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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2005
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OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File No. 09081
CYBRDI INC.
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(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
CALIFORNIA 95-2461404
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(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
401 ROSEMONT AVE. FREDERICK, MD 21701
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(ADDRESS OF PRINCIPAL EXECUTIVE OFFICE) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (301) 644-3901
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Certron Corporation
11845 W. Olympic Boulevard, Suite 1080,
Los Angeles, California 90064
(Prior year end October 31)
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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 [x]
Indicate by a check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes [X] No [ ]
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:
Indicate the number of shares outstanding of each of the issuer's classes of
Common Stock as of the latest practicable date:
50,456,569 shares of Common Stock, without par value, as of December 6, 2005
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INDEX
PART I. - FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets as at September 30, 2005
(unaudited) and December 31, 2004
Condensed Consolidated Statements of Income and Comprehensive
Income (unaudited) for three months ended September 30, 2005
and September 30, 2004; and for nine months ended September 30,
2005 and September 30, 2004.
Condensed Consolidated Statements of Cash Flow (unaudited) for
nine months ended September 30, 2005 and September 30, 2004
Notes to Condensed Consolidated Financial Statements
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operation
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Item 4. Controls and Procedures
PART II. - OTHER INFORMATION
Item 1. Legal Proceedings
Item 2. Unregistered Sales of Equity Securities
Item 3. Defaults upon senior securities
Item 4. Submission of matters to a vote of security holders
Item 5. Exhibits and reports on Form 8-K
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
CYBRDI, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
AS OF SEPTEMBER 30, 2005 (UNAUDITED) AND DECEMBER 31, 2004
- --------------------------------------------------------------------------------
(in thousands)
Sep 30, 2005 Dec 31, 2004
------------ ------------
ASSETS (unaudited)
CURRENT ASSETS
Cash and cash equivalents $ 3,762 $ 3,900
Accounts receivable 603 252
Inventories 264 265
Other receivables and prepaid expenses 148 7
-------- --------
TOTAL CURRENT ASSETS 4,777 4,424
PROPERTY, PLANT AND EQUIPMENT, NET 550 629
INTANGIBLE ASSETS (NET) 586 644
DEFERRED TAX ASSETS 41 40
-------- --------
TOTAL ASSETS $ 5,954 $ 5,737
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 10 $ --
Other payables 47 59
Customer deposits 7 --
Dividends payable -- 139
Amount due to stockholders 660 555
-------- --------
TOTAL CURRENT LIABILITITES 724 753
MINORITY INTERESTS 967 884
-------- --------
TOTAL LIABILITIES 1,691 1,637
-------- --------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Preferred Stock, $1.00 per value, 500,000 shares authorized,
zero shares issued and outstanding -- --
Common Stock, no par value in 2005 and $0.10 par value in 2004,
150,000,000 shares in 2005 and 30,210,000 shares in 2004 authorized,
50,456,569 shares in 2005 and 30,210,000 shares in 2004 issued and outstanding -- 3,021
Additional paid-in capital 3,394 573
Reserve funds 240 240
Retained earnings 539 266
Accumulated other comprehensive income 90 --
-------- --------
TOTAL STOCKHOLDERS' EQUITY 4,263 4,100
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 5,954 $ 5,737
======== ========
The accompanying notes are an integral part of these
condensed consolidated financial statements.
