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 July 31, 2004
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
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(Address of principal executive offices)
10165
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(Zip Code)
(212) 808-0607
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(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 September 17, 2004
- ------------ ---------------------------------
Common Stock 6,995,000
EMBRYO DEVELOPMENT CORPORATION
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FORM 10-QSB
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QUARTERLY REPORT
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For the Three Months Ended July 31, 2004
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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.......................4-11
Item 2. Management's discussion and analysis
of financial condition and plan
of operations......................................12-17
Item 3. Controls and Procedures......................18
Part II. - Other information..........................19
Signatures............................................20
Part I - Financial Information
- ------------------------------
Item 1. Financial Statements
- ----------------------------
EMBRYO DEVELOPMENT CORPORATION
------------------------------
BALANCE SHEET
-------------
(Unaudited)
---------
July 31, 2004
-------------
ASSETS
------
CURRENT ASSETS:
Cash $ 470
------------
Total current assets 470
PROPERTY AND EQUIPMENT AT COST, net of accumulated
depreciation of $39,185 2,187
INVESTMENT IN UNCONSOLIDATED INVESTEE - at cost 39,026
------------
Total assets $ 41,683
============
LIABILITIES AND STOCKHOLDERS' DEFICIT
- -------------------------------------
CURRENT LIABILITIES:
Accounts payable and accrued expenses $ 258,366
Note and interest payable 126,251
Royalty payable 379,000
Costs of failed merger 202,500
------------
Total current liabilities 966,117
------------
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 (10,917,001)
------------
Total stockholders' deficit (924,434)
------------
Total liabilities and stockholders' deficit $ 41,683
============
-1-
EMBRYO DEVELOPMENT CORPORATION
------------------------------
STATEMENTS OF OPERATIONS
------------------------
(Unaudited)
---------
THREE MONTHS ENDED
------------------
JULY 31,
--------
2004 2003
---- ----
(INCOME) EXPENSES:
General, selling and administrative 541 32,463
Interest income - related party (2,837) (2,837)
Interest and other 693 2,549
Reserve for collectibility of
promissory notes and interest 4,067 283,752
Adjustment for collectibility
of amount due from unconsolidated
investee - (34,633)
--------- ---------
Total (Income) Expenses 2,464 281,294
--------- ---------
NET LOSS $( 2,464) $(281,294)
========= =========
BASIC AND DILUTED NET LOSS
PER COMMON SHARE $ .00 $ (.04)
========= =========
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES USED IN COMPUTING
BASIC AND DILUTED NET LOSS PER
COMMON SHARE 6,995,000 6,995,000
========= =========
-2-
EMBRYO DEVELOPMENT CORPORATION
------------------------------
STATEMENTS OF CASH FLOWS
------------------------
(Unaudited)
---------
THREE MONTHS ENDED
------------------
JULY 31,
--------
2004 2003
---- ----
OPERATING ACTIVITIES:
Net loss $( 2,464) $(281,294)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 347 528
Reserve for collectibility of
promissory notes and interest 4,067 283,752
Adjustment for collectibility of amount
due from unconsolidated investee - ( 34,633)
Changes in operating assets and liabilities:
(Increase) decrease in assets:
Interest receivable (4,067) (4,066)
Prepaid expenses and other
current assets - (6,601)
Increase (decrease) in liabilities:
Accounts payable and accrued expenses (12,383) 8,217
---------- ---------
Net cash - operating activities ( 14,500) ( 34,097)
---------- ---------
INVESTING ACTIVITIES:
Repayment of loans from unconsolidated
investee 14,876 34,115
---------- ---------
Net cash - investing activities 14,876 34,115
---------- ---------
NET INCREASE (DECREASE) IN CASH 376 18
CASH at beginning of period 94 116
---------- ---------
CASH at end of period $ 470 $ 134
========= =========
-3-
EMBRYO DEVELOPMENT CORPORATION
------------------------------
NOTES TO FINANCIAL STATEMENTS
-----------------------------
(Unaudited)
---------
THREE MONTHS ENDED JULY 31, 2004
--------------------------------
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.
