Attached files

file filename
EX-3.1 - CERTIFICATE OF INCORPORATION - CYBRA CORPf10k2010ex3i_cybra.htm
EX-32.1 - CERTIFICATION PURSUANT TO SECTION 906 OF SARBANES OXLEY ACT OF 2002 - CYBRA CORPf10k2010ex32i_cybra.htm
EX-31.1 - CERTIFICATION PURSUANT TO SECTION 302 OF SARBANES OXLEY ACT OF 2002 - CYBRA CORPf10k2010ex31i_cybra.htm
EX-32.2 - CERTIFICATION PURSUANT TO SECTION 906 OF SARBANES OXLEY ACT OF 2002 - CYBRA CORPf10k2010ex32ii_cybra.htm
EX-31.2 - CERTIFICATION PURSUANT TO SECTION 302 OF SARBANES OXLEY ACT OF 2002 - CYBRA CORPf10k2010ex31ii_cybra.htm


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K
(Mark One)
xANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2010
OR
oTRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______ to _______

Commission File Number 000-52624
 
CYBRA CORPORATION
(Exact Name of Registrant as Specified in Its Charter)

New York
 
13-3303290
(State or Other Jurisdiction of
Incorporation or Organization)
 
(I.R.S. Employer
Identification No.)
     
One Executive Blvd., Yonkers, NY
 
10701
(Address of Principal Executive Offices)
 
(Zip Code)
     
Registrant’s Telephone Number, Including Area Code
 
(914)963-6600

Securities registered pursuant to Section 12(b) of the Act: None

Securities registered pursuant section 12(g) of the Act:

Common Stock, $0.001 par value  

Title of Class
 
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o   No x
 
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Exchange Act. Yes o   No x  
 
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 o  
 
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 amendment to this Form 10-K . 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 the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.  (Check One):

Large accelerated filer o
 
Accelerated filer o
Non-accelerated filer o
 
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 Act). Yes o    No x

As of June 30, 2010, which was the last business day of the registrant’s most recent second fiscal quarter, the aggregate market value of the registrant’s Common Stock held by non-affiliates of the registrant was $3,126,281.
 
As of March 15, 2011, there were 15,519,667 shares of Common Stock outstanding.
 
Documents Incorporated by Reference: None

 
 

 
 
TABLE OF CONTENTS
 
       
Page
 
               
Part I
             
               
Item 1.  
   
Description of Business
      1  
               
Item 1A.  
   
Risk Factors
      15  
               
Item 1B.  
   
Unresolved Staff Comments
      21  
               
Item 2.  
   
Properties
      21  
               
Item 3.  
   
Legal Proceedings
      22  
               
Item 4.
   
Reserved
      22  
               
Part II
             
               
Item 5.  
   
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
      23  
               
Item 6.  
   
Selected Financial Data
      24  
               
Item 7.  
   
Management’s Discussion and Analysis of Financial Condition and Results of Operations
      24  
               
Item 7A.  
   
Quantitative and Qualitative Disclosures About Market Risk
      27  
               
Item 8.  
   
Financial Statements and Supplementary Data
      F-1  
               
Item 9.  
   
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
      28  
               
Item 9A(T). 
   
Controls and Procedures
      28  
               
Item 9B.  
   
Other Information
      29  
               
Part III
             
               
Item 10.  
   
Directors, Executive Officers and Corporate Governance
      30  
               
Item 11.  
   
Executive Compensation
      32  
               
Item 12.  
   
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
      34  
               
Item 13.     Certain Relationships and Related Transactions, and Director Independence      35  
               
Item 14.       Principal Accountant Fees and Services      35  
               
Part IV              
               
Item 15.       Exhibits, Financial Statement Schedules      35  
               
Signatures              36  
 
 
 

 
 
FORWARD LOOKING STATEMENTS

This report on Form 10-K contains forward-looking statements within the meaning of Rule 175 of the Securities Act of 1933, as amended, and Rule 3b-6 of the Securities Exchange Act of 1934, as amended, that involve substantial risks and uncertainties. These forward-looking statements are not historical facts, but rather are based on current expectations, estimates and projections about our industry, our beliefs and our assumptions. Words such as “anticipates”, “expects”, “intends”, “plans”, “believes”, “seeks” and “estimates” and variations of these words and similar expressions are intended to identify forward-looking statements. These statements are not guarantees of future performance and are subject to risks, uncertainties and other factors, some of which are beyond our control and difficult to predict and could cause actual results to differ materially from those expressed or forecasted in the forward-looking statements. You should not place undue reliance on these forward-looking statements, which apply only as of the date of this Form 10-K. Investors should carefully consider all of such risks before making an investment decision with respect to the Company’s stock.
  
PART I
 
ITEM 1. DESCRIPTION OF BUSINESS

THE COMPANY

CYBRA Corporation (“CYBRA” or the “Company”) was founded as a New York corporation in 1985 by Harold Brand, an Information Technology (“IT”) professional with extensive experience in computer systems design, and Dr. Shlomo Kalish, an authority in marketing for start up ventures.  Initially, CYBRA was a consulting organization for mid-range computing systems. Utilizing Mr. Brand’s expertise in the IT industry, CYBRA resold and integrated Israeli software products for the IBM System 34, 36, and 38 platforms in the North American marketplace. In the early 1990’s, one of the Company’s main clients asked CYBRA (in collaboration with Pitney Bowes) to develop a bar code label software component. In order to accommodate its client’s needs, CYBRA agreed to develop the new technology.  The results had a profound effect on the Company’s future.  CYBRA became much more heavily involved in software application development, and wrote the code for a new proprietary software product known as MarkMagicTM.  CYBRA owns the trademark for MarkMagic.  The MarkMagic software is not patented.  It is protected by use of standard secure software keys that are locked to specific computer serial numbers.  Computer source code is not distributed with the product.
 
In August 1997, Monarch Marking Systems, a supplier of labels and printers to retail customers, acquired a minority ownership position in CYBRA with the intention of establishing a strategic partnership.  Since that time, CYBRA’s fundamental strategy has been to establish OEM partnerships that embed MarkMagic in leading business software products. Vendors of these business software products resell MarkMagic to their customers. In addition, CYBRA sells MarkMagic directly to businesses needing radio frequency identification (RFID) and bar code labels, as well as electronic forms. Today, the Company is well known for its computerized bar code document design and printing. CYBRA’s R&D department has core competencies in auto id/bar code and RFID expertise, object oriented programming and design, and information technology — especially in connection with the IBM System i.

IBM System i and its predecessors (IBM iSeries and IBM AS/400) have been deployed into midsize companies since the late 1980s. System i, however, has been transformed since that time, meeting a new set of price points and performance results that far outstrip the price/performance ratio offered in the 1990s, or even a few years ago. The System i is a midrange computer platform aimed at meeting the business information and technology needs of midsize businesses, and it is designed to support the growth of a business over time.

 
1

 
 
CYBRA’s key distributors and resellers are Manhattan Associates, Apparel Business Systems, Vormittag Associates (“VAI”) and Solzon Corporation. CYBRA’s primary suppliers are: Avery Dennison (bar code and RFID printers and printing supplies), Psion Teklogix (bar scanners and wireless equipment), ScanSource (wholesale distributors), Blue Star (wholesale distributors), and Nimax (wholesale distributors).

   
 
Percentage of
Sales
Attributable to Software
Manufacturers
   
Percentage of
Sales
to End Users
 
2010
    78 %     22 %
2009  
    75 %     25 %

CYBRA’s annual revenues are derived from hundreds of customers. Sales to the largest customers are as follows::
 

   
 
Total Sales
 
Sales to the 
largest
customer
   
Percentage of
Total
Sales
 
2010
  $ 1,605,744  
Manhattan Assoc.
  $ 133,205       8.1 %
2009  
  $ 1,335,944  
Foot Locker
  $ 86,285       6.6 %

PRODUCTS AND SERVICES
 
MarkMagicTM
With a single, simple interface, MarkMagic lets businesses design and print all types of documents, such as bar code labels, RFID tags, e-forms, and other media, using live data, with little or no programming necessary. MarkMagic’s “what-you-see-is-what-you-get” design component, JMagic, was developed in Java specifically in order to be deployed across the Internet, as well as on diverse computing platforms, including Windows, UNIX and Linux.

Until recently, MarkMagic has addressed the IBM System i market. In 2010, CYBRA completed a version of MarkMagic called MarkMagic Platform Independent (PI) that is designed to run on all major computing platforms, such as Windows, UNIX and Linux. MarkMagic PI sales to end-user customers began in 2010.  A major OEM software partner is planning to roll it out to its customer base in mid-2011.
 
MarkMagic Version 7, a major new release, was launched in May 2009. It contains the MarkMagic FormsComposer feature that adds full report writing functions to MarkMagic with a simple user interface. The other significant feature introduced in Version 7 is the Print Transformer, which provides MarkMagic users with powerful conditional printing capabilities.  Since its initial launch, MarkMagic Version 7 has undergone two upgrade releases, providing improvements in performance, usability and functionality.
 
 
2

 
 
EdgeMagic®     
EdgeMagic, released in February 2008, is an integrated RFID control solution for IBM System i customers. It is also deployable on other platforms and is highly scalable. EdgeMagic is designed to manage RFID readers and analog control devices; commission, read, filter and verify RFID tags to comply with Electronic Product Code (EPC) compliance mandates and to track company assets; and integrate with popular ERP and Warehouse Management application packages.

Throughout 2007 and 2008 management focused substantially all of the Company’s resources on development and release of EdgeMagic with revenue potential that management believes will be far in excess of the current product mix.  EdgeMagic product development remains a high priority for the Company.  During 2010, EdgeMagic was enhanced to provide industry specific functionality.  Key among those were enhancements for tracking item level apparel and document tracking.

Auto-ID MagicTMSales Strategy

Together, MarkMagic and EdgeMagic constitute CYBRA’s Auto-ID Magic family of products. CYBRA’s primary sales strategy is to sell through Application Software Vendors (ASV’s) that bundle MarkMagic and EdgeMagic with their package offerings.

Auto-ID (Automatic Identification) is a term that encompasses a wide range of technologies that allow items to be automatically identified, including Bar Code, RFID Tagging, Magnetic Stripe, Biometrics, etc.
 
The main benefits of Auto-ID are:

·  
Reduced human error by eliminating manual look-up and entry;
·  
Increased speed,  reducing labor costs;
·  
Improved security, as it can be difficult to forge or fool;
·  
Increased revenue by insuring that products are always available; and
·  
Significant reductions in personnel training.
 
The key benefits to the ASV of OEMing CYBRA’s Auto-ID Magic family of products are:

 
·
Increased Revenues – ASV’s can generate an additional source of revenue through sales of CYBRA’s Auto-ID Magic family of products to future customers as well as to their installed base. With MarkMagic integrated into their application, their customers can quickly create new labels and change existing labels with ease, including RFID “smart” labels. With CYBRA’s forms component, they can eliminate many, or all, of the preprinted forms required by their application. These net savings give ASV customers a compelling reason to upgrade their ASV product. Utilizing EdgeMagic, ASV’s can help their customers with the essential need to comply with trading partner mandates, as well as developing tracking of their own assets, with ease and at a competitive price compared to other alternatives.
 
 
·
Cost Avoidance – ASV’s can greatly reduce, or eliminate, their staff costs for ongoing source code maintenance and customer support for all Auto-ID customer requirements. Their staff no longer needs to learn and maintain competence on complex RFID printer or reader command languages.  As Auto-ID Magic provides a full range of RFID and bar code solutions that run on all major computing platforms, the burden for the ASV to support multiple computing environments is dramatically reduced.
   
 
3

 
 
 
·
Competitive Advantage – ASV’s can improve their competitive advantage by offering compliance labeling solutions – including the printing of RFID smart labels, and the commissioning, validating and management of RFID tags – to their customers on a wide range of RFID and bar code equipment from numerous manufacturers. ASV’s can avail themselves of a source for all RFID needs – middleware, training, services, equipment, supplies, maintenance and support – without having to develop their own expertise.
 
