance sheet date but before the date the financial statements are issued, or available to be issued in the case of non-public entities. SFAS 165 requires entities to recognize in the financial statements the effect of all events or transactions that provide additional evidence of conditions that existed at the balance sheet date, including the estimates inherent in the financial preparation process. Entities shall not recognize the impact of events or transactions that provide evidence about conditions that did not exist at the balance sheet date but arose after that date. SFAS 165, also requires entities to disclose the date through which subsequent events have been evaluated. SFAS 165 is effective for interim and annual reporting periods ending after June 15, 2009. We adopted the provisions of SFAS 165 for the year ended June 30, 2009, as required, the adoption did not have a material impact on our financial statements. We have evaluated subsequent events from the balance sheet date through August 28, 2009, and determined there are no material transactions to disclose, other then those reported in Note O - Subsequent Events.
F - 16
In June, 2009, the FASB issued Statement of Financial Accounting Standards No. 168 (SFAS 168) "Accounting Standards CodificationTM and the Hierarchy of Generally Accepted Accounting Principles" - a replacement of FASB Statement No. 162. SFAS 168 establishes the FASB Accounting Standards CodificationTM as the source of authoritative accounting principles recognized by the FASB to be applied by nongovernmental entities in the preparation of financial statements in conformity with US GAAP. FAS 168 will be effective for financial statements issued for interim and annual periods ending after September 15, 2009, for most entities. On the effective date, all non-SEC accounting and reporting standards will be superseded. We will adopt SFAS 168 for the quarterly period ended September 30, 2009, as required, and adoption is not expected to have a material impact on our consolidated financial statements.
NOTE O - SUBSEQUENT EVENTS - DISCONTINUED OPERATIONS
As previously reported in our current report on Form 8-K, filed on August 3, 2009, we entered into an Asset Purchase Agreement, effective July 31, 2009 with Priority Diabetes Supply, Inc., a Florida corporation, doing business as Diabetes Wellness Supply ("Priority Diabetes"). Pursuant to the Agreement, we sold certain "Purchased Assets," as defined in the Agreement, including Sirius' customer list, to Priority Diabetes. Thus, as of July 31, 2009, Sirius no longer offers testing products to diabetic customers. Management is considering various options for the future direction of Sirius. The sale to date generated proceeds of $80,000, based on $225 per patient. This will be recognized in the first quarter of fiscal 2010. After a hundred and eighty day period, an adjusting payment will be made, based on the results of the production of the patient list that was sold. The agreement also contains a non-compete period of two years, prohibiting Sirius from engaging in the business of the sale of diabetic testing supply products.
As a result of the sale, the results of the Sirius subsidiary, which had previously been presented as a separate reporting segment, are included in discontinued operations in the Company's consolidated financial statements of operations, no other assets or liabilities were sold in this sale. All prior period information has been reclassified to be consistent with the current period presentation.
The following amounts related to the Sirius subsidiary were derived from historical financial information and have been segregated from continuing operations and reported as discontinued operations.
2009 2008 --------- ---------
Revenues $ 262,056 $ 307,884
Cost of Sales (154,740) (179,466)
Salaries and Benefits (139,203) (162,899)
Selling, General and Administrative (66,975) (66,696) --------- ---------
Loss from Operations (98,861) (101,177)
Interest Income 3,684 3,633 --------- ---------
Loss from Discontinued Operations (95,178) (97,544)
Income Tax Benefit (Expense) 25,327 36,709 --------- ---------
Loss from Discontinued Operations, net of income taxes $ (69,851) $ (60,835) ========= =========
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ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS, MANAGEMENT AND RELATED STOCKHOLDER MATTERS.
The following table sets forth certain information regarding beneficial ownership of our Common Stock as of September 2, 2009 by (i) each person known by the Company to own beneficially more than 5% of the outstanding Common Stock, (ii) each director or director nominee, and (iii) all executive officers and directors as a group. Each person has sole voting and sole investment or dispositive power with respect to the shares shown except as noted. As to the Company's preferred stock, as of September 2, 2009, no officer or director of the company owned any preferred shares. In addition, no individual shareholder beneficially owned more than 5% of the Company's preferred shares.
Common Shareholdings on September 2, 2009
Number of Percent of Name and Address(5) Shares Class
Regina W. Anderson 72,500 * Chester L. Wallack (l) 120,000(3) 1.5 Fred W. Suggs (l) 160,000(3) 2.0 Alan B. Crane 80,000(3) 1.0 Jeffery S. Slowgrove 536,200(4) 6.7 James B. Anderson 111,000(7) 1.4 Justice W. Anderson(6) 3,483,500(3) 43.3 Michael T. Foley(1)(2) 210,000(8) 2.6 All directors and officers as a group (eight persons) 4,838,200 59.0% RMS Limited Partnership, 50 W. Liberty St, 1,600,000 19.9% Suite 650, Reno, NV 89501
*Less than 1%
(1) Member of the Compensation Committee. (2) Member of the Audit Committee. (3) Includes 60,000 shares subject to currently exercisable options or options which will become exercisable within 60 days. (4) Includes 10,000 shares of subject to currently exercisable options or options which will become exercisable within 60 days. (5) Except as noted above, the address for all persons listed is 1300 S. Highland Ave, Clearwater, Florida 33756 (6) Mr. Anderson beneficially owns 3,350,500 shares of common stock and 60,000 currently exercisable options to purchase shares of common stock as Trustee of the John C. Anderson Trust in accordance with Mr. Anderson's will. He also owns of record 73,000 shares of common stock. (7) Includes 30,000 shares subject to currently exercisable options and 10,000 shares in joint name with his wife. (8) Includes 5,000 shares in joint name with his wife.
Regina W. Anderson, our Chairman and Chief Executive Officer, personally guaranteed the loan we secured from Bank of America, N.A., in the amount of $508,000, to purchase our office building in July 2006 as well as the $250,000 line of credit. Mr. Slowgrove, a director, acted as a consultant to the Company for portions of fiscal 2008, but not fiscal 2009, at a total compensation to him of approximately $6,250.
Director Independence.
We have determined that the following directors are independent within applicable Nasdaq rules: Messrs. Wallack, Suggs, Crane, Slowgrove and Foley. We considered the fact that Mr. Slowgrove acted as a consultant to the Company for portions of fiscal 2008, at a total compensation to him of approximately $6,250. Regina, James and Justice Anderson are not independent as they are executive officers of the Company and its subsidiaries. Accordingly, our Board of Directors is composed of a majority of independent directors. Our Compensation Committee and Audit Committee are composed entirely of independent directors pursuant to applicable Nasdaq rules. In addition, Mr. Foley, also meets the definition of independence under SEC Rule 10A-3.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
Audit Fees. In fiscal 2009, the Company paid to its independent accountants $49,756 in fees related directly to the audit and review of the Company's financial statements. In fiscal 2008, the Company paid to its independent accountants $32,629 in fees related directly to the audit and review of the Company's financial statements.
Audit-Related Fees. The Company's independent accountants performed no other audit-related services for the Company during fiscal 2008 and 2009, other than the audit services described above.
Tax Fees: In fiscal 2009, the Company paid to its independent accountants $2,868 in fees related directly to tax preparations. In fiscal 2008, the Company paid to its independent accountants $2,490 in fees related directly to tax preparations.
All Other Fees: The Company's independent accountants performed no other services for the Company during fiscal 2008 and 2009, other than the audit and tax services described above.
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES.
