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, 1999
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)
565 Fifth Avenue
New York, New York
--------------------------
(Address of principal executive offices)
10017
------------
(Zip Code)
(212) 808-0607
--------------
(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, 1999
- -------------- ---------------------------------
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, 1999
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........................5-7
Management's discussion and analysis
of financial condition and result
of operations.......................................8-12
Part II. - Other information.......................13-14
Signatures............................................15
<PAGE>
<TABLE>
EMBRYO DEVELOPMENT CORPORATION
(A Development Stage Company)
BALANCE SHEET
(Unaudited)
October 31, 1999
--------------------
<CAPTION>
<S> <C>
ASSETS
- -----------------
CURRENT ASSETS:
Cash and cash equivalents $ 62,532
Accounts receivable 7,535
Inventories 19,170
Prepaid expenses and other current assets 21,372
-----------
Total current assets 110,609
PROPERTY AND EQUIPMENT, net of accumulated
depreciation of $24,926 15,287
LICENSED TECHNOLOGY, net of accumulated
amortization of $452,381 287,619
INVESTMENT IN UNCONSOLIDATED INVESTEE - at cost 40,841
OTHER ASSETS:
Due from unconsolidated investee -
net of reserve of $427,356 427,355
Interest receivable 21,570
Deposits 95,881
----------
Total other assets 544,806
----------
Total assets $ 999,162
==========
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
CURRENT LIABILITIES:
Accounts payable and accrued expenses $ 71,379
Royalty payable 30,000
----------
Total current liabilities 101,379
----------
Royalty payable - long-term 396,500
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock, $.0001 par value; authorized 15,000,000
shares; 6,000,000 issued and outstanding, liquidation
preference $600,000 600
Common stock, $.0001 par value; authorized 30,000,000
shares; 6,995,000 issued and outstanding 700
Additional paid-in-capital 9,991,267
Unearned compensation (315,000)
Deficit accumulated during the development stage (8,974,614)
Notes receivable (201,670)
-----------
Total stockholders' equity 501,283
-----------
Total liabilities and stockholders' equity $ 999,162
===========
</TABLE>
-1-
<PAGE>
<TABLE>
EMBRYO DEVELOPMENT CORPORATION
(A Development Stage Company)
STATEMENTS OF OPERATIONS
-------------------------------
<CAPTION>
SIX MONTHS ENDED THREE MONTHS ENDED Cumulative
OCTOBER 31, OCTOBER 31, During
1999 1998 1999 1998 Development
Stage
---------------------- --------------------- -----------
(Unaudited) (Unaudited)(Unaudited)(Unaudited)(Unaudited)
<S> <C> <C> <C> <C> <C>
REVENUES $ 39,189 $ 62,851 $ 10,908 $ 37,137 $ 1,388,942
--------- ----------- --------- ----------- -----------
COSTS AND EXPENSES:
Cost of sales 28,944 47,787 8,238 27,646 1,213,369
General, selling
and administrative 412,897 478,322 207,063 244,576 5,572,336
Royalties - 50,000 - 50,000 583,593
Research and development 26,428 125,579 811 53,917 1,090,027
Amortization 52,857 52,857 26,428 26,428 835,596
Equity loss of operations
of unconsolidated investee - 186,933 - 89,409 665,374
Loss on write-off of licensed
technology - - - - 486,785
Interest income - related party(29,715) (21,437) (15,308) (10,672) (85,920)
Interest and other
(income)expense (4,867) (14,072) ( 600) (9,187) 433,503
Adjustment for
collectibility of amount
due from unconsolidated
investee 54,014 - 29,743 - 427,356
Gain on sale of stock of
unconsolidated investee - - - - (653,510)
----------- ---------- ---------- ---------- ----------
540,558 905,969 256,375 472,117 10,568,509
----------- ---------- ---------- ---------- ----------
LOSS BEFORE
MINORITY INTEREST (501,369) ( 843,118) (245,467) (434,980) (9,179,567)
MINORITY INTEREST IN NET
LOSS OF SUBSIDIARY - - - - 204,953
----------- ----------- ---------- ----------- -----------
NET LOSS $ (501,369)$( 843,118) $(245,467) $ (434,980) $(8,974,614)
========== ============ ========== =========== ============
BASIC NET LOSS PER SHARE $ (.07) $ (.13) $ (.04) $ (.06) $ (1.76)
=========== =========== ========== =========== ============
WEIGHTED AVERAGE NUMBER OF
SHARES OF COMMON STOCK
