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, 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 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 March 13, 2000
- ----------------- -----------------------------
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, 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........................5-8
Management's discussion and analysis
of financial condition and result
of operations.......................................9-13
Part II. - Other information.......................14-15
Signatures............................................16
<PAGE>
<TABLE>
EMBRYO DEVELOPMENT CORPORATION
(A Development Stage Company)
BALANCE SHEET
(Unaudited)
January 31, 2000
----------------
<S> <C>
ASSETS
- ----------------------
CURRENT ASSETS:
Cash and cash equivalents $ 7,747
Accounts receivable 3,395
Inventories 17,842
Prepaid expenses and other current assets 15,523
-----------
Total current assets 44,507
PROPERTY AND EQUIPMENT, net of accumulated
depreciation of $25,740 14,473
LICENSED TECHNOLOGY, net of accumulated
amortization of $478,809 and reserve of $100,000 161,191
INVESTMENT IN UNCONSOLIDATED INVESTEE - at cost 40,841
OTHER ASSETS:
Due from unconsolidated investee -
net of reserve of $430,523 430,522
Interest receivable 25,637
Deposits 95,881
-----------
Total other assets 552,040
-----------
Total assets $ 813,052
============
LIABILITIES AND STOCKHOLDERS' EQUITY
- -------------------------------------
CURRENT LIABILITIES:
Accounts payable and accrued expenses $ 81,561
Royalty payable 30,000
------------
Total current liabilities 111,561
------------
Royalty payable - long-term 389,000
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 (213,750)
Deficit accumulated during the development stage (9,264,656)
Notes receivable (201,670)
-----------
Total stockholders' equity 312,491
-----------
Total liabilities and stockholders' equity $ 813,052
=============
</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
2000 1999 2000 1999 Development
Stage
---------------------- ----------------------- ------------
(Unaudited) (Unaudited) (Unaudited) (Unaudited) (Unaudited)
<S> <C> <C> <C> <C> <C>
REVENUES $ 40,784 $ 86,227 $ 1,595 $ 23,376 $ 1,390,537
-------- ----------- ---------- ----------- -----------
COSTS AND EXPENSES:
Cost of sales 30,472 66,640 1,528 18,853 1,214,897
General, selling
and administrative 590,489 746,863 177,592 268,541 5,749,928
Royalties - 500,000 - 450,000 583,593
Research and development 26,428 128,799 - 3,220 1,090,027
Amortization 79,286 79,286 26,429 26,429 862,025
Equity loss of operations
of unconsolidated investe - 298,630 - 111,697 665,374
Loss on write-off and reserve
adjustment for
licensed technology 100,000 - 100,000 - 586,785
Interest income
- related party (45,481) (32,101) (15,766) (10,664) (101,686)
Interest and other
(income)expense (6,180) (23,225) (1,313) (9,153) 432,190
Adjustment for collectibility
of amount due from
unconsolidated investee 57,181 332,849 3,167 332,849 430,523
Gain on sale of stock of
unconsolidated investee - (653,510) - (653,510) (653,510)
-------- ----------- --------- --------- -----------
832,195 1,444,231 291,637 538,262 10,860,146
-------- ----------- --------- --------- -----------
LOSS BEFORE
MINORITY INTEREST (791,411) (1,358,004) (290,042) (514,886) (9,469,609)
MINORITY INTEREST IN NET
LOSS OF SUBSIDIARY - - - - 204,953
--------- ------------ ---------- ---------- ------------
NET LOSS $ (791,411) $(1,358,004) $(290,042)$ (514,886) $(9,264,656)
=========== ============ ========== =========== =============
NET LOSS
PER SHARE $ (.11) $ (.21) $ (.04) $ (.07) (1.78)
=========== =========== ========== =========== =============
WEIGHTED AVERAGE NUMBER OF
SHARES OF
COMMON STOCK
OUTSTANDING 6,995,000 6,519,819 6,995,000 6,995,000 5,201,715
========= ========= ========= ========= ==========
</TABLE>
-2-
<PAGE>
<TABLE>
EMBRYO DEVELOPMENT CORPORATION
(A Development Stage Company)
STATEMENTS OF CASH FLOWS
<CAPTION>
NINE MONTHS ENDED Cumulative
JANUARY 31, During
2000 1999 Development
Stage
(Unaudited) (Unaudited) (Unaudited)
----------- ----------- -----------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net loss $ (791,411)$(1,358,004) $(9,264,656)
---------- ------------ ------------
