UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2014 OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File No: 09081
CYBRDI, INC.
(Exact name of registrant as specified in its charter)
CALIFORNIA
(State or other jurisdiction of incorporation or organization)
95-2461404
(I.R.S. Employer ID 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: (011) 86-29-8237-3068
N/A
Former name, former address and former fiscal year, (if changed since last report)
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for 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, a non-accelerated filer, or a smaller reporting company. See definitions of "large accelerated filer", "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act. (Check one):
| Large accelerated filer [ ] | Accelerated filer [ ] | Non-accelerated filer [ ] | Smaller reporting company [X] |
| | | (Do not check if a smaller | |
| | | reporting company) | |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes [ ] No [X]
The number of shares of common stock, no par value per share, outstanding as of May9, 2014 was120,225,323.
1
FORM 10-Q
QUARTERLY PERIOD ENDED March 31, 2014
INDEX
TABLE OF CONTENTS
| | | Page |
| PART I – FINANCIAL INFORMATION | |
| Item 1: | Financial Statements | F-1 |
| Item 2: | Management’s Discussion and Analysis of Financial Condition and Results of Operations | 3 |
| Item 3: | Quantitative and Qualitative Disclosures About Market Risk | 10 |
| Item 4T: | Controls and Procedures | 10 |
| PART II – OTHER INFORMATION | |
| Item 1: | Legal Proceedings | 11 |
| Item 1A: | Risk Factors | 11 |
| Item 2: | Unregistered Sales of Equity Securities and Use of Proceeds | 12 |
| Item 3: | Defaults Upon Senior Securities | 12 |
| Item 4: | Mine Safety Disclosures | 12 |
| Item 5: | Other Information | 12 |
| Item 6: | Exhibits | 13 |
2
Item 1 Financial Statements
CYBRDI, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
| | | March 31, | | | December | |
| | | | | | 31, | |
| | | 2014 | | | 2013 | |
| ASSETS | | (Unaudited) | | | (Audited) | |
| CURRENT ASSETS | | | | | | |
| Cash and equivalents | $ | 886,570 | | $ | 203,921 | |
| Accounts receivable, net | | 50,235 | | | 6,409 | |
| Inventories | | 797,775 | | | 848,525 | |
| Other receivables, net and prepaid expenses | | 127,343 | | | 906,459 | |
| Advance to suppliers | | 3 | | | 4,536 | |
| TOTAL CURRENT ASSETS | | 1,861,926 | | | 1,969,850 | |
PROPERTY, PLANT AND EQUIPMENT, NET | | 1,090,546 | | | 1,144,781 | |
CONSTRUCTION IN PROGRESS | | 6,535,811 | | | 6,609,918 | |
INTANGIBLE ASSETS, NET | | 616,382 | | | 628,193 | |
| | | | | | |
TOTAL ASSETS | $ | 10,104,665 | | $ | 10,352,742 | |
| | | | | | |
LIABILITIES AND EQUITY | | | | | | |
| | | | | | |
CURRENT LIABILITIES | | | | | | |
Short-term loan | $ | 1,447,783 | | $ | 1,308,858 | |
Accounts payable | | 31,402 | | | 11,903 | |
Accrued expenses | | 865,286 | | | 810,331 | |
Deferred revenue | | 130,575 | | | 126,128 | |
Customers deposits | | 157,971 | | | 165,066 | |
Due to related parties | | 3,015,609 | | | 2,963,494 | |
Deferred tax liabilities | | 10,421 | | | 10,598 | |
Other payables | | 441,075 | | | 591,613 | |
TOTAL CURRENT LIABILITIES | | 6,100,122 | | | 5,987,991 | |
CONSTRUCTION PAYABLE | | 369,989 | | | 376,297 | |
TOTAL LIABILITIES | | 6,470,111 | | | 6,364,288 | |
| | | | | | |
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 March 31, 2014 and December 31, 2013, respectively | | 4,313,614 | | | 4,313,614 | |
Additional paid-in capital | | 172,308 | | | 172,308 | |
Reserve funds | | 336,885 | | | 336,885 | |
Accumulated deficit | | (3,758,942 | ) | | (3,525,809 | ) |
Accumulated other comprehensive income | | 1,586,167 | | | 1,656,723 | |
TOTAL STOCKHOLDERS’ EQUITY | | 2,650,032 | | | 2,953,721 | |
NONCONTROLLING INTEREST | | 984,522 | | | 1,034,733 | |
TOTAL EQUITY | | 3,634,554 | | | 3,988,454 | |
| | | | | | |
TOTAL LIABILITIES AND EQUITY | $ | 10,104,665 | | $ | 10,352,742 | |
See notes to consolidated financial statements.
