With 70% of consumer goods expected to ultimately originate in China, the Chinese government is strongly driving use of RFID technology. The Korean government is subsidizing RFID usage, for similar reasons.
COMPETITION — MarkMagic
CYBRA Corporation’s MarkMagic product family faces competition for each of its feature sets, but it is our belief that no single product, on any platform, offers the wide range of output device and document support that MarkMagic brings to the marketplace.
MarkMagic’s advantage is that besides addressing the key requirements of thermal bar code label and RFID printing, it alone provides virtually all other printing needs that customers may demand. Only MarkMagic supports all the following printer devices and document types:
| | · | Laser printed bar code documents |
| | · | Ink jet printed documents |
| | · | Plastic ID cards with magnetic stripe encoding |
In our current market, which can be defined as IBM System i users of bar code and RFID labeling, CYBRA faces one major competitor, T.L. Ashford, Covington, Kentucky, a private company of similar size to CYBRA. The competitor entered the bar code labeling software arena a few years before we did. To the best of our knowledge, the competitor has a larger base of System i bar code labeling customers than we have. The competitor’s base price is lower than ours, but additional features can level out the price difference. To the best of our knowledge, the competitor sells software only, and does not offer bar code and RFID equipment, supplies or services.
We expect to move beyond the IBM System i platform in 2009 and we anticipate a number of additional competitors. We believe that many of these competitors are well financed and have large customer installed bases. We expect CYBRA’s appeal will be based on our multiple platform support, multiple document type support and our experience and track record in integrating with business software packages.
COMPETITION — EdgeMagic
CYBRA’s EdgeMagic product faces well financed competition for each of its feature sets, but no single product offers the integrated solution that EdgeMagic brings to the System i platform.
EdgeMagic’s competitive advantage is that the functions of RFID tag reading and device control it provides are native to the System i platform. No PC’s or additional servers are required. The EdgeMagic solution significantly reduces the systems’ integration effort required to install competing solutions.
Competing Windows, Linux, or Unix-based solutions may have more functions, but each installation in a System i environment requires custom programming to match up System i files and programs with RFID data.
EdgeMagic alone provides a tightly integrated solution that has the functions System i customers require, yet offers the flexibility for System i customers to implement advanced RFID applications without costly custom programming.
Included certified EPC-compliant label templates, pre-configured interfaces to leading ERP and WMS packages, and modular device control allows System i customers to roll out both open loop and closed loop industrial strength RFID solutions in far less time than with competing solutions.
High-end competitors (selling a suite of products to a specific industry) include:
| | · | BEA Weblogic RFID Platform Edge Server |
| | · | OAT Systems OAT Foundation Suite |
| | · | IBM Websphere RFID Premises |
| | · | Manhattan Associates EPC Manager |
| | · | Seeburger RFID Workbench |
| | · | Sybase iAnywhere |
Low end (selling stand-alone tools that are not industry-specific) includes EPCSolutions Tag Manager.
Recent RFID investments include:
| Company | Company Profile | Recent Investment |
GLOBERANGER | RFID Middleware | March 2009 | $8.3 million Series C from new and existing investors |
| OMNI-ID | RFID Technology | February 2009 | $15 million Series C |
| THINGMAGIC | Manufactures RFID readers | November 2008 July 2008 | Undisclosed from CIA $9.5 million CISCO |
| VUE TECHNOLOGY | RFID Middleware | October 2008 | Acquired by Sensormatic for $43 million |
| AGILITY HEALTHCARE | RFID Middleware for Healthcare | October 2008 | Acquired by GE for undisclosed amount |
| ALIEN | Manufactures RFID readers and tags | October 2008 | $38 million from existing investors |
| OAT SYSTEMS | RFID Middleware | June 2008 | Acquired by Checkpoint for $37 million (+ $8 million in incentives) |
| IMPINJ | RFID Technology | January 2008 | $14 million |
In the RFID market we anticipate that we will face many competitors as the market grows. Many of these will be large companies, both public and private. There are currently no clearly dominant companies in the RFID space. We anticipate that CYBRA’s appeal will be based on our multiple platform support and our experience and track record in providing solutions for developers of business software packages.
PARTNERSHIPS
CYBRA has established partnerships with key bar code and RFID companies. CYBRA partners fall into one or more of the following categories:
| · | OEM ASV (Application Software Vendor) partners who have integrated MarkMagic into their application software products that also sell through VARs and Systems Integrators. |
| · | Technology Partners with whom CYBRA works closely to support their printing technologies or computing platforms. CYBRA has relationships with their VAR channels. |
| · | Channel Partners whose products CYBRA resells to provide a single source for a customer’s entire bar code label and RFID needs. The table below contains a list of our key partners, the type of relationship(s) and the product(s) involved: |
| Company | | ASV | | Technology | | Channel | | Product |
Apparel Business | | √ | | | | | | MarkMagic Labels Development |
Infor | | √ | | | | | | MarkMagic Labels Runtime |
Manhattan Assoc. | | √ | | | | | | MarkMagic Labels Runtime |
Network Systems | | √ | | | | | | MarkMagic Labels Development |
Vormittag Assoc. | | √ | | | | | | MarkMagic Enterprise Development |
Wynne Systems | | √ | | | | | | MarkMagic Labels Development |
Avery Dennison | | | | √ | | √ | | Printers, Supplies, and RFID Encoders and Care Label Printers and Supplies |
Datamax | | | | √ | | √ | | Printers, Supplies, and RFID Encoders |
HP | | | | √ | | √ | | HP PCL laser printers |
IBM | | | | √ | | √ | | Printers, Supplies, and RFID Encoders, System servers |
Intermec | | | | √ | | √ | | Printers, Supplies, and RFID Encoders |
Motorola | | | | √ | | √ | | RFID Readers, Mobile Computers, Wireless Networks and Bar Code Scanners |
Printronix | | | | √ | | √ | | Printers, Supplies, and RFID Encoders |
SATO | | | | √ | | √ | | Printers, Supplies, and RFID Encoders |
Teklogix | | | | √ | | √ | | RFID Readers, Mobile Computers, Wireless Networks |
| Zebra | | | | √ | | √ | | Label and Plastic Card Printers, Supplies, and RFID Encoders |
| Alien Technologies | | | | | | √ | | RFID UHF readers and tags |
Hand Held | | | | | | √ | | Bar code scanners and imagers |
IIMAK | | | | | | √ | | Thermal Ribbons |
| Magellan | | | | | | √ | | RFID PJM technology – readers and tags |
Microscan | | | | | | √ | | Fixed bar code scanners |
| PSC | | | | | | √ | | Bar code scanners and imagers |
| Tagsys | | | | | | √ | | RFID HF and UHF readers and tags |
CYBRA’s key distributors and resellers are Manhattan Associates, Inc., Vormittag Associates, Inc., Apparel Business Systems, LLC and Solzon Corporation.
On October 20, 1998, the Company signed a five-year Software License, Sublicensing and Distribution Commitment Agreement (the “License Agreement”) with Manhattan Associates, Inc. (“MAI”). The License Agreement automatically renews on a year-to-year basis unless cancelled by either party 30 days prior to each renewal date. Pursuant to the License Agreement, the Company granted to MAI a worldwide non-exclusive license to market and sell its MarkMagic software and related products. MAI pays to the Company a per copy license fee for copies of MarkMagic licensed by MAI or its distributors to end user customers. MAI agrees to provide support to its customers and CYBRA agrees to provide back-up support to MAI. The License Agreement contains other standard provisions such as a source code escrow, copyright indemnification and limitation of warranties.
Effective April 20, 2007, the Company entered into a two year OEM Software Licensing Agreement with Vormittag Associates, Inc. (“VAI”) (the “VAI Agreement”). Pursuant to the VAI Agreement the reseller is granted marketing rights to the MarkMagic and EdgeMagic suite of software products and ancillary products in the United States and Canada. Thus VAI became the first OEM reseller for EdgeMagic. The VAI Agreement provides for set commissions on the sale of products based upon the then current list price. The VAI Agreement contains confidentiality provisions, warranty and support obligations of CYBRA and the reseller’s provisions governing selling methods, and related standard provisions. The VAI Agreement automatically renews for additional one-year periods unless either party notifies the other of its intention to terminate at least 30 days prior to any termination or renewal date. Each party may terminate the VAI Agreement by notifying the other party of its intent to do so three months in advance without cause.
Effective October 23, 2006, the Company entered into a two-year Domestic Reseller Agreement with Apparel Business Systems, Inc. (“ABS”) (the “Reseller Agreement”). Pursuant to this Reseller Agreement the Company granted ABS marketing rights to the MarkMagic suite of software products and ancillary products in the United States and Canada. The Reseller Agreement provides for set commissions on the sale of products based upon the then current list price. The Reseller Agreement contains confidentiality provisions, warranty and support obligations of CYBRA and the reseller’s provisions governing selling methods, and related standard provisions. The Reseller Agreement automatically renews for additional one-year periods unless either party notifies the other of its intention to terminate at least 30 days prior to any termination or renewal date. Each party may terminate the Reseller Agreement by notifying the other party of its intent to do so three months in advance without cause.
Effective August 27, 2007, CYBRA entered into three agreements with Solzon Corporation, Nashua, New Hampshire: (1) a Technology License Agreement; (2) a Contractor Agreement for System Integration and Consulting Services; and (3) a Reseller Agreement (the “Solzon Agreements”). Pursuant to the Solzon Agreements, Solzon has assigned to CYBRA a perpetual world-wide license to utilize Solzon’s RFID for iSeries Product and Solzon has agreed to provide support of the installation and configuration of CYBRA’s EdgeMagic Application Software at certain of CYBRA’s customer facilities. Pursuant to these Agreements, Solzon will abandon future development of Solzon’s products and for so long as Solzon is a reseller of CYBRA’s products, and for a period of two years thereafter, Solzon will cease all sales and marketing of its products to any third party. Solzon will be available to answer customers’ RFID and associated questions regarding application and customer needs. In addition, the parties entered in a two-year “Premier Reseller Software Licensing Agreement” (the “PRSLA”), pursuant to which Solzon will market and sell CYBRA’s suite of software products anywhere in the world. The PRSLA provides for set commissions on the sale of products based upon the then current list price. The PRSLA contains confidentiality provisions, warranty and support obligations of CYBRA and the reseller’s provisions governing selling methods, and related standard provisions. The PRSLA automatically renews for additional one-year periods unless either party notifies the other of its intention to terminate at least 30 days prior to any termination or renewal date. Each party may terminate the PRSLA by notifying the other party of its intent to do so three months in advance without cause. For so long as Solzon acts as a reseller of CYBRA’s products, and for a period of two years thereafter, Solzon has agreed not to compete with CYBRA’s business.
In May, 2008 CYBRA signed a strategic partnership agreement with Globe Tracker, Inc. (GTI), a Beijing, China based provider of Global Tracking and Monitoring solutions, to deliver comprehensive, integrated worldwide tracking solutions for global trading partners. Says Jim Davis, Globe Tracker President, “CYBRA’s technology will be a key component of GTI’s Global Tracking and Monitoring Data Exchange Network. This partnership will provide its users the ability to collect tracking and monitoring data from any GTI enabled server in the world, in the same building or across the globe.”
Effective August 6, 2008, the Company entered into a two year OEM Software Licensing Agreement with DCS, Inc., a provider of IBM System i-based software solutions for law enforcement. Pursuant to this agreement the reseller is granted marketing rights to the MarkMagic™ and EdgeMagic® suite of software products and ancillary products in the United States and Canada. The agreement provides for set sales credits on the sale of products based upon the then current list price. The agreement contains confidentiality provisions, warranty and support obligations of CYBRA and the reseller's provisions governing selling methods, and related standard provisions. The agreement automatically renews for additional one-year periods unless either party notifies the other of its intentions to terminate at least 30 days prior to any termination or renewal date. Each party may terminate the agreement by notifying the other party of its intent to do so three months in advance without cause.
Research and Development
In fiscal year 2008, CYBRA Corporation spent $574,150 on Research and Development activities and in fiscal year 2007, the Company spent $839,879 on Research and Development activities. For the years ended December 31, 2008 and 2007, $358,867 and $318,333, respectively were capitalized and recorded as “Software Development” on the Balance Sheet. All costs were borne directly by CYBRA. No customers paid for these activities in any direct fashion.
Employees
As of March 1, 2009, the Company employed eleven full time employees. In addition, the Company retains the services of consultants and other third-parties on an as-needed basis.
Stock Option Plan
The Company adopted an Incentive Stock Plan on April 30, 2006 and has reserved 5,000,000 shares of its Common Stock for issuance thereunder.
There are numerous and varied risks, known and unknown, that may prevent us from achieving our goals, including those described below. The risks described below are not the only ones we will face. Additional risks not presently known to us or that we currently believe are immaterial may also impair our financial performance and business operations. If any of these risks actually occurs, our business, financial condition or results of operations may be materially adversely affected.
We may not be able to pay, refinance or otherwise satisfy our obligations under the 8% Convertible Debentures (the “Debentures”).
The Debentures become due on April 10, 2009. We presently do not have the resources to pay the Debentures, and it is unlikely that we will be able to generate adequate cash from our operations to pay the Debentures when they become due. Furthermore, we can provide no assurance that we will be able to refinance the Debentures through new debt or equity financing or extend the term of the Debentures. If we are able to refinance or extend the term of the Debentures, the terms of such a refinancing or extension of the term may be burdensome and result in substantial dilution to our shareholders.
Although the terms of the Debentures permit us to force conversion, subject to certain conditions, we can provide no assurance that we will be able to satisfy those conditions and force conversion of the Debentures before they mature on April 10, 2009. If we are unable to renegotiate or pay the Debentures or force their conversion on or before their maturity date, the holders of the Debentures have the right to declare a default and demand their immediate payment. Although we believe that it is unlikely that the holders of the Debentures will seek immediate payment, in such a case, we may be required to seek protection under the federal or state bankruptcy laws or take other actions that could impair our ability to continue our operations.
If our revenues or expenses differ from those that we project, our cash flow may decline and we may be forced to curtail our operations or seek additional financing.
Our cash requirements may vary from those now planned depending on numerous factors, including the impact of the recessionary economy on our revenues and possible increases in the cost of the products and services we use to support our business. Although we currently estimate that our cash on hand together with projected cash flow from operations will be sufficient to finance our working capital and other cash requirements for the foreseeable future, there can be no assurance that our actual cash flow will be adequate to sustain our operations at their present level. In that event, we may be forced to curtail our operations or to seek additional financing, which may not be available or available only on terms that are unfavorable to us and our shareholders.
We may not be able to raise sufficient capital to successfully operate or expand our business.
Our continued operations will depend upon the availability of cash flow from operations and/or our ability to raise additional funds through various financing methods. If sales or revenues do not meet expectations, or cost estimates for development and expansion of business prove to be inaccurate, we will require additional funding. If additional capital cannot be obtained, we may have to delay or postpone acquisitions, development or other expenditures, which can be expected to harm our competitive position, business operations and growth potential. There can be no assurance that cash flow from operations will be sufficient to fund our financial needs, or if such cash flow is not sufficient, that additional financing will be available on satisfactory terms, if at all. Changes in capital markets and the cost of capital are unpredictable. Any failure to obtain such financing, or obtaining financing on unfavorable terms, can be expected to have a material adverse effect on our business, financial condition, results of operations and future business prospects.
We have had limited revenues thus far.
To date, we have had limited revenues. We had revenues of $1,397,150 and $1,705,742 in fiscal years 2008 and 2007, respectively. In fiscal year 2008, we had a net loss of $3,184,549 and in fiscal year 2007, we had a net loss of $1,410,352. Because we are subject to all risks inherent in a business venture, it is not possible to predict whether we will be profitable
Accordingly, it is not possible to predict whether or not our current and proposed activities will be sufficiently profitable. Prospective purchasers of our securities should bear in mind that, in light of the risks and contingencies involved, no assurance can be given that we will ever generate enough revenue to offset expenses or to generate a return on invested capital. There is no guarantee of our successful, profitable operation. Our failure to achieve or maintain profitability can be expected to have a material adverse effect on our business, financial condition, results of operations and future business prospects.