To date, the Company has generated minimal sales and 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-Shielding
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.
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 $10,917,000, has a working capital
deficit of approximately $966,000, and utilized cash of approximately $15,000
for operating activities for the three months ended July 31, 2004. In addition,
the Company has not generated any revenue during the three months ended July 31,
2004 or in the last three fiscal years. 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.
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 was 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. At April 30, 2004, the Company held 11.4% of the
common stock of HDS and 10.3% of total voting shares. On May 25, 2004, Nesco
Industries, Inc. ("Nesco"), a publicly traded company listed on the Over The
Counter Bulletin Board
-4-
EMBRYO DEVELOPMENT CORPORATION
------------------------------
NOTES TO FINANCIAL STATEMENTS
-----------------------------
(Unaudited)
---------
THREE MONTHS ENDED JULY 31, 2004
--------------------------------
(Continued)
---------
1. Organization and Nature of Operations and Liquidity (Cont'd):
-----------------------------------------------------------
Exchange (OTCC BB, Symbol NESK), HDS, certain stockholders of Nesco and certain
stockholders of HDS completed the transactions contemplated by the Share
Exchange Agreement, dated as of April 29, 2004 (the "Exchange Agreement"),
whereby HDS has become a majority owned subsidiary of Nesco and, upon the
completion of the exchange of HDS securities for shares of Nesco common stock,
the holders of HDS common stock and debt will hold a majority interest of Nesco.
In addition to the exchange of HDS common stock and debt for shares of
Nesco common stock ("Nesco Common Stock"), Nesco agreed to dispose of all of its
subsidiaries, convert all of its currently outstanding preferred stock and
warrants into common stock and exchange certain of its indebtedness into common
stock.
Nesco had intended to issue shares of its common stock in exchange for the
equity securities of HDS in certain ratios as provided for in the Exchange
Agreement. However, because Nesco did not have the required number of authorized
shares of common stock to complete the exchange on this basis, it agreed to
issue shares of its newly designated Series B Preferred Stock ("Preferred
Stock") for, among others, equity and debt of HDS as described in the Exchange
Agreement. Upon filing of the Certificate of Amendment to the Certificate of
Incorporation to increase the number of shares of common stock which Nesco is
authorized to issue, each share of the Preferred Stock will be automatically
converted into shares of Nesco Common Stock.
The Company now holds the equivalent of approximately 4,837,500 shares or
5.42% of Nesco Common Stock. Nesco was engaged primarily in asbestos abatement
contracting but had ceased operations in 2003.
Management had entered into a Share Exchange Agreement in April 2004 with
Yellow Brick Road Ventures, LLC (see Note 4 ). As of the date hereof, the party
involved in the transaction has not delivered the required financing to the
Company and the Company shall take all necessary steps to terminate the
transaction as provided by that agreement. Management is in discussions with
several other 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.
-5-
EMBRYO DEVELOPMENT CORPORATION
------------------------------
NOTES TO FINANCIAL STATEMENTS
-----------------------------
(Unaudited)
---------
THREE MONTHS ENDED JULY 31, 2004
--------------------------------
(Continued)
1. Organization and Nature of Operations and Liquidity (Cont'd):
------------------------------------------------------------
The Company expects to incur minimal additional expenditures over the next
twelve (12) 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 has been able to effectively
eliminate most of its ongoing expenses, inclusive of rent and salaries. 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 twelve (12) months.
Within the next twelve (12) months, the Company will seek alternative methods to
begin generating sufficient revenues to support operations subsequent to this
period. These alternatives include the possible 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 Nesco. As of July 31, 2004, the Company held the equivalent
of 4,837,500 shares of Nesco common stock representing 5.42% of the outstanding
equity securities of Nesco. Alternatively, the Company may need to consider
liquidating its investment in Nesco to meet its cash requirements. The Company
may be prohibited from selling these securities for up to a year from May 25,
2004.