(a) Exhibits
1. The financial statements filed herewith are listed in the Index to Financial Statements included in Item 7.
Exhibit No. Document ----------- --------
* 3.1 Articles of Incorporation + 3.1.1 Articles of Amendment to Articles of Incorporation * 3.2 Bylaws + 4.1 Designation of Series A Preferred Stock # 10.1 1998 Omnibus Stock Option Plan - 10.1 Office Lease dated September 23, 2003 / 10.2 Promissory Note dated July 21, 2006 / 10.3 Mortgage dated July 21, 2006
+ 10.4 Loan and Security Agreement, dated as of January 1, 1995, by and between the Company and Amerx Health Care Corp., including Promissory Notes issued there under. o 10.5 Agreement and Plan of Exchange, dated January 31, 1996, by and between the Company and Amerx. **10.6 Asset Purchase Agreement between Sirius Medical Supply, Inc. and Priority Diabetes Supply, Inc., effective July 31, 2009. ++14.1 Code of Ethics for Senior Financial Officers. x 31.1 Certification of Regina W. Anderson pursuant to Exchange Act Rule 13a-14(a)/15d-14(a) x 31.2 Certification of James B. Anderson pursuant to Exchange Act Rule 13a-14(a)/15d-14(a) x 32.1 Certification Pursuant to 18 U.S.C. ss. 1350, as Adopted Pursuant to Section906 of the Sarbanes-Oxley Act Of 2002 - ---------- * Incorporated by reference to the Company's Registration Statement on Form S-1, S.E.C. File No.33-13273. + Incorporated by reference to the Company's Form 10-KSB for the fiscal year ended June 30, 1995. o Incorporated by reference to the Company's Form 8-K filed on or about February 2, 1996. # Incorporated by reference to the Company's Schedule 14A filed on or about November 17, 1998. / Incorporated by reference to the Company's Form 8-K filed on or about August 8, 2006 - Incorporated by reference to the Company's Form 10-QSB for the period ending September 30, 2003 ++ Incorporated by reference to the Company's Schedule 14A filed on or about October 15, 2004 ** Incorporated by reference to the Company's Form 8-K filed on or about August 3, 2009. x Filed herewith.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, there unto duly authorized.
PROCYON CORPORATION
By: /s/ Regina W. Anderson -------------------------- Regina W. Anderson, Chief Executive Officer
Date: September 28, 2009
Pursuant to the requirements of the Securities Exchange Act of 1934, the following persons on behalf of the registrant and in the capacities and on the dates indicated have signed this report below.
Signature Title Date - --------- ----- ----
/s/ Regina W. Anderson Chief Executive Officer, September 28, 2009 Regina W. Anderson President
/s/ James B. Anderson Chief Financial Officer, September 28, 2009 James B. Anderson President (Sirius) and Director
/s/ Justice W. Anderson President (Amerx) and Director September 28, 2009 Justice W. Anderson
/s/ Michael T. Foley Director September 28, 2009 Michael T. Foley
/s/ Jeffery S. Slowgrove Director September 28, 2009 Jeffery S. Slowgrove
/s/ Fred W. Suggs, Jr. Director September 28, 2009 Fred W. Suggs, Jr.
/s/ Chester L. Wallack Director September 28, 2009 Chester L. Wallack
PROCYON CORPORATION AND SUBSIDIARIES CONSOLIDATED FINANCIAL STATEMENTS Years Ended June 30, 2009 and 2008
Page No.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
FINANCIAL STATEMENTS
Consolidated Balance Sheets
Consolidated Statements of Operations
Consolidated Statements of Stockholders' Equity
Consolidated Statements of Cash Flows
Notes to Financial Statements
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Shareholders of Procyon Corporation and Subsidiaries
We have audited the accompanying consolidated balance sheets of Procyon Corporation and Subsidiaries as of June 30, 2009 and 2008 and the related statements of operations, stockholders' equity, and cash flows for each of the years in the two-year period ended June 30, 2009. Procyon Corporation and Subsidiaries' management is responsible for these financial statements. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of internal control over financial reporting. Our audit includes consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purposes of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Procyon Corporation and Subsidiaries as of June 30, 2009 and 2008 and the results of its operations and its cash flows for each of the years in the two-year period ended June 30, 2009, in conformity with accounting principles generally accepted in the United States of America.
/s/ FERLITA, WALSH & GONZALEZ, P.A. - ----------------------------------- FERLITA, WALSH & GONZALEZ, P.A. Certified Public Accountants Tampa, Florida
August 28, 2009
F - 1
PROCYON CORPORATION AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business Activity
Procyon Corporation has two wholly-owned subsidiaries, Amerx Health Care Corp. (Amerx) and Sirius Medical Supply, Inc. (Sirius). Amerx manufactures and markets wound and skin care products primarily in the United States whereas Sirius markets diabetic supplies primarily to Medicare patients in the United States. As previously reported on our form 8-K, in July 2009, we sold certain "Purchased Assets" as defined in the Asset Purchase agreement included the customer list of Sirius to Priority Diabetes Supply, Inc., a Florida corporation, doing business as Diabetes Wellness Supply ("Priority Diabetes"). Thus, as of July 31, 2009, Sirius no longer offers testing products to diabetic customers. Management is considering various options for the future direction of Sirius. See footnote O for further details.
Principles of Consolidation
The consolidated financial statements include the accounts of Procyon Corporation and its wholly-owned subsidiaries, Amerx and Sirius. All material inter-company accounts and transactions are eliminated.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Revenue Recognition
The Company recognizes revenue in accordance with Securities and Exchange Commission Staff Accounting Bulletin No. 104, "Revenue Recognition, corrected copy," which requires that four basic criteria must be met before revenue can be recognized: (1) persuasive evidence of an arrangement exists; (2) delivery has occurred or services have been rendered; (3) the seller's price to the buyer is fixed or determinable; and, (4) collectibility is reasonably assured.
The Company recognizes revenue related to product sales to customers who have placed orders upon shipment of such orders, provided that risk of loss has passed to the customer and the Company has received and verified any written documentation required to bill Medicare, other third-party payers, and customers. The Company records revenue at the amounts expected to be collected from Medicare, other third-party payers, and directly from customers. Revenue recognition is delayed for product shipments for which the Company has not yet received the required written forms, until the period in which those documents are collected and verified.
Revenue related to Medicare reimbursement is calculated based on government-determined reimbursement prices for Medicare-covered items. The reimbursements that Medicare pays the Company are subject to review by appropriate government regulators. Medicare reimburses at 80% of the government-determined reimbursement prices for reimbursable supplies, and the Company bills the remaining balance to either third-party payers or directly to customers.
F - 6
Accounts Receivable and Concentration of Credit Risk
Amerx grants credit to customers, most of whom are national pharmaceutical distributors, drug stores nationwide and physicians. Amerx wholesales its products to national pharmaceutical distributors and drug stores at a sales term of 2/10, net 30. Amerx has a written return policy with its customers. Each return request is reviewed by management for approval. Sales to physicians are at contracted rates and standard payment term is 2/10 net 30 days.
Sirius grants credit to patients who are eligible for Medicare coverage. Sales are at standard payment term of 30 days.
Accounts receivable are generally due from Medicare, private insurance companies, and customers. The collection process is time consuming, complex and typically involves the submission of claims to multiple payers whose payment of claims may be contingent upon the payment of another payer. In accordance with applicable regulatory requirements, the Company makes reasonable and appropriate efforts to collect accounts receivable, including deductible and copayment amounts, in a consistent manner for all payer classes. The valuation of accounts receivable is based upon the credit-worthiness of customers and third-party payers as well as historical collection experience. Estimating the credit worthiness of customers and recoverability of customer accounts requires us to exercise considerable judgment. 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 and write-off experience, current trends, credit policy, and on analysis of accounts receivable by aging category. As of June 30, 2009, accounts receivable allowance was $4,200, or approximately 2% of gross accounts receivable.