OUTSTANDING 6,995,000 6,282,228 6,995,000 6,995,000 5,105,335
========== ========== ========= ========= =========
</TABLE>
-2-
<PAGE>
<TABLE>
EMBRYO DEVELOPMENT CORPORATION
(A Development Stage Company)
STATEMENTS OF CASH FLOWS
-------------------------------
<CAPTION>
SIX MONTHS ENDED Cumulative
OCTOBER 31, During
1999 1998 Development
Stage
(Unaudited)(Unaudited) (Unaudited)
---------- ---------- -------------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net loss $ (501,369)$ (843,118) $(8,974,614)
---------- ----------- ------------
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 55,793 57,155 1,494,533
Write-off of licensed technology - - 486,785
Gain on sale of stock of unconsolidated
investee - - (653,510)
Adjustment for collectibility of amount
due from unconsolidated investee 54,014 - 427,356
Minority interest in loss of subsidiary - - (204,953)
Equity loss in operations of unconsolidated
investee - 186,933 665,374
Non-cash consideration - other 202,500 232,500 1,781,233
Non-cash consideration - research
and development - - 440,000
Changes in operating assets and liabilities:
(Increase) decrease in assets:
Accounts receivable 16,823 (4,077) (87,232)
Interest receivable (8,133) 2,782 6,612
Inventories 13,485 13,447 (64,206)
Prepaid expenses and other
current assets 4,247 16,699 ( 31,872)
Other assets (109,026) (18,386) (349,118)
Increase (decrease) in liabilities:
Accounts payable and accrued expenses (10,654) (10,290) 761,327
Royalty payable (15,000) - 426,500
Customer deposits - - -
---------- ---------- ----------
Total adjustments 204,049 476,763 5,098,829
---------- ---------- ----------
Net cash operating activities - forward (297,320) (366,355) (3,875,785)
---------- ----------- -----------
INVESTING ACTIVITIES:
Proceeds from sale of stock of
unconsolidated investee - - 710,000
Purchase of short-term investments - - (847,000)
Proceeds from sale of short-term investments - 288,000 847,000
Purchase of investments in available-
for-sale securities - - (6,129,521)
Proceeds from sale of investments in
available-for-sale securities - - 6,129,521
Net cash paid for asset acquisition - - (200,588)
Purchase of licensed technology - - (450,000)
Purchase of property and equipment ( 664) (1,190) (1,035,580)
Divestiture of cash of subsidiary - - (77,794)
-------- -------- -----------
Net cash investing activities - forward ( 664) 286,810 (1,053,962)
-------- -------- ------------
</TABLE>
-3-
<PAGE>
<TABLE>
EMBRYO DEVELOPMENT CORPORATION
(A Development Stage Company)
STATEMENTS OF CASH FLOWS
-------------------------------
<CAPTION>
SIX MONTHS ENDED Cumulative
OCTOBER 31, During
1999 1998 Development
Stage
(Unaudited) (Unaudited) (Unaudited)
----------- ----------- -----------
<S> <C> <C> <C>
Net cash - operating activities - forwarded $ (297,320)$ (366,355) $ (3,875,785)
Net cash - investing activities - forwarded (664) 286,810 (1,053,962)
FINANCING ACTIVITIES:
Proceeds from issuance of debt - - 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 - - 4,992,279
----------- ------------ ------------
NET (DECREASE) INCREASE IN CASH
AND CASH EQUIVALENTS (297,984) ( 79,545) 62,532
CASH AND CASH EQUIVALENTS at
beginning of period 360,516 134,508 -
----------- ----------- -----------
CASH AND CASH EQUIVALENTS at end of period $ 62,532 $ 54,963 $ 62,532
========== ========== ===========
</TABLE>
-4-
<PAGE>
EMBRYO DEVELOPMENT CORPORATION
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
SIX MONTHS ENDED OCTOBER 31, 1999
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 historical financial statements included 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 was
being accounted for using the equity method of accounting subsequent to
January 21, 1998 through January 31, 1999. In January 1999, the Company's
share of HDS dropped below 20% and is being presented on the cost basis from
then onward. HDS is engaged in the manufacture, marketing, selling and
distribution of hydrogel, an aqueous polymer-based radiation ionized
medical/consumer product.
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, 1999 and October 31, 1998. 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, 1999. The results
of operations for the six month periods ended October 31, 1999 and 1998 are
not necessarily indicative of the results to be expected for the full year.