On December 12, 2003, the Company received a letter from the SEC's Division
of Investment Management inquiring as to the possible status of the Company as
an unregistered "investment company" within the meaning of the Investment
Company Act of 1940 ("40 Act"). The Company responded to this letter on January
28, 2004 explaining that the Company may have inadvertently and temporarily
fallen into the SEC's definition of an investment company because of the lack of
success with a licensing agreements program that resulted in a disproportionate
percentage of assets being represented by ownership in another company. The
Company's response continued that by August 31, 2004, it intended to enter into
some form of reorganization with a private company or re-configure its assets to
remove itself from the definition of an investment company under the '40 Act.
The share exchange agreement with Yellow Brick Road LLC described in the
Company's 10-KSB filed on August 13, 2004, was intended to satisfy this
commitment. That transaction has not been successful and is being terminated.
The Company advised the SEC on September 1, 2004 that it will continue its
-6-
EMBRYO DEVELOPMENT CORPORATION
------------------------------
NOTES TO FINANCIAL STATEMENTS
-----------------------------
(Unaudited)
---------
THREE MONTHS ENDED JULY 31, 2004
--------------------------------
(Continued)
---------
1. Organization and Nature of Operations and Liquidity (Cont'd):
------------------------------------------------------------
efforts to achieve a reconfiguration of its assets or enter into some from of
re-organization by December 31, 2004. The Company cannot give any assurance that
it will be successful but believes it will resolve the issue within that time
frame. However, a determination by the SEC that the Company is in fact an
unregistered investment company could have a material adverse effect on the
Company's business.
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.
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 July 31, 2004
and for the three month periods ended July 31, 2004 and 2003. 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, 2004. The results of operations
for the three month periods ended July 31, 2004 and 2003 are not necessarily
indicative of the results to be expected for the full year.
3. Investment in HDS and Nesco:
---------------------------
As of April 30, 2004, the Company held approximately 11.4% of the common
stock of HDS and 10.3% of total voting shares. This investment was accounted for
using the cost method. Pursuant to the share exchange agreement described in
Note 1, the Company now holds the equivalent of approximately 4,837,500 shares
or 5.42% of Nesco Common Stock. This investment has been valued at cost as there
is no readily determinable fair value for the shares at this time.
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 April 30, 2004, borrowings under the revolver
approximated $15,000 including accrued interest. During the three months ended
July 31, 2004, the balance was paid in full.
-7-
EMBRYO DEVELOPMENT CORPORATION
------------------------------
NOTES TO FINANCIAL STATEMENTS
-----------------------------
(Unaudited)
---------
THREE MONTHS ENDED JULY 31, 2004
--------------------------------
(Continued)
4. Share Exchange Agreement:
------------------------
Pursuant to a Share Exchange Agreement, as amended, initially dated as of
the 10th day of April, 2004 (the "YBR Agreement"), by and among the Company,
Yellow Brick Road Ventures LLC, a New Jersey limited liability company ( "YBR"),
and Music Asset Corp., a Delaware corporation ("MAC") that was at the time of
execution of the Agreement a wholly owned subsidiary of YBR, the Company agreed
to acquire from YBR, 100% of the outstanding stock of MAC in exchange for the
issuance by the Company of 22,473,214.29 shares of the Company's common stock,
subject to YBR providing certain financing to the Company in connection with the
exploitation of the assets of MAC, which, subsequent to the transaction would
have become a wholly owned subsidiary of the Company.
The assets of MAC included the non-exclusive rights to distribute and
exploit a music library of approximately 9,000 recordings pursuant to that
certain Asset Purchase Agreement (the "Startek Agreement") made the 7th day of
April 2004 by and between Startek Entertainment Corp., a New Jersey Corporation
("Startek"), Joe Venneri who is also President of Startek ("Venneri") and MAC.
The Startek Agreement provides that a sale of all of the shares of stock of MAC
to a third party shall not affect the enforceability of this agreement subject
to satisfying certain obligations, which the Company met, including the issuance
of 1,000,000 shares of common stock of the Company to Startek. The value of the
common shares granted ($30,000) was charged to operations in the year ended
April 30,2004 and is included in current liabilities as these shares have not
been issued as of July 31, 2004.