Inventories
Inventories are valued at the lower of average cost or market determined by the first-in, first-out method.
Property and Equipment
Property and equipment are stated at cost. Depreciation is computed on a straight-line basis over their estimated useful lives. Leased equipment is recorded at it's fair market value at the beginning of the lease term and is depreciated over the life of the equipment. Depreciation on leased equipment is included in depreciation expense.
Cash and Cash Equivalents
For the purpose of the Statements of Cash Flows, the Company considers cash-on-hand, demand deposits in banks and highly liquid investments purchased with an original maturity of three months or less to be cash equivalents.
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Concentration of Credit Risk
The Company maintained its cash in three financial institutions. The Federal Deposit Insurance Corporation insures up to $250,000 per legal entity per financial institution. At June 30, 2009, our uninsured cash balance was $0.
Shipping and Handling Costs
Shipping and handling costs incurred were approximately $76,000 and $78,000 for the years ended June 30, 2009, and 2008, respectively, and were included in selling, general and administrative expenses.
Advertising and Marketing
The company records advertising and marketing expenses in the periods in which they are incurred. During the years ended June 30, 2009 and 2008, approximately $466,000 and $397,000, of advertising and marketing costs were included in selling, general and administrative expenses for each respective year.
Income Taxes
Income taxes are accounted for using an asset and liability approach that requires the recognition of deferred tax assets and liabilities for the expected future tax consequences attributable to differences between financial statement carrying amounts of existing assets and liabilities and their respective tax bases. A valuation allowance is provided when it is more likely than not that some portion or all of the deferred tax asset will not be realized. The Company adopted Financial Standards Board Interpretation No. 48, Accounting for Income Taxes ("FIN 48"), an interpretation of SFAS 109, on January 1, 2007.
Net Income Per Share
The Company computes net income per share in accordance with SFAS No. 128, "Earnings per Share" (SFAS 128). SFAS 128 requires presentation of both basic and diluted earnings per shares (EPS) on the face of the income statement. Basic EPS is computed by dividing net income available to common shareholders (numerator) by the weighted average number of common shares outstanding (denominator) during the period. Diluted EPS gives effect to all dilutive potential common shares outstanding during the period including stock options, using the treasury stock method, and convertible preferred stock, using the if-converted method. In computing diluted EPS, the average stock price for the period is used in determining the number of shares assumed to be purchased from the exercise of stock options. Diluted EPS excludes all dilutive potential common shares if their effect is anti-dilutive.
Fair Value of Financial Instruments
The carrying value of cash, accounts receivable, prepaid expenses, deposits, inventory, accounts payable, accrued expenses and notes payable approximate fair value.
Considerable judgement is required in interpreting market data to develop the estimates of fair value, and accordingly, the estimates are not necessarily indicative of the amounts that the Company could realize in a current market exchange.
F - 8
Stock Based Compensation
In December 1998, the Company adopted a 1998 Omnibus Stock Option Plan that provides for the granting of equity-based incentive and other awards to employees and directors of the Company, its subsidiaries and selected consultants. The Plan is administered by the Compensation Committee of the Board of Directors. Any employee, directors who are not employees of the Corporation or a subsidiary, and consultants who are not employees or directors of the Corporation are eligible to participate in the Plan. The maximum number of shares of common stock issuable on exercise of options or other awards granted under the Plan is 1,000,000. Non-qualified options granted must have an exercise price not less than 85% (100% as amended, effective for options granted December 31, 2007) of the fair market value of the underlying shares of common stock. Incentive options must have an exercise price not less than 100% of the fair market value of the underlying shares of common stock. The term of the options cannot be more than ten years. Awards may be granted in the form of restricted stock. Awards can also be granted in the form of stock appreciation rights. A stock appreciation right entitles the participant to receive from the Company an amount equal to the positive difference between the fair market value of common stock on the date of exercise of the stock appreciation right and the grant price. No stock appreciation rights have been issued to date.
Additional information with respect to the Plan's stock option activity is as follows:
Weighted Number of Average Shares Exercise Price ------ -------------- Outstanding at June 30, 2007 300,000 $0.20 Granted - - Exercised - - Expired - - ------- --------- Outstanding at June 30, 2008 300,000 $0.20 Granted - - Exercised - - Expired - - Outstanding at June 30, 2009 300,000 $0.20 ======= ===== Options exercisable at June 30, 2008 300,000 $0.20 ======= ===== Options exercisable at June 30, 2009 300,000 $0.20 ======= =====
The following table summarizes information about stock options outstanding at June 30, 2009:
Stock Options Outstanding --------------------------------- Weighted Average Number of Remaining Weighted Range of Shares Contractual Life Average Exercise Prices Outstanding In Years Exercise Price --------------- ----------- -------- --------------
$0.15 - $0.20 65,000 1.39 $0.16
$0.20 - $0.25 235,000 0.51 $0.21 ------- 300,000 0.70 $0.20 =======
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Effective January 1, 2006, we adopted Statement of Financial Accounting Standards No. 123(R) ("SFAS 123R"), "Share-Based Payment". SFAS 123R requires all share-based payments to employees, including grants of employee stock options, to be recognized in the statement of operations based upon their fair values and rescinds the acceptance of pro forma disclosure. SFAS 123R permits two methods of adoption, a "modified prospective" method and a "modified retrospective" method. Under the modified prospective method, stock-based compensation cost is recognized, beginning with the effective date, based on the requirements of SFAS 123R for all share-based payments granted after the effective date and for all awards granted prior to the effective date that remain unvested on the effective date. The modified retrospective method includes the requirements of the modified prospective method and also permits restatement of prior periods based on amounts previously reported in pro forma disclosures pursuant to SFAS 123 for either all periods presented or for only prior interim periods of the year of adoption. We adopted the modified prospective method prescribed in SFAS 123R, effective January 1, 2006.
On June 30, 2009, there were outstanding options to purchase 300,000 shares of our common stock at exercise prices ranging from $0.16 to $0.21 per share and expiration dates between December 2009 and November 2010. These options were vested at the time of grant. During the year ended June 30, 2009, no options were granted. Therefore, the adoption of SFAS 123R does not have an impact on the statement of operations for period ending June 30, 2009.
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.
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.
There were no options granted during fiscal years ended June 30, 2009 and 2008. Had there been options issued during the fiscal years ended June 30, 2009 and 2008, the fair value of the options would have been determined using the Black-Scholes option-pricing model, which values options based on the stock price at the grant date, the expected dividend payments, and the risk-free interest rate over the life of the option.
Equity instruments issued to non-employees in exchange for goods, fees and services are accounted for under the fair value-based method of SFAS No. 123(R).
Segment Reporting
In previous years, the Company reported certain financial information on its two operating segments, sale of skin and wound care products and sales of diabetic supplies. As a result of the sale of its diabetic supply segment, it is no longer an operating segment. See note O - SUBSEQUENT EVENTS - DISCONTINUED OPERATIONS for further details.
Reclassification
Certain information in the 2008 financial statements have been reclassified to conform to the 2009 financial statement presentations.
