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 January 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
(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 March 20, 1998
- ------------ -------------------------------
Common Stock 4,845,000
EMBRYO DEVELOPMENT CORPORATION
(A Development Stage Company)
FORM 10-QSB
QUARTERLY REPORT
For the Nine Months Ended January 31, 1998
TABLE OF CONTENTS
------------------
Page to Page
------------
Financial Statements:
Balance sheet..........................................1
Statements of operations...............................2
Statements of cash flows...............................3
Notes to financial statements........................4-9
Management's discussion and analysis
of financial condition and result
of operations......................................10-12
Part II. - Other information.......................13-14
Signatures............................................15
<TABLE>
EMBRYO DEVELOPMENT CORPORATION
(A Development Stage Company)
BALANCE SHEET
(Unaudited)
January 31, 1998
<S> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 216,689
Investments in available-for-sale securities 299,942
Accounts receivable 55,892
Interest receivable 45,521
Inventories 50,194
Investment in and advances to
nonconsolidated subsidiary 773,413
Prepaid expenses and other current assets 172,280
---------
Total current assets 1,613,931
PROPERTY AND EQUIPMENT, net of accumulated
depreciation of $12,218 14,857
LICENSED TECHNOLOGY, net of accumulated
amortization of $619,525 990,475
OTHER ASSETS 83,497
---------
$ 2,702,760
===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued expenses $ 272,179
-----------
Total current liabilities 272,179
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 9,148,599
Unearned compensation (1,076,250)
Deficit accumulated during the development stage (5,642,853)
-----------
Total equity 2,430,581
-----------
$ 2,702,760
============
</TABLE>
-1-
<TABLE>
EMBRYO DEVELOPMENT CORPORATION AND SUBSIDIARY
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF OPERATIONS
NINE MONTHS ENDED THREE MONTHS ENDED Cumulative
JANUARY 31, JANUARY 31, During
1998 1997 1998 1997 Development
Stage
(Unaudited) (Unaudited)(Unaudited) (Unaudited) (Unaudited)
<S> <C> <C> <C> <C> <C>
REVENUES $ 758,875 $ 70,804 $ 189,354 $ 38,973 $ 1,194,135
---------- ---------- ---------- ----------- -----------
COSTS AND EXPENSES:
Cost of sales 718,190 50,646 257,808 28,163 1,048,079
General, selling
and administrative 1,557,814 975,783 572,922 334,231 3,809,414
Royalties 52,395 -0- (5,357) -0- 52,395
Research and development 130,103 146,683 42,126 52,901 848,547
Amortization 172,500 172,500 57,500 57,500 619,525
Equity loss in operations
of subsidiary 242,921 -0- 242,921 -0- 242,921
Interest and other
(income)expense 63,212 (76,805) 57,537 (33,121) 421,060
----------- ----------- ---------- ----------- -----------
2,937,135 1,268,807 1,225,457 439,674 7,041,941
----------- ----------- ---------- ----------- -----------
LOSS BEFORE
MINORITY INTEREST (2,178,260) (1,198,003)(1,036,103) (400,701) (5,847,806)
MINORITY INTEREST IN NET
LOSS OF SUBSIDIARY 65,881 -0- -0- -0- 204,953
----------- ------------ ---------- ----------- ---------
NET LOSS $(2,112,379)$(1,198,003)(1,036,103) $ (400,701) $(5,642,853)
============ =========== =========== ========== ===========
NET LOSS PER SHARE $ (.44) $ (.26)$ (.21) $ (.09) $ (1.32)
=========== =========== ========== ============ ============
WEIGHTED AVERAGE NUMBER OF
SHARES OF COMMON STOCK
OUTSTANDING 4,845,000 4,693,895 4,845,000 4,695,000 4,276,904
========= ========= ========= ========= =========
</TABLE>
-2-
<TABLE>
EMBRYO DEVELOPMENT CORPORATION AND SUBSIDIARY
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED Cumulative
JANUARY 31, During
1998 1997 Development
Stage
(Unaudited) (Unaudited) (Unaudited)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(2,112,379 $(1,198,003) $(5,642,853)
----------- ----------- ------------
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 266,591 176,973 1,265,754