F-1
CYBRDI, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(Unaudited)
| | | Three Months Ended March 31, | |
| | | 2014 | | | 2013 | |
Revenue | | | | | | |
Housing | $ | 80,650 | | $ | - | |
Commercial rental | | - | | | - | |
Tissue array products | | 68,136 | | | 151,152 | |
Total revenue | | 148,786 | | | 151,152 | |
Cost of Sales | | | | | | |
Housing | | 47,145 | | | - | |
Commercial rental - related party | | 26,299 | | | 16,696 | |
Tissue array products | | 68,070 | | | 98,520 | |
Total cost of sales | | 141,514 | | | 115,216 | |
| | | | | | |
Gross Profit | | 7,272 | | | 35,936 | |
| | | | | | |
Operating Expenses: | | | | | | |
Salaries and wages | | 50,988 | | | 53,913 | |
Depreciation and amortization | | 11,422 | | | 33,445 | |
Bad debt expense | | - | | | 6,630 | |
Professional fees | | 38,575 | | | 40,107 | |
Selling and distribution expenses | | 2,861 | | | 4,186 | |
Other general and administrative expenses | | 123,538 | | | 27,592 | |
Total Operating Expenses | | 227,384 | | | 165,873 | |
| | | | | | |
Loss from Operations | | (220,112 | ) | | (129,937 | ) |
| | | | | | |
Other Expense | | | | | | |
Interest expenses, net | | (47,472 | ) | | (46,188 | ) |
Other expense, net | | (767 | ) | | (2,048 | ) |
Total Other Expense, Net | | (48,239 | ) | | (48,236 | ) |
| | | | | | |
Loss before Income Taxes | | (268,351 | ) | | (178,173 | ) |
Less: Income Tax (Benefit) Expense | | (1,738 | ) | | 142 | |
Net loss | | (266,613 | ) | | (178,315 | ) |
Less: Net loss attributable to the non-controlling interests | | (33,480 | ) | | (31,493 | ) |
Net loss attributable to CYBRDI, INC. | | (233,133 | ) | | (146,822 | ) |
Foreign currency translation loss | | (70,556 | ) | | (37,094 | ) |
Comprehensive loss | $ | (303,689 | ) | $ | (183,916 | ) |
| | | | | | |
Net Loss Per Common Share | | | | | | |
Basic and Diluted | $ | (0.00 | ) | $ | (0.00 | ) |
| | | | | | |
Weighted Average Number of Shares Outstanding | | | | | | |
Basic and Diluted | | 120,225,323 | | | 120,225,323 | |
See notes to consolidated financial statements.
