UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For quarterly period ended July 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number: 0-27028
EMBRYO DEVELOPMENT CORPORATION
(Exact name of Registrant as specified in its charter)
Delaware 13-3832099
(State or other jurisdiction of (State or I.R.S. Employer
incorporation of organization) Identification Number)
750 Lexington Avenue, Suite 2750
New York, New York 10022
(Address of principal executive offices)
10022
(Zip Code)
(212) 355-8484
(Registrant's telephone number including area code)
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 and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
Class Outstanding at September 10, 1997
Common Stock 4,845,000
EMBRYO DEVELOPMENT CORPORATION
(A Development Stage Company)
FORM 10-QSB
QUARTERLY REPORT
For the Three Months Ended July 31, 1997
TABLE OF CONTENTS
Page to Page
Consolidated Financial Statements:
Balance sheet..........................................1
Statements of operations...............................2
Statements of cash flows...............................3
Notes to financial statements........................4-6
Management's discussion and analysis
of financial condition and result
of operations........................................7-9
Part II. - Other information..........................10
Signatures............................................11
<PAGE>
EMBRYO DEVELOPMENT CORPORATION AND SUBSIDIARY
(A Development Stage Company)
CONSOLIDATED BALANCE SHEET
(Unaudited)
July 31, 1997
<TABLE>
ASSETS
<S> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 75,505
Short-term investments 175,000
Investments in available-for-sale securities 799,531
Accounts receivable 136,204
Interest receivable 19,243
Inventories 78,450
Prepaid expenses and other current assets 212,370
_________
Total current assets 1,496,303
INVESTMENTS IN AVAILABLE-FOR-SALE SECURITIES 250,000
PROPERTY AND EQUIPMENT, net of accumulated
depreciation of $24,523 457,743
CONSTRUCTION PROJECTS IN PROGRESS 812,265
LICENSED TECHNOLOGY, net of accumulated
amortization of $504,525 1,105,475
OTHER ASSETS 127,177
____________
$ 4,248,963
============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued expenses $ 437,350
Customer deposits 25,000
____________
Total current liabilities 462,350
NOTE PAYABLE 600,000
INTEREST OF MINORITY HOLDERS IN SUBSIDIARY 9,612
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common stock, $.0001 par value; authorized 30,000,000
shares; 4,845,000 issued and outstanding 485
Preferred stock, $.0001 par value; authorized 15,000,000
shares; 6,000,000 issued and outstanding 600
Additional paid-in-capital 8,446,277
Unearned compensation (1,323,750)
Deficit accumulated during the development stage (3,946,611)
___________
Total equity 3,177,001
$ 4,248,963
=============
</TABLE>
-1-
EMBRYO DEVELOPMENT CORPORATION AND SUBSIDIARY
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
THREE MONTHS ENDED Cumulative
JULY 31, During
1997 1996 Development
Stage
(Unaudited) (Unaudited) (Unaudited)
<S> <C> <C> <C>
REVENUES $ 334,280 $ 6,565 $ 769,540
_________ __________ ___________
COST AND EXPENSES:
Cost of sales 231,550 5,077 561,439
General, selling
and administrative 468,126 321,876 2,719,726
Research and development 41,436 38,528 759,880
Amortization 57,500 57,500 504,525
Interest and other
(income)expense (4,533) (38,435) 353,315
___________ __________ __________
794,079 384,546 4,898,885
___________ __________ __________
LOSS BEFORE
MINORITY INTEREST $ (459,799) $(377,981) $(4,129,345)
MINORITY INTEREST IN NET
LOSS OF SUBSIDIARY 43,662 - 182,734
__________ __________ ___________
NET LOSS $ (416,137) $ (377,981) $(3,946,611)
=========== =========== ============
NET LOSS PER SHARE $ (.09) $ (.08) $ (.95)
=========== =========== ============
WEIGHTED AVERAGE NUMBER OF
SHARES OF COMMON STOCK
OUTSTANDING 4,845,000 4,691,685 4,167,574
=========== =========== ===========
</TABLE>
-2-
EMBRYO DEVELOPMENT CORPORATION AND SUBSIDIARY
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
THREE MONTHS ENDED Cumulative
JULY 31, During
1997 1996 Development
Stage
(Unaudited) (Unaudited) (Unaudited)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (416,137) $ (377,981) $(3,946,611)
___________ ___________ ____________
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 70,097 58,667 1,069,260
Minority interest in loss
of subsidiary (43,662) - (182,734)
Non-cash consideration - consulting 128,750 141,250 743,750
Non-cash consideration - research
and development - - 440,000
Changes in operating assets and liabilities:
(Increase) decrease in assets:
Accounts receivable (18,606) 2,005 (136,204)
Interest receivable (1,198) 624 (19,243)
Inventories (29,954) (9,125) (51,455)
Prepaid expenses and other