The Startek Agreement provided that the acquisition price was Four Million
Dollars ($4,000,000) (the "Purchase Price"), payable One Million Dollars
($1,000,000) on the date of the closing, and the balance of Three Million
Dollars ($3,000,000) in the form of a Senior Secured Obligation payable as
twenty five percent (25%) of Distributable Net Income as specifically defined.
As a condition to the sale, Mr. Venneri agreed to work for MAC and receive an
employment agreement, in connection therewith. The Company was also required to
make a non-refundable deposit of $25,000 to Startek, which was funded by a loan
from an unrelated third party. In addition, an officer of the Company loaned the
Company $5,000 in connection with additional fees related to this transaction.
These loans are payable on demand and are non-interest bearing.
-8-
EMBRYO DEVELOPMENT CORPORATION
------------------------------
NOTES TO FINANCIAL STATEMENTS
-----------------------------
(Unaudited)
---------
THREE MONTHS ENDED JULY 31, 2004
--------------------------------
(Continued)
---------
4. Share Exchange Agreement (cont'd):
---------------------------------
As of the date hereof, YBR has not satisfied its obligation to deliver
financing to the Company, and the Company has put YBR on notice that YBR is in
default of the YBR Agreement and the Company shall take all necessary steps to
terminate the transaction as provided by the YBR Agreement. At such time as the
Company terminates this transaction, the Company will issue an aggregate of
5,750,000 shares of common stock, 4,250,000 to YBR and 1,500,000 Advisor Shares
as part of the YBR Agreement. The value of the common shares to be issued
($172,500) was charged to operations in the year ended April 30, 2004 and is
included in current liabilities as these shares have not been issued as of July
31, 2004. YBR has acknowledged its obligations and agreed to cooperate in those
actions. The non refundable deposit in the amount of $25,000 has been charged to
operations in the year ended April 30, 2004.
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 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 July 31, 2004, the
Company has not been able to make the royalty payment due to cash flow
deficiencies. At July 31, 2004, the remaining unpaid balance of $379,000 is
included in current liabilities.
6. Note Payable:
------------
In conjunction with the litigation settlement as described in Note 8, the
Company recorded a long-term note payable in the amount of $75,000 which was due
on June 26, 2003 and bears interest at 7% per year. The note was not paid when
due. The balance due on the note with accrued interest of $91,251 is included in
current liabilities. No default has been declared on the note.
-9-
EMBRYO DEVELOPMENT CORPORATION
------------------------------
NOTES TO FINANCIAL STATEMENTS
-----------------------------
(Unaudited)
---------
THREE MONTHS ENDED JULY 31, 2004
--------------------------------
(Continued)
---------
7. Stockholders' Deficit:
---------------------
[A] Issuance of Securities - On June 17, 1998, the Company issued options,
to three (3) directors and an employee, to purchase 1,650,000 shares of the
Company's common stock at an exercise price equal to the market price on the
date of the grant ($.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 $300,000
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:
-----------------------------
In June 2001, definitive settlement documents were executed in connection
with a consolidated class action in which the Company was a defendant. The
settlement documents provided that the Company would pay $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 had 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. No default has been declared on the note.
-10-
EMBRYO DEVELOPMENT CORPORATION
------------------------------
NOTES TO FINANCIAL STATEMENTS
-----------------------------
(Unaudited)
---------
THREE MONTHS ENDED JULY 31, 2004
--------------------------------
(Continued)
---------
9. Supplementary Information - Statements of Cash Flows:
----------------------------------------------------
The Company paid interest of $-0-, and $892 for the three months ended July
31, 2004 and 2003, respectively.
The Company has not paid income taxes for the three months ended July 31,
2004 and 2003.
-11-
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 $(10,917,000)cumulative to
July 31, 2004. At July 31, 2004, the Company has a net working capital deficit
of approximately $(966,000) and a stockholders' deficit of approximately
$(924,000) , 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 three months ended July 31,
2004 reflects cash used in operating activities of approximately $15,000. This
use of cash is primarily attributable to general and administrative expenses
consisting of professional fees and other general expenses. The repayment of the
HDS credit line of approximately $15,000 was used to fund current operations.