F-2
CYBRDI INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
| | | Three Months Ended March 31, | |
CASH FLOWS FROM OPERATING ACTIVITIES | | 2014 | | | 2013 | |
Net loss attributable to Cybrdi Inc. | $ | (233,133 | ) | $ | (146,822 | ) |
Adjustments to Reconcile Net Loss to Cash Provided by operating activities: | | | | | | |
Depreciation and amortization | | 44,707 | | | 55,881 | |
Bad debt expense | | - | | | 6,630 | |
Minority interest | | (33,480 | ) | | (31,493 | ) |
Changes in Operating Assets and Liabilities: | | | | | | |
Accounts receivable | | (44,753 | ) | | (15,067 | ) |
Inventories | | 37,206 | | | 4,262 | |
Other receivable and prepaid expenses | | 782,725 | | | 6,552 | |
Accounts payable and other current liabilities | | 96,421 | | | 92,845 | |
Deferred revenue | | 6,683 | | | - | |
Advance to suppliers | | (4,409 | ) | | 24,307 | |
Net Cash used in Operating Activities | | 651,967 | | | (2,905 | ) |
| | | | | | |
CASH FLOWS FROM INVESTING ACTIVITIES | | | | | | |
Advance for loan to affiliated companies | | (4,249 | ) | | - | |
Purchase of property, plant, and equipment | | (7,702 | ) | | (7,601 | ) |
Payments for construction in progress | | (37,970 | ) | | (279 | ) |
Net Cash used in Investing Activities | | (49,921 | ) | | (7,880 | ) |
| | | | | | |
CASH FLOWS FROM FINANCING ACTIVITIES | | | | | | |
Proceeds from loans from related companies | | 78,950 | | | 10,668 | |
Loan from shareholders/officers | | 17,877 | | | 8,998 | |
Net cash provided by Financing Activities | | 96,827 | | | 19,666 | |
NET INCREASE IN CASH & CASH EQUIVALENTS | | 698,873 | | | 8,881 | |
EFFECT OF EXCHANGE RATE CHANGE ON CASH & CASH EQUIVALENTS | | (16,224 | ) | | 15,074 | |
CASH & CASH EQUIVALENTS, BEGINNING BALANCE | | 203,921 | | | 956,235 | |
| | | | | | |
CASH & CASH EQUIVALENTS, ENDING BALANCE | $ | 886,570 | | $ | 980,190 | |
| | | | | | |
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION | | | | | | |
Interest paid | $ | 39,328 | | $ | 45,799 | |
Income taxes paid | $ | 113 | | $ | 153 | |
See notes to consolidated financial statements.
F-3
CYBRDI, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE A - BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
1. Interim Financial Statements
The unaudited consolidated financial statements of Cybrdi Inc. and subsidiaries have been prepared in accordance with U.S. generally accepted accounting principles for interim financial information and pursuant to the requirements for reporting on Form 10-Q. Accordingly, they do not include all the information and footnotes required by accounting principles generally accepted in the United States of America for annual financial statements. However, the information included in these interim financial statements reflects all adjustments (consisting solely of normal recurring adjustments) which are, in the opinion of management, necessary for the fair presentation of the consolidated financial position and the consolidated results of operations. Results shown for interim periods are not necessarily indicative of the results to be obtained for a full year. The consolidated balance sheet information as of December 31, 2013 was derived from the audited consolidated financial statements included in the Company’s Annual Report on Form 10-K. These interim financial statements should be read in conjunction with that report. Certain comparative amounts have been reclassified to conform to the current period's presentation.
The consolidated financial statements include the accounts of Cybrdi, Inc. and its wholly-owned subsidiaries and joint ventures. All material intercompany balances and transactions have been eliminated.
2. Description of Business
Cybrdi, Inc. 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 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.
F-4
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-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, of which it owns an 80% interest. 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 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. The Chinese partner is a principal shareholder of the Company and Mr. Bai, the Company’s chief executive officer, chairman and a principal shareholder, is also a principal of the Chinese partner. 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 2010. 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 $3.0 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 March 31, 2014, 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. Chaoying Biotech has been its sole shareholder.
F-5
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 $3,758,942 and $3,525,809 as of March 31, 2014 and December 31, 2013, including net losses of $266,613 and $178,315 for the three months ended March 31, 2014 and 2013, respectively. In addition, current liabilities exceeded current assets by $4,238,196 and $4,018,141 at March 31, 2014 and December 31, 2013, 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 and/or officers/shareholders. In order to complete the construction of SD Chaoying cultural and entertainment center, approximately $3.0 million (equivalent to RMB 19 million) of capital is needed. The Company, taking into accounts the available banking facilities, internal financial resource, and support 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 $0.3 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 $0.68 million per year. Management fee revenue will be charged to commercial tenants at 3% of annual gross revenue. As of March 31, 2014, the Company has not commenced collecting rental and management fee revenue for the culture and entertainment center. |
The Company may require additional funds and may seek to raise such funds through 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 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-6
4. Use of Estimates:
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ materially from those estimates.
