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, 2003
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)
305 Madison Avenue, Suite 4510
New York, New York
-------------------------------
(Address of principal executive offices)
10165
---------
(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 12, 2003
- ------------- ---------------------------------
Common Stock 6,995,000
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EMBRYO DEVELOPMENT CORPORATION
FORM 10-QSB
QUARTERLY REPORT
For the Six Months Ended October 31, 2003
------------------------------------------
TABLE OF CONTENTS
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Page to Page
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Part I - Financial Information
Item 1. Financial Statements:
Balance sheet..........................................1
Statements of operations...............................2
Statements of cash flows...............................3
Notes to financial statements........................4-9
Item 2. Management's discussion and analysis
of financial condition and plan
of operations......................................10-12
Item 3. Controls and Procedures......................13
Part II. - Other information.......................14-15
Signatures............................................16
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Part I - Financial Information
Item 1. Financial Statements
EMBRYO DEVELOPMENT CORPORATION
BALANCE SHEET
(Unaudited)
October 31, 2003
---------------------------------
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ASSETS
---------
CURRENT ASSETS:
Cash $ 99
Due from unconsolidated investee 19,129
Prepaid expenses and other current assets 15,160
------------
Total current assets 34,388
PROPERTY AND EQUIPMENT AT COST, net of accumulated
depreciation of $38,103 3,269
INVESTMENT IN UNCONSOLIDATED INVESTEE - at cost 39,026
------------
Total assets $ 76,683
============
LIABILITIES AND STOCKHOLDERS' DEFICIT
- -------------------------------------
CURRENT LIABILITIES:
Accounts payable and accrued expenses $ 215,548
Note and interest payable 87,325
Royalty payable 379,000
------------
Total current liabilities 681,873
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
Accumulated deficit (10,597,757)
--------------
Total stockholders' deficit (605,190)
--------------
Total liabilities and stockholders' deficit $ 76,683
==============
-1-
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EMBRYO DEVELOPMENT CORPORATION
STATEMENTS OF OPERATIONS
(Unaudited)
-------------------------------
SIX MONTHS ENDED THREE MONTHS ENDED
OCTOBER 31, OCTOBER 31,
2003 2002 2003 2002
------ ------ ----- -----
<s> <c> <c> <c> <c>
(INCOME) EXPENSES:
General, selling and administrative 60,786 91,538 28,323 46,108
Interest income - related party (2,837) (1,189) - -
Interest and other 5,399 (3,448) 2,850 (2,135)
Reserve for collectibility of
promissory notes and interest 283,752 - - -
Adjustment for collectibility
of amount due from unconsolidated
investee (34,633) (61,103) - (24,473)
--------- ---------- ------ --------
Total (Income) Expenses 312,467 25,798 31,173 19,500
---------- ---------- ------- --------
NET LOSS $(312,467) $(25,798) $(31,173)$(19,500)
========== ========= ======== =========
BASIC AND DILUTED NET LOSS
PER COMMON SHARE $ (.04) $ .00 $ .00 $ .00
========== ========= ======== =========
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES USED IN COMPUTING
BASIC AND DILUTED NET LOSS PER
COMMON SHARE 6,995,000 6,995,000 6,995,000 6,995,000
========= ========= ========= =========
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EMBRYO DEVELOPMENT CORPORATION
STATEMENTS OF CASH FLOWS
(Unaudited)
--------------------------------
SIX MONTHS ENDED
OCTOBER 31,
2003 2002
<s> <c> <c>
OPERATING ACTIVITIES:
Net loss $(312,467) $ (25,798)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 899 1,433
Reserve for collectibility of
promissory notes and interest 283,752 -
Adjustment for collectibility of amount
due from unconsolidated investee (34,633) ( 61,103)
Changes in operating assets and liabilities:
(Increase) decrease in assets:
Interest receivable (4,066) (8,133)
Prepaid expenses and other
current assets (3,799) (4,371)
Increase (decrease) in liabilities:
Accounts payable and accrued expenses 20,159 (24,938)
-------- --------
Net cash - operating activities (50,155) (122,910)
--------- ---------
INVESTING ACTIVITIES:
Repayment of loans from unconsolidated
investee 50,138 122,205
---------- ---------
Net cash - investing activities 50,138 122,205
---------- ----------
NET INCREASE (DECREASE) IN CASH (17) (705)
CASH at beginning of period 116 1,022
---------- -----------
CASH at end of period $ 99 $ 317
========== ===========
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EMBRYO DEVELOPMENT CORPORATION
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
SIX MONTHS ENDED OCTOBER 31, 2003
----------------------------------
1. Organization and Nature of Operations and Liquidity:
Embryo Development Corporation [the "Company"] is a Delaware Corporation
which was formed in 1995 to develop, acquire, manufacture and market various
bio-medical devices throughout the United States.