Minority interest in loss of subsidiar (65,881) - (204,953)
Equity loss in operations of subsidiary 242,921 - 242,921
Non-cash consideration - other 404,983 388,750 1,019,983
Non-cash consideration - research
and development - - 440,000
Changes in operating assets and liabilities:
(Increase) decrease in assets:
Accounts receivable (17,991) 3,752 (135,589)
Interest receivable 11,728 (6,350) (6,317)
Inventories (73,729) (36,521) (95,230)
Prepaid expenses and other
current assets (25,996) (68,398) (182,780)
Other assets (34,921) (13,873) (102,816)
Increase (decrease) in liabilities:
Accounts payable and accrued expenses 642,590 44,515 962,127
Customer deposits (25,000) - -
---------- ----------- -----------
Total adjustments 1,325,295 488,848 3,203,100
---------- ----------- -----------
Net cash used in operating activities (787,084) (709,155) (2,439,753)
CASH FLOWS FROM INVESTING ACTIVITIES:
Decrease in short-term investments 559,000 - -
Net sale (purchase) of investments
in available-for-sale securities 749,438 744,977 (299,942)
Net cash paid for asset acquisition - - (200,588)
Purchase of licensed technology - - (450,000)
Purchase of plant, equipment and
construction projects in progress (857,070) (7,887) (1,022,442)
Divestiture of cash of subsidiary (77,794) - (77,794)
--------- ---------- ----------
Net cash provided by (used in)
investing activities 373,574 737,090 (2,050,766)
CASH FLOWS FROM 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 debt - - (550,000)
Proceeds of stock offering, net of
deferred costs - - 4,337,208
----------- ------------- ----------
Net cash provided by financing
activities 350,000 - 4,707,208
NET (DECREASE) INCREASE IN
CASH AND CASH EQUIVALENTS (63,510) 27,935 216,689
CASH AND CASH EQUIVALENTS at
beginning of period 280,199 408,867 -
-------- -------- -------
CASH AND CASH EQUIVALENTS at
end of period $ 216,689 $ 436,802 $ 216,689
========== ========== ============
</TABLE>
-3-
EMBRYO DEVELOPMENT CORPORATION AND SUBSIDIARY
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED JANUARY 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, 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 nine and three
month periods ended January 31, 1998 and January 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, 1997. The results
of operations for the nine month periods ended January 31, 1998 and 1997 are
not necessarily indicative of the results to be expected for the full year.
3. Inventories:
Inventories at January 31, 1998 consist principally of finished goods.
4. Investment in HDS:
On January 21, 1998, the Company's equity interest in HDS, which
previously represented a 50.04% majority common interest and 92.9% voting
interest, was reduced to 45.6% common ownership as a result of the Company
surrendering all 15,000,000 shares of voting Preferred Stock in exchange for
21,500 shares of Common Stock. The exchange was done at the request of
certain third party investors of a Private Placement by HDS, under which HDS
issued approximately 475,000 additional common shares. As of January 21,
1998, these transactions resulted in the Company retaining approximately
45.6% of the Common Stock of HDS. In February, 1998 the Private Placement was
fully subscribed, and the Company's ownership decreased to approximately
35.6% of common interest.
-4-
EMBRYO DEVELOPMENT CORPORATION AND SUBSIDIARY
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED JANUARY 31, 1998
(Continued)
4. Investment in HDS: (Continued)
As a result of the surrender of the voting Preferred Stock and the
issuance of additional Common Stock, the Company's ownership in HDS was
reduced to below 50% interest and therefore, the assets, liabilities and
operations of HDS after January 21, 1998 are not included in the financial
statements of the Company.
Approximately $284,000 and $206,000 of the loss applicable to minority
interest for the period May 1, 1997 through January 21, 1998 and November 1,
1997 through January 21, 1998, respectively, was in excess of minority
interest in capital, and accordingly has been charged to EDC's operations.
