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, 2000
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 (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 13, 2000
----------------- ----------------------------------
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, 2000
-----------------------------------------
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........................5-9
Management's discussion and analysis
of financial condition and plan
of operations......................................10-14
Part II. - Other information.......................15-16
Signatures............................................17
<PAGE>
<TABLE>
EMBRYO DEVELOPMENT CORPORATION
(A Development Stage Company)
BALANCE SHEET
(Unaudited)
October 31, 2000
----------------
<S> <C>
ASSETS
-----------
CURRENT ASSETS:
Cash $ 619
Prepaid expenses and other current assets 22,424
--------
Total current assets 23,043
PROPERTY AND EQUIPMENT AT COST, net of accumulated
depreciation of $29,227 11,777
LICENSED TECHNOLOGY AT COST, net of accumulated
amortization of $515,595 and reserve of $224,405 -0-
INVESTMENT IN UNCONSOLIDATED INVESTEE - at cost 40,841
OTHER ASSETS:
Due from unconsolidated investee -
net of reserve of $297,684 297,684
Interest receivable 37,748
Deposits 95,176
--------
Total other assets 430,608
--------
Total assets $ 506,269
============
LIABILITIES AND STOCKHOLDERS' DEFICIT
-------------------------------------
CURRENT LIABILITIES:
Accounts payable and accrued expenses $ 240,080
Royalty payable 30,000
------------
Total current liabilities 270,080
------------
Royalty payable - long-term 366,500
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' DEFICIT:
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 ( 60,000)
Deficit accumulated during the development stage (9,861,208)
Notes receivable (201,670)
------------
Total stockholders' deficit (130,311)
------------
Total liabilities and stockholders' deficit $ 506,269
============
</TABLE>
-1-
<PAGE>
<TABLE>
EMBRYO DEVELOPMENT CORPORATION
(A Development Stage Company)
STATEMENTS OF OPERATIONS
SIX MONTHS ENDED THREE MONTHS ENDED Cumulative
OCTOBER 31, OCTOBER 31, During
2000 1999 2000 1999 Development
Stage
-------- ----------- ----------- ---------- -----------
(Unaudited) (Unaudited) (Unaudited) (Unaudited)(Unaudited)
----------- ----------- ----------- ---------- -----------
<S> <C> <C> <C> <C> <C>
REVENUES $ (3,490) $ 39,189 $ -0- $ 10,908 $ 1,389,789
----------- --------- ----------- ---------- -----------
COSTS AND EXPENSES:
Cost of sales 612 28,944 - 8,238 1,222,647
General, selling
and administrative 252,892 412,897 125,388 207,063 6,237,506
Royalties - - - - 583,593
Research and development 1,350 26,428 - 811 1,091,377
Amortization 10,357 52,857 - 26,428 898,810
Loss on write-off and reserve
of licensed technology 69,048 - 69,048 - 711,190
Loss on write-off of inventories - - - - 10,755
Interest income- related party (21,777) (29,715) (9,930) (15,308) (137,666)
Interest and other
(income)expense (3,446) (4,867) (2,860) (600) 428,190
Equity loss of operations
of unconsolidated investee - - - - 665,374
Provision for litigation
settlement - - - - 100,000
Adjustment for
collectibility of amount
due from unconsolidated
investee (77,074) 54,014 (40,718) 29,743 297,684
Gain on sale of stock of
unconsolidated investee - - - - (653,510)
--------- -------- ---------- -------- ---------
Total Costs and Expenses 231,962 540,558 140,928 256,375 11,455,950
-------- -------- -------- ------- -----------
LOSS BEFORE
MINORITY INTEREST $ (235,452) $(501,369) $(140,928) $(245,467)$(10,066,161)
MINORITY INTEREST IN NET
LOSS OF SUBSIDIARY - - - - 204,953
---------- ---------- ---------- ---------- ------------
NET LOSS $ (235,452) $(501,369) $(140,928) $(245,467) $(9,861,208)
=========== ========== ========== ========== ============
BASIC AND DILUTED NET
LOSS PER SHARE $ (.03) $ (.07) $ (.02) $ (.04) $ (1.81)
========= ========== ========== ========== ============
WEIGHTED AVERAGE NUMBER OF
SHARES OF COMMON STOCK
OUTSTANDING 6,995,000 6,995,000 6,995,000 6,995,000 5,439,087
========= ========= ========= ========= =========
</TABLE>
-2-
<PAGE>
<TABLE>
EMBRYO DEVELOPMENT CORPORATION
(A Development Stage Company)
STATEMENTS OF CASH FLOWS
------------------------------
SIX MONTHS ENDED Cumulative
OCTOBER 31, During
2000 1999 Development
Stage
------- ------- -----------
(Unaudited)(Unaudited) (Unaudited)