3
CYBRDI, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME (UNAUDITED)
FOR THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2005 AND 2004
- --------------------------------------------------------------------------------
(in thousands, except per share data)
Three months ended Three months ended Nine months ended Nine months ended
September 30, 2005 September 30, 2004 September 30, 2005 September 30, 2004
------------------ ------------------ ------------------ ------------------
Revenue
Products $ 281 $ 299 $ 957 $ 863
Service rendered 34 94 116 256
------- ------- ------- -------
Total revenue 315 393 1,073 1,119
------- ------- ------- -------
Cost of sales
Products 50 77 158 190
Service rendered 3 10 12 28
------- ------- ------- -------
Total cost of sales 53 87 170 218
------- ------- ------- -------
Gross profit 262 306 903 901
------- ------- ------- -------
Operating expenses:
Selling and distribution expenses 13 12 55 51
General and administrative expenses 189 136 511 424
------- ------- ------- -------
Total operating expenses 202 148 566 475
------- ------- ------- -------
Income from operations 60 158 337 426
------- ------- ------- -------
Other income/(expense)
Interest income -- 3 3 7
Other (expense)/income, net 53 9 51 14
------- ------- ------- -------
Total other (expense)/ income 53 12 54 21
------- ------- ------- -------
Income before income taxes 113 170 391 447
Income taxes 10 -- 35 --
------- ------- ------- -------
Income before minority interest 103 170 356 447
Minority Interest 23 41 83 107
------- ------- ------- -------
Net income 80 129 273 340
Other comprehensive loss:
Foreign currency translation gain 90 -- 90 --
------- ------- ------- -------
Comprehensive income $ 170 $ 129 $ 363 $ 340
======= ======= ======= =======
Weighted average number of shares outstanding 50,457 24,619 39,244 24,619
======= ======= ======= =======
Earnings per share, basic and diluted $ 0.00 $ 0.01 $ 0.01 $ 0.01
======= ======= ======= =======
The accompanying notes are an integral part of these
condensed consolidated financial statements.
4
CYBRDI INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2005 AND 2004
- --------------------------------------------------------------------------------
(in thousands)
Nine months ended Nine months ended
September 30, 2005 September 30, 2004
------------------ ------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 273 $ 340
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 178 144
Minority interest's share of net income 83 107
Changes in operating assets and liabilities:
Accounts receivable, net (338) 101
Inventories 6 (99)
Other receivable and prepaid expenses (137) 289
Accrued interest receivable -- 7
Accounts payable and accrued expenses 10 54
Other payables and liabilities (13) (19)
Customer Deposit 7 1
------- -------
Net cash provided by operating activities 69 925
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property, plant and equipment (16) (9)
------- -------
Net cash (used in) investing activities (16) (9)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds advanced from shareholders 90 20
Payment of dividend (139) (158)
Payment for merger expenses (200) --
Payment for private placement costs -- (132)
------- -------
Net cash (used in) financing activities (249) (270)
------- -------
NET (DECREASE) INCREASE IN CASH AND
CASH EQUIVALENTS (196) 646
Effect of exchange rate changes on cash 58 --
Cash and cash equivalents, at beginning of period 3,900 2,066
------- -------
CASH AND CASH EQUIVALENTS, AT END OF PERIOD $ 3,762 $ 2,712
======= =======
The accompanying notes are an integral part of these
consolidated financial statements.
5
CYBRDI, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 2005 (UNAUDITED)
(DOLLAR IN THOUSAND, EXCEPT NOTED OTHERWISE)
NOTE A - BASIS OF PRESENTATION
Interim financial statements:
The accompanying financial statements and footnotes have been condensed and
therefore do not contain all disclosures required by generally accepted
accounting principles. The interim financial statements are unaudited; however,
in the opinion of Cybrdi Inc. (the "Company"), the interim financial statements
include all adjustments, consisting only of normal recurring adjustments,
necessary for a fair statement of the results for the interim periods. Results
for interim periods are not necessarily indicative of those to be expected for
the full year. It is suggested that these condensed consolidated financial
statements be read in conjunction with the December 31, 2004 audited
consolidated financial statements and the accompanying notes thereto.
Description of business and revenue recognition:
On April 2, 2005 the Company filed amendments to its articles of incorporation
to change its name from Certron Corporation to Cybrdi, Inc. The amendment was
approved by the required vote of shareholders in accordance with Section 902 and
Section 903 of the California Corporations Code.
Until its acquisition of Cybrdi, Inc. on February 10, 2005, the Company's
business consisted primarily of the distribution of magnetic media products.
With the completion of the merger, all the magnetic media distribution business
activities have ceased and Certron's sole business is conducted through Cybrdi.
Cybrdi's focus is the field of biogenetics commercialization, specializing in
the rapid introduction of tissue microarray products and services in both the
international and Chinese markets.