F - 10
NOTE B - INVENTORIES
Inventories consisted of the following:
June 30, 2009 June 30, 2008 ------------- -------------
Finished Goods $ 45,217 $109,561 Raw Materials 64,281 74,597 -------- -------- $109,498 $184,158 ======== ========
NOTE C - PROPERTY AND EQUIPMENT
Property and equipment consisted of the following:
As of June 30, 2009 Capitalized Owned Leases Total ------------------------------------------
Office Equipment $ 86,731 $ 26,928 $ 113,659
Furniture and Fixtures 20,726 20,726
Software 19,471 19,471
Leasehold improvements 21,614 21,614
Production Equipment 34,118 34,118
Building 474,168 474,168
Land 64,547 64,547 ------------------------------------------
721,375 26,928 748,303
Less accumulated depreciation (187,036) (26,928) (213,964) ------------------------------------------
$ 534,339 $ 0 $ 534,339 ==========================================
As of June 30, 2008 Capitalized Owned Leases Total ------------------------------------------
Office Equipment $ 83,246 $ 26,928 $ 110,354
Furniture and Fixtures 20,726 20,726
Software 19,471 19,471
Leasehold Improvements 13,587 13,587
Production Equipment 34,118 34,118
Building 474,168 474,168
Land 64,547 64,547 ------------------------------------------
710,043 26,928 736,971
Less accumulated depreciation (154,975) (26,767) (181,742) ------------------------------------------
$ 555,068 $ 161 $ 555,229 ==========================================
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NOTE D - RELATED PARTY TRANSACTIONS
Mr. Slowgrove, a director, acted as a consultant to the Company for portions of fiscal 2008, and was paid compensation of $6,250. Our Chief Executive Officer, Regina W. Anderson, guaranteed a loan to us in the amount of $508,000, issued in connection with our purchase of our office building in July 2006, as well as the $250,000 line of credit.
NOTE E - MORTGAGE PAYABLE
On July 21, 2006, we entered into a mortgage loan, guaranteed by our C.E.O. Regina W. Anderson, for $508,000 with the Bank of America for the purchase of our corporate office building. The mortgage loan is due in 15 years and interest is fixed at 7.25%. Interest expense was $ 33,795 for the fiscal year end June 30, 2009.
Maturities of long-term debt associated with the mortgage payable are as follows:
Year Ending June 30, ---------------------------------------------------
2010 $ 24,498
2011 26,335
2012 28,309
2013 30,431
2014 32,712
2015 and thereafter 305,327 -----------
447,612
Less current portion 24,498 -----------
$ 423,114 ===========
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 $109,498 and accounts receivable assets of $218,697. The line of credit is renewable annually in April. The C.E.O. of the Company personally guaranteed the line of credit to the Company. At June 30, 2009, the Company owed $0 on the line of credit. Interest expense for the years ended June 30, 2009 was $0. The line of credit extends terms of cash advances at a variable rate set equal to the banks prime rate at the time of advance. The interest rate can fluctuate according to the banks changes in its published prime rate.
F - 12
NOTE G - COMMITMENTS AND CONTINGENCIES
The Company leases certain equipment under various operating leases expiring through year 2011. The minimum lease payments due under the equipment lease agreements for fiscal years ended June 30 is as follow:
2010 $ 11,458 2011 9,447 --------- $ 20,905 =========
NOTE H - 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. The preferred stockholders are entitled to receive, if declared by the board of directors, quarterly dividends at an annual rate of $.10 per share of Series A Cumulative Convertible Preferred Stock per annum. Dividends accrue without interest and are cumulative from the date of issuance of the Series A Cumulative Convertible Preferred Stock and are payable quarterly in arrears in cash or publicly traded common stock when and if declared by the board of directors. As of June 30, 2009, no dividends have been declared. Dividends in arrears on the outstanding preferred shares total $241,371 or approximately $1.21 per share as of June 30, 2009. The preferred stockholders have the right to convert each share of Series A Cumulative Convertible Preferred Stock into one share of the Company's common stock at any time without additional consideration. Each share of Series A Cumulative Convertible Preferred Stock is subject to mandatory conversion into one share of common stock of the Company, effective as of the close of a public offering of the Company's common stock provided, however, that the offering must provide a minimum of $1 million in gross proceeds to the Company and the initial offering price of such common stock must be at least $1 per share. In addition to the rights described above, the holders of the Series A Cumulative Convertible Preferred Stock have voting rights equal to the common stockholders based upon the number of shares of common stock into which the Series A Cumulative Convertible Preferred Stock is convertible. The Company is obligated to reserve an adequate number of shares of its common stock to satisfy the conversion of all of the outstanding Series A Cumulative Convertible Preferred stock.
F - 13
The components of the provision for income taxes (benefits) are attributable to continuing operations as follows:
2009 2008 --------- --------- Current Federal $ -- $ -- State -- --
Deferred Federal 15,417 (575,651) State 2,638 (98,540) --------- --------- $ 18,055 $(674,191) ========= =========
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:
Current Non-Current ------- -----------
Deferred tax assets: NOL and contribution carryforwards $ 47,374 $ 1,019,068 Allowance for doubtful accounts 1,580 -- ----------- ----------- 48,954 1,019,068
Deferred tax (liabilities): Excess of tax over book depreciation -- (10,855) ----------- ----------- 48,954 1,008,213
Net deferred tax asset (liability) $ 48,954 $ 1,008,213 =========== ===========
The change in the valuation allowance is as follow:
June 30, 2008 $ -- June 30, 2009 -- ---------
Decrease in valuation allowance $ -- =========
Management believes it is more likely than not that it will realize the benefit of the NOL carryforward, because of its continuing trend of earnings. Therefore, a valuation allowance is not considered necessary.
Income taxes for the years ended June 30, 2009 and 2008 differ from the amounts computed by applying the effective income tax rates of 37.63% and 37.63%, respectively, to income before income taxes as a result of the following:
2009 2008 --------- ---------
Expected provision at US statutory rate $ 14,543 $ 40,465 State income tax net of federal benefit 1,553 4,320 Nondeductibles 5,200 4,372 Change in estimates in available NOL carryforwards (3,241) 13,936 Change in valuation allowance -- (737,284) --------- ---------
Income tax expense / (benefit) $ 18,055 $(674,191) ========= =========
The Company's tax years 2005 through 2008 remain open to examination by taxing jurisdictions.
F - 15
NOTE K - CONCENTRATION OF SUPPLY RISK
The Company's manufacturing and packaging activities are performed at a production facility owned and operated by a non-affiliated pharmaceutical manufacturer. At the present time, the manufacturer is the major source of the Company's wound care products. The sudden loss or failure of this manufacturer could significantly impair Amerx's ability to fulfill customer orders on a short-term basis and therefore, could materially and adversely affect the Company's operations. However, the Company has maintained a long-term relationship with this manufacturer and does not expect a discontinuance of its wound care products from the manufacturer in the near term.
During the year, Sirius purchased approximately 83% of its diabetic supplies from a non-affiliated supplier. As of July 31, 2009, Sirius is considered a discontinued segment.
NOTE L - MAJOR CUSTOMERS
During the year ended June 30, 2009, sales from one customer accounted for approximately 18% of Amerx's sales. The loss of this single customer would have a material adverse effect on our financial condition or the results of our operations. During the year ended June 30, 2008, one customer accounted for 11% of Amerx's sales.
NOTE M - RESEARCH AND DEVELOPMENT
Amerx spent approximately $12,700 towards research and development efforts over the past fiscal year. These efforts were directed towards additional studies aimed at expanding existing markets.