Summarized balance sheet information for HDS, which EDC accounted for
using the equity method, as of January 31, 1998 is as follows:
Summarized Balance Sheet Information:
Current assets $ 303,000
Property, plant, and
equipment, net 1,769,000
Purchased technology 797,000
Other assets 61,000
----------
$2,930,000
==========
Current liabilities $ 1,597,000
Long-term notes payable 1,599,000
Shareholders' equity (266,000)
------------
$ 2,930,000
===========
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 January 31, 1998, borrowings under the
revolver approximated $793,000.
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.
-5-
EMBRYO DEVELOPMENT CORPORATION AND SUBSIDIARY
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED JANUARY 31, 1998
(Continued)
5. Investments in Available-for-Sale Securities:
Investments in available-for-sale securities consist of the following at
January 31, 1998:
Current:
Guaranteed by the U.S. Government:
Federal National Mortgage Notes $ 299,942
6. License Agreements:
In March 1995, the Company entered into seven (7) license agreements for
the rights to manufacture and market seven medical devices which provide for
minimum payment obligations which commenced September 30, 1997. 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 payment due on (1) of
the devices of $25,000 was made in accordance with the terms of the original
agreement.
7. Note Payable:
On October 1, 1997, HDS entered into a loan agreement in the amount of
$350,000 with a third party affiliated with certain stockholders of the
Company and HDS. The loan is evidenced by a promissory note payable on
demand and bears interest at 8% per annum. As additional consideration for
making the loan, the lender also received options to purchase 100,000 shares
of HDS Common Stock exercisable for a period of five (5) years at $.40 per
share. The fair value of the options($9,900) has been recorded as additional
interest and is being amortized over the estimated life of the loan.
8. Stockholders' Equity:
a. Issuance of securities
On September 16, 1997, HDS issued an aggregate of 25,000 shares of
common stock to four (4) employees as additional compensation. The value of
the common stock granted ($10,000) was charged to operations.
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.
-6-
EMBRYO DEVELOPMENT CORPORATION AND SUBSIDIARY
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED JANUARY 31, 1998
(Continued)
9. Commitments:
In September 1997, the Company amended an employment agreement with an
officer dated January 1, 1997. The agreement, as amended, provides for
annual compensation of $60,000 effective January 1, 1998. The officer was
also granted options to purchase 400,000 shares of the Company's common stock
at an exercise price equal to the market price on the date of the amendment
($.59)exercisable for a period of four (4) years.
In addition, the Company entered into a two-year employment agreement
with an executive which provides for annual compensation of $30,000
commencing January 1, 1998. The executive was also granted options to
purchase 50,000 shares of the Company's common stock at an exercise price
equal to the market price on August 1, 1997 ($.25).
In September 1997, HDS entered into multi-year employment agreements
with two executives. The agreements, which take effect January 1, 1998,
provide for minimum annual compensation of $80,000, which may increase to
$150,000 bassed upon earnings and other contingencies, and minimum bonuses.
Further, the executives were granted (i) options to purchase 200,000 shares
of HDS common stock at an exercise price of $.40 per share and (ii) 20,000
shares of HDS common stock (valued at $8,000). The agreements provide for
the reimbursement of any tax liability arising from the grant of securities.
10. Litigation:
a. Class action complaints:
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-
EMBRYO DEVELOPMENT CORPORATION AND SUBSIDIARY
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED JANUARY 31, 1998
(Continued)
10. Litigation: (Continued)
b. HDS litigation:
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 November 6, 1997, HDS brought action in New York State Court
against the former owners of the acquired entities alleging breach of
contract, negligence and other charges. On November 24, 1997, the former
owners filed their Answer and counterclaim against HDS.