3. Inventories:
Inventories at October 31, 1999 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, 1999, the Company holds approximately 13.6% ownership
of the common stock of HDS which is accounted for using the cost method.
-5-
<PAGE>
EMBRYO DEVELOPMENT CORPORATION
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
SIX MONTHS ENDED OCTOBER 31, 1999
(Continued)
4. Investment in HDS:(Cont'd)
Summarized financial information for HDS, which commencing January 21,
1998, the Company accounted for using the equity method,and subsequent to
January 31, 1999, the Company accounts for using the cost method, is no
longer presented due to the reduction in the investment, which is currently
reported at cost.
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, 1999, borrowings under the
revolver approximated $769,000 and unpaid interest approximated $86,000
totalling an aggregate of $855,000 due to the Company. The Company's
management has set up a reserve of approximately $427,000 or approximately
50% of the outstanding balance at October 31, 1999, based upon anticipated
probably collectibility.
5. Stockholders' Equity:
a. 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. 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.
-6-
<PAGE>
EMBRYO DEVELOPMENT CORPORATION
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
SIX MONTHS ENDED OCTOBER 31, 1999
(Continued)
6. Litigation:(Cont'd)
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.
In August 1999, an agreement of principle was entered into providing for
settlement of the consolidated class action against the Company, Mr. Lulkin
and Steven Wasserman, who was also a member of the Company's Board of
Directors at the time of the Company's initial public offering. Under the
agreement in principle, all claims in the action against the Company, and
against Mr. Lulkin and Mr. Wasserman insofar as they were members of the
Company's Board of Directors, would be dismissed in exchange for a payment of
$400,000, of which $100,000 would need to be paid by the Company and $300,000
would be paid by an insurance company under a directors and officers
liability policy of insurance. The settlement is contingent upon, among
other things, execution of the definitive documentation and approval by the
court. There can be no assurance that the settlement will be concluded.
7. Supplementary Information - Statements of Cash Flows:
The Company paid interest of $1,733 and $2,355 for the six months ended
October 31, 1999 and 1998, $866 and $1,178 for the three months ended October
31, 1999 and 1998, and $8,590 for the cumulative period from inception (March
3, 1995) through October 31, 1999, respectively.
The Company paid income taxes of $-0- and $-0- for the six months ended
October 31, 1999 and 1998, $-0- and $-0- for the three months ended October
31, 1999 and 1998, and $14,276 for the cumulative period from inception
(March 3, 1995) through October 31, 1999, respectively.
-7-
<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 $9,230 at October 31, 1999.
Approximately $63,000 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, 1999 reflects cash used in operating activities of approximately
$297,000. This use of cash is primarily attributable to general and
administrative expenses and product development expenses. The cash and cash
equivalents balance decreased in the six months ended October 31, 1999 by
$298,000, which was the cash used to fund current operations.
In August 1999, an agreement of principle was entered into providing for
settlement of a consolidated class action against the Company, Mr. Lulkin and
Steven Wasserman, who was also a member of the Company's Board of Directors
at the time of the Company's initial public offering. Under the agreement in
principle, all claims in the action against the Company, and against Mr.
Lulkin and Mr. Wasserman insofar as they were members of the Company's Board
of Directors, would be dismissed in exchange for a payment of $400,000, of
which $100,000 would need to be paid by the Company and $300,000 would be
paid by an insurance company under a directors and officers liability policy
of insurance. The settlement is contingent upon, among other things,
execution of the definitive documentation and approval by the court. There
can be no assurance that the settlement will be concluded.
The Company expects to incur additional expenditures over the next 6 to
12 months for general and administrative expenses and to continue its product
development. The Company's management no longer believes that the Company's
cash on hand will be sufficient to fund the Company's operations for the next
twelve (12) months. However, management continues to believe that the
outstanding amount due from HDS of approximately $855,000 will be at least
partially repaid during the next (6) months although it has been classified
as a long-term asset based on the current financial condition of HDS and the
two-year extension on the credit line to January, 2001 which was agreed upon
in February, 1999. In addition, the Company's management has set up a
reserve of approximately $427,000 or approximately 50% of the outstanding
balance at October 31, 1999, based upon anticipated probable collectibility.
In the event that no repayment can be made in the next (6) months, the
Company will seek alternative methods of raising additional capital or the
possible liquidation of assets. To the extent that the Company will not be
able to collect its investee receivable, its ability to continue operating
will be dependent upon its ability to successfully sell other assets of the
Company.