---------- ----------- -----------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net loss $ (235,452)$ (501,369) $(9,861,208)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 12,680 55,793 1,562,050
Write-off and reserve of
licensed technology 69,048 - 711,190
Write-off of inventories - - 10,755
Gain on sale of stock of unconsolidated
investee - - (653,510)
Adjustment for collectibility of amount
due from unconsolidated investee (77,074) 54,014 297,684
Minority interest in loss of subsidiary - - (204,953)
Equity loss in operations of unconsolidated
investee - - 665,374
Provision for litigation settlement - - 100,000
Non-cash consideration - other 90,000 202,500 2,036,233
Non-cash consideration - research
and development - - 440,000
Changes in operating assets and liabilities:
(Increase) decrease in assets:
Accounts receivable 7,628 16,823 (79,697)
Interest receivable (8,133) (8,133) (9,566)
Inventories - 13,485 (55,791)
Prepaid expenses and other
current assets (6,372) 4,247 ( 32,924)
Other assets 705 (109,026) (243,218)
Increase (decrease) in liabilities:
Accounts payable and accrued expenses (453) (10,654) 830,028
Royalty payable (15,000) (15,000) 396,500
--------- ---------- ---------
Net cash operating activities - forward (162,423) (297,320) (4,091,053)
---------- ---------- -----------
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 - - 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
Repayment of loans to unconsolidated investee 154,148 - 412,969
Net cash paid for asset acquisition - - (200,588)
Purchase of licensed technology - - (450,000)
Purchase of property and equipment - ( 664) (1,036,373)
Divestiture of cash of subsidiary - - (77,794)
-------- ------- -----------
Net cash investing activities - forward 154,148 ( 664) ( 641,786)
--------- ------- -----------
</TABLE>
-3-
<PAGE>
<TABLE>
EMBRYO DEVELOPMENT CORPORATION
(A Development Stage Company)
STATEMENTS OF CASH FLOWS (Continued)
---------------------------------------
SIX MONTHS ENDED Cumulative
OCTOBER 31, During
2000 1999 Development
Stage
------ ------- -----------
(Unaudited) (Unaudited) (Unaudited)
----------- ----------- -----------
<S> <C> <C> <C>
Net cash - operating activities - forwarded$ (162,423) $ (297,320) $ (4,091,053)
Net cash - investing activities - forwarded 154,148 (664) ( 641,786)
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 debt - - (550,000)
Proceeds of stock offering, net of
deferred costs - - 4,337,208
Due from unconsolidated investee - - 26,250
----------- ---------- -----------
Net cash financing activities - - 4,733,458
----------- ---------- -----------
NET (DECREASE) INCREASE IN CASH
AND CASH EQUIVALENTS (8,275) (297,984) 619
CASH AND CASH EQUIVALENTS at
beginning of period 8,894 360,516 -
---------- ----------- -----------
CASH AND CASH EQUIVALENTS at end of period $ 619 $ 62,532 $ 619
========== ============= ===========
</TABLE>
-4-
<PAGE>
EMBRYO DEVELOPMENT CORPORATION
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
SIX MONTHS ENDED OCTOBER 31, 2000
-----------------------------------
1. Organization and Basis of Consolidation and Liquidity:
-----------------------------------------------------------
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.
The Company expects to incur additional expenditures over the next 6 to
12 months for general and administrative expenses and to evaluate its future
course of operations. The Company has a working capital deficit and an
accumulated deficit and 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 which raises substantial doubt about its ability to continue as a
going concern. However, management continues to believe that the outstanding
amount due from HDS, which is due January 31, 2001, of approximately $595,000
will be at least partially repaid during the next (6) months although it has
been classified as a long-term asset based on the financial condition of HDS
as of October 31, 2000. In the six months ended October 31, 2000, HDS repaid
approximately $154,000 of the outstanding receivable balance to the Company.
In addition, the Company's management has recorded a reserve of approximately
$298,000 or approximately 50% of the outstanding balance at October 31, 2000,
based upon anticipated probable collectibility of the balance. In the event
that no additional repayment or an insufficient repayment is 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 is unable to collect the balance of its investee receivable, its
ability to continue operating will be dependent upon its ability to
successfully sell other assets of the Company or raise additional capital.