current assets (30,586) (25,035) (187,370)
Other assets (75,501) (20,002) (143,396)
Increase (decrease) in liabilities:
Accounts payable and
accrued expenses 117,813 (4,547) 437,350
Customer deposits - - 25,000
_________ _________ __________
Total adjustments 117,153 143,837 1,994,958
Net cash used in
operating activities (298,984) (234,144) (1,951,653)
__________ _________ ___________
CASH FLOWS FROM INVESTING ACTIVITIES:
Decrease (increase) in
short-term investments 384,000 - (175,000)
Net sale (purchase) of investments
in available-for-sale securities (151) 496,520 (1,049,531)
Net cash paid for asset acquisition - - (200,588)
Purchase of licensed technology - - (450,000)
Purchase of plant, equipment and
construction projects in progress (289,559) (7,887) (454,931)
__________ ________ ___________
Net cash provided by (used in)
investing activities 94,290 488,633 (2,330,050)
__________ ________ ___________
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of debt - - 300,000
Proceeds from issuance of stock - - 120,000
Proceeds from issuance of subsidiary
stock to minority shareholder - - 150,000
Repayment of debt - - (550,000)
Proceeds of stock offering, net of
deferred costs - - 4,337,208
_________ ________ __________
Net cash provided by financing
activities - - 4,357,208
_________ ________ __________
NET (DECREASE) INCREASE IN CASH
AND CASH EQUIVALENTS (204,694) 254,489 75,505
CASH AND CASH EQUIVALENTS at
beginning of period 280,199 408,867 -
_________ ________ __________
CASH AND CASH EQUIVALENTS at
end of period $ 75,505 $ 663,356 $ 75,505
========== ========== ===========
</TABLE>
-3-
EMBRYO DEVELOPMENT CORPORATION AND SUBSIDIARY
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED JULY 31, 1997
1. Organization and Basis of Consolidation:
Embryo Development Corporation (the Company) is a Delaware Corporation
which was formed to develop, acquire, manufacture and market various bio-
medical devices. The accompanying financial statements include the accounts
of the Company and its majority-owned subsidiary, Hydrogel Design Systems,
Inc.(HDS). HDS is engaged in the manufacture, marketing, selling and
distribution of hydrogel, an aqueous polymer-based radiation ionized
medical/consumer product, and after-market components for apnea monitoring.
Upon consolidation, all significant intercompany accounts and
transactions have been eliminated.
2. Basis of Presentation:
The interim financial statements furnished reflect all adjustments which
are, in the opinion of management, necessary to present a fair statement of
the financial position and results of operations for the three month periods
ended July 31, 1997 and July 31, 1996. The financial statements should be
read in conjunction with the summary of significant accounting policies and
notes to financial statements included in the Company's Form 10-KSB for the
fiscal year ended April 30, 1997. The results of operations for the three
month periods ended July 31, 1997 and 1996 are not necessarily indicative of
the results to be expected for the full year.
3. Inventories:
Inventories at July 31, 1997 consist principally of finished goods.
4. Investments in Available-for-Sale Securities:
Investments in available-for-sale securities consist of the following at
July 31, 1997:
Current:
Guaranteed by the U.S. Government:
Federal National Mortgage Notes $ 299,590
U.S. Treasury Notes 499,941
$ 799,531
Non-current:
Guaranteed by the U.S. Government:
Federal Farm Credit Notes $ 250,000
-4-
EMBRYO DEVELOPMENT CORPORATION AND SUBSIDIARY
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED JULY 31, 1997
(Continued)
5. Stockholders' Equity:
Net loss per share was computed by dividing net loss by the weighted
average number of shares outstanding. Common stock equivalents have been
excluded as their effect would be anti-dilutive.
6. Litigation:
Class Action complaints have been filed naming as defendants the Company
and certain Board members. The Class Actions assert that the underwriter of
the Company's initial public offering and other defendants engaged in various
violations of the federal securities laws. The Company and Board members
deny that they engaged in any improper conduct or any violations of any
federal securities laws and intend to vigorously defend the action. Although
the ultimate disposition of legal proceedings cannot be predicted with
certainty, management does not believe that they should result in a
materially adverse effect on the Company's financial position.
7. Subsequent Events:
a. Investment in HDS
In January 1997, the Company entered into a commitment to make
available to HDS a $500,000, 8% revolving line of credit as part of its
investment interest. At July 31, 1997, the balance approximated $483,000.