On January 21, 1998, HDS entered into a Settlement Agreement (the
"Agreement") with John and Janice Essmyer settling in all regards its
outstanding litigation. In connection with the Agreement, the Essmyer's
received a cash payment of $450,000 and a promissory note from HDS in the
amount of $950,000 which is due and payable upon the earlier of the (a)
initial public offering of securities of HDS, (b) completion of a private
financing by HDS in the aggregate amount of at least $4,000,000, (c) the sale
or transfer of all, or substantially all of the assets of HDS, or (d)
January 10, 2002. In addition, the Essmyers surrendered their rights to the
150,000 shares of Embryo Common Stock formerly granted to them and John
Essmyer surrendered the 250,000 shares of HDS Common Stock formerly issued
to him. Further, the Agreement provides that the Essmyer's will resume the
sale of apnea monitoring equipment through Alternative Designs Systems,
Inc. (an entity controlled by the Essmyers') and HDS will immediately
satisfy all outstanding payables incurred since February 6, 1997 with
respect to Alternative Design Systems, Inc. vendors while retaining all
accounts receivables and all inventory as of December 15, 1997.
-8-
EMBRYO DEVELOPMENT CORPORATION AND SUBSIDIARY
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED JANUARY 31, 1998
(Continued)
11. Supplementary Information - Statements of Cash Flows:
The Company paid interest of $2,395 and $138 for the nine months ended
January 31, 1998 and 1997 and $342 and $-0- for the three months ended
January 31, 1998 and 1997, respectively.
The Company paid income taxes of $7,402 and $12,274 for the nine
months ended January 31, 1998 and 1997 and $4,441 and $4,186 for the three
months ended January 31, 1998 and 1997, respectively.
-9-
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 $1,341,752 at January 31, 1998.
Approximately $773,000 represents net cash advances made to the Company's
subsidiary, HDS which are due to be repaid within the next 12 months and
approximately $517,000 represents cash and marketable securities.
Approximately $340,000 of the subsidiary advance was repaid in February 1998
in connection with a Private Placement by HDS. 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 nine months ended January
31, 1998 reflects cash used in operating activities of approximately
$787,000. 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 $451,000
representing the sale of investments of approximately $1,308,000, of which
$857,000 was used to purchase property and equipment for HDS through its
revolving credit line with the Company. The remaining cash from sale of
investments was used to fund current operations. Cash provided by financing
activities of $350,000 is the result of a loan to HDS evidenced by a demand
promissory note with a third party affilitated with certain stockholders of
the Company and HDS. As additional consideration for making the loan, the
lender also received options to purchase 100,000 shares of HDS Common Stock
at $.40 per share. This cash was also used to fund current operations.
At January 31, 1998, the balance on the revolving line of credit between
HDS and the Company approximated $793,000. In August 1997, the Company
increased the amount of the revolving line of credit to $850,000. In
addition, the Company entered into a management agreement with HDS which
provides for an annual minimum fee of $75,000 per year in consideration for
Embryo providing HDS with administrative, marketing and management services.
On January 21, 1998, the Company's equity interest in HDS, which
previously represented a 50.04% majority common interest and 92.9% voting
interest, was reduced to 45.6% common ownership as a result of the Company
surrendering all 15,000,000 shares of voting Preferred Stock in exchange for
21,500 shares of Common Stock. The exchange was done at the request of
certain third party investors of a Private Placement by HDS, under which HDS
issued approximately 475,000 additional common shares. The proceeds from the
placement were used to pay off accounts payable of HDS and its $450,000
obligation under the terms of the litigation settlement with the former
owners of the entities HDS acquired on February 6, 1997. In February, 1998,
the Private Placement was completed and an additional 775,000 shares of HDS
-10-
EMBRYO DEVELOPMENT CORPORATION AND SUBSIDIARY
(A Development Stage Company)
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
Liquidity and Capital Resources (Continued)
stock were issued, thereby reducing the Company's ownership to 35.6%. From
the proceeds of the placement, HDS paid down approximately $340,000 of its
credit line balance. As a result of the Company's reduced ownership in HDS
and surrender of the voting Preferred Stock, the assets, liabilities and
operations of HDS after January 21, 1998 will not be included in the
financial statements of the Company.
The Company expects to incur substantial expenditures over the next 6 to
12 months for product development and to implement its sales and marketing
plans. The Company's management believes that the Company's investments and
anticipated paydown of the HDS line of credit will be sufficient to fund its
liquidity needs for the next 12 months.
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 January 31, 1998
is $1,194,135. This is a result of the sale of the C.F. Medical Devices of
approximately $459,000 and HDS sales of hydrogel and apnea monitor products
of approximately $735,000. 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 $5,642,853 as of
January 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
On February 6, 1997, the Company's 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.
