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, 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, 11th Floor
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 March 12, 1999
- ---------------- -----------------------------
Common Stock 6,995,000
<PAGE>
EMBRYO DEVELOPMENT CORPORATION
(A Development Stage Company)
FORM 10-QSB
QUARTERLY REPORT
For the Nine Months Ended January 31, 1999
TABLE OF CONTENTS
-----------------
Page to Page
------------
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>
<TABLE>
EMBRYO DEVELOPMENT CORPORATION
(A Development Stage Company)
BALANCE SHEET
(Unaudited)
January 31, 1999
-------------------------------
<CAPTION>
<S> <C>
ASSETS
- ------
CURRENT ASSETS:
Cash and cash equivalents $ 371,813
Accounts receivable 19,563
Receivable from sale of investee stock 215,000
Inventories 56,812
Prepaid expenses and other current assets 67,227
------------
Total current assets 730,415
PROPERTY AND EQUIPMENT, net of accumulated
depreciation of $20,537 12,361
LICENSED TECHNOLOGY, net of accumulated
amortization of $373,095 366,905
INVESTMENT IN UNCONSOLIDATED INVESTEE, at cost 40,841
OTHER ASSETS:
Due from unconsolidated investee, net of reserve
of $332,849 332,849
Cash in escrow 18,000
Deposits and other assets 90,001
------------
Total other assets 440,850
------------
Total assets $ 1,591,372
============
LIABILITIES AND STOCKHOLDERS' EQUITY
- -------------------------------------
CURRENT LIABILITIES:
Accounts payable and accrued expenses 101,686
Royalty payable $ 31,000
------------
Total current liabilities 132,686
------------
ROYALTY PAYABLE 419,000
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 9,991,267
Unearned compensation (618,750)
Deficit accumulated during the development stage (8,132,461)
Notes due on common stock purchases (201,670)
-------------
Total equity 1,039,686
-------------
Total liabilities and stockholders' equity $ 1,591,372
============
</TABLE>
-1-
<PAGE>
<TABLE>
EMBRYO DEVELOPMENT CORPORATION
(A Development Stage Company)
STATEMENTS OF OPERATIONS
-----------------------------------
<CAPTION>
NINE MONTHS ENDED THREE MONTHS ENDED Cumulative
JANUARY 31, JANUARY 31, During
1999 1998 1999 1998 Development
Stage
---------------------- ---------------------- ------------
(Unaudited) (Unaudited)(Unaudited) (Unaudited) (Unaudited)
<S> <C> <C> <C> <C> <C>
REVENUES $ 86,227 $ 758,875 $ 23,376 $ 189,354 $ 1,321,981
--------- ----------- ---------- ----------- -----------
COSTS AND EXPENSES:
Cost of sales 66,640 718,190 18,853 257,808 1,147,263
General, selling
and administrative 746,863 1,557,814 268,541 572,922 4,945,819
Royalties 500,000 52,395 450,000 (5,357) 582,752
Research and
development 128,799 130,103 3,220 42,126 1,046,494
Amortization 79,286 172,500 26,429 57,500 756,311
Adjustment for
collectibility
of amount due from un-
consolidated investee 332,849 - 332,849 - 332,849
Equity loss of operations
of unconsolidated
investee 298,630 242,921 111,697 242,921 665,374
Loss on write-off of
licensed technology - - - - 486,785
Gain on sale of stock of
unconsolidated
investee (653,510) - (653,510) - (653,510)
Interest income -
related party (32,101) - (10,664) - (43,123)
Interest and other
(income)expense (23,225) 63,212 (9,153) 57,537 392,381
---------- ------- ---------- ----------- -----------
1,444,231 2,937,135 538,262 1,225,457 9,659,395
---------- --------- ---------- ----------- ----------
LOSS BEFORE
MINORITY INTEREST (1,358,004) (2,178,260) (514,886)(1,036,103) (8,337,414)
MINORITY INTEREST IN NET
LOSS OF SUBSIDIARY - 65,881 - - 204,953
----------- ------------ --------- ----------- -----------
NET LOSS $(1,358,004)$(2,112,379) $(514,886)$(1,036,103) $(8,132,461)
============ =========== ========== =========== ============
NET LOSS PER SHARE $ (.21) $ (.44) $ (.07)$ (.21) $ (1.71)
=========== ============ ========== =========== ============
WEIGHTED AVERAGE NUMBER OF
SHARES OF COMMON STOCK
OUTSTANDING 6,519,819 4,845,000 6,995,000 4,845,000 4,744,832