5. 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.
6. Reverse Merger
On February 10, 2005, (the "Closing Date") the Company closed on an Agreement and Plan of Merger (the "Agreement") among Certron Corporation (“Certron”), a California corporation, Certron Acquisition Corp., a Maryland corporation and a wholly-owned subsidiary of Certron ("Acquisition Sub"), and Cybrdi, Inc., a Maryland corporation (“Cybrdi – Maryland”) relating to the acquisition by Certron of all of the issued and outstanding capital stock of Cybrdi -Maryland in exchange for shares of common stock of Certron that will aggregate approximately 93.8% of the issued and outstanding common stock of Certron. Pursuant to the terms of the Agreement, at the Closing Date (a) Acquisition Sub has been merged with and into Cybrdi - Maryland, with Cybrdi -Maryland being the surviving corporation, (b) the common stock of Cybrdi-Maryland has been cancelled and converted into the right to receive shares of the common stock of Certron at an exchange ratio of 1.566641609 per share. This resulted in the issuance of 47,328,263 shares of the Carton’s common stock, and (c) each share of the common stock of Acquisition Sub has been converted in to and become one share of the common stock of Cybrdi-Maryland. The share exchange has been accounted for as a reverse merger under the purchase method of accounting. Accordingly, Cybrdi, Inc. will be treated as the continuing entity for accounting purposes and the historical financial statements presented will be those of Cybrdi, Inc.
In connection with the Agreement, on February 10, 2005, the Company amended its articles of incorporation to authorize the issuance of 150 million shares of common stock no par value and 500,000 shares of preferred stock, $1.00 par value per share, none of which are issued or outstanding.
Concurrent with the filing of the Articles of Merger, all of the Company then existing officers and directors tendered their resignation and Yanbiao Bai was appointed as its Chairman of the Board of Directors. Mr. Bai then nominated the balance of the Board of Directors.
F-7
7. 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 the 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 income taxes.
8. Recent Accounting Pronouncements
The Company has adopted all recently issued accounting pronouncements. The adoption of the accounting pronouncements, including those not yet effective, is not anticipated to have a material effect on the financial position or results of operations of the Company.
F-8
NOTE B – ASSETS
The March 31, 2014 consolidated balance sheet included total current assets of $1,861,926 and non-current assets of $8,242,739. Of these amounts, $886,570 in cash and equivalents is planned for funding current operations and for future business expansion.
Current assets also included accounts receivable, inventories, other receivables and prepaid expenses, and advance to suppliers. Inventories are mainly finished goods. Other components of inventories include raw materials and housing 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 weighted average basis and are comprised of direct materials, direct labor, and an appropriate proportion of overhead.
Included in non-current assets are property, plant and equipment, construction-in-progress and intangible assets. Property, plant and equipment mainly consist of building, office equipment, motor vehicles, leasehold improvement and machinery used for product manufacturing located in the People’s Republic of China (“PRC”). Depreciation on property, plant and equipment is computed using the straight-line method over the estimated useful life of the assets. The majority of the assets have estimated useful lives of 10 years. Building and office equipment have estimated useful lives of 20 and 5 years, respectively. The “construction in progress” in the amount of $6,535,811 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. For the $3.22 million land use rights, $2.5 million was classified under construction-in-progress for the commercial property and the remaining $0.62 million was classified under intangible assets subject to amortization. Intangible assets included a tissue chip patent at Chaoying Biotech and $0.62 million of land use rights being put in operation for the partial completed commercial property at SD Chaoying. Effective January 1, 2002, with the adoption of the accounting guidance for Goodwill and Other Intangible Assets, intangible assets with a definite life are amortized on a straight-line basis. The patent expired on April 30, 2013, which was amortized over its estimated life of 10 years. The land use rights classified in intangible asset is being amortized over its estimated life of 36.9 years through the maturity of the land use rights for commercial use on November 6, 2047.
