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 October 31, 1998
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
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(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 December 10, 1998
- --------------- --------------------------------
Common Stock 6,995,000
<PAGE>
EMBRYO DEVELOPMENT CORPORATION
(A Development Stage Company)
FORM 10-QSB
QUARTERLY REPORT
For the Six Months Ended October 31, 1998
TABLE OF CONTENTS
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Page to Page
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Financial Statements:
Balance sheet..........................................1
Statements of operations...............................2
Statements of cash flows.............................3-4
Notes to financial statements.......................5-10
Management's discussion and analysis
of financial condition and result
of operations......................................11-14
Part II. - Other information.......................15-16
Signatures............................................17
<PAGE>
EMBRYO DEVELOPMENT CORPORATION
(A Development Stage Company)
BALANCE SHEET
(Unaudited)
October 31, 1998
<TABLE>
<S> <C>
ASSETS
------
CURRENT ASSETS:
Cash and cash equivalents $ 54,963
Accounts receivable 38,183
Inventories 58,404
Prepaid legal fees 75,000
Prepaid expenses and other current assets 103,421
-----------
Total current assets 329,971
PROPERTY AND EQUIPMENT, net of accumulated
depreciation of $18,472 14,158
LICENSED TECHNOLOGY, net of accumulated
amortization of $346,667 393,333
INVESTMENT IN UNCONSOLIDATED INVESTEE 195,649
OTHER ASSETS:
Due from unconsolidated investee 655,342
Cash in escrow 28,800
Deposits and other assets 85,934
------------
Total other assets 770,076
------------
Total assets $ 1,703,187
============
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
CURRENT LIABILITIES:
Accounts payable and accrued expenses $ 263,243
------------
Total current liabilities 263,243
------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock, $.0001 par value; authorized 15,000,000
shares; 6,000,000 issued and outstanding 600
Common stock, $.0001 par value; authorized 30,000,000
shares; 6,995,000 issued and outstanding 700
Additional paid-in-capital 9,977,889
Unearned compensation (720,000)
Deficit accumulated during the development stage (7,617,575)
Notes due on common stock purchases (201,670)
-------------
Total equity 1,439,944
-------------
Total liabilities and stockholders' equity $ 1,703,187
=============
</TABLE>
-1-
<PAGE>
EMBRYO DEVELOPMENT CORPORATION
(A Development Stage Company)
STATEMENTS OF OPERATIONS
<TABLE>
SIX MONTHS ENDED THREE MONTHS ENDED Cumulative
OCTOBER 31, OCTOBER 31, During
1998 1997 1998 1997 Development
Stage
(Unaudited) (Unaudited)(Unaudited) (Unaudited) (Unaudited)
---------- ---------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
REVENUES $ 62,851 $ 569,521 $ 37,137 $ 235,241 $ 1,298,605
--------- ----------- ---------- ----------- -----------
COSTS AND EXPENSES:
Cost of sales 47,787 460,382 27,646 228,832 1,128,410
General, selling
and administrative 478,322 984,892 244,576 516,766 4,677,278
Royalties 50,000 57,752 50,000 57,752 132,752
Research and development 125,579 87,977 53,917 46,541 1,043,274
Amortization 52,857 115,000 26,428 57,500 729,882
Equity loss of operations
of unconsolidated
investee 186,933 - 89,409 - 553,677
Loss on write-off of
licensed technology - - - - 486,785
Interest income -
related party (21,437) - (10,672) - (32,459)
Interest and other
(income)expense (14,072) 5,675 (9,187) 10,208 401,534
---------- ---------- ---------- --------- ----------
905,969 1,711,678 472,117 917,599 9,121,133
---------- ---------- ---------- --------- ----------
LOSS BEFORE
MINORITY INTEREST (843,118) (1,142,157) (434,980) (682,358) (7,822,528)
MINORITY INTEREST IN NET
LOSS OF SUBSIDIARY - 65,881 - 22,219 204,953
---------- ----------- ---------- --------- ----------
NET LOSS $ (843,118) $(1,076,276) $(434,980) $ (660,139)$(7,617,575)
=========== ============ ========== ========================
NET LOSS PER SHARE $ (.13) $ (.22) $ (.06) $ (.14)$ (1.66)
=========== ============ ========== =========================