In January 1997, the Company acquired a majority interest in Hydrogel
Design Systems, Inc. ["HDS"] which 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 14.4% and is
being presented on the cost basis from then on. HDS is engaged in the
manufacture, marketing, selling and distribution of hydrogel, an aqueous
polymer-based radiation ionized medical/consumer product. The Company
presently holds 11.4% of the common stock of HDS and 10.3% of total voting
shares.
To date, the Company has generated minimal sales and has devoted its
efforts primarily to various organizational activities, including negotiating
of license agreements inclusive of the Self-Shielding Needle, developing its
business strategy, hiring management personnel, raising capital through an
initial public offering which was completed in November 1995, and undertaking
preliminary activities for the commencement of operations. All of the
license agreements for the development of various medical devices, inclusive
of the Self-Sheilding Needle, have effectively been terminated and the
Company has determined that the remaining assets it had purchased relating to
medical products have no viable marketability. As a result, management has
determined that the Company is no longer in the development stage.
The accompanying financial statements have been prepared in conformity
with accounting principles generally accepted in the United States of
America, which contemplate continuation of the Company as a going concern.
The Company has incurred cumulative losses of approximately $10,598,000, has
a working capital deficit of approximately $371,000, and utilized cash of
approximately $50,000 for operating activities for the six months ended
October 31, 2003. In addition, the Company has not generated any revenue
during the six months ended October 31, 2003 or in the last two fiscal years
ended April 30, 2003 and April 30, 2002. Management recognizes that the
Company must generate revenue to achieve profitable operations and to meet
current operating costs. Management anticipates that to meet these needs
will require raising additional funds from either the debt or equity markets.
The Company is presently exploring several alternatives, inclusive of the
possible acquisition of a new line of business, which may or may not be
related to the development of medical devices.
-4-
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EMBRYO DEVELOPMENT CORPORATION
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
SIX MONTHS ENDED OCTOBER 31, 2003
(Continued)
----------------------------------
1. Organization and Nature of Operations and Liquidity:
The Company expects to incur additional expenditures over the next six
(6) months for general and administrative expenses consisting primarily of
maintaining an office for the Company, to handle administrative and
accounting functions inclusive of required SEC reporting and to retain the
CEO whose function is to explore and evaluate future potential financial
opportunities for the Company. The Company's management does not believe
that the Company's cash on hand will be sufficient to fund the Company's
operations for the next six (6) months. However, management continues to
believe that the outstanding amount due from HDS, which was due September 30,
2002, of approximately $19,000 will be repaid during the next (6) months.
Management believes that collection of this receivable will fund the Company
for approximately (3) months. During the six months ended October 31, 2003,
HDS repaid approximately $50,000 of the outstanding receivable balance to the
Company and has continued to make additional payments subsequent to October
31, 2003. Within the next six (6) months, the Company will seek alternative
methods to begin generating sufficient revenues to support operations
subsequent to this period. These alternatives include : (a) the potential
licensing or distribution or new products or product lines, both within the
medical industry and outside the medical arena; and (b) the acquisition of an
operating entity or entities (subject to the Company's ability to raise
sufficient capital to complete such an acquisition).
In the event the Company is unable to satisfy its capital needs through
one of the transactions described above, management will pursue the sale of
some or all of the Company's assets. At this time, the primary asset is the
Company's equity position in HDS. As of October 31, 2003, the Company held
537,500 shares of HDS common stock representing 10.3% of the outstanding
equity securities of HDS. Alternatively, the Company may need to consider
liquidating its investment in HDS to meet its cash requirements.
Management is in discussions with several entities regarding such
transactions, however at this time no letter of intent or definitive
agreement has been made. If such agreements are formalized the Company will
disclose this information in the appropriate filings.
No assurance can be made as to the success of these capital raising
alternatives or as to the success of the Company's future course of
operations which are undetermined at this time. The accompanying financial
statements do not include any adjustments that might be necessary if the
Company is unable to continue as a going concern.