-5-
<PAGE>
EMBRYO DEVELOPMENT CORPORATION
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
SIX MONTHS ENDED OCTOBER 31, 2000
(Continued)
-------------------------------------
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, results of operations, and cash flows as of October
31, 2000 and for the six and three month periods ended October 31, 2000 and
October 31, 1999. 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, 2000. The results of operations for the six month periods ended
October 31, 2000 and 1999 are not necessarily indicative of the results to be
expected for the full year.
3. Investment in HDS:
----------------------
As of October 31, 2000, the Company holds approximately 12.9% ownership
of the common stock of HDS which is accounted for using the cost method.
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, 2000, borrowings under the
revolver approximated $595,000. The Company's management has recorded a
reserve of approximately $298,000 or approximately 50% of the outstanding
balance at October 31, 2000, based upon anticipated probable collectibility.
In addition, the Company has classified this receivable as a long-term asset
although it is due on January 31, 2001, due to the financial condition of HDS
as of October 31, 2000. Approximately $154,000 of the outstanding balance at
April 30, 2000 was collected during the six months ended October 31, 2000.
-6-
<PAGE>
EMBRYO DEVELOPMENT CORPORATION
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
SIX MONTHS ENDED OCTOBER 31, 2000
(Continued)
-----------------------------------
4. License Agreement:
-----------------------
In March 1995, the Company entered into a license agreement, for the
rights to manufacture and market a medical device, the self-shielding
needle.
On January 22, 1999, the Company amended the Licensing Agreement dated
March 31, 1995. The amendment eliminated 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 maximum royalty 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. The aggregate royalty of $450,000 was
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-shielding needle withing two (2) years, the agreement shall
terminate unless the Company pays the licensor an additional $250,000,
which will extend the regulatory approval requirement by two (2) additional
years.
At October 31, 2000, the Company determined that the necessary
government approval would not be obtained within the two (2) year term of
the agreement ending January 22, 2001, since the Company has halted
development of the device due to capital constraints. The Company also
determined that it could not pay the licensor an additional $250,000 to
extend the regulatory approval requirement, although the Company intends to
negotiate for an extension with the licensor. The remaining unamortized
cost of $69,048 for this license agreement has been fully reserved for and
was charged to operations in the six months ended October 31, 2000.
-7-
<PAGE>
EMBRYO DEVELOPMENT CORPORATION
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
SIX MONTHS ENDED OCTOBER 31, 2000
(Continued)
----------------------------------
5. Stockholders' Deficit:
--------------------------
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.
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.
-8-
<PAGE>
EMBRYO DEVELOPMENT CORPORATION
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
SIX MONTHS ENDED OCTOBER 31, 2000
(Continued)
6. Litigation (Continued):
-----------------------------
In August 1999, an agreement in 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. At April 30, 2000, the Company recorded a reserve of $100,000,
which is included in accounts payable and accrued expenses, for this
obligation.
7. Supplementary Information - Statements of Cash Flows:
---------------------------------------------------------
The Company paid interest of $2,170 and $1,733 for the six months ended
October 31, 2000 and 1999, $1,075 and $866 for the three months ended October
31, 2000 and 1999, and $12,211 for the cumulative period from inception
(March 3, 1995) through October 31, 2000, respectively.
The Company has not paid income taxes for the six months ended October
31, 2000 and 1999 and for the three months ended October 31, 2000 and 1999.
The Company paid income taxes of $14,276 for the cumulative period from
inception (March 3, 1995) through October 31, 2000.
-9-
<PAGE>
EMBRYO DEVELOPMENT CORPORATION
(A Development Stage Company)
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND PLAN OF OPERATIONS
-------------------------------------------
Liquidity and Capital Resources
--------------------------------
The Company had a net working capital deficit of $(247,037) at October
31, 2000. Approximately $1,000 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, 2000 reflects cash used in operating activities of approximately
$162,000. This use of cash is primarily attributable to general and
administrative expenses. The cash and cash equivalents balance decreased in
the six months ended October 31, 2000 by approximately $8,000, which is
attributable to the cash used to fund current operations and a net repayment
of the HDS credit line of approximately $154,000.
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 has
set up a reserve of $100,000 for this obligation, which is included in
accounts payable and accrued expenses, as of October 31, 2000.