WEIGHTED AVERAGE NUMBER OF
SHARES OF COMMON STOCK
OUTSTANDING 6,282,228 4,845,000 6,995,000 4,845,000 4,590,228
========= ========= ========= ========= ==========
</TABLE>
-2-
<PAGE>
EMBRYO DEVELOPMENT CORPORATION
(A Development Stage Company)
STATEMENTS OF CASH FLOWS
<TABLE>
SIX MONTHS ENDED Cumulative
OCTOBER 31, During
1998 1997 Development
Stage
(Unaudited) (Unaudited) (Unaudited)
----------- ----------- -----------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net loss $ (843,118) $(1,076,276) $(7,617,575)
----------- ------------ ------------
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 57,155 156,988 1,382,366
Write-off of licensed technology - - 486,785
Minority interest in loss of subsidiary - (65,881) (204,953)
Equity loss in operations of unconsolidated
investee 186,933 - 553,677
Non-cash consideration - other 232,500 269,483 1,376,233
Non-cash consideration - research
and development - - 440,000
Changes in operating assets and liabilities:
(Increase) decrease in assets:
Accounts receivable (4,077) 2,212 (117,880)
Interest receivable 2,782 14,233 28,182
Inventories 13,447 (32,340) (103,440)
Prepaid expenses and other
current assets 16,699 (29,348) (188,921)
Other assets (18,386) (49,969) (168,602)
Increase (decrease) in liabilities:
Accounts payable
and accrued expenses (10,290) 362,731 953,191
Customer deposits - (21,205) -
--------- ---------- ----------
Total adjustments 476,763 606,904 4,436,638
--------- ---------- ----------
Net cash operating activities -
forward (366,355) (469,372) (3,180,937)
---------- --------- -----------
INVESTING ACTIVITIES:
Purchase of short-term investment s - - (847,000)
Proceeds from sale of
short-term investments 288,000 559,000 847,000
Purchase of investments in available-
for-sale securities - - (6,129,521)
Proceeds from sale of investments in
available-for-sale securities - 499,615 6,129,521
Net cash paid for asset acquisition - - (200,588)
Purchase of licensed technology - - (450,000)
Purchase of property and equipment (1,190) (763,175) (1,027,997)
Divestiture of cash of subsidiary - - (77,794)
----------- --------- -----------
Net cash investing activities
- forward 286,810 295,440 (1,756,379)
----------- --------- ------------
</TABLE>
-3-
<PAGE>
<TABLE>
EMBRYO DEVELOPMENT CORPORATION
(A Development Stage Company)
STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED Cumulative
OCTOBER 31, During
1998 1997 Development
Stage
(Unaudited) (Unaudited) (Unaudited)
----------- ----------- ------------
<S> <C> <C> <C>
Net cash - operating activities -
forwarded $ (366,355) $ (469,372) $ (3,180,937)
Net cash - investing activities -
forwarded 286,810 295,440 (1,756,379)
FINANCING ACTIVITIES:
Proceeds from issuance of debt - 350,000 650,000
Proceeds from issuance of stock - - 120,000
Proceeds from issuance of subsidiary
stock to minority shareholder - - 150,000
Repayment of loans to
unconsolidated investee - - 258,821
Repayment of debt - - (550,000)
Proceeds of stock offering, net of
deferred costs - - 4,337,208
Due from unconsolidated investee - - 26,250
----------- ---------- ---------
Net cash financing activities - 350,000 4,992,279
----------- ---------- ---------
NET (DECREASE) INCREASE IN CASH
AND CASH EQUIVALENTS (79,545) 176,068 54,963
CASH AND CASH EQUIVALENTS at
beginning of period 134,508 280,199 -
---------- --------- -----------
CASH AND CASH EQUIVALENTS at
end of period $ 54,963 $ 456,267 $ 54,963
========== ========= ===========
</TABLE>
-4-
<PAGE>
EMBRYO DEVELOPMENT CORPORATION
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
SIX MONTHS ENDED OCTOBER 31, 1998
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 subsidiary, Hydrogel Design Systems, Inc.(HDS) through
January 21, 1998. The assets, liabilites and operations of HDS after January
21, 1998 are not included in the financial statements of the Company as a
result of a reduction in ownership and voting interest. This investment is
being accounted for using the equity method of accounting subsequent to
January 21, 1998. HDS is engaged in the manufacture, marketing, selling
and distribution of hydrogel, an aqueous polymer-based radiation ionized
medical/consumer product.