We may experience significant fluctuations in our operating results and rate of growth and may not be profitable in the future.
Our results of operations may fluctuate significantly due to a variety of factors, many of which are outside of our control and difficult to predict. The following are some of the factors that may affect us from period to period and may affect our long-term financial performance:
| | · | our ability to retain and increase revenues associated with customers and satisfy customers’ demands; |
| | · | our ability to be profitable in the future; |
| | · | our investments in longer-term growth opportunities; |
| | · | our ability to expand our marketing network, and to enter into, maintain, renew and amend strategic alliance arrangements on favorable terms; |
| | · | changes to offerings and pricing by us or our competitors; |
| | · | fluctuations in the size of our customer base, including fluctuations caused by marketing efforts and competitors’ marketing and pricing strategies; |
| | · | the effects of commercial agreements and strategic alliances and our ability to successfully integrate them into our business; |
| | · | technical difficulties, system downtime or interruptions; |
| | · | the effects of litigation and the timing of resolutions of disputes; |
| | · | the amount and timing of operating costs and capital expenditures; |
| | · | changes in governmental regulation and taxation policies; |
| | · | events, such as a sustained decline in our stock price, that cause us to conclude that goodwill or other long-term assets are impaired and for which a significant charge to earnings is required; and |
| | · | changes in, or the effect of, accounting rules, on our operating results, including new rules regarding stock-based compensation. |
The market for RFID services may not develop as anticipated, which would adversely affect our ability to execute our business strategy.
The success of our RFID offerings depends on growth in the number of RFID users, which in turn depends on wider public acceptance of RFID software solutions. The RFID market is in its early stages and may not develop as rapidly as is expected. Potential new users may view RFID as unattractive relative to traditional bar code products for a number of reasons, including implementation, procurement, integration and supply costs, greater technical complexity, immature technology, consumer privacy concerns, or the perception that the performance advantage for RFID is insufficient to justify the increased costs. There is no assurance that RFID will ever achieve broad user acceptance.
We may not successfully enhance existing products and services or develop new products and services in a cost-effective manner to meet customer demand in the evolving market for bar code and RFID software services.
The market for bar code and RFID software solutions is characterized by evolving technology and industry standards, changes in customer needs and frequent new product introductions. We are currently focused on enhancing our RFID encoding capabilities through an improved user interface, wider printer type coverage, and supporting other computing platforms beyond the System i. In addition to improving our software for encoding RFID, we are also focused on the development of RFID “edge” technology for the acquisition and management of RFID data, as well as RFID system integration capabilities. Our future success will depend, in part, on our ability to use leading technologies effectively, to continue to develop our technical expertise, to enhance our existing services and to develop new services that meet changing customer needs on a timely and cost-effective basis. We may not be able to adapt quickly enough to changing technology, customer requirements and industry standards. If we fail to use new technologies effectively, to develop our technical expertise and new services, or to enhance existing services on a timely basis, either internally or through arrangements with third parties, our product and service offerings may fail to meet customer needs, which would adversely affect our revenues and prospects for growth.
We have spent and will continue to spend significant resources enhancing our existing capabilities and developing, implementing and launching our RFID products. We believe RFID software solutions represent a significant growth opportunity. However, losses are expected to result in the early stages until a sufficient number of customers are added whose recurring revenues, net of recurring costs, more than offset sales, marketing and other expenses incurred to add additional customers.
RFID solutions may have technological problems or may not be accepted by customers. To the extent we pursue commercial agreements, acquisitions and/or strategic alliances to facilitate new product activities, the agreements, acquisitions and/or alliances may not be successful. If any of this were to occur, it could damage our reputation, limit our growth, negatively affect our operating results and harm our business.
Intense competition could reduce market share and harm financial performance.
The market for bar code and RFID encoding software is emerging, intensely competitive and characterized by rapid technological change.
Bar code and RFID software companies compete for customers based on industry experience, know-how, technology and price, with the dominant providers conducting extensive advertising campaigns to capture market share. Many of our competitors have (i) greater financial, technical, engineering, personnel and marketing resources; (ii) longer operating histories; (iii) better name recognition; and (iv) larger consumer bases. These advantages afford our competitors the ability to (a) offer greater pricing flexibility, (b) offer more attractive incentive packages to encourage resellers to carry competitive products, (c) negotiate more favorable distribution contracts with resellers and (d) negotiate more favorable contracts with suppliers. We believe additional competitors may be attracted to the market, including IBM, Sun Microsystems, Microsoft, and HP. We also believe existing competitors are likely to continue to expand their offerings.
Current and prospective competitors include many large companies that have substantially greater market presence and greater financial, technical, marketing and other resources than we have. We compete directly or indirectly with the following categories of companies:
| | · | UNIX/Linux/Windows Label Software |
| | · | UNIX/Linux/Windows Forms Software |
| | · | UNIX/Linux/Windows RFID Edge Software |
As competition in the bar code and RFID market continues to intensify, competitors may continue to merge or form strategic alliances that would increase their ability to compete with us for customers. These relationships may negatively impact our ability to form or maintain our own strategic relationships and could adversely affect our ability to expand our customer base. Because we operate in a highly competitive environment, the number of customers we are able to add may decline, and the cost of acquiring new customers through our own sales and marketing efforts may increase.
Our ability to compete effectively in the bar code and RFID services industry will depend upon our ability to (i) continue to provide high quality products and services at prices competitive with, or lower than, those charged by our competitors and (ii) develop new and innovative products and services. There can be no assurance that competition from existing or new competitors or a decrease in prices by competitors will not have a material adverse effect on our business, financial condition and results of operations, or that we will be able to compete successfully in the future.
We may not be able to keep up with rapid technological and other changes.
The industry in which we compete is characterized, in part, by rapid growth, evolving industry standards, significant technological changes and frequent product enhancements. These characteristics could render existing systems and strategies obsolete, and require us to continue to develop and implement new products and services, anticipate changing customer demands and respond to emerging industry standards and technological changes. We intend to evaluate these developments and others that may allow us to improve service to our customers. However, no assurance can be given that we will be able to keep pace with rapidly changing customer demands, technological trends and evolving industry standards. The failure to keep up with such changes is likely to have a material adverse effect on our business, long-term growth prospects and results of operations.
We are dependent on strategic relationships.
Our business is dependent, in part, upon current relationships and those we intend to develop with suppliers, distributors and resellers in various markets and other third parties. The failure to develop or maintain these relationships could result in a material adverse effect on our financial condition and results of operations.
Reliance upon third-party suppliers for components may place us at risk of interruption of supply or increase in costs.
We rely on third-party suppliers for certain hardware and software necessary for our services and we do not have any long-term supply agreements. Although we believe we can secure other suppliers, we expect that the deterioration or cessation of any relationship would have a material adverse effect, at least temporarily, until the new relationships are satisfactorily in place. Adverse affects could limit our ability to fill customer orders for bar code and RFID hardware and supplies, resulting in potential loss of revenues and loss of goodwill. Replacing any one supplier could take weeks.
Ongoing success and our ability to compete depend upon hiring and retention of key personnel.
Success will be dependent to a significant degree upon the involvement of current management, especially Harold Brand, our CEO. These individuals have critical industry experience and relationships upon which we rely. The loss of services of any of our key personnel could divert time and resources, delay the development of our business and negatively affect our ability to sell our services or execute our business plan. In addition, we will need to attract and retain additional talented individuals in order to carry out our business objectives. The competition for such persons is intense and there are no assurances that these individuals will be available. Such problems might be expected to have a material adverse impact on our financial condition, results of operations and future business prospects.
We are subject to control by officers and management and there could be conflicts of interest with management which may be adverse to your interests.
Management of CYBRA currently beneficially owns approximately 63.5% of the outstanding shares of our Common Stock. As a result, management possesses meaningful influence and control over the Company, and may be able to control and direct the Company’s affairs, including the election of directors and approval of significant corporate transactions for the foreseeable future.
A conflict of interest may arise between our management’s personal pecuniary interest and its fiduciary duty to our shareholders. Conflicts of interest create the risk that management may have an incentive to act adversely to the interests of other investors. Such influence may not necessarily be consistent with the interests of our other shareholders.
Director and officer liability is limited.
As permitted by New York law, our certificate of incorporation limits the personal liability of directors to the fullest extent permitted by the provisions of New York Business Corporation Law. As a result of our charter provision and New York law, shareholders may have limited rights to recover against directors for breach of fiduciary duty.
If we raise additional funds through the issuance of equity securities, or determine in the future to register additional Common Stock, your percentage ownership will be reduced, you will experience dilution which could substantially diminish the value of your stock and such issuance may convey rights, preferences or privileges senior to your rights which could substantially diminish your rights and the value of your stock.
We may issue additional shares of Common Stock for various reasons and may grant additional stock options to employees, officers, directors and third parties. If we determine to register for sale to the public additional shares of Common Stock or other debt or equity securities in any future financing or business combination, a material amount of dilution can be expected to cause the market price of the Common Stock to decline. One of the factors that generally affects the market price of publicly traded equity securities is the number of shares outstanding in relationship to assets, net worth, earnings or anticipated earnings. Furthermore, the public perception of future dilution can have the same effect even if actual dilution does not occur.
In order for us to obtain additional capital, complete a business combination, or refinance the Debentures, we may find it necessary to issue securities, including but not limited to debentures, options, warrants or shares of preferred stock, conveying rights senior to those of the holders of Common Stock. Those rights may include voting rights, liquidation preferences and conversion rights. To the extent senior rights are conveyed, the value of the Common Stock can be expected to decline.
The existence of outstanding warrants and shares available under our Incentive Stock Plan may harm our ability to obtain additional financing and their exercise will result in dilution to your interests.
We have outstanding 10,571,003 warrants to purchase an aggregate of 10,571,003 shares of Common Stock. Each of the Class A and Class B Warrants is exercisable for up to five years from date of issue at an exercise price of $.75 per share (Class A Warrants) and $1.75 per share (Class B Warrants). The holder of a warrant may not exercise a warrant, if, after giving effect to such issuance after exercise, such holder would beneficially own more than 4.99% of the Company’s outstanding shares.
We also have 5 million shares of Common Stock available for the grant of stock options and other grants of equity-based compensation under our 2006 Incentive Stock Plan.
The warrants contain standard anti-dilution provisions in the event of stock divided, splits or other dilutive transactions. While these warrants are outstanding and shares are available for option grants and other stock-based awards, our ability to obtain future financing may be harmed. Upon exercise of these warrants or options or grants of other equity-based awards, dilution to your ownership interests will occur as the number of shares of Common Stock outstanding increases.
Penny stock regulations may impose certain restrictions on marketability of the Company’s securities.
We are subject to rules pertaining to “penny stocks”. The SEC has adopted regulations which generally define a “penny stock” to be any equity security that has a market price (as defined) of less than $5.00 per share or an exercise price of less than $5.00 per share, subject to certain exceptions. Our shares have not had a market price of or greater than $5.00 per share since they began trading, nor is it likely that they will attain such price in the foreseeable future. As a result, our Common Stock will be subject to rules that impose additional sales practice requirements on broker-dealers who sell such securities to persons other than established clients and “accredited investors”. For transactions covered by these rules, the broker-dealer must make a special suitability determination for the purchase of such securities and have received the purchaser’s written consent to the transaction prior to the purchase. Additionally, for any transaction involving a penny stock, unless exempt, the rules require the delivery, prior to the transaction, of a risk disclosure document mandated by the SEC relating to the penny stock market. The broker-dealer must also disclose the commission payable to both the broker-dealer and the registered representative, current quotations for the securities and, if the broker-dealer is the sole market maker, the broker-dealer must disclose this fact and the broker-dealer’s presumed control over the market. Finally, monthly statements must be sent disclosing recent price information for the penny stock held in the account and information on the limited market in penny stocks. Consequently, the “penny stock” rules may restrict the ability of broker-dealers to sell shares of our Common Stock and may affect the ability of investors to sell such shares of Common Stock in the secondary market and the price at which such investors can sell any of such shares.
Investors should be aware that, according to the SEC, the market for penny stocks has suffered in recent years from patterns of fraud and abuse. Such patterns include:
| | · | control of the market for the security by one or a few broker-dealers that are often related to the promoter or issuer; |
| | · | manipulation of prices through prearranged matching of purchases and sales and false and misleading press releases; |
| | · | “boiler room” practices involving high pressure sales tactics and unrealistic price projections by inexperienced sales persons; |
| | · | excessive and undisclosed bid-ask differentials and markups by selling broker-dealers; and |
| | · | the wholesale dumping of the same securities by promoters and broker-dealers after prices have been manipulated to a desired level, along with the inevitable collapse of those prices with consequent investor losses. |
Our management is aware of the abuses that have occurred historically in the penny stock market.
Our Common Stock is thinly traded, and as a result, the market price for our Common Stock may be particularly volatile, which could lead to wide fluctuation in our share price, as the sale of substantial amounts of our Common Stock in the public market could depress the price of our Common Stock.
The trading volume of our Common Stock on the OTC Bulletin Board has been relatively low when compared with larger companies listed on the OTC Bulletin Board or other stock exchanges. Thinly traded stocks, such as ours, can be more volatile than stocks trading in an active public market. Because of this, our shareholders may not be able to sell their shares at the volumes, prices, or times that they desire.
We cannot predict the effect, if any, that future sales of our Common Stock in the market, or availability of shares of our Common Stock for sale in the market, will have on the market prices of our Common Stock. Therefore, we can give no assurance that sales of substantial amounts of our Common Stock in the market, or the potential for large amounts of sale in the market, would not cause the price of our Common Stock to decline or impair our ability to raise capital through sales of our Common Stock.
The market price of our Common Stock may fluctuate in the future, and these fluctuations may be unrelated to our performance. General market price declines or overall market volatility in the future could adversely affect the price of our Common Stock, and the current market price may not be indicative of future market prices.
Not applicable.
The Company maintains its administrative and R&D offices in approximately 3,400 square feet of space located at One Executive Blvd., Yonkers, New York 10701. The Company has leased this space for a period of 17 years, beginning January 1993. Monthly rent is currently $6,437, plus an additional $376 for storage space in basement. Monthly rent for 2010 and subsequent years will be $6,438. Monthly rent includes electricity.
CYBRA also leases approximately 1,100 square feet in West Seneca (Buffalo), New York for sales and customer support. The Company is leasing this space for a period of 6 years, beginning June 1, 2005. Monthly rent is $908 for the duration of the lease. Electricity is billed directly from the utility company.
A complaint was filed against the Company and its CEO on December 28, 2006 in Magistrate’s court in Herzliya, Israel, by Raz-Lee Security Ltd. (“Raz-Lee”), a former distributor of the Company’s products (Case No. 8443/06). The action seeks $50,000 in damages plus interest, court costs and attorney’s fees. The action against the Company’s CEO was dismissed and an appeal of such dismissal is pending. The Company has counter-claimed against Raz-Lee for failure to report sales and royalties and seeks an accounting, with damages estimated at $50,000. Each of the parties has asked the court to order a deposit of security for costs. The Company has provided a security deposit of $7,000 as requested by the court. At a pre-trial conference, the Court suggested that the Company pay Raz-Lee $25,000 in settlement of the claim and counter-claim. This suggestion was rejected by both parties. The Company intends to vigorously defend the claim and prosecute its counter-claim. The case is still pending. Management has consulted with counsel and at December 31, 2008, the Company has reserved $25,000 against the potential settlement, which is included in accrued expenses on the Balance Sheet and as a general and administrative expense on the Statement of Operations. The Company is not a party to any other pending or threatened legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
PART II
| MARKET FOR COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES. |
Trading in our Common Stock began in the third quarter of 2008. Our Common Stock is currently quoted on the OTC Bulletin Board under the symbol “CYRP”. The following table sets forth the range of high and low bid prices per share of our Common Stock for each of the calendar quarters identified below as reported by the OTC Bulletin Board. These quotations represent inter-dealer prices, without retail mark-up, markdown or commission, and may not represent actual transactions.
| 2008: | | High | | Low | |
| Quarter ended September 30, 2008 | | $ | 0.9700 | | $ | 0.2000 | |
| Quarter ended December 31, 2008 | | $ | 1.2500 | | $ | 0.2500 | |
Holders
As of March 13, 2009, there were sixty-nine record owners of our Common Stock and twenty-five owners of convertible debentures.