In August, 1997, the Company increased the amount of the revolving line of
credit to $850,000, in consideration for HDS entering into a management
agreement with the Company. The management agreement provides for the
payment to Embryo of at least $75,000 per year in consideration for Embryo
providing HDS with administrative, marketing and management services.
b Business Combination Contingency
On February 6, 1997, HDS acquired certain assets from a group of
entities for an aggregate purchase price of $150,000 in cash and 150,000
shares of Embryo Common Stock (valued at $75,000). The Embryo shares vest on
the second anniversary date of the agreement only if HDS has earned $500,000
in cumulative gross revenue derived from the sale of certain products during
the two (2) year period. If, on the vesting date, the fair market value of
the shares is less than $900,000, the parties may demand that HDS purchase
all of the shares at an aggregate purchase price of $900,000 in either cash
and/or marketable securities.
On August 31, 1997, HDS determined that the $500,000 revenue
contingency will be met within the two (2) year period and has, accordingly,
recorded an additional $825,000 liability due to the seller as of August 31,
1997.
-5-
EMBRYO DEVELOPMENT CORPORATION AND SUBSIDIARY
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED JULY 31, 1997
(Continued)
8. Supplementary Information - Statements of Cash Flows:
The Company paid interest of $1,026 and -0- for the three months ended
July 31, 1997 and 1996, respectively.
The Company paid income taxes of $2,961 and $5,030 for the three months
ended January 31, 1997 and 1996, respectively.
-6-
EMBRYO DEVELOPMENT CORPORATION AND SUBSIDIARY
(A Development Stage Company)
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Liquidity and Capital Resources
The Company had net working capital of $1,033,953 at July 31, 1997 which
is primarily due to the remainder of the proceeds from the public offering
which was completed in November 1995. Additionally, the Company has invested
approximately $250,000 of these proceeds in long-term investments. The
Company remains in its development stage as it has not yet derived
significant revenues from the sale of its products.
The Company's statement of cash flows for the three months ended July
31, 1997 reflects cash used in operating activities of approximately
$299,000. This use of cash is primarily attributable to general and
administrative expenses, product development and advertising and marketing
expenses. Net cash provided by investing activities approximated $94,000
representing the sale of investments of approximately $384,000, of which
$290,000 was used to purchase property and equipment for HDS through its
revolving credit line with the Company. Credit line advances aggregated
approximately $317,000 during the three month period ended July 31, 1997. The
remaining cash was used to fund current operations. In addition, the cash and
cash equivalents balance decreased by $205,000, which was also used to fund
current operations.
At July 31, 1997, the balance on the revolving line of credit between
HDS and the Company approximated $483,000. In August of 1997, the Company
increased the amount of the revolving line of credit to $850,000,in
consideration for HDS entering into a management agreement with the Company.
The management agreement provides for the payment to Embryo of at least
$75,000 per year in consideration for Embryo providing HDS with
administrative, marketing and management services.
In August, 1997, HDS determined that the $500,000 revenue contingency
associated with its asset purchase of a group of entities which was completed
on February 6, 1997 will be met within the required (2) year period. This
contingency has resulted in the recording, in August 1997, of an additional
$825,000 liability due to the seller, which will become due on February 6,
1999.
The Company expects to incur substantial expenditures over the next 6 to
12 months for product development, to implement its sales and marketing plans
and to establish a manufacturing facility for HDS. The Company's management
believes that the Company's short and long-term investments will be
sufficient to fund its liquidity needs for at least the next 12 months.
-7-
EMBRYO DEVELOPMENT CORPORATION AND SUBSIDIARY
(A Development Stage Company)
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
Results of Operations
Since its inception, the Company's primary activities have consisted of
obtaining the exclusive license to seven (7) medical devices developed by Dr.
Lloyd Marks, developing a marketing strategy for the C.F. Medical Devices and
the start-up of HDS.
The Company has not derived significant revenues since its inception in
March 1995. The total revenue earned from inception through July 31, 1997 is
$769,540. This is a result of the sale of the C.F. Medical Devices of
approximately $367,000 and HDS sales of hydrogel and apnea monitor products
of approximately $403,000. As a result of the Company's start-up expenses
and acquisition of licenses and royalty rights for the products in the
development stage, the Company had an accumulated deficit of $3,946,611 as of
July 31, 1997. The Company expects to continue to incur operating losses
until such time it can generate significant revenues from the sale of its
products.
Plan of Operation
On February 6, 1997, the Company, through its majority owned subsidiary,
HDS, entered into asset purchase agreements pursuant to which it has acquired
certain assets from two entities. The two companies were engaged in the
business of manufacturing, marketing, selling and distributing hydrogel, a
aqueous polymer-based radiation ionized medical/consumer product, as well as
after-market components for apnea monitoring. Assets acquired include
property rights and technical data, machinery and equipment, and inventory.
During the next six (6) months HDS will seek to increase revenues from the
sale of after-market apnea monitoring components primarily through increased
marketing efforts. The Company has also leased a facility in Langhorne, PA
where it will establish a manufacturing facility for the in-house production
of hydrogel and electronic beam processing of medical, cosmetic and
pharmaceutical products. The Company anticipates completion of the facility
in the fourth calendar quarter of 1997.