=========== ========== ========== ========== ==========
</TABLE>
-2-
<PAGE>
<TABLE>
EMBRYO DEVELOPMENT CORPORATION
(A Development Stage Company)
STATEMENTS OF CASH FLOWS
-----------------------------
<CAPTION>
NINE MONTHS ENDED Cumulative
JANUARY 31, During
1999 1998 Development
Stage
(Unaudited)(Unaudited) (Unaudited)
---------------------- -----------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net loss $(1,358,004) $(2,112,379) $(8,132,461)
------------ ------------ ------------
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 85,648 266,591 1,410,859
Write-off of licensed technology - - 486,785
Gain on sale of stock of unconsolidated
investee (653,510) - (653,510)
Adjustment for collectibility of amount
due from unconsolidated investee 332,849 - 332,849
Minority interest in loss of subsidiary - (65,881) (204,953)
Equity loss in operations of unconsolidated
investee 298,630 242,921 665,374
Non-cash consideration - other 333,750 404,983 1,477,483
Non-cash consideration - research
and development - - 440,000
Changes in operating assets and liabilities:
(Increase) decrease in assets:
Accounts receivable 14,543 (17,991) ( 99,260)
Interest receivable 2,782 11,728 28,182
Inventories 15,039 (73,729) (101,848)
Prepaid expenses and other
current assets 127,893 (25,996) ( 77,727)
Other assets (22,009) (34,921) (172,225)
Increase (decrease) in liabilities:
Accounts payable and accrued expenses (171,847) 642,590 791,634
Royalty payable 450,000 - 450,000
Customer deposits - (25,000) -
----------- ---------- ---------
Total adjustments 813,768 1,325,295 4,773,643
----------- ---------- ----------
Net cash operating activities - forward (544,236) (787,084) (3,358,818)
----------- ---------- -----------
INVESTING ACTIVITIES:
Purchase of short-term investments - - (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 - 749,438 6,129,521
Proceeds from sale of stock of
unconsolidated investee 495,000 - 495,000
Net cash paid for asset acquisition - - (200,588)
Purchase of licensed technology - - (450,000)
Purchase of property and equipment (1,459) (857,070) (1,028,266)
Divestiture of cash of subsidiary - (77,794) (77,794)
----------- ---------- -----------
Net cash investing activities - forward 781,541 373,574 (1,261,648)
----------- ---------- -----------
</TABLE>
-3-
<PAGE>
<TABLE>
EMBRYO DEVELOPMENT CORPORATION
(A Development Stage Company)
STATEMENTS OF CASH FLOWS
<CAPTION>
NINE MONTHS ENDED Cumulative
JANUARY 31, During
1999 1998 Development
Stage
(Unaudited) (Unaudited) (Unaudited)
----------------------- -----------
<S> <C> <C> <C>
Net cash - operating activities - forwarded $ (544,236) $ (787,084) $ (3,358,818)
Net cash - investing activities - forwarded 781,541 373,574 (1,261,648)
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 237,305 (63,510) 371,813
CASH AND CASH EQUIVALENTS at
beginning of period 134,508 280,199 -
------------ ----------- ----------
CASH AND CASH EQUIVALENTS at end of period $ 371,813 $ 216,689 $ 371,813
========== ========= ===========
</TABLE>
-4-
<PAGE>
EMBRYO DEVELOPMENT CORPORATION
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
NINE MONTHS ENDED JANUARY 31, 1999
1. Organization:
Embryo Development Corporation (the Company) is a Delaware Corporation
which was formed to develop, acquire, manufacture and market various bio-medical
devices. Hydrogel Design Systems, Inc.(HDS) was a consolidated subsidiary of
the Company until January 21, 1998. On that date, the Company's ownership of
HDS dropped to 45.6%, and the investment was accounted for under the equity
method. In January, 1999, the Company's share of HDS dropped to 13.5% 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 nine and three month
periods ended January 31, 1999 and January 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, 1998. The results
of operations for the nine month periods ended January 31, 1999 and 1998 are
not necessarily indicative of the results to be expected for the full year.