In 2011, we are expanding our channel strategy beyond OEMs to include System Integrators that specialize in Auto-ID solutions.  Auto-ID Magic provides the integrator with out-of-the-box solutions that permit work on virtually any computing platform and implement a full scale system in days, rather than weeks or months.

CYBRACare
During 2010, CYBRA designed a solution family for the long-term care market called CYBRACare.  CYBRACare incorporates RFID and RTLS (Real Time Location Systems) technology. The basic CYBRACare technology layer is CYBRA’s EdgeMagic RFID tracking software.

The concept of the CYBRACare suite of solutions for long-term care covers a broad range of areas within long-term care facilities of all types.  In its initial release, CYBRACare consists of three types of tracking: resident, staff and equipment.

           Resident Tracking  is based on a resident wristband containing an RFID tag so that a patient’s whereabouts can be tracked automatically at every moment.  This prevents unsafe wandering and leaving the premises (elopement).

           Staff Tracking uses RFID “smart” cards to track staff whereabouts and response times by caregiver in order to monitor productivity.  The CYBRACare card also provides the staff member with emergency call buttons.

           Medical Equipment tracking provides for the location of expensive medical appliances and equipment that are often in limited supply and need to be located quickly.  Examples of medical equipment that can be tracked include mechanical lifts, intravenous pumps, respiratory machines, scooters, and defibrillators.
 
CYBRA’s strategic partner in its long-term care venture is CenTrak, Inc.  CenTrak is a leader in providing simple and reliable tracking innovations to hospitals. Their products include patient, staff and equipment tracking.  CenTrak is headquartered in Newtown, Pennsylvania with manufacturing facilities in Hong Kong, South Korea and India.  CenTrak solutions are currently operating in millions of square feet at dozens of world-class healthcare sites throughout the United States.  Its largest installation to date is at Mount Sinai Hospital in New York, which uses a system supplied by CenTrak partner GE Healthcare.  CYBRA is among the few solution providers to utilize CenTrak technology in long-term care.
 
 
4

 
 
The Evolution of Auto-ID: From Bar Code To RFID
 
This section will introduce you to two key Auto-ID technologies – Bar Coding and RFID – briefly explaining what they are about, how businesses benefit from their use, how bar coding evolved to RFID and what role CYBRA plays in these vital areas.
 
In the beginning: UPC Bar Code
 

 
History was made on June 26, 1974, when the first product with a “Universal Product Code” (UPC) bar code was run through a hand-made scanner at a check-out counter at Marsh’s supermarket in Troy, Ohio. It was a 10-pack of Wrigley’s Juicy Fruit chewing gum.
 
The supply chain would never be the same.
 
Today, that pack of gum is on display at the Smithsonian Institution’s National Museum of American History.
 
Grocery items and other consumer products are well-suited for UPC bar codes. Developed by the food industry to give every product a unique symbol and numeric code, the multi-digit number identifies the manufacturer and the item. Scanners can read the bars and spaces of the symbol. This system speeds customer checkout, reduces item price marking requirements, and helps collect complete and accurate information on all aspects of the sales transaction.
 
Since the early seventies, bar code systems have spread far from the supermarket checkout counter. In warehouses, hospitals, and automobile assembly lines, bar code systems enter data at speeds, efficiency and accuracy levels far beyond human ability.
 
Comply or Die 
 
In the late 1980s, manufacturers and distributors had no choice but to add bar code technology to their operations. These companies had to “comply” and integrate bar code technology because their customers had installed scanning systems to read bar code labels to cut data entry and handling costs and demanded that they either bar code or lose the business to a competitor.
 
Customer demands (“compliance mandates”) typically include special shipping labels developed by industry trade associations. Item ticketing is another type of compliance. Across all industries, there are literally thousands of different compliance label types. Industries that have established compliance specification standards include retail consumer goods, the automobile industry, and the health industry.
 
Customers required to supply bar code shipping labels are given detailed, explicit instructions defining how the label is supposed to look, what data should appear on the label, how the bar code information is presented and how the label is to be printed.
 
Compliance specifications are complex and constantly changing, often without notice to the supplier. If any portion of the label is defective, out of date, or “out of spec”, the customer is liable for hefty fines called chargebacks.
 
 
5

 
 
 
 
Chargebacks can easily add up to hundreds of thousands of dollars per year for a small to medium sized manufacturer. Major retailers such as Wal-Mart, Sears, Target, etc., accrue tens of millions of dollars from chargeback revenue.
 
Chargebacks are a significant cost center for a small to medium manufacturer and can mean the difference between profit and loss. Software that can help reduce a company’s chargeback expenses, by providing proper carton labeling and ticketing of merchandise produces an immediate return on investment.
 
This is where CYBRA’s MarkMagic comes in.
 
Thousands of CYBRA customers reduce their chargeback burden daily by relying on MarkMagic to handle their compliance labeling.
 
Manhattan Associates, a $670 million supply chain solution company, is a CYBRA OEM Partner that has built its business on this premise by guaranteeing 100% compliance with the top U.S. and global retailers’ guidelines for shipping and content labels.  One of the principal ways in which this is accomplished is by integrating CYBRA’s MarkMagic bar code label software into Manhattan’s Warehouse Management and Transportation Execution software packages.

Second Generation: 2D Bar Codes
 
 
Advances in bar code printing and scanning capabilities have led to the development of new bar code types that can contain greater amounts of information in less and less space. The newer bar code types are called “stacked” 2D (two dimensional) bar codes because they encode data by layering a series of bars and spaces. Stacked 2D bar codes can contain as many as 3,000 characters or more in the space of a postage stamp, while the one dimensional bar codes are limited to between twelve and thirty characters.
 
 
6

 
 

Another 2D bar code family includes “matrix” codes, such as the UPS MaxiCode. Because 2D bar codes are able to encode entire packing lists or shipping label addresses, these bar codes are now specified by a number of carriers for their labels. Compliance with FedEx Ground and UPS is the biggest reason the use of these bar code types is growing. MarkMagic has helped customers print 2D bar codes since 1994. In addition, MarkMagic makes it possible for customers in certain industries, such as those that ship directly to the consumer, to produce shipping documents containing both a pick ticket and a FedEx Ground or UPS carrier label with a 2D bar code.

 
A QR code (short for Quick Response) is a matrix barcode readable by dedicated QR barcode readers as well as smart phones.  The information encoded can be text, a website URL or other data.  Common in Japan, where it was created by Toyota subsidiary Denso-Wave in 1994, the QR code is one of the most popular types of two-dimensional barcodes today.   QR codes are of particular interest to marketers, giving them the ability to measure response rates with a high degree of precision, allowing for easier ROI (return on investment) calculation, thus helping justify spending on marketing budgets.  Media where QR codes have been deployed include: billboard ads, guerilla marketing campaigns, in-store displays, event ticketing and tracking, trade-show management, business cards, print ads, contests, direct mail campaigns, websites, email marketing and couponing.
 
 
 
7

 
 
There are many apps available for Apple’s iPhone and Google Android phones that let users scan barcodes using the smartphone’s camera. These barcode apps are typically meant to make the shopping experience more enjoyable.  Examples of popular smartphone bar code apps are:

·  
RedLaser: Scans product barcodes and compares prices using Google Products and Amazon.

·  
FoodScanner: Scans UPC barcodes on foods letting the users know how many calories they are consuming.

·  
Cardstar: Lets users store, manage and retrieve reward, club, and loyalty cards on their smart phone, where they can be scanned directly from the phone’s screen at many merchants.[Missing Graphic Reference]

 
The Future Arrives:RFID
 
 
Bar codes have one big shortcoming: a scanner has to “see” the bar code to read it. RFID, by contrast, does not have this limitation. RFID tags – chips no larger than a grain of sand plus an attached antenna – can be read without being “seen” as long as they are within range of a reader, anywhere from a few inches to twenty or more feet. The tags can be embedded into packaging or applied to a product in a “smart” label. An entire pallet of 200 RFID tagged items can be read in an instant.
 
RFID technology was first used during World War II as an aircraft identification system, and businesses have used RFID technology on a limited basis for years. Drivers in twelve states in the Northeast United States are familiar with the E-ZPass system for paying tolls, which is based on RFID technology.
 
Recent technical breakthroughs have made RFID well-suited for retail, distribution, and consumer packaged goods manufacturing. Major retailers such as Wal-Mart, Target, and Metro Group Germany have mandated the tagging of items coming into their businesses. The U. S. Department of Defense requires RFID tagged shipments to solve such problems as tracking munitions.

Currently retailers’ RFID mandates affect only the largest suppliers (the top Wal-Mart vendors, for example). In the years ahead, however, the RFID compliance mandates are expected to impact virtually all suppliers regardless of size. The supply chain standards groups have adopted a new RFID standard, the EPC (Electronic Product Code), to supplement the simple UPC bar code.
 
The UPC bar code identifies the manufacturer and the product. Like a UPC bar code, the EPC also identifies the manufacturer and product. The EPC, however, identifies each item in the supply chain with a unique serial number.
 
Unlike bar coding, where scanning of data one by one can be integrated into an organization’s existing infrastructure in a relatively straightforward manner, reading and managing RFID tags is a far more complex process. It requires a class of software referred to as RFID management software.

RFID management software, also referred to as RFID Edge Middleware, enables the rapid development and deployment of RFID systems. The software absorbs differences in various RFID tags from multiple suppliers and integrates that data, making it possible to build flexible and scalable RFID solutions. The middleware also includes tools to monitor and maintain RFID systems.
 
 
8

 
 
Middleware needs to filter non-essential RFID data as close to the source as possible. It is invisible to applications and does not overwhelm the existing system. The transition from deployments to networks capable of handling this increased load requires a solution that is scalable as the deployment grows.

CYBRA’s EdgeMagic RFID middleware is designed to provide RFID management capabilities with maximum scalability and minimum customization.  EdgeMagic provides a fully integrated RFID management system to manage readers and edge devices, commission and read RFID tags, and interface to the major ERP and Warehouse Management packages. EdgeMagic runs on the IBM System i, as well as other major computing platforms such as Windows, UNIX and Linux.
 
THE MARKET
 
Wal-Mart, along with the U.S. Department of Defense and the FDA, kick-started the entire RFID industry in 2003 when they announced plans for revolutionizing the supply chain with RFID technology. RFID would enable a more visible and effective supply chain and better tracking of corporate assets.  Other benefits included lower labor cost, reduced product theft, elimination of counterfeiting and reduced stock outages.  According to figures released by the National Retail Foundation, out of stock alone is a $92 billion annual problem.

From the outset, proponents insisted that RFID would dramatically change the way companies track goods in the supply chain.  For the next seven years it remained a niche technology, held back by the difficulties its pioneers had pulling in a critical mass of partners.  A relatively small number of Wal-Mart’s suppliers had started using RFID since the retailer announced its famous supply chain “mandate”.

All that changed in the middle of 2010.

Retailers at all points on the price spectrum are now embracing RFID and are positioning themselves to gain market share from rivals and operate more intelligently.  Wal-Mart has thrown its considerable weight behind item-level RFID in the apparel category as have JCPenney, Macy’s and Dillard’s.  The world’s leading specialty apparel retailers — GAP Inc. and Inditex (operator of multiple retail banners, including Zara) — are both devoting energy to RFID, as is Banana Republic.  Wal-Mart’s decision to initiate tagging of all men’s jeans, socks, underwear and t-shirts is significant, especially considering that some of the items being tagged sell for less than $5.  The significance of the fact that disposable RFID tags are now being applied to millions of items with retail price points of $5 or less shatters the myth that RFID tags are too expensive.