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 six and three month
periods ended October 31, 1998 and October 31, 1997. 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, 1998. The results
of operations for the six month periods ended October 31, 1998 and 1997 are
not necessarily indicative of the results to be expected for the full year.
3. Inventories:
Inventories at October 31, 1998 consist principally of finished goods,
which are stated at the lower of cost (first-in, first-out method) or market.
4. Investment in HDS:
As of October 31, 1998, the Company holds approximately 31.3% ownership
of the common stock of HDS which is accounted for using the equity method.
-5-
<PAGE>
EMBRYO DEVELOPMENT CORPORATION
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
SIX MONTHS ENDED OCTOBER 31, 1998
(Continued)
4. Investment in HDS:(Cont'd)
Summarized financial information for HDS, which commencing January 21,
1998, the Company accounts for using the equity method, is as follows:
Summarized Financial Information:
October 31, 1998
------------------
Balance Sheet:
Current assets $ 509,000
Property, plant, and
equipment, net 1,683,000
Purchased technology 712,000
Other assets 53,000
------------
Total assets $ 2,957,000
===========
Current liabilities $ 735,000
Long-term notes payable 1,635,000
Shareholders' equity 587,000
-----------
Total liabilities and
stockholders' equity $ 2,957,000
===========
Statement of Operations:
Revenue $ 329,000
===========
Cost of sales $ 358,000
===========
Net loss $ (561,000)
============
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. In August, 1997, the Company increased the amount of the revolving
line of credit to $850,000. At October 31, 1998, borrowings under the
revolver approximated $562,000.
In August 1997, HDS entered into a one year management agreement with the
Company subject to automatic renewal each year. The management agreement
provides for an annual fee of the greater of $75,000 per annum or ten (10%)
percent of the gross sales generated by the Company's sales representatives
in consideration for Embryo providing HDS with administrative, marketing and
management services. General and administrative services have been reduced
by $18,750 and -0- for the six months ended October 31, 1998 and 1997,by -0-
for the three months ended October 31, 1998 and 1997, and by $37,500 for the
cumulative period from inception (March 3, 1995) through October 31, 1998,
respectively, as a result of the agreement. In May 1998, HDS notified the
Company that the agreement would not be renewed in August 1998.
-6-
<PAGE>
EMBRYO DEVELOPMENT CORPORATION
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
SIX MONTHS ENDED OCTOBER 31, 1998
(Continued)
5. License Agreements:
In March 1995, the Company entered into seven license agreements for the
rights to manufacture and market seven medical devices. Each of the seven
agreements also provide for minimum payment obligations commencing 2 1/2 years
after the date of the agreements. On September 30, 1997, the agreements for
six (6) of the devices were amended to extend the date for the first minimum
payment obligation to March 31, 1998. In consideration for the extension,
the aggregate first minimum payment obligation increased from $150,000 to
$165,000.
The Company did not make the minimum payments required under the
License Agreements with respect to six (6) of the devices including the
adjustable blood pressure cuff, a multi-function fluid communication control
system and stereoscopic fluoroscopy apparatus. The minimum payment
obligations with respect to the self-shielding needle were made in accordance
with the terms of the original agreement through March 31, 1998. On August
21, 1998, the Company notified the licensor that it was terminating the
agreements with respect to these six (6) devices. The remaining unamortized
cost of $486,785 for these agreements was charged to operations in the year
ended April 30, 1998.