Dividends
Holders of Common Stock are entitled to receive dividends as may be declared by our Board of Directors and, in the event of liquidation, to share pro rata in any distribution of assets after payment of liabilities. The Board of Directors is not obligated to declare a dividend. In addition, the terms of the Debentures restrict our ability to pay dividends. We have not paid any dividends and do not have any current plans to pay any dividends.
Recent Sales of Unregistered Securities
During the fourth quarter of 2008, the Company sold 16,667 Units, each Unit consisting of one share of the Company’s Common Stock, and one Class A and one Class B warrant to purchase one share of the Company’s Common Stock. Each Class A warrant allows the holder thereof to purchase, for a period of five years from the date of issuance, a number of shares of the Common Stock equal to one-half of the Units purchased by the buyer for $0.75 per share. Each Class B warrant allows the holder thereof to purchase, for a period of five years from the date of issuance, a number of shares of Common Stock equal to the Units purchased by the Buyer for $1.75 per share.
The securities were issued in the following transactions:
| Shares of Stock | | Class A Warrants | | Class B Warrants | | Consideration | | Date of Purchase | |
| | 16,667 | | | 8,333.5 | | | 16,667 | | $ | 12,500.25 | | | 10/8/2008 | |
The issuance of above shares of Common Stock and warrants was made pursuant to the exemption from registration provided by Section 4(2) of the Securities Act of 1933, as amended, Regulation D promulgated thereunder, and related state private offering exemptions. All of the investors were Accredited Investors as defined in the Securities Act, who acquired their shares for investment purposes without a view to distribution and had access to information concerning the Company and its business prospects, as required by the Securities Act. In addition, there was no general solicitation or advertising for the purchase of the Company’s shares
Securities Authorized For Issuance under Equity Compensation Plan
| Plan Category | | Number of securities to be issued upon exercise of outstanding options, warrants and rights | | Weighted-average exercise price of outstanding options, warrants and rights | | Number of securities remaining available for future issuance under equity compensation plan (excluding securities reflected in column (a) | |
| | | (a) | | (b) | | (c) | |
| Equity compensation plans approved by security holders | | | 100,000 | | $ | 0.75 | | | 4,821,046 | |
| Equity compensation plans not approved by security holders | | | — | | | — | | | — | |
| Total | | | 100,000 | | $ | 0.75 | | | 4,821,046 | |
ITEM 6. SELECTED FINANCIAL DATA
Not applicable
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS AND PLAN OF OPERATIONS
This report on Form 10-K contains forward-looking statements. Forward-looking statements are statements not based on historical information and that relate to future operations, strategies, financial results or other developments. Forward-looking statements are necessarily based upon estimates and assumptions that are inherently subject to significant business, economic and competitive uncertainties and contingencies, many of which are beyond our control and many of which, with respect to future business decisions, are subject to change. These uncertainties and contingencies can affect actual results and could cause actual results to differ materially from those expressed in any forward-looking statements made by us or on our behalf. We disclaim any obligation to update forward-looking statements.
Comparison of the Year Ended December 31, 2008 to the Year Ended December 31, 2007
The following table summarizes certain aspects of the Company’s results of operations for the year ended December 31, 2008, compared with the year ended December 31, 2007.
| | | Year Ended December 31, | | | | | | | |
| | | 2008 | | | 2007 | | | Change $ | | | Change | % |
| | | | | | | | | | | | | |
| Revenues | | | | | | | | | | | | |
| Products | | | 792,002 | | | | 1,175,162 | | | | (383,160 | ) | | | -33 | % |
| Services | | | 605,148 | | | | 530,580 | | | | 74,568 | | | | 14 | % |
| Total Revenues | | $ | 1,397,150 | | | $ | 1,705,742 | | | $ | (308,592 | ) | | | -18 | % |
| | | | | | | | | | | | | | | | | |
| Direct Costs | | $ | | | | $ | | | | | | | | $ | | |
| Hardware and Supplies | | | 257,414 | | | | 614,183 | | | | (356,769 | ) | | | -58 | % |
| Royalties & Consulting | | | 74,770 | | | | 98,724 | | | | (23,954 | ) | | | -24 | % |
| | | | | | | | | | | | | | | | | |
| Total Direct Costs | | $ | 332,184 | | | $ | 712,907 | | | $ | (380,723 | ) | | | -53 | % |
| % of total revenues | | | 24 | % | | | 42 | % | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| Gross profit | | $ | 1,064,966 | | | $ | 992,835 | | | $ | 72,131 | | | | 7 | % |
| % of total revenues | | | 76 | % | | | 58 | % | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| Research and development costs | | $ | 215,283 | | | $ | 171,590 | | | $ | 43,693 | | | | 25 | % |
| % of total revenues | | | 15 | % | | | 10 | % | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| Sales and marketing expenses | | $ | 212,027 | | | $ | 460,337 | | | $ | (248,310 | ) | | | -54 | % |
| % of total revenues | | | 15 | % | | | 27 | % | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| General and administrative expenses | | $ | 1,809,503 | | | $ | 1,807,585 | | | $ | 1,918 | | | | 0 | % |
| % of total revenues | | | 130 | % | | | 106 | % | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| Interest expense | | $ | 756,363 | | | $ | 610,219 | | | $ | 146,144 | | | | 24 | % |
| % of total revenues | | | 54 | % | | | 36 | % | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| Other Income (Expenses) | | $ | 4,058 | | | $ | 26,648 | | | $ | (22,590 | ) | | | -85 | % |
| % of total revenues | | | 0 | % | | | 2 | % | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| Loss Before Taxes | | $ | (1,924,152 | ) | | $ | (2,030,248 | ) | | $ | 106,096 | | | | -5 | % |
| | | | 138 | % | | | 119 | % | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| Income Taxes (Benefit) | | $ | 1,260,397 | | | $ | (619,896 | ) | | $ | 1,880,293 | | | | 303 | % |
| Effective tax rate | | | -66 | % | | | 31 | % | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| Net loss | | $ | (3,184,549 | ) | | $ | (1,410,352 | ) | | $ | (1,774,197 | ) | | | -126 | % |
| % of total revenues | | | -228 | % | | | -83 | % | | | | | | | | |
Revenues
The decrease in revenues in absolute dollars for the year ended December 31, 2008, as compared to the same period in 2007, is primarily due to lower demand for hardware and supplies during the year and a reduction in revenues from CYBRA’s OEM partners. We believe that this is a reflection of lower spending on technology in the general economy. We expect that our revenues will increase due to sale of our new product, EdgeMagic.
Direct Costs
The costs for hardware and supplies for the year ended December 31, 2008, were lower, as compared to the same period in 2007, due to less demand for these product types as compared to the same period in 2007.
Gross Profit
Gross Profit as a percentage of sales increased in the year ended December 31, 2008 as compared to the same periods in 2007. This was due to selling fewer low margin products (hardware and supplies), while selling more higher margin products (software).
We expect that our gross margin will continue to increase in 2009 due to the sales of our new product, EdgeMagic, and the related relatively higher margin hardware and RFID supplies to be sold with our new product.
Software Development Costs
Software development costs consist primarily of compensation of development personnel, related overhead incurred to develop EdgeMagic and upgrades, and to enhance the Company’s current products, and fees paid to outside consultants. Substantially all of these expenses have been incurred by the Company in the United States. Software development costs are accounted for in accordance with SFAS No. 86, “Accounting for the Costs of Computer Software to be Sold, Leased or Otherwise Marketed,” under which the Company is required to capitalize software development costs between the time technological feasibility is established and the product is ready for general release. Costs that do not qualify for capitalization are charged to research and development expense when incurred. The EdgeMagic software product is now available for general release and all costs after September 1, 2008, in accordance with SFAS No. 86 are expensed. During the year ended December 31, 2008 and 2007, the software development costs that were expensed were $215,283 and $171,590, respectively.
Sales and Marketing Expenses
Sales and marketing expenses consist primarily of, commissions, advertising and promotional expenses. The decrease in absolute dollars for the year ended December 31, 2008 as compared to the same period in 2007 is due to the prior year having a major advertising campaign. Beginning with the second half of 2007 marketing and promotion were brought in-house as opposed to using outside agencies.
General and Administrative Expense��
General and administrative expenses consist primarily of costs associated with the Company’s executive, financial, human resources and information services functions. General and administrative expenses increased in absolute dollars for the year ended December 31, 2008 as compared to the same period in 2007. This increase was due to standard inflation and increased costs.
Interest Expense
Interest expense is due to the 8% convertible debentures holders and in total was $756,363 and $610,219 for the years ended December 31, 2008 and 2007. It also includes amortization of deferred financing costs of $301,393 (2008) and $164,795 (2007).
Other Income, Net
Interest and other income, decreased for the year ended December 31, 2008 as compared to the same period in 2007. The decrease is due primarily to less interest income earned on lower bank balances.
Provision for Income Taxes
The provision for income taxes consists of provisions for federal and state income taxes.
The Company recorded income tax expense (benefit) of $1,260,397 and ($619,896) for the years ended December 31, 2008 and 2007. The effective income tax rates were - -66% and 31% for the twelve months ended December 31, 2008 and 2007. The effective tax rate differs from the statutory U.S. federal income tax rate of 35%, primarily due to state income tax increase in valuation allowance for deferred tax asset and permanent differences between GAAP pre-tax income and taxable income.
Liquidity and Capital Resources
The following table summarizes the Company’s cash and cash equivalents, working capital, long-term debt and cash flows as of and for the nine months ended December 31, 2008 and 2007.
| | | Year ended December 31, | | | | |
| | | 2008 | | 2007 | | Change $ | | Change % |
| Cash and cash equivalents | $ | 70,591 | $ | 787,157 | | (716,566) | | -91% |
| Working capital deficit | $ | (3,431,973) | $ | (31,660) | | (3,337,886) | | 10543% |
| Net cash used in operating activities | $ | (791,729) | $ | (1,009,648) | | 217,919 | | 22% |
| Net cash used in investing activities | $ | (365,537) | $ | (371,442) | | 5,905 | | -2% |
| Net cash provided by financing activities | $ | 440,701 | $ | 904,876 | | (464,175) | | -51% |
| Long-term debt, less current portion | $ | - | $ | 2,160,800 | | (2,160,800) | | -100% |
| | | | | | | | | |
As of December 31, 2008, the Company’s principal sources of liquidity included cash and cash equivalents of $70,591. The Company’s operations used $791,729 in cash during the twelve months ended December 31, 2008. The company projects average monthly gross sales for the upcoming year to be $270,000. The Company requires $130,000 per month in total operating costs. The Company’s working capital deficiency excluding deferred revenue is $3,085,557. The Company believes this is a relevant measurement of working capital, as deferred revenue represents an obligation to provide future services instead of a future cash outflow.
During 2008, the Company issued 587,335 shares of common stock to investors for proceeds of $440,701.
As of the beginning of 2009, we are operating at break-even on a cash flow basis. However, the Company does not have the resources to repay the Debentures. We are currently attempting to renegotiate the terms of the Debentures, either by extending the due date of the Debentures or by exchanging the Debentures for a new series of preferred stock. However, there is no guarantee that we will be successful in negotiating an extension of the maturity date of the Debentures or an exchange of the Debentures for preferred stock with all holders of the Debentures. If we are successful, we believe we can sustain the Company’s cash flow at break-even and will not need additional sources of financing for the short term.
Critical Accounting Policies
Critical Accounting Policies and Estimates
The SEC issued Financial Reporting Release No. 60, Cautionary Advice Regarding Disclosure About Critical Accounting Policies, suggesting that companies provide additional disclosure and commentary on their most critical accounting policies. In Financial Reporting Release No. 60, the SEC has defined the most critical accounting policies as the ones that are most important to the portrayal of a company’s financial condition and operating results, and require management to make its most difficult and subjective judgments, often as a result of the need to make estimates of matters that are inherently uncertain. Based on this definition, we have identified the following significant policies as critical to the understanding of our financial statements.
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make a variety of estimates and assumptions that affect (i) the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the financial statements and (ii) the reported amounts of revenues and expenses during the reporting periods covered by the financial statements.
Our management expects to make judgments and estimates about the effect of matters that are inherently uncertain. As the number of variables and assumptions affecting the future resolution of the uncertainties increase, these judgments become even more subjective and complex. Although we believe that our estimates and assumptions are reasonable, actual results may differ significantly from these estimates. Changes in estimates and assumptions based upon actual results may have a material impact on our results of operation and/or financial condition. We have identified certain accounting policies that we believe are most important to the portrayal of our current financial condition and results of operations.
Software Costs
The Company accounts for software development costs in accordance with Statement of Financial Accounting Standards No. 86, Accounting for the Costs of Computer Software to be Sold, Leased, or Otherwise Marketed (“SFAS 86”). SFAS 86 requires that costs related to the development of enhancements to MarkMagic be capitalized as an asset when incurred subsequent to the point at which technological feasibility of the enhancement is established. SFAS 86 specifies that “technological feasibility” for purposes of SFAS 86 can only be established by the completion of a “detailed program design” or if no such design is prepared, upon the completion of a “working model” of the software. The Company’s development process does not include a detailed program design. Management believes that such a design could be produced in the early stages of development but would entail significant wasted expense and delay. Consequently, SFAS 86 requires the development costs to be recorded as expense until the completion of a “working model”. In the Company’s case, the completion of a working model does not occur until almost the time when the software is ready for sale.
Accounting for Stock Based Compensation, Stock Options and Warrants Granted to Employees and Non-employees
We adopted SFAS 123(R), as of January 1, 2006. SFAS 123(R) replaced the existing requirements under SFAS No. 123, Accounting for Stock Based Compensation, and Accounting Principles Board Opinion No. 25, Accounting for Stock-based Compensation to Employees, or APB 25. According to SFAS 123(R), all forms of share-based payments to employees, including employee stock options and employee stock purchase plans, are treated the same as any other form of compensation by recognizing the related cost in the statement of income.
Under SFAS 123(R), stock-based compensation expense is measured at the grant date based on the fair value of the award, and the expense is recognized ratably over the award’s vesting period. For all grants made, we recognize compensation cost under the straight-line method.
We measure the fair value of stock options on the date of grant using a Black-Scholes option-pricing model which requires the use of several estimates, including:
| | • | the volatility of our stock price; |
| | • | the expected life of the option; |
| | • | risk free interest rates; and |
| | • | expected dividend yield. |
Income Taxes
We account for income taxes using the liability method in accordance with SFAS No.109, Accounting for Income Taxes, which requires the recognition of deferred tax assets or liabilities for the tax-effected temporary differences between the financial reporting and tax bases of our assets and liabilities and for net operating loss and tax credit carry forwards. The tax expense or benefit for unusual items, prior year tax exposure items or certain adjustments to valuation allowances are treated as discrete items in the interim period in which the events occur.
On January 1, 2007, we adopted FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes — an interpretation of FASB Statement No. 109, or FIN 48. FIN 48 addresses the determination of whether tax benefits claimed or expected to be claimed on a tax return should be recorded in the financial statements. Under FIN 48, we may recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. As a result of the implementation of FIN 48, we did not recognize any current tax liability for unrecognized tax benefits. We do not believe that there are any unrecognized tax positions that would have a material effect on the net operating losses disclosed. We have estimated the amount of our net operating loss carry-forwards and we currently have engaged tax professionals to evaluate the amount of net operating loss carry-forward available to us to offset future taxable income, under Internal Revenue Code Section 382.
Revenue Recognition
The Company recognizes revenues in accordance with AICPA Statement of Position (SOP) 97-2, Software Revenue Recognition, as amended by SOP 98-9 (Modification of SOP 97-2, Software Revenue Recognition, With Respect to Certain Transactions).
Revenue from software license agreements is recognized when persuasive evidence of an agreement exists, delivery of the software has occurred, the fee is fixed or determinable, and collectibility is probable. In software arrangements that include more than one element, the Company allocates the total arrangement fee among the elements based on the relative fair value of each of the elements.