-5-
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EMBRYO DEVELOPMENT CORPORATION
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
SIX MONTHS ENDED OCTOBER 31, 2003
(Continued)
----------------------------------
2. New Accounting Pronouncements:
In April 2003, the FASB issued SFAS No. 149, Amendment of Statement
133 on Derivative Instruments and Hedging Activities. SFAS No. 149 amends
and clarifies financial accounting and reporting for derivative
instruments, including certain derivative instruments embedded in other
contracts and for hedging activities under SFAS No. 133. The Statements is
generally effective for contracts entered into or modified after June 30,
2003 and for hedging relationships designated after June 30, 2003 and
should be applied prospectively. The Company is currently evaluating SFAS
No. 149 and has not yet determined the impact of adopting its provisions.
The implementation of this standard is not expected to have a material
impact on the Company's financial position, results of operations or cash
flows.
In May 2003, the FASB issued SFAS No. 150, Accounting for Certain
Financial Instruments with Characteristics of Both Liabilities and Equity.
SFAS No. 150 requires certain freestanding financial instruments, such as
mandatorily redeemable preferred stock, to be measured at fair value and
classified as liabilities. The provisions of SFAS No. 150 are effective
beginning July 1, 2003. The adoption of SFAS No. 150 is not expected to
have a material impact on the Company's financial position, results of
operations or cash flows.
3. 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, 2003 and for the six and three month periods ended October 31, 2003 and
2002. 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,
2003. The results of operations for the six month periods ended October 31,
2003 and 2002 are not necessarily indicative of the results to be expected
for the full year.
-6-
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EMBRYO DEVELOPMENT CORPORATION
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
SIX MONTHS ENDED OCTOBER 31, 2003
(Continued)
----------------------------------
4. Investment in HDS:
As of October 31, 2003, the Company holds approximately 11.4% of the
common stock of HDS and 10.3% of total voting shares. This investment is
accounted for using the cost method.
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, 2003, borrowings
under the revolver approximated $19,000 including accrued interest. The
original line of credit, which was extended several times, expired on
September 30, 2002. HDS was unable to pay the outstanding balance of
approximately $156,000 on that date due to its current financial condition,
but has continued to make monthly payments subsequently. Approximately
$50,000 of the outstanding balance at April 30, 2003 was collected during
the six months ended October 31, 2003.
5. License Agreement:
Under the terms of an amended licensing agreement entered into on
January 22, 1999 pertaining to the manufacture and marketing of a medical
device, the self-shielding needle, the Company agreed to pay the licensor a
maximum royalty of $450,000 which was to be paid at a rate of $2,500 per
month. The aggregate royalty was charged to operations in the year ended
April 30, 1999. On January 22, 2001, this license agreement effectively
terminated and the total remaining royalty payments became due as the
Company could not obtain the necessary government approval within the
required timeframe since the Company had halted development of the device
due to capital constraints. Additionally, the Company could not pay the
licensor the required additional $250,000 to extend the regulatory approval
requirement. As of October 31, 2003, the Company has not been able to make
the royalty payment due to cash flow deficiencies. At October 31, 2003, the
remaining unpaid balance of $379,000 is included in current liabilities.
6. Note Payable:
In conjunction with the litigation settlement described in Note 8, the
Company recorded a long-term note in the amount of $75,000 which was due on
June 26, 2003 and bears interest at 7% per year. The Company has not paid
the note as of October 31, 2003 due to cash flow deficiencies.
-7-
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EMBRYO DEVELOPMENT CORPORATION
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
SIX MONTHS ENDED OCTOBER 31, 2003
(Continued)
----------------------------------
7. Stockholders' Deficit:
[A] Issuance of Securities - On June 17, 1998, the Company issued options,
to three (3) directors and an employee, to purchase 1,650,000 shares of the
Company's common stock at an exercise price equal to the market price on the
date of the grant ($.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.
The Company received 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 were to mature in five (5) years on July 1, 2003, with
interest at 8%, and were secured by the related securities. On July 1, 2003,
these promissory notes were extended for an additional three (3) year term
under the same terms and conditions as the original notes.
The Company has set up a reserve in the aggregate of approximately
$284,000 for the principal and interest due on these notes as their
collectibility is uncertain at this time.
[B] Net 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.
8. Commitments and Contingencies:
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.