NOTE N - RECENT ACCOUNTING PRONOUNCEMENTS
In May 2009, the FASB issued Statement of Financial Accounting Standards No. 165, "Subsequent Events" (SFAS 165). Under SFAS 165, requires companies to evaluate events and transactions that occur after the balance sheet date but before the date the financial statements are issued, or available to be issued in the case of non-public entities. SFAS 165 requires entities to recognize in the financial statements the effect of all events or transactions that provide additional evidence of conditions that existed at the balance sheet date, including the estimates inherent in the financial preparation process. Entities shall not recognize the impact of events or transactions that provide evidence about conditions that did not exist at the balance sheet date but arose after that date. SFAS 165, also requires entities to disclose the date through which subsequent events have been evaluated. SFAS 165 is effective for interim and annual reporting periods ending after June 15, 2009. We adopted the provisions of SFAS 165 for the year ended June 30, 2009, as required, the adoption did not have a material impact on our financial statements. We have evaluated subsequent events from the balance sheet date through August 28, 2009, and determined there are no material transactions to disclose, other then those reported in Note O - Subsequent Events.
F - 16
In June, 2009, the FASB issued Statement of Financial Accounting Standards No. 168 (SFAS 168) "Accounting Standards CodificationTM and the Hierarchy of Generally Accepted Accounting Principles" - a replacement of FASB Statement No. 162. SFAS 168 establishes the FASB Accounting Standards CodificationTM as the source of authoritative accounting principles recognized by the FASB to be applied by nongovernmental entities in the preparation of financial statements in conformity with US GAAP. FAS 168 will be effective for financial statements issued for interim and annual periods ending after September 15, 2009, for most entities. On the effective date, all non-SEC accounting and reporting standards will be superseded. We will adopt SFAS 168 for the quarterly period ended September 30, 2009, as required, and adoption is not expected to have a material impact on our consolidated financial statements.
NOTE O - SUBSEQUENT EVENTS - DISCONTINUED OPERATIONS
As previously reported in our current report on Form 8-K, filed on August 3, 2009, we entered into an Asset Purchase Agreement, effective July 31, 2009 with Priority Diabetes Supply, Inc., a Florida corporation, doing business as Diabetes Wellness Supply ("Priority Diabetes"). Pursuant to the Agreement, we sold certain "Purchased Assets," as defined in the Agreement, including Sirius' customer list, to Priority Diabetes. Thus, as of July 31, 2009, Sirius no longer offers testing products to diabetic customers. Management is considering various options for the future direction of Sirius. The sale to date generated proceeds of $80,000, based on $225 per patient. This will be recognized in the first quarter of fiscal 2010. After a hundred and eighty day period, an adjusting payment will be made, based on the results of the production of the patient list that was sold. The agreement also contains a non-compete period of two years, prohibiting Sirius from engaging in the business of the sale of diabetic testing supply products.
As a result of the sale, the results of the Sirius subsidiary, which had previously been presented as a separate reporting segment, are included in discontinued operations in the Company's consolidated financial statements of operations, no other assets or liabilities were sold in this sale. All prior period information has been reclassified to be consistent with the current period presentation.
The following amounts related to the Sirius subsidiary were derived from historical financial information and have been segregated from continuing operations and reported as discontinued operations.
2009 2008 --------- ---------
Revenues $ 262,056 $ 307,884
Cost of Sales (154,740) (179,466)
Salaries and Benefits (139,203) (162,899)
Selling, General and Administrative (66,975) (66,696) --------- ---------
Loss from Operations (98,861) (101,177)
Interest Income 3,684 3,633 --------- ---------
Loss from Discontinued Operations (95,178) (97,544)
Income Tax Benefit (Expense) 25,327 36,709 --------- ---------
Loss from Discontinued Operations, net of income taxes $ (69,851) $ (60,835) ========= =========
F - 17
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
Audit Fees. In fiscal 2009, the Company paid to its independent accountants $49,756 in fees related directly to the audit and review of the Company's financial statements. In fiscal 2008, the Company paid to its independent accountants $32,629 in fees related directly to the audit and review of the Company's financial statements.
Audit-Related Fees. The Company's independent accountants performed no other audit-related services for the Company during fiscal 2008 and 2009, other than the audit services described above.
Tax Fees: In fiscal 2009, the Company paid to its independent accountants $2,868 in fees related directly to tax preparations. In fiscal 2008, the Company paid to its independent accountants $2,490 in fees related directly to tax preparations.
All Other Fees: The Company's independent accountants performed no other services for the Company during fiscal 2008 and 2009, other than the audit and tax services described above.
ITEM 15.
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES.
(a) Exhibits
1. The financial statements filed herewith are listed in the Index to Financial Statements included in Item 7.
Exhibit No. Document ----------- --------
* 3.1 Articles of Incorporation + 3.1.1 Articles of Amendment to Articles of Incorporation * 3.2 Bylaws + 4.1 Designation of Series A Preferred Stock # 10.1 1998 Omnibus Stock Option Plan - 10.1 Office Lease dated September 23, 2003 / 10.2 Promissory Note dated July 21, 2006 / 10.3 Mortgage dated July 21, 2006
+ 10.4 Loan and Security Agreement, dated as of January 1, 1995, by and between the Company and Amerx Health Care Corp., including Promissory Notes issued there under. o 10.5 Agreement and Plan of Exchange, dated January 31, 1996, by and between the Company and Amerx. **10.6 Asset Purchase Agreement between Sirius Medical Supply, Inc. and Priority Diabetes Supply, Inc., effective July 31, 2009. ++14.1 Code of Ethics for Senior Financial Officers. x 31.1 Certification of Regina W. Anderson pursuant to Exchange Act Rule 13a-14(a)/15d-14(a) x 31.2 Certification of James B. Anderson pursuant to Exchange Act Rule 13a-14(a)/15d-14(a) x 32.1 Certification Pursuant to 18 U.S.C. ss. 1350, as Adopted Pursuant to Section906 of the Sarbanes-Oxley Act Of 2002 - ---------- * Incorporated by reference to the Company's Registration Statement on Form S-1, S.E.C. File No.33-13273. + Incorporated by reference to the Company's Form 10-KSB for the fiscal year ended June 30, 1995. o Incorporated by reference to the Company's Form 8-K filed on or about February 2, 1996. # Incorporated by reference to the Company's Schedule 14A filed on or about November 17, 1998. / Incorporated by reference to the Company's Form 8-K filed on or about August 8, 2006 - Incorporated by reference to the Company's Form 10-QSB for the period ending September 30, 2003 ++ Incorporated by reference to the Company's Schedule 14A filed on or about October 15, 2004 ** Incorporated by reference to the Company's Form 8-K filed on or about August 3, 2009. x Filed herewith.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, there unto duly authorized.
PROCYON CORPORATION
By: /s/ Regina W. Anderson -------------------------- Regina W. Anderson, Chief Executive Officer
Date: September 28, 2009
Pursuant to the requirements of the Securities Exchange Act of 1934, the following persons on behalf of the registrant and in the capacities and on the dates indicated have signed this report below.
Signature Title Date - --------- ----- ----
/s/ Regina W. Anderson Chief Executive Officer, September 28, 2009 Regina W. Anderson President
/s/ James B. Anderson Chief Financial Officer, September 28, 2009 James B. Anderson President (Sirius) and Director
/s/ Justice W. Anderson President (Amerx) and Director September 28, 2009 Justice W. Anderson
/s/ Michael T. Foley Director September 28, 2009 Michael T. Foley
/s/ Jeffery S. Slowgrove Director September 28, 2009 Jeffery S. Slowgrove
/s/ Fred W. Suggs, Jr. Director September 28, 2009 Fred W. Suggs, Jr.