Stores that utilize RFID have the potential to be much more attractive shopping destinations.  Superior on-shelf availability, faster checkout and amenities such as “smart” fitting rooms could be a powerful draw.  Research analyst group, IDTechEx, estimated that about 300 million RFID labels were used for apparel tagging globally in 2010 – a 50% increase over the previous year.  Additionally, nearly 225 million RFID labels were used for tagging pallets and cases by companies such as Wal-Mart and Target.  The role of RFID in apparel retail is still in its early stages but is poised to potentially become an area of explosive growth in the ticketing and labeling market.

CYBRA anticipated this trend in planning the architecture of its EdgeMagic product.  After a number of difficult years in which we waited for the RFID curve to take off, we believe that we are now well positioned to leverage our IP to gain market share with respect to this fast emerging trend.
 
 
9

 
 
RFID Business Forecasts

A selection of quotes from recent analyst reports shows that 2011 should be a growth year for RFID, that apparel will be the principal industry affected, and that healthcare will also benefit significantly from RFID technology.
 
Jan
 2011
“…37 percent of companies expect RFID budgets to grow…
The level of RFID activity in the apparel industry is clearly on the rise.”
Sept 2010
“Apparel RFID will grow at double the rate of the overall RFID market through the next ten years.”
“RFID will not be just big in China - it will be huge.”
“RFID tags and systems in healthcare... $2.03 billion in 2018 …locating systems for staff, patients and assets…”
Jan
 2011
“2011 to be a year of steady growth for the RFID industry…
The most growth will likely occur in apparel retail and health care…”
Nov 2010
“…RFID is going strong.”
Nov 2010
“…biggest retail supply chain transformation since the bar code …”
Sept 2010
“RFID Systems Revenue to Exceed $6 Billion in 2011”
 
“The latest research indicates CAGRs of between 21.7% and 28.8%...”
Jan
 2011
“Inventory accuracy rates of more than 95%, up from an average of 62%.
 
 …time savings of 96%... out-of-stock reductions of up to 50%...”
Jan
 2011
“40% of 125 survey respondents denote that a pilot store is part of their RFID roll-out strategy”
… consumer goods, apparel, and consumer electronics are the top three product categories that retailers are currently tagging or plan to tag.
 
 
10

 

COMPETITION — MarkMagic
 
CYBRA Corporation’s MarkMagic product family faces competition for each of its feature sets, but it is our belief that no single product, on any platform, offers the wide range of output device and document support that MarkMagic brings to the marketplace.
 
MarkMagic’s advantage is that besides addressing the key requirements of thermal bar code label and RFID printing, it alone provides virtually all other printing needs that customers may demand. Only MarkMagic supports all the following printer devices and document types:
 
 
Thermal bar code tags
 
 
Thermal care labels
 
 
RFID smart labels
     
  Laser printed bar code documents
     
  Ink jet printed documents
     
  Plastic ID cards with magnetic stripe encoding
 
In the market consisting of IBM System i users of bar code and RFID labeling, CYBRA faces one major competitor, T.L. Ashford, located in Covington, Kentucky, a private company of similar size to CYBRA. The competitor entered the bar code labeling software arena a few years before we did. To the best of our knowledge, the competitor has a larger base of System i bar code labeling customers than we have. The competitor’s base price is lower than ours, but additional features can level out the price difference. To the best of our knowledge, the competitor sells software only, and does not offer bar code and RFID equipment, supplies or services.

In 2010, we began to expand beyond the IBM System i platform and we anticipate a number of additional competitors.  We believe that many of these competitors are well financed and have large customer installed bases. We expect CYBRA’s appeal to end-user customers will be based on our multiple platform support, multiple document type support, our experience and track record in integrating with business software packages and the upgrade path we provide to those requiring or anticipating a full RFID control solution.  Our primary channels – software OEM companies and system integrators – tend to be attracted to CYBRA for ease of integration into their software packages, multiple platforms supported, the wide range of capabilities available (thus lowering their R&D burden) and competitive discount structure.

COMPETITION — EdgeMagic
 
In the RFID market, we anticipate that we will face many competitors as the market grows.  Many of these will be large companies, both public and private.  There are currently no clearly dominant companies in the RFID space.  We anticipate that CYBRA’s appeal will be based on our multiple platform support and our experience and track record in providing solutions for developers of business software packages.

CYBRA’s EdgeMagic product faces well financed competition for each of its feature sets, but we believe that no single product offers the integrated solution that EdgeMagic brings to the IBM Power System i platform.  
 
EdgeMagic’s competitive advantage is that the functions of RFID tag reading and device control it provides are native to the System i platform. No PC’s or additional servers are required. The EdgeMagic solution significantly reduces the systems’ integration effort required to install competing solutions.

Competing Windows, Linux, or Unix-based solutions may have more functions, but each installation in a System i environment requires custom programming to match up System i files and programs with RFID data.
 
 
11

 
 
We believe that EdgeMagic alone provides a tightly integrated solution that has the functions System i customers require, yet offers the flexibility for System i customers to implement advanced RFID applications without costly custom programming.

On platforms other than System i, EdgeMagic’s advantages are scalability, ease of integration, and ease of use.

Included certified EPC-compliant label templates, pre-configured interfaces to leading ERP and WMS packages, and modular device control allows customers to roll out both open loop and closed loop industrial strength RFID solutions in far less time than with competing solutions.

High-end competitors (selling a suite of products to a specific industry) include:

 
BEA Weblogic RFID Platform Edge Server
 
OAT Systems OAT Foundation Suite
 
IBM Websphere RFID Premises
 
Manhattan Associates EPC Manager
 
Seeburger RFID Workbench
 
Sybase iAnywhere

Low end (selling stand-alone tools that are not industry-specific) includes EPCSolutions Tag Manager.

PARTNERSHIPS
 
CYBRA has established partnerships with key bar code and RFID companies. CYBRA partners fall into one or more of the following categories:
 
OEM ASV (Application Software Vendor) partners who have integrated MarkMagic into their application software products that also sell through VARs and Systems Integrators.
 
Technology Partners with whom CYBRA works closely to support their printing technologies or computing platforms. CYBRA has relationships with their VAR channels.
   
Channel Partners whose products CYBRA resells to provide a single source for a customer’s entire bar code label and RFID needs. The table below contains a list of our key partners, the type of relationship(s) and the product(s) involved:
 
Company
 
  ASV
 
Technology
 
Channel
 
  Product
Apparel Business Systems
 
 
 
         
MarkMagic Labels Development
 
Infor
 
 
 
         
MarkMagic Labels Runtime
 
Manhattan Assoc.
 
 
 
         
MarkMagic Labels Runtime
 
Network Systems
 
 
 
         
MarkMagic Labels Development
 
Vormittag Assoc.
 
 
 
         
MarkMagic Enterprise Development
 
Wynne Systems
 
 
 
         
MarkMagic Labels Development
 
Avery Dennison
 
     
 
 
 
 
Printers, Supplies, and RFID Encoders and Care Label Printers and Supplies
 
Datamax
 
     
 
 
 
 
Printers, Supplies, and RFID Encoders
 
HP
 
     
 
 
 
 
HP PCL laser printers
 
 
 
12

 
 
IBM
 
     
 
 
 
 
Printers, Supplies, and RFID Encoders, System servers
 
Intermec
 
     
 
 
 
 
Printers, Supplies, and RFID Encoders
 
Impinj
 
     
 
 
 
 
RFID Readers and antennas
Motorola
 
     
 
 
 
 
RFID Readers, Mobile Computers, Wireless Networks, Bar Code Scanners
 
Printronix
 
     
 
 
 
 
Printers, Supplies, and RFID Encoders
 
SATO
 
     
 
 
 
 
Printers, Supplies, and RFID Encoders
 
Teklogix
 
     
 
 
 
 
RFID Readers, Mobile Computers, Wireless Networks
 
Zebra
     
 
 
Label and Plastic Card Printers, Supplies, and RFID Encoders
 
Alien Technologies
         
 
 
RFID UHF readers and tags
Hand Held
 
         
 
 
Bar code scanners and imagers
 
IIMAK
 
         
 
 
Thermal Ribbons
 
Microscan
 
         
 
 
Fixed bar code scanners
 
PSC
         
 
 
Bar code scanners and imagers
 
Tagsys
         
 
RFID HF and UHF readers and tags

CYBRA’s key distributors and resellers are Manhattan Associates, Inc., Vormittag Associates, Inc., Apparel Business Systems, LLC and Solzon Corporation.

On October 20, 1998, the Company signed a five-year Software License, Sublicensing and Distribution Commitment Agreement (the “License Agreement”) with Manhattan Associates, Inc. (“MAI”). The License Agreement automatically renews on a year-to-year basis unless cancelled by either party 30 days prior to each renewal date. Pursuant to the License Agreement, the Company granted to MAI a worldwide non-exclusive license to market and sell its MarkMagic software and related products. MAI pays to the Company a per copy license fee for copies of MarkMagic licensed by MAI or its distributors to end user customers. MAI has agreed to provide support to its customers, and CYBRA has agreed to provide back-up support to MAI. The License Agreement contains other standard provisions such as a source code escrow, copyright indemnification and limitation of warranties.

Effective April 20, 2007, the Company entered into a two year OEM Software Licensing Agreement with Vormittag Associates, Inc. (“VAI”) (the “VAI Agreement”). Pursuant to the VAI Agreement the reseller is granted marketing rights to the MarkMagic and EdgeMagic suite of software products and ancillary products in the United States and Canada. Thus VAI became the first OEM reseller for EdgeMagic. The VAI Agreement provides for set commissions on the sale of products based upon the then current list price. The VAI Agreement contains confidentiality provisions, warranty and support obligations of CYBRA and the reseller’s provisions governing selling methods, and related standard provisions. The VAI Agreement automatically renews for additional one-year periods unless either party notifies the other of its intention to terminate at least 30 days prior to any termination or renewal date. Each party may terminate the VAI Agreement by notifying the other party of its intent to do so three months in advance without cause.
 
 
13

 
 
Effective October 23, 2006, the Company entered into a two-year Domestic Reseller Agreement with Apparel Business Systems, Inc. (“ABS”) (the “Reseller Agreement”). Pursuant to this Reseller Agreement the Company granted ABS marketing rights to the MarkMagic suite of software products and ancillary products in the United States and Canada. The Reseller Agreement provides for set commissions on the sale of products based upon the then current list price. The Reseller Agreement contains confidentiality provisions, warranty and support obligations of CYBRA and the reseller’s provisions governing selling methods, and related standard provisions. The Reseller Agreement automatically renews for additional one-year periods unless either party notifies the other of its intention to terminate at least 30 days prior to any termination or renewal date. Each party may terminate the Reseller Agreement by notifying the other party of its intent to do so three months in advance without cause.

Effective August 27, 2007, CYBRA entered into three agreements with Solzon Corporation, Nashua, New Hampshire: (1) a Technology License Agreement; (2) a Contractor Agreement for System Integration and Consulting Services; and (3) a Reseller Agreement (the “Solzon Agreements”). Pursuant to the Solzon Agreements, Solzon has assigned to CYBRA a perpetual world-wide license to utilize Solzon’s RFID for iSeries Product and Solzon has agreed to provide support of the installation and configuration of CYBRA’s EdgeMagic Application Software at certain of CYBRA’s customer facilities. Pursuant to these Agreements, Solzon will abandon future development of Solzon’s products and for so long as Solzon is a reseller of CYBRA’s products, and for a period of two years thereafter, Solzon will cease all sales and marketing of its products to any third party. Solzon will be available to answer customers’ RFID and associated questions regarding application and customer needs. In addition, the parties entered in a two-year “Premier Reseller Software Licensing Agreement” (the “PRSLA”), pursuant to which Solzon will market and sell CYBRA’s suite of software products anywhere in the world. The PRSLA provides for set commissions on the sale of products based upon the then current list price. The PRSLA contains confidentiality provisions, warranty and support obligations of CYBRA and the reseller’s provisions governing selling methods, and related standard provisions. The PRSLA automatically renews for additional one-year periods unless either party notifies the other of its intention to terminate at least 30 days prior to any termination or renewal date. Each party may terminate the PRSLA by notifying the other party of its intent to do so three months in advance without cause. For so long as Solzon acts as a reseller of CYBRA’s products, and for a period of two years thereafter, Solzon has agreed not to compete with CYBRA’s business.