-11-
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 (Cont'd)
The Company has also leased a facility in Langhorne, PA, which is has
subleased to HDS where it has established a manufacturing facility for the
in-house production of hydrogel and electronic beam processing of medical,
cosmetic and pharmaceutical products by HDS. The facility was completed and
became operational in October of 1997. Although HDS is no longer a majority
owned subsidiary, the Company will recognize its share (35.6%) of the
operations of HDS on the equity method.
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 submitting a 510(k) to the FDA for approval for this device
within the next six (6) months.
The Company is continuing 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. 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's management believes that the Company's investments and
anticipated paydown of the HDS line of credit will be sufficient to fund its
liquidity needs for the next 12 months.
-12-
PART II- OTHER INFORMATION
Item 1. - Legal Proceedings
The Company has been named in three (3) actions seeking class
certification of claims against the Company and various other defendants.
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, its Chairman 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 and its Chairman deny the
material allegations of the consolidated complaint and intend to vigorously
defend this action.
In addition, on November 6, 1997, HDS brought action in New York State
Court against John Essmyer and Janice Essmyer alleging breach of contract,
breach of fiduciary duty, common law fraud and negligence. On November 24,
1997, the Essmyers served an answer to HDS's complaint. Such answer
contained certain counter-claims against HDS.
On January 21, 1998, HDS entered into a Settlement Agreement (the
"Agreement") with John and Janice Essmyer settling in all regards its
outstanding litigation. In connection with the Agreement, the Essmyer's
received a cash payment of $450,000 and a promissory note from HDS in the
amount of $950,000 which is due and payable upon the earlier of the (a)
initial public offering of securities of HDS, (b) completion of a private
financing by HDS in the aggregate amount of at least $4,000,000, (c) the sale
or transfer of all, or substantially all of the assets of HDS, or (d)
January 10, 2002. In addition, the Essmyers surrendered their rights to the
150,000 shares of Embryo Common Stock formerly granted to them and John
Essmyer surrendered the 250,000 shares of HDS Common Stock formerly issued to
him. Further, the Agreement provides that the Essmyer's will resume the sale
of apnea monitoring equipment through Alternative Designs Systems, Inc. (an
entity controlled by the Essmyers') and HDS will immediately satisfy all
outstanding payables incurred since February 6, 1997 with respect to
Alternative Design Systems, Inc. vendors while retaining all accounts
receivables and all inventory as of December 15, 1997.
-13-
PART II- OTHER INFORMATION (Cont'd)
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:
On December 3, 1997, the Company filed a report on Form 8-K, reporting
under Items 5, disclosing that HDS brought action against John and Janice
Essmyer, two former employees, for breach of contract, and that on November
24, 1997, the Essmyers served an answer to the complaint and certain
counter-claims against the Subsidiary.
-14-
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: March 20, 1998
-15-
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION THAT IS EXTRACTED FROM
FORM 10-QSB FOR THE QUARTER ENDED JANUARY 31, 1998 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> APR-30-1998
<PERIOD-END> JAN-31-1998
<CASH> 216,689
<SECURITIES> 299,942
<RECEIVABLES> 55,892
<ALLOWANCES> 0
<INVENTORY> 50,194
<CURRENT-ASSETS> 1,613,931
<PP&E> 27,075
<DEPRECIATION> 12,218
<TOTAL-ASSETS> 2,702,760
<CURRENT-LIABILITIES> 272,179
<BONDS> 0
0
600
<COMMON> 485
<OTHER-SE> 2,429,496
<TOTAL-LIABILITY-AND-EQUITY> 2,702,760
<SALES> 758,875
<TOTAL-REVENUES> 785,875
<CGS> 718,190
<TOTAL-COSTS> 718,190
<OTHER-EXPENSES> 354,998
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 58,007
<INCOME-PRETAX> (2,112,379)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,112,379)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,112,379)
<EPS-PRIMARY> (.44)
<EPS-DILUTED> (.44)
</TABLE>