F-9
NOTE C – LIABILITIES
As of March 31, 2014, the balance sheet included total liabilities of $6,470,111, which consisted of current liabilities of $6,100,122 and construction payable of $369,989. Included in the current liabilities was a short-term loan of $160,865 (equivalent to RMB 1.0 million) from Mr. Fengguo Liu, an unrelated party. The short-term loan is due on January 15, 2015 with an interest rate at 2% per month. Also included in the current liabilities was $3,015,609 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.
NOTE D – STOCKHOLDERS’ EQUITY
As a result of the reverse merger (see Note A item 6), the common stock of Cybrdi-Maryland has been cancelled and converted into shares of common stock of Certron at an exchange ratio of 1.566641609 per share. This resulted in the issuance of 47,328,263 shares of Carton’s common stock to the Cybrdi shareholders. As of March 31, 2014 and December 31, 2013, the Company had 120,225,323 shares issued and outstanding, respectively.
As of March 31, 2014, the balance sheet included total equity of $3,634,554, of which $984,522 was for non-controlling interest, representing 20% minority interest in Chaoying Biotech and 16.67% minority interest in SD Chaoying.
As of March 31, 2013, the balance sheet included total equity of $3,988,454, of which $1,034,733 was for non-controlling interest, representing 20% minority interest in Chaoying Biotech and 16.67% minority interest in SD Chaoying.
F-10
NOTE E – INCOME TAXES
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. According to the Western Developing Plan implemented by the PRC Government, Chaoying Biotech is entitled to a 50% reduction in EIT of preferential policy, but not less than 15%. As a result, Chaoying Biotech’s effective EIT tax rate has been 15% since 2008.
The Company’s income tax expense includes U.S. and PRC income taxes. There were no U.S. current taxes for the three months ended March 31, 2014 according to net loss incurred in the U.S. entity, which will not be anticipated to have any tax benefit in the future since no revenue is expected to be generated in the U.S as a result of discontinuing the U.S. operating company in Maryland in October 2007. There were $116 and $0 of PRC current income taxes accrued for the three months ended March 31, 2014 in SD Chaoying and Chaoying Biotech, respectively.
NOTE F – CONTINGENCIES AND LITIGATION LIABILITIES
During the three months ended March 31, 2014, there were no material developments in any previously reported litigation.
F-11
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operation
The following discussion and analysis should be read in conjunction with the company’s Financial Statements and Notes thereto appearing elsewhere in this Report on Form 10-Q as well as the company’s other SEC filings, including our annual report on Form 10-K for the year ended December 31, 2013.
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
Certain statements in this quarterly report on Form 10-Q contain or may contain forward-looking statements that are subject to known and unknown risks, uncertainties and other factors which may cause actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. These forward-looking statements were based on various factors and were derived utilizing numerous assumptions and other factors that could cause its actual results to differ materially from those in the forward-looking statements. These factors include, but are not limited to, economic, political and market conditions and fluctuations, government and industry regulation, interest rate risk, U.S. and global competition, and other factors. Most of these factors are difficult to predict accurately and are generally beyond its control. You should consider the areas of risk described in connection with any forward-looking statements that may be made herein. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date of this report. Readers should carefully review this quarterly report in its entirety, including but not limited to its financial statements and the notes thereto. Except for its ongoing obligations to disclose material information under the Federal securities laws, the Company undertakes no obligation to release publicly any revisions to any forward-looking statements, to report events or to report the occurrence of unanticipated events. For any forward-looking statements contained in any document, the Company claims the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995. This report on Form 10-Q 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." 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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PLAN OF OPERATIONS
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, which is also developing a casino.
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 U.S. 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 (TMAs) 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 (“TMA”): 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 types of 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.
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.
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Culture, Entertainment, and Real Estate Business
Chaoying Biotech owns 83.33% of SD Chaoying, a culture and entertainment company. SD Chaoying is developing a Culture and Entertainment Square in Changle City of Shandong Province on the 33,333 square meter 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, body buildup gyms, the Square will become 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, 68 units had been sold as of March 30, 2014.
