UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2013
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM __________ TO __________
COMMISSION FILE NO. 09081
CYBRDI INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
| CALIFORNIA | 95-2461404 |
| (STATE OR OTHER JURISDICTION OF | (I.R.S. EMPLOYER |
| INCORPORATION OR ORGANIZATION) | IDENTIFICATION NO.) |
| | |
| No 29 Chang’An South Road Xi’an Shaanxi P.R. China | 710061 |
| (ADDRESS OF PRINCIPAL EXECUTIVE OFFICE) | (ZIP CODE) |
| | |
| REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: | (011) 86-29-8237-3068 |
Former name, former address and former fiscal year, (if changed since last report)
Indicate by a check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act
Yes [ ] No [X]
Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act
Yes [X] No [ ]
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities and Exchange Act 0f 1934 during the preceding 12 months (of for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes [ ] No [X]
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer [ ] | Accelerated filer [ ] | Non-accelerated filer [ ] | Smaller Reporting Company [X] |
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendments to this Form 10-K. Indicate by a check mark whether the registrant is a large accelerated filer (as defined in Rule 12b-2 of the Exchange Act).
Yes [ ] No [X]
Indicate by a check mark whether the registrant is a shell Company (as defined by Rule 12b-2 of the Act).
Yes [ ] No [X]
APPLICABLE ONLY TO CORPORATE ISSUERS:
As of March 29, 2014, the Company had 120,225,323 shares of Common Stock, without par value, outstanding.
The aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to, as of June 30, 2013 was approximately $350,964 based on a closing bid price of $0.01 at June 30, 2013 and a total of 35,096,404 shares held by non-affiliates.
Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court.
Yes [ ] No [ ] Not Applicable [X]
DOCUMENTS INCORPORATED BY REFERENCE: None
TABLE OF CONTENTS
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This annual report contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These include statements about our expectations, beliefs, intentions or strategies for the future, which we indicate by words or phrases such as "anticipate," "expect," "intend," "plan," "will," "we believe," "our company believes," "management believes" and similar language. These forward-looking statements are based on our current expectations and are subject to certain risks, uncertainties and assumptions, including those set forth in the discussion under Item 1. "Business" and Item 7 "Management's Discussion and Analysis", including under the heading "- Risk Factors" under Item 1A. Our actual results may differ materially from results anticipated in these forward-looking statements. We base our forward-looking statements on information currently available to us, and we assume no obligation to update them. In addition, our historical financial performance is not necessarily indicative of the results that may be expected in the future and we believe such comparisons cannot be relied upon as indicators of future performance.
Certain financial information included in this annual report has been derived from data originally prepared in Renminbi (RMB), the currency of the People's Republic of China ("China" or "PRC"). For purposes of this annual report, conversion at year-end exchange rates of US$1.00 to RMB 6.1122 for assets and liabilities, and average rate of US$1.00 to RMB 6.1943 for revenue and expenses in year 2013. There is no assurance that RMB amounts could be converted into US dollars at that rate. Please see Note 3 “Summary of Significant Accounting Policy Item (l) for Foreign Currency Translation” of the accompanying financial statements.
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PART I
ITEM 1. BUSINESS
HISTORY
Cybrdi, Inc. (the “Company” or “us”, f/k/a Certron Corporation) was incorporated on August 1, 1966, under the laws of the State of California. From then to approximately June 2004, we conducted business in the distribution of magnetic media products, primarily blank audio and video cassettes. Due to continuing intense price competition and technological changes in the marketplace for its products, the Company lost its remaining significant customers and disposed of or wrote off its remaining inventory. As a result of these occurrences, the Company concluded that its audio and videotape businesses were no longer viable and some of its product lines were obsolete.
In November 2004, we acquired all of the ownership interests in Cybrdi, Inc., a privately held company incorporated in the State of Maryland ("Cybrdi Maryland"). For financial statement reporting purposes, the transaction was treated as a reverse acquisition, with Cybrdi Maryland deemed the accounting acquirer and Certron Corporation deemed the accounting acquiree. Historical information of the surviving company is that of Cybrdi Maryland.
Cybrdi Maryland was established in 2001 to acquire an interest in biogenetic products commercialization and related services entities in Asia. On March 5, 2003, Cybrdi Maryland acquired an 80% interest in Shaanxi Chao Ying Biotechnology Co., Ltd. (“Chaoying Biotech”), a sino-foreign equity joint venture established in July 2000 in the People's Republic of China (“PRC”), through the exchange of 99% of Cybrdi Maryland’s shares to the existing shareholders of Chaoying Biotech. For financial statement reporting purposes, the merger was treated as a reverse acquisition, with Chaoying Biotech deemed the accounting acquirer and Cybrdi Maryland deemed the accounting acquiree.
Chaoying Biotech is a sino-foreign equity joint venture between Shaanxi Chaoying Beauty & Cosmetics Group Co., Ltd. (the “Chinese Partner”, a PRC corporation) and Immuno-OncoGenomics Inc. (the “Foreign Partner”, a U.S. corporation). The joint venture agreement has a 15 year operating period starting from its formation in July 2000 and it may be extended upon mutual consent. The principal activities of Chaoying Biotech are research, manufacture and sale of various high-quality tissue arrays and the related services in the PRC.
Most of our activities are conducted through Chaoying Biotech. Chaoying Biotech, with its principal operations located in China, aims to take advantage of China's abundant scientific talent, low wage rates, less stringent biogenetic regulation, and the huge genetic population as it introduces its growing list of tissue micro array products.
On February 10, 2005, we completed the merger with Cybrdi Maryland and changed its name to Cybrdi, Inc.
On July 26, 2007, Chaoying Biotech entered into an acquisition agreement with the Chinese Partner to acquire 83.33% equity ownership of Shandong Chaoying Culture and Entertainment Co., Ltd (“SD Chaoying”) from the Chinese Partner for RMB 15 million. SD Chaoying is a corporation organized in the Shandong province of P.R.China. On September 5, 2007, Shandong MOFCOM approved this acquisition and ownership of SD Chaoying was transferred to Chaoying Biotech from the Chinese Partner. The business of SD Chaoying will primarily focus on culture and entertainment, including make-up, personal care, health club, gambling, saunas for massage and bath, karaoke, catering, and lodging. The Company plans for SD Chaoying to have a specific emphasis on casino gambling, but such operations have not been approved by Shandong Administration for Civil Affairs. At the end of 2010, SD Chaoying had substantially completed the construction of two residential buildings and had recognized revenue from sales of housing units from these buildings for the year then ended. The main structure of the commercial entertainment center has also been completed, with the exterior, rooftop, the surrounding supporting projects and the community landscaping yet to be completed, but which are expected to be completed in 2014 prior to the commencement of operations by merchant tenants if we can obtain an estimated $2.8 million to complete construction. In January 2011, SD Chaoying engaged Dongshan Victoria Spring Hotel (“Victoria”), which is controlled by the wife of the General Manager of SD Chaoying, to manage and operate the SPA business at the completed section of the cultural and entertainment facility. SD Chaoying has not charged any fees from Victoria and no written agreement was signed. As of December 31, 2013, the Company has not commenced collecting rental and management fee revenue for the culture and entertainment center.
On April 29, 2011, Chaoying Biotech invested $154,732 (equivalent to RMB 1 million) to restore the operation of the Institute of Shaanxi Chaoying Clinical Pathology (“IOSCCP”), a wholly-owned subsidiary established on July 31, 2003, whose main business includes pathology research and consulting, diagnostic clinical pathology and pathology-related research and development of new technologies, and basic training in pathology.
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BUSINESS OVERVIEW
Cybrdi is a holding company incorporated with 80% equity in Chaoying Biotech, which is engaged in biotechnology manufacturing, and research and development. Through Chaoying Biotech, Cybrdi controls SD Chaoying, a cultural and entertainment company.
Biotechnology Manufacturing, R&D Business
Chaoying Biotech is actively seeking to expand its biotechnology manufacturing business. Tissue chips, also called micro-tissue arrays, represent a newly developed technology which is intended to provide high-throughput molecular profiling and parallel analysis of biological and molecular characteristics for hundreds of pathologically controlled tissue specimens. Tissue arrays can, at times, provide rapid and cost-effective localization and evaluation of proteins, RNA, or DNA molecules, which is particularly useful for functioning genomic studies. Cybrdi manufactures both human and animal tissue micro-array for a wide variety of scientific uses, including drug discovery and development.
We supply US BioMax, Inc., a United States research and development subcontractor for Pfizer, and, through US BioMax, Inc. we provide our products and services to other major biotechnology companies in the US and Europe such as America Nanoarray. We are also a supplier for the China’s National Biomedical Center, Shanghai Biochip Center, a research partner with Peking University Academy of Military Medical Sciences, and perform dermatological research and development for Lancome and Estee Lauder. Since 2010, our sole domestic sales representative in China was Xi’an AiLiNa Biotechnology Co., Ltd., and the only overseas sales representative was US BioMax, Inc. We mainly distribute our products through these two sales representatives, which are controlled by the same individual, an unrelated party.
We are the patent holder and producer of Tissue Microarrays, which are a powerful tool to examine disease pathology across a variety of patients and disease conditions. We also hold three patents in antibody detection.
Our manufacturing facility and a pathology and molecule laboratory is located at an approximately 18,000 square foot facility that we own in Shaanxi province. At this facility, we have established the standard tissue chip production, processing procedure and a quality control system. We have also established an electronic management system to effectively manage biologic information databank.
Specifically, our products and services include:
TISSUE MICROARRAYS (“TMAs”): TMA technology can survey hundreds or even thousands of clinical specimens in a single experiment utilizing common probes, including DNA, RNA, peptide, protein and antibody probes. This is an efficient, in vivo approach for the validation of gene discoveries and identification of potential molecules for diagnosis and therapy. TMA chips can be broadly applied in both basic and clinical research conducted by the academic, medical, pharmaceutical and biogenetic research communities. We currently offer a wide variety of tissue array products and services on the commercial market, including approximately (at present) 234 different disease and 98 different organ typesof both human and animal varieties. These tissues are prepared in a variety of array panels of differing formats and tissue densities to service the full range of scientific research interests. New products are being added on a monthly basis per customer demands.
TECHNICAL SERVICES: Complimenting the production and marketing of tissue chips, we have launched an in-house technical services platform to perform customized research according to customer specifications. By outsourcing experimentation to us, international research labs, (particularly those in high labor and material cost markets) can incur substantial cost savings.
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Frequently requested services include the standard immunohisto chemistry (IHC) and in-situ-hybridization (ISH) services needed to locate proteins or genes of interest using customer-supplied probes. These probes are applied to select normal, diseased and marginal tissue from our tissue array bank. The results are presented as publishable, detailed pathology reports including high resolution digital photographs. Through virtual cybernetic bio-services (vCBS), these results can be sent via the Internet to the customer the day after the probe is received by our labs. Our technical services currently serve our Chinese customers.
Our business strategies and focus in the near future include: enhancing R&D in TMAs and technical service; expanding our product portfolio and virtual tissue array data bank (vTMAB); and launching the health diagnosis kit for obesity and skin disease.
Culture, Entertainment, and Real Estate Business
Chaoying Biotech owns 83.33% of SD Chaoying, a culture and entertainment company which we plan to include a casino, if we obtain a special license for casino gambling. SD Chaoying is developing a Culture and Entertainment Square in Changle City of Shandong Province on the 33,333 square meters of land it owns the right to use. The usage areas of the Square will be approximately 19,145 square meters. With the entertainment facilities of restaurants spas, hotel rooms, movie theaters, cosmetic and personal care salons and body buildup gyms, the Square will become a local cultural and entertainment center. The project includes four multi-family residential buildings (about 14,188 square meters) and two of them had been completed. Of 74 total units, no residential units were sold in 2013 and eight units were sold in 2012 for $268,582.
The total cost for the construction is estimated to be $8.2 million. At present, SD Chaoying has invested approximately $6.6 million in the construction. We intend to build a casino and engage another party to operate the casino. We have not yet reached agreement with any operator. Operation of the casino has not yet been approved by the Shandong Administration for Civil Affairs and such approval is required in order to operate the casino. There can be no assurance we will obtain such approval. We believe that the casino will attract patrons from surrounding areas and that the potential for a cultural and entertainment business is enhanced as living standards rise in the region. We anticipate financing the balance of the construction in part from the sale of the residential units. However, there is no assurance that sufficient proceeds will be generated from the sale of the residential units. We believe that the balance of any funding will need to be obtained from affiliated companies or from banks and affiliates.
We will also explore other business development opportunities that can leverage our sales platform and relationship with affiliated companies. Until such time as we can identify attractive marketing opportunities, we will loan available cash on a short term unsecured basis to non-affiliated third parties in order to generate interest income.
MARKETING
Marketing strategy in ShaanXi,Chaoying:By leveraging existing hospital relationships and Shaanxi Chaoying's marketing channels, we have marketed TMA products, medical care products and other services within the Chinese market. There are two primary regions in China where we focus our marketing: the northern provinces which include the cities of Beijing, Tianjing and Hebei Province, and the eastern provinces which include the cities of Shanghai, Jiangsu , Guangdong, Fujian, Shaanxi, Hunan, Hubei, Zhejiang Province and Shandong Province. Our domestic sales accounted for approximately 27% of our total sales of ChaoYing Biotech in the fiscal year of 2013. Since 2010, our sole domestic sales representative in China has been Xi’an AiLiNa Biotechnology Co., Ltd,, and the only overseas sales representative has been US BioMax, Inc. We mainly distribute our products through these two sales representatives, which are controlled by the same individual, an unrelated party.
Marketing strategy in Shandong Chaoying:We have sold 66 residential units of 74 residential housing units, but none in 2013, and have begun to rent space to merchants for the culture and entertainment center are also under way. Shandong Chaoying’s main focus in 2014 will be to lease the culture and entertainment center to merchant and commercial tenants and commence the operation.
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International Marking Strategy: By leveraging our know-how and current infrastructure of our operations in China, we attempt to expand our international distribution network. With the comparatively low cost for our products and services and our patented technology, we have a competitive advantage in the international market. In 2001, we set up Cybrdi Maryland to develop our business in the United States. The expansion of our business in the international arena came on March 10, 2007, when we entered into a Sales Agent Agreement with US BioMax, Inc., a re-seller located in the United States. Under the Sales Agent Agreement, US BioMax, Inc. acts as our exclusive agent dealing with the distribution of our products and services in all countries and regions except the P.R.China mainland. We expect our business in the international market will continue to grow through the efforts of US BioMax, Inc.. US BioMax, Inc. has played an important role in introducing us to the leading pharmaceutical companies and institutes outside of China. Through US BioMax, Inc., we have gradually built up our sales channels in the United States, Canada, Germany, Italy, Belgium, Japan and Taiwan. In the fiscal years of 2013 and 2012, US BioMax, Inc. accounted for about 73% and 57% of our sales revenue, respectively, which also represents our export sales.
MARKET OPPORTUNITIES AND COMPETITION
China Biotech Trends
Biotechnology research has been supported by the Chinese government, having been designated a “key industry” in China's scientific development plan since 1986. However, most biotech investments have been made in the areas of basic research in government funded laboratories or government linked companies which are focused on major scientific discoveries in gene functions.
Competition
Our TMAs products are facing increased competition. While in the past, the high costs and strict patient information protocol associated with tissue collection in most developed economies made it difficult for companies with competing products of similar quality to compete, cost differences are now narrowing. Furthermore, established genomics firms such as Ambion and Clinomics customarily outsourced most TMAs production, yet now are beginning to offer the wide product series variety demanded by the global research community. This results in increased price and service competition for us under either in-house and/or through OEM programs.
At the other end of the price spectrum, low-priced tissue chips are providing better quality and adequate density. The production of qualified TMAs requires expertise in several scientific areas including pathology, immunology, molecular and biology. Producers of TMA must also meet in hygienic standards, quality controls, and special materials processing and shipping procedures not only in the country of manufacture but for usage in the country of ultimate destination. In addition, because of the high cost of reliable commercial TMAs, and, conversely, the low quality of low cost TMAs, many research institutions had previously established their own production teams for in-house research needs prior to the introduction of our TMAs.