Most of the Company's activities are conducted through its 80% equity ownership
in China Shaanxi Shaoying Bio-technology Co., Ltd. ("Chaoying Biotech") a
sino-foreign equity joint venture established in July 2000 in the People's
Republic of China. The Company, 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 microarray products.
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. This resulted in the issuance of
47,328,263 shares of the Certron'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's then
existing officers and directors tendered their resignation and Yanbiao Bai was
appointed as our Chairman of the Board of Directors. Mr. Bai then nominated the
following individuals to serve on the Board of Directors: Lei Liu, James Pan,
Xue Bu, Lieping Chen and MinMin Qin. The new Directors subsequently elected Dr.
Lei Liu as Chief Executive Officer, Mr. Yanbiao Bai as President, and Mrs. Xue
Bu as Secretary and Treasurer.
On March 31, 2005 the Company's Board of Directors changed its fiscal year end
from October 31 to December 31. Certron's fiscal year end was changed to
correspond with the fiscal year end of Cybrdi - Maryland.
Principles of consolidation:
The condensed consolidated financial statements include the accounts of Cybrdi,
Inc. and its wholly-owned subsidiaries and joint ventures.
All significant intercompany balances and transactions have been eliminated.
Recent Accounting Pronouncements:
In May 2005, the FASB issued Statement No. 154, "Accounting Changes and Error
Corrections" ("FAS 154"). FAS 154 generally require that accounting changes and
errors be applied retrospectively. FAS 154 is effective for accounting changes
and corrections of errors made in fiscal years beginning after December 15,
2005. The Company does not expect FAS 154 to have a material impact on its
financial statements.
In March 2005, the FASB issued Statement of Financial Accounting Standards
Interpretation Number 47, "Accounting for Conditional Asset Retirement
Obligations" ("FIN 47"). FIN 47 provides clarification regarding the meaning of
the term "conditional asset retirement obligation" as used in FASB Statement No.
143, "Accounting for Asset Retirement Obligations." FIN 47 is effective for
fiscal years beginning after December 15, 2005. The Company is currently
evaluating the impact of FIN 47 on its financial statements.
7
On December 16, 2004, the Financial Accounting Standards Board ("FASB")
published Statement of Financial Accounting Standards No. 123 (Revised 2004),
Share-Based Payment ("SFAS 123R"). SFAS 123R requires that compensation cost
related to share-based payment transactions be recognized in the financial
statements. Share-based payment transactions within the scope of SFAS 123R
include stock options, restricted stock plans, performance-based awards, stock
appreciation rights, and employee share purchase plans. This standard will be
effective for awards granted, modified or settled in fiscal years beginning
after June 15, 2005. Accordingly, the Company will implement the revised
standard in the first quarter of fiscal year 2006. Management is assessing the
implications of this revised standard, which may materially impact the Company's
results of operations in fiscal year 2006 and thereafter.
NOTE B - ASSETS
The September 30, 2005 balance sheet included total current assets of $4,777 and
non-current assets of $1,177. Of these amounts, approximately $3,762 cash is
planned for funding current operations and for future business expansion.
Other current assets also included inventories that are mainly finished goods
and very few raw materials. 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
mainly consisting of 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. Intangible assets include a patent. Effective January 1, 2002, with the
adoption of SFAS No. 142, 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.
NOTE C - LIABILITIES
The September 30, 2005 balance sheet included total liabilities of $1,691 of
which $967 represents the 20% minority interest in Chaoying Biotech. Included in
the total liabilities, $660 was due to stockholders who are also officers of the
Company. The amount is an advance to the Company to assist with operations in
prior years. This advance is non-interest bearing and has no set repayment
terms.
In accordance with the relevant tax laws and regulations of the PRC, Chaoying
Biotech is entitled to full exemption from Corporation Income Tax ("CIT") for
the first two years and a 50% reduction in CIT for the next three years,
commencing from the first profitable year after offsetting all tax losses
carried forward from the previous five years. As 2003 was Chaoying Biotech's
first profitable year, the Company begins to record 50% CIT provision for first
quarter of 2005. Effective tax rate is approximately 7.5% for the quarter and
nine months ended September 30, 2005.