The total cost for the construction is estimated to be $10 million. At present, SD Chaoying has invested approximately $7 million in the construction. We are planning to include a casino but the casino has not yet been completed and we intend to 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, and there can be no assurance we will receive 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. Two units were sold during the three months ended March 31, 2014.
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.
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RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2014 AND 2013
Net Revenue
Cybrdi now mainly generates two categories of revenues, including sales of tissue chip & kits products and residential housing. The net sales decreased by $2,366 to $148,786 for the three months ended March 31, 2014 from $151,152 for the three months ended March 31, 2013, a decrease of 2%.
Tissue Chip & Kit Products: Net sales decreased by $83,016 to $68,136 for the three months ended March 31, 2014 as compared to $151,152 for the three months ended March 31, 2013, a decrease of 55%. The decrease in net sales of tissue chip & kit product was primarily due to no export sales during the three months ended March 31, 2014. The sales revenues generated from export sales now are subject to the value added tax (“VAT”) pursuant to PRC tax regulations, which was exempt for export sales in the past. The VAT imposed by PRC tax bureau on export sales is absorbed by the Company without charging to the customers. Currently, our sole domestic sales representative in China is Xi’an AiLiNa Biotechnology Co., Ltd., and the only overseas sales representative is US BioMax, Ltd., a reseller located in the US. We mainly distribute our products through these two sales representatives, which are under common control by a non-affiliated person.
Housing: SD Chaoying completed the construction of the two six-story multi-family residential buildings with a total of 74 housing units in 2009. There were two housing units sold during the three months ended March 31, 2014, and we recognized sales revenue aggregating $80,650; compared to no housing unit sold during the quarter ended March 31, 2013. Since SD Chaoying is required to continue its involvement with the property after the sale, including installations of utility systems, improvements and amenities, and community landscaping, profit from the sale was recognized using the percentage of completion method as required by ASC Topic 360-20, “Property, Plant, and Equipment – Real Estate Sales”.
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 three months ended March 31, 2014 and 2013, respectively. Costs related to operating commercial rentals amounted to $26,299 and $16,696 for the three months ended March 31, 2014 and 2013, respectively.
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Gross Margin
Gross margin as a percentage of sales are 5% and 24% for the three months ended March 31, 2014 and the three months ended March 31, 2013.
Gross margin of tissue chip & kit products segment decreased from 35% to 0.1% from first quarter of 2013 to first quarter of 2014; because no export sale with higher gross margin during this quarter. Gross margin of housing segment was 42% for the first quarter of 2014; there was no sale and cost incurred for housing segment in first quarter of 2013.
The commercial rental segment has not generated revenue since its commencement, but incurred costs directly associated with the business. As a result, a loss of $26,299 and $16,696 was recorded at the commercial rental segment for the three months ended March 31, 2014 and 2013, respectively.
Operating Expenses
The Company’s operating expenses increased by $61,511 to $227,384 for the three months ended March 31, 2014 from $165,873 for the three months ended March 31, 2013, and increase of 37%. Such increase was mainly attributable to the increase of heating fees incurred in winter and marketing espense.
Other Expense
Net other expenses increased by $3 to $48,239 for the three months ended March 31, 2014, a 0.01% increase, from $48,236 for the three months ended March 31, 2013.
Income Taxes
The Company did not record any U.S. and PRC current income tax for the three months ended March 31, 2014, and 2013, since there was no taxable income during these periods. There was $116 of PRC current income taxes accrued for the three months ended March 31, 2014 in SD Chaoying.
Net Loss
As a result of the above factors, our net loss excluding minority interests increased by $88,298, or 50%, from $178,315 for the three months ended March 31, 2014 to $266,613 for the three months ended March 31, 2013.