INTELLECTUAL PROPERTY
Our service marks, trademarks, trade secrets, patents and other intellectual properties are critical to our success. We rely on patent, trademark and trade secret law, as well as confidentiality and license agreements with certain of our employees, customers and others to protect our proprietary rights. Currently, we own four invention patents:
Intellectual Property
| Name of Patent | | Name of Patent | | Awarded | |
Tissue Microarrays(TMAs) | | ZL01128783.7 | | June 1st 2005 | |
A way to test content of special antibody in body fluid in a certain part | | ZL01131756.6 | | December 15th 2004 | |
Diabetes autoimmune antibody test kit multiples Chip,equipment and method | | ZL02415561.9 | | November 17th 2004 | |
Diabetes immunization antibody testing protein chips and its own preparation, detection methods | | ZL02145535.X | | October 27th 2004 | |
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RESEARCH AND DEVELOPMENT
Our strategy is to incrementally advance from our current technological base into complementary, rapidly commercialized products and services. New product development can represent an expansion of existing TMA technical knowledge or a new commercial application of current knowledge.
We currently perform all of our own research and development activities. We have our own research development and laboratory facilities located at our Shaanxi facility and retain our own professional research and development team. We may also enter into agreements for research and development activities with third parties in the future.
We plan to continue to attempt to enhance research and development in TMAs and technical services by expanding our virtual tissue array data bank (vTMAB) to meet expected growing demand from various research institutions and medical universities and colleges. Offering our products and services on a price competitive basis will be a key to meeting this growing market demand.
Our strategic focuses in the near future also include the biotechnology cosmetics and healthcare products, and health diagnosis for obesity and skin disease.
ENVIRONMENTAL LAW COMPLIANCE
Our operation currently complies with all the environmental law and regulations in China. Moreover, since China does not have additional environmental regulations dealing with climate change that apply to our operations, we have not planned material capital expenditures for environmental control facilities or changes in our business practices specific to climate change
EMPLOYEES
As of December 31, 2013, we had 47 full-time employees, with 37 employees at Chaoying Biotech, 5 employees at IOSCCP, and 5 employees at SD Chaoying. All of the Company’s employees are engaged full-time.
AVAILABLE INFORMATION
Information regarding the Company's annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and any amendments to these reports, are available to the public from the SEC's website at http://www.sec.gov as soon as reasonably practicable after the Company electronically files such reports with the Securities and Exchange Commission. Any document that the Company files with the SEC may also be read and copied at the SEC's public reference room. Please call the SEC at 1-800-SEC-0330 for further information on the public reference room. We will also supply this information to any shareholder requesting copies of any of the foregoing free of charge. Shareholders should contact our office at (301) 644-3901 if they desire copies of any of our filings with the Securities and Exchange Commission.
ITEM 1A. RISK FACTORS
You should consider each of the following risk factors and any other information set forth in this Form 10-K and our other reports that we have filed with the Securities and Exchange Commission), including the Company's financial statements and related notes, in evaluating the Company's business and prospects. The risks and uncertainties described below are not the only ones that impact on the Company's operations and business. Additional risks and uncertainties not presently known to the Company, or that the Company currently considers immaterial, may also impair its business or operations. If any of the following risks actually occur, our business and financial condition, results or prospects could be harmed.
RISKS ASSOCIATED WITH THE COMPANY'S BUSINESS AND OPERATIONS IN THE MEDICAL TECHNOLOGY FIELD
The Company has a limited history with respect to the manufacture, sale and distribution of TMAs. Medical technology is constantly evolving and there can be no assurance that our TMAa will keep pace with medical breakthroughs. The Company's ability to achieve and maintain profitability and positive cash flow over time will be dependent upon, among other things, its ability to (i) continue to develop new TMA products and market these products both in China and other developing companies and (ii) its ability to evaluate the merits of pursuing the beauty supply business and its success in developing franchise opportunities despite no prior experience.
OUR BUSINESS IS HEAVILY DEPENDENT ON THE ECONOMIC GROWTH OF CHINA
Our business is heavily dependent on the economy and developing middle and upper class in China. Should the country suffer an economic downturn or should the government imposed restrictions on the growth of private companies and the ability of a large consumer class to earn money in the private sector our business will suffer. To the extent that any of the foregoing should occur, our revenues will decline significantly.
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RELIANCE ON SINGLE CUSTOMER
In 2013, we generated 72.6% of our revenue of tissue array from sales to a single customer. Should this customer face financial difficulty, refuse to pay our invoices as they become due or direct their business to a competitor, our business operations will suffer a material adverse effect.
RELIANCE ON SINGLE VENDOR
In 2013, we obtained 78.6% of our raw materials from two suppliers. Should these suppliers face financial difficulty or refuse to do business with us or have difficulty fulfilling our orders, our business operations will suffer a material adverse effect.
WE MAY NOT BE ABLE TO SUPPORT OUR OPERATIONS THROUGH INTERNAL GROWTH
In order to fully implement our business plan, we require additional financing. Financing may be in the form of traditional bank financing or through the sale of our common stock. There can be no assurance that we will be able to secure adequate bank financing or if available, will be on terms acceptable to the Company. If we attempt to sell shares of our common stock, existing shareholders will face dilution and likely a reduction in the price of our common stock. There are currently no financing arrangements in place.
OUR BUSINESS MAY BE AFFECTED BY UNEXPECTED CHANGES IN REGULATORY REQUIREMENTS IN THE JURISDICTIONS IN WHICH WE OPERATE.
Development and distribution of our TMAs are subject to regulation both where we manufacture and sell the products. We believe that we are in compliance with applicable governmental rules and procedures. However, there can be no assurance that changes in the regulatory environment will not make it difficult for us to comply or result in a substantial increase in our operating costs and a resulting decline in our margins.
THERE IS UNCERTAINTY AS TO OUR ABILITY TO CONTROL COSTS AND EXPENSES.
If our business grows, costs will increase. Management cannot accurately project or give any assurance, with respect to its ability to control development and operating costs and/or expenses in the future. Consequently, even if the Company is successful in expanding its operations (of which there can be no assurance), our management still may not be able to control costs and expenses adequately, and therefore such expansion may result in operating losses.
COMPETITION
Our market is highly competitive and some of our competitors may have greater resources than us. These competitors may be able to respond more quickly to new or emerging technologies and changes in customer requirements and devote greater resources to develop, promote and sell their services. If this should occur, revenues may decline and we will likely lose market share.
IF WE DO NOT MANAGE OUR GROWTH, WE MAY NOT BE ABLE TO OPERATE OUR BUSINESS EFFECTIVELY.
We expect significant expansion will be required to address potential growth in our customer base, the breadth of our service offerings, and other opportunities. This expansion could strain our management, operations, systems and financial resources. To manage any future growth of our operations and personnel, we must improve and effectively utilize operational, management, marketing and financial systems and successfully recruit, hire, train and manage personnel and maintain close coordination among our technical, finance, marketing, sales and recruitment staffs. We also will need to manage an increasing number of complex relationships with customers, strategic partners, advertisers and other third parties. Our failure to manage growth could disrupt our operations and ultimately prevent us from generating the revenue we expect.
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UNANTICIPATED OBSTACLES TO EXECUTION OF OUR BUSINESS PLAN.
The Company's business plans may change significantly. Many of our potential business endeavors are capital intensive and may be subject to statutory or regulatory requirements. Management believes that our activities and strategies are achievable in light of current economic and legal conditions with the skills, background, and knowledge of the Company's principals and advisors. Management reserves the right to make significant modifications to the Company's stated strategies depending on future events.
CERTAIN POLITICAL AND ECONOMIC CONSIDERATIONS RELATING TO THE PRC COULD ADVERSELY AFFECT OUR COMPANY.
The government of the People's Republic of China has welcomed foreign investment and the expansion of business opportunities in the private sector. There can be no assurance that this policy will continue or alternatively, that this policy will not be modified to make it more restrictive to transfer funds from China to the United States or any other country. Moreover, political instability could adversely impact our ability to fully implement our business plan as political instability would likely lead to a downturn in the Chinese economy.
CURRENCY EXCHANGE
Changes in the exchange rate of the Chinese Yuan or Renminbi (“CNY” or “RMB”) may adversely impact our profitability. If the CNY declines with respect to the U. S. dollar, our profitability will be adversely affected.
RESEARCH AND DEVELOPMENT CAN BE COSTLY
Medical advances are taking place at a rapid pace. In order to stay competitive, and bring state of the art TMAs to the market at competitive prices will require us to continue to devote significant resources to research and development. There can be no assurance that we will have sufficient cash flow to make this commitment on a going forward basis.
RELIANCE ON CURRENT MANAGEMENT
We are reliant on our current management team, particularly Mr. Bai and Mr. Ren, to help us fully implement our business plan. The loss of any of their services could have a material adverse impact on the implementation of our business plan and our future growth. We do not carry any type of key man insurance.
Our business may experience periods of rapid growth that will place significant demands on its managerial, operational and financial resources. In order to manage this possible growth, the Company must continue to improve and expand its management, operational and financial systems and controls. The Company will need to expand, train and manage its employee base. No assurances can be given that the Company will be able to timely and effectively meet such demands.
WE MAY HAVE DIFFICULTY ATTRACTING TALENT IN FOREIGN COUNTRIES.
Our research and development program requires us to recruit highly skilled personnel. There can be no assurance that we will be able to attract these personnel for work either in the United States or China. If we cannot attract skilled personnel, our operations will likely suffer and any competitive edge that we have in the marketplace will quickly erode.
RISKS RELATED TO THE COMPANY’S RESIDENTIAL, CASINO & ENTERTAINMENT BUSINESS
THE ENTERTAINMENT AND LEISURE BUSINESS IS PARTICULARLY SENSITIVE TO REDUCTIONS IN DISCRETIONARY CONSUMER SPENDING AS A RESULT OF DOWNTURNS IN THE ECONOMY AND SALES OF RESIDENTIAL HOUSING ARE ALSO SENSITIVE TO DOWNTURNS IN THE REAL ESTATE INDUSTRY.
Consumer demand for hotel/casino resorts and for the type of luxury amenities we offer may be particularly sensitive to downturns in the economy. Demand for residential housing is also sensitive to downturns in the real estate market. Changes in consumer preferences or discretionary consumer spending brought about by factors such as fears of war, future acts of terrorism, general economic conditions, disposable consumer income, fears of recession and changes in consumer confidence in the economy could reduce customer demand for the luxury products and leisure services we offer, thus imposing practical limits on pricing and harming our operations.
THERE ARE SIGNIFICANT RISKS ASSOCIATED WITH OUR PLANNED CONSTRUCTION PROJECTS, WHICH COULD ADVERSELY AFFECT OUR FINANCIAL CONDITION, RESULTS OF OPERATIONS OR CASH FLOWS FROM THESE PLANNED FACILITIES.
Our ongoing and future construction projects entail significant risks. Construction activity requires us to obtain qualified contractors and subcontractors, the availability of which may be uncertain. In addition, the failure to sell our residential units as expected could adversely affect development of the casino and entertainment project as we are anticipating using the proceeds of such sales to help finance completion of the project. While we anticipate being able to obtain alternate financing, possibly from affiliated companies, there is no assurance such financing will be available. Construction projects are subject to cost overruns and delays caused by events outside of our control or, in certain cases, our contractors’ control, such as shortages of materials or skilled labor, unforeseen engineering, environmental and/or geological problems, work stoppages, weather interference, unanticipated cost increases and unavailability of construction materials or equipment. Construction, equipment or staffing problems or difficulties in obtaining any of the requisite materials, licenses, permits, allocations and authorizations from governmental or regulatory authorities could increase the total cost, delay, jeopardize, prevent the construction or opening of our projects, or otherwise affect the design and features. In addition, the number of ongoing projects and their locations throughout the world present unique challenges and risks to our management structure. If our management is unable to successfully manage our worldwide construction projects, it could have an adverse effect on our financial condition, results of operations or cash flows.
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FAILURE TO OBTAIN OUR GAMING LICENSE OR THE LOSS OF OUR GAMING LICENSE OR OUR FAILURE TO COMPLY WITH THE EXTENSIVE REGULATIONS THAT GOVERN OUR OPERATIONS COULD HAVE AN ADVERSE EFFECT ON OUR FINANCIAL CONDITION, RESULTS OF OPERATIONS OR CASH FLOWS.
Our gaming operations and the ownership of our securities are subject to extensive regulation by the Shandong Administration for Civil Affairs. They have broad authority with respect to licensing and registration of our business entities and individuals investing in or otherwise involved with us. And no casino license has been issued to date and there is no assurance that such a license will be issued. These authorities may, among other things, refuse to issue or revoke the gaming license of any corporate entity or the registration of a registered corporation or any entity registered as a holding company of a corporate licensee for violations of gaming regulations. This would have a material adverse effect on our business. Furthermore, any change in the laws, regulations or licenses applicable to our business or gaming licenses could require us to make substantial expenditures or could otherwise have a material adverse effect on our financial condition, results of operations or cash flows.
WE MAY BE EXPOSED TO POTENTIAL RISKS RELATING TO OUR INTERNAL CONTROLS OVER FINANCIAL REPORTING AND OUR ABILITY TO HAVE THOSE CONTROLS ATTESTED TO BY OUR INDEPENDENT AUDITORS.
As directed by Section 404 of the Sarbanes-Oxley Act of 2002 or SOX 404, the SEC adopted rules requiring public companies to include a report of management on the company’s internal controls over financial reporting in their annual reports, including Form 10-K. We have established disclosure controls and procedures effective for the purposes set forth in the definition thereof in Exchange Act Rule 13a-15(e) as of December 31, 2013. Also projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree or compliance with the policies or procedures may deteriorate.
WE MAY BE AFFECTED BY GLOBAL CLIMATE CHANGE OR BY LEGAL, REGULATORY, OR MARKET RESPONSES TO SUCH CHANGE.
The growing political and scientific sentiment is that increased concentrations of carbon dioxide and other greenhouse gases in the atmosphere are influencing global weather patterns. Changing weather patterns, along with the increased frequency or duration of extreme weather conditions, could impact the availability or increase the cost of key raw materials that we use to produce our products. Additionally, the sale of our products can be impacted by weather conditions.
Concern over climate change, including global warming, has led to legislative and regulatory initiatives directed at limiting greenhouse gas (GHG) emissions. For example, proposals that would impose mandatory requirements on GHG emissions continue to be considered by policy makers in the territories that we operate. Laws enacted that directly or indirectly affect our production, distribution, packaging, cost of raw materials, fuel, ingredients, and water could all impact our business and financial results.
THE COMPANY DOES NOT EXPECT TO PAY CASH DIVIDENDS IN THE FORESEEABLE FUTURE.
We have never paid cash dividends on its common stock and have no plans to do so in the foreseeable future. The Company intends to retain earnings, if any, to develop and expand its business.
"PENNY STOCK" RULES MAY MAKE BUYING OR SELLING THE COMMON STOCK DIFFICULT A SEVERELY LIMIT THEIR MARKET AND LIQUIDITY.
Trading in the Company's common stock is subject to certain regulations adopted by the SEC commonly known as the "Penny Stock Rules". Our common stock qualifies as penny stock and is covered by Section 15(g) of the Securities and Exchange Act of 1934, as amended (the "1934 Act"), which imposes additional sales practice requirements on broker/dealers who sell our common stock in the market. The "Penny Stock" rules govern how broker/dealers can deal with their clients and "penny stock". For sales of our common stock, the broker/dealer must make a special suitability determination and receive from clients a written agreement prior to making a sale. The additional burdens imposed upon broker/dealers by the "penny stock" rules may discourage broker/dealers from effecting transactions in our common stock, which could severely limit its market price and liquidity. This could prevent investors from reselling our common stock and may cause the price of the common stock to decline.