NOTE D - STOCKHOLDERS' EQUITY
As a result of the reverse merger (see Note A), 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. This
resulted in the issuance of 47,328,263 shares of Certron's common stock. As of
September 30, 2005, the Company had 50,456,569 shares of common stock issued and
outstanding. Historical information of the surviving company is that of Cybrdi -
Maryland.
8
NOTE E - LEGAL PROCEEDINGS
There is 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
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 the Company 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.
The Company 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. The Company is waiting for communication from the government
concerning payment of the proposed settlement. As of September 30, 2005, the
Company has accrued a sufficient amount to cover any potential liabilities from
this matter.
9
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 our
Financial Statements and Notes thereto appearing elsewhere in this Report on
Form 10-Q as well as our other SEC filings.
Plan of Operations
With the completion of the merger, management determined to discontinue
Certron's prior business operations, the sale of magnetic media distribution
tapes and products, and pursue business opportunities through Cybrdi, Inc. Most
of Cybrdi's activities are conducted through its 80% equity ownership in China
Shaanxi Shaoying Bio-technology Co., Ltd. ("Chaoying Biotech") a sino-foreign
equity joint venture established in July 2000 in the People's Republic of China.
Cybrdi became affiliated with Chaoying Biotech in March 2003. The Chaoying
Biotech joint venture agreement has a term of 15 years. The term of joint
venture may be extended upon the mutual consent of the parties.
The Company focuses on biogenetics commercialization. The business includes
sales of tissue microarray products and services. Tissue chips, also called
microtissue arrays, represent a newly developed technology providing
high-throughput molecular profiling and parallel analysis of biological and
molecular characteristics for hundreds of pathologically controlled tissue
specimens. Tissue arrays can 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
microarrays for a wide variety of scientific uses, including drug discovery and
development purposes.
Our principal operations are located in Shaanxi China, where we aim 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 microarray products.
10
RESULTS OF OPERATIONS
THE FOLLOWING TABLE SETS FORTH CERTAIN ITEMS IN OUR UNAUDITED CONDENSED
CONSOLIDATED STATEMENTS OF INCOME FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2005
AND SEPTEMBER 30, 2004; AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2005 AND
SEPTEMBER 30, 2004:
(Dollar in thousand, except noted otherwise)
Three months ended Three months ended Nine months ended Nine months ended
September 30, 2005 September 30, 2004 September 30, 2005 September 30, 2004
------------------ ------------------ ------------------ ------------------
(in thousands, except per share data)
Revenue
Products $ 281 $ 299 $ 957 $ 863
Service rendered 34 94 116 256
------ ------ ------ ------
Total revenue 315 393 1,073 1,119
------ ------ ------ ------
Cost of sales
Products 50 77 158 190
Service rendered 3 10 12 28
------ ------ ------ ------
Total cost of sales 53 87 170 218
------ ------ ------ ------
Gross profit 262 306 903 901
------ ------ ------ ------
Operating expenses:
Selling and distribution expenses 13 12 55 51
General and administrative expenses 189 136 511 424
------ ------ ------ ------
Total operating expenses 202 148 566 475
------ ------ ------ ------
Income from operations 60 158 337 426
------ ------ ------ ------
Other income/(expense)
Interest income -- 3 3 7
Other (expense)/income, net 53 9 51 14
------ ------ ------ ------
Total other (expense)/ income 53 12 54 21
------ ------ ------ ------
Income before income taxes 113 170 391 447
Income taxes 10 -- 35 --
------ ------ ------ ------
Income before minority interest 103 170 356 447
Minority Interest 23 41 83 107
------ ------ ------ ------
Net income $ 80 $ 129 $ 273 $ 340
====== ====== ====== ======
THREE MONTHS ENDED SEPTEMBER 30, 2005 COMPARED TO THREE MONTHS ENDED
SEPTMEBER 30, 2004
Net Sales
Cybrdi generates two categories of revenues: tissue chip product and services.
The net sales decrease to $315,000 for the three months ended September 30, 2005
from $393,000 for the three months ended September 30, 2004.