In May, 2008 CYBRA signed a strategic partnership agreement with Globe Tracker, Inc. (GTI), a Beijing, China based provider of Global Tracking and Monitoring solutions, to deliver comprehensive, integrated worldwide tracking solutions for global trading partners.

Effective August 6, 2008, the Company entered into a two year OEM Software Licensing Agreement with DCS, Inc., a provider of IBM System i-based software solutions for law enforcement. Pursuant to this agreement the reseller is granted marketing rights to the MarkMagic™ and EdgeMagic® suite of software products and ancillary products in the United States and Canada. The agreement provides for set sales credits on the sale of products based upon the then current list price. The agreement contains confidentiality provisions, warranty and support obligations of CYBRA and the reseller's provisions governing selling methods, and related standard provisions. The agreement automatically renews for additional one-year periods unless either party notifies the other of its intentions to terminate at least 30 days prior to any termination or renewal date. Each party may terminate the agreement by notifying the other party of its intent to do so three months in advance without cause.

On August 3, 2009, the Company entered into an Agreement for Establishment of Beijing Smart Shipping Technologies (SST) Co. Ltd. (the “Beijing Agreement”), with the Waterborne Transportation Institute of the Ministry of Communications, a governmental agency of the People’s Republic of China, and Key West Technologies, Inc.  The Beijing Agreement proposes to establish an equity joint venture, and contemplates a subsequent definitive joint venture agreement. The business scope of the proposed joint venture is to utilize the Company’s identification software to develop and sell products and services that track and monitor goods throughout the shipping supply chain. The Beijing Agreement contemplates a financial commitment by the Company to the joint venture of $2.5 million over eighteen months in exchange for a 52% equity interest in the joint venture. The Company is under no obligation to make these capital contributions unless and until the parties enter into a binding, definitive joint venture agreement.  The Company will require additional financing in the form of debt and/or equity to participate in the joint venture and make the required contributions.  Both the agreement and the subsequent binding, definitive joint venture agreement will be governed by the law of the People’s Republic of China.
 
 
14

 
 
Research and Development

In fiscal year 2010, the Company spent $215,772 on Research and Development activities and in fiscal year 2009, the Company spent $204,509 on Research and Development activities. For the years ended December 31, 2010 and 2009, all costs were borne directly by CYBRA.  No customers paid for these activities in any direct manner.

Employees

As of March 15, 2011, the Company employed 11 full time employees. In addition, the Company retains the services of consultants and other third-parties on an as-needed basis.
 
Stock Option Plan

The Company adopted an Incentive Stock Plan on April 30, 2006 and has reserved 5,000,000 shares of its Common Stock for issuance thereunder.

ITEM 1A. Risk Factors

There are numerous and varied risks, known and unknown, that may prevent us from achieving our goals, including those described below. The risks described below are not the only ones we will face. Additional risks not presently known to us or that we currently believe are immaterial may also impair our financial performance and business operations. If any of these risks actually occurs, our business, financial condition or results of operations may be materially adversely affected.

We may not be able to continue as a going concern.

Management is planning to commence negotiations with the holders of the Debentures. In the event that negotiations are not successful, the Company does not have sufficient cash to pay the balances and will be in default.

This factor raises serious doubt about the Company’s ability to continue as a going concern. Management is hopeful that they will succeed in settling with the Debenture holders in a manner that will provide the Company with sufficient time to repay the debt and not have the risk of further default. No assurances can be given that management will be successful in its negotiations with the Debenture holders.  If the Company is unable to successfully negotiate with the Debenture holders, it is unlikely that it will be able to continue as a going concern.

We may not be able to pay, refinance or otherwise satisfy our obligations under certain of the 8% Convertible Debentures (the “Debentures”).

We did not pay the Debentures when they became due on April 10, 2009.  In 2010, certain holders of the Debentures agreed to extend the term of their Debentures, and certain other holders agreed to exchange their Debentures for a new class of preferred stock.  Holders of Debentures having an aggregate principal amount of $1,445,000 have agreed to extend the term of their Debentures until April 10, 2011.  We can provide no assurance that we will be able to generate adequate revenue from our operations to pay such Debentures when they mature or to refinance or further extend the term of the Debentures at that time.
 
 
15

 
 
We may not be able to raise sufficient capital to successfully operate or expand our business.

Our continued operations will depend upon the availability of cash flow from operations and/or our ability to raise additional funds through various financing methods. If sales or revenues do not meet expectations, or cost estimates for development and expansion of our business prove to be inadequate, we will require additional funding. If additional capital cannot be obtained, we may have to delay or postpone acquisitions, development or other expenditures, which can be expected to harm our competitive position, business operations and growth potential. There can be no assurance that cash flow from operations will be sufficient to fund our financial needs, or if such cash flow is not sufficient, that additional financing will be available on satisfactory terms, if at all. Changes in capital markets and the cost of capital are unpredictable. Any failure to obtain such financing, or obtaining financing on unfavorable terms, can be expected to have a material adverse effect on our business, financial condition, results of operations and future business prospects.

We have had limited revenues and experienced significant net losses thus far.

To date, we have had limited revenues. We had revenues of $1,605,744 and $1,335,944 in fiscal years 2010 and 2009, respectively. In fiscal year 2010, we had a net loss of $2,491,966 and in fiscal year 2009, we had a net loss of $1,090,284. A substantial portion of our net losses for fiscal year 2010, aggregating approximately 88% of our total net losses for fiscal 2010, resulted from charges as a result of debt restructuring and other non-cash charges. Nevertheless, because we are subject to all risks inherent in a business venture, it is not possible to predict whether we will be profitable.
 
Accordingly, it is not possible to predict whether or not our current and proposed activities will be sufficiently profitable. Prospective purchasers of our securities should bear in mind that, in light of the risks and contingencies involved, no assurance can be given that we will ever generate enough revenue to offset expenses or to generate a return on invested capital. There is no guarantee of our successful, profitable operation. Our failure to achieve or maintain profitability can be expected to have a material adverse effect on our business, financial condition, results of operations and future business prospects.
 
We may experience significant fluctuations in our operating results and rate of growth and may not be profitable in the future.

Our results of operations may fluctuate significantly due to a variety of factors, many of which are outside of our control and difficult to predict. The following are some of the factors that may affect us from period to period and may affect our long-term financial performance:

 
our ability to retain and increase revenues associated with customers and satisfy customers’ demands;

 
our ability to be profitable in the future; 

 
our investments in longer-term growth opportunities; 

 
our ability to expand our marketing network, and to enter into, maintain, renew and amend strategic alliance arrangements on favorable terms; 
     
  changes to offerings and pricing by us or our competitors; 
 
 
fluctuations in the size of our customer base, including fluctuations caused by marketing efforts and competitors’ marketing and pricing strategies;  

 
the effects of commercial agreements and strategic alliances and our ability to successfully integrate them into our business; 

 
technical difficulties, system downtime or interruptions; 
     
  the effects of litigation and the timing of resolutions of disputes; 
     
  the amount and timing of operating costs and capital expenditures; 
     
  changes in governmental regulation and taxation policies; 
 
 
16

 
 
 
events, such as a sustained decline in our stock price, that cause us to conclude that goodwill or other long-term assets are impaired and for which a significant charge to earnings is required; and

 
changes in, or the effect of, accounting rules, on our operating results.

The market for RFID services may not develop as anticipated, which would adversely affect our ability to execute our business strategy.

The success of our RFID offerings depends on growth in the number of RFID users, which in turn depends on wider public acceptance of RFID software solutions. The RFID market is in its early stages and may not develop as rapidly as is expected. Potential new users may view RFID as unattractive relative to traditional bar code products for a number of reasons, including implementation, procurement, integration and supply costs, greater technical complexity, immature technology, consumer privacy concerns, or the perception that the performance advantage for RFID is insufficient to justify the increased costs. There is no assurance that RFID will ever achieve broad user acceptance.

We may not successfully enhance existing products and services or develop new products and services in a cost-effective manner to meet customer demand in the evolving market for bar code and RFID software services.

The market for bar code and RFID software solutions is characterized by evolving technology and industry standards, changes in customer needs and frequent new product introductions. We are currently focused on enhancing our RFID capabilities through wider device coverage, additional application coverage and supporting other computing platforms beyond the System i. Our future success will depend, in part, on our ability to use leading technologies effectively, to continue to develop our technical expertise, to enhance our existing services and to develop new services that meet changing customer needs on a timely and cost-effective basis. We may not be able to adapt quickly enough to changing technology, customer requirements and industry standards. If we fail to use new technologies effectively, to develop our technical expertise and new services, or to enhance existing services on a timely basis, either internally or through arrangements with third parties, our product and service offerings may fail to meet customer needs, which would adversely affect our revenues and prospects for growth.

We have spent and will continue to spend significant resources enhancing our existing capabilities and developing, implementing and launching our RFID products. We believe RFID software solutions represent a significant growth opportunity. However, losses are expected to result in the early stages until a sufficient number of customers are added whose recurring revenues, net of recurring costs, more than offset sales, marketing and other expenses incurred to add additional customers.

RFID solutions may have technological problems or may not be accepted by customers. To the extent we pursue commercial agreements, acquisitions and/or strategic alliances to facilitate new product activities, the agreements, acquisitions and/or alliances may not be successful. If any of this were to occur, it could damage our reputation, limit our growth, negatively affect our operating results and harm our business.

Intense competition could reduce market share and harm financial performance.

The market for bar code and RFID encoding software is emerging, intensely competitive and characterized by rapid technological change.

Bar code and RFID software companies compete for customers based on industry experience, know-how, technology and price, with the dominant providers conducting extensive advertising campaigns to capture market share. Many of our competitors have (i) greater financial, technical, engineering, personnel and marketing resources; (ii) longer operating histories; (iii) better name recognition; and (iv) larger customer bases. These advantages afford our competitors the ability to (a) offer greater pricing flexibility, (b) offer more attractive incentive packages to encourage resellers to carry competitive products, (c) negotiate more favorable distribution contracts with resellers and (d) negotiate more favorable contracts with suppliers. We believe additional competitors may be attracted to the market, including IBM, Oracle, Microsoft, and HP. We also believe existing competitors are likely to continue to expand their offerings.
 
 
17

 
 
Current and prospective competitors include many large companies that have substantially greater market presence and greater financial, technical, marketing and other resources than we have. We compete directly or indirectly with the following categories of companies:
 
  System i Label Software
     
 
System i Forms Software 
     
 
UNIX/Linux/Windows Label Software
     
 
UNIX/Linux/Windows Forms Software
 
 
UNIX/Linux/Windows RFID Edge Software

As competition in the bar code and RFID market continues to intensify, competitors may continue to merge or form strategic alliances that would increase their ability to compete with us for customers. These relationships may negatively impact our ability to form or maintain our own strategic relationships and could adversely affect our ability to expand our customer base. Because we operate in a highly competitive environment, the number of customers we are able to add may decline, and the cost of acquiring new customers through our own sales and marketing efforts may increase.

Our ability to compete effectively in the bar code and RFID services industry will depend upon our ability to (i) continue to provide high quality products and services at prices competitive with, or lower than, those charged by our competitors and (ii) develop new and innovative products and services. There can be no assurance that competition from existing or new competitors or a decrease in prices by competitors will not have a material adverse effect on our business, financial condition and results of operations, or that we will be able to compete successfully in the future.

We may not be able to keep up with rapid technological and other changes.

The industry in which we compete is characterized, in part, by rapid growth, evolving industry standards, significant technological changes and frequent product enhancements. These characteristics could render our existing systems and strategies obsolete, and require us to continue to develop and implement new products and services, anticipate changing customer demands and respond to emerging industry standards and technological changes. We intend to evaluate these developments and others that may allow us to improve service to our customers. However, no assurance can be given that we will be able to keep pace with rapidly changing customer demands, technological trends and evolving industry standards. The failure to keep up with such changes is likely to have a material adverse effect on our business, long-term growth prospects and results of operations.
 