Management had entered into a Share Exchange Agreement with a Yellow Brick
Road LLC in April 2004.(See Note 4). As of the date hereof, the party involved
in the transaction has not delivered the required financing to the Company and
the Company shall take all necessary steps to terminate the agreement. At such
time as the Company terminates this transaction, the Company will issue an
aggregate of 5,750,000 shares of common stock, 4,250,000 to the party to this
Share Exchange Agreement and 1,500,000 Advisor Shares as part of the agreement.
The value of the common shares to be issued ($172,500) was charged to operations
in the year ended April 30, 2004 and is included in current liabilities as these
shares have not been issued as of July 31, 2004. Management is in discussions
with several other 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.
The Company expects to incur minimal additional expenditures over the next
twelve (12) 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 has been able to effectively
eliminate most of its ongoing expenses, inclusive of rent and salaries. 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 twelve (12) months.
Within the next twelve (12) months, the Company will seek alternative methods
-12-
to begin generating sufficient revenues to support operations subsequent to this
period. These alternatives include the possible 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 Nesco. As of July 31, 2004, the Company held the equivalent
of 4,837,500 shares of Nesco common stock representing 5.42% of the outstanding
equity securities of Nesco. Alternatively, the Company may need to consider
liquidating its investment in Nesco to meet its cash requirements. The Company
may be prohibited from selling these securities for up to a year from May 25,
2004.
On December 12, 2003, the Company received a letter from the SEC's Division
of Investment Management inquiring as to the possible status of the Company as
an unregistered "investment company" within the meaning of the Investment
Company Act of 1940 ("40 Act"). The Company responded to this letter on January
28, 2004 explaining that the Company may have inadvertently and temporarily
fallen into the SEC's definition of an investment company because of the lack of
success with a licensing agreements program that resulted in a disproportionate
percentage of assets being represented by ownership in another company. The
Company's response continued that by August 31, 2004, it intended to enter into
some form of reorganization with a private company or re-configure its assets to
remove itself from the definition of an investment company under the '40 Act.
The share exchange agreement with Yellow Brick Road LLC described in the
Company's 10-KSB filed on August 13, 2004, was intended to satisfy this
commitment. That transaction has not been successful and is being terminated.
The Company advised the SEC on September 1, 2004 that it will continue its
efforts to achieve a reconfiguration of its assets or enter into some from of
re-organization by December 31, 2004. The Company cannot give any assurance that
it will be successful but believes it will resolve the issue within that time
frame. However, a determination by the SEC that the Company is in fact an
unregistered investment company could have a material adverse effect on the
Company's business.
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 previously held a 10.3% voting
share at April 30, 2004.
-13-
At July 31, 2004, 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.
On May 25, 2004, Nesco, a publicly traded company listed on the Over The
Counter Bulletin Board Exchange (OTCC BB,Symbol NESK), HDS, certain stockholders
of Nesco and certain stockholders of HDS completed the transactions contemplated
by the Exchange Agreement, dated as of April 29, 2004, whereby HDS has become a
majority owned subsidiary of Nesco and, upon the completion of the exchange of
HDS securities for shares of Nesco common stock, the holders of HDS common stock
and debt will hold a majority interest of Nesco.
In addition to the exchange of HDS common stock and debt for shares of
Nesco common stock, Nesco agreed to dispose of all of its subsidiaries, convert
all of its currently outstanding preferred stock and warrants into common stock
and exchange certain of its indebtedness into common stock.
Nesco had intended to issue shares of its common stock in exchange for the
equity securities of HDS in certain ratios as provided for in the Exchange
Agreement. However, because Nesco did not have the required number of authorized
shares of common stock to complete the exchange on this basis, it agreed to
issue shares of its newly designated Series B Preferred Stock for, among others,
equity and debt of HDS as described in the Exchange Agreement. Upon filing of
the Certificate of Amendment to the Certificate of Incorporation to increase the
number of shares of common stock which Nesco is authorized to issue, each share
of the Preferred Stock will be automatically converted into shares of Nesco
Common Stock.