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Although publicly traded, our common stock has substantially less liquidity than the average trading market for a stock quoted on other national exchanges, and our price may fluctuate dramatically in the future.
Our Common Stock is currently quoted on the OTCQB Markets. Our Common Stock was previously listed for trading on the Over-the-Counter Electronic Bulletin Board. The trading market in the common stock has substantially less liquidity than the average trading market for companies quoted on other national stock exchanges. A public trading market having the desired characteristics of depth, liquidity and orderliness depends on the presence in the marketplace of willing buyers and sellers of our common stock at any given time. This presence depends on the individual decisions of investors and general economic and market conditions over which we have no control. Due to limited trading volume, the market price of the Company's common stock may fluctuate significantly in the future, and these fluctuations may be unrelated to the Company's performance. General market price declines or overall market volatility in the future could adversely affect the price of the Company's common stock, and the current market price may not be indicative of future market prices.
ITEM 1B. UNRESOLVED STAFF COMMENTS
Not Applicable.
ITEM 2. DESCRIPTION OF PROPERTY
Our operations in the People's Republic of China are located at the Chaoying Workshop, Third Floor, Changyanbu, Private-owned industrial zone, Xi’an City,Shaanxi Province, where we use approximately 18,000 square feet (2,000 square meters) of space. We lease office space from a related party, Shaanxi Chaoying Personal Care Group Co., Inc. We pay $6,458 per month in rent (equivalent to RMB 40,000 per month). We have renewed the lease agreement to December 31, 2015. We believe that this arrangement is comparable to what we would pay had we leased similar space from a non-affiliated entity. The facility is sufficient for our current operations. Should our operations expand and we need to locate additional rental properties, we do not anticipate any problem in securing additional leased space.
In connection with our entertainment facility, as discussed previously, we purchased 33,333 square meters land, in Changle County, Weifang, Shandong Province. SD Chaoying is building a 19,145 square meters entertainment, culture, casino and lodging facilities, and another 14,188 square meters residential buildings.
ITEM 3. LEGAL PROCEEDINGS
There are no material pending legal proceedings to which we are a party. We received a notice on June 6, 2000 to inform us that we may have a potential liability from waste disposal in the Casmalia Disposal Site at Santa Barbara County, California. We were given a choice of either signing an agreement that would toll the statute of limitations for eighteen (18) months in order to allow us to resolve any liability with the government without incurring costs associated with being named a defendant in a lawsuit, or becoming an immediate defendant in a lawsuit. We signed the tolling agreement. On November 20, 2001, the tolling agreement was extended for an additional 18 months. On May 20, 2003 the tolling agreement was again extended for an additional 18 months and on November 24, 2004 the tolling agreement was again extended for additional 18 months. On June 29, 2004, we received a proposed settlement from the EPA in the amount of $21,131, which had been accrued as other payable. We are waiting for communication from the government concerning payment of the final settlement. As of and subsequent to December 31, 2013, the Company had not received further correspondences from the EPA regarding this matter.
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ITEM 4. MINE SAFETY DISCLOSUE
Not applicable.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our current stock symbol is "CYDI.PK". Our common stock was previously quoted on the Over-the-Counter-Bulletin Board. ("OTCBB"). Prior to our merger with Cybrdi we traded on the OTCBB under the symbol "CRTN". Following our acquisition of Cybrdi, Inc., we requested a symbol change and were assigned CYDI.
In February 2011, due to the transformation of its market makers to use the platform provided by OTC Markets Group to quote OTC securities, the Company began trading on the OTCQB, a marketplace developed by the OTC Markets Group, as of the reporting date, under the ticker symbol CYDI. The OTCQB is a market tier for U.S. listed companies that are in compliance with their SEC reporting obligations.
The following table sets forth, for the periods indicated, the range of high and low bid quotations for our common stock as quoted on the OTCBB and the Pink Sheets. The reported bids quotations reflect inter-dealer prices without retail markup, markdown or commissions, and may not necessarily represent actual transactions.
| YEAR | | PERIOD | | | HIGH | | | LOW | |
| 2013 | | First Quarter | | | 0.01 | | | 0.01 | |
| | | Second Quarter | | | 0.02 | | | 0.01 | |
| | | Third Quarter | | | 0.02 | | | 0.01 | |
| | | Fourth Quarter | | | 0.02 | | | 0.01 | |
| | | | | | | | | | |
| 2012 | | First Quarter | | | 0.01 | | | 0.00 | |
| | | Second Quarter | | | 0.01 | | | 0.01 | |
| | | Third Quarter | | | 0.01 | | | 0.01 | |
| | | Fourth Quarter | | | 0.03 | | | 0.01 | |
(a) Transfer Agent
Our transfer agent is Securities Transfer Corporation, whose address is 2591 Dallas Parkway, Suite 102, Frisco, Tx. 75034. Their telephone number is 972-963-0012.
(b) Stockholders
As of March 29, 2014, there were approximately 1,317 record holders of our common stock.
(c) Dividend Policy.
We have not paid cash dividends or made distributions in the past, and we do not anticipate that we will pay cash dividends or make distributions in the foreseeable future. We currently intend to retain and reinvest future earnings, if any, to finance our operations.
(d) Securities authorized for issuance under equity compensation plans
None.
ITEM 6. SELECTED FINANCIAL INFORMATION
We are a “smaller reporting company” and, as such, are not required to provide this information.
ITEM 7. MANAGEMENT DISCUSSION AND ANALYSIS
This annual report contains forward-looking statements within the meaning of the federal securities laws. These include statements about our expectations, beliefs, intentions or strategies for the future, which we indicate by words or phrases such as "anticipate," "expect," "intend," "plan," "will," "we believe," "Cybrdi believes," "management believes" and similar language. The forward-looking statements are based on the current expectations of Cybrdi and are subject to certain risks, uncertainties and assumptions, including those set forth in the discussion under "Description of Business" and "Management's Discussion and Analysis," including the discussion under "Risk Factors" thereunder. The actual results may differ materially from results anticipated in these forward-looking statements. We base the forward-looking statements on information currently available to us, and we assume no obligation to update them.
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CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Principle of consolidation
The accompanying consolidated financial statements present the financial position, results of operations and cash flows of the Company and all entities in which the Company has a controlling voting interest. The consolidated financial statements also include the accounts of any variable interest entities in which the Company is considered to be the primary beneficiary and such entities are required to be consolidated in accordance with accounting principles generally accepted in the United States (“US GAAP”). The consolidated financial statements include the financial statements of Cybrdi, Inc. and its subsidiary. All significant intercompany transactions and balances are eliminated in consolidation.
Use of estimates and assumptions
The preparation of financial statements 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 revenues and expenses during the reported period. Actual results could differ from those estimates. Estimates and assumptions are periodically reversed and the effects of reversions are reflected in the financial statement in the period they are determined to be necessary.
Inventories
Inventories are stated at the lower of cost or market. Cost of raw materials is determined on the basis of first in first out method (“FIFO”). Finished goods are determined on the moving weighted average basis and are comprised of direct materials, direct labor and an appropriate proportion of overhead.
Property, plant and equipment
Property, plant and equipment are stated at cost less accumulated depreciation and amortization. Depreciation on property, plant and equipment is calculated on the straight-line basis to write off the cost of assets over their respective estimated useful lives. Leasehold improvements are amortized over the estimated useful life of the improvement or the lease term, whichever is shorter.
The cost and related accumulated depreciation of assets sold or otherwise retired are eliminated from the accounts and any gain or loss is included in the statements of operations. The cost of maintenance and repairs is charged to expenses as incurred, whereas significant renewals and betterments are capitalized.
Long-term assets of the Company are reviewed annually as to whether their carrying value has become impaired, pursuant to the guidelines established in FASB ASC Topic 360, “Property, Plant, and Equipment” (formerly SFAS No. 144). The Company also re-evaluates the periods of amortization to determine whether subsequent events and circumstances warrant revised estimates of useful lives.
Construction in progress
Construction in progress consists of commercial property and residential unit sites under construction. The Company leases the land for the commercial property and residential unit sites under land use rights agreement with the PRC government. Construction in progress is stated at the lower of cost or fair value less selling costs.
Expenditures for land development, including cost of land use rights, deed tax, pre-development costs and engineering costs, are capitalized and allocated to development projects by the specific identification method. Costs are allocated to specific units within a project based on the ratio of the floor measure of units to the estimated total floor measurement of the total projects.
Costs of amenities transferred to buyers are allocated as common costs of the project that are allocated to specific units as a component of total construction costs. For amenities retained by the Company, costs in excess of the related fair value of the amenity are also treated as common costs. Results of operations of amenities retained by the Company are included in current operating results.
In accordance with ASC 360, “Property, Plant and Equipment” (“ASC 360”), construction in progress is subject to valuation adjustments when the carrying amount exceeds fair value. An impairment loss is recognized only if the carrying amount of the assets is not recoverable and exceeds fair value. The carrying amount is not recoverable if it exceeds the sum of the undiscounted cash flows expected to be generated by the assets.
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When the profitability of a current project deteriorates due to a slowdown in the sales pace, reduction of pricing or some other factor, this indicates that there may be a possible future loss on delivery and possible impairment in the recoverability of the assets. Accordingly, the assets of such project are subsequently reviewed for future losses and impairment by comparing the estimated future undiscounted cash flows for the project to the carrying value of such project. If the estimated future undiscounted cash flows are less than the asset’s carrying value such deficit will be charged as a future loss and the asset will then be written down to its estimated fair value.
Accounts and other receivables
Accounts and other receivables are recognized and carried at original invoice amount less allowance for any uncollectible amounts. An estimate for doubtful accounts is made when collection of the full amount is no longer probable.
Fair value measurements
The carrying amounts of cash and equivalents, accounts receivable, inventories, loan to unaffiliated company, other receivables and prepaid expenses, accounts payable, accrued expenses, other payables, customers deposit , loan from related company and amounts due to shareholders/officers approximate fair value due to the short-term maturities of the assets and liabilities.
Revenue recognition
Revenue represents the invoiced value of goods sold recognized upon the delivery of goods to customers and service income is recognized when services are provided. Deferred revenue represents the undelivered portion of invoiced value of goods sold to customers. Sales transactions not meeting all the conditions of the full accrual method are accounted for using the deposit method of accounting. Under the deposit method, all costs are capitalized as incurred, and payments received from the buyer are recorded as customer deposits.
Foreign currency translation
The accompanying consolidated financial statements are presented in United States dollars. The functional currency of the Company’s PRC subsidiary is Renminbi (RMB). The financial statements are translated into United States dollars from RMB at year-end exchange rates as to assets and liabilities and weighted average exchange rates as to revenues and expenses. Capital accounts are translated at their historical exchange rates when the capital transactions occurred.
The RMB is not freely convertible into foreign currency and all foreign exchange transactions must take place through authorized institutions. No representation is made that the RMB amounts could have been, or could be, converted into USD at the rates used in translation.
Income taxes
Income taxes are provided for the tax effects of transactions reported in the financial statements and consist of taxes currently due plus deferred taxes related primarily to differences between the basis of assets and liabilities for financial and income tax reporting. The deferred tax assets and liabilities represent the future tax return consequences of those differences, which will either be taxable or deductible when the assets and liabilities are recovered or settled. Deferred taxes also are recognized for operating losses that are available to offset future federal and state income taxes.
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Comprehensive income (loss)
FASB ASC Topic 220, “Comprehensive Income”, established standards for the reporting and display of comprehensive income, its components and accumulated balances in a full set of general purpose financial statements. ASC Topic 220 defines comprehensive income to include all changes in equity except those resulting from investments by owners and distributions to owners. Among other disclosures, ASC Topic 220 requires that all items that are required to be recognized under current accounting standards as components of comprehensive income be reported in a financial statement that is presented with the same prominence as other financial statements. The Company’s only current component of comprehensive income is the foreign currency translation adjustment.
Intangible assets
Intangible assets consist of land use rights and include a patent. With the adoption of FASB ASC Topic 350, “Intangibles”, intangible assets with a definite life are amortized on a straight-line basis. The patent is being amortized over its estimated life of 10 years. Intangible assets with a definite life are tested for impairment whenever events or circumstances indicate that a carrying amount of an asset (asset group) may not be recoverable. An impairment loss would be recognized when the carrying amount of an asset exceeds the estimated undiscounted cash flows used in determining the fair value of the asset. The amount of the impairment loss to be recorded is calculated by the excess of the asset’s carrying value over its fair value. Fair value is generally determined using a discounted cash flow analysis. Costs related to internally develop intangible assets are expensed as incurred.
RESULTS OF OPERATIONS
For the fiscal year ended December 31, 2013 compared to the fiscal year ended December 31, 2012.
Revenue
Cybrdi generates one category of revenue in 2013, including sales of tissue chip & kits products, and two categories of revenue in 2012, including sales of tissue chip & kits products and residential housing. The total revenue for the fiscal year ended December 31, 2013 was $574,261, a decrease of approximately 26.7% from $783,175 for the fiscal year ended December 31, 2012 mainly due to no sales in residential housing.
Tissue Chip & Kit Product: Net sales increased by $59,668 from $514,593 for the fiscal year ended December 31, 2012 to $574,261 for the fiscal year ended December 31, 2013, a increase of approximately 11.6% . These net sales were generated from our PRC subsidiary, Chaoying Biotech. The increase in net sales of tissue chip & kit product was primarily due to the increase in the domestic sales revenue. Cost of sales increased by $10,836 from $329,089 to $339,925 for the fiscal year ended December 31, 2013, an increase of 3.3%. Since 2010, our sole domestic sales representative in China has become Xi’an AiLiNa Biotechnology Co., Ltd, and the only overseas sales representative has been US BioMax, Inc. We mainly distribute our products through these two sales representatives, which are controlled by the same individual, an unrelated party.
Commercial rental: In January 2011, SD Chaoying engaged Dongshan Victoria Spring Hotel (“Victoria”), which is controlled by the wife of the General Manager of SD Chaoying, to manage and operate the SPA business at the completed section of the cultural and entertainment facility. SD Chaoying has not charged any fees from Victoria and no written agreement was signed. As a result, no revenue was recognized for the years ended December 31, 2013 and 2012. Costs related to operating commercial rental amounted to $50,485 and $65,846 for the years ended December 31, 2013 and 2012, respectively.
Gross Margin
Gross margin as a percent of sales was 32.0% and 21.4% for the years ended December 31, 2013 and 2012, respectively. Gross margin of tissue chip & kit products segment increased 4.8% from 36.0% to 40.8% and increased $48,832 $from $185,504 to $234,336 for the fiscal year ended December 31, 2013 from the fiscal year ended December 31, 2012, mainly due to the increase in domestic sales which gross margin is higher than tissue chip sold to the Company’s US distributor.
The commencement of the business in the commercial rental segment has not generated revenue, but incurred costs directly associated with the business. As a result, a loss of $50,485 and 65,846 was recorded at the commercial rental segment for the years ended December 31, 2013 and 2012,, respectively.
Operating Expenses
The Company’s operating expenses increased by $127,166 to $726,176 for the fiscal year ended December 31, 2013 from $599,010 for the fiscal year ended December 31, 2012. This was primarily due to a increase of $53,399 in repair cost from $0 for the fiscal year ended December 31, 2012 to $53,399 for the fiscal year ended December 31, 2013, a increase of $58,923 in entertainment expense from $26,170 for the fiscal year ended December 31, 2012 to $85,093 for the fiscal year ended December 31, 2013.
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Other Income and Expense
Net other expenses decreased by $150,822 to $72,212 for the fiscal year ended December 31, 2013, a 67.6% decrease, as compared to $223,034 for the fiscal year ended December 31, 2012. The decrease of other expenses was mainly because the Company confiscated the deposit in an amount of $96,863 from SHILIHEXIN as other income according to the contract terms, that SHILIHEXIN did not perform obligations in a timely basis as constructor for building residential housing based. In addition the Company recognized the interest expenses from short-term loan to interest expenses, amounting to $220,979.