/s/ Chester L. Wallack Director September 28, 2009 Chester L. Wallack
PROCYON CORPORATION AND SUBSIDIARIES CONSOLIDATED FINANCIAL STATEMENTS Years Ended June 30, 2009 and 2008
Page No.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
FINANCIAL STATEMENTS
Consolidated Balance Sheets
Consolidated Statements of Operations
Consolidated Statements of Stockholders' Equity
Consolidated Statements of Cash Flows
Notes to Financial Statements
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Shareholders of Procyon Corporation and Subsidiaries
We have audited the accompanying consolidated balance sheets of Procyon Corporation and Subsidiaries as of June 30, 2009 and 2008 and the related statements of operations, stockholders' equity, and cash flows for each of the years in the two-year period ended June 30, 2009. Procyon Corporation and Subsidiaries' management is responsible for these financial statements. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of internal control over financial reporting. Our audit includes consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purposes of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Procyon Corporation and Subsidiaries as of June 30, 2009 and 2008 and the results of its operations and its cash flows for each of the years in the two-year period ended June 30, 2009, in conformity with accounting principles generally accepted in the United States of America.
/s/ FERLITA, WALSH & GONZALEZ, P.A. - ----------------------------------- FERLITA, WALSH & GONZALEZ, P.A. Certified Public Accountants Tampa, Florida
August 28, 2009
F - 1
PROCYON CORPORATION AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business Activity
Procyon Corporation has two wholly-owned subsidiaries, Amerx Health Care Corp. (Amerx) and Sirius Medical Supply, Inc. (Sirius). Amerx manufactures and markets wound and skin care products primarily in the United States whereas Sirius markets diabetic supplies primarily to Medicare patients in the United States. As previously reported on our form 8-K, in July 2009, we sold certain "Purchased Assets" as defined in the Asset Purchase agreement included the customer list of Sirius to Priority Diabetes Supply, Inc., a Florida corporation, doing business as Diabetes Wellness Supply ("Priority Diabetes"). Thus, as of July 31, 2009, Sirius no longer offers testing products to diabetic customers. Management is considering various options for the future direction of Sirius. See footnote O for further details.
Principles of Consolidation
The consolidated financial statements include the accounts of Procyon Corporation and its wholly-owned subsidiaries, Amerx and Sirius. All material inter-company accounts and transactions are eliminated.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Revenue Recognition
The Company recognizes revenue in accordance with Securities and Exchange Commission Staff Accounting Bulletin No. 104, "Revenue Recognition, corrected copy," which requires that four basic criteria must be met before revenue can be recognized: (1) persuasive evidence of an arrangement exists; (2) delivery has occurred or services have been rendered; (3) the seller's price to the buyer is fixed or determinable; and, (4) collectibility is reasonably assured.
The Company recognizes revenue related to product sales to customers who have placed orders upon shipment of such orders, provided that risk of loss has passed to the customer and the Company has received and verified any written documentation required to bill Medicare, other third-party payers, and customers. The Company records revenue at the amounts expected to be collected from Medicare, other third-party payers, and directly from customers. Revenue recognition is delayed for product shipments for which the Company has not yet received the required written forms, until the period in which those documents are collected and verified.
Revenue related to Medicare reimbursement is calculated based on government-determined reimbursement prices for Medicare-covered items. The reimbursements that Medicare pays the Company are subject to review by appropriate government regulators. Medicare reimburses at 80% of the government-determined reimbursement prices for reimbursable supplies, and the Company bills the remaining balance to either third-party payers or directly to customers.
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Accounts Receivable and Concentration of Credit Risk
Amerx grants credit to customers, most of whom are national pharmaceutical distributors, drug stores nationwide and physicians. Amerx wholesales its products to national pharmaceutical distributors and drug stores at a sales term of 2/10, net 30. Amerx has a written return policy with its customers. Each return request is reviewed by management for approval. Sales to physicians are at contracted rates and standard payment term is 2/10 net 30 days.
Sirius grants credit to patients who are eligible for Medicare coverage. Sales are at standard payment term of 30 days.
Accounts receivable are generally due from Medicare, private insurance companies, and customers. The collection process is time consuming, complex and typically involves the submission of claims to multiple payers whose payment of claims may be contingent upon the payment of another payer. In accordance with applicable regulatory requirements, the Company makes reasonable and appropriate efforts to collect accounts receivable, including deductible and copayment amounts, in a consistent manner for all payer classes. The valuation of accounts receivable is based upon the credit-worthiness of customers and third-party payers as well as historical collection experience. Estimating the credit worthiness of customers and recoverability of customer accounts requires us to exercise considerable judgment. 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 and write-off experience, current trends, credit policy, and on analysis of accounts receivable by aging category. As of June 30, 2009, accounts receivable allowance was $4,200, or approximately 2% of gross accounts receivable.
Inventories
Inventories are valued at the lower of average cost or market determined by the first-in, first-out method.
Property and Equipment
Property and equipment are stated at cost. Depreciation is computed on a straight-line basis over their estimated useful lives. Leased equipment is recorded at it's fair market value at the beginning of the lease term and is depreciated over the life of the equipment. Depreciation on leased equipment is included in depreciation expense.
Cash and Cash Equivalents
For the purpose of the Statements of Cash Flows, the Company considers cash-on-hand, demand deposits in banks and highly liquid investments purchased with an original maturity of three months or less to be cash equivalents.
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Concentration of Credit Risk
The Company maintained its cash in three financial institutions. The Federal Deposit Insurance Corporation insures up to $250,000 per legal entity per financial institution. At June 30, 2009, our uninsured cash balance was $0.
Shipping and Handling Costs
Shipping and handling costs incurred were approximately $76,000 and $78,000 for the years ended June 30, 2009, and 2008, respectively, and were included in selling, general and administrative expenses.
Advertising and Marketing
The company records advertising and marketing expenses in the periods in which they are incurred. During the years ended June 30, 2009 and 2008, approximately $466,000 and $397,000, of advertising and marketing costs were included in selling, general and administrative expenses for each respective year.
Income Taxes
Income taxes are accounted for using an asset and liability approach that requires the recognition of deferred tax assets and liabilities for the expected future tax consequences attributable to differences between financial statement carrying amounts of existing assets and liabilities and their respective tax bases. A valuation allowance is provided when it is more likely than not that some portion or all of the deferred tax asset will not be realized. The Company adopted Financial Standards Board Interpretation No. 48, Accounting for Income Taxes ("FIN 48"), an interpretation of SFAS 109, on January 1, 2007.
Net Income Per Share
The Company computes net income per share in accordance with SFAS No. 128, "Earnings per Share" (SFAS 128). SFAS 128 requires presentation of both basic and diluted earnings per shares (EPS) on the face of the income statement. Basic EPS is computed by dividing net income available to common shareholders (numerator) by the weighted average number of common shares outstanding (denominator) during the period. Diluted EPS gives effect to all dilutive potential common shares outstanding during the period including stock options, using the treasury stock method, and convertible preferred stock, using the if-converted method. In computing diluted EPS, the average stock price for the period is used in determining the number of shares assumed to be purchased from the exercise of stock options. Diluted EPS excludes all dilutive potential common shares if their effect is anti-dilutive.
Fair Value of Financial Instruments
The carrying value of cash, accounts receivable, prepaid expenses, deposits, inventory, accounts payable, accrued expenses and notes payable approximate fair value.
Considerable judgement is required in interpreting market data to develop the estimates of fair value, and accordingly, the estimates are not necessarily indicative of the amounts that the Company could realize in a current market exchange.