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 83,035 85,648 1,521,775
Write-off and reserve adjustment
for licensed technology 100,000 - 586,785
Gain on sale of stock of unconsolidated
investee - (653,510) (653,510)
Adjustment for collectibility of amount
due from unconsolidated investee 57,181 332,849 430,523
Minority interest in loss of subsidiary - - (204,953)
Equity loss in operations of unconsolidated
investee - 298,630 665,374
Non-cash consideration - other 303,750 333,750 1,882,483
Non-cash consideration - research
and development - - 440,000
Changes in operating assets and liabilities:
(Increase) decrease in assets:
Accounts receivable 20,963 14,543 (83,092)
Interest receivable (12,200) 2,782 2,545
Inventories 14,813 15,039 (62,878)
Prepaid expenses and other
current assets 10,096 127,893 ( 26,023)
Other assets (115,360) (22,009) (355,452)
Increase (decrease) in liabilities:
Accounts payable and accrued expe nses (472) (171,847) 771,509
Royalty payable (22,500) 450,000 419,000
Customer deposits - - -
--------- ---------- -----------
Total adjustments 439,306 813,768 5,334,086
---------- ---------- -----------
Net cash operating activities - forward (352,105) (544,236) (3,930,570)
---------- ---------- ------------
INVESTING ACTIVITIES:
Proceeds from sale of stock of
unconsolidated investee - 495,000 710,000
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) (1,459) (1,035,580)
Divestiture of cash of subsidiary - - (77,794)
---------- ----------- ------------
Net cash investing activities - forward ( 664) 781,541 (1,053,962)
---------- ----------- ------------
</TABLE>
-3-
<PAGE>
<TABLE>
EMBRYO DEVELOPMENT CORPORATION
(A Development Stage Company)
STATEMENTS OF CASH FLOWS
<CAPTION>
NINE MONTHS ENDED Cumulative
JANUARY 31, During
2000 1999 Development
Stage
(Unaudited) (Unaudited) (Unaudited)
------------ ---------- -----------
<S> <C> <C> <C>
Net cash - operating activities
- forwarded $ (352,105)$ (544,236) $ (3,930,570)
Net cash - investing activities
- forwarded (664) 781,541 (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 (352,769) 237,305 7,747
CASH AND CASH EQUIVALENTS at
beginning of period 360,516 134,508 -
----------- -------- ---------
CASH AND CASH EQUIVALENTS
at end of period $ 7,747 $ 371,813 $ 7,747
========= ========== ===========
</TABLE>
-4-
<PAGE>
EMBRYO DEVELOPMENT CORPORATION
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
NINE MONTHS ENDED JANUARY 31, 2000
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 nine and three month
periods ended January 31, 2000 and January 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, 1999. The results
of operations for the nine month periods ended January 31, 2000 and 1999 are
not necessarily indicative of the results to be expected for the full year.
3. Inventories:
Inventories at January 31, 2000 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 January 31, 2000, the Company holds approximately 13.4% 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
NINE MONTHS ENDED JANUARY 31, 2000
(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 January 31, 2000, borrowings under the
revolver approximated $759,000 and unpaid interest approximated $102,000
totalling an aggregate of $861,000 due to the Company. The Company's
management has set up a reserve of approximately $430,000 or approximately
50% of the outstanding balance at January 31, 2000, based upon anticipated
probably 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 January 31, 2000.
5. Licensed Technology:
In September 1995, the Company entered into an agreement to purchase
certain assets and the ongoing business of the Medical Division of C.F.
Electronics, Inc. ["C.F."]. The Company acquired the rights to CF's medical
products for consideration of $450,000 which was capitalized as licensed
technology.
In October 1999, the Company ceased sales on these 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 these
rights. At January 31, 2000, the unamortized amount of this technology
approximated $171,000, of which the Company has set-up a reserve of $100,000
based upon anticipated marketability of these rights. Upon resolution of
this evaluation, the Company may need to consider accounting for this as a
discontinued segment.