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LIQUIDITY AND CAPITAL RESOURCES
Operating working capital deficit (total current asset deduct total current liabilities) increased by $220,055 from $(4,018,141) as of December 31, 2013 to $(4,238,196) as of March 31, 2014. The Company's cash and cash equivalents increased to $886,570 as of March 31, 2014 from $203,921 as of December 31, 2013, primarily as a result of a decline in other receivables to $127,343 as of March 31, 2014 from $906,450 as of December 31, 2013. The decline in other receivable was attributable to the construction material purchase deposit of $756,065 that was returned to the Company in January, 2014.
For investing activities, the Company incurred net cash outflow during the three months ended March 31, 2014. The primary reason was due to $7,702 used in purchasing property, plant, and equipment and there were payments for construction in progress amounting to $37,970 during the first quarter of 2014.
For financing activities, the Company obtained net proceeds of $96,827, from related parties and shareholders/officers of the Company.
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 $3,758,942 and $3,525,809 as of March 31, 2014 and December 31, 2013, including net losses of $266,613 and $178,315 for the three months ended March 31, 2014 and 2013, respectively. In addition, current liabilities exceeded current assets by $4,238,196 and $4,018,141 as of March 31, 2014 and December 31, 2013, respectively. These matters raise substantial doubt about the Company’s ability to continue as a going concern.
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The Company finances its operations primarily through short-term bank borrowings and advances from related parties and/or officers/shareholders. In order to complete the construction of SD Chaoying cultural and entertainment center, approximately $3.0 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 and affiliates, 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 its financial 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 $0.3 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 $0.68 million per year. Management fee revenue will be charged to commercial tenants at 3% of annual gross revenue. As of March 31, 2014, the Company has not commenced collecting rental and management fee revenue for the culture and entertainment center. |
The Company will likely require additional funds and may seek to raise such funds through 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.
INFLATION
Inflation has not had a material impact on our business.
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Item 3. Quantitative and Qualitative Disclosures about Market Risk
A smaller reporting company is not required to provide the information required by this Item.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures. Under the supervision and with the participation of our management, including our Chief Executive Officer, Yanbiao Bai, and Principal Financial Officer, Yonghong Ren, we evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (the "Exchange Act")) as of the end of the period covered by this report. Based upon that evaluation, our Chief Executive Officer and Principal Financial Officer concluded that our disclosure controls and procedures as of the end of the period covered by this report were effective such that the information required to be disclosed by us in reports filed under the Securities Exchange Act of 1934 is (i) recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms and (ii) accumulated and communicated to our management to allow timely decisions regarding disclosure. A controls system cannot provide absolute assurance, however, that the objectives of the controls system are met, and no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within a company have been detected.
Changes in Internal Control Over Financial Reporting. During the most recent quarter ended March 31, 2014, there has been no change in our internal control over financial reporting (as defined in Rule 13a-15(f) and 15d-15(f) under the Exchange Act) ) that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
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PART II. OTHER INFORMATION
Item 1. Legal Proceedings
On June 6, 2000, we received a notice 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 March 31, 2014, the Company had not received further correspondences from the EPA regarding this matter.
Other than stated above, there are no material pending legal proceedings to which the Registrant is a party or as to which any of its property is subject, and no such proceedings are known to the Registrant to be threatened or contemplated against it.
Item 1A. Risk Factors
A smaller reporting company is not required to provide the information required by this Item.
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Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
None.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Mine Safety Disclosures
Not Applicable
Item 5. Other Information
None
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Item 6. Exhibits
XBRL Exhibit
| 101.INS† | XBRL Instance Document. |
| 101.SCH† | XBRL Taxonomy Extension Schema Document. |
| 101.CAL† | XBRL Taxonomy Extension Calculation Linkbase Document. |
| 101.DEF† | XBRL Taxonomy Extension Definition Linkbase Document. |
| 101.LAB† | XBRL Taxonomy Extension Label Linkbase Document. |
| 101.PRE† | XBRL Taxonomy Extension Presentation Linkbase Document. |
SIGNATURE
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.
CYBRDI, INC.
| DATE: May , 2014 | By/s/ Yanbiao Bai |
| | Yanbiao Bai, Chief Executive Officer and president |
| | |
| | By/s/ Yonghong Ren |
| | Yonghong Ren, Principal Financial Officer |
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