The Company expects to incur additional expenditures over the next 6 to
12 months for general and administrative expenses and to evaluate its future
course of operations. 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, which is due January 31, 2001, of
approximately $595,000 will be at least partially repaid during the next (6)
months although it has been classified as a long-term asset based on the
financial condition of HDS as of October 31, 2000. In the six months ended
October 31, 2000, HDS repaid approximately $154,000 of the outstanding
receivable balance to the Company. In addition, the Company's management has
recorded a reserve of approximately $298,000 or approximately 50% of the
outstanding balance at October 31, 2000, based upon anticipated probable
collectibility of the balance. In the event that no additional repayment or
-10-
<PAGE>
EMBRYO DEVELOPMENT CORPORATION
(A Development Stage Company)
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND PLAN OF OPERATIONS
(Continued)
---------------------------------------------
Liquidity and Capital Resources (Continued)
--------------------------------------------
an insufficient repayment is 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 is unable to collect
the balance of its investee receivable, its ability to continue operating
will be dependent upon its ability to successfully sell other assets of the
Company or raise additional capital.
Plan 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 was charged to operations in the
year ended April 30, 1999.
-11-
<PAGE>
EMBRYO DEVELOPMENT CORPORATION
(A Development Stage Company)
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND PLAN OF OPERATIONS
(Continued)
--------------------------------------------
Plan of Operations (Continued)
-------------------------------
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.
At October 31, 2000, the Company determined that the necessary government
approval would not be obtained within the two (2) year term of the agreement
ending January 22, 2001, since the Company has halted development of the
device due to capital constraints. The Company also determined that it could
not pay the licensor an additional $250,000 to extend the regulatory approval
requirement, although the Company intends to negotiate for an extension with
the licensor. The remaining unamortized cost of $69,048 for this license
agreement has been fully reserved for and was charged to operations in the
six months ended October 31, 2000.
In October 1999, the Company ceased sales on the C.F. Medical products
due to the relatively low level of sales, capital constraints and price
increases by C.F. The Company is presently evaluating the marketability of
the licensed technology relating to these products and exploring alternative
means of production of these products. However, even if alternative means of
production of these products is found, the Company would still need to obtain
additional capital to restart production, for which there can be no
assurance. At October 31, 2000, the unamortized amount of this technology
approximated $155,000, of which the Company set-up a 100% reserve at April
30, 2000, based upon anticipated marketability of these assets.
The Company has not derived significant revenues since its inception in
March 1995. The total revenue earned from inception through October 31, 2000
is $1,389,789. This is a result of the sale of the C.F. Medical Devices of
approximately $655,000 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 $9,861,208 as of
October 31, 2000. The Company is attempting to reduce operating losses
through reductions in operating expenses until such time it can generate
additional capital for future operations.
-12-
<PAGE>
EMBRYO DEVELOPMENT CORPORATION
(A Development Stage Company)
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND PLAN OF OPERATIONS
(Continued)
--------------------------------------------
Plan of Operations (Continued)
-------------------------------
The Company had temporarily halted plans to complete the development of
the Self-Shielding Needle due to capital constraints. The license to develop
the self-shielding needle will terminate on January 22, 2001, unless mutually
agreeable extended terms can be negotiated with the licensor. If an
acceptable amendment can be reached, the Company intends to continue with the
development as additional working capital becomes available through
collection of its investee receivable or possible liquidation of certain
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 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 was evaluating whether to submit a
PMA application or to modify the device further and submit a new 510(k)
application. This process was halted due to a deficiency of capital. The
Company, has not, at this time, determined whether it will be able to obtain
additional capital to proceed with any such plans. In addition, no assurance
can be made with respect to the license for the self-shielding needle, which
will terminate on January 22, 2001, unless the Company can negotiate mutually
acceptable terms with the licensor for an extension of time to obtain
government approval.
The Company also has retained a 12.9% 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.
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<PAGE>
EMBRYO DEVELOPMENT CORPORATION
(A Development Stage Company)
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND PLAN OF OPERATIONS
(Continued)
-------------------------------------------
Plan of Operations (Continued)
------------------------------
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 will require an extension of the license agreement which
will otherwise terminate in January, 2001 and 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.
-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.
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. At
April 30, 2000, the Company set up a reserve of $100,000, which is included
in current liabilities, for this obligation, although at the present time the
Company does not have sufficient capital to fund such payment.
-15-
<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.
-16-
<PAGE>
Signatures
-----------------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
EMBRYO DEVELOPMENT CORPORATION
By: /s/ Matthew L. Harriton
---------------------------
Matthew L. Harriton
President and Chief
Executive Officer
Chief Financial Officer
Dated: December 13, 2000
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<PAGE>