3. Inventories:
Inventories at January 31, 1999 consist principally of finished goods,
which are stated at the lower of cost (first-in, first-out method) or market.
-5-
<PAGE>
EMBRYO DEVELOPMENT CORPORATION
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
NINE MONTHS ENDED JANUARY 31, 1999
(Continued)
4. Investment in HDS:
Between November 20, 1998 and January 31, 1999, the Company sold an
aggregate of 710,000 shares of the common stock of HDS for $710,000, of which
$215,000 was collected in February, 1999. The Company previously held a
total investment of 1,272,500 shares of HDS which represented 31.3% common
ownership. As a result of this transaction, the Company presently holds
562,500 shares or 13.5% common ownership of HDS. On January 31, 1999, as a
result of this transaction, the ownership decreased below 20% and the Company
changed the accounting for this investment from the equity method to the cost
method.
Summarized financial information for HDS, which prior to January
21,1998, was consolidated, commencing January 21, 1998 through January 31,
1999, was accounted for using the equity method,and as of January 31, 1999,
is being accounted for on the cost method is as follows:
Summarized Financial Information:
January 31, 1999
Balance Sheet: (Unaudited)
---------------------------------
Current assets $ 351,000
Property, plant, and
equipment, net 1,628,000
Purchased technology 683,000
Other assets 45,000
-----------
Total assets $ 2,707,000
===========
Current liabilities $ 783,000
Long-term notes payable 1,647,000
Shareholders' equity 277,000
-----------
Total liabilities and
stockholders' equity $ 2,707,000
============
Nine months ended
January 31, 1999
------------------
Statement of Operations:
Revenue $ 456,000
===========
Cost of sales $ 525,000
===========
Net loss $ (914,000)
===========
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, 1999, borrowings
under the revolver approximated $573,000.
-6-
<PAGE>
EMBRYO DEVELOPMENT CORPORATION
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
NINE MONTHS ENDED JANUARY 31, 1999
(Continued)
4. Investment in HDS: (Cont'd)
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 nine
months ended January 31, 1999 and 1998,by -0- for the three months ended
January 31, 1999 and 1998, and by $37,500 for the cumulative period from
inception (March 3, 1995) through January 31, 1999, respectively, as a
result of the agreement. In May 1998, HDS notified the Company that the
agreement would not be renewed in August 1998.
On January 31, 1999, all amounts under the revolver became due. The
Company requested payment from HDS for an aggregate of $667,000 which
represents all monies due inclusive of interest under the revolver and all
monies due under the terms of the management agreement. HDS was unable to
make the required payment due to its current financial condition. The
Company and HDS are presently negotiating extended payment terms. The
Company's management has set up a reserve of $333,000 or approximately 50%
of the outstanding balance at January 31, 1999, based upon anticipated
probable collectibility.
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.
-7-
<PAGE>
EMBRYO DEVELOPMENT CORPORATION
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
NINE MONTHS ENDED JANUARY 31, 1999
(Continued)
5. License Agreements: (Cont'd)
The remaining unamortized cost of $486,785 for these agreements was charged
to operations in the year ended April 30, 1998.
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%;
(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 period ended January 31, 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
$125,000. 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
$250,000, which will extend the regulatory approval requirement by (2) two
additional years.
6. Stockholders' Equity:
a. Issuance of securities
On June 17, 1998, the Company issued options, to three (3) directors
and an employee, to purchase 1,650,000 shares of the Company's common stock
at an exercise price equal to the market price on the date of the grant
($.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.
-8-
<PAGE>
EMBRYO DEVELOPMENT CORPORATION
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
NINE MONTHS ENDED JANUARY 31, 1999
(Continued)
6. Stockholders' Equity: (Cont'd)
a. Issuance of securities (Cont'd)
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.
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.
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.
-9-
<PAGE>
EMBRYO DEVELOPMENT CORPORATION
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
NINE MONTHS ENDED JANUARY 31, 1999
(Continued)
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.
9. 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 anticipates resuming domestic sales in April, 1999. The
Company currently derives the majority of its revenue from the sale of the
Hot Sack products.