-8-
<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.
On January 22, 1999, the Company amended the Licensing Agreement dated
March 31, 1995 pertaining to the seventh device, for the manufacture and
marketing of the self-shielding needle. The amendment eliminates the
"Minimum Payment Obligation" as defined in the original agreement. The last
such payment which was due on September 30, 1998 in the amount of $50,000 was
paid on January 26, 1999 upon execution of the amendment.
In consideration for eliminating all future and any prior minimum
payment obligations on this invention and any other products or inventions
currently or previously licensed by the Company from the licensor, the
Company agreed to (a) increase the royalty on future sales from 8% to 10%;
and (b) pay the licensor a "cap" on minimum royalty payments of $450,000.
Such payments shall be payable at the rate of $2,500 per month plus 10% of
the proceeds received by the Company from any capital raised which exceeds
$600,000, and 10% of annual pre-tax income until the aggregate "cap" payment
is made. The aggregate royalty of $450,000 has been charged to operations in
the year ended April 30, 1999.
In addition, if the Licensor terminates the agreement for any reason,
the maximum royalty shall be reduced by $125,000 and all information with
respect to the invention (the "Know-How") shall be returned to the licensor
free and clear of any liens. If the Company terminates the agreement, the
licensor may acquire the Know-How for a reduction in the remaining balance
due equal to the lesser amount of $125,000 or the remaining balance due. If
the Company does not obtain the necessary government approval to market the
self-sheilding needle within (2) two years, the agreement shall terminate
unless the Company pays the licensor an additional $250,000, which will
extend the regulatory approval requirement by (2) two additional years.
-9-
<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 (Cont'd)
The Company has not derived significant revenues since its inception in
March 1995. The total revenue earned from inception through October 31, 1999
is $1,388,942. This is a result of the sale of the C.F. Medical Devices of
approximately $654,000 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 $8,974,614 as of
October 31, 1999. The Company is attempting to reduce operating losses
through reductions in operating expenses until such time it can generate
significant revenues from the sale of its products.
Plan of Operation
In October, 1999, the Company ceased sales on a portion of its emergency
medical equipment line due to the relatively low level of sales, capital
constraints, and a price increase by the manufacturer. The Company is
presently evaluating the marketability of these products and will make a
decision in the next few months as to this line of products as to whether to
resume sales or possibly market the rights to these products. In addition,
the Company has temporarily halted plans to complete the development of the
Self-Shielding Needle due to capital constraints. The Company intends to
continue with the development as additional working capital becomes available
through collection of its investee receivable or possible liquidation of
assets. On May 26, 1998 the Company completed its 510(k) notification for
its Safety Needle (due to regulatory restrictions and 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.
-10-
<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's management no longer believes that the Company's cash on
hand will be sufficient to fund the Company's operations for the next twelve
(12) months. However, management continues to believe that the outstanding
amount due from HDS of approximately $855,000 will be at least partially
repaid during the next (6) months although it has been classified as a long-term
asset based on the current financial condition of HDS and the two-year
extension on the credit line to January, 2001 which was agreed upon in
February, 1999. In addition, the Company's management has set up a reserve
of approximately $427,000 or approximately 50% of the outstanding balance at
October 31, 1999, based upon anticipated probable collectibility. In the
event that no repayment can be made in the next (6) months, the Company will
seek alternative methods of raising additional capital or the possible
liquidation of assets. To the extent that the Company will not be able to
collect its investee receivable, its ability to continue operating will be
dependent upon its ability to successfully sell other assets of the Company.
In an effort to strengthen the Company's position until a meaningful
revenue stream and positive cash flow can be achieved, management continues
to further reduce costs. In addition to payroll reductions, the termination
of two consulting contracts, the reduction of rental expense, and the
reduction of expenses related to the development of the needle which
accounted for more than approximately $250,000 savings in annual expenses in
the prior year, the Company continues to reduce expenses through cash royalty
reductions achieved with the amended license agreement, insurance
reductions, and reduced professional fees .
The Company also has retained a 13.6% investment, in its nonconsolidated
affiliate HDS, which is accounted for under the cost method commencing
January 31, 1999. The manufacturing facility of HDS became fully operational
in late 1997. The Company anticipates that the future operations of HDS
could allow HDS to repay its obligations to the Company in the future.
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 to consider liquidating some of its
assets to meet cash requirements. No assurances can be made as to the
success of these working capital raising alternatives.