License revenue allocated to software products generally is recognized upon delivery of the products or deferred and recognized in future periods to the extent that an arrangement includes one or more elements to be delivered at a future date and for which fair values have not been established. Revenue allocated to maintenance agreements is recognized ratably over the maintenance term and revenue allocated to training and other service elements is recognized as the services are performed. If evidence of fair value does not exist for all elements of a license agreement and post customer support (PCS) is the only undelivered element, then all revenue for the license arrangement is recognized ratably over the term of the agreement as license revenue. If evidence of fair value of all undelivered PCS elements exists but evidence does not exist for one or more delivered elements, then revenue is recognized using the residual method. Under the residual method, the fair value of the undelivered elements is deferred and the remaining portion of the arrangement fee is recognized as revenue.
Contingencies
Management assesses the probability of loss for certain contingencies and accrues a liability and/or discloses the relevant circumstances, as appropriate. Management believes that any liability to the Company that may arise as a result of having to pay out additional expenses that may have a material adverse effect on the financial condition of the Company taken as a whole should be disclosed. Refer to Note 8 of Notes to the Financial Statements.
Recent Accounting Standards and Pronouncements
Refer to Note 2 of Notes to the Financial Statements for a discussion of recent accounting standards and pronouncements.
ITEM 7A. QUANTITIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable to smaller reporting companies.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements and notes thereto are set forth immediately after the signature page in this Annual Report on Form 10-K. Set forth below is the table of contents for the aforementioned financial statements and notes thereto.
| | | Page |
| REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM – KBL, LLP | | F-1 |
| | | |
| REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM – BERNSTEIN & PINCHUK LLP | | F-2 |
| | | |
| FINANCIAL STATEMENTS | | |
| | | |
| BALANCE SHEETS | | F-3 |
| | | |
| STATEMENTS OF OPERATIONS | | F-4 |
| | | |
| STATEMENTS OF CHANGES IN STOCKHOLDERS’ DEFICIT | | F-5 |
| | | |
| STATEMENTS OF CASH FLOWS | | F-6 |
| | | |
| NOTES TO FINANCIAL STATEMENTS | | F-7 - F-17 |
Item 9. CHANGES IN AND DISGAREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
Disclosure Controls and Procedures
As required by Rule 13a-15 under the Exchange Act, we carried out an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures, as of the end of the period covered by this report on Form 10-K. This evaluation was carried out under the supervision and with the participation of our management, including our President and Chief Executive Officer and our interim Chief Financial Officer. Based upon that evaluation, management concluded that our disclosure controls and procedures are effective to ensure that information required to be disclosed in the reports that it files or submits under the Exchange Act is accumulated and communicated to management (including the chief executive officer and chief financial officer) to allow timely decisions regarding required disclosure and that our disclosure controls and procedures are effective to give reasonable assurance that the information required to be disclosed by us in reports that we file under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC.
Internal Controls Over Financial Reporting
Under the supervision and with the participation of our management, including our President and Chief Executive Officer and our interim Chief Financial Officer, we are responsible for establishing and maintaining an adequate system of internal control over financial reporting (as defined in Rule 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934). Our management has conducted an assessment of our internal control over financial reporting, and has concluded that our internal controls over financial reporting are effective and provide a reasonable assurance of achieving their objective.
Limitations on the Effectiveness of Controls
A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues, if any, within a company have been detected. The Company’s disclosure controls and procedures are designed to provide reasonable assurance of achieving their objectives, and the CEO and CFO have concluded that these controls and procedures are effective at the “reasonable assurance” level.
Changes in Internal Control Over Financial Reporting
There were no changes in our internal control over financial reporting identified in connection with the evaluation performed that occurred during the period covered by this report that has materially affected or is reasonably likely to materially affect our internal control over financial reporting.
None.
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANACE.
Set forth below are the present directors and executive officers of the Company. There are no arrangements or understandings between any of the directors, officers and other persons pursuant to which such person was selected as a director or an officer, except that Jonathan Rubin and Matt Rothman were chosen by the purchasers of Debentures to serve as directors, as described below in Item 13. Directors are elected to serve until the next annual meeting of shareholders and until their successors have been elected and have qualified. Officers serve at the pleasure of the Board of Directors and may be terminated at any time at will.
Directors
| Name | | Age | | Present Position and Offices | | Term of Office |
| | | | | | | |
| Harold Brand | | 58 | | Chairman of the Board, Chief Executive Officer and Interim Chief Financial Officer | | Since 1985 |
| | | | | | | |
| Sheldon Reich | | 51 | | Vice President Solutions and Director | | Since 1990 |
| | | | | | | |
| Robert J. Roskow | | 65 | | Executive Vice President and Director | | Since 1995 |
| | | | | | | |
| Jonathan Rubin | | 38 | | Director | | Since 2007 |
| | | | | | | |
| Matt Rothman | | 30 | | Director | | Since 2007 |
Set forth below are brief accounts of the business experience during the past five years of each director of the Company.
Harold Brand is a founder of CYBRA and has been its Chairman of the Board and Chief Executive Office since 1985. Mr. Brand has been the Company’s Interim Chief Financial Officer since 2006. He is responsible for managing the Company’s operations, monitoring its performance, and planning and overseeing R&D projects. Mr. Brand developed much of CYBRA’s proprietary technology. Prior to founding CYBRA, Mr. Brand was the Vice President of Personnel Systems at Manufacturers Hanover Trust Company (currently JP Morgan Chase Bank), a New York City money center bank, where he managed a multimillion dollar annual budget and a staff of 25 professionals. A highly rated speaker at IBM technical conferences, Mr. Brand holds a Masters of Science degree in Computer Science from Rutgers University in New Brunswick, New Jersey.
Sheldon Reich has been Vice President of Marketing and a Director of the Company since 1990. His title was recently changed to Vice President Solutions to more accurately reflect his role in the Company. He has expertise in the creative application of Auto ID technology. In April 2004, Mr. Reich was selected by IBM to help design their infrastructure solution for enabling RFID wireless inventory systems. Prior to joining CYBRA, Mr. Reich held the position of Copy Director at Bantam Doubleday Dell publishing. He developed business-to-business marketing programs for such clients as: NYNEX, AT&T Microelectronics, and Philips Information Systems. A frequent speaker at industry conferences and user group meetings, Mr. Reich, holds a Bachelor of Arts degree in Linguistics from the State University of New York at Stony Brook.
Robert J. Roskow joined CYBRA in 1994 in the capacity of Vice President of Sales and a Director. His participation has recently transitioned to that of a sales advisory role, along with a change in title to Executive Vice President. Bob is also founder of Profit Horizons, Inc., a sales consultancy. He brings to CYBRA more than 30 years of high technology marketing experience with the IBM Corporation. Mr. Roskow���s marketing achievements with IBM were rewarded with membership in 17 100% clubs and three Golden Circles, which signified reaching the top 3% of sales professionals in the company. One of the chief architects of IBM’s Business Partner Program, Mr. Roskow has consulted to more than 50 IBM Business Partners with annual revenues ranging from $200,000 to $50 million. Bob was a New Business Executive with IBM for the four years prior to his retiring in 1992.
Jonathan Rubin is an experienced small businessperson, having run his own businesses for the past six years. Mr. Rubin is a partner in the Jefferson Title Agency, which is licensed in several states. He is a seasoned real estate professional, with extensive experience in numerous areas of the real estate field, including, management, brokerage, title and finance. Mr. Rubin is active in the Lakewood, NJ, community, where he manages a free loan society, and sits on the Township Rent Control Board, the Board of Congregation Ohr Meir and other community involvement.
Matt Rothman is the owner of MorFra Designs, a wholesale jewelry company supplying retailers and catalog companies throughout the U.S. MorFra specializes in cubic zirconia silver jewelry. Prior to the formation of MorFra in 2003, Mr. Rothman was for one year, vice president - sales at Designs by FMC, Inc., a manufacturer and distributor of gold and silver jewelry, selling to large retail chains, through catalogues and various cable television channels. Mr. Rothman also serves as a consultant to Global Equities, a real estate investment company with interests in residential and commercial real estate.
Officers
In addition to Harold Brand, Sheldon Reich and Robert J. Roskow, the following two people also serve as officers of the Company:
| Name | | Age | | Present Position and Offices | | Term of Office |
| | | | | | | |
| Charles M. Roskow | | 37 | | Vice President of Operations | | Since 2006 |
| | | | | | | |
| Larry Goldman | | 51 | | Vice President Finance | | Since 2007 |
Charles M. Roskow heads CYBRA’s West Seneca, New York branch office and is chiefly responsible for pre-sales and post-sales support of CYBRA Corporation’s software products. He joined the Company in 1994 as an Account Manager and served as Customer Support Manager from 1997 to 2005, when he became Branch Manager. Acting in a sales engineering capacity, Mr. Roskow is CYBRA’s OEM customers’ primary point of contact and manages the end user support effort. Previously, as a CYBRA marketing representative, Mr. Roskow tripled sales in his territory. Before joining CYBRA, he was the owner and proprietor of Just Belts, a martial art belt manufacturer, which he built from a standing start to profitability and sale to new owners in 18 months. Mr. Roskow holds a Bachelor of Science degree in Business Administration from the State University of New York College at Fredonia.
Larry Goldman became a part-time consultant to the company and was given the title of Vice President of Finance of the Company on March 23, 2007. Mr. Goldman is a certified public accountant with over 20 years of auditing, consulting and technical experience as a partner in a mid-size New York City based accounting firm, working with a wide variety of companies, assisting them in streamlining their operations and increasing profitability. Prior to joining the Company, Mr. Goldman worked as the Chief Financial Officer, Treasurer and Vice President of Finance of WinWin Gaming, Inc. (OTCBB: WNWN), a multi-media developer and publisher of sports, lottery and other games. Prior to joining WinWin, in October 2004, Mr. Goldman was a partner at Livingston Wachtell & Co., LLP and had been with that firm for the previous 19 years. Mr. Goldman is also an independent director and audit committee chairman of Winner Medical Group Inc. (OTCBB: WMDG.OB), a China based manufacturer of medical disposable products and surgical dressings. Mr. Goldman has extensive experience in both auditing and consulting with public companies, and has experience providing accounting and consulting services to the Asian marketplace, having audited several Chinese public companies. Mr. Goldman was also Acting CFO and Treasurer of Thorium Power, Ltd., a nuclear fuel technology company (OTCBB: THPW) and is now working as a consultant with several public companies, including Thorium Power Ltd.
Matt Rothman is the son of Samuel Rothman, an investor in the Company and an investor and control person of Global Equities. Robert J. Roskow is Charles M. Roskow’s father. None of the other directors or officers is related to any other director or officer of the Company.
No officer or director has, during the past five years, been involved in (a) any bankruptcy petition filed by or against any business of which such person was a general partner or executive officer either at the time of the bankruptcy or within two years prior to that time, (b) any conviction in a criminal proceeding or being subject to a pending criminal proceeding (excluding traffic violations and other minor offenses), (c) any order, judgment, or decree, not subsequently reversed, suspended or vacated, of any court of competent jurisdiction, permanently or temporarily enjoining, barring, suspending or otherwise limiting his involvement in any type of business, securities or banking activities or (d) a finding by a court of competent jurisdiction (in a civil action), the Commission or the Commodity Futures Trading Commission to have violated a federal or state securities or commodities law, and the judgment has not been reversed, suspended, or vacated.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Exchange Act requires our executive officers and directors, and persons who own more than 10% of a registered class of our equity securities to file reports of ownership and changes in ownership with the SEC. SEC regulations also require us to identify in this annual report any person subject to this requirement who failed to file any such report on a timely basis.
Based on our records and other information available to us, we believe that, in 2008, all Section 16(a) filing requirements were satisfied, except for four transactions. Two of our directors, Matt Rothman and Jonathan Rubin, each failed to file a Form 4 relating to two transactions on a timely basis in 2008.
Code of Ethics
Due to the early stage nature of the business of CYBRA, it does not have a Code of Ethics.
Audit Committee
Due to the early stage nature of the business of CYBRA, it does not have an audit committee, nor has its board of directors deemed it necessary to have an audit committee financial expert. CYBRA expects to have several committees in place, including a compensation, budget and audit committee. At such time, CYBRA Corporation intends to have a member of the Board of Directors that meets the qualifications for an audit committee financial expert.
The following table sets forth all the compensation earned by Mr. Harold Brand who is serving as the Chief Executive Officer (Principal Executive Officer) and Interim Chief Financial Officer (Principal Financial Officer) for the last three completed fiscal years. The Company had no other executive officers whose aggregate compensation was in excess of $100,000 during the aforementioned fiscal years.
SUMMARY COMPENSATION TABLE
| Name and principal position | | Year | | Salary ($) | | All Other Compensation ($) | | Total ($) | |
| Harold Brand, Chairman and Chief Executive Officer | | 2008 | | $ 165,847 | | $22,096(1) | | $ 187,943 | |
| | | 2007 | | $ 187,943 | | -0- | | $ 187,943 | |
| | | 2006 | | $ 194,135 | | -0- | | $ 194,135 | |
| (1) | This amount consists of $14,153 of salary, and $7,943 of bonus, that were voluntarily deferred by Mr. Brand. |
Effective April 30, 2006, the Company entered into a five-year Employment Agreement with Mr. Brand, with base salary set at $180,000 per annum. In addition to this salary, Mr. Brand is entitled to incentive compensation an amount equal to two percent (2%) of annual gross sales of the Company on sales in excess of one million dollars ($1,000,000). In addition, Mr. Brand will be entitled to standard benefits: four weeks of paid vacation, accident and health insurance, sick leave benefits, holidays and personal days, personal expenses reimbursement, life insurance, disability insurance and the use of a corporate car.
Director Compensation
Inside directors are not compensated in their roles as directors. They are reimbursed, however, for reasonable expenses incurred on behalf of the Company. Outside Director compensation is $7,500 per year, plus expenses, for up to four regular meetings per year and an unspecified number of special meetings. For any additional in person meetings, compensation is $750 per meeting. In 2008, Messrs. Rubin and Rothman each received $3,750 in cash compensation and 5,000 shares of common stock for services rendered as a director in 2007. In 2008, Mr. Rubin also received $3,750 in cash compensation and 5,000 shares of common stock for services rendered as a director in 2008, and Mr. Rothman received 5,000 shares of common stock, but has deferred such cash compensation and will be paid in the future.
Advisory Board
CYBRA Corporation’s Advisory Board consists of executive officers, as well as two outside advisors.
Arthur Hershaft, the former Chairman of Paxar Corporation, grew Paxar from $2 million in 1959 to over $800 million in 2007. He served as Paxar’s Chairman of the Board since 1986 and as Chief Executive Officer from 1980 through August 2001, resuming that position from May 2003 through late April 2005. In June 2007, Paxar was acquired by Avery Dennison for $1.34 billion. Mr. Hershaft is one of the pioneers of the labeling industry. Shortly after graduating from Carnegie Mellon Institute in Pittsburgh with a degree in engineering, Mr. Hershaft went into his father's business. Together they developed the first non-woven label to be compatible with permanent-press fabric. Under Arthur Hershaft’s stewardship, Paxar Corporation became a global leader in providing innovative merchandising systems for the retail and apparel industry. As part of the Avery Dennison Retail Information Services Group, Paxar designs and manufactures tickets, tags and labels, and provides the technology-including the printers, software control systems and necessary supplies-for retail product identification. Customers include the world's major retailers, branded apparel companies and contract manufacturers.