Income Taxes
The Company had not recorded a provision for U.S. federal income tax for years ended December 31, 2013 and 2012 due to a net operating loss incurred, the company recorded income tax as $2,210 for the fiscal year ended December 31, 2013 and it was not required to accrue income taxes due to the net operation loss for the fiscal year ended December 31, 2013. According to Western Developing Plan of the PRC, Chaoying Biotech enjoys a 50% reduction in preferential policy of EIT, but not less than 15%. As a result, Chaoying Biotech’s effective EIT tax rate has been 15% since 2008. SD Chaoying is subject to the standard EIT rate of 25%. A 100% valuation reserve was recognized since it is more likely than not that all of the deferred tax assets will not be realized.
Net Loss
As a result of the above factors, our net loss before minority interests decreased $38,893, or 5.9%, from $655,640 for the fiscal year ended December 31, 2012 to $616,747 for the fiscal year ended December 31, 2013.
LIQUIDITY AND CAPITAL RESOURCES
Operating working capital deficit (total current asset deduct total current liabilities) decreased by $608,538 from $3,409,603 as of December 31, 2012 to $4,018,141 as of December 31, 2013. The decrease was primarily due to an increase in total current liabilities by $709,396 from $5,278,595 as of December 31, 2012 to $5,987,991 as of December 31, 2013, and an increase in total current assets by $100,858 from $1,868,992 as of December 31, 2012 to $1,969,850 as of December 31, 2013. The increase in total current liabilities was primarily the result of an increase of $892,352 in due to related parties, an increase of $123,892 in accrued expenses, an increase of $20,514 in other payables, partially offset by decreases of $355,537 in short-term loan. The increase in total current assets was primarily due to a increase of $813,812 in other receivables, partially offset by a decrease of $752,314 in cash and equivalents.
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For investing activities, the Company incurred net cash outflow $72,122during the fiscal year ended December 31, 2013. The Company made payments of $53,610 for construction in progress
For financing activities, the Company obtained net proceeds of $436,108 during the fiscal year ended December 31, 2013, The company received proceeds from loans from related companies of $256,265, proceeds from loans from shareholders/officers of $583,440, partially offset by $403,597 repayment of short term loans of the Company.
The Company had a short-term loan in the principal amount of $1,308,858 (equivalent to RMB 8.0 million) with Changle Rural Credit Unionwhich is a bank located in Shandong Province of the PRC. The loan had a maturity date of September 2, 2013. On November 17, 2013, the Company renewed this short-term loan. The term of the renewal loan started from November 17, 2013 with a maturity date of October 16, 2014. The interest rate for the short-term loan was 12% per annum as of December 31, 2013. This short-term loan had been secured by the Company’s land use right and construction-in-progress of SD Chaoying with a book value of $3.25 million (equivalent to RMB 19.69 million) and $4.65 million (equivalent to RMB27.47 million) as of December 31, 2013, respectively. For the $3.25 million land use rights, $2.62 million was classified under construction-in-progress for the commercial property and the remaining $0.63 million was classified under intangible assets subject to amortization. Additionally, there is another short-term loan of $165,188 (equivalent to RMB1.0 million) from Mr. Fengguo Liu, an unrelated party. The short-term loan is due on January 12, 2014 with an interest rate at 2% per month. On February 11, 2014, the Company renewed this short-term loan, the term of the renewal loan started from February 11, 2014 with a maturity date of February 10, 2015. The interest rate for the short-term loan was 2% per month as of December 31, 2013. Also included in the current liabilities was $2,963,494 of loans from related companies, including Xi’an Yanfeng Biotechnology Co., Ltd., Shaanxi Yanfeng Real Estate Co. Ltd, Shaanxi Chaoying Beauty & Cosmetics Group Co., Ltd., and the stockholders who are also the Company's officers. These entities were related to the Company through common ownership and principal officers. These loans are non-interest bearing and have no set repayment terms.
The accompanying consolidated financial statements have been prepared assuming the Company will continue as a going concern, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. The Company has incurred significant losses and has not demonstrated the ability to generate sufficient cash flows from operations to satisfy its liabilities and sustain operations. The Company had accumulated deficit of $3,525,809 and $2,977,443 as of December 31, 2013 and 2012, including net losses of $548,366 and $529,800 for the years ended December 31, 2013 and 2012, respectively.
The Company finances its operations primarily through short-term bank borrowings and advances from related parties or officers/shareholders. In order to complete the construction of SD Chaoying cultural and entertainment center, approximately $3.1 million (equivalent to RMB 19 million) of capital is expected to be needed. The Company, taking into accounts the available banking facilities, internal financial resource, and supports from related companies, believes it has sufficient working capital to meet its present obligation for at least the next twelve months.
Management is taking actions to address the Company's financial condition and deteriorating liquidity position. The following sets forth management’s plans for dealing with the adverse effects of the conditions:
(a) Sale of housing inventories: Proceeds to be received from the sale of the remaining housing of the two completed residential buildings are expected to amount to approximately $0.5 million. However, there is no assurance when such sales will occur.
(b) Rental and management fee revenue from the cultural and entertainment center: Annual rental revenue is estimated to be approximately $0.69 million per year. Management fee revenue will be charged to commercial tenants at 3% of annual gross revenue. As of December 31, 2013, the Company has not commenced collecting rental and management fee revenue for the culture and entertainment center.
(c) Additional advances from related companies and affiliates: Our major shareholders and officers advanced additional $892,352 to the Company in 2013 to finance operations and the costs to maintain the Company’s public status in the U.S. Shaanxi Chaoying Beauty & Cosmetics Group, which is an affiliate of the Company under common control. As of December 31, 2013, advances from Shaanxi Chaoying Beauty & Cosmetics Group amounted to $181,690. In addition, Shaanxi Yanfeng Real Estate Co., Ltd., which is also an affiliate, provided $12,734 to the Company during 2013 for working capital.
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The Company will require additional funds and may seek to raise such funds though public and private financings or from other sources. There is no assurance that the above management’s plans will be realized or the additional financing will be available at all or that, if available, such financing will be obtainable on terms favorable to the Company or that any additional financing will not be dilutive. The consolidated financial statements do not include any adjustments that might result from the outcome of those uncertainties.
OFF-BALANCE SHEET ARRANGEMENTS
We do not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition or results of operations.
RECENT ACCOUNTING PRONOUNCEMENTS
In July 2013, the FASB issued ASU 2013-11, “Income Taxes (Topic 740): Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists.” An unrecognized tax benefit, or a portion of an unrecognized tax benefit, should be presented in the financial statements as a reduction to a deferred tax asset. To the extent a net operating loss carryforward, a similar tax loss, or a tax credit carryforward is not available at the reporting date under the tax law of the applicable jurisdiction to settle any additional income taxes that would result from the disallowance of a tax position or the tax law of the applicable jurisdiction does not require the entity to use, and the entity does not intend to use, the deferred tax asset for such purpose, the unrecognized tax benefit should be presented in the financial statements as a liability and should not be combined with deferred tax assets. The assessment of whether a deferred tax asset is available is based on the unrecognized tax benefit and deferred tax asset that exist at the reporting date and should be made presuming disallowance of the tax position at the reporting date. For public entities, the guidance is effective prospectively for reporting periods beginning after December 15, 2013. Early adoption is permitted. The adoption of this standard is not expected to have a material impact on the Company’s financial position and results of operations.
In February 2013, the FASB issued ASU 2013-02, “Comprehensive Income (Topic 220): Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income.” This ASU does not change the current requirements for reporting net income or other comprehensive income in financial statements. However, this guidance requires an entity to provide information about the amounts reclassified out of accumulated other comprehensive income by component. In addition, an entity is required to present, either on the face of the statement where net income is presented or in the notes, significant amounts reclassified out of accumulated other comprehensive income by the respective line items of net income but only if the amount reclassified is required under U.S. GAAP to be reclassified to net income in its entirety in the same reporting period. For other amounts that are not required under U.S. GAAP to be reclassified in their entirety to net income, an entity is required to cross-reference to other disclosures required under U.S. GAAP that provide additional detail about those amounts. For public entities, the guidance is effective prospectively for reporting periods beginning after December 15, 2012. For nonpublic entities, the guidance is effective prospectively for reporting periods beginning after December 15, 2013. Early adoption is permitted. The adoption of this standard is not expected to have a material impact on the Company’s consolidated financial position and results of operations.
INFLATION
Inflation has not had a material impact on our business.
CURRENCY EXCHANGE FLUCTUATIONS
The net sales, costs and expenses generated by our activities in China are priced in Chinese renminbi. Approximately 99% of our assets are located in China, the remaining less than 1% in assets are located in the United States. Since 1994, the exchange rate for Renminbi against the United States dollar has remained relatively stable; with an exchange rate approximately RMB 8.28 to US$1.00. On July 21, 2005, China announced a revaluation of RMB and reduced its peg to the US dollar. China is planning to move to a managed float against a basket of currencies. The exchange rate has been adjusted to approximately RMB 6.1122 to US$1.00 as of December 31, 2013. The Chinese Renminbi has increased significantly in value as compared to the U.S. dollar. However, there can be no assurance that Renminbi will not be subject to devaluation. We may not be able to hedge effectively against Renminbi devaluation, so there can be no assurance that future movements in the exchange rate of Renminbi and other currencies will not have an adverse effect on our financial condition.
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ITEM 7A.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Not Applicable.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The information required by Item 8 appears after the signature page to this report.
ITEM 9.CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 9A.Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Based on their evaluation as of December 31, 2013, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended) were effective to ensure that the information required to be disclosed by us in this Annual Report on Form 10-K was recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and instructions for Form 10-K.
Management’s Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934, as amended). Our management assessed the effectiveness of our internal control over financial reporting as of December 31, 2013.
Our internal control over financial reporting is a process designed by or under the supervision of our principal executive and principal financial officers to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Our internal control over financial reporting includes policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect transactions and dispositions of assets; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures are being made only in accordance with authorizations of management and the directors of the Company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the Company’s assets that could have a material effect on our financial statements.
20
In making this assessment, our management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) in ‘Internal Control – Integrated Framework’. Our management has concluded that, as of December 31, 2013, our internal control over financial reporting is effective based on these criteria.
This annual report does not include an attestation report of the Company's registered public accounting firm regarding internal control over financial reporting. Management's report was not subject to attestation by the company's registered public accounting firm pursuant to rules of the Securities and Exchange Commission that permit the Company to provide only management's report in this annual report.
There were no changes in our internal controls over financial reporting during the quarter ended December 31, 2013 that have materially affected, or are reasonably likely to materially affect our internal controls over financial reporting.
Our management, including our Chief Executive Officer and Chief Financial Officer, does not expect that our disclosure controls and procedures or our internal controls will prevent all error and all fraud. 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. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within Cybrdi, Inc. have been detected.
ITEM 9B.OTHER INFORMATION.
Not applicable.
PART III
ITEM10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The following table sets forth the names, ages, principal offices and positions and the date each such person became a director or executive officer. Executive officers are elected annually by our Board of Directors. Each executive officer holds his office until he resigns, is removed by the Board or his successor is elected and qualified. Each director holds his office until his successor is elected and qualified or his earlier resignation or removal.
21
| | | | | | YEAR OF | |
| NAME AND PRINCIPAL POSITION | | AGE | | | APPOINTMENT | |
| YanBiao Bai, Chairman, CEO and President | | 53 | | | 2003 | |
| Yonghong Ren, Treasurer and Chief Operating Officer | | 38 | | | 2011 | |
Below are brief descriptions of the backgrounds and experiences of our current officers and directors:
YanBiaoBai, Chairman, CEO and President
YanBiao Bai graduated from the Second Military Medical University in 1984, receiving a legal qualification certificate. He is an experienced entrepreneur and corporate executive. Since 1999 he has served as Chairman of Shaanxi Chaoying Group, a chain of cosmetic and personal care training schools and franchises located in China. Since 2003, he has served as Chairman of the Board of Directors of Cybrdi, Inc. In 2006 he assumed the role as CEO. Long interested in Chinese traditional and modern medicine, Mr. Bai is working to apply his marketing and management expertise to the emerging biotech field in China, focusing on rapidly marketable products and services. In 2005, Mr. Bai was awarded one of the Shaanxi Province "Outstanding Young Industrialist Award," among other titles and honors. The Board believes that Mr. Bai has the experience, qualifications, attributes and skills necessary to serve on the Board because of his over 12 years of experience in the biotech industry, his having provided leadership and strategic direction to the Company and his unparalleled knowledge of the Company and its business. Mr. Bai is not a member of the Board of any other public company or any investment company, neither has he been a member of the boards of directors of such companies for the past five years.
YonghongRen, Director, Treasurer & Chief Operating Officer
Mr. Ren joined the Company from Shaanxi Chaoying Beauty and Cosmetic Co, Ltd. Since 2000, Mr. Ren has worked with Chaoying Beauty and Cosmetic Co, Ltd., where he was the general manager since March 2009 and the deputy manager from October 2005 to March 2009. He attended Baoji University of Arts and Science, graduating with a Bachelor degree in Chinese in July 1996. Mr. Ren has served as the Company’s Director, Treasurer and COO since August 19, 2011.. The Board believes that Mr. Ren has the experience, qualifications, attributes and skills necessary to serve on the Board because of his over 14 years of experience with the Company and its subsidiary. Mr. Ren is not a member of the Board of any other public company or any investment company, neither has he been a member of the boards of directors of such companies for the past five years.
INVOLVEMENT IN CERTAIN LEGAL PROCEEDINGS
None of our directors, executive officers, or control persons has been involved in any of the following events during the past ten years:
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 bankruptcy or within two years prior to that time; or
Any conviction in a criminal proceeding or being subject to a pending criminal proceeding (excluding traffic violations and other minor offenses); or
Being subject to 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
22
Being found by a court of competent jurisdiction (in a civil violation), the SEC or the Commodity Future Trading Commission to have violated a federal or state securities or commodities law, and the judgment has not been reversed, suspended, or vacated; or
Being the subject of, or a party to, any Federal or State judicial or administrative order, judgment, decree, or finding, not subsequently reversed, suspended or vacated, relating to an alleged violation of: any Federal or State securities or commodities law or regulation; or any law or regulation respecting financial institutions or insurance companies including, but not limited to, a temporary or permanent injunction, order of disgorgement or restitution, civil money penalty or temporary or permanent cease-and-desist order, or removal or prohibition order; or any law or regulation prohibiting mail or wire fraud or fraud in connection with any business entity. This violation does not apply to any settlement of a civil proceeding among private litigants; or
Being the subject of, or a party to, any sanction or order, not subsequently reversed, suspended or vacated, of any self-regulatory organization (as defined in Section 3(a)(26) of the Exchange Act (15 U.S.C. 78c(a)(26))), any registered entity (as defined in Section 1(a)(29) of the Commodity Exchange Act (7 U.S.C. 1(a)(29))), or any equivalent exchange, association, entity or organization that has disciplinary authority over its members or persons associated with a member.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING REQUIREMENTS
For companies registered pursuant to section 12(g) of the Exchange Act, Section 16(a) of the Exchange Act requires our executive officers and directors, and persons, who beneficially own more than ten percent of our equity securities, to file reports of ownership and changes in ownership with the Securities and Exchange Commission. Officers, directors and greater than ten percent shareholders are required by SEC regulation to furnish us with copies of all Section 16(a) forms they file. To our knowledge, based solely on a review of the copies of reports filed with the Securities and Exchange Commission, Section 16(a) filing requirements applicable to our officers, directors and greater than ten percent beneficial owners were met during the Company's last fiscal year and there has been no change in beneficial ownership.
All officers and directors owning shares of common stock have filed the required reports under Section 16(A) of the Act.
BOARD COMMITTEES
Our board of directors is currently composed of two directors: Mr. YanBiaoBai and Mr. YonghongRen. All board action requires the approval of a majority of directors in attendance at a meeting at which a quorum is present. We currently do not have standing audit, nominating or compensation committees. Our entire board of directors handles the functions that would otherwise be handled by each of the committees.