-8-
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EMBRYO DEVELOPMENT CORPORATION
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
SIX MONTHS ENDED OCTOBER 31, 2003
(Continued)
---------------------------------
8. Commitments and Contingencies: (Cont'd)
In November 1998, it was announced that Michael Lulkin, a director and
Chairman of the Board of Directors of the Company at the time of the Company's
initial public offering, had plead guilty to, among other things, conspiracy
to commit securities fraud. The charges to which Mr. Lulkin plead were
premised on allegations that Mr. Lulkin, Sterling Foster, and others had
entered into an undisclosed agreement pursuant to which, upon conclusion of
the Company's initial public offering, they would (a) cause Sterling Foster
to release Mr. Lulkin and others who owned the Company 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 the Company
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 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.
In June 2001, definitive settlement documents were executed. The
settlement documents provide that the Company would pay the foregoing $100,000
by remitting to the class representatives $25,000 and a note in the amount of
$75,000 payable in June 2003 with interest thereon at 7% per year. The
Company has remitted the funds and note described above to the class
representatives to be held by them in accordance with the terms of the
settlement agreement and pending final court review of the settlement. In
December 2002, the court approved the settlement. The note was not paid when
due.
9. Supplementary Information - Statements of Cash Flows:
The Company paid interest of $1,600 and $1,316 for the six months ended
October 31, 2003 and 2002, respectively.
The Company did not pay income taxes for the six months ended October 31,
2003 and 2002.
-9-
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Item. 2
- -------
EMBRYO DEVELOPMENT CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
Liquidity and Capital Resources
- -------------------------------
The Company's ability to continue in the normal course of business is
dependent upon the success of future operations. The Company has had
recurring losses from operations which aggregate approximately
$(10,598,000)cumulative to October 31, 2003. At October 31, 2003, the Company
has a net working capital deficit of approximately $(371,000) and a
stockholders' deficit of approximately $(605,000) , which raise substantial
doubt about its ability to continue as a going concern. Management has
determined that the Company is no longer in the development stage as it has
ceased development of all products due to loss of licenses and product
marketability.
The Company's statement of cash flows for the six months ended October
31, 2003 reflects cash used in operating activities of approximately $50,000.
This use of cash is primarily attributable to general and administrative
expenses consisting of salaries, rent, insurance and other general expenses
.. The repayment of the HDS credit line of approximately $50,000 was used to
fund current operations.
The Company expects to incur additional expenditures over the next six
(6) months for general and administrative expenses consisting primarily of
maintaining an office for the Company, to handle administrative and accounting
functions inclusive of required SEC reporting and to retain the CEO whose
function is to explore and evaluate future potential financial opportunities
for the Company. The Company's management does not believe that the
Company's cash on hand will be sufficient to fund the Company's operations for
the next six (6) months. However, management continues to believe that the
outstanding amount due from HDS, which was due September 30, 2002, of
approximately $19,000 will be repaid during the next (6) months. Management
believes that collection of this receivable will fund the Company for
approximately three(3) months. During the six months ended October 31, 2003,
HDS repaid approximately $50,000 of the outstanding receivable balance to the
Company and has continued to make additional payments subsequent to October
31, 2003. Within the next six (6) months, the Company will seek alternative
methods to begin generating sufficient revenues to support operations
subsequent to this period. These alternatives include : (a) the potential
licensing or distribution or new products or product lines, both within the
medical industry and outside the medical arena; and (b) the acquisition of an
operating entity or entities (subject to the Company's ability to raise
sufficient capital to complete such an acquisition).
-10-
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In the event the Company is unable to satisfy its capital needs through
one of the transactions described above, management will pursue the sale of
some or all of the Company's assets. At this time, the primary asset is the
Company's equity position in Hydrogel Design Systems, Inc. As of October 31,
2003, the Company held 537,500 shares of HDS common stock representing 10.3%
of the outstanding equity securities of HDS.
Management is in discussions with several entities regarding such
transactions, however at this time no letter of intent or definitive agreement
has been made. If such agreements are formalized the Company will disclose
this information in the appropriate filings.
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 its other medical devices and
the start-up of HDS, a majority owned manufacturer of gel related products.
HDS was a majority subsidiary in which the Company presently owns a 10.3%
voting share.
At October 31, 2003, the Company no longer holds any of these (7)
licenses it had purchased from Dr. Lloyd Marks. The final license for the
development of the self-shielding needle terminated on January 22, 2001 as the
Company could not obtain the necessary government approval since the Company
had halted development of the device due to capital constraints. The Company
also could not pay the licensor the required additional $250,000, under the
terms of the amended agreement, to extend the regulatory approval requirement.