-11-
<PAGE>
EMBRYO DEVELOPMENT CORPORATION
(A Development Stage Company)
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Cont'd)
Year 2000
General Description of the Year 2000 Problem. The year 2000 problem
concerns the inability of certain computer systems to appropriately recognize
the year 2000 when the last two digits of the year are entered in the date
field. Our date critical functions related to the Year 2000 and beyond, may
be adversely affected unless these computer systems are or become Year 2000
compliant.
Our State of Readiness. We are a development stage company and do not
use major computer systems in our business. Our computer needs are satisfied
through personal computers, all of which are Year 2000 compliant and
purchased software, all of which is Year 2000 compliant.
Effect of Third Party Readiness. Our Year 2000 compliance is partially
dependent upon key third parties also being Year 2000 compliant on a timely
basis. We could be adversely affected by the Year 2000 problem if computer
systems of third parties such as banks, suppliers and others with whom we do
business fail to address the Year 2000 problem successfully. For example, we
may be adversely affected by the disruption or inaccuracy of data provided to
us by non-Year 2000 compliant third parties, and the failure of our service
providers to become Year 2000 compliant.
Our management believes that the purchasing patterns of customers and
prospective customers might be affected by Year 2000 issues. Many companies
may need to modify or upgrade their information systems to address the Year
2000 problem. The effects of this issue and of the efforts by other
companies to address it are unclear. Many companies are expending
significant resources to correct their current software systems for Year 2000
compliance. These expenditures might result in reduced funds available to
purchase services and products such as those that we offer.
Risks. We have no reason to believe that our exposure to the risks or
lack of supplier and customer Year 2000 readiness is any greater than the
exposure to such risks that affect our competitors generally. However, if a
significant number of our key vendors, customers and other business partners
experience business disruptions as a result of their lack of Year 2000
readiness, their problems could have a material adverse effect on our
financial position and operations. In addition, if all Year 2000 issues
within our business are not properly identified there can be no assurance
that the Year 2000 issue will not have a material adverse effect on our
results of operations or financial position.
Our cost estimates and time frames will be influenced by our ability to
identify Year 2000 problems, the nature of programming required to fix any
problems, and the compliance success of third parties. For those reasons, no
assurance can be given at this point that our computer system will be Year
2000 compliant in a timely manner or that we will not incur significant
additional expenses pursuing Year 2000 compliance.
-12-
<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.
In August 1999, an agreement of principle was entered into providing for
settlement of the consolidated class action against the Company, Mr. Lulkin
and Steven Wasserman, who was also a member of the Company's Board of
Directors at the time of the Company's initial public offering. Under the
agreement in principle, all claims in the action against the Company, and
against Mr. Lulkin and Mr. Wasserman insofar as they were members of the
Company's Board of Directors, would be dismissed in exchange for a payment of
$400,000, of which $100,000 would need to be paid by the Company and $300,000
would be paid by an insurance company under a directors and officers
liability policy of insurance. The settlement is contingent upon, among
other things, execution of the definitive documentation and approval by the
court. There can be no assurance that the settlement will be concluded.
-13-
<PAGE>
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 (filed herewith).
(B) Reports on Form 8-K:
None.
-14-
<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 17, 1999
-15-
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION THAT IS EXTRACTED FROM
10-QSB FOR THE QUARTER ENDED OCTOBER 31, 1999 AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> APR-30-2000
<PERIOD-END> OCT-31-1999
<CASH> 62,532
<SECURITIES> 0
<RECEIVABLES> 7,535
<ALLOWANCES> 0
<INVENTORY> 19,170
<CURRENT-ASSETS> 110,609
<PP&E> 40,212
<DEPRECIATION> 24,926
<TOTAL-ASSETS> 999,162
<CURRENT-LIABILITIES> 101,379
<BONDS> 396,500
0
600
<COMMON> 700
<OTHER-SE> 499,983
<TOTAL-LIABILITY-AND-EQUITY> 999,162
<SALES> 39,189
<TOTAL-REVENUES> 39,189
<CGS> 28,944
<TOTAL-COSTS> 28,944
<OTHER-EXPENSES> 79,285
<LOSS-PROVISION> 54,014
<INTEREST-EXPENSE> 1,733
<INCOME-PRETAX> (501,369)
<INCOME-TAX> 0
<INCOME-CONTINUING> (501,369)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (501,369)
<EPS-BASIC> (.07)
<EPS-DILUTED> (.07)
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