Dr. Shlomo Kalish, a CYBRA founder, is an Israel-based technology investor. In January 2007, Dr. Kalish made the 39th slot in Forbes’ Midals List of top dealmakers in the world, and first among Israeli dealmakers. In 1994, Dr. Kalish founded The Jerusalem Global Group, a technology focused investment house, and in 1999 he founded Jerusalem Global Ventures, a venture capital firm managing $120M. Jerusalem Global Ventures invests in seed and early-stage communications, information technology and life sciences companies. From 1997 to 1999, Dr. Kalish served as a General Partner of Concord (K.T.) Ventures I, LP, a leading Israeli venture capital fund, where he was responsible for the investments in Oridion Medical and Oren Semiconductors. Dr. Kalish frequently appears in the media and has been featured on the cover of Upside Magazine. He has also been cited in The Wall Street Journal, Dow Jones, Business Week and other business publications. Dr. Kalish holds a Ph.D. in Operations Research from MIT, a M.Sc. from the Sloan School of Management at MIT and a B.Sc. from Tel Aviv University. From 1970 to 1975 Dr. Kalish served in the Israeli Air Force as a fighter pilot. Dr. Kalish is active on the boards of many non-profit organizations and academic institutions, including Shalom Beineinu, a charitable organization of which he is Chairman; the Board of Governors of Bar Ilan University; the Board of Governors of the Technion and The Jerusalem College of Technology. Dr. Kalish serves on the board of Saifun Semiconductors — selected by Globes, an Israeli business journal, as one of Israel’s most successful startups, Valor Computerized systems, as well as a number of JGV’s portfolio companies.
The Advisory Board meets twice a year, in the fall and spring. Members of the Advisory Board are not compensated but are reimbursed for travel-related expenses.
| SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS |
The following table sets forth certain information regarding the beneficial ownership of the Common Stock as of March 24, 2009: (i) each person who is known by CYBRA to own beneficially more than 5% of the outstanding Common Stock; (ii) each of the directors of CYBRA; and (iii) all executive officers and directors of CYBRA as a group. The address of each director and Named Executive Officer listed in the table below is c/o CYBRA Corporation, One Executive Boulevard, Yonkers, NY 10701.
Name and Address of Beneficial Owner | | Number of Shares Beneficially Owned | | Percentage of Shares Beneficially Owned(1) |
| | | | | | |
| Directors and Officers | | | | | |
| | | | | | |
| Harold Brand | | | 7,438,460 | | 54.8% |
| | | | | | |
| Robert Roskow | | | 536,200 | | 4.0 % |
| | | | | | |
| Sheldon Reich | | | 943,220 | (2) | 6.7% |
| | | | | | |
| Matt Rothman | | | 10,500 | | * |
| | | | | | |
| Jonathan Rubin | | | 10,000 | | * |
| | | | | | |
| All Officers and Directors as a Group (6 persons) | | | 8,938,380 | (3) | 63.5% |
| | | | | | |
| Beneficial Owners of More Than 5% | | | | | |
| | | | | | |
Sam Rothman c/o ABC, Inc. 149 Burd Street Nyack, NY 10960 | | | 1,600,833 | (4) | 11.8% |
| | | | | | |
Sholom Chaim Babad c/o ABC, Inc. 149 Burd Street Nyack, NY 10960 | | | 1,080,000 | (5) | 8.0% |
| * | Less than 1%. |
| (1) | Based upon 13,572,143 shares issued and outstanding as at March 24, 2009. |
| (2) | Includes 200,000 shares issuable to Mr. Reich’s wife upon conversion of 8% Convertible Debentures, 100,000 shares issuable to his wife upon exercise of Class A warrants, and 200,000 shares issuable upon exercise of Class B warrants. Mr. Reich disclaims beneficial ownership of all such shares. Does not include shares of Common Stock that may be issued upon payment of accrued and unpaid interest of the 8% Convertible Debentures. |
| (3) | Includes 200,000 shares issuable upon conversion of 8% Convertible Debentures, 100,000 shares issuable upon exercise of class A warrants that are presently exercisable, and 200,000 shares issuable upon exercise of class B warrants that are presently exercisable. Does not include shares of Common Stock that may be issued upon payment of accrued. |
| (4) | Includes 100,000 shares issuable upon conversion of 8% Convertible Debentures, 50,000 shares issuable upon exercise of class A warrants that are presently exercisable, and 100,000 shares issuable upon exercise of class B warrants that are presently exercisable. Does not include shares of Common Stock that may be issued upon payment of accrued and unpaid interest of the 8% Convertible Debentures. |
| (5) | Includes 175,000 shares issuable upon conversion of 8% Convertible Debentures, 87,500 shares issuable upon exercise of class A warrants that are presently exercisable, and 175,000 shares issuable upon exercise of class B warrants that are presently exercisable. Does not include shares of Common Stock that may be issued upon payment of accrued and unpaid interest of the 8% Convertible Debentures. |
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE.
In 2006, the Company sought to raise capital through a private placement of 8% Convertible Debentures. Two shareholders of the Company, Sholom Chaim Babad and Sam Rothman acted as finders in the private placement and were paid a 10% fee, which they converted into Debentures and Warrants. They will also be entitled to receive as additional fees equal to 5% of any cash received by the Company upon the exercise of Warrants. In addition, Messrs. Babad and Rothman loaned $151,000 to the Company in 2005, and an additional $19,000 in the first quarter of 2006, the proceeds of which were used to redeem Preferred Stock owned by a third party. This loan, together with interest, was repaid out of the proceeds of the private placement.
The Company agreed, in connection with the private placement, to allow the purchasers of Debentures to appoint two members to its Board of Directors. Jonathan Rubin and Matt Rothman have been chosen by the Purchasers to join the Board of Directors.
The Board of the Company has confirmed, that in accordance with NASDAQ Rule 4200, only Messrs. Matt Rothman and Jonathan Rubin are deemed Independent Directors.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
The firm of Bernstein & Pinchuk LLP (“B&P”) audited our financial statements for the fiscal year ended December 31, 2007. On January 7, 2009, our Board of Directors dismissed B&P as our independent registered public accounting firm effective immediately. On January 7, 2009, our Board of Directors appointed KBL, LLP (“KBL”) as our independent registered public accounting firm for the fiscal year ended December 31, 2008. The aggregate fees we paid to KBL for the year ended December 31, 2008, and to B&P for the year ended December 31, 2007 were as follows:
| Bernstein & Pinchuk LLP | | 2008 | | | 2007 | |
| | | | | | | | | |
| Audit Fees | | $ | 48,000 | | | $ | 61,836 | |
| Audit-Related Fees | | | -0- | | | | -0- | |
| Total Audit and Audit-Related Fees | | $ | 48,000 | | | $ | 61,836 | |
| Tax Fees | | | -0- | | | | -0- | |
| All Other Fees | | | -0- | | | | -0- | |
| KBL, LLP | | 2008 | | | 2007 | |
| | | | | | | | | |
| Audit Fees | | $ | 18,000 | | | $ | 0 | |
| Audit-Related Fees | | | -0- | | | | -0- | |
| Total Audit and Audit-Related Fees | | $ | 18,000 | | | $ | 0 | |
| Tax Fees | | | -0- | | | | -0- | |
| All Other Fees | | | -0- | | | | -0- | |
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULE.
See “Index to Exhibits” immediately following the financial statements and notes to financial statements in this Form 10-K for a description of the documents that are filed as Exhibits to this report on Form 10-K or incorporated by reference herein.
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Date: April 1, 2009
| By: | /s/ Harold Brand |
| | HAROLD BRAND |
| | Chief Executive Officer |
In accordance with the Exchange Act, this report has been signed below by the following persons in the capacities and on the dates as indicated.
| Name | | Title | | Date |
| | | | | |
| /s/ Harold Brand | | Chairman of the Board, | | April 1, 2009 |
| HAROLD BRAND | | Chief Executive Officer (Principal Executive Officer), and Interim Chief Financial Officer (Principal Financial and Accounting Officer) | | |
| | | | | |
| /s/ Sheldon Reich | | Director | | April 1, 2009 |
| SHELDON REICH | | | | |
| | | | | |
| /s/ Robert J. Roskow | | Director | | April 1, 2009 |
| ROBERT J. ROSKOW | | | | |
| | | | | |
| /s/ Jonathan Rubin | | Director | | April 1, 2009 |
| JONATHAN RUBIN | | | | |
| | | | | |
| /s/ Matt Rothman | | Director | | April 1, 2009 |
| MATT ROTHMAN | | | | |
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
CYBRA Corporation
We have audited the accompanying balance sheet of CYBRA Corporation (“the Company”) as of December 31, 2008 and the related statements of operations, changes in stockholders’ deficit, and cash flows for the year then ended. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audit.
We conducted our audit 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 its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides 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 the Company as of December 31, 2008 and the results of its operations and its cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America.
/s/ KBL, LLP
Forest Hills, New York
April 01, 2009
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of CYBRA Corporation.
We have audited the accompanying balance sheet of CYBRA Corporation. (“the Company”) as of December 31, 2007 and the related statement of operations, changes in stockholders’ deficiency, and cash flows for the year then ended. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audit.
We conducted our audit 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 its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides 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 the Company as of December 31, 2007 and the results of its operations and its cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America.
/s/ Bernstein & Pinchuk, LLP
New York, New York
March 5, 2008
CYBRA CORPORATION
FINANCIAL STATEMENTS
CYBRA CORPORATION
BALANCE SHEETS
| | | | | | | |
| ASSETS | |
| | | December 31, | |
| | | 2008 | | | 2007 | |
| | | | | | | |
| | | | | | | |
| CURRENT ASSETS | | | | | | |
| Cash and cash equivalents | | $ | 70,591 | | | $ | 787,156 | |
| Accounts receivable, less allowance for doubtful | | | | | | | | |
| accounts of $17,000 in 2008 and $5,000 in 2007 | | | 331,021 | | | | 352,647 | |
| Loan receivable | | | - | | | | 6,000 | |
| Deferred income taxes | | | - | | | | 104,093 | |
| | | | | | | | | |
| Total Current Assets | | | 401,612 | | | | 1,249,896 | |
| | | | | | | | | |
| PROPERTY AND EQUIPMENT, at cost, less accumulated | | | | | | | | |
| depreciation and amortization of $237,186 (2008) and $210,852 (2007) | | | 78,831 | | | | 98,495 | |
| | | | | | | | | |
| SOFTWARE DEVELOPMENT, at cost, less accumulated amortization | | | 553,071 | | | | 318,333 | |
| of $124,129 (2008) | | | | | | | | |
| DEFERRED INCOME TAXES | | | - | | | | 1,156,304 | |
| | | | | | | | | |
| DEFERRED FINANCE COSTS | | | 113,010 | | | | 414,857 | |
| | | | | | | | | |
| SECURITY DEPOSITS AND OTHER ASSETS | | | 18,711 | | | | 11,685 | |
| | | | | | | | | |
| TOTAL ASSETS | | $ | 1,165,235 | | | $ | 3,249,570 | |
| | | | | | | | | |
| LIABILITIES AND STOCKHOLDERS' DEFICIT | | | | | | | | |
| | | | | | | | | |
| CURRENT LIABILITIES | | | | | | | | |
| Accounts payable and accrued expenses | | $ | 437,088 | | | $ | 550,397 | |
| Accrued interest | | | 537,290 | | | | 336,169 | |
| Deferred revenue | | | 346,416 | | | | 284,990 | |
| Accrued liquidated damages - registration rights agreement | | | 110,000 | | | | 110,000 | |
| 8% Convertible Debentures | | | 2,402,791 | | | | | |
| Total Current Liabilities | | | 3,833,585 | | | | 1,281,556 | |
| | | | | | | | | |
| 8% Convertible Debentures | | | - | | | | 2,160,800 | |
| | | | | | | | | |
| TOTAL LIABILITIES | | | 3,833,585 | | | | 3,442,356 | |
| | | | | | | | | |
| STOCKHOLDERS' DEFICIT | | | | | | | | |
| Preferred Stock, Class A 1,000 shares authorized, Class B 1,000 shares | | | | | | | | |
| authorized, no shares outstanding at December 31, 2008 and 2007 | | | - | | | | - | |
| Common stock, par value .001 per share, 100,000,000 shares authorized; | | | | | | | | |
| 13,512,143 and 12,610,954 shares issued and outstanding | | | 13,512 | | | | 12,611 | |
| at December 31, 2008 and 2007, respectively | | | | | | | | |
| Additional Paid - in capital | | | 2,752,621 | | | | 2,044,537 | |
| Accumulated deficit | | | (5,434,483 | ) | | | (2,249,934 | ) |
| | | | | | | | | |
| Total Stockholders' Deficit | | | (2,668,350 | ) | | | (192,786 | ) |
| | | | | | | | | |
| TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT | | $ | 1,165,235 | | | $ | 3,249,570 | |
The accompanying notes are an integral part of these financial statements
CYBRA CORPORATION
| | | | |
| | | Years Ended December 31, | |
| | | 2008 | | | 2007 | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| REVENUES | | | | | | |
| Products | | $ | 792,002 | | | $ | 1,175,162 | |
| Services | | | 605,148 | | | | 530,580 | |
TOTAL REVENUES | | | 1,397,150 | | | | 1,705,742 | |
| | | | | | | | | |
| COST OF GOODS SOLD | | | | | | | | |
| Equipment Purchases | | | 257,414 | | | | 614,183 | |
| Royalties and consulting | | | 74,770 | | | | 98,724 | |
| | | | 332,184 | | | | 712,907 | |
| | | | | | | | | |
GROSS PROFIT | | | 1,064,966 | | | | 992,835 | |
| | | | | | | | | |
| RESEARCH AND DEVELOPMENT COSTS | | | 215,283 | | | | 171,590 | |
| GENERAL AND ADMINISTRATIVE EXPENSES | | | 2,021,530 | | | | 2,267,922 | |
TOTAL OPERATING EXPENSES | | | 2,236,813 | | | | 2,439,512 | |
| | | | | | | | | |
| LOSS FROM OPERATIONS | | | (1,171,847 | ) | | | (1,446,677 | ) |
| | | | | | | | | |
| OTHER INCOME (EXPENSE) | | | | | | | | |
| Interest expense, 2008 includes $301,847 and 2007 includes | | | | | | | | |
| $164,795 of amortization of deferred finance costs for the year | | | (756,363 | ) | | | (610,219 | ) |
| Interest income | | | 4,058 | | | | 26,648 | |
| | | | (752,305 | ) | | | (583,571 | ) |
| | | | | | | | | |
| LOSS BEFORE INCOME TAXES | | $ | (1,924,152 | ) | | $ | (2,030,248 | ) |
| | | | | | | | | |
| DEFERRED INCOME TAXES (BENEFIT) | | | 1,260,397 | | | | (619,896 | ) |
| | | | | | | | | |
| NET LOSS | | $ | (3,184,549 | ) | | $ | (1,410,352 | ) |
| | | | | | | | | |
| | | | | | | | | |
| PER SHARE DATA | | | | | | | | |
| Basic and diluted net loss per share | | $ | (0.25 | ) | | $ | (0.12 | ) |
| | | | | | | | | |
| Basic and diluted weighted-average shares outstanding | | | 12,936,951 | | | | 11,591,720 | |
| | | | | | | | | |
| | | | | | | | | |
The accompanying notes are an integral part of these financial statements
| CYBRA CORPORATION | | | | | | | | | | | | | | | | | | |
| STATEMENTS OF CHANGES IN STOCKHOLDERS' DEFICIT | | | | | | | | | | |
| FOR THE YEARS ENDED DECEMBER 31, 2008 AND 2007 | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | Stock | | | | | | | |
| | | Common Stock | | | Additional | | | Subscription | | | Accumulated | | | | |
| | | Shares | | | Amount | | | paid-in-capital | | | Receivable | | | Deficit | | | Total | |
| | | | | | | | | | | | | | | | | | | |
| Balance at December 31, 2006 | | | 10,956,000 | | | $ | 10,956 | | | $ | 177,883 | | | $ | (1,826 | ) | | $ | (839,582 | ) | | $ | (652,569 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Common stock issuance in private placement | | | 1,460,000 | | | | 1,460 | | | | 1,093,540 | | | | - | | | | - | | | | 1,095,000 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Stock issued for services | | | 78,854 | | | | 79 | | | | 163,270 | | | | - | | | | - | | | | 163,349 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Exercise of stock options | | | 116,100 | | | | 116 | | | | 57,934 | | | | - | | | | - | | | | 58,050 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Stock subscription paid | | | - | | | | - | | | | - | | | | 1,826 | | | | - | | | | 1,826 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Derivative instruments converted in APIC | | | - | | | | - | | | | 551,910 | | | | - | | | | - | | | | 551,910 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Net loss for the year | | | - | | | | - | | | | - | | | | - | | | | (1,410,352 | ) | | | (1,410,352 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Balance at December 31, 2007 | | | 12,610,954 | | | $ | 12,611 | | | $ | 2,044,537 | | | $ | - | | | $ | (2,249,934 | ) | | $ | (192,786 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Common stock issuance in private placement | | | 587,335 | | | | 587 | | | | 440,114 | | | | - | | | | - | | | | 440,701 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Stock issued for services | | | 293,854 | | | | 294 | | | | 256,592 | | | | - | | | | - | | | | 256,886 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Conversion of debentures to equity | | | 20,000 | | | | 20 | | | | 11,378 | | | | - | | | | - | | | | 11,398 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Net loss for the year | | | - | | | | - | | | | - | | | | - | | | | (3,184,549 | ) | | | (3,184,549 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Balance at December 31, 2008 | | | 13,512,143 | | | | 13,512 | | | | 2,752,621 | | | $ | - | | | $ | (5,434,483 | ) | | $ | (2,668,350 | ) |
The accompanying notes are an integral part of these financial statements
CYBRA CORPORATION
STATEMENTS OF CHANGES IN STOCKHOLDERS’ DEFICIT
| | | Years Ended December 31, | |
| | | 2008 | | | 2007 | |
| | | | | | | |
| | | | | | | |
| CASH FLOWS FROM OPERATING ACTIVITIES | | | | | | |
| Net loss | | $ | (3,184,549 | ) | | $ | (1,410,352 | ) |
| Adjustments to reconcile net loss to net cash used in operating activities | | | | | | | | |
| Provision for doubtful accounts | | | 12,000 | | | | - | |
| Depreciation and Amortization | | | 150,463 | | | | 19,417 | |
| Stock based compensation | | | 256,886 | | | | 163,349 | |