The minimum payment of $50,000 required under the License Agreement
with respect to the self-shielding needle, which was due on September 30,
1998, has not been made as of October 31, 1998 and is included in current
liabilities.
6. Stockholders' Equity:
a. Issuance of securities
On June 17, 1998, the Company issued options, to three (3) directors
and an employee, to purchase 1,650,000 shares of the Company's common stock
at an exercise price equal to the market price on the date of the grant
($.0938) under the Incentive Stock Option Plan. In addition, an aggregate of
500,000 options which were granted to an officer under the terms of a prior
employment agreement were amended to have an exercise price of ($.0938), the
market price on the date of the amendment. These options were exercised in
June 1998 for an aggregate of 2,150,000 shares. The Company issued
promissory notes dated July 1, 1998 to the three (3) directors and an
employee in the aggregate of $201,670 for payment of the shares. The notes
mature in five (5) years, bear interest at 8%, and are secured by the related
securities.
-7-
<PAGE>
EMBRYO DEVELOPMENT CORPORATION
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
SIX MONTHS ENDED OCTOBER 31, 1998
(Continued)
6. Stockholders' Equity: (Cont'd)
b. Loss per share
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.
7. Litigation:
The Company has been named as a defendant in a consolidated class
action pending before the U.S. District Court for the Eastern District of New
York. In a consolidated complaint, plaintiffs assert claims against the
Company and others under the Securities Act of 1933, the Securities Exchange
Act of 1934 and New York common and statutory law arising out of the November
1995 initial public offering of 1 million shares of the Company's common
stock. According to the complaint, the underwriter of the offering, Sterling
Foster & Co., Inc. ("Sterling Foster"), which is also a defendant,
manipulated secondary market trading in shares of the Company's common stock
following the offering and covered certain short positions it created through
such manipulation by purchasing shares of Company stock from persons who
owned such stock prior to the offering pursuant to an arrangement with such
persons that was not disclosed in the registration statement and prospectus
distributed in connection with the offering. The complaint seeks unspecified
damages. The Company intends to vigorously defend this action.
8. Commitments:
In 1995, the Company entered into a four-year consulting agreement with
a licensor of medical devices. The agreement provides for an annual
consulting fee of $75,000. On June 22, 1998, notice was given to the
licensor to terminate the agreement effective July 22, 1998.
-8-
<PAGE>
EMBRYO DEVELOPMENT CORPORATION
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
SIX MONTHS ENDED OCTOBER 31, 1998
(Continued)
9. Subsequent Events:
a. Litigation
In November 1998, it was announced that Michael Lulkin, a director and
Chairman of the Board of Directors of the Company at the time of the
Company's initial public offering, had plead guilty to, among other things,
conspiracy to commit securities fraud. The charges to which Mr. Lulkin plead
were premised on allegations that Mr. Lulkin, Sterling Foster, and others had
entered into an undisclosed agreement pursuant to which, upon conclusion of
the Company's initial public offering, they would (a) cause Sterling Foster
to release Mr. Lulkin and others who owned Embryo stock prior to the offering
from certain "lock up" agreements restricting them from selling such stock;
and (b) cause Mr. Lulkin and such other persons to sell their Embryo stock to
Sterling Foster at prearranged prices to enable Sterling Foster to use such
stock to cover certain short positions it had created.
b. License Agreement
On November 26, 1998, the Company received a demand for payment from
the licensor for the minimum payment of $50,000 which was due on September
30, 1998 with respect to the self-shielding needle. The Company believes
that is has 30 days to remedy this breach in accordance with the License
Agreement. The Company is currently in negotiations with the licensor of the
self-shielding needle to amend the terms of the original agreement to extend
or modify mimimum payment terms.
c. Investment in HDS
On November 20, 1998, the Company sold 100,000 shares of HDS stock for
an aggregate of $100,000 which resulted in a decrease of its common
investment from 31.3% to 28.8%.
d. Suspension of Sales
The Company recently received notification that an intravenous
warmer manufactured and sold by C.F. Electronics had overheated which
resulted in the suspension of product sales and use in the U.K. C.F.