11
Tissue Chip Product: sales increased along all product lines in the tissue chip
business. The net sales decreased approximately $18,000 to $281,000 for the
three months ended September 30, 2005 as compared to $299,000 for the three
months ended September 30, 2004. The decrease in net sales of our Tissue Chip
business is primarily attributable to the discontinuance in sales of some array
slides which are going to be replaced by new array lines during the next
quarter.
Services: Fewer technical service orders were received during the third quarter
of 2005 as compared to 2004 resulting in a decrease in sales of $60,000;
declining to $34,000 from $94,000 for the three months ended September 30, 2005
as compared to September 30, 2004.
Gross Margin
Gross margin as a percent of sales was 83% and 78% for the three months ended
September 30, 2005 and 2004, respectively. As a result of lower sales revenues
gross Profit for the three months ended September 30, 2005 decreased to $262
from $306 for the three months ended September 30, 2004. Our gross margin
increased as a result of increased operating efficiencies and an increase in
sales volume of higher gross margin biological chips products.
Operating Expenses
Our operating expenses increased to $202,000 for the three months ended
September 30, 2005 from $148,000 for the three months ended September 30, 2004.
This is primarily due to an increase in general and administrative expenses to
$189,000 for the three months ended September 30, 2005 from $136,000 for the
three months ended September 30, 2004. This increase was mainly attributable to
an increase in professional fees and administrative expenses which Cybrdi
incurred as a result of its acquisition by Certron.
Income Taxes
The Company has not recorded a provision for federal income tax for quarter
ended September 30, 2005 due to utilization of net operating loss carry forward
to offset taxable income in United States. In accordance with the relevant tax
laws and regulations of the People's Republic of China, Chaoying Biotech is
entitled to full exemption from Corporation Income Tax ("CIT") for the first two
years and a 50% reduction in CIT for the next three years, commencing from the
first profitable year after offsetting all tax losses carried forward from the
previous five years. As 2003 was Chaoying Biotech's first profitable year, the
Company begins to record 50% CIT provision from the first quarter of 2005.
Effective tax rate is approximately 7.5% for the quarter ended September 30,
2005.
NINE MONTHS ENDED SEPTEMBER 30, 2005 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
2004
Net Sales
Cybrdi generates two categories of revenues: tissue chip product and services.
Our net sales decreased to $1,073,000 for the nine months ended September 30,
2005 from $1,119,000 for the nine months ended September 30, 2004.
Tissue Chip Product: sales increased along most product lines in the tissue chip
business. The net sales increased approximately $94,000 to $957,000 for the nine
months ended September 30, 2005 from $863,000 for the nine months ended
September 30, 2004. The increase in net sales of our Tissue Chip business is
primarily attributable to the stronger sales in our diabetes detection
biological chip during the first two quarters offset by a reduction in sales of
some discontinued array products during the third quarter.
12
Services: Fewer technical service orders were received during the first nine
months of 2005 as compared to 2004 resulting in a decrease in sales of $140,000
to $116,000 for the nine months ended September 30, 2005 from $256,000 for the
nine months ended September 30, 2004.
Gross Margin
Gross margin as a percent of sales was 84% and 81% for the nine months ended
September 30, 2005 and 2004, respectively. Gross Profit for the nine months
ended September 30, 2005 increased to $903,000 from $901,000 for the nine months
ended September 30, 2004. The gross margin increased as a result of operation
efficiency and increase in sales volume of higher gross margin biological chips
products.
Operating Expenses
The operating expenses increased to $566,000 for the nine months ended September
30, 2005 from $475,000 for the nine months ended September 30, 2004. This is
primarily due to the increase in general and administrative expenses to $511,000
for the nine months ended September 30, 2005 from $424,000 for the nine months
ended September 30, 2004, which was mainly attributable to an increase in
professional fees and administrative expenses as Cybrdi incurred additional
professional fees during the quarter ended March 31, 2005 as a result of Cybrdi,
Maryland being acquired by Certron. In addition, an increase in salespersons
also contributed to the increase in selling and distribution to $55,000 for the
nine months ended September 30, 2005 from $51,000 for the nine months ended
September 30, 2004.