CODE OF ETHICS
The Company has a Code of Business Conduct and Ethics, which is applicable to all directors, officers and employees of the Company. The Code is designed to deter wrongdoing and to promote:
Honest and ethical conduct, including the ethical handling of actual or apparent conflicts of interest between personal and professional relationships;
Full, fair, accurate, timely and understandable disclosure in reports and documents that we file with, or submit to, the SEC, and in other public communications that we made;
Compliance with applicable governing laws, rules and regulations;
The prompts internal reporting of violations of the Code to the appropriate person or persons; and
Accountability for adherence to this Code.
23
ITEM 11. EXECUTIVE COMPENSATION
COMPENSATION PHILOSOPHY
Our board of directors has historically determined the compensation to be paid to our executive officers based on our financial and operating performance and prospects, and contributions made by the officers’ to our success. Each of the named officers will be measured by a series of performance criteria by the board of directors, on a yearly basis. Such criteria will be based on certain objective parameters such as job characteristics, required professionalism, management skills, interpersonal skills, related experience, personal performance and overall corporate performance.
Our board of directors has not adopted or established a formal policy or procedure for determining the amount of compensation paid to our executive officers. As our executive leadership and board of directors grow, our board of directors may decide to form a compensation committee charged with the oversight of executive compensation plans, policies and programs.
Our compensation program for our executive officers and all other employees is designed such that it will not incentivize unnecessary risk-taking. We provide our executive officers solely with a base salary to compensate them for services rendered during the year. Our policy of compensating our executives with a cash salary has served us well. Except for the stock issuances in 2010, we have not believed it necessary to provide our executives discretionary bonuses, equity incentives, or other benefits in order for us to continue to be successful. Senior executives do not have the incentive to take unnecessary risks in order to receive a bonus. However, as the Company grows and the operations become more complex, the Board of Directors may deem it in the best interest of the Company to provide such additional compensation to existing executives and in order to attract new executives.
SUMMARY COMPENSATION TABLE
The following table sets forth all cash compensation paid or to be paid by Cybrdi, as well as certain other compensation paid or accrued, for each of the last three fiscal years of our company to each named executive officer.
| | ANNUALCOMPENSATION | | | LONG-TERM COMPENSATIONAWARDS | | | | |
NAMEANDPRINCIPALPOSITION | | | | | BONUS | | | STOCKAND
OPTION
AWARD | | | SECURITIES
UNDERLYING
OPTIONS | | | ALLOTHER
COMPENSATION | |
| YEAR | | | SALARY |
Yanbiao Bai, Chairman,CEO and President | | 2013
2012 | | $ $ | 100,000
100,000 | | $ $ | -
- | | $ $ | -
- | | $ $ | -
- | | $ $ | -
- | |
Yonghong Ren, Chief Operating Officer | | 2013
2012 | | $ $ | 4,500
4,500 | | $ $ | -
- | | $ $ | -
- | | $ $ | -
- | | $ $ | -
- | |
Zhiwu Liu, Director | | 2013
2012 | | $ $ | 2,000
2,000 | | $ $ | -
- | | $ $ | -
- | | $ $ | -
- | | $ $ | -
- | |
Yanjun Han, Director | | 2013
2012 | | $ $ | 2,000
2,000 | | $ $ | -
- | | $ $ | -
- | | $ $ | -
- | | $ $ | -
- | |
Shiyu Bai, Director | | 2013
2012 | | $ $ | 2,000
2,000 | | $ $ | -
- | | $ $ | -
- | | $ $ | -
- | | $ $ | -
- | |
EMPLOYMENT AGREEMENTS
There are no written employment agreements with any of the Company's officers.
Mr. Bai serves as our President and Chief Executive Officer and his annual compensation was $100,000 in 2013 and 2012, respectively. Any future increases in his salary must be approved by the Company's board of directors.
No compensation was paid to any director solely in connection with their role as a director in 2013. In 2012, $2,000 annual compensation was paid to each director in connection with their role as a director.
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ITEM 12.SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The following table sets forth, as of March 29, 2014 information with respect to the beneficial ownership of our common stock by (i) persons known by us to beneficially own more than five percent of the outstanding shares, (ii) each director, (iii) each executive officer and (iv) all directors and executive officers as a group. As of March 29, 2014, there were issued and outstanding 120,225,323 shares of Common Stock. There are no outstanding options or warrants.
| | | | | TITLE | | | | | | PERCENTAGE | |
NAME OF OFFICER OR | | | | | OF | | | NO. OF | | | OF | |
DIRECTOR | | TITLE | | | CLASS | | | SHARES | | | OWNERSHIP | |
YanBiao Bai | | Chairman/CEO/Pres | | | Common | | | 75,594,153(1) | | | 62.88% | |
Lei Liu | | Former Director | | | Common | | | 6,234,766(2) | | | 5.19% | |
Xue Bu | | Former COO/ Treasurer/Dir | | | Common | | | 3,300,000(3) | | | 2.74% | |
All officers, directors, and former director as a group (3 people) | | | | | Common | | | 85,128,919 | | | 70.81% | |
(1)Includes shares held by Shaanxi Chaoying Beauty & Cosmetic Group of which Mr. Bai owns 64% and is the president.
(2)Includes 4,370,462 shares issued to Immuno-Oncogenomics, Inc., an affiliated entity of Lei Liu, and 1,864,304 shares owned individually by Lei Liu.
(3)Ms. Bu is the wife of Mr. Bai.
ITEM 13CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
Certain Relationships and Related Transactions
We occasionally borrow money from or loan money to our affiliated companies in PRC, our shareholders and officers. These affiliated companies include Shaanxi Chaoying Beauty & Cosmetics Group Co., Ltd. (“Chaoying Cosmetics”) of which our CEO Mr. YanBiaoBai owns 64% of the equity and is president; Shaanxi Yanfeng Real Estate Co., Ltd. (“Shaanxi Yanfeng”) of which Mr. Bai is Chairman; Xi’an Yanfeng Biotechnology Co., Ltd. (“Yanfeng Biotech”) of which Mr. Bai is the Chairman; and TianjingYanfend Real Estate Co., Ltd. (“TianjingYanfend”) of which Mr. Bai is Chairman; and Shaanxi NuoQi Health Food Co., Ltd (“Shaanxi NuoQi”), of which our former Chief Financial and Operating Officer, also Mr. Bai’s wife, Ms. Xue Bu is the Chairman.. The related transactions with these affiliated companies include: Due to related parties
Due to related parties consisted of the following:
| | As of December 31, | |
| | 2013 | | | 2012 | |
Advance from officers and shareholders | $ | 1,917,958 | | $ | 1,120,059 | |
Loan from Shaanxi Yanfeng Real Estate Co., Ltd. | | 409,018 | | | 396,284 | |
Loan from Xi'an Yanfeng Biotechnology Co., Ltd. | | 376,297 | | | 364,582 | |
Loan from Shaanxi Chaoying Beauty & Cosmetics Group Co., Ltd. | | 181,690 | | | 114,130 | |
Shaanxi Chaoying Personal Care Group Co., Inc | | 78,531 | | | 76,087 | |
Total due to related parties: | $ | 2,963,494 | | $ | 2,071,142 | |
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Mr. Yanbiao Bai owns 64% and is the CEO and Chairman of Shaanxi Chaoying Beauty & Cosmetics Group. Mr. Bai is the Chairman of Shaanxi Yanfeng Real Estate and Xi’an Yanfeng Biotechnology. The above amounts due to related parties were unsecured, interest free and due on demand.
Lease agreement
The Company’s subsidiary in the PRC leased an office space under an operating lease agreement from Shaanxi Chaoying Beauty & Cosmetics Group Co., Ltd. for a lease term originally expired on December 31, 2009, and had been extended to December 31, 2015. The rent payment under this operating lease was $6,458 (equivalent to RMB 40,000) per month.
Total rental expense charged to operations amounted to $77,491 and $70,537 for the years ended December 31, 2013 and 2012, respectively.
Operation of SPA business
In January 2011, SD Chaoying engaged Dongshan Victoria Spring Hotel (“Victoria”), which is controlled by the wife of the General Manager of SD Chaoying, to manage and operate the SPA business at the completed section of the cultural and entertainment facility. SD Chaoying has not charged any fees from Victoria and no written agreement was signed. As a result, no revenue was recognized for the years ended December 31, 2013 and 2012. Costs related to operating commercial rental amounted to $50,485 and $65,846 for the years ended December 31, 2013 and 2012, respectively.
Director Independence
None of the members of the Company’s Board of Directors is an independent director, pursuant to the definition of “independent director” under the Rules of the NASDAQ Stock Market.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The following chart sets forth public accounting fees paid and payable to KCCW Accountancy Corp. (“KCCW”) during the years ended December 31, 2013 and 2012:
| Services | | 2013 | | | 2012 | |
| Audit Fees | $ | 40,000 | | $ | 40,000 | |
| Audit Related Fees | | - | | | - | |
| Tax Fees | | - | | | - | |
| All Other Fees | | - | | | - | |
| TOTAL | $ | 40,000 | | $ | 40,000 | |
Audit fees were for professional services rendered by KCCW for the audit of our annual financial statements and the review of the financial statements included in our quarterly reports on Forms 10-Q, and services that are normally provided by KCCW in connection with statutory and regulatory filings or engagements for that fiscal year.
Audit related fees consist of the aggregate fees billed for professional services rendered for assurance and related services that reasonably related to the performance of the audit or review of our financial statements that were not otherwise included in audit fees.
Tax fees consist of the aggregate fees billed for professional services rendered for tax compliance, tax advice and tax planning. These services include assistance regarding federal, state and local tax compliance and consultation in connection with various transactions and acquisitions.
All other fees consist of the aggregate fees billed for products and services provided by our independent auditors and not otherwise included in audit fees, audit related fees or tax fees.
It is the policy of the Company that all services other than audit, review or attest services must be pre-approved by the Board of Directors.
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PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits
*3.1 | Articles of Incorporation of Registrant, as amended (incorporated by reference to Exhibit 3.1 to Registrant's Annual Report of from 10-K for the year ended October 31, 1981and Exhibit "A" and Exhibit "B" to Registrant's Proxy Statement dated February 17, 1988). |
*3.2 | By-Laws of Registrant, as amended (incorporated by reference to Exhibit 3.2 to Registrant's Quarterly Report on form 10-Q for the quarter ended April 30, 1989). |
*3.3 | Amended Articles of Incorporation as amended increasing the number of authorized shares filed as an exhibit to Form 8-k filed February 15, 2005. |
*3.4 | Articles of Merger filed with the Maryland Secretary of State filed as an exhibit to Form 8-k filed February 15, 2005. |
*3.5 | Amendment to Articles of Incorporation changing name to Cybrdi, Inc. filed as an exhibit to Form 8-k filed April 6, 2005. |
*10.1 | Registrant's Executive Stock Option Plan (incorporated by reference to Exhibit "B" to Registrant's Proxy Statement dated February 21, 1989). |
*10.2 | Amendment to Registrant's 1989 Stock Option Plan (incorporated by reference to Exhibit 10.5 to Registrant's Annual Report on Form 10-K for the year ended October 31, 1995). |
*10.3 | Amendment to Registrant's Executive Stock Option Plan (incorporated by reference to Exhibit 10.1 to Registrant's Quarterly Report on Form 10Q for the quarter ended April 30, 2001). |
*10.4 | Form of Indemnification Agreement between Registrant and its Directors and selected officers and agents (incorporated by reference to Exhibit "C" to Registrant's Proxy Statement dated February 17, 1988). |
*10.5 | Employment Agreement effective as of November 1, 1993 between Registrant and Marshall I. Kass (incorporated by reference to Exhibit 10.1 to Registrant's Quarterly Report on Form 10-Q for quarter ended January 31, 1994). |
*10.6 | Amendment to Employment Agreement between Registrant and Marshall I. Kass dated November 1, 1998 (incorporated by reference to Exhibit 10.8 to Registrant's Annual Report on Form 10-K for the year ended October 31, 1998). |
*10.7 | Agreement and Plan of Merger among Certron Corporation, Certron Acquisition Corp. and Cybrdi, Inc. filed as an exhibit to Cybrdi’s Report on Form 8-k filed February 15, 2005. |
*10.8 | Sales Agency Agreement between Shaanxi Chao Ying Biotech Co., Ltd. and US BioMax, Inc. (incorporated by reference to Exhibit 10.1 to Registrant's Quarterly Report on Form 10- QSB for the quarter ended September 30, 2007) |
*10.9 | Equity Transfer Agreement dated July 26, 2007 by and between Shaanxi Chaoying Personal Care Group Co., Inc. and Shaanxi Chaoying Biotechnology Co., Ltd (incorporated by reference to Exhibit 10.1 to Registrant's Quarterly Report on Form 10-QSB for the quarter ended September 30, 2007) |
31.1 | Rule 13(a)-14(a)/15(d)-14(a) Certification |
31.2 | Rule 13(a)-14(a)/15(d)-14(a) Certification |
32.1 | Certification Under Section 906 of the Sarbanes-Oxley Act of 2002 |
32.2 | Certification Under Section 906 of the Sarbanes-Oxley Act of 2002 |
* Previously filed
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities and Exchange Act, the Registrant has duly caused this Report to be signed on its behalf by the undersigned thereunto duly authorized.
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.
| Date: April 15, 2014 | By: /s/ Yan Biao Bai |
| | By: YanBiaoBai |
| | Title: Chief Executive Officer and |
| | Director |
Pursuant to the requirements of the Securities and Exchange Act of 1934, this Report has been signed below by the following person on behalf of the Registrant and in the capacities and on the dates indicated.
| NAME AND PRINCIPAL POSITION | SIGNATURE | | DATE |
| | | |
| YanBiaoBai, Chairman, CEO and President | /s/YanBiaoBai | | April 15, 2014 |
| | | | |
| YonghongRen, Director, Treasurer & COO | /s/ YonghongRen | | April 15, 2014 |
28
CYBRDI, INC. AND SUBSIDIARIES
TABLE OF CONTENTS
F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of:
Cybrdi, Inc.
We have audited the accompanying consolidated balance sheets of Cybrdi, Inc. and Subsidiaries (the “Company”) as of December 31, 2013 and 2012, and the related consolidated statements of operations and comprehensive income, changes in equity, and cash flows for the years then ended. The Company’s management is responsible for these consolidated financial statements. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated 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 audits 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 consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall consolidated financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Cybrdi, Inc. and Subsidiaries as of December 31, 2013 and 2012, and the consolidated results of their operations and their cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America.
The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As described in Note 3 of the consolidated financial statements, the Company has incurred recurring losses, accumulated deficit, and working capital deficit at December 31, 2013 and 2012. These matters raise substantial doubt about the Company’s ability to continue as a going concern. Managements’ plans in regard to these matters are also described in Note 3 to the consolidated financial statements. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
/s/ KCCW Accountancy Corp.