Electronics manufactures a similar intravenous warmer, the "Hot Sack", for
the Company. As a result of the C.F. suspension, sales and use of the
Company's Hot Sack products have been suspended in the U.K. The Company has
voluntarily suspended worldwide sales of its Hot Sack products and is
currently working with the manufacturer to resolve this issue before resuming
sales. The Company currently derives the majority of its revenue from the
sale of the Hot Sack products.
-9-
<PAGE>
EMBRYO DEVELOPMENT CORPORATION
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
SIX MONTHS ENDED OCTOBER 31, 1998
(Continued)
10. Supplementary Information - Statements of Cash Flows:
The Company paid interest of $2,355 and $2,053 for the six months ended
October 31, 1998 and 1997, $1,178 and $1,207 for the three months ended
October 31, 1998 and 1997,and $6,755 for the cumulative period from inception
(March 3, 1995) through October 31, 1998, respectively.
The Company paid income taxes of $-0- and $2,961 for the six months
ended October 31, 1998 and 1997, $-0- for the three months ended October 31,
1998 and 1997, and $14,276 for the cumulative period from inception (March 3,
1995) through October 31, 1998, respectively.
In June, 1998, the Company issued an aggregate of 2,150,000 shares of
common stock in exchange for an aggregate of $201,670 in promissory notes
as payment for the shares.
-10-
<PAGE>
EMBRYO DEVELOPMENT CORPORATION
(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 $66,728 at October 31, 1998.
Approximately $55,000 of current assets represents cash on hand. 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 six months ended October
31, 1998 reflects cash used in operating activities of approximately
$366,000. 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 $288,000
representing the sale of investments which was used to fund current
operations. In addition, the cash and cash equivalents balance decreased by
$80,000, which was also used to fund current operations.
The Company expects to incur additional expenditures over the next 6
to 12 months for product development and to implement its sales and marketing
plans. In November, 1998, the Company sold 100,000 of its 1,272,500 common
shares of its investment in HDS for an aggregate of $100,000. The Company's
management believes that the Company's cash inclusive of the proceeds of this
stock sale, the potential sale of additional HDS stock, and a reduction in
general and administrative expenses will be sufficient to fund its liquidity
needs for the next 12 months. Management believes that there is no assurance
that the outstanding amount due from HDS in January, 1999 of $655,000 will be
repaid during the next (12) months and it has been classified as a long-term
asset based on the current financial condition of HDS. As a consequence
thereof, the Company has sought alternative methods of raising additional
capital or liquidating assets which includes the sale of additional shares of
HDS stock.
The Company was advised by The Nasdaq Stock Market that it failed to
meet the continued listing requirements of The Nasdaq SmallCap Market. The
Company submitted an application for continued listing. The Company was
advised in July, 1998 that the NASD had denied the Company's submission for
continued listing. The Company filed an appeal to that decision. A hearing
on continued listing was held on September 17, 1998 whereby the appeal was
denied. Effective October 21, 1998, the Company's common stock is now listed
on the OTC-Bulletin Board.
-11-
<PAGE>
EMBRYO DEVELOPMENT CORPORATION
(A Development Stage Company)
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Cont'd)
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. In March 1998, the Company decided not to make the
minimum payment obligations due on six (6) of the medical devices developed
by Dr. Lloyd Marks due to capital constraints. Accordingly, the unamortized
cost of these licenses of $487,000 was charged to operations in the year
ended April 30, 1998. In August 1998, the Company notified Dr. Marks that it
was terminating these six (6) license agreements due to financial
constraints. The Company has not made the mimimum payment obligation of
$50,000 which was due September 30, 1998 in respect to the self-shielding
needle, the only remaining license. On November 26, 1998, the Comany
received a request for payment from the licensor. The Company believes that
it has 30 days to remedy this breach. The Company is currently in
negotiations with the licensor of the self-shielding needle to amend the
terms of the original agreement to extend or modify mimimum payment terms.