6. 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-
<PAGE>
EMBRYO DEVELOPMENT CORPORATION
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
NINE MONTHS ENDED JANUARY 31, 2000
(Continued)
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.
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-
<PAGE>
EMBRYO DEVELOPMENT CORPORATION
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
NINE MONTHS ENDED JANUARY 31, 2000
(Continued)
8. Supplementary Information - Statements of Cash Flows:
The Company paid interest of $2,394 and $2,355 for the nine months ended
January 31, 2000 and 1999, $661 and $-0- for the three months ended January
31, 2000 and 1999, and $9,251 for the cumulative period from inception (March
3, 1995) through January 31, 2000, respectively.
The Company paid income taxes of $-0- and $-0- for the nine months
ended January 31, 2000 and 1999, $-0- and $-0- for the three months ended
January 31, 2000 and 1999, and $14,276 for the cumulative period from
inception (March 3, 1995) through January 31, 2000, respectively.
-8-
<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 a net working capital deficit of $(67,054) at January
31, 2000. Approximately $8,000 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 nine months ended January
31, 2000 reflects cash used in operating activities of approximately
$352,000. 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 nine months ended January 31, 2000 by
approximately $352,000, 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, which is due January 31, 2001, of
approximately $861,000 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 January 31, 2000. In February 2000, HDS
repaid approximately $23,000 of the outstanding receivable balance to the
Company. In addition, the Company's management has set up a reserve of
approximately $430,000 or approximately 50% of the outstanding balance at
January 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
-9-
<PAGE>
EMBRYO DEVELOPMENT CORPORATION
(A Development Stage Company)
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Cont'd)
Liquidity and Capital Resources(Cont'd)
the Company will not be able 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.
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 was charged to operations in the
year ended April 30, 1999.
-10-
<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)
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.
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. At January 31, 2000, the
unamortized amount of this technology approximated $171,000, of which the
Company has set-up a reserve of $100,000 based upon anticipated marketability
of these assets. Upon resolution of this evaluation, the Company may need to
consider accounting for this as a discontinued segment.
The Company has not derived significant revenues since its inception in
March 1995. The total revenue earned from inception through January 31, 2000
is $1,390,537. This is a result of the sale of the C.F. Medical Devices of
approximately $656,000 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 $9,264,656 as of
January 31, 2000. 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
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
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 notification was
-11-
<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)
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.
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 $861,000
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 January 31, 2000. In February 2000, HDS repaid approximately $23,000 of
the outstanding receivable balance to the Company. In addition, the Company's
management has set up a reserve of approximately $430,000 or approximately
50% of the outstanding balance at January 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 certain assets. To the extent that the Company will
not be able 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.
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
-12-
<PAGE>
EMBRYO DEVELOPMENT CORPORATION
(A Development Stage Company)
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Cont'd)
Plan of Operation Cont'd)
reduction of expenses related to the development of the needle which
accounted for in the aggregate 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 13.4% 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.
-13-
<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.
-14-
<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.
-15-
<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, 2000
-16-
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION THAT IS EXTRACTED FROM
10-QSB FOR THE QUARTER ENDED JANUARY 31, 2000 AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> APR-30-2000
<PERIOD-END> JAN-31-2000
<CASH> 7,747
<SECURITIES> 0
<RECEIVABLES> 3,395
<ALLOWANCES> 0
<INVENTORY> 17,842
<CURRENT-ASSETS> 44,507
<PP&E> 40,213
<DEPRECIATION> 25,740
<TOTAL-ASSETS> 813,052
<CURRENT-LIABILITIES> 111,561
<BONDS> 389,000
0
600
<COMMON> 700
<OTHER-SE> 311,191
<TOTAL-LIABILITY-AND-EQUITY> 813,052
<SALES> 40,784
<TOTAL-REVENUES> 40,784
<CGS> 30,472
<TOTAL-COSTS> 30,472
<OTHER-EXPENSES> 105,714
<LOSS-PROVISION> 157,181
<INTEREST-EXPENSE> 2,394
<INCOME-PRETAX> (791,411)
<INCOME-TAX> 0
<INCOME-CONTINUING> (791,411)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (791,411)
<EPS-BASIC> (.11)
<EPS-DILUTED> (.11)
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