Diamond Bar, California
April 15, 2014
F-2
CYBRDI, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Audited)
| | December 31, 2013 | | | December 31, 2012 | |
| | | | | | |
ASSETS | | | | | | |
CURRENT ASSETS | | | | | | |
Cash and equivalents | $ | 203,921 | | $ | 956,235 | |
Accounts receivable, net | | 6,409 | | | 493 | |
Inventories | | 848,525 | | | 816,490 | |
Other receivables, net and prepaid expenses | | 906,459 | | | 92,647 | |
Advance to suppliers | | 4,536 | | | 3,127 | |
TOTAL CURRENT ASSETS | | 1,969,850 | | | 1,868,992 | |
PROPERTY, PLANT AND EQUIPMENT, NET | | 1,144,781 | | | 1,189,647 | |
CONSTRUCTION IN PROGRESS | | 6,609,918 | | | 6,831,894 | |
INTANGIBLE ASSETS, NET | | 628,193 | | | 660,975 | |
TOTAL ASSETS | $ | 10,352,742 | | $ | 10,551,508 | |
| | | | | | |
LIABILITIES AND EQUITY | | | | | | |
CURRENT LIABILITIES | | | | | | |
Short-term loan | $ | 1,308,858 | | $ | 1,664,395 | |
Accounts payable | | 11,903 | | | 3,887 | |
Accrued expenses | | 810,331 | | | 686,439 | |
Deferred revenue | | 126,128 | | | 122,201 | |
Advance from Customer | | 165,066 | | | 149,163 | |
Due to related parties | | 2,963,494 | | | 2,071,142 | |
Deferred tax liabilities | | 10,598 | | | 10,269 | |
Other payables | | 591,613 | | | 571,099 | |
TOTAL CURRENT LIABILITIES | | 5,987,991 | | | 5,278,595 | |
CONSTRUCTION PAYABLE | | 376,297 | | | 846,063 | |
TOTAL LIABILITIES | | 6,364,288 | | | 6,124,658 | |
| | | | | | |
EQUITY | | | | | | |
Preferred Stock, $1.00 per value, 500,000 shares authorized,
no shares issued and outstanding | | - | | | - | |
Common Stock, no par value, 150,000,000 shares authorized,
and 120,225,323 shares issued and outstanding as of December 31, 2013 and December 31, 2012, respectively | | 4,313,614 | | | 4,313,614 | |
Additional paid-in capital | | 172,308 | | | 172,308 | |
Reserve funds | | 336,885 | | | 336,885 | |
Accumulated deficit | | (3,525,809 | ) | | (2,977,443 | ) |
Accumulated other comprehensive income | | 1,656,723 | | | 1,529,967 | |
TOTAL STOCKHOLDERS’ EQUITY | | 2,953,721 | | | 3,375,331 | |
NONCONTROLLING INTEREST | | 1,034,733 | | | 1,051,519 | |
TOTAL EQUITY | | 3,988,454 | | | 4,426,850 | |
| | | | | | |
TOTAL LIABILITIES AND EQUITY | $ | 10,352,742 | | $ | 10,551,508 | |
The accompanying notes are an integral part of these consolidated financial statements.
F-3
CYBRDI, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(Audited)
| | For the Fiscal Years Ended December 31, | |
| | 2013 | | | 2012 | |
Revenue | | | | | | |
Housing | $ | - | | $ | 268,582 | |
Commercial rental - related party | | - | | | - | |
Tissue array products | | 574,261 | | | 514,593 | |
Total revenue | | 574,261 | | | 783,175 | |
Cost of Sales | | | | | | |
Housing | | - | | | 220,980 | |
Commercial rental - related party | | 50,485 | | | 65,846 | |
Tissue array products | | 339,925 | | | 329,089 | |
Total cost of sales | | 390,410 | | | 615,915 | |
| | | | | | |
Gross Profit | | 183,851 | | | 167,260 | |
| | | | | | |
Operating Expenses: | | | | | | |
Salaries and wages | | 228,526 | | | 233,124 | |
Depreciation and amortization | | 121,954 | | | 149,925 | |
Bad debt expense | | 2,895 | | | 330 | |
(Reversal) Estimates of loss contingencies | | - | | | (38,025 | ) |
Professional fees | | 74,924 | | | 77,408 | |
Selling and distribution expenses | | 9,097 | | | 6,654 | |
Other general and administrative expenses | | 288,780 | | | 169,594 | |
Total Operating Expenses | | 726,176 | | | 599,010 | |
| | | | | | |
Loss from Operations | | (542,325 | ) | | (431,750 | ) |
| | | | | | |
Other Income/(Expense) | | | | | | |
Interest expenses | | (220,979 | ) | | (194,592 | ) |
Other income (expense), net | | 148,767 | | | (28,442 | ) |
Total Other Expense, Net | | (72,212 | ) | | (223,034 | ) |
| | | | | | |
Loss before Income Taxes | | (614,537 | ) | | (654,784 | ) |
Income Tax Expense | | (2,210 | ) | | (856 | ) |
Net loss | | (616,747 | ) | | (655,640 | ) |
Less: Net loss attributable to the non-controlling interests | | (68,381 | ) | | (125,840 | ) |
Net loss attributable to CYBRDI, INC. | | (548,366 | ) | | (529,800 | ) |
Foreign currency translation gain / (loss) | | 126,756 | | | (10,362 | ) |
Comprehensive loss | $ | (421,610 | ) | $ | (540,162 | ) |
| | | | | | |
Net Loss Per Common Share | | | | | | |
Basic and Diluted | $ | (0.01 | ) | $ | (0.01 | ) |
| | | | | | |
Weighted Average Number of Shares Outstanding | | | | | | |
Basic and Diluted | | 120,225,323 | | | 120,225,323 | |
The accompanying notes are an integral part of these consolidated financial statements.
F-4
CYBRDI, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
(Audited)
| | Common Stockholders | | | | | | | |
| | | | | | | | | | | | | | | | | Accumulated | | | Total | | | | | | | |
| | | | | | | | Additional | | | | | | | | | Other | | | Common | | | | | | | |
| | Common Stocks | | | paid-in | | | Reserve | | | Accumulated | | | Comprehensive | | | Stockholders' | | | Noncontrolling | | | Total | |
| | Shares | | | Amount | | | capital | | | Fund | | | Deficit | | | Income | | | Equity | | | Interests | | | Equity | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
Balance as of December 31, 2010 | | 65,756,567 | | $ | 3,877,864 | | $ | - | | $ | 336,885 | | $ | (1,847,882 | ) | $ | 1,287,737 | | $ | 3,654,604 | | $ | 1,320,048 | | $ | 4,974,652 | |
Net loss | | - | | | - | | | - | | | - | | | (599,761 | ) | | - | | | (599,761 | ) | | (139,392 | ) | | (739,153 | ) |
Debt conversion to equity | | 54,468,756 | | | 435,750 | | | 172,308 | | | - | | | - | | | - | | | 608,058 | | | - | | | 608,058 | |
Net change in foreign currency translation adjustment | | - | | | - | | | - | | | - | | | - | | | 252,592 | | | 252,592 | | | (1 | ) | | 252,591 | |
Balance as of December 31, 2011 | | 120,225,323 | | | 4,313,614 | | | 172,308 | | | 336,885 | | | (2,447,643 | ) | | 1,540,329 | | | 3,915,493 | | | 1,180,655 | | | 5,096,148 | |
Net loss | | - | | | - | | | - | | | - | | | (529,800 | ) | | - | | | (529,800 | ) | | (125,840 | ) | | (655,640 | ) |
Net change in foreign currency translation adjustment | | - | | | - | | | - | | | - | | | - | | | (10,362 | ) | | (10,362 | ) | | (3,296 | ) | | (13,658 | ) |
Balance as of December 31, 2012 | | 120,225,323 | | | 4,313,614 | | | 172,308 | | | 336,885 | | | (2,977,443 | ) | | 1,529,967 | | | 3,375,331 | | | 1,051,519 | | | 4,426,850 | |
Net loss | | - | | | - | | | - | | | - | | | (548,366 | ) | | - | | | (548,366 | ) | | (68,381 | ) | | (616,747 | ) |
Net change in foreign currency translation adjustment | | - | | | - | | | - | | | - | | | - | | | 126,756 | | | 126,756 | | | 51,595 | | | 178,351 | |
Balance as of December 31, 2013 | | 120,225,323 | | $ | 4,313,614 | | $ | 172,308 | | $ | 336,885 | | $ | (3,525,809 | ) | $ | 1,656,723 | | $ | 2,953,721 | | $ | 1,034,733 | | $ | 3,988,454 | |
See notes to consolidated financial statements.
F-5
CYBRDI INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Audited)
| | For the Fiscal Years Ended December 31, | |
| | 2013 | | | 2012 | |
CASH FLOWS FROM OPERATING ACTIVITIES | | | | | | |
Net loss attributable to Cybrdi Inc. | $ | (548,366 | ) | $ | (529,800 | ) |
| Adjustments to reconcile net loss to | | | | | | |
| Provided by operating activities: | | | | | | |
Depreciation and amortization | | 148,017 | | | 248,705 | |
Bad debt expense | | 2,895 | | | 330 | |
Minority interest | | (68,381 | ) | | (125,840 | ) |
(Reversal) Estimates of loss contingencies | | - | | | (38,025 | ) |
Changes in Operating Assets and Liabilities: | | | | | | |
Accounts receivable | | (1,720 | ) | | (823 | ) |
Inventories | | (5,721 | ) | | 233,984 | |
Other receivable and prepaid expenses | | (808,373 | ) | | (20,021 | ) |
Accounts payable and other current liabilities | | 134,040 | | | 236,870 | |
Deferred revenue | | - | | | 19,601 | |
Advance from Customer | | 10,963 | | | (74,746 | ) |
Net Cash used in Operating Activities | | (1,136,646 | ) | | (49,765 | ) |
| | | | | | |
CASH FLOWS FROM INVESTING ACTIVITIES | | | | | | |
Advance for loan to affiliated companies | | (5,790 | ) | | 79,219 | |
Purchase of property, plant, and equipment | | (12,722 | ) | | (11,573 | ) |
Payments for construction in progress | | (53,610 | ) | | (65,050 | ) |
Net Cash provided by/(used in) Investing Activities | | (72,122 | ) | | 2,596 | |
| | | | | | |
CASH FLOWS FROM FINANCING ACTIVITIES | | | | | | |
Proceeds from loans from related companies | | 256,265 | | | 88,726 | |
Proceeds from loan from shareholders/officers | | 583,440 | | | 135,362 | |
Repayment of short term loans | | (403,597 | ) | | - | |
Net cash provided by Financing Activities | | 436,108 | | | 224,088 | |
| | | | | | |
NET DECREASE IN CASH & CASH EQUIVALENTS | | (772,660 | ) | | 176,919 | |
EFFECT OF EXCHANGE RATE CHANGE ON CASH & CASH EQUIVALENTS | | 20,346 | | | (1,732 | ) |
CASH & CASH EQUIVALENTS, BEGINNING BALANCE | | 956,235 | | | 781,048 | |
| | | | | | |
CASH & CASH EQUIVALENTS, ENDING BALANCE | $ | 203,921 | | $ | 956,235 | |
| | | | | | |
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION | | | | | | |
Interest paid | $ | 146,620 | | $ | 160,668 | |
Income taxes paid | $ | 545 | | $ | 997 | |
| | | | | | |
NONCASH INVESTING TRANSACTIONS | | | | | | |
Constructions in process incurred by accrued construction payable | $ | 496,953 | | $ | - | |
The accompanying notes are an integral part of these consolidated financial statements.
F-6
CYBRDI, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2013 AND 2012
1. ORGANIZATION AND PRINCIPAL ACTIVITIES
Cybrdi, Inc. (f/k/a Certron Corporation) (the “Company” or “Cybrdi”) was incorporated on August 1, 1966, under the laws of the State of California. Until around June 2004, the Company’s business consisted of the distribution of magnetic media products, primarily blank audio and video cassettes. Due to continuing intense price competition and technological changes in the marketplace for its products, the Company lost its remaining significant customers and disposed of or wrote off its remaining inventory. As a result of these occurrences, the Company concluded that its audio and videotape businesses were no longer viable and some of its product lines were obsolete.
In November 2004, the Company, formed a wholly-owned subsidiary Certron Acquisition Corp., a Maryland corporation ("Acquisition Sub") to acquire all the ownership interest in Cybrdi, Inc., a privately held company incorporated in the State of Maryland ("Cybrdi Maryland"). The Company acquired Cybrdi Maryland in exchange for 47,328,263 shares of common stock in a merger transaction. As a result of the merger, the former shareholders of Cybrdi Maryland acquired approximately 93.8% of the outstanding shares of the Company’s common stock. As a result of the ownership interests of the former shareholders of Cybrdi Maryland, for financial statement reporting purposes, the transaction was treated as a reverse acquisition, with Cybrdi Maryland deemed the accounting acquirer and Certron Corporation deemed the accounting acquiree. Historical information of the surviving company is that of Cybrdi Maryland.
Cybrdi Maryland was established in 2001 to acquire an interest in biogenetic products commercialization and related services entities in Asia. On March 5, 2003, Cybrdi Maryland acquired an 80% interest Shaanxi Chao Ying Biotechnology Co., Ltd. (“Chaoying Biotech”), a sino-foreign equity joint venture established in July 2000 in the People's Republic of China (“PRC”), through the exchange of 99% of the Company’s shares to the existing shareholders of Chaoying Biotech. For financial statement reporting purposes, the merger was treated as a reverse acquisition, with Chaoying Biotech deemed the accounting acquirer and Cybrdi Maryland deemed the accounting acquiree.
Chaoying Biotech is a sino-foreign equity joint venture between Shaanxi Chaoying Beauty & Cosmetics Group Co., Ltd. Ltd. (the “Chinese Partner”, a PRC corporation) and Immuno-Onco Genomics Inc. (the “Foreign Partner”, a USA corporation). The joint venture agreement has a 15 year operating period starting from its formation in July 2000 and it may be extended upon mutual consent. The principal activities of Chaoying Biotech are research, manufacture and sale of various high-quality tissue arrays and the related services in the PRC.
Most of the Company’s activities are conducted through Chaoying Biotech. Chaoying Biotech, with its principal operations located in China, aims to take advantage of China's abundant scientific talent, low wage rates, less stringent biogenetic regulation, and the huge genetic population as it introduces its growing list of tissue micro array products.
On February 10, 2005, the Company completed the merger with Cybrdi Maryland and changed its name to Cybrdi, Inc.
On July 26, 2007, Chaoying Biotech entered into an acquisition agreement with its Chinese partner, which is a principal shareholder of the company, Mr. Bai, the Company’s chief executive officer and a director is also a principal of its Chinese partner On July 28, 2007, Chaoying Biotech invested RMB15 millions (equivalent to US$2,454,108) to acquire an 83.33% equity ownership of Shandong Chaoying Culture and Entertainment Co., Ltd. (“SD Chaoying”) from its Chinese partner, SD Chaoying is a corporation organized in Shandong Province P.R.China. On September 5, 2007, Shandong Commercial government had approved this acquisition and the ownership title of SD Chaoying had been transferred to Chaoying Biotech from its Chinese partner. The future business of SD Chaoying will primarily focus on culture and entertainment, including spa activities, cosmetic and personal care, health club, gambling, saunas for massage and bath, karaoke, catering, and lodging, etc. The Company plans for SD Chaoying to have a specific emphasis on casino gambling, but such operations have not been approved by Shandong Administration for Civil Affairs. At the end of 2010, SD Chaoying had substantially completed the construction of two residential buildings and had recognized revenue from sales of housing for the year then ended. The main structure of the commercial entertainment center has also been completed, except for the exterior, rooftop, the surrounding supporting projects and the community landscaping, which are expected to be completed in 2014 prior to the commencement of operations by merchant tenants.
F-7
On March 10, 2007 the Company entered into a Sales Agency Agreement with US BioMax, Inc., a reseller located in USA. In addition, the Company terminated its branch office in USA to reduce the general and administrative costs of Cybrdi Maryland in October 2007.
On April 29, 2011, Chaoying Biotech invested $163,607 (equivalent to RMB 1 million) to restore the operation of the Institute of Shaanxi Chaoying Clinical Pathology (“IOSCCP”), a wholly-owned subsidiary established on July 31, 2003, whose main business includes pathology research and consulting, consulting and diagnostic clinical pathology and pathology-related research and development of new technologies, and basic training in pathology. Its sole shareholder has been Chaoying Biotech. However, Chaoying Biotech withdrew the original investment from IOSCCP in September 2007 as we believed that both internal and external conditions of IOSCCP were not mature at that time. In light of foreseeable benefits and new business opportunities for this entity, we resumed its business and re-invested $163,607 (equivalent to RMB 1 million) in it in April 2011.