The Company has not derived significant revenues since its inception
in March 1995. The total revenue earned from inception through October 31,
1998 is $1,298,605. This is a result of the sale of the C.F. Medical Devices
of approximately $564,000 and HDS sales of hydrogel and apnea monitor
products of approximately $735,000 which are included in the statement of
operations through January 21, 1998. 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 $7,617,575
as of October 31, 1998. 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
The Company intends to continue with the sales and marketing of its
emergency medical equipment and plans to aggressively market the Safety
Needle upon approval by the FDA. The Company recently received notification
that an intravenous warmer manufactured and sold by C.F. Electronics had
overheated which resulted in the suspension of product sales and use in the
U.K. C.F. Electronics manufactures a similar intravenous warmer, the "Hot
Sack", for the Company. As a result of the C.F. suspension, sales and use
of the Company's Hot Sack products have been suspended in the U.K. The
Company has voluntarily suspended worldwide sales of its Hot Sack products
and is currently working with the manufacturer to resolve this issue before
resuming sales. On May 26, 1998 the Company completed its 510(k)
notification for its Safety Needle (due to regulatory restrictions and
-12-
<PAGE>
EMBRYO DEVELOPMENT CORPORATION
(A Development Stage Company)
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Cont'd)
Plan of Operation (Cont'd)
liability issues the Safety Needle is now referred to as the Self-Shielding
Needle) and submitted it to the FDA. The notification was prepared with the
assistance of ACT Medical, Inc. a medical device consulting and manufacturing
firm located in Newton, MA. The Company's primary focus since inception has
been the development of the Self-Shielding Needle. The submission of the
510(k) notification was a critical step in the development process. On June
22,1998 the Company received a request for additional information from the
FDA regarding the 510(k) submission. On July 13, 1998 the Company responded
to the FDA's request. Subsequently, the Company was notified by the FDA that
its application was rejected due primarily to deficiencies in clinical
studies and bench test data. The Company made design changes to the Safety
Needle and performed a new clinical study. A new 510(k) submission was
completed on October 16, 1998. On October 26, 1998, the Company was notified
by the FDA that the device is considered a class III and requires a premarket
approval application (PMA). The Company is currently evaluating whether to
submit a PMA application or to modify the device further and submit a new
510(k) application. Once this is completed, management will begin to develop
its long-term strategy regarding the sale and marketing of the product. To
further this effort, the Company intends to market the product to both
potential distributors and end users such as hospitals and clinics.
Management believes that the Company's current cash, inclusive of the
HDS stock sale totalling approximately $155,000, and the potential sale of
additional HDS stock, will be sufficient to fund the Company's operations
for the next twelve (12) months with a reduction in operating expenses.
Management believes that there is no assurance that the outstanding amount
due from HDS in January, 1999 of $655,000 will be repaid during the next (12)
months and it has been classified as a long-term asset based on the current
financial condition of HDS. As a consequence thereof, the Company has sought
alternative methods of raising additional capital which includes the sale
of additional shares of HDS stock.
In an effort to strengthen the Company's position until a meaningful
revenue stream and positive cash flow can be achieved, management has
undertaken a significant cost reduction program. The program includes
payroll reductions, the termination of two consulting contracts, the
reduction of rental expense, the reduction of expenses related to the
development of the needle as it is substantially complete, and other
administrative expenses. These reductions account for more than a $325,000
savings in annual expenses. Additionally, the Company anticipates an
additional reduction of approximately $200,000 in cash outlay for
professional fees which represents non-recurring legal expenses.
-13-
<PAGE>
EMBRYO DEVELOPMENT CORPORATION
(A Development Stage Company)
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Cont'd)
Plan of Operation (Cont'd)
The Company also has a 31.3% equity interest in its nonconsolidated
affiliate HDS, which was reduced to 28.8% in November 1998. The
manufacturing facility of HDS became fully operational in late 1997. The
Company anticipates that this investment will have a positive effect on the
financial results in the next twelve months.