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Stock Based Compensation
In December 1998, the Company adopted a 1998 Omnibus Stock Option Plan that provides for the granting of equity-based incentive and other awards to employees and directors of the Company, its subsidiaries and selected consultants. The Plan is administered by the Compensation Committee of the Board of Directors. Any employee, directors who are not employees of the Corporation or a subsidiary, and consultants who are not employees or directors of the Corporation are eligible to participate in the Plan. The maximum number of shares of common stock issuable on exercise of options or other awards granted under the Plan is 1,000,000. Non-qualified options granted must have an exercise price not less than 85% (100% as amended, effective for options granted December 31, 2007) of the fair market value of the underlying shares of common stock. Incentive options must have an exercise price not less than 100% of the fair market value of the underlying shares of common stock. The term of the options cannot be more than ten years. Awards may be granted in the form of restricted stock. Awards can also be granted in the form of stock appreciation rights. A stock appreciation right entitles the participant to receive from the Company an amount equal to the positive difference between the fair market value of common stock on the date of exercise of the stock appreciation right and the grant price. No stock appreciation rights have been issued to date.
Additional information with respect to the Plan's stock option activity is as follows:
Weighted Number of Average Shares Exercise Price ------ -------------- Outstanding at June 30, 2007 300,000 $0.20 Granted - - Exercised - - Expired - - ------- --------- Outstanding at June 30, 2008 300,000 $0.20 Granted - - Exercised - - Expired - - Outstanding at June 30, 2009 300,000 $0.20 ======= ===== Options exercisable at June 30, 2008 300,000 $0.20 ======= ===== Options exercisable at June 30, 2009 300,000 $0.20 ======= =====
The following table summarizes information about stock options outstanding at June 30, 2009:
Stock Options Outstanding --------------------------------- Weighted Average Number of Remaining Weighted Range of Shares Contractual Life Average Exercise Prices Outstanding In Years Exercise Price --------------- ----------- -------- --------------
$0.15 - $0.20 65,000 1.39 $0.16
$0.20 - $0.25 235,000 0.51 $0.21 ------- 300,000 0.70 $0.20 =======
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Effective January 1, 2006, we adopted Statement of Financial Accounting Standards No. 123(R) ("SFAS 123R"), "Share-Based Payment". SFAS 123R requires all share-based payments to employees, including grants of employee stock options, to be recognized in the statement of operations based upon their fair values and rescinds the acceptance of pro forma disclosure. SFAS 123R permits two methods of adoption, a "modified prospective" method and a "modified retrospective" method. Under the modified prospective method, stock-based compensation cost is recognized, beginning with the effective date, based on the requirements of SFAS 123R for all share-based payments granted after the effective date and for all awards granted prior to the effective date that remain unvested on the effective date. The modified retrospective method includes the requirements of the modified prospective method and also permits restatement of prior periods based on amounts previously reported in pro forma disclosures pursuant to SFAS 123 for either all periods presented or for only prior interim periods of the year of adoption. We adopted the modified prospective method prescribed in SFAS 123R, effective January 1, 2006.
On June 30, 2009, there were outstanding options to purchase 300,000 shares of our common stock at exercise prices ranging from $0.16 to $0.21 per share and expiration dates between December 2009 and November 2010. These options were vested at the time of grant. During the year ended June 30, 2009, no options were granted. Therefore, the adoption of SFAS 123R does not have an impact on the statement of operations for period ending June 30, 2009.
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.
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.
There were no options granted during fiscal years ended June 30, 2009 and 2008. Had there been options issued during the fiscal years ended June 30, 2009 and 2008, the fair value of the options would have been determined using the Black-Scholes option-pricing model, which values options based on the stock price at the grant date, the expected dividend payments, and the risk-free interest rate over the life of the option.
Equity instruments issued to non-employees in exchange for goods, fees and services are accounted for under the fair value-based method of SFAS No. 123(R).
Segment Reporting
In previous years, the Company reported certain financial information on its two operating segments, sale of skin and wound care products and sales of diabetic supplies. As a result of the sale of its diabetic supply segment, it is no longer an operating segment. See note O - SUBSEQUENT EVENTS - DISCONTINUED OPERATIONS for further details.
Reclassification
Certain information in the 2008 financial statements have been reclassified to conform to the 2009 financial statement presentations.
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NOTE B - INVENTORIES
Inventories consisted of the following:
June 30, 2009 June 30, 2008 ------------- -------------
Finished Goods $ 45,217 $109,561 Raw Materials 64,281 74,597 -------- -------- $109,498 $184,158 ======== ========
NOTE C - PROPERTY AND EQUIPMENT
Property and equipment consisted of the following:
As of June 30, 2009 Capitalized Owned Leases Total ------------------------------------------
Office Equipment $ 86,731 $ 26,928 $ 113,659
Furniture and Fixtures 20,726 20,726
Software 19,471 19,471
Leasehold improvements 21,614 21,614
Production Equipment 34,118 34,118
Building 474,168 474,168
Land 64,547 64,547 ------------------------------------------
721,375 26,928 748,303
Less accumulated depreciation (187,036) (26,928) (213,964) ------------------------------------------
$ 534,339 $ 0 $ 534,339 ==========================================
As of June 30, 2008 Capitalized Owned Leases Total ------------------------------------------
Office Equipment $ 83,246 $ 26,928 $ 110,354
Furniture and Fixtures 20,726 20,726
Software 19,471 19,471
Leasehold Improvements 13,587 13,587
Production Equipment 34,118 34,118
Building 474,168 474,168
Land 64,547 64,547 ------------------------------------------
710,043 26,928 736,971
Less accumulated depreciation (154,975) (26,767) (181,742) ------------------------------------------
$ 555,068 $ 161 $ 555,229 ==========================================
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NOTE D - RELATED PARTY TRANSACTIONS
Mr. Slowgrove, a director, acted as a consultant to the Company for portions of fiscal 2008, and was paid compensation of $6,250. Our Chief Executive Officer, Regina W. Anderson, guaranteed a loan to us in the amount of $508,000, issued in connection with our purchase of our office building in July 2006, as well as the $250,000 line of credit.
NOTE E - MORTGAGE PAYABLE
On July 21, 2006, we entered into a mortgage loan, guaranteed by our C.E.O. Regina W. Anderson, for $508,000 with the Bank of America for the purchase of our corporate office building. The mortgage loan is due in 15 years and interest is fixed at 7.25%. Interest expense was $ 33,795 for the fiscal year end June 30, 2009.
Maturities of long-term debt associated with the mortgage payable are as follows:
Year Ending June 30, ---------------------------------------------------
2010 $ 24,498
2011 26,335
2012 28,309
2013 30,431
2014 32,712
2015 and thereafter 305,327 -----------
447,612
Less current portion 24,498 -----------
$ 423,114 ===========
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 $109,498 and accounts receivable assets of $218,697. The line of credit is renewable annually in April. The C.E.O. of the Company personally guaranteed the line of credit to the Company. At June 30, 2009, the Company owed $0 on the line of credit. Interest expense for the years ended June 30, 2009 was $0. The line of credit extends terms of cash advances at a variable rate set equal to the banks prime rate at the time of advance. The interest rate can fluctuate according to the banks changes in its published prime rate.