| Deferred income tax expense resulting from increase in | | | | | | | | |
| valuation allowance of deferred tax asset | | | 1,260,397 | | | | (619,896 | ) |
| Interest expense - amortization of debt discount | | | 253,389 | | | | 242,646 | |
| Amortization of deferred finance cost | | | 301,847 | | | | 164,795 | |
| Provision for settlement of litigation | | | 25,000 | | | | | |
| Changes in operating assets and liabilities | | | | | | | | |
| Accounts receivable | | | 9,626 | | | | (77,840 | ) |
| Loan Receivable | | | 6,000 | | | | (6,000 | ) |
| Prepaid income taxes/income taxes payable | | | - | | | | 105 | |
| Security deposits and other assets | | | (7,026 | ) | | | (304 | ) |
| Accounts payable and accrued expenses | | | (138,309 | ) | | | 246,708 | |
| Accrued interest | | | 201,121 | | | | 239,878 | |
| Sales tax payable | | | - | | | | - | |
| | | | | | | | | |
| Net Cash Used in Operating Activities | | | (791,729 | ) | | | (1,009,648 | ) |
| | | | | | | | | |
| CASH FLOWS FROM INVESTING ACTIVITIES | | | | | | | | |
| Acquisition of property and equipment | | | (6,670 | ) | | | (53,109 | ) |
| Additions to software development costs | | | (358,867 | ) | | | (318,333 | ) |
| Net Cash Used in Investing Activities | | | (365,537 | ) | | | (371,442 | ) |
| | | | | | | | | |
| CASH FLOWS FROM FINANCING ACTIVITIES | | | | | | | | |
| Paid to former stockholder | | | - | | | | (250,000 | ) |
| Proceeds from stock subscription | | | - | | | | 1,826 | |
| Proceeds from private placements | | | 440,701 | | | | 1,153,050 | |
| | | | | | | | | |
| Net Cash Provided by Financing Activities | | | 440,701 | | | | 904,876 | |
| | | | | | | | | |
| DECREASE IN CASH AND CASH EQUIVALENTS | | | (716,565 | ) | | | (476,214 | ) |
| | | | | | | | | |
| CASH AND CASH EQUIVALENTS | | | | | | | | |
| Beginning of year | | | 787,156 | | | | 1,263,370 | |
| | | | | | | | | |
| End of year | | $ | 70,591 | | | $ | 787,156 | |
| | | | | | | | | |
| SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: | | | | | | | | |
| Cash paid during the year for: | | | | | | | | |
| Interest | | $ | - | | | $ | 16,982 | |
| Income Taxes | | $ | 490 | | | $ | - | |
| NON-CASH DISCLOSURE | | | | | | | | |
| Conversion of Debt to Equity | | $ | 11,398 | | | $ | - | |
| | | | | | | | | |
The accompanying notes are an integral part of these financial statements
NOTES TO FINANCIAL STATEMENTS
1. NATURE OF OPERATIONS AND FINANCIAL STATUS OF COMPANY
Description of Business and Credit Risk
CYBRA Corporation (“the Company”) was incorporated under the laws of the State of New York on September 6, 1985. The Company is a software developer, publisher, and systems integrator in the IBM midrange market. Their flagship product, MarkMagicTM, is an online bar code software product for IBM System i (formerly known as the AS/400) computers. Substantially all of the Company’s accounts receivables are due from manufacturing companies and software vendors located throughout the United States.
EdgeMagic®, first released February 2008, is an integrated radio frequency identification (“RFID”) control solution for IBM System i customers that is capable of deployment on other platforms and is highly scalable. It is designed to manage edge readers and analog control devices, commission, read, filter and verify RFID tags to comply with Electronic Product Code (EPC) compliance mandates, as well as for asset tracking applications and integrate with popular ERP and Warehouse Management application packages.
At December 31, 2008, the Company had cash and cash equivalents of $70,591, and a working capital deficit of $3,431,973, which includes certain current liabilities that are not expected to require cash settlement. Additionally, the Company has incurred a net loss of $3,184,549 for the year ended December 31, 2008. Management has taken several steps to improve sales and reduce costs in order to ensure that its cash flows will meet its operating cash requirements for 2009, particularly with the introduction of EdgeMagic®, which management believes has revenue potential far in excess of the current product mix, as well as the formation of a field level sales team.
The Company, as further discussed in Note 3, is obligated under 8% Convertible Debentures that become due on April 10, 2009. The Company presently does not have the resources to pay the Debentures, and it is unlikely that it will be able to generate adequate cash from its operations to pay the Debentures when they become due. Furthermore, the Company can provide no assurance that it will be able to refinance the Debentures through new debt or equity financing or extend the term of the Debentures. If the Company is able to refinance or extend the term of the Debentures, the terms of such a refinancing or extension of the term may be burdensome and result in substantial dilution to its shareholders.
Although the terms of the Debentures permit the Company to force conversion, subject to certain conditions, the Company can provide no assurance that it will be able to satisfy those conditions and force conversion of the Debentures before they mature on April 10, 2009. If the Company is unable to renegotiate or pay the Debentures or force their conversion on or before their maturity date, the holders of the Debentures have the right to declare a default and demand their immediate payment. In such a case, the Company may be required to seek protection under the federal or state bankruptcy laws or take other actions that could impair its ability to continue its operations. While Management of the Company is currently continuing to negotiate with debenture holders in good faith and remains optimistic of a positive result, the Company remains vulnerable in the near term to the real possibility of catastrophic events that would be caused should a bankruptcy filing be required, even though that may not necessarily occur on April 10, 2009, but could take place some time thereafter.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Software Costs
The Company accounts for software development costs in accordance with Statement of Financial Accounting Standards No. 86, Accounting for the Costs of Computer Software to be Sold, Leased, or Otherwise Marketed (“SFAS 86”). SFAS 86 requires that costs related to the development of enhancements to MarkMagic be capitalized as an asset when incurred subsequent to the point at which technological feasibility of the enhancement is established. SFAS 86 specifies that “technological feasibility” for purposes of SFAS 86 can only be established by the completion of a “detailed program design” or if no such design is prepared, upon the completion of a “working model” of the software. The Company’s development process does not include a detailed program design. Management believes that such a design could be produced in the early stages of development but would entail significant wasted expense and delay. Consequently, SFAS 86 requires the development costs to be recorded as expense until the completion of a “working model”. In the Company’s case, the completion of a working model does not occur until almost the time when the software is ready for sale.
Research and Development Costs
Research and development costs prior to completion of development of a product are expensed as incurred. Total research and development expense for the years ended December 31, 2008 and 2007 were $215,283 and $171,590, respectively. In 2007, some of these costs were included in salary expense. In May 2005, the Company began development of MarkMagic Version 6 and has incurred research and development expense of $520,815 and $209,997 for the years ended December 31, 2008 and 2007, respectively. The cumulative development costs for Version 6 are $659,205 at December 31, 2008. The cumulative cost for EdgeMagic® is $941,805. Of that amount, $264,605 has been included in general and administrative expenses and $677,200 has been capitalized and is classified as Software Development Costs.
Accounting for Warrants Classified as Equity Issued to Purchase Company Common Stock
Warrants issued in conjunction with equity financings were accounted for under the Emerging Issues Task Force FSP (“EITF”) Issue No. 00-19, Accounting for Derivative Financial Instruments Indexed to and Potentially Settled in a Company’s Own Stock. In December 2006, the FASB approved FSP EITF 00-19-2, Accounting for Registration Payment Arrangements, which establishes the standard that contingent obligations to make future payments under a registration rights arrangement shall be recognized and measured separately in accordance with Statement 5 and FASB Interpretation No. 14, Reasonable Estimation of the Amount of a Loss. The Company has evaluated the effect of how FSP EITF 00-19-2 and FSP EITF Topic D-98 affected these accompanying financial statements. The adoption of FSP EITF 00-19-2 accounting pronouncement on January 1, 2007 changed the classification of the warrant liability, which was $551,910 at January 1, 2007, to stockholders’ equity (additional paid in capital).
Derivative Financial Instruments
The Company accounts for its Warrants which were issued in a private placement of the 8% Convertible Debentures with detachable Warrants on April 10, 2006, as derivatives under the guidance of Statement of Financial Accounting Standards No. 133 – Accounting for Derivative Instruments and Hedging Activities (“SFAS 133”), and Emerging Issues Task Force Issue 00-19 – Accounting for Derivative Financial Instruments Indexed to and Potentially Settled In, a Company’s Own Stock (“EITF 00-19”). The Company considers these standards applicable by adopting “View A” of the Issue Summary relating to Emerging Issues Task Force Issue 05-04 – The Effect of a Liquidated Damages Clause on a Freestanding Financial Instrument Subject to Issue No. 00-19 (“EITF 05-04”) in which the Warrants and the related registration rights agreement are viewed together as a combined instrument that is indexed to the Company's stock. The embedded conversion feature of the Debentures has not been classified as a derivative financial instrument because the Company believes that they are “conventional” as defined in Emerging Issues Task Force Issue 05-02 – The Meaning of “Conventional Convertible Debt Instrument” in Issue No. 00-19 (“EITF 05-02”)
Depreciation and Amortization
Depreciation and amortization are provided by the straight-line and accelerated methods over the estimated useful lives indicated in Note 5.
Income Taxes
Income taxes are accounted for under the asset and liability method in accordance with SFAS No. 109, Accounting for Income Taxes. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial carrying amounts of existing assets and liabilities and their respective tax bases as well as operating loss and tax credit carry forwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Deferred tax assets are reduced by a valuation allowance to the extent that the recoverability of the asset is unlikely to be recognized. The Company did not provide any current or deferred income tax provision or benefit for any periods presented to date because the Company has continued to experience a net operating loss since inception.
The Company adopted FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes – an Interpretation of FASB Statement No. 109 (“FIN 48”). This interpretation provides guidance for recognizing and measuring uncertain tax positions, as defined in SFAS No. 109, Accounting for Income Taxes. FIN 48 prescribes a threshold condition that a tax position must meet for any of the benefits of the uncertain tax position to be recognized in the financial statements. FIN 48 also provides accounting guidance on derecognizing, classification and disclosure of these uncertain tax positions.
Interest costs and penalties related to income taxes are classified as interest expense and general and administrative costs, respectively, in the Company's financial statements. For the years ended December 31, 2008 and 2007, the Company did not recognize any interest or penalty expense related to income taxes. The Company is currently subject to a three-year statute of limitations by major tax jurisdictions. The Company files income tax returns in the U.S. federal jurisdiction and New York State.
Advertising Costs
Advertising costs are charged to expense as incurred. Total advertising included amounted to $59,983 and $278,812 in 2008 and 2007, respectively.
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 and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. The most significant estimates relate to valuation of stock grants and stock options, the net operating loss carry-forward, the valuation allowance for deferred taxes and various contingent liabilities. It is reasonably possible that these above-mentioned estimates and others may be adjusted as more current information becomes available, and any adjustment could be significant in future reporting periods.
Cash and Cash Equivalents
We classify marketable securities that are highly liquid and have maturities of three months or less at the date of purchase as cash equivalents. We manage our exposure to counterparty credit risk through specific minimum credit standards, diversification of counterparties and procedures to monitor our credit risk concentrations.
Revenue Recognition
The Company recognizes revenues in accordance with AICPA Statement of Position (SOP) 97-2, Software Revenue Recognition, as amended by SOP 98-9 (Modification of SOP 97-2, Software Revenue Recognition, With Respect to Certain Transactions).
Revenue from software license agreements is recognized when persuasive evidence of an agreement exists, delivery of the software has occurred, the fee is fixed or determinable, and collectibility is probable. In software arrangements that include more than one element, the Company allocates the total arrangement fee among the elements based on the relative fair value of each of the elements.
License revenue allocated to software products generally is recognized upon delivery of the products or deferred and recognized in future periods to the extent that an arrangement includes one or more elements to be delivered at a future date and for which fair values have not been established. Revenue allocated to maintenance agreements is recognized ratably over the maintenance term and revenue allocated to training and other service elements is recognized as the services are performed. If evidence of fair value does not exist for all elements of a license agreement and post customer support (PCS) is the only undelivered element, then all revenue for the license arrangement is recognized ratably over the term of the agreement as license revenue. If evidence of fair value of all undelivered PCS elements exists but evidence does not exist for one or more delivered elements, then revenue is recognized using the residual method. Under the residual method, the fair value of the undelivered elements is deferred and the remaining portion of the arrangement fee is recognized as revenue.
Cost of license revenue primarily includes product, delivery, and royalty costs. Cost of maintenance and service revenue consists primarily of labor costs for engineers performing implementation services, technical support, and training personnel as well as facilities and equipment costs.
Deferred Finance Costs
Deferred finance costs are being amortized over the term of the 8% Convertible Debentures on the effective interest method.
Accounts Receivable
We record trade accounts receivable at net realizable value. This value includes an appropriate allowance for estimated uncollectible accounts to reflect any loss anticipated on the trade accounts receivable balances and charged to the provision for doubtful accounts. We calculate this allowance based on our history of write-offs, level of past-due accounts based on the contractual terms of the receivables, and our relationships with and the economic status of our customers.
Trade receivables are presented net of an allowance for doubtful accounts of $17,000 and $5,000 for the years ended December 2008 and 2007, respectively.
Stock-Based Compensation
In December 2004, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 123R (FAS-123R), Share-Based Payment, which is a revision of Statement of Financial Accounting Standards No. 123 (FAS-123), Accounting for Stock-Based Compensation. In addition to requiring supplemental disclosures, FAS-123R addressed the accounting for share-based payment transactions in which a company receives goods or services in exchange for (a) equity instruments of the company or (b) liabilities that are based on the fair value of the company's equity instruments or that may be settled by the issuance of such equity instruments. FAS-123R focuses primarily on accounting for transactions in which a company obtains employee services in share-based payment transactions. The Statement eliminates the ability to account for share-based compensation transactions using Accounting Principles Board Opinion No. 25 (APB-25), Accounting for Stock Issued to Employees, and generally requires that such transactions be accounted for using a fair value based method. Accordingly, pro-forma disclosure is no longer an alternative.
Under FAS-123R, the Company was required to recognize compensation cost for the portion of outstanding awards previously accounted for under the provisions of APB-25 for which the requisite service had not been rendered as of the adoption date for this Statement. The Statement also required companies to estimate forfeitures of stock compensation awards as of the grant date of the award.
The Company adopted FAS-123R on January 1, 2006, using the modified prospective method. Stock issued to consultants for consulting services was valued as of the date of the agreements with the various consultants, which in all cases was earlier than the dates when the services were committed to be performed by the various consultants.