We are dependent on strategic relationships.

Our business is dependent, in part, upon current relationships and those we intend to develop with suppliers, distributors and resellers in various markets and other third parties. The failure to develop or maintain these relationships could result in a material adverse effect on our financial condition and results of operations.

Reliance upon third-party suppliers for components may place us at risk of interruption of supply or increase in costs.

We rely on third-party suppliers for certain hardware and software necessary for our services and we do not have any long-term supply agreements. Although we believe we can secure other suppliers, we expect that the deterioration or cessation of any relationship would have a material adverse effect, at least temporarily, until the new relationships are satisfactorily in place. Adverse affects could limit our ability to fill customer orders for bar code and RFID hardware and supplies, resulting in potential loss of revenues and loss of goodwill. Replacing any one supplier could take weeks.
 
 
18

 
 
Ongoing success and our ability to compete depend upon hiring and retention of key personnel.

Success will be dependent to a significant degree upon the involvement of current management, especially Harold Brand, our CEO. These individuals have critical industry experience and relationships upon which we rely. The loss of services of any of our key personnel could divert time and resources, delay the development of our business and negatively affect our ability to sell our products and services or execute our business plan. In addition, we will need to attract and retain additional talented individuals in order to carry out our business objectives. The competition for such persons is intense and there are no assurances that these individuals will be available. Such problems might be expected to have a material adverse impact on our financial condition, results of operations and future business prospects.

We are subject to control by officers and management and there could be conflicts of interest with management that may be adverse to your interests. 

Management of CYBRA currently beneficially owns approximately 62.3% of the outstanding shares of our Common Stock. As a result, management possesses meaningful influence and control over the Company, and may be able to control and direct the Company’s affairs, including the election of directors and approval of significant corporate transactions for the foreseeable future.

A conflict of interest may arise between our management’s personal pecuniary interest and its fiduciary duty to our shareholders. Conflicts of interest create the risk that management may have an incentive to act adversely to the interests of other investors. Such influence may not necessarily be consistent with the interests of our other shareholders.

Director and officer liability is limited.

As permitted by New York law, our certificate of incorporation limits the personal liability of directors to the fullest extent permitted by the provisions of New York Business Corporation Law. As a result of our charter provision and New York law, shareholders may have limited rights to recover against directors for breach of fiduciary duty.

If we raise additional funds through the issuance of equity securities, or determine in the future to register additional Common Stock, your percentage ownership will be reduced, you will experience dilution which could substantially diminish the value of your stock and such issuance may convey rights, preferences or privileges senior to your rights, which could substantially diminish your rights and the value of your stock.

We may issue additional shares of Common Stock for various reasons and may grant additional stock options to employees, officers, directors and third parties. If we determine to register for sale to the public additional shares of Common Stock or other debt or equity securities in any future financing or business combination, a material amount of dilution can be expected to cause the market price of the Common Stock to decline. One of the factors that generally affects the market price of publicly traded equity securities is the number of shares outstanding in relationship to assets, net worth, earnings or anticipated earnings. Furthermore, the public perception of future dilution can have the same effect even if actual dilution does not occur.

In order for us to obtain additional capital, complete a business combination, or refinance the Debentures, we may find it necessary to issue securities, including but not limited to debentures, options, warrants or shares of preferred stock, conveying rights senior to those of the holders of Common Stock. Those rights may include voting rights, liquidation preferences and conversion rights. To the extent senior rights are conveyed, the value of the Common Stock can be expected to decline.

 
19

 
 
The existence of outstanding warrants, debentures, preferred stock and shares available under our Incentive Stock Plan may harm our ability to obtain additional financing and their exercise will result in dilution to your interests.
 
We have outstanding 11,400,404 warrants to purchase an aggregate of 11,400,404 shares of Common Stock. Each of the Class A and Class B Warrants is exercisable for up to five years from date of issue at an exercise price of $.75 per share (Class A Warrants) and $1.75 per share (Class B Warrants). The holder of a warrant may not exercise a warrant, if, after giving effect to such issuance after exercise, such holder would beneficially own more than 4.99% of the Company’s outstanding shares.

We also have 2,860,000 shares of Common Stock issuable upon exercise of the outstanding Debentures, and an additional 2,090,000 shares of Common Stock issuable upon exercise of an equal number of shares of Series A Preferred Stock.  The Debentures and the Series A Preferred Stock are generally convertible into shares of Common Stock at any time at the option of the holders thereof.

Further, we have 5 million shares of Common Stock available for the grant of stock options and other grants of equity-based compensation under our 2006 Incentive Stock Plan.
 
The warrants contain standard anti-dilution provisions in the event of stock dividend, splits or other dilutive transactions. While these various securities are outstanding or otherwise available for grant, our ability to obtain future financing may be harmed. Upon exercise of these warrants, conversion of debentures or preferred stock or exercise of options or grants of other equity-based awards, substantial dilution to your ownership interests will occur as the number of shares of Common Stock outstanding increases.

We have identified material weaknesses in our internal controls over financial reporting.

In connection with our assessment of internal control over financial reporting for the year ended December 31, 2010, we identified two material weaknesses with respect to our internal control over financial reporting:  A lack of an effective control environment, i.e., insufficient complement of personnel with an appropriate level of accounting knowledge, experience and training in the application of GAAP commensurate with our financial reporting requirements and business environment; and a failure to maintain effective controls over the period-end reporting process.  In response to the material weaknesses identified by the Company, management has taken certain remedial measures that we believe will correct the design and operational effectiveness of such internal controls; however, we cannot guarantee that such remedial measures will actually correct the design and operational effectiveness of such internal controls and that in the future we will not discover additional material weaknesses in internal control over financial reporting.

Penny stock regulations may impose certain restrictions on marketability of the Company’s securities.
 
We are subject to rules pertaining to “penny stocks”. The SEC has adopted regulations which generally define a “penny stock” to be any equity security that has a market price (as defined) of less than $5.00 per share or an exercise price of less than $5.00 per share, subject to certain exceptions. Our shares have not had a market price of or greater than $5.00 per share since they began trading, nor is it likely that they will attain such price in the foreseeable future. As a result, our Common Stock will be subject to rules that impose additional sales practice requirements on broker-dealers who sell such securities to persons other than established clients and “accredited investors”. For transactions covered by these rules, the broker-dealer must make a special suitability determination for the purchase of such securities and have received the purchaser’s written consent to the transaction prior to the purchase. Additionally, for any transaction involving a penny stock, unless exempt, the rules require the delivery, prior to the transaction, of a risk disclosure document mandated by the SEC relating to the penny stock market. The broker-dealer must also disclose the commission payable to both the broker-dealer and the registered representative, current quotations for the securities and, if the broker-dealer is the sole market maker, the broker-dealer must disclose this fact and the broker-dealer’s presumed control over the market. Finally, monthly statements must be sent disclosing recent price information for the penny stock held in the account and information on the limited market in penny stocks. Consequently, the “penny stock” rules may restrict the ability of broker-dealers to sell shares of our Common Stock and may affect the ability of investors to sell such shares of Common Stock in the secondary market and the price at which such investors can sell any of such shares.
 
 
20

 
 
Investors should be aware that, according to the SEC, the market for penny stocks has suffered in recent years from patterns of fraud and abuse. Such patterns include:

 
control of the market for the security by one or a few broker-dealers that are often related to the promoter or issuer;
     
  manipulation of prices through prearranged matching of purchases and sales and false and misleading press releases;
     
  “boiler room” practices involving high pressure sales tactics and unrealistic price projections by inexperienced sales persons;
     
  excessive and undisclosed bid-ask differentials and markups by selling broker-dealers; and
     
  the wholesale dumping of the same securities by promoters and broker-dealers after prices have been manipulated to a desired level, along with the inevitable collapse of those prices with consequent investor losses.
 
Our management is aware of the abuses that have occurred historically in the penny stock market.

Our Common Stock is thinly traded, and as a result, the market price for our Common Stock may be particularly volatile, which could lead to wide fluctuation in our share price, as the sale of substantial amounts of our Common Stock in the public market could depress the price of our Common Stock.

The trading volume of our Common Stock on the OTC Bulletin Board has been relatively low when compared with larger companies listed on the OTC Bulletin Board or other stock exchanges.  Thinly traded stocks, such as ours, can be more volatile than stocks trading in an active public market. Because of this, our shareholders may not be able to sell their shares at the volumes, prices, or times that they desire.

We cannot predict the effect, if any, that future sales of our Common Stock in the market, or availability of shares of our Common Stock for sale in the market, will have on the market prices of our Common Stock.  Therefore, we can give no assurance that sales of substantial amounts of our Common Stock in the market, or the potential for large amounts of sale in the market, would not cause the price of our Common Stock to decline or impair our ability to raise capital through sales of our Common Stock.

The market price of our Common Stock may fluctuate in the future, and these fluctuations may be unrelated to our performance. General market price declines or overall market volatility in the future could adversely affect the price of our Common Stock, and the current market price may not be indicative of future market prices.
 
ITEM 1B. UNRESOLVED STAFF COMMENTS

Not applicable.

ITEM 2. DESCRIPTION OF PROPERTY

The Company maintains its administrative and R&D offices in approximately 3,400 square feet of space located at One Executive Blvd., Yonkers, New York 10701. The Company has leased this space for a period of four years, beginning January 2010.  Monthly rent for 2010 and 2011 will be $5,937 and subsequent years will be $6,312, which includes electricity.

CYBRA also leases approximately 1,100 square feet in West Seneca (Buffalo), New York for sales and customer support. The Company is leasing this space for a period of two years, beginning June 1, 2010.  Monthly rent is $926 through May 2011 and $945 for the duration of the lease.  Electricity is billed directly from the utility company.
 
 
21

 
ITEM 3. LEGAL PROCEEDINGS

In June 2009, the Herzliya, Israel Magistrate’s Court issued a judgment in favor of Raz-Lee Security Ltd. (“Raz-Lee”), a former distributor of the Company's products, in the amount of $26,944 plus interest at the rate of LIBOR plus one percent (1%), and an additional amount of 25,000 New Israel Shekels in costs. This judgment represented approximately ¼ of the amount that had been claimed by Raz-Lee.
 
The Company has to date paid 23,000 New Israel Shekels on account of the costs, leaving a balance of 2,000 New Israel Shekels (approximately $550). The Company has also paid the amount of $6,688 on account of the judgment, leaving a balance of approximately $21,000 (the original amount plus interest less the payment).
 
On February 15, 2011, Raz-Lee instituted proceedings in the Supreme Court of the State of New York, County of Westchester, Index No. 4763/11, for enforcement of the foreign judgment.  In its pleading, Raz-Lee incorrectly states the balance due. Raz-Lee also seeks costs and disbursements.
 
The Company has included the liability for the balance in accrued expenses.

ITEM 4. Reserved.
 
22

 
 
PART II
 
ITEM 5. MARKET FOR COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.
 
Trading in our Common Stock began in the third quarter of 2008. Our Common Stock is currently quoted on the OTC Bulletin Board under the symbol “CYRP”.  The following table sets forth the range of high and low bid prices per share of our Common Stock for each of the calendar quarters identified below as reported by the OTC Bulletin Board. These quotations represent inter-dealer prices, without retail mark-up, markdown or commission, and may not represent actual transactions.

2010:
 
High
   
Low
 
Quarter ended March 31, 2010
  $ 0.51     $ 0.10  
Quarter ended June 30, 2010
  $ 0.59     $ 0.50  
Quarter ended September 30, 2010
  $ 0.60     $ 0.25  
Quarter ended December 31, 2010
  $ 0.55     $ 0.15  
2009:
 
High
   
Low
 
Quarter ended March 31, 2009
  $ 1.2500     $ 0.4000  
Quarter ended June 30, 2009
  $ 1.2500     $ 0.6000  
Quarter ended September 30, 2009
  $ 0.6000     $ 0.2000  
Quarter ended December 31, 2009
  $ 0.6000     $ 0.2500  

Holders

As of March 2011, there were 99 record owners of our Common Stock.