LIQUIDITY AND CAPITAL RESOURCES
Operating working capital (accounts receivable plus inventory less accounts
payable) increased by $340,000 from $517,000 as of December 31, 2004 to $857,000
as of September 30, 2005. The increase was primarily due to an increase in
accounts receivable of $351,000 from $252,000 at December 31, 2004 to $603,000
at September 30, 2005, which was offset by an increase in accounts payable of
$10,000 from less than $1,000 at December 31, 2004 to $10 at September 30, 2005.
Inventory remains stable with a slight decrease of $1,000 from $265,000 at
December 31, 2004 to $264,000 at September 30, 2005. Increase in net sales on
Tissue Chip Product is attributable to the increase in account receivable and
accounts payables.
Cash provided by operating activities was $69,000 for the nine months ended
September 30, 2005 as compared to $925,000 provided for the nine months ended
September 30, 2004. The decrease in cash provided by operating activities for
the nine months ended September 30, 2005 reflected reduction of net income,
increased in accounts receivable and the increase of prepayment for professional
services.
The Company has $16,000 capital expenditure for the nine months ended September
30, 2005 as compared to a capital spending of $9,000 for the nine months ended
September 30, 2004. Financing activities for the nine months ended September 30,
2005 consumed $249, 000 reflecting dividend payments of $139,000 payment of
$200,000 associated with the reverse merger transaction and offset by a $90,000
advance from shareholders.
With approximately $4.0 million of net working capital as of September 30, 2005,
the Company believes it will have sufficient resources to finance its operations
for the coming year.
13
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 our 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 our 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 our financial statements and the notes
thereto. Except for our ongoing obligations to disclose material information
under the Federal securities laws, we undertake 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, we claim the protection of the safe harbor
for forward-looking statements contained in the Private Securities Litigation
Reform Act of 1995.
Critical Accounting Policies
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.
The preparation of financial statements in conformity with generally accepted
accounting principles (GAAP) 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 may differ from those estimates.
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.
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Item 3. Quantitative and Qualitative Disclosures About Market Risk
Foreign Currency Exchange Risk
The majority of our net sales, costs and expenses are priced in Chinese
renminbi. Our assets are predominantly located inside China. Since 1994, the
exchange rate for Renminbi against the United States dollar has remained
relatively stable, with an exchange rate approximately RMB8.28 to US$1.00. On
July 21, 2005, China announced a revaluation of RMB and dropped 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 RMB8.11 to
US$1.00, or an appreciation of 2%, and has remained relatively stable since
then. 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.
Item 4. Controls and Procedures
An evaluation was carried out by the Company's chief executive officer and
treasurer of the effectiveness of the Company's disclosure controls and
procedures (as defined in Rule 13a-15e or 15(d)-15(e) of the Securities Exchange
Act of 1934) as of September 30, 2005. Based upon that evaluation, the chief
executive officer and the treasurer concluded that the design and operation of
these disclosure controls and procedures were effective after giving affect to
the acquisition of Cybrdi, Inc. by the Company and its obligations to comply
with applicable accounting and disclosure requirements.
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PART II. OTHER INFORMATION
Item 1. Legal Proceedings
There is no material pending legal proceedings to which the Company is a party.
The Company was notified by a letter dated June 2, 2000 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 the Company 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. The Company 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.
The Company is waiting for communication from the government concerning payment
of the proposed settlement. As of September 30, 2005, the Company has accrued a
sufficient amount to cover any potential liabilities from this matter.
Item 2. Unregistered Sales of Equity Securities,
None.
Item 3. Defaults upon senior securities.
None.
Item 4. Submission of matters to a vote of security holders.
None.
Item 5. Exhibits and Report on Form 8-K
(a) Exhibits:
31.1 Rule 13(a)-14(a)/15(d)-14(a) Certification
31.2 Rule 13A-14(A)/15D-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
(b) Reports on Form 8-K:
None
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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: December 7, 2005 /s/ Larry Liu
-----------------------
Larry Liu
Chief Executive Officer
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