References to the issuances of restricted stock refer to stock of a public company issued in private placement transactions to individuals who are eligible to sell all or some of their shares of restricted Common Stock pursuant to Rule 144, promulgated under the Securities Act (“Rule 144”), subject to certain limitations. In general, pursuant to Rule 144, a stockholder who is not an affiliate and has satisfied a six-month holding period may sell all of his restricted stock without restriction, provided that the Company has current information publicly available. Rule 144 also permits, under certain circumstances, the sale of restricted stock, without any limitations, by a non-affiliate of our Company that has satisfied a one-year holding period.
Fair Value of Financial Instruments
The Company is required to estimate the fair value of the stock-based financial instruments issued in connection with the sale of the Debentures, which were issued at the time that the Company was privately held. Estimating the values of the stock-based financial instruments of privately held companies, which cannot be referenced to a quoted market price, even to establish the value of the underlying common shares, involves significant uncertainty. It also involves the application of assumptions that may vary substantially from those that would be applied by actual buyers and sellers of the instruments. Without a quoted stock price to use as a basis of measurement, the Company has estimated the value of the Common Stock, Warrants and the conversion feature of the Debentures based on a value of approximately $0.13 per share. This value was estimated by 1) assuming that the $2,500,000 received from investors, as an arm’s-length transaction, represented the total fair value of the instruments issued to those investors, 2) estimating the fair value of the Debentures issued if there were no conversion feature or Warrants, 3) allocating the remainder to the derivative financial instruments, and 4) using a 147% volatility factor, as discussed below, to derive the implied Common Stock value, the value of conversion feature (included as part of the initial value of the Debentures) and values for the two classes of Warrants that are accounted for as separate derivative financial instruments.
The estimated initial fair value of the Debentures payable (separated from the embedded conversion feature), is based on the discounted contractual cash flows with the discount rate of 27.1%. This discount rate is based on the 22.6% mean return on United States equity for companies with market capitalizations of under $1,500,000 and then adding 4.5% as the long-term risk premium on software companies as published in a respected independent source. An equity-related discount rate was used because, in the Company’s situation, unsecured debt at this amount would entail equity-like risks. The estimated initial value of the embedded conversion feature was then added to this value to arrive at the total initial value of the convertible debenture.
In valuing the embedded conversion features and Warrants, in the absence of quoted market prices or historical volatilities for the Company stock, the total fair value of the financial instruments issued in the April 10, 2006 financing was considered to be equal to the proceeds, representing a valuation provided by an arm’s-length transaction. Allocating the total, however, required estimation subject to significant uncertainty. First, proceeds were allocated to the values of the principal and interest payable on the Debentures based on a 27.1% p.a. discount rate as described in the last paragraph. The remainder was allocated between the conversion feature and the Warrants based on Black-Scholes related option pricing models. The Black-Scholes computations used a volatility factor of approximately 147%. The volatility was the average calculated volatility, for the one-year ended April 10, 2006, of a sample of software companies with market capitalizations of over $1,000,000. The implied Common Stock value that resulted in a value for the derivatives equal to the difference between the debenture value and the gross proceeds was approximately $0.13 per share. This value, less an estimated 26% discount for lack of marketability for a net value of approximately $0.096 per share, was used to estimate the fair value of the 1,826,000 shares of Common Stock sold at a discount to three individuals involved in finding investors for the Company. Management believes that the discount on the finders’ stock is appropriate because 1) there are no liquidated damages provisions associated with that stock, and 2) although they are being included among the shares being registered by the Company for sale by the holders to the public, there is no certainty that the registration will become and remain effective.
In December 2006, the Financial Accounting Standards Board (“FASB”) issued FASB Staff Position EITF 00-19-2 FSP 00-19-2, Accounting for Registration Payment Arrangements. This FSP addresses an issuer’s accounting for registration payment arrangements by specifying that the contingent obligation to make future payments or otherwise transfer consideration under a registration payment arrangement, whether issued as a separate agreement or included as a provision of a financial instrument or other agreement, should be separately recognized and measured in accordance with FASB Statement No. 5, Accounting for Contingencies. FSP 00-19-2 became effective for fiscal years beginning after December 15, 2006, and interim periods within those fiscal years.
Basic and Diluted Loss per Share
In accordance with Financial Accounting Standards Board (“FASB”) Statement of Financial Accounting Standard No. 128 (“SFAS 128”), Earnings Per Share, the basic loss per common share is computed by dividing net loss available to common stockholders by the weighted average number of common shares outstanding. Diluted loss per common share is computed in a manner similar to basic loss per common share except that the denominator is increased to include the number of additional common shares that would have been outstanding if the potential common shares had been issued and if the additional common shares were dilutive. At December 31, 2008 and 2007, the Company stock equivalents were anti-dilutive and excluded in the diluted loss per share computation.
Commitments and Contingencies
Liabilities for loss contingencies arising from various claims, assessments, litigation, fines and penalties and other sources are recorded when it is probable that a liability has been incurred and the amount of the assessment can be reasonably estimated.
New Accounting Pronouncements
Recently Issued Accounting Standards
In October 2008, the FASB issued FSP SFAS No. 157-3, Determining the Fair Value of a Financial Asset When the Market for That Asset Is Not Active (“FSP 157-3”), to clarify the application of the provisions of SFAS 157 in an inactive market and how an entity would determine fair value in an inactive market. FSP 157-3 was effective upon issuance and applies to the Company’s current financial statements. The application of the provisions of FSP 157-3 did not materially affect the Company’s results of operations or financial condition for the year ended December 31, 2008.
In June 2008, the FASB issued EITF No. 07-5, Determining Whether an Instrument (or Embedded Feature) Is Indexed to an Entity’s Own Stock, effective for financial statements issued for fiscal years and interim periods beginning after December 15, 2008. EITF No.07-5 provides guidance for determining whether an equity-linked financial instrument (or embedded feature) is indexed to an entity’s own stock. The adoption of EITF No. 07-5 is not expected to have a material effect on the Company’s financial statements.
In June 2008, the FASB issued FSP Emerging Issues Task Force (EITF) No. 03-6-1, Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities. Under the FSP, unvested share-based payment awards that contain rights to receive nonforfeitable dividends (whether paid or unpaid) are participating securities, and should be included in the two-class method of computing EPS. The FSP is effective for fiscal years beginning after December 15, 2008, and interim periods within those years, and is not expected to have a significant impact on the Company’s results of operations, financial condition or cash flows.
In May 2008, the FASB issued SFAS No. 162 (“SFAS No. 162”), The Hierarchy of Generally Accepted Accounting Principles. This statement identifies the sources of accounting principles and the framework for selecting the principles to be used in the preparation of financial statements of nongovernmental entities that are presented in conformity with GAAP. While this statement formalizes the sources and hierarchy of GAAP within the authoritative accounting literature, it does not change the accounting principles that are already in place. This statement will be effective 60 days following the SEC’s approval of the Public Company Accounting Oversight Board amendments to AU Section 411, The Meaning of Present Fairly in Conformity With Generally Accepted Accounting Principles. SFAS No. 162 is not expected to have a material impact on the Company’s financial statements.
In May 2008, FASB Staff Position (“FSP”) No. APB 14-1, Accounting for Convertible Debt Instruments That May be Settled in Cash upon Conversion (Including Partial Cash Settlement) (“FSP No. APB 14-1”) was issued which specifies that issuers of such instruments should separately account for the liability and equity components in a manner that will reflect the issuer’s nonconvertible debt borrowing rate when interest cost is recognized in subsequent periods. FSP No. APB 14-1 is effective for financial statements issued for fiscal years beginning after December 15, 2008. Early adoption is not permitted. Adoption of this standard is not expected to have a material impact on the Company’s financial statements.
In April 2008, FSP No. FAS 142-3, Determination of the Useful Life of Intangible Assets (“FSP No. FAS 142-3”) was issued which provides for additional considerations to be used in determining useful lives and requires additional disclosure regarding renewals. FSP No. FAS 142-3 is effective for fiscal years beginning after December 15, 2008. Early adoption is not permitted. The Company is currently evaluating the impact of this standard.
In March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative Instruments and Hedging Activities—an Amendment of FASB Statement No. 133. Constituents have expressed concerns that the existing disclosure requirements in FASB Statement No. 133, Accounting for Derivative Instruments and Hedging Activities, do not provide adequate information about how derivative and hedging activities affect an entity’s financial position, financial performance, and cash flows. SFAS No. 161 requires enhanced disclosures about an entity’s derivative and hedging activities and thereby improves the transparency of financial reporting. This Statement is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008, with early application encouraged. This Statement encourages, but does not require, comparative disclosures for earlier periods at initial adoption. The adoption of FASB 161 is not expected to have a material impact on the Company’s financial position.
In December 2007, the FASB issued SFAS No. 141 (revised 2007), Business Combinations. SFAS 141(R) broadens the guidance of SFAS 141, extending its applicability to all transactions and other events in which one entity obtains control over one or more other businesses. It broadens the fair value measurement and recognition of assets acquired, liabilities assumed, and interests transferred as a result of business combinations. SFAS 141(R) expands on required disclosures to improve the statement users' abilities to evaluate the nature and financial effects of business combinations. SFAS 141(R) is effective for our fiscal year beginning January 1, 2009.
In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in Consolidated Financial Statements—an Amendment of ARB No. 51. SFAS 160 requires that a noncontrolling interest in a subsidiary be reported as equity and the amount of consolidated net income specifically attributable to the noncontrolling interest be identified in the consolidated financial statements. It also calls for consistency in the manner of reporting changes in the parent's ownership interest and requires fair value measurement of any noncontrolling equity investment retained in a deconsolidation. SFAS 160 is effective for our fiscal year beginning January 1, 2009.
The Company does not anticipate that the adoption of SFAS No. 141R and No. 160 will have an impact on the Company's overall results of operations or financial position, unless the Company makes a business acquisition in which there is a non-controlling interest.
Reclassifications
Certain reclassifications have been made to the 2007 financial statements included herein to conform to the 2008 presentation. These reclassifications had no material effect on the financial position, results of operations, or cash flows of the Company.
3. 8% CONVERTIBLE DEBENTURES AND DERIVATIVE FINANCIAL INSTRUMENTS
On April 10, 2006, the Company issued 8% Convertible Debentures (the “Debentures”) with a principal (“face”) value of $2,500,000, along with 7,500,000 detachable Stock Warrants (the “Warrants”) to several investors. The gross proceeds of this transaction were $2,500,000, consisting of $2,080,000 cash, $151,000 from the cancellation of debt incurred in 2005, $19,000 from the cancellation of debt incurred earlier in 2006 and $250,000 applied as finders’ fees. The convertible debenture balance at December 31, 2008 and 2007 was $2,402,791 and $2,160,800, respectively. The amortization of deferred finance costs was $301,847 and $164,795 for the years ended December 31, 2008 and 2007, respectively. The deferred finance cost balance at December 31, 2008 and 2007 was $113,010 and $414,857, respectively.
Interest on the Debentures is due semiannually at 8% per annum beginning December 31, 2006. Interest is also due upon conversion, redemption and maturity. The Debentures mature on April 10, 2009 at which point the full principal balance (“face amount”) is due. The Debentures are convertible, at the holders’ option, into Common Stock of the Company at a rate of $0.50 for each share of Common Stock. Interest on the Debentures may be paid by the issuance of Common Stock at the rate of $0.50 per share.
Through April 10, 2007 the Company had the right, subject to certain conditions, to redeem the Debentures for 120% of the principal value. The Company declined to do so.
The investors also received 7,500,000 Warrants, 2,500,000 of Class A and 5,000,000 of Class B. Each Class A Warrant gives the holder the right to buy one share of Common Stock for $0.75. Each Class B Warrant gives the holder the right to buy one share of Common Stock for $1.75. The Warrants are exercisable at any time through April 10, 2011. The 7,500,000 Warrants are the only outstanding Warrants at December 31, 2008 that were issued in connection with the sale of the Debentures.
As part of the transaction, $250,000 principal amount of the Debentures were issued along with 125,000 Class A Warrants and 250,000 Class B Warrants as finders’ fees. The finders will also receive as additional fees equal to 5% of any cash collected as on the exercise of any of the Warrants. To date, no Warrants have been exercised.
The shares of Common Stock that underlie the conversion feature of the Debentures and those that underlie the Warrants are subject to a registration rights agreement. Pursuant to the registration rights agreement, the Company was obligated to file a registration statement with the United States Securities and Exchange Commission by June 8, 2006 registering the shares for public sale, and to have the registration statement become effective by September 7, 2006 and to keep the registration statement continuously effective. Failure to achieve these registration requirements will result, in addition to other possible claims by the holders for damages, partial liquidated damages equal to 1.5% per month (pro-rated by day) of the aggregate purchase price originally paid by the investors (i.e., the monthly partial liquidated damages would be $37,500 per month). Any claims and liquidated damages that might have been due as a result of filing the registration statement on June 16, 2006 have been waived by the holders. The registration statement did not become effective until December 6, 2006. Liquidated damages of $110,000 for the period September 7 through December 6, 2006 and $3,151 of related interest have been accrued through December 31, 2008.
The Warrants have been classified as derivative financial instruments as a result of the issuance of a registration rights agreement that includes a liquidated damages clause, which is linked to an effective registration of such securities. Accordingly, the Company applied EITF 00-19 and accounted for the Warrants as liabilities at estimated fair value. The Company’s value estimation methods which, in the case of a private company, must inherently involve significant uncertainly are described in the “fair value of financial instruments” section of Note 1, above.
The fair value of the financial instrument as shown on the balance sheet assumes that the shares will be registered. The liability under the alternative of the shares never being registered and paying the full cash liquidated damages is estimated to be approximately $892,000 greater than the fair value recorded on the balance sheet. This estimate of value is subject to an extra level of uncertainty concerning the amount at which a willing seller and buyer would exchange such instruments. The estimated value represents discounting the $450,000 p.a. ($2,500,000 at 18%) liquidated damages, in perpetuity, at a rate of 33.875% and adding a separate value of the Warrants. The separate value of the Warrants was in turn, based on the Black-Scholes calculation used for the balance sheet (if registered estimate) but reducing the current share value assumption by 45% for lack of marketability. The 45% was based on published long-term studies.
The derivative financial instruments have not been designated as hedges. The purpose of their issuance was to raise additional capital in a more advantageous fashion than could be done without the use of such instruments. In addition to expecting the overall cost of capital to be less, the use of the derivative instruments reduces the cost to the common shareholders when the value of their shares declines in exchange for increasing the cost to the common shareholders when the value of their shares increase, all of which should tend to reduce the volatility of the value of the Company’s common shares.
4. STOCKHOLDERS’ DEFICIT
During the year ended December 31, 2008, the Company issued 313,854 shares of Common Stock. Of this amount, 293,854 shares were issued for services such as advertising, consulting, and investor relations. The Company issued 282,188 of these shares on September 22, 2008 at $.90 per share and 11,666 shares on November 17, 2008 at a value of $.25 per share. On November 24, 2008 an additional 20,000 shares were issued at $.50 per share to a Debenture holder on a conversion to common stock.
The Company also sold 587,335 units for $0.75 per unit. Each unit consisted of one share of restricted Common Stock, one Class A Warrant to purchase one-half share of Common Stock at $0.75 per share, and one Class B Warrant to purchase one share of Common Stock at $1.75 per share. Each class of Warrants has a five-year term. Accordingly, the Company issued 293,667 Class A Warrants and 587,335 Class B Warrants in 2008. The Company received total proceeds of $440,701 from the sale of units in 2008. The Company issued a total of 901,189 shares of Common Stock in 2008.