Dividends

Holders of Common Stock are entitled to receive dividends as may be declared by our Board of Directors and, in the event of liquidation, to share pro rata in any distribution of assets after payment of liabilities and payment of the liquidation preference to holders of our preferred stock. The Board of Directors is not obligated to declare a dividend. In addition, the terms of the Debentures and preferred stock restrict our ability to pay dividends. We have not paid any dividends and do not have any current plans to pay any dividends.
 
Recent Sales of Unregistered Securities

None.
 
23

 
 
Securities Authorized For Issuance under Equity Compensation Plan
 
Plan Category
Number of securities
to be issued upon exercise
of outstanding options, 
warrants and rights
 
Weighted-average 
exercise price of 
outstanding options, 
warrants and rights
 
Number of securities 
remaining available for 
future issuance under 
equity compensation plan
(excluding securities 
reflected in column (a)
 
 
(a)
 
(b)
 
(c)
 
Equity compensation plans approved by security holders
    100,000     $ 0.75       4,821,046  
Equity compensation plans not approved by security holders
     —              —  
Total
    100,000     $ 0.75       4,821,046  

ITEM 6. SELECTED FINANCIAL DATA

Not applicable
 
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS AND PLAN OF OPERATIONS

This report on Form 10-K contains forward-looking statements. Forward-looking statements are statements not based on historical information and that relate to future operations, strategies, financial results or other developments. Forward-looking statements are necessarily based upon estimates and assumptions that are inherently subject to significant business, economic and competitive uncertainties and contingencies, many of which are beyond our control and many of which, with respect to future business decisions, are subject to change. These uncertainties and contingencies can affect actual results and could cause actual results to differ materially from those expressed in any forward-looking statements made by us or on our behalf. We disclaim any obligation to update forward-looking statements.
 
   
Years ended
             
   
December 31,
             
   
2010
   
2009
   
Change $
   
Change %
 
                         
Revenues
                       
Products
  $ 806,980     $ 651,962     $ 155,018       24 %
Services
    798,764       683,982       114,782       17 %
Total Revenues
    1,605,744       1,335,944       269,800       20 %
                                 
Direct Costs
                               
Equipment Purchases
  $ 143,272     $ 218,258     $ (74,986 )     -34 %
Royalties & Consulting
    50,243       59,576       (9,333 )     -16 %
                                 
Total Direct Costs
  $ 193,515     $ 277,834     $ (84,319 )     -30 %
% of total revenues
    12 %     21 %                
                                 
Gross margin
  $ 1,412,229     $ 1,058,110     $ 354,119       33 %
% of total revenues
    88 %     79 %                
                                 
Research and development costs
  $ 215,772     $ 204,509     $ 11,263       6 %
% of total revenues
    13 %     15 %                
                                 
Sales and marketing expenses
  $ 173,550     $ 165,595     $ 7,955       5 %
% of total revenues
    11 %     12 %                
                                 
General and administrative expenses
  $ 1,594,243     $ 1,309,346     $ 284,897       22 %
% of total revenues
    99 %     98 %                
                                 
Interest expense
  $ 173,616     $ 407,698     $ (234,082 )     -57 %
% of total revenues
    11 %     31 %                
                                 
Other Income (Expenses)
  $ (1,747,014 )   $ (61,246 )   $ (1,685,768 )     2752 %
% of total revenues
    -109 %     -5 %                
                                 
Loss Before Taxes
  $ (2,491,966 )   $ (1,090,284 )   $ (1,401,682 )     129 %
% of total revenues
    -155 %     -82 %                
 
 
24

 
 
Revenues

Total revenues for the twelve months ended ,December 31, 2010, as compared to the same period in 2009, increased by  approximately 20%. New MarkMagic features previously released have met with positive reception from new and existing customers.  Sales for our most recent RFID product, EdgeMagic, began to pick up this year, mirroring the general trend of increased market acceptance of RFID technology. Demand for services has showed an increase for the three and six month periods as well.  We expect these trends to continue contributing to positive growth in revenues over the course of the year.

Direct Costs

The costs for equipment purchases for the twelve months ended December 31, 2010, were lower as compared to the same period in 2009, due to a sale from earlier in the year that was canceled in the third quarter, resulting in a vendor credit. The cost for equipment purchases for the twelve months ended December 31, 2010 was 34% lower as compared to 2009 due to a continuing trend of decrease in sales of lower profit hardware products.

Gross Margin

Gross Margin as a percentage of sales for the twelve months ended December 31, 2010 as compared to the same period in 2009 increased from 79% to 88%.  This was due to the improved product sales mix of increased sales of higher profit software products and decrease of lower profit hardware products.

Research and Development Costs

Research and development costs consist primarily of compensation of development personnel, related overhead incurred to develop EdgeMagic and upgrades, and to enhance our current products and fees paid to outside consultants. Substantially all of these expenses have been incurred by us in the United States.  Software development costs are accounted for in accordance with ACS 985-20-25, Research and Development Costs of Computer Software, under which we are required to capitalize software development costs between the time technological feasibility is established and the product is ready for general release. Costs that do not qualify for capitalization are charged to research and development expense when incurred. Our EdgeMagic software product was available for general release on September 1, 2009, and all costs after that date have been expensed in accordance with ACS 985-20-25.  During the twelve months ended December 31, 2010 and 2009, the software development costs that were expensed were $226,605 and $204,509 , respectively.  Software development costs increased slightly in 2010 due to enhancements to our MarkMagic and EdgeMagic products.
 
 
25

 
 
Sales and Marketing Expenses

Sales and marketing expenses consist primarily of commissions and advertising and promotional expenses. The small increase in absolute dollars for the twelve months ended December 31, 2010 as compared to the same period in 2009 is due to higher commissions paid as a result of higher revenues.

General and Administrative Expense

General and administrative expenses consist primarily of costs associated with our executive, financial, human resources and information services functions. General and administrative expenses increased in absolute dollars for the twelve months ended December 31, 2010 as compared to the same period in 2009 primarily due to the resolution of the Board to issue common stock in lieu of deferred management salaries, as well as management salaries paid in full beginning mid-year.

Interest Expense

Interest expense represents interest accrued on, and amortization of deferred financing cost related to, the 8% Convertible Debentures originally due April 10, 2009 (the “Debentures’).  Amortization of these deferred finance costs ceased in April 2009 and standard interest continued to accrue on them.  On June 8, 2010, holders of our Debentures having an aggregate principal amount of $1,445,000 converted outstanding interest due through April 2009 into shares of common stock. On the same date, 16 holders of Debentures having an aggregate principal amount of $1,045,000 agreed to exchange their Debentures for a new class of preferred stock of the Company having terms similar to those in the Debentures, resulting in decreased interest expense for the twelve months ended December 31, 2010.

Other Income (Expenses)

Other income and expenses increased for the twelve months ended December 31, 2010 compared to the same period in 2009 due to the reversal of default interest on the Debentures.  Holders of our Debentures having an aggregate principal amount of $2,490,000 converted outstanding interest due through April 2009 into shares of common stock.  The common stock was issued at $0.50 per share compared to the fair market value on June 8, 2010 of $0.59.  As a result, the conversion generated a beneficial conversion cost.  In addition, we incurred a loss of approximately $1,900,000 due to the amendment of Debentures having an aggregate principal amount of $2,490,000.

Provision for Income Taxes

The provision for income taxes consists of provisions for federal and state income taxes.

We recorded no income tax expense or benefit for the twelve months ended ended December 31, 2010 and 2009.  The effective tax rate of 0% differs from the statutory U.S. federal income tax rate of 35% primarily due to increases in valuation allowance for deferred tax asset that we believe we are unlikely to be able to realize.

Liquidity and Capital Resources

The following table summarizes our cash and cash equivalents, working capital, long-term debt and cash flows for the twelve months ended December 31, 2010 and 2009.

 
26

 
 
   
Years Ended
             
   
2010
   
2009
   
Change $
   
Change %
 
                         
Cash and cash equivalents
  $ 24,335     $ 58,039     $ (33,704 )     -139 %
Working capital deficit
    (2,410,668 )     (4,011,848 )     1,601,180       -66 %
Net cash used in operating activities
    (64,847 )     (11,162 )     (53,685 )     83 %
Net cash used in investing activities
    (16,357 )     (1,390 )     (14,967 )     92 %
Net cash provided by financing activities
    47,500       -       47,500       100 %
 
As of December 31, 2010, our principal source of liquidity was cash of $24,000. Our operations used $64,847 in cash during the twelve months ended December 31, 2010 as compared to $11,162 for the same period in 2009.

To sustain operations under our current structure, we need cash of approximately $110,000 per month to fund research and administrative expenses. We believe that we will be able to meet that continuing obligation at our current sales level.

Our working capital deficit was approximately $2,245,000 at December 31, 2010. The deficit in working capital included approximately $1,420,000 in liabilities related to the Convertible Debentures, as well as $414,737 in deferred revenues that require settlement in future services rather than cash.

During the year ended December 31, 2010, the Company issued 285,000 shares of common stock for services rendered as consultants and directors for total compensation of $147,750. Pursuant to a resolution of the Board of Directors on August 3, 2010, 436,861 shares were issued to management in lieu of deferred compensation of $93,157. The shares were valued at the then market price of $.51 resulting in a gross valuation of the shares issued of $222,799 of which $129,643 was charged to operations as officer compensation.

During 2010, the Company issued 150,000 shares of Common Stock to Nathan Retek, and 125,000 shares of Common Stock to Shmilly Gruenstein, in both instances for services rendered by Messrs. Retek and Gruenstein to the Company.

As of the fourth quarter of 2010, we were operating at better than break-even on a cash flow basis. This is due to an upturn in business that we believe may be a result of the overall improvement in the general business environment, positive market acceptance of new product features, as well as our success in maintaining tight control on expenses.  We see a recent positive trend in customer interest in RFID in general and in our EdgeMagic product in particular.  Wal-Mart’s implementation of RFID tracking throughout its stores for selected apparel goods is a positive sign.  Apparel suppliers represent a large segment of our customer base.  Wal-Mart is often a pioneer in new technology, with other retailers following suit.  JC Penney and Dillard’s have already joined Wal-Mart in encouraging their suppliers - among them a number of CYBRA customers - to tag their apparel goods at the item level.  We therefore, expect increased interest in EdgeMagic to meet anticipated retailer compliance requirements over the course of 2011.

The Company does not have the resources to repay the Debentures that remain outstanding. We are currently attempting to renegotiate the terms of the Debentures, either by extending the due date of the Debentures or by exchanging the Debentures for a new series of preferred stock. However, there is no guarantee that we will be successful in negotiating an extension of the maturity date of the Debentures or an exchange of the Debentures for preferred stock with all holders of the Debentures.  If we are successful, we believe we can sustain the Company’s cash flow at break-even and will not need additional sources of financing for the short term.  If we are unsuccessful, we may not be able to continue operations as a going concern.

ITEM 7A. QUANTITIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Not applicable to smaller reporting companies.
 
 
27

 

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The financial statements and notes thereto are set forth immediately after the signature page in this Annual Report on Form 10-K. Set forth below is the table of contents for the aforementioned financial statements and notes thereto.

 
Page
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM – KBL, LLP
F-1
   
FINANCIAL STATEMENTS
 
   
BALANCE SHEETS
F-2
   
STATEMENTS OF OPERATIONS
F-3
   
STATEMENTS OF CHANGES IN STOCKHOLDERS’ DEFICIT
F-4
   
STATEMENTS OF CASH FLOWS
F-5
   
NOTES TO FINANCIAL STATEMENTS
F-6 - F-18
 
 
 
 

 
 
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 

 
To the Board of Directors and Stockholders of
CYBRA Corporation
 
We have audited the accompanying balance sheets of CYBRA Corporation ("the Company") as of December 31, 2010 and 2009 and the related statements of operations, changes in stockholders' deficit, and cash flows for the years then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
 
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of 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 financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
 
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2010 and 2009 and the results of its operations and its cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America.