10. Supplementary Information - Statements of Cash Flows:
The Company paid interest of $2,355 and $2,395 for the nine months
ended January 31, 1999 and 1998, $-0- and $342 for the three months ended
January 31, 1999 and 1998,and $6,755 for the cumulative period from inception
(March 3, 1995) through January 31, 1999, respectively.
The Company paid income taxes of $-0- and $7,402 for the nine months
ended January 31, 1999 and 1999, $-0-and $4,441 for the three months ended
January 31, 1999 and 1998, and $14,276 for the cumulative period from
inception (March 3, 1995) through January 31, 1999, 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.
11. Subsequent Event - Investment in HDS:
At January 31, 1999, the Company had a receivable of $215,000 from
the sale of a portion of its investment in HDS, which was collected in
February 1999.
-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 $597,729 at January 31, 1999.
Approximately $372,000 of current assets represents cash on hand and $215,000
represents receivables from the sale of the Company's investment in HDS which
was collected in February, 1999. 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, 1999 reflects cash used in operating activities of approximately
$544,000. 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 $782,000
representing the sale of general investments and the sale of a portion of the
Company's investment in HDS which was used to fund current operations. In
addition, the cash and cash equivalents balance increased in the nine months
ended January 31, 1999 by $237,000, which will be utilized for future
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. Between November 20, 1998 and January 31, 1999, the Company sold an
aggregate of 710,000 of its 1,272,500 common shares of its investment in HDS
for an aggregate of $710,000. The Company's management believes that the
Company's cash on hand, the proceeds of the stock sale of which $215,000 was
collected in February, 1999, 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 which was due from HDS in January, 1999 of $667,000 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. In addition, the Company's
management has set up a reserve of $333,000 or approximately 50% of the
outstanding balance at January 31, 1999, based upon anticipated probable
collectibility. The Company and HDS are presently negotiating extended
payment terms.
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.
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%;
(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 period ended January 31, 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 $125,000. 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.
-12-
<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 January 31,
1999 is $1,321,981. This is a result of the sale of the C.F. Medical Devices
of approximately $587,000 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 $8,132,461
as of January 31, 1999. 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. The Company anticipates resuming domestic sales in April,
1999. 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
-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)
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 on hand and the
proceeds of the HDS stock sale, of which $215,000 was collected in February,
1999, 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 which was due from HDS in
January, 1999 of $667,000 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. In addition, the Company's management has set up a
reserve of $333,000 or approximately 50% of the outstanding balance at
January 31, 1999, based upon anticipated probable collectibility. The Company
and HDS are presently negotiating extended payment terms.
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.
The Company also has retained a 13.5% investment, after the sale of
710,000 shares of stock, 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 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:
10.1+ Amendment No. 1 to Licensing Agreement of Safety Needle by and
between Dr. Lloyd Marks and the Company dated January 22, 1999.
27. Financial data schedule (filed herewith).
+ Incorporated by reference to the Company's Form 8-K filed on
February 12, 1999.
(B) Reports on Form 8-K:
On January 21, 1999, the Company filed a report on Form 8-K, reporting
under Item 2, disclosing that the Company had sold 345,000 shares of the
common stock of HDS for $345,000, thereby reducing its common ownership from
31.3% to 22.8%.
-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: March 15, 1999
-17-
<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, 1999 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> APR-30-1999
<PERIOD-END> JAN-31-1999
<CASH> 371,813
<SECURITIES> 0
<RECEIVABLES> 234,563
<ALLOWANCES> 0
<INVENTORY> 56,812
<CURRENT-ASSETS> 730,415
<PP&E> 32,898
<DEPRECIATION> 20,537
<TOTAL-ASSETS> 1,591,372
<CURRENT-LIABILITIES> 132,686
<BONDS> 419,000
0
600
<COMMON> 700
<OTHER-SE> 1,038,386
<TOTAL-LIABILITY-AND-EQUITY> 1,591,372
<SALES> 86,227
<TOTAL-REVENUES> 86,227
<CGS> 66,640
<TOTAL-COSTS> 66,640
<OTHER-EXPENSES> 708,085
<LOSS-PROVISION> 332,849
<INTEREST-EXPENSE> 2,355
<INCOME-PRETAX> (1,358,004)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,358,004)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,358,004)
<EPS-PRIMARY> (.21)
<EPS-DILUTED> (.21)
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