The Company has adopted the CYBRA Corporation 2006 Incentive Stock Plan, a stock-based compensation plan to reward for services rendered by officers, directors, employees and consultants. The Company has reserved 5,000,000 shares of Common Stock of its unissued share capital for issuance under the plan.
i) Stock Options granted to a person who at the time the Option is granted is not a Ten Percent Holder shall have an exercise price of no less than 100% of the Fair Market Value of the Stock as of the date of grant.
ii) Nonstatutory Options granted to a person who at the time the Option is granted is not a Ten Percent Holder shall have an exercise price of no less than 85% of the Fair Market Value of the Stock as of the date of grant.
iii) Any Option granted to an employee of the Company shall become exercisable over a period of no longer than five (5) years, and no less than twenty percent (20%) of the shares covered thereby shall become exercisable annually. No Option shall be exercisable, in whole or in part, prior to one (1) year from the date it is granted unless the Board shall specifically determine otherwise. In no event shall any Option be exercisable after the expiration of ten (10) years from the date it is granted, and no Incentive Stock Option granted to a Ten Percent Holder shall, by its terms, be exercisable after the expiration of five (5) years from the date of the Option. Unless otherwise specified by the Board or the Committee in the resolution authorizing such Option, the date of grant of an Option shall be deemed to be the date upon which the Board or the Committee authorizes the granting of such Option.
The adoption of FAS-123R had no effect on cash flow from operations or cash flow from financing activities for the years ended December 31, 2008 and 2007. FAS-123R requires the cash flows from tax benefits resulting from tax deductions in excess of the compensation cost recognized for those options (“excess tax benefits”) to be classified as financing cash flows. Prior to the adoption of FAS-123R, excess tax benefits would have been classified as operating cash inflows. The Company has not recognized, and does not expect to recognize in the near future, any tax benefit related to stock-based compensation costs as a result of the full valuation allowance on our net operating loss carry forwards.
The Company recognizes share-based compensation expense for all service-based awards with graded vesting schedules on a straight-line basis over the requisite service period for the entire award. Initial accruals of compensation expense are based on the estimated number of shares for which requisite service is expected to be rendered. Estimates are revised if subsequent information indicates that forfeitures will differ from previous estimates, and the cumulative effect on compensation cost of a change in the estimated forfeitures is recognized in the period of the change.
For awards with service conditions and graded vesting that were granted prior to the adoption of FAS-123R, the Company estimates the requisite service period and the number of shares expected to vest and recognize compensation expense for each tranche on a straight-line basis over the estimated requisite service period of the award or over a period ending with an employee's eligible retirement date, if earlier. Adjustments to compensation expense as a result of revising the estimated requisite service period are recognized prospectively.
Total stock options outstanding at December 31, 2008 were 100,000, all of which were vested.
Stock option transactions to the employees, directors, and consultants are summarized as follows:
| | | 2008 | |
| Stock Options Outstanding | | | |
Beginning of the Year | | | 100,000 | |
| Granted | | | 0 | |
| Exercised | | | 0 | |
| Outstanding end of the year | | | 100,000 | |
| Options exercisable at the end of the year | | | 100,000 | |
| | | | | |
| | | 2007 | |
| Stock Options Outstanding | | | |
Beginning of the Year | | | 0 | |
| Granted | | | 178,954 | |
| Exercised | | | (78,954) | |
| Outstanding end of the year | | | 100,000 | |
| Options exercisable at the end of the year | | | 100,000 | |
The 100,000 options outstanding at December 31, 2008 were issued in December 2007, have a remaining outstanding life of 4 years and have an exercise price of $0.75 per share.
Assumptions used in the Black-Scholes option-pricing model for the years ended December 31, 2008 and 2007 were as follows:
| Average risk-free interest rate | | | 4.5% | |
| Average expected life | | | 5 years | |
| Expected volatility | | | 147% | |
| Expected dividends | | | 0% | |
Following is a summary of the warrant activity:
| Class A and B Warrants | Total Number of Shares | Class A | Class B | Average Exercise Price per Share | Weighed Average Remaining Contractual Term In Years |
| | | | | | |
| Outstanding at December 31, 2007 | 9,690,000 | 3,230,000 | 6,460,000 | 1.42 | 3.40 |
| Total Outstanding Warrants – December 31, 2007 | 9,690,000 | 3,230,000 | 6,460,000 | 1.42 | 3.40 |
| Exercisable at December 31, 2007 | 9,690,000 | 3,230,000 | 6,460,000 | 1.42 | 3.40 |
| Granted | 881,003 | 293,669 | 587,334 | 1.42 | 4.50 |
| Exercised | - | - | - | | |
| Forfeited | - | - | - | | |
| Outstanding at December 31, 2008 | 10,571,003 | 3,523,669 | 7,047,334 | 1.42 | 3.49 |
| Total Outstanding Warrants – December 31, 2008 | 10,571,003 | 3,523,669 | 7,047,334 | 1.42 | 3.49 |
| Exercisable at December 31, 2008 | 10,571,003 | 3,523,669 | 7,047,334 | 1.42 | 3.49 |
5. PROPERTY AND EQUIPMENT
At December 31, 2008 and 2007, property and equipment consisted of the following:
| | | December 31, | | |
| | | | | | | |
| | | 2008 | | 2007 | | Estimated Useful Life in Years |
| Furniture and office equipment | | $ | 185,479 | | $ | 178,809 | | | 5 |
| Computer software | | | 109,244 | | | 109,244 | | | 3 |
| Leasehold Improvements | | | 21,294 | | | 21,294 | | | Life of Lease |
| | | | 316,017 | | | 309,347 | | | |
| | | | | | | | | | |
| Less: Accumulated Depreciation | | | 237,186 | | | 210,852 | | | |
| | | | | | | | | | |
| | | $ | 78,831 | | $ | 98,495 | | | |
| | | December 31, | | |
| | | | | | | |
| | | 2008 | | 2007 | | Estimated Useful Life in Years |
| Software Development Costs | | $ | 677,200 | | $ | 318,333 | | | 3 |
| Less: Accumulated Amortization | | | 124,129 | | | -0- | | | |
| | | | | | | | | | |
| | | $ | 553,071 | | $ | 318,333 | | | |
The Company’s policy is to capitalize software development costs in accordance to SFAS No. 86. The Company’s quarterly reports on Form 10-Q made during 2008 did not reflect the capitalization of the software development costs incurred during the period January 1, 2008 to September 1, 2008, in the Company’s financial statements filed with these quarterly reports. The Company capitalized a total of $358,867 of software development costs in 2008 and amortized $124,129 of these costs for the year ended December 31, 2008. The net effect of this capitalization reduced the net loss for the year ended December 31, 2008 by $234,738. If the capitalization of the software costs were properly made during the interim quarterly periods reported in 2008, this reduction in the net loss would have changed the financial results reported in each of the Company’s quarterly reports on Form 10-Q filed with the SEC. Management has determined that the amount of the restatement of the quarterly information is not material and has decided not to restate the quarterly financial statements previously filed.
6. INCOME TAXES
The Company has the following deferred tax assets and liabilities at December 31, 2008 and 2007:
| | | December 31, | |
| | | 2008 | | | 2007 | |
| Current assets and liabilities: | | | | | | |
| Accounts receivable | | $ | (135,000 | ) | | $ | (156,928 | ) |
| Accounts payable and accrued expenses | | | 57,000 | | | | 134,200 | |
| Deferred revenues | | | 141,000 | | | | 126,821 | |
| | | | 63,000 | | | | 104,093 | |
| Valuation allowance | | | (63,000 | ) | | | - | |
| Net current deferred tax asset | | $ | 0 | | | $ | 104,093 | |
| | | | | | | | | |
| Non-current assets and liabilities: | | | | | | | | |
| Net operating loss carryforwards | | $ | 2,117,000 | | | $ | 1,162,505 | |
| Depreciation | | | (94,000 | ) | | | (6,201 | ) |
| | | | 2,023,000 | | | | 1,156,304 | |
| Valuation allowance | | | (2,023,000 | ) | | | - | |
| Net deferred tax asset | | $ | 0 | | | $ | 1,156,304 | |
The Company has net operating losses amounting to approximately $5,000,000 that expire in various years from 2024 through 2028. The ultimate realization of the net operating losses is dependent upon future taxable income, if any, of the Company and may be limited in any one year by alternative minimum tax rules. Although management believes that the Company will have sufficient future taxable income to absorb the net operating loss carryovers before the expiration of the carryover period, the current global economic crisis imposes additional profitability risks that are beyond our control. Accordingly, management has determined that a full valuation allowance of the deferred tax asset is appropriate at this time.
Internal Revenue Code Section 382 imposes limitations on the use of net operating loss carryovers when the stock ownership of one or more 5% shareholders (shareholders owning 5% or more of the Company’s outstanding capital stock) has increased by more than 50 percentage points. Management intends to carefully monitor share ownership of 5% shareholders but cannot control the ownership changes occurring as a result of public trading of the Company’s Common Stock. Accordingly, there is a risk of an ownership change beyond the control of the Company that could trigger a limitation of the use of the loss carryover.
The Company has no uncertain income tax positions under FIN No. 48.
The provision (benefit) for income taxes, consist of the following:
| | | Year Ended December 31, | |
| | | 2008 | | | 2007 | |
| | | | | | | |
| Current tax expense | | $ | - | | | $ | - | |
| Deferred tax (benefit) | | | (825,063 | ) | | | (619,896 | ) |
| Net change in valuation allowance | | | 2,086,000 | | | | - | |
| | | | | | | | | |
| | | $ | 1,260,397 | | | $ | (619,896 | ) |
The provision (benefit) for income taxes is comprised of the following:
| | | Year Ended December 31, | |
| | | 2008 | | | 2007 | |
| Deferred: | | | | | | |
| | | | | | | |
| Federal income | | $ | 937,060 | | | $ | (460,870 | ) |
| State income taxes | | | 323,337 | | | | (159,026 | ) |
| | | | | | | | | |
| | | $ | 1,260,397 | | | $ | (619,896 | ) |
The statutory Federal income tax rate and the effective rate is reconciled as follows:
| | | Year Ended December 31, | |
| | | 2008 | | | 2007 | |
| Statutory Federal income tax rate | | | 34 | % | | | 34 | % |
| | | | | | | | | |
| State taxes, net of Federal tax benefit | | | 5 | % | | | 5 | % |
| | | | | | | | | |
| Valuation allowance | | | -108 | % | | | 0 | % |
| | | | | | | | | |
| Reversal of timing differences | | | 3 | % | | | -8 | % |
| | | | | | | | | |
| | | | -66 | % | | | 31 | % |
7. PREFERRED STOCK
The Company is authorized to issue 1,000 Class A Preferred shares and 1,000 Class B Preferred shares, each of which has a par value of $1.00. No shares of preferred stock are currently outstanding.
8. COMMITMENTS AND CONTINGENCIES
a. Operating lease
The Company occupies office space in Yonkers under a lease agreement that expires on January 31, 2010. They also rent space in West Seneca. This lease agreement expires on May 31, 2010.
The minimum rental commitment is as follows:
| 2009 | | $ | 88,152 | |
| 2010 | | | 10,978 | |
| | | $ | 99,130 | |
Rent expense amounted to $92,786 and $92,193 for the years ended December 31, 2008 and 2007, respectively. This includes additional expense for storage.
b. Line of Credit
The Company has a $115,000 credit line available through its bank. No money was drawn from this line of credit in 2007 or 2008. In the event of borrowing, the repayment period is 36 months. The line of credit is personally guaranteed by Harold Brand, Chairman and Chief Executive and majority shareholder of the Company. The Company’s right to draw on the credit line is subject to approval of holders of Debentures constituting 60% of the principal amount of Debentures outstanding.
c. Litigation
A complaint was filed against the Company and its CEO on December 28, 2006 in Magistrate’s court in Herzliya, Israel, by Raz-Lee Security Ltd. (“Raz-Lee”), a former distributor of the Company’s products (Case No. 8443/06). The action seeks $50,000 in damages plus interest, court costs and attorney’s fees. The action against the Company’s CEO was dismissed and an appeal of such dismissal is pending. The Company has counter-claimed against Raz-Lee for failure to report sales and royalties and seeks an accounting, with damages estimated at $50,000. Each of the parties has asked the court to order a deposit of security for costs. The Company has provided a security deposit of $7,000 as requested by the court. At a pre-trial conference, the Court suggested that the Company pay Raz-Lee $25,000 in settlement of the claim and counter-claim. This suggestion was rejected by both parties. The Company intends to vigorously defend the claim and prosecute its counter-claim. The case is still pending. Management has consulted with counsel and at December 31, 2008, the Company has reserved $25,000 against the potential settlement, which is included in accrued expenses on the Balance Sheet and as a general and administrative expense on the Statement of Operations. The Company is not a party to any other pending or threatened legal proceedings.
d. Executive Employment Contract
Effective April 30, 2006, the Company entered into a five-year Employment Agreement with Mr. Brand, with base salary set at $180,000 per annum. In addition to this salary, Mr. Brand is entitled to incentive compensation an amount equal to two percent (2%) of annual gross sales of the Company on sales in excess of one million dollars ($1,000,000). In addition, Mr. Brand will be entitled to standard benefits: four weeks of paid vacation, accident and health insurance, sick leave benefits, holidays and personal days, personal expenses reimbursement, life insurance, disability insurance and the use of a corporate car.
9. PROFIT SHARING PLAN
The Company has a qualified 401(k) profit sharing plan covering all eligible employees. The plan provides for contributions by the Company in such amounts as the Board of Directors may annually determine but subject to statutory limitations.
10. RELATED PARTY TRANSACTIONS
Profit Horizon, Inc., a company controlled by Robert J. Roskow, Executive Vice President and Director of the Company, provides sales consulting services. During the years ended December 31, 2008 and 2007, the Company incurred approximately $34,000 and $44,000 respectively, in sales commissions to Profit Horizon, Inc.
11. FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company’s financial instruments consisted of the following at December 31, 2008 and 2007:
| | | 2008 | 2007 |
| 8% Convertible Debentures | | | 2,402,791 | 2,160,800 |
The fair value of the Debentures does not differ significantly to their carrying amount because of their short-term maturity.
12. LOSS PER SHARE
Loss per share for the years ended December 31, 2008 and December 31, 2007 does not include the effects of the 10,571,003 Warrants or the 5,000,000 shares into which the 8% Convertible Debentures are convertible because the effects would be anti-dilutive.
In February 2009, the Company issued 60,000 shares of Common Stock. These shares were issued for consulting services.
INDEX TO EXHIBITS
| 3.1 | Certificate of Incorporation* |
| 3.2 | Bylaws* |
| | |
| 4.1 | Form of Securities Purchase Agreement dated as of April 10, 2006* |
| 4.2 | Form of Common Class A and B Stock Purchase Warrant dated as of April 10, 2006* |
| 4.3 | Form of 8% Convertible Debenture issued on April 10, 2006* |
| 4.4 | Form of Registration Rights Agreement dated as of April 10, 2006* |
| 4.5 | Form of Common Class A Stock Purchase Warrant issued in connection with private placement**** |
| 4.6 | Form of Common Class B Stock Purchase Warrant issued in connection with private placement**** |
| 10.1 | 2006 Incentive Stock Plan*† |
| 10.2 | Employment Agreement between Harold Brand and CYBRA dated as of April 30, 2006* |
| 10.3 | Form of Domestic Reseller Agreement** |
| 10.4 | Form of International Reseller Agreement** |
| 10.5 | Form of Premier Reseller Software Licensing Agreement between CYBRA Corporation and Solzon Corporation dated as of August 27, 2007*** |
| 10.6 | Form of Technology License Agreement dated as of August 27, 2007*** |
| 10.7 | Form of Contractor Agreement for System Integration and Consulting Services dated as of August 27, 2007*** |
| 31.1 | Section 302 Sarbanes-Oxley Certification – CEO**** |
| 31.2 | Section 302 Sarbanes-Oxley Certification – CFO**** |
| 32.1 | Section 906 Sarbanes-Oxley Certification – CEO**** |
| 32.2 | Section 906 Sarbanes-Oxley Certification – CFO**** |
| † | Compensatory Plan or Arrangement |
| | |
| * | Incorporated herein by reference to the Registrant’s Registration Statement on Form SB-2 filed with the Commission on June 16, 2006, File No. 333-135068. |
| | |
| ** | Incorporated herein by reference to the Registrant’s report on Form 10-KSB filed with the Commission on April 2, 2007. |
| | |
| *** | Incorporated herein by reference to the Registrant’s current report on Form 8-K, filed with the Commission on September 27, 2007. |
| | |
| **** | Filed herewith. |