2. BASIS OF PRESENTATION
The accompanying consolidated financial statements are prepared in accordance with generally accepted accounting principles in the United States of America (“US GAAP”). This basis of accounting differs from that used in the statutory accounts of the Subsidiary, which were prepared in accordance with the accounting principles and relevant financial regulations applicable to enterprises with foreign investment in the PRC (“PRC GAAP”). Necessary adjustments were made to the Subsidiary’s statutory accounts to conform to US GAAP were included in these consolidated financial statements.
3. GOING CONCERN
The accompanying consolidated financial statements have been prepared assuming the Company will continue as a going concern, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. The Company has incurred significant losses and has not demonstrated the ability to generate sufficient cash flows from operations to satisfy its liabilities and sustain operations. The Company had an accumulated deficit of $3,525,809 and $2,977,443 as of December 31, 2013 and 2012, respectively, including net losses of $548,366 and $529,800 for the years ended December 31, 2013 and 2012, respectively. In addition, current liabilities exceeded current assets by $4,018,141 and $3,409,603 at December 31, 2013 and 2012, respectively. These matters raise substantial doubt about the Company’s ability to continue as a going concern.
The Company finances its operations primarily through short-term bank borrowings and advances from related parties or officers/shareholders. In order to complete the construction of SD Chaoying cultural and entertainment center, approximately $3.1 million (equivalent to RMB19 million) of capital is expected to be needed. The Company, taking into accounts the available banking facilities, internal financial resource, and supports from related companies, believes it has sufficient working capital to meet its present obligation for at least the next twelve months. Management is taking actions to address the company's financial condition and deteriorating liquidity position. The following sets forth management’s plans for dealing with the adverse effects of the conditions:
(a) Sale of housing inventories: Proceeds to be received from the sale of the remaining housing of the two completed residential buildings are expected to amount to approximately $0.5 million. However, there is no assurance when such sales will occur.
(b) Rental and management fee revenue from the cultural and entertainment center: Annual rental revenue is estimated to be approximately $0.69 million per year. Management fee revenue will be charged to commercial tenants at 3% of annual gross revenue. As of December 31, 2013, the Company has not commenced collecting rental and management fee revenue for the culture and entertainment center.
(c) Additional advances from related companies and affiliates: Our major shareholders and officers advanced additional $892,352 to the Company in 2013 to finance operations and the costs to maintain the Company’s public status in the U.S. Shaanxi Chaoying Beauty & Cosmetics Group, which is an affiliate of the Company under common control, is anticipated to provide up to $67,560 of working capital to support operational use. As of December 31, 2013, advances from Shaanxi Chaoying Beauty & Cosmetics Group amounted to $181,690. In addition, Shaanxi Yanfeng Real Estate Co., Ltd., which is also an affiliate, provided $12,734 to the Company during 2013 for working capital.
The Company will require additional funds and may seek to raise such funds though public and private financings or from other sources. There is no assurance that the above management’s plans will be realized or the additional financing will be available at all or that, if available, such financing will be obtainable on terms favorable to the Company or that any additional financing will not be dilutive. The consolidated financial statements do not include any adjustments that might result from the outcome of those uncertainties.
F-8
4. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a)Principle of consolidation
The accompanying consolidated financial statements present the financial position, results of operations and cash flows of the Company and all entities in which the Company has a controlling voting interest. The consolidated financial statements also include the accounts of any variable interest entities in which the Company is considered to be the primary beneficiary and such entities are required to be consolidated in accordance with accounting principles generally accepted in the United States (“US GAAP”). The consolidated financial statements include the financial statements of Cybridi, Inc. and its subsidiary. All significant intercompany transactions and balances are eliminated in consolidation.
(b)Use of estimates
The preparation of financial statements 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 revenues and expenses during the reported period. Actual results could differ from those estimates.
(c)Reclassifications
Certain amounts reflected in the consolidated financial statements for the fiscal year ended December 31, 2012 have been reclassified to conform to the presentation for the fiscal year ended December 31, 2013.
(d)Cash and cash equivalents
For financial reporting purposes, the Company considers all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents.
(e)Inventories
Inventories are stated at the lower of cost or market. Cost of raw materials is determined on the basis of first in first out method (“FIFO”). Finished goods are determined on the moving weighted average basis and are comprised of direct materials, direct labor and an appropriate proportion of overhead.
(f)Property, plant and equipment
Property, plant and equipment are stated at cost less accumulated depreciation and amortization. Depreciation on property, plant and equipment is calculated on the straight-line basis to write off the cost of assets over their respective estimated useful lives. Leasehold improvements are amortized over the estimated useful life of the improvement or the lease term, whichever is shorter. Estimated useful lives of the property, plant and equipment are as follows:
F-9
| | | Useful Life | |
| Buildings | | 20 years | |
| Plant and machinery | | 10 years | |
| Motor vehicles | | 10 years | |
| Office equipment | | 5 years | |
| Leasehold improvements | | Lower of lease term or 5 years | |
| Software - website | | 3 years | |
The cost and related accumulated depreciation of assets sold or otherwise retired are eliminated from the accounts and any gain or loss is included in the statements of operations. The cost of maintenance and repairs is charged to expenses as incurred, whereas significant renewals and betterments are capitalized.
Long-term assets of the Company are reviewed annually as to whether their carrying value has become impaired, pursuant to the guidelines established in FASB ASC Topic 360, “Property, Plant, and Equipment” (formerly SFAS No. 144). The Company also re-evaluates the periods of amortization to determine whether subsequent events and circumstances warrant revised estimates of useful lives.
For the years ended December 31, 2013 and 2012, the Company had not recognized any impairment for property, plant and equipment.
(g)Construction in progress
Construction in progress consists of commercial property and residential unit sites under construction. The Company leases the land for the commercial property and residential unit sites under land use rights agreement with the PRC government. Construction in progress is stated at the lower of cost or fair value less selling costs.
Expenditures for land development, including cost of land use rights, deed tax, pre-development costs and engineering costs, are capitalized and allocated to development projects by the specific identification method. Costs are allocated to specific units within a project based on the ratio of the floor measure of units to the estimated total floor measurement of the total projects.
Costs of amenities transferred to buyers are allocated as common costs of the project that are allocated to specific units as a component of total construction costs. For amenities retained by the Company, costs in excess of the related fair value of the amenity are also treated as common costs. Results of operations of amenities retained by the Company are included in current operating results.
In accordance with ASC 360, “Property, Plant and Equipment” (“ASC 360”), construction in progress is subject to valuation adjustments when the carrying amount exceeds fair value. An impairment loss is recognized only if the carrying amount of the assets is not recoverable and exceeds fair value. The carrying amount is not recoverable if it exceeds the sum of the undiscounted cash flows expected to be generated by the assets.
When the profitability of a current project deteriorates due to a slowdown in the sales pace, reduction of pricing or some other factor, this indicates that there may be a possible future loss on delivery and possible impairment in the recoverability of the assets. Accordingly, the assets of such project are subsequently reviewed for future losses and impairment by comparing the estimated future undiscounted cash flows for the project to the carrying value of such project. If the estimated future undiscounted cash flows are less than the asset’s carrying value such deficit will be charged as a future loss and the asset will then be written down to its estimated fair value.
For the years ended December 31, 2013 and 2012, the Company had not recognized any impairment for construction in progress.
(h)Accounts and other receivables
Accounts and other receivables are recognized and carried at original invoice amount less allowance for any uncollectible amounts. An estimate for doubtful accounts is made when collection of the full amount is no longer probable.
(i)Research and development costs
Research and development costs are charged to operations when incurred and are included in operating expenses.
F-10
(j)Advertising costs
Advertising costs are charged to operations when incurred and are included in operating expenses. Advertising expenses were $1,744 and $1,141 for the years ended December 31, 2013 and 2012, respectively.
(k)Fair value measurements
The carrying amounts of cash and equivalents, accounts receivable, inventories, loan to unaffiliated company, other receivables and prepaid expenses, accounts payable, accrued expenses, other payables, customers deposit , loan from related company and amounts due to shareholders/officers approximate fair value due to the short-term maturities of the assets and liabilities.
(l)Revenue recognition
Revenue represents the invoiced value of goods sold recognized upon the delivery of goods to customers and service income is recognized when services are provided. Deferred revenue represents the undelivered portion of invoiced value of goods sold to customers. Sales transactions not meeting all the conditions of the full accrual method are accounted for using the deposit method of accounting. Under the deposit method, all costs are capitalized as incurred, and payments received from the buyer are recorded as customer deposits.
(m)Foreign currency translation
The accompanying consolidated financial statements are presented in United States dollars. The functional currency of the Company’s PRC subsidiary is Renminbi (RMB). The financial statements are translated into United States dollars from RMB at year-end exchange rates as to assets and liabilities and weighted average exchange rates as to revenues and expenses. Capital accounts are translated at their historical exchange rates when the capital transactions occurred.
The RMB is not freely convertible into foreign currency and all foreign exchange transactions must take place through authorized institutions. No representation is made that the RMB amounts could have been, or could be, converted into USD at the rates used in translation.
(n)Income taxes
Income taxes are provided for the tax effects of transactions reported in the financial statements and consist of taxes currently due plus deferred taxes related primarily to differences between the basis of assets and liabilities for financial and income tax reporting. The deferred tax assets and liabilities represent the future tax return consequences of those differences, which will either be taxable or deductible when the assets and liabilities are recovered or settled. Deferred taxes also are recognized for operating losses that are available to offset future federal and state income taxes.
(o)Comprehensive income (loss)
FASB ASC Topic 220, “Comprehensive Income”, established standards for the reporting and display of comprehensive income, its components and accumulated balances in a full set of general purpose financial statements. ASC Topic 220 defines comprehensive income to include all changes in equity except those resulting from investments by owners and distributions to owners. Among other disclosures, ASC Topic 220 requires that all items that are required to be recognized under current accounting standards as components of comprehensive income be reported in a financial statement that is presented with the same prominence as other financial statements. The Company’s only current component of comprehensive income is the foreign currency translation adjustment.
(p)Intangible assets
Intangible assets include a patent. With the adoption of FASB ASC Topic 350, “Intangibles”, intangible assets with a definite life are amortized on a straight-line basis. The patent is being amortized over its estimated life of 10 years. Intangible assets with a definite life are tested for impairment whenever events or circumstances indicate that a carrying amount of an asset (asset group) may not be recoverable. An impairment loss would be recognized when the carrying amount of an asset exceeds the estimated undiscounted cash flows used in determining the fair value of the asset. The amount of the impairment loss to be recorded is calculated by the excess of the asset’s carrying value over its fair value. Fair value is generally determined using a discounted cash flow analysis. Costs related to internally develop intangible assets are expensed as incurred.
For the years ended December 31, 2013 and 2012, the Company had not recognized any impairment for intangible assets.
F-11
(q)Recent Accounting Pronouncements
In February 2013, the FASB issued ASU 2013-02, “Comprehensive Income (Topic 220): Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income.” This ASU does not change the current requirements for reporting net income or other comprehensive income in financial statements. However, this guidance requires an entity to provide information about the amounts reclassified out of accumulated other comprehensive income by component. In addition, an entity is required to present, either on the face of the statement where net income is presented or in the notes, significant amounts reclassified out of accumulated other comprehensive income by the respective line items of net income but only if the amount reclassified is required under U.S. GAAP to be reclassified to net income in its entirety in the same reporting period. For other amounts that are not required under U.S. GAAP to be reclassified in their entirety to net income, an entity is required to cross-reference to other disclosures required under U.S. GAAP that provide additional detail about those amounts. For public entities, the guidance is effective prospectively for reporting periods beginning after December 15, 2012. For nonpublic entities, the guidance is effective prospectively for reporting periods beginning after December 15, 2013. Early adoption is permitted. The adoption of this standard is not expected to have a material impact on the Company’s consolidated financial position and results of operations.
In July 2013, the FASB issued ASU 2013-11, “Income Taxes (Topic 740): Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists.” An unrecognized tax benefit, or a portion of an unrecognized tax benefit, should be presented in the financial statements as a reduction to a deferred tax asset. To the extent a net operating loss carryforward, a similar tax loss, or a tax credit carryforward is not available at the reporting date under the tax law of the applicable jurisdiction to settle any additional income taxes that would result from the disallowance of a tax position or the tax law of the applicable jurisdiction does not require the entity to use, and the entity does not intend to use, the deferred tax asset for such purpose, the unrecognized tax benefit should be presented in the financial statements as a liability and should not be combined with deferred tax assets. The assessment of whether a deferred tax asset is available is based on the unrecognized tax benefit and deferred tax asset that exist at the reporting date and should be made presuming disallowance of the tax position at the reporting date. For public entities, the guidance is effective prospectively for reporting periods beginning after December 15, 2013. Early adoption is permitted. The adoption of this standard is not expected to have a material impact on the Company’s financial position and results of operations.
In December 2013, the FASB issued ASU 2013-12, “Definition of a Public Business Entity”. The Board has decided that it should proactively determine which entities would be within the scope of the Private Company Decision-Making Framework: A Guide for Evaluating Financial Accounting and Reporting for Private Companies (Guide). This will aim to minimize the inconsistency and complexity of having multiple definitions of, or a diversity in practice as to what constitutes, a nonpublic entity and public entity within U.S. generally accepted accounting principles (GAAP) on a going-forward basis. This Update addresses those issues by defining public business entity. The Accounting Standards Codification includes multiple definitions of the terms nonpublic entity and public entity. The amendment in this Update improves U.S. GAAP by providing a single definition of public business entity for use in future financial accounting and reporting guidance. The amendment does not affect existing requirements. There is no actual effective date for the amendment in this Update. However, the term public business entity will be used in Accounting Standards Updates which are the first Updates that will use the term public business entity. The adoption of this standard is not expected to have a material impact on the Company’s consolidated financial position and results of operations.
5. INVENTORIES
Inventories consisted of the following:
| | | As of December 31, | |
| | | 2013 | | | 2012 | |
| Raw materials | $ | 6,932 | | $ | 2,546 | |
| Finished goods | | 284,675 | | | 272,983 | |
| Housing inventory | | 556,918 | | | 540,961 | |
| Total | $ | 848,525 | | $ | 816,490 | |
F-12
6. OTHER RECEIVABLE, NET AND PREPAID EXPENSE
Other receivables, net and prepaid expense consisted of the following:
| | | As of December 31, | |
| | | 2013 | | | 2012 | |
| Advances to Employee | $ | 781,273 | | $ | 12,253 | |
| Deposits | | - | | | 26,947 | |
| Other | | 132,276 | | | 60,316 | |
| Subtotal | | 913,548 | | | 99,516 | |
| Less: Allowance for doubtful account | | (7,090 | ) | | (6,869 | ) |
| $ | 906,459 | | $ | 92,647 | |
The increase of $813,812 or 878% is mainly attributable to advances to employee, which were with assignment for related work.
7. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consisted of the following:
| | As of December 31, | |
| | 2013 | | | 2012 | |
Buildings | $ | 1,035,894 | | | 1,003,644 | |
Machinery and equipments | | 754,152 | | | 721,416 | |
Motor vehicles | | 351,695 | | | 340,746 | |
Office equipments | | 94,292 | | | 88,122 | |
Leasehold improvement | | 314,620 | | | 304,826 | |
Subtotal | | 2,550,653 | | | 2,458,754 | |
Less: Accumulated depreciation | | (1,405,872 | ) | | (1,269,107 | ) |
| $ | 1,144,781 | | $ | 1,189,647 | |
Depreciation expense for the years ended December 31, 2013 and 2012 were $121,954 and $129,344, respectively.
8. CONSTRUCTION IN PROGRESS
Construction in progress of $6,609,918 and $6,831,894 as of December 31, 2013 and 2012 respectively mainly consisted of land under development and construction of the entertainment, culture, and casino facility in Shandong Province, which will be transferred to fixed assets in SD Chaoying when construction is completed. As of December 31, 2013 and 2012, land use rights in the amounts of $2,618,333 and $2,512,539 were classified under construction in progress for the commercial property and residential unit sites under construction, and the remaining $628,193 and $627,121 for partial operation of the commercial property was classified under intangible assets subject to amortization.