In October 1999, the Company ceased sales on its other medical devices
due to the relatively low level of sales, capital constraints and price
increases by the manufacturer. The Company has evaluated the marketability
of the licensed technology relating to these products and has determined that
these products have no viable marketability at this time. At April 30, 2000,
the unamortized amount of this technology approximated $155,000, of which the
Company has set-up a 100% reserve based upon anticipated marketability of
these products.
The Company has not derived significant revenues since its inception in
March 1995. As a result of the Company's start-up expenses and acquisition
of licenses and royalty rights for the products that were being developed, the
Company has accumulated a deficit of approximately $10,598,000 through October
31, 2003. The Company is attempting to reduce operating losses through
reductions in operating expenses until such time as it can generate, or raise
additional capital for future operations.
-11-
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The net loss for the six months ended October 31, 2003 was approximately
($312,000) as compared to a net loss of approximately ($26,000) for the six
months ended October 31, 2002. There were no revenues in either of the two
periods. The increase in the loss of approximately $286,000 for the six
months ended October 31, 2003 as compared to the six months ended October 31,
2002 is primarily attributable to a reduction in overhead costs of
approximately $31,000 in the current year consisting primarily of reductions
in salaries, rent and insurance offset by decrease in the recognition of
income for the reversal of the reserve for collectibility of the HDS credit
line of $27,000 which is lower due to the decline in the remaining outstanding
balance and the establishment of a reserve of approximately $284,000 which has
been set-up by management for the collectibility of promissory notes and
interest which were due on July 1, 2003, for the purchase of securities (See
Note 7A). Although the notes have been extended for an additional three (3)
year term, management believes that their collectibility is uncertain at this
time.
Plan of Operation
- -----------------
The Company has effectively terminated all of its license agreements as
of October 31, 2003. The Company halted plans to complete the development of
the Self-Shielding Needle, the last remaining license, due to capital
constraints. On January 22, 2001, the license agreement effectively
terminated as the Company could not obtain the necessary government approval
with the two (2) year term as required in the agreement. The Company also
determined that it could not pay the licensor an additional $250,000 to extend
the regulatory approval requirement.
The Company has retained a 10.3% 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.
No assurance can be made with respect to the viability of the Company in
the long term. The Company no longer holds any development licenses and
has determined that its current medical products have no viable marketability.
The Company is presently exploring several alternatives, inclusive of a
possible acquisition of a new line of business, which may or may not be
related to the development of medical devices or the potential licensing or
distribution of new products or product lines both within the medical industry
and outside of the medical arena. Management anticipates that to meet current
operating costs would require raising additional funds from either the debt
or equity markets in the next six (6) months. Alternatively, the Company may
need to consider liquidating its investment in HDS to meet its cash
requirements. No assurances can be made as to the success of these capital
raising alternatives.
-12-
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Item 3. Controls and Procedures
- --------------------------------
(a) Evaluation of disclosure controls and procedures. Based on his
evaluation of the Company's disclosure controls and procedures (as defined
in Rules 13a-14(c) and 15d-14(c) under the Securities Exchange Act of 1934)
as of a date within 90 days of the filing date of this Quarterly Report on
Form 10-QSB, our chief executive officer and chief financial officer has
concluded that our disclosure controls and procedures are designed to
ensure that the information we are required to disclose in the reports we
file or submit under the Exchange Act is recorded, processed, summarized
and reported within the time periods specified in the SEC's rules and forms
and are operating in an effective manner.
(b) Changes in internal controls. There were no significant changes
in our internal controls or in other factors that could significantly
affect these controls subsequent to the date of their most recent
evaluation.
-13-
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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. In June 2001, definitive settlement documents were
executed. The settlement documents provide that the Company would pay the
foregoing $100,000 by remitting to the class representatives $25,000 and a
note in the amount of $75,000 payable in June 2003 with interest thereon at
7% per year. The Company has remitted the funds and note described above to
the class representatives to be held by them in accordance with the terms of
the settlement agreement and pending final court review of the settlement.
In December 2002, the court approved the settlement. The note was not paid
when due.
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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:
Exhibit 31 - Certifications
Exhibit 32 - Certification of the Chief Executive Officer and Chief
Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
(B) Reports on Form 8-K:
None.
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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 there unto duly authorized.
EMBRYO DEVELOPMENT CORPORATION
By: /s/ Matthew L. Harriton
------------------------
Matthew L. Harriton
President and Chief
Executive Officer
Chief Financial Officer
Dated: December 12, 2003
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