In May of 1996 the Company entered into contracts with two different
firms to commence final design and manufacture of the Safety Needle, one of
the medical devices developed by Dr. Lloyd Marks. Toward that end, the
Company has implemented the manufacture of prototypes for this medical device
and has held focus groups with various medical professionals to refine and
enhance the device. The Company anticipates the development of a marketing
strategy and seeking FDA approval for this device in the next six (6) - nine
(9) months.
-8-
EMBRYO DEVELOPMENT CORPORATION AND SUBSIDIARY
(A Development Stage Company)
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
Plan of Operation (Continued)
During the next six (6) months, the Company will also continue to
conduct market research studies on the other six (6) medical devices it has
licensed from Dr. Marks in order to determine which of the devices are most
commercially marketable. The review will also include an analysis of the
most efficient way to market each of the devices. The Company will determine
if it is more efficient to license the products to third parties for
development or to develop and market the products itself. Within 12 months
the Company intends to implement the development and marketing of the most
commercially viable and potentially profitable medical devices. The Company
also intends to undertake clinical and beta tests to evaluate the products as
they are being developed. The Company may enter into discussions with
unaffiliated third parties that may be able to utilize, develop or market the
devices in either a cooperative joint venture or as a licensee. The
relationship may also assist the Company in the preparation of applications
to the Food and Drug Administration in order to receive approval to market
the devices in the United States.
The Company is also seeking to increase revenues from the sale of the
C.F. Medical Devices primarily through increased demonstrations to the
appropriate interest groups.
The Company believes it has sufficient capital to fund the Company's
operations for the next 12 months.
-9-
PART II- OTHER INFORMATION
Item 1. - Legal Proceedings
The Company has been named in four (4) actions, three (3) of which are
seeking class certification of their claims against the Company and various
other defendants.
Morehead, et al. v. Advanced Voice Technologies, et al., (New York
Supreme Court, New York County); Control Touch Systems, Inc. v. Advanced
Voice Technologies, Inc., et al, (New York Supreme Court, New York County);
Mott v. Sterling Foster & Co., Inc., et al., (United States District Court,
District of South Carolina); Petit, et al. v. Sterling Foster & Co., Inc., et
al., (United States District Court, Eastern District of New York). These
complaints against numerous defendants including the Company allege
violations of the Securities Act of 1933 arising out of the November 1995
initial public offering of 1 million shares of the Company's stock.
According to the complaints, the underwriter of the offering, Sterling Foster
& Co., Inc. ("Sterling Foster"), manipulated secondary market trading in
shares of the Company's common stock following the offering. The complaints
further allege that the prospectus and registration statement for the
offering failed to disclose material facts, in violation of federal and state
securities laws. The complaints seek unspecified damages. The Company and
its officers and directors deny the allegation of the complaints and are
vigorously defending these actions.
Item 2. - Changes in Securities.
Not applicable.
Item 3. - Defaults Upon Senior Securities.
Not applicable.
Item 4. - Submission Of Matters To A Vote Of Security Holders.
Not applicable.
Item 5. - Other Information.
Not applicable.
Item 6. - Exhibits And Reports on Form 8-K.
(A) Exhibits:
27. Financial data schedule
(B) Reports on Form 8-K:
None
-10-<PAGE>
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
EMBRYO DEVELOPMENT CORPORATION
By: /s/ Matthew L. Harriton
Matthew L. Harriton
President and Chief
Executive Officer
Chief Financial Officer
Dated: September 10, 1997
-11-
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION THAT IS EXTRACTED FROM
FORM 10-QSB FOR THE QUARTER ENDED JULY 31, 1997 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> APR-30-1998
<PERIOD-END> JUL-31-1997
<CASH> 75,505
<SECURITIES> 799,531
<RECEIVABLES> 136,204
<ALLOWANCES> 0
<INVENTORY> 78,450
<CURRENT-ASSETS> 1,496,303
<PP&E> 1,294,531
<DEPRECIATION> 24,523
<TOTAL-ASSETS> 4,248,963
<CURRENT-LIABILITIES> 462,350
<BONDS> 600,000
0
600
<COMMON> 485
<OTHER-SE> 3,175,916
<TOTAL-LIABILITY-AND-EQUITY> 4,248,963
<SALES> 334,280
<TOTAL-REVENUES> 334,280
<CGS> 179,547
<TOTAL-COSTS> 179,547
<OTHER-EXPENSES> 98,936
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 13,125
<INCOME-PRETAX> (416,137)
<INCOME-TAX> 0
<INCOME-CONTINUING> (416,137)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (416,137)
<EPS-PRIMARY> (.09)
<EPS-DILUTED> (.09)
</TABLE>