9. INTANGIBLE ASSETS, NET
Intangible assets consisted of the following:
| | | As of December 31, | |
| | | 2013 | | | 2012 | |
| Patent | $ | 1,047,086 | | $ | 1,014,488 | |
| Land use rights | | 684,372 | | | 663,066 | |
| Software | | 117,405 | | | 113,750 | |
| Subtotal | | 1,848,863 | | | 1,791,304 | |
| Less: Accumulated amortization | | (1,220,670 | ) | | (1,130,329 | ) |
| | $ | 628,193 | | $ | 660,975 | |
Amortization expenses for the years ended December 31, 2013 and 2012 were $90,341 and $119,361, respectively.
Expected amortization expenses for intangible assets in the next five years are as follows:
| For the Years Ended December 31, | | Amount | |
| 2013 | $ | 17,983 | |
| 2014 | | 17,983 | |
| 2015 | | 17,983 | |
| 2016 | | 17,983 | |
| 2017 | | 17,983 | |
| Thereafter | | 538,278 | |
| Total | $ | 628,193 | |
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10. ADVANCE FROM CUSTOMER
Advance from customer consisted of residential properties down payments amounted to $165,066 and $149,163 as of December 31, 2013 and 2012, respectively.
11. SHORT-TERM LOAN
The Company had a short-term loan in the principal amount of $1,321,506 (equivalent to RMB 8.0 million) and $1,505,880 (equivalent to RMB 9.5 million) as of December 31, 2013 and 2012 from Changle Rural Credit Union,which is a bank located in Shandong Province of the PRC. The loan had a maturity date of September 2, 2013. On November 17, 2013, the Company renewed this short-term loan. The term of the renewal loan started from November 17, 2013 with a maturity date of October 16, 2014. The interest rate for the short-term loan was 12% per annum as of December 31, 2013. This short-term loan had been secured by the Company’s land use right and construction-in-progress of SD Chaoying with a book value of $3.25 million (equivalent to RMB 19.69 million) and $4.65 million (equivalent to RMB27.47 million) as of December 31, 2013, respectively. For the $3.25 million land use rights, $2.62 million was classified under construction-in-progress for the commercial property and the remaining $0.63 million was classified under intangible assets subject to amortization.
Additionally, there is another short-term loan of $165,188 (equivalent to RMB1.0 million) from Mr. Fengguo Liu, an unrelated party. The short-term loan is due on January 12, 2014 with an interest rate at 2% per month. Also included in the current liabilities was $2,963,494 of loans from related companies, including Xi’an Yanfeng Biotechnology Co., Ltd., Shaanxi Yanfeng Real Estate Co. Ltd, Shaanxi Chaoying Beauty & Cosmetics Group Co., Ltd., and the stockholders who are also the Company's officers. These entities were related to the Company through common ownership and principal officers. These loans are non-interest bearing and have no set repayment terms.
12. RELATED PARTY TRANSACTIONS
Due to related parties
Due to related parties consisted of the following:
| | As of December 31, | |
| | 2013 | | | 2012 | |
Loan from officers and shareholders | $ | 1,917,958 | | $ | 1,120,059 | |
Loan from Shaanxi Yanfeng Real Estate Co., Ltd. | | 409,018 | | | 396,284 | |
Loan from Xi'an Yanfeng Biotechnology Co., Ltd. | | 376,297 | | | 364,582 | |
Loan from Shaanxi Chaoying Beauty & Cosmetics Group Co., Ltd. | | 181,690 | | | 114,130 | |
Shaanxi Chaoying Personal Care Group Co., Inc | | 78,531 | | | 76,087 | |
Total | $ | 2,963,494 | | $ | 2,071,142 | |
Mr. Yanbiao Bai owns 64% and is the CEO and Chairman of Shaanxi Chaoying Beauty & Cosmetics Group. Mr. Bai is the Chairman of Shaanxi Yangfeng Real Estate and Xi’an Yanfeng Biotechnology. The above amounts of due to relate parties were unsecured, interest free, and due on demand.
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Lease agreement
The Company’s subsidiary in the PRC leased an office space under an operating lease agreement from Shaanxi Chaoying Beauty & Cosmetics Group Co., Ltd. for a lease term originally expired on December 31, 2009, and had been extended to December 31, 2015. The rent payment under this operating lease was $6,458 (equivalent to RMB 40,000) per month. The total future minimum lease payments for this lease as of December 31, 2013 were $154,992.
Future minimum lease payments under operating leases with initial or remaining terms of one year or more are as follows:
| For the Years Ended December 31, | | Amount | |
| 2014 | $ | 77,496 | |
| 2015 | | 77,496 | |
| Total | $ | 154,992 | |
Total rental expense charged to operations amounted to $77,496 and $70,537 for the years ended December 31, 2013 and 2012, respectively.
Operation of SPA business
In January 2011, SD Chaoying engaged Dongshan Victoria Spring Hotel (“Victoria”), which is controlled by the wife of the General Manager of SD Chaoying, to manage and operate the SPA business at the completed section of the cultural and entertainment facility. SD Chaoying has not charged any fees from Victoria and no written agreement was signed. As a result, no revenue was recognized for the years ended December 31, 2013 and 2012. Costs related to operating commercial rental amounted to $50,485 and $65,846 for the years ended December 31, 2013 and 2012, respectively.
13. COMMITMENTS, CONTINGENCIES, AND LEGAL PROCEEDINGS
There are no material pending legal proceedings to which the Company is a party. The Company was notified by a letter dated June 2, 2000 received June 6, 2000 stated that the Company may have a potential liability from waste disposal in the Casmalia Disposal Site at Santa Barbara County, California. The Company was given a choice of either signing an agreement that would toll the statute of limitations for eighteen (18) months in order to allow us to resolve any liability with the government without incurring costs associated with being named a defendant in a lawsuit, or becoming an immediate defendant in a lawsuit. We signed the tolling agreement. On November 20, 2001, the tolling agreement was extended for an additional 18 months. On May 20, 2003 the tolling agreement was again extended for an additional 18 months and on November 24, 2004 the tolling agreement was again extended for additional 18 months. On June 29, 2004, the Company received a proposed settlement from the EPA in the amount of $21,131, which had been accrued as other payable. The Company is waiting for communication from the government concerning payment of the final settlement. As of and subsequent to December 31, 2010, the Company had not receive further correspondences from the EPA regarding this matter.
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14. STOCKHOLDERS’ EQUITY
On February 10, 2005, the Company completed the merger with Cybrdi Maryland and changed its name to Cybrdi, Inc. The Company acquired Cybrdi Maryland in exchange for 47,328,263 shares of common stock of the Company. Subsequent to the merger, the former shareholders of Cybrdi Maryland own approximately 93.8% of the outstanding shares of the Company’s common stock. The Company has 50,456,567 shares of common stock issued and outstanding after the issuance of new shares. As a result of the ownership interests of the former shareholders of Cybrdi Maryland, for financial statement reporting purposes, the merger was treated as a recapitalization event for Cybrdi Maryland and as a reverse acquisition, with Cybrdi Maryland deemed the accounting acquirer and Certron Corporation deemed the accounting acquiree. Historical information of the surviving company is that of Cybrdi Maryland.
In 2004, the Cybrdi Maryland completed a private placement arrangement and had issued 5,590,645 ordinary common shares for a net proceed of approximately $1,006,316. In connection with this private placement, the Company incurred a total of $491,596 legal and professional expenses, of which $311,113 were deferred through December 31, 2003, and the full amount were written off against additional paid in capital upon consummation of the transaction. As of December 31, 2009, the Company had 50,456,567 shares of common stock issued and outstanding.
On January 15, 2010, the Board of Directors adopted resolutions that authorized incentive compensation to key management of the Company for services it has provided to the Company. As set forth in the Board of Directors’ resolution dated January 15, 2010, the incentive compensation shall be paid by the issuance of 12,000,000 shares of common stock of the Company to Mr. YanbiaoBai, Chief Executive Officer and President of the Company, and 3,300,000 shares of common stock of the Company to Ms. Xue Bu, Chief Financial and Operating Officer of the Company. Compensation cost of $306,000 will be recorded during the first quarter of 2010 at $0.02 per share, the market price of the Company’s common stock on January 15, 2010, the grant date.
On June 30, 2011, the Company entered into a written Debt Conversion Agreement with Shaanxi Chaoying Beauty & Cosmetics Group Co., Ltd. (a related party), Shaanxi NuoQiHealthfood Co., Ltd. (a related party), and Mr. YanbiaoBai, Chairman and CEO of the Company. In the Agreement, the Company agreed to repay a total of $605,723 (RMB 3,920,000) debt due to Shaanxi Chaoying Beauty & Cosmetics Group Co., Ltd. by issuing the Company’s common stock. Simultaneously upon the execution of the repayment, Shaanxi Chaoying Beauty & Cosmetics Group Co., Ltd. agreed to transfer to Mr. YanbiaoBai the number of shares to be issued through the debt repayment. The number of shares transferred to Mr. YanbiaoBai was further offset by a number of shares equivalent to $169,973 (RMB 1,100,000) due by Shaanxi NuoQi Health Food Co., Ltd., a company wholly-controlled by Ms. Xue Bu, the spouse of Mr. YanbiaoBai and former COO and Director of the Company, to offset its debt due to the Company. The Agreement was approved by the Company’s Board of Directors on June 30, 2011. As a result of the debt conversion and offset, the number of shares of common stock issued to Mr. YanbiaoBai was 54,468,756 shares, which was determined based on the closing price of $0.008 per share on June 30, 2011. The share issuance for repayment of debt as agreed upon and approved was executed on August 17, 2011.
15. RESERVE FUNDS
The Company’s subsidiary in PRC is required to maintain certain statutory reserves by appropriating from the profit after taxation in accordance with the relevant laws and regulations in the PRC and articles of association of the subsidiary before declaration or payment of dividends. The reserves form part of the equity of the Company.
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The appropriation to the statutory surplus reserve and statutory common welfare fund reserve represent 10 percent and 5 percent of the profits after taxation, respectively. In accordance with the laws and regulations in the PRC, the appropriation to statutory reserve ceased when the balances of the reserve reach 50 percent of the registered capital of the Company.
In the years ended December 31 2013 and 2012, the Company’s PRC subsidiaries either incurred net loss or accumulated net loss after offset with prior year losses. Accordingly, they were not required to reserve additional statutory surplus and common welfare fund for the years ended December 31, 2013 and 2012. The reserve funds balance consisted of the following:
| | | As of December 31, | |
| | | 2013 | | | 2012 | |
| Statutory Surplus Reserve | $ | 224,590 | | $ | 224,590 | |
| Statutory Common Welfare Fund Reserve | | 112,295 | | | 112,295 | |
| Total | $ | 336,885 | | $ | 336,885 | |
16. TAXATION
(a) Corporation Income Tax
The Company and its US subsidiary will file consolidated federal income tax return and state income taxes return individually. The operations in the United States of America had operational losses in year 2013 and 2012. The possible future deferred tax benefits arise from the net operating loss carry forward has been fully offset by a full valuation allowance, since more likely than not that all these benefits will not be realized in the future.
(b) Corporation Income Tax (“CIT”) ofthe Company’ssubsidiary in PRC
Under the Enterprise Income Tax (“EIT”) of the PRC, prior to 2007, Chinese enterprises are generally subject to an income tax at an effective rate of 33% (30% statutory income taxes plus 3% local income taxes) on income reported in the statutory financial statements after appropriate tax adjustments, unless the enterprise is located in a specially designated region for which more favorable effective tax rates are applicable. Beginning on January 1, 2008, the new EIT law has replaced the existing laws for Domestic Enterprises (“DEs”) and Foreign Invested Enterprises (“FIEs”). The new standard EIT rate of 25% will replace the 33% rate previously applicable to both DES and FIEs. The two year tax exemption, six year 50% tax reduction and tax holiday for production-oriented FIEs will be eliminated. The Company is currently evaluating the effect of the new EIT law on its financial position. According to Western Developing Plan of the PRC, Chaoying Biotech enjoys a 50% reduction in preferential policy of EIT, but not less than 15%. As a result, Chaoying Biotech’s effective EIT tax rate has been 15% since 2008.
In the years ended December 31, 2013 and 2012, the Company’s PRC subsidiaries either incurred net loss or had accumulated net loss after offset with prior year loss. The Company recorded income tax as $856 and they were not required to accrue and pay any income taxes for the fiscal year ended December 31, 2013. A 100% valuation reserve was recognized since it is more likely than not that all of the deferred tax assets will not be realized.
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17. CONCENTRATIONS OF BUSINESS AND CREDIT RISK
Credit Risks:
The Company provides credit in the normal course of business. The Company performs ongoing credit evaluations of its customers and maintains allowances for doubtful accounts based on factors surrounding the credit risk of specific customers, historical trends, and other information.
Major Customers:
The following summarizes sales to major customers (each comprising 10% or more of revenue):
| December 31, | | Number of | | | Percentage of | |
| | | Customers | | | Total | |
| 2013 | | 2 | | | 84.0% | |
| 2012 | | 2 | | | 66.0% | |
Major Suppliers:
The following summarizes purchases of raw materials from major suppliers (each comprising 10% or more of purchases):
| December 31, | | Number of | | | Percentage of | |
| | | Suppliers | | | Total | |
| 2013 | | 2 | | | 78.6% | |
| 2012 | | 2 | | | 82.3% | |
18. SEGMENT REPORTINGAs defined in ASC Topic 280, “Segment Reporting”, the Company has three operating segments, and two reportable segments, including Chaoying Biotech and SD Chaoying. Chaoying Biotech is primarily in the business of researching, producing, and selling of high-quality tissue arrays and providing related services. SD Chaoying mainly focused on real estate development and intended to operate a cultural and entertainment center which will encompass a wide variety of recreational and commercial activities. Earnings performance is measured using segment operating income.
| | | Years Ended December 31, | |
| | | 2013 | | | 2012 | |
| Revenues: | | | | | | |
| Chaoying Biotech | $ | 574,261 | | $ | 514,593 | |
| SD Chaoying | | - | | | 268,582 | |
| Others | | - | | | - | |
| Total Revenues | $ | 574,261 | | $ | 783,175 | |
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| | | Years Ended December 31, | |
| | | 2013 | | | 2012 | |
| Segment loss: | | | | | | |
| Chaoying Biotech | $ | (62,734 | ) | $ | (121,753 | ) |
| SD Chaoying | | (334,939 | ) | | (304,170 | ) |
| Others | | (219,074 | ) | | (229,717 | ) |
| Loss before Income Taxes | $ | (616,747 | ) | $ | (655,640 | ) |
| | | Years Ended December 31, | |
| | | 2013 | | | 2012 | |
| Total Assets: | | | | | | |
| Chaoying Biotech | $ | 714,925 | | $ | 1,460,233 | |
| SD Chaoying | | 9,584,273 | | | 9,006,220 | |
| Others | | 53,544 | | | 85,055 | |
| Total assets | $ | 10,352,742 | | $ | 10,551,508 | |
The following sets forth geographic information relating to the Company’s revenues from external customers attributed to the Company’s country of domicile, China, and attributed to foreign countries.
| | | Years Ended December 31, | |
| | | 2013 | | | 2012 | |
| United States | $ | 417,082 | | $ | 450,042 | |
| China | | 157,179 | | | 333,133 | |
| Total revenue | $ | 574,261 | | $ | 783,175 | |
All revenues are from external customers. One major customer from the United States accounted for 73% and 57% of our total revenues for the years ended December 31, 2013 and 2012. All long-lived assets are located in China.
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19. SUBSEQUENT EVENTS
Management has considered all events occurring through April 15, 2014, the date which the financial statements were available to be issued. All subsequent events requiring recognition as of December 31, 2013 have been incorporated into the accompanying consolidated and combined financial statements, and those requiring disclosure have been fully disclosed in accordance with FASB ASC Topic 855.
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