The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the financial statements, the Company incurred a net loss of $ 2,491,966 for the year ended December 31, 2010, had a working capital deficit of $2,410,668, and had a stockholders’ deficit of $2,245,100 at December 31, 2010. Additionally, the amended 8% Convertible Debentures with a balance of $1,420,000 are due on April 11, 2011 and the Company will not have sufficient cash reserves to make the payments when they come due. These conditions raise substantial doubt about the Company’s ability to continue as a going concern. Management’s plans regarding those matters also are described in Note 1. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
 

/s/ KBL, LLP

New York, New York
March 31, 2011
  
 
F-1

 
 
CYBRA CORPORATION
 
BALANCE SHEETS
 
   
December 31,
 
   
2010
   
2009
 
             
ASSETS            
CURRENT ASSETS
           
Cash
  $ 24,335     $ 58,039  
Accounts receivable, less allowance for doubtful accounts of $6,000 and $17,000, respectively
    221,590       174,538  
                 
Total Current Assets
    245,925       232,577  
                 
PROPERTY AND EQUIPMENT, at cost, less accumulated depreciation and amortization of
               
$281,017 and $263,425
    51,246       53,982  
SOFTWARE DEVELOPMENT, at cost, less accumulated amortization of
               
$576,033 and $349,862
    102,668       327,338  
SECURITY DEPOSITS AND OTHER ASSETS
    11,654       11,654  
                 
TOTAL ASSETS
  $ 411,493     $ 625,551  
                 
LIABILITIES AND STOCKHOLDERS' DEFICIT
               
                 
CURRENT LIABILITIES
               
   8% Convertible Debentures
  $ 1,420,000     $ 2,604,098  
Accrued liquidated damages - registration rights agreement
    -       110,000  
Accounts payable and accrued expenses
    329,283       472,211  
Deferred officer/director compensation
    131,827       90,565  
Accrued interest
    313,246       599,728  
Loans from shareholders in contemplation of private placement of common stock
    47,500       -  
Deferred revenue
    414,737       367,823  
TOTAL CURRENT LIABILITIES
    2,656,593       4,244,425  
                 
STOCKHOLDERS' DEFICIT
               
Preferred Stock, Series A 10% Convertible Preferred Stock, par value $0.001 per share, 10,000,000
               
shares authorized; 2,090,000 shares issued and outstanding (liquidation preference $1,045,000)
    2,090       -  
Common stock, par value $0.001 per share, 100,000,000 shares authorized;
               
15,519,667 and 13,766,662 shares issued and outstanding
    15,519       13,767  
                 
Additional Paid - in capital
    6,754,024       2,892,126  
                 
Accumulated deficit
    (9,016,733 )     (6,524,767 )
                 
   Total Stockholders' Deficit
    (2,245,100 )     (3,618,874 )
                 
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT
  $ 411,493     $ 625,551  
 
The accompanying notes are an integral part of these financial statements
 
 
F-2

 
 
CYBRA CORPORATION
 
STATEMENT OF OPERATIONS
 
             
   
Years Ended
 
   
December 31,
 
   
2010
   
2009
 
REVENUES
           
Products
  $ 806,980     $ 651,962  
Services
    798,764       683,982  
TOTAL REVENUES
    1,605,744       1,335,944  
                 
COST OF GOODS SOLD
               
Equipment purchases
    143,272       218,258  
Royalties and consulting
    50,243       59,576  
      193,515       277,834  
                 
GROSS PROFIT
    1,412,229       1,058,110  
                 
Research and Development
    215,772       204,509  
Selling, General and Administrative
    1,767,793       1,474,941  
TOTAL OPERATING EXPENSES
    1,983,565       1,679,450  
                 
LOSS FROM OPERATIONS
    (571,336 )     (621,340 )
                 
OTHER INCOME (EXPENSE)
               
Reversal (Loss) on debenture valuation adjustment
    61,316       (61,316 )
Reversal on liquidated damages
    110,000       -  
Loss on debt restructuring
    (1,225,748 )     -  
Beneficial conversion cost resulting from stock issued in payment
               
of accrued debenture interest at amounts less than the current
               
quoted market price of the shares
    (88,083 )     -  
Loss in connection with issuance of Series A 10% Convertible Preferred
               
Stock valued at $1,665,788 in exchange for 8% convertible debentures with
               
an outstanding balance of $1,045,000 at the date of exchange
    (620,788 )     -  
Interest expense, includes amortization of deferred finance costs of $113,010 (2009)
               
and $20,007 to officers related to deferred compensation (2010)
    (173,616 )     (407,698 )
Refundable state tax credits
    16,243       -  
Interest income
    46       70  
      (1,920,630 )     (468,944 )
                 
NET LOSS
  $ (2,491,966 )   $ (1,090,284 )
                 
PER SHARE DATA
               
Basic and diluted net loss per share
  $ (0.17 )   $ (0.08 )
                 
Basic and diluted weighted-average shares outstanding
    15,080,701       13,499,937  
 
The accompanying notes are an integral part of these financial statements
 
 
F-3

 
 
CYBRA CORPORATION
                                         
STATEMENTS OF CHANGES IN STOCKHOLDERS' DEFICIT
                               
FOR THE YEARS ENDED DECEMBER 31, 2010 AND DECEMBER 31, 2009
                         
                                           
   
Series A 10% Convertible
                               
   
Preferred Stock
   
Common Stock
   
Additional
   
Accumulated
       
   
Shares
   
Amount
   
Shares
   
Amount
   
paid-in-capital
   
Deficit
   
Total
 
                                           
                                           
Balance at January 1, 2009
                13,512,143     $ 13,512     $ 2,752,621     $ (5,434,483 )   $ (2,668,350 )
                                                     
Common Stock issued to consultants in lieu
                                                   
of cash payments for services rendered
                70,000       70       47,430               47,500  
                                                     
Common Stock issued in payment of accrued
                                                   
interest payable on 8% convertible debentures
                184,519       185       92,075               92,260  
                                                     
Net loss for the year
                -       -       -       (1,090,284 )     (1,090,284 )
                                                     
Balance at December 31, 2009
    -       -       13,766,662       13,767       2,892,126     $ (6,524,767 )   $ (3,618,874 )
                                                         
Common Stock issued to consultants in lieu
                                                       
of cash payments for services rendered
                    285,000       285       147,465               147,750  
                                                         
Common Stock issued in payment of accrued
                                                       
interest payable on 8% convertible debentures
                    981,144       980       489,592               490,572  
                                                         
Series A Preferred Stock issued in exchange
                                                       
for 8% convertible debentures
    2,090,000       2,090                       1,663,698               1,665,788  
                                                         
                                                         
Valuation adjustment on old warrants exchanged
                                                       
 for new warrants with extended terms and reduced
                                                       
  exercise price, issued in connection with the
                                                       
   renegotiation and exchange of debentures
                                    1,225,748               1,225,748  
                                                         
Beneficial conversion cost resulting from stock issued
                                                       
 in payment of accrued debenture interest at amounts
                                                       
less than the current quoted market price of the shares
                              88,083               88,083  
                                                         
Shares issued to officers and directors in partial
                                                       
 payment of previously accrued deferred compensation
                                                       
   of $93,157 and additional compensation of $129,643
                    436,861       437       222,362               222,799  
                                                         
Conversion of 8% Convertible Debentures into Common Stock
              50,000       50       24,950               25,000  
                                                         
Net loss for the year
                                            (2,491,966 )     (2,491,966 )
                                                         
Balance at December 31, 2010
    2,090,000       2,090       15,519,667       15,519       6,754,024       (9,016,733 )     (2,245,100 )
 
The accompanying notes are an integral part of these financial statements
 
 
F-4

 
 
CYBRA CORPORATION
 
STATMENTS OF CASH FLOWS
 
   
Years Ended
 
   
December 31,
 
   
2010
   
2009
 
             
             
CASH FLOWS FROM OPERATING ACTIVITIES
           
Net loss
  $ (2,491,966 )   $ (1,090,284 )
Adjustments to reconcile net loss to net cash provided by (used in) operating activities
               
Depreciation and Amortization
    243,763       251,972  
Stock based compensation to officers
    129,643       -  
Stock based compensation to outside directors
    7,500       10,000  
Stock based compensation to consultants
    140,250       37,500  
Reduction in allowance for doubtful accounts
    11,000       -  
Common Stock issued in payment of accrued interest payable on 8% convertible debentures
    490,572       -  
Loss on debt restructuring-warrants valuation adjustment
    1,225,748       -  
Beneficial conversion cost in connection with issuance of common stock
               
in exchange for interest payable.
    88,083       -  
Loss in connection with issuance of 10% convertible preferred stock valued at $1,665,788 in exchange
               
for 8% convertible debentures with an outstanding balance of $1,045,000 at the date of exchange
    620,788       -  
Interest expense - amortization of debt discount
    -       139,992  
Amortization of deferred finance cost
    -       113,010  
Provision for settlement of litigation
    -       3,000  
Debenture valuation adjustment
    (61,316 )     61,316  
Changes in operating assets and liabilities
               
(Decrease) in accrued liquidated damages
    (110,000 )     -  
(Decrease) in accounts receivable
    (58,052 )     156,482  
Increase in security deposits and other assets
    -       7,057  
(Decrease) increase in accounts payable and accrued expenses
    (9,303 )     122,688  
(Decrease) increase in accrued interest
    (338,471 )     154,698  
Deferred revenue
    46,914       21,407  
Net Cash Used in Operating Activities
    (64,847 )     (11,162 )
                 
Acquisition of property and equipment  and increase in software development
    (16,357 )     (1,390 )
Additions to software development costs
            -  
Net Cash Used in Investing Activities
    (16,357 )     (1,390 )
                 
CASH FLOWS FROM FINANCING ACTIVITIES
               
Loans from shareholders towards the planned issuance of common stock
    47,500       -  
Net Cash Provided by Financing Activities
    47,500       -  
                 
(DECREASE) IN CASH AND CASH EQUIVALENTS
    (33,704 )     (12,552 )
                 
CASH AND CASH EQUIVALENTS
               
    Beginning of period
    58,039       70,591  
                 
    End of period
  $ 24,335     $ 58,039  
                 
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
               
    Cash paid during the period for:
               
          Income Taxes
  $ 714     $ 3,752  
          Interest
  $ 1,545     $ -  
                 
NON-CASH DISCLOSURES
               
    Issuance of 978,703 shares of common stock in settlement of accrued interest payable to
  $ 490,572     $ -  
     holders of 8% convertible debentures
    Issuance of 184,519 shares of common stock in settlement of accrued interest payable to
               
     holders of (original) 8% convertible debentures
  $ -     $ 92,260  
    Conversion of 8% Convertible Debentures into 50,000 shares of common stock
  $ 25,000     $ -  
 286,861 shares of common stock issued to officers and directors in partial payment of previously deferred
               
     compensation
  $ 93,157     $ -  
    Issuance of 2,090,000 shares of Series A Preferred Stock in exchange for 8% Convertible Debentures
  $ 1,665,788     $ -  
    Reversal of Mandatory Prepayment balance in connection with Debenture Amendment and Exchange Agreements
  $ 51,989     $ -  
 
The accompanying notes are an integral part of these financial statements
 
 
F-5

 
 
CYBRA CORPORATION

NOTES TO FINANCIAL STATEMENTS

1.  ORGANIZATION, DESCRIPTION OF OPERATIONS, FINANCIAL STATUS OF THE COMPANY AND BASIS OF PRESENTATION

Organization and Description of Operations

CYBRA Corporation (the “Company”) was incorporated under the laws of the State of New York on September 6, 1985. The Company is a software developer, publisher and systems integrator specializing in Automatic Identification technology solutions. The Company’s flagship product, MarkMagicTM, is a barcode, radio frequency identification (“RFID”) and forms middleware solution relied upon daily by thousands of customers worldwide. It helps customers easily integrate bar code labels, RFID technology and electronic forms into their business systems. EdgeMagic®, first released in February 2008, is an integrated RFID control solution that is highly scalable. It is designed to manage edge readers and analog control devices, commission, read, filter and verify RFID tags to comply with Electronic Product Code (EPC) compliance mandates, as well as for asset tracking applications and integration with popular ERP and Warehouse Management application packages.  CYBRA software solutions run on all major computing platforms including IBM Power Systems (System i, iSeries, AS/400, AIX) as well as Linux, Unix, and Microsoft Windows.
 