However, no assurance can be made with respect to the viability of the
Company in the long term. Realization of the revenue potential of the Self-
Shielding Needle may require additional capital expenditures and other
expenses. Management anticipates that to meet such needs would require
raising additional funds from either the debt or equity markets.
Alternatively, the Company may need for the long term to consider
liquidating some of its assets to meet cash requirements. No assurances can
be made as to the success of these capital raising alternatives.
-14-
<PAGE>
PART II- OTHER INFORMATION
- --------------------------
Item 1. - Legal Proceedings
- ---------------------------
The Company has been named as a defendant in a consolidated class
action pending before the U.S. District Court for the Eastern District of New
York. In a consolidated complaint, plaintiffs assert claims against the
Company and others under the Securities Act of 1933, the Securities Exchange
Act of 1934 and New York common and statutory law arising out of the November
1995 initial public offering of 1 million shares of the Company's common
stock. According to the complaint, the underwriter of the offering, Sterling
Foster & Co., Inc. ("Sterling Foster"), which is also a defendant,
manipulated secondary market trading in shares of the Company's common stock
following the offering and covered certain short positions it created through
such manipulation by purchasing shares of Company stock from persons who
owned such stock prior to the offering pursuant to an arrangement with such
persons that was not disclosed in the registration statement and prospectus
distributed in connection with the offering. The complaint seeks unspecified
damages. The Company intends to vigorously defend this action.
In November 1998, it was announced that Michael Lulkin, a director and
Chairman of the Board of Directors of the Company at the time of the
Company's initial public offering, had plead guilty to, among other things,
conspiracy to commit securities fraud. The charges to which Mr. Lulkin plead
were premised on allegations that Mr. Lulkin, Sterling Foster, and others had
entered into an undisclosed agreement pursuant to which, upon conclusion of
the Company's initial public offering, they would (a) cause Sterling Foster
to release Mr. Lulkin and others who owned Embryo stock prior to the offering
from certain "lock up" agreements restricting them from selling such stock;
and (b) cause Mr. Lulkin and such other persons to sell their Embryo stock to
Sterling Foster at prearranged prices to enable Sterling Foster to use such
stock to cover certain short positions it had created.
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.
-15-
<PAGE>
Item 6. - Exhibits And Reports on Form 8-K.
- -------------------------------------------
(A) Exhibits:
27. Financial data schedule (filed herewith).
(B) Reports on Form 8-K:
On October 23, 1998, the Company filed a report on Form 8-K, reporting
under Item 5, disclosing that the Company's securities were delisted due to
the Company's failure to meet certain continued listing requirements of the
Nasdaq SmallCap Market.
-16-
<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: December 18, 1998
-17-
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION THAT IS EXTRACTED FROM FORM
10-QSB FOR THE QUARTER ENDED OCTOBER 31, 1998 AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> APR-30-1999
<PERIOD-END> OCT-31-1998
<CASH> 54,963
<SECURITIES> 0
<RECEIVABLES> 38,183
<ALLOWANCES> 0
<INVENTORY> 58,404
<CURRENT-ASSETS> 329,971
<PP&E> 32,630
<DEPRECIATION> 18,472
<TOTAL-ASSETS> 1,703,187
<CURRENT-LIABILITIES> 263,243
<BONDS> 0
0
600
<COMMON> 700
<OTHER-SE> 1,438,644
<TOTAL-LIABILITY-AND-EQUITY> 1,703,187
<SALES> 62,851
<TOTAL-REVENUES> 62,851
<CGS> 47,787
<TOTAL-COSTS> 47,787
<OTHER-EXPENSES> 228,436
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,355
<INCOME-PRETAX> (843,118)
<INCOME-TAX> 0
<INCOME-CONTINUING> (843,118)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (843,118)
<EPS-PRIMARY> (.13)
<EPS-DILUTED> (.13)
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