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NOTE G - COMMITMENTS AND CONTINGENCIES
The Company leases certain equipment under various operating leases expiring through year 2011. The minimum lease payments due under the equipment lease agreements for fiscal years ended June 30 is as follow:
2010 $ 11,458 2011 9,447 --------- $ 20,905 =========
NOTE H - 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. The preferred stockholders are entitled to receive, if declared by the board of directors, quarterly dividends at an annual rate of $.10 per share of Series A Cumulative Convertible Preferred Stock per annum. Dividends accrue without interest and are cumulative from the date of issuance of the Series A Cumulative Convertible Preferred Stock and are payable quarterly in arrears in cash or publicly traded common stock when and if declared by the board of directors. As of June 30, 2009, no dividends have been declared. Dividends in arrears on the outstanding preferred shares total $241,371 or approximately $1.21 per share as of June 30, 2009. The preferred stockholders have the right to convert each share of Series A Cumulative Convertible Preferred Stock into one share of the Company's common stock at any time without additional consideration. Each share of Series A Cumulative Convertible Preferred Stock is subject to mandatory conversion into one share of common stock of the Company, effective as of the close of a public offering of the Company's common stock provided, however, that the offering must provide a minimum of $1 million in gross proceeds to the Company and the initial offering price of such common stock must be at least $1 per share. In addition to the rights described above, the holders of the Series A Cumulative Convertible Preferred Stock have voting rights equal to the common stockholders based upon the number of shares of common stock into which the Series A Cumulative Convertible Preferred Stock is convertible. The Company is obligated to reserve an adequate number of shares of its common stock to satisfy the conversion of all of the outstanding Series A Cumulative Convertible Preferred stock.
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The components of the provision for income taxes (benefits) are attributable to continuing operations as follows:
2009 2008 --------- --------- Current Federal $ -- $ -- State -- --
Deferred Federal 15,417 (575,651) State 2,638 (98,540) --------- --------- $ 18,055 $(674,191) ========= =========
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:
Current Non-Current ------- -----------
Deferred tax assets: NOL and contribution carryforwards $ 47,374 $ 1,019,068 Allowance for doubtful accounts 1,580 -- ----------- ----------- 48,954 1,019,068
Deferred tax (liabilities): Excess of tax over book depreciation -- (10,855) ----------- ----------- 48,954 1,008,213
Net deferred tax asset (liability) $ 48,954 $ 1,008,213 =========== ===========
The change in the valuation allowance is as follow:
June 30, 2008 $ -- June 30, 2009 -- ---------
Decrease in valuation allowance $ -- =========
Management believes it is more likely than not that it will realize the benefit of the NOL carryforward, because of its continuing trend of earnings. Therefore, a valuation allowance is not considered necessary.
Income taxes for the years ended June 30, 2009 and 2008 differ from the amounts computed by applying the effective income tax rates of 37.63% and 37.63%, respectively, to income before income taxes as a result of the following:
2009 2008 --------- ---------
Expected provision at US statutory rate $ 14,543 $ 40,465 State income tax net of federal benefit 1,553 4,320 Nondeductibles 5,200 4,372 Change in estimates in available NOL carryforwards (3,241) 13,936 Change in valuation allowance -- (737,284) --------- ---------
Income tax expense / (benefit) $ 18,055 $(674,191) ========= =========
The Company's tax years 2005 through 2008 remain open to examination by taxing jurisdictions.
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NOTE K - CONCENTRATION OF SUPPLY RISK
The Company's manufacturing and packaging activities are performed at a production facility owned and operated by a non-affiliated pharmaceutical manufacturer. At the present time, the manufacturer is the major source of the Company's wound care products. The sudden loss or failure of this manufacturer could significantly impair Amerx's ability to fulfill customer orders on a short-term basis and therefore, could materially and adversely affect the Company's operations. However, the Company has maintained a long-term relationship with this manufacturer and does not expect a discontinuance of its wound care products from the manufacturer in the near term.
During the year, Sirius purchased approximately 83% of its diabetic supplies from a non-affiliated supplier. As of July 31, 2009, Sirius is considered a discontinued segment.
NOTE L - MAJOR CUSTOMERS
During the year ended June 30, 2009, sales from one customer accounted for approximately 18% of Amerx's sales. The loss of this single customer would have a material adverse effect on our financial condition or the results of our operations. During the year ended June 30, 2008, one customer accounted for 11% of Amerx's sales.
NOTE M - RESEARCH AND DEVELOPMENT
Amerx spent approximately $12,700 towards research and development efforts over the past fiscal year. These efforts were directed towards additional studies aimed at expanding existing markets.
NOTE N - RECENT ACCOUNTING PRONOUNCEMENTS
In May 2009, the FASB issued Statement of Financial Accounting Standards No. 165, "Subsequent Events" (SFAS 165). Under SFAS 165, requires companies to evaluate events and transactions that occur after the balance sheet date but before the date the financial statements are issued, or available to be issued in the case of non-public entities. SFAS 165 requires entities to recognize in the financial statements the effect of all events or transactions that provide additional evidence of conditions that existed at the balance sheet date, including the estimates inherent in the financial preparation process. Entities shall not recognize the impact of events or transactions that provide evidence about conditions that did not exist at the balance sheet date but arose after that date. SFAS 165, also requires entities to disclose the date through which subsequent events have been evaluated. SFAS 165 is effective for interim and annual reporting periods ending after June 15, 2009. We adopted the provisions of SFAS 165 for the year ended June 30, 2009, as required, the adoption did not have a material impact on our financial statements. We have evaluated subsequent events from the balance sheet date through August 28, 2009, and determined there are no material transactions to disclose, other then those reported in Note O - Subsequent Events.
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In June, 2009, the FASB issued Statement of Financial Accounting Standards No. 168 (SFAS 168) "Accounting Standards CodificationTM and the Hierarchy of Generally Accepted Accounting Principles" - a replacement of FASB Statement No. 162. SFAS 168 establishes the FASB Accounting Standards CodificationTM as the source of authoritative accounting principles recognized by the FASB to be applied by nongovernmental entities in the preparation of financial statements in conformity with US GAAP. FAS 168 will be effective for financial statements issued for interim and annual periods ending after September 15, 2009, for most entities. On the effective date, all non-SEC accounting and reporting standards will be superseded. We will adopt SFAS 168 for the quarterly period ended September 30, 2009, as required, and adoption is not expected to have a material impact on our consolidated financial statements.
NOTE O - SUBSEQUENT EVENTS - DISCONTINUED OPERATIONS
As previously reported in our current report on Form 8-K, filed on August 3, 2009, we entered into an Asset Purchase Agreement, effective July 31, 2009 with Priority Diabetes Supply, Inc., a Florida corporation, doing business as Diabetes Wellness Supply ("Priority Diabetes"). Pursuant to the Agreement, we sold certain "Purchased Assets," as defined in the Agreement, including Sirius' customer list, to Priority Diabetes. Thus, as of July 31, 2009, Sirius no longer offers testing products to diabetic customers. Management is considering various options for the future direction of Sirius. The sale to date generated proceeds of $80,000, based on $225 per patient. This will be recognized in the first quarter of fiscal 2010. After a hundred and eighty day period, an adjusting payment will be made, based on the results of the production of the patient list that was sold. The agreement also contains a non-compete period of two years, prohibiting Sirius from engaging in the business of the sale of diabetic testing supply products.
As a result of the sale, the results of the Sirius subsidiary, which had previously been presented as a separate reporting segment, are included in discontinued operations in the Company's consolidated financial statements of operations, no other assets or liabilities were sold in this sale. All prior period information has been reclassified to be consistent with the current period presentation.
The following amounts related to the Sirius subsidiary were derived from historical financial information and have been segregated from continuing operations and reported as discontinued operations.
2009 2008 --------- ---------
Revenues $ 262,056 $ 307,884
Cost of Sales (154,740) (179,466)
Salaries and Benefits (139,203) (162,899)
Selling, General and Administrative (66,975) (66,696) --------- ---------
Loss from Operations (98,861) (101,177)
Interest Income 3,684 3,633 --------- ---------
Loss from Discontinued Operations (95,178) (97,544)
Income Tax Benefit (Expense) 25,327 36,709 --------- ---------
Loss from Discontinued Operations, net of income taxes $ (69,851) $ (60,835) ========= =========
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