Financial Status of the Company/Going Concern

At December 31, 2010, the Company had cash of approximately $24,000, and a working capital deficit of $ 2,410,668, which includes certain current liabilities that do not require near term cash settlement. Additionally, the Company incurred a net loss of  $2,491,966 for the year ended December 31, 2010, and had a sharehholders’ deficit of  $2,245,100 at December 31, 2010. Management has taken several steps to improve sales and reduce costs in order to ensure that its cash flows will meet its operating cash requirements for the next quarter. These steps include increasing sales of  EdgeMagic®, which management believes has revenue potential far in excess of the current product mix, as well as the formation of a field level sales team.

The amended 8% Convertible Debentures with a principal balance of $1,420,000 are due on April 11, 2011.Management is planning to commence negotiations with the holders of these debentures. In the event that negotiations are not successful, the Company does not have sufficient cash to pay the balances and will be in default.

These factors raise serious doubt about the Company’s ability to continue as a going concern. Management is hopeful that they will succeed in settling with the debenture holders in a manner that will provide the Company with sufficient time to repay the debt and not have the risk of further default. No assurances can be given that management will be successful in its negotiations with the debenture holders or that the efforts to improve the sales of EdgeMagic® will result in improvements significant enough to provide sufficient cash flows and operating capital.  No adjustments have been made to the accompanying financial statements to reflect the recoverability or classification of recorded asset amounts or the amounts or classification of liabilities should the Company be unable to continue in existence.

 
2.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Software Costs

The Company accounts for software development costs in accordance with ASC 985.730, Software Research and Development, and ASC 985-20, Costs of Software to be Sold, Leased or Marketed.  ASC 985-20 requires that costs related to the development of enhancements to MarkMagic be capitalized as an asset when incurred subsequent to the point at which technological feasibility of the enhancement is established.  ASC 985-20 specifies that “technological feasibility” can only be established by the completion of a “detailed program design” or if no such design is prepared, upon the completion of a “working model” of the software. The Company’s development process does not include a detailed program design. Management believes that such a design could be produced in the early stages of development but would entail significant wasted expense and delay. Consequently, ASC 985-20 requires the development costs to be recorded as an expense until the completion of a “working model”. In the Company’s case, the completion of a working model does not occur until shortly before the time when the software is ready for sale.
 
Research and Development Costs 

Research and development costs incurred after completion of development of a product are expensed as incurred. Total research and development expense for the years ended December 31, 2010 and 2009 was $ 215,772 and $204,509, respectively.
 
 
F-6

 
 
Accounting for Warrants Classified as Equity Issued to Purchase Company Common Stock

Warrants issued in conjunction with equity financings were accounted for under ASC 815-40, Contracts in Entity’s Own Stock.  ASC 825-20, Accounting for Registration Payment Arrangements, establishes the standard that contingent obligations to make future payments under a registration rights arrangement shall be recognized and measured separately in accordance with the standard, Reasonable Estimation of the Amount of a Loss. The Company has evaluated how these standards affected these accompanying financial statements. The adoption of the accounting pronouncement on January 1, 2007 changed the classification of the warrant liability, which was $551,910 at January 1, 2007, to stockholders’ equity (additional paid in capital). This is no longer applicable.
 
Derivative Financial Instruments

The Company accounts for its Warrants, which were issued in a private placement of the 8% Convertible Debentures (the “Debentures”) with detachable Warrants on April 10, 2006, and amended on June 8, 2010 to extend their maturity to April 10,   2013, and reduce the exercise prices to amounts between $1.00 and $1.30 from $1.75 (see Note 3, 8% Convertible Debentures and Derivative Financial Instruments), as derivatives under the guidance of ASC 815-10, Accounting for Derivative Instruments and Hedging Activities, and ASC 815-40, Contracts in an Entity’s Own Stock. The Company considers these standards applicable by adopting “View A” of the Issue Summary–The Effect of a Liquidated Damages Clause on a Freestanding Financial Instrument in which the Warrants and the related registration rights agreement are viewed together as a combined instrument that is indexed to the Company's stock. The embedded conversion feature of the Debentures has not been classified as a derivative financial instrument because the Company believes that they are “conventional” as defined in ASC 470-20, Conventional Convertible Debt Instrument.

Depreciation and Amortization

Depreciation and amortization are provided by the straight-line and accelerated methods over the estimated useful lives indicated in Note 5, Property and Equipment.

Income Taxes

Income taxes are accounted for under the asset and liability method in accordance with ASC 740, Income Taxes. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial carrying amounts of existing assets and liabilities and their respective tax bases as well as operating loss and tax credit carry forwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the periods in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Deferred tax assets are reduced by a valuation allowance to the extent that the recoverability of the asset is unlikely to be recognized.

The Company follows ASC 740 rules governing uncertain tax positions, which provides guidance for recognition and measurement. This prescribes a threshold condition that a tax position must meet for any of the benefits of the uncertain tax position to be recognized in the financial statements. It also provides accounting guidance on derecognization, classification and disclosure of these uncertain tax positions.

Interest costs and penalties related to income taxes are classified as interest expense and selling, general and administrative costs, respectively, in the Company's financial statements. For the years ended December 31, 2010 and 2009, the Company did not recognize any interest or penalty expense related to income taxes. The Company is currently subject to a three-year statute of limitations by major tax jurisdictions. The Company files income tax returns in the U.S. federal jurisdiction and New York State.

Advertising Costs

Advertising costs are charged to expense as incurred. Total advertising amounted to $12,852 and $11,504 for the years ended December 31, 2010 and 2009, respectively.

Use of Estimates

The preparation of financial statements, in conformity with accounting principles generally accepted in the United States of America, requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. The most significant estimates relate to valuation of warrants, stock grants and stock options, the net operating loss carry-forward, the valuation allowance for deferred taxes and various contingent liabilities. It is reasonably possible that these above-mentioned estimates and others may be adjusted as more current information becomes available, and any adjustment could be significant in future reporting periods. The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources.  Actual results could differ from those estimates.
 
 
F-7

 

Concentrations of Credit Risk

Financial instruments that potentially subject the Company to concentrations of credit risk consist of commercial accounts receivable and temporary cash investments, which could, from time-to-time, exceed the federal depository insurance coverage. The Company has cash investment policies that restrict placement of these investments with financial institutions evaluated as highly creditworthy.  As of December 31, 2010, the Company does not hold cash and cash equivalents with individual banks in excess of federally insured limits.

Concentrations of credit risk that arise from financial instruments exist for groups of customers when they have similar economic characteristics that would cause their ability to meet contractual obligations to be similarly affected by changes in economic conditions.  The Company operates in one segment, software development and systems integration of bar code and RFID to manufacturers and wholesale distributors in the United States of America.  Management believes that the customer base is sufficiently diverse and therefore does not consider the aggregate of customer accounts receivable to be a concentration of credit risk.

Cash and Cash Equivalents

The Company classifies marketable securities that are highly liquid and have maturities of six months or less at the date of purchase as cash equivalents. The Company manages its exposure to counterparty credit risk through specific minimum credit standards, diversification of counterparties and procedures to monitor its credit risk concentrations.

Revenue Recognition

The Company recognizes revenues in accordance with AICPA Statement of Position ASC 985-605, Software Revenue Recognition.

Revenue from software license agreements is recognized when persuasive evidence of an agreement exists, delivery of the software has occurred, the fee is fixed or determinable, and collectability is probable. In software arrangements that include more than one element, the Company allocates the total arrangement fee among the elements based on the relative fair value of each of the elements.
 
License revenue allocated to software products generally is recognized upon delivery of the products or deferred and recognized in future periods to the extent that an arrangement includes one or more elements to be delivered at a future date and for which fair values have not been established. Revenue allocated to maintenance agreements is recognized ratably over the maintenance term and revenue allocated to training and other service elements is recognized as the services are performed. If evidence of fair value does not exist for all elements of a license agreement and post customer support (PCS) is the only undelivered element, then all revenue for the license arrangement is recognized ratably over the term of the agreement as license revenue. If evidence of fair value of all undelivered PCS elements exists but evidence does not exist for one or more delivered elements, then revenue is recognized using the residual method. Under the residual method, the fair value of the undelivered elements is deferred and the remaining portion of the arrangement fee is recognized as revenue.

Cost of license revenue primarily includes product, delivery, and royalty costs. Cost of maintenance and service revenue consists primarily of labor costs for engineers performing implementation services, technical support, and training personnel as well as facilities and equipment costs.
 
Accounts Receivable

The Company records trade accounts receivable at net realizable value. This value includes an appropriate allowance for estimated uncollectible accounts to reflect any loss anticipated on the trade accounts receivable balances and charged to the provision for doubtful accounts. The Company calculates this allowance based on its history of write-offs, level of past-due accounts based on the contractual terms of the receivables, and its relationships with and the economic status of its customers. Uncollectible receivables are charged off against the allowance for doubtful accounts as management determines that they are clearly uncollectible after taking all reasonable steps to collect the balances.
 
Trade receivables are presented net of an allowance for doubtful accounts of $ 6,000 and $17,000 as of December 31, 2010 and 2009.

Substantially all of the Company’s accounts receivable are due from manufacturing companies and software vendors located throughout the United States.
 
 
F-8

 

Stock-Based Compensation

In addition to requiring supplemental disclosures, ASC 718, Compensation – Stock Compensation, and ASC 505-50, Equity-Based Payments to Non-Employees, addresses the accounting for share-based payment transactions in which a company receives goods or services in exchange for (a) equity instruments of the company or (b) liabilities that are based on the fair value of the company’s equity instruments or that may be settled by the issuance of such equity instruments. ASC 718 focuses primarily on accounting for transactions in which a company obtains employee services in share-based payment transactions.

The Company uses the modified prospective method. Stock issued to consultants for consulting services was valued as of the date of the agreements with the various consultants, which in all cases was earlier than the dates when the services were committed to be performed by the various consultants.

References to the issuances of restricted stock refer to stock of a public company issued in private placement transactions to individuals who are eligible to sell all or some of their shares of restricted Common Stock pursuant to Rule 144, promulgated under the Securities Act of 1933, as amended (“Rule 144”), subject to certain limitations. In general, pursuant to Rule 144, a stockholder who is not an affiliate and has satisfied a six-month holding period may sell all of his restricted stock without restriction, provided that the Company has current information publicly available. Rule 144 also permits, under certain circumstances, the sale of restricted stock, without any limitations, by a non-affiliate of the Company that has satisfied a one-year holding period.
 
Fair Value of Financial Instruments

The fair value of the Company’s assets and liabilities, which qualify as financial instruments under ASC 820, Fair Value Measurements and Disclosures, approximates the carrying amounts represented in the balance sheet.

ASC 825-20, Accounting for Registration Payment Arrangements, addresses an issuer’s accounting for registration payment arrangements by specifying that the contingent obligation to make future payments or otherwise transfer consideration under a registration payment arrangement, whether issued as a separate agreement or included as a provision of a financial instrument or other agreement, should be separately recognized and measured in accordance with ASC 450, Contingencies.  In connection with the Debenture Amendment and Exchange Agreements (as discussed in Note 3, 8% Convertible Debentures and Derivative Financial Instruments), the registration rights and penalties under the original Securities Purchase Agreements were waived.

Basic and Diluted Loss per Share