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The Company now holds the equivalent of approximately 4,837,500 shares or
5.42% of Nesco Common Stock. This investment has been valued at cost as there is
no readily determinable fair value for the shares at this time. Nesco was
engaged primarily in asbestos abatement contracting but had ceased operations in
2003.
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 $10,917,000 through July 31,
2004. 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.
The net loss for the three months ended July 31, 2004 was approximately
($2,000) as compared to a net loss of approximately ($281,000) for the three
months ended July 31, 2003. There were no revenues in either of the two periods.
The decrease in the loss of approximately $279,000 for the three months ended
July 31, 2004 as compared to the three months ended July 31, 2003 is primarily
attributable to the recording of a reserve of approximately $284,000 in the
prior period 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
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The Company has effectively terminated all of its license agreements as of
January 22, 2001. 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 a 5.42% investment, in its nonconsolidated affiliate Nesco,
which holds a majority interest in HDS, which is accounted for under the cost
method. The manufacturing facility of HDS became fully operational in late 1997.
Pursuant to a Share Exchange Agreement, as amended, initially dated as of
the 10th day of April, 2004 (the "YBR Agreement"), by and among the Company,
Yellow Brick Road Ventures LLC, a New Jersey limited liability company ( "YBR"),
and Music Asset Corp., a Delaware corporation ("MAC") that was at the time of
execution of the Agreement a wholly owned subsidiary of YBR, the Company agreed
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to acquire from YBR, 100% of the outstanding stock of MAC in exchange for the
issuance by the Company of 22,473,214.29 shares of the Company's common stock,
subject to YBR providing certain financing to the Company in connection with the
exploitation of the assets of MAC, which, subsequent to the transaction would
have become a wholly owned subsidiary of the Company.
The assets of MAC included the non-exclusive rights to distribute and
exploit a music library of approximately 9,000 recordings pursuant to that
certain Asset Purchase Agreement (the "Startek Agreement") made the 7th day of
April 2004 by and between Startek Entertainment Corp., a New Jersey Corporation
("Startek"), Joe Venneri who is also President of Startek ("Venneri") and MAC.
The Startek Agreement provides that a sale of all of the shares of stock of MAC
to a third party shall not affect the enforceability of this agreement subject
to satisfying certain obligations, which the Company met, including the issuance
of 1,000,000 shares of common stock of the Company to Startek. The value of the
common shares granted ($30,000) was charged to operations in the year ended
April 30, 2004 and is included in current liabilities as these shares have not
been issued as of July 31, 2004.
The Asset Purchase Agreement provided that the acquisition price was Four
Million Dollars ($4,000,000) (the "Purchase Price"), payable One Million Dollars
($1,000,000) on the date of the closing, and the balance of Three Million
Dollars ($3,000,000) in the form of a Senior Secured Obligation payable as
twenty five percent (25%) of Distributable Net Income as specifically defined.
As a condition to the sale, Mr. Venneri agreed to work for MAC and receive an
employment agreement, in connection therewith. The Company was also required to
make a non-refundable deposit of $25,000 to Startek, which was funded by a loan
from an unrelated third party. In addition, an officer of the Company loaned the
Company $5,000 in connection with additional fees related to this transaction.
These loans are payable on demand and are non-interest bearing.
As of the date hereof, YBR has not satisfied its obligation to deliver
financing to the the Company, and Company has put YBR on notice that YBR is in
default of the YBR Agreement and Company shall take all necessary steps to
terminate the transaction as provided by the YBR agreement. At such time as the
Company terminates this transaction, the Company will issue an aggregate of
5,750,000 shares of common stock, 4,250,000 to YBR and 1,500,000 Advisor Shares
as part of the agreement. The value of the common shares to be issued ($172,500)
was charged to operations in the year ended April 30, 2004 and is included in
current liabilities as these shares have not been issued as of July 31, 2004.
YBR has acknowledged its obligations and agreed to cooperate in those actions.
The non refundable deposit in the amount of $25,000 has been charged to
operations in the year ended April 30, 2004.
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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 three (3) months. Alternatively, the Company may need to consider
liquidating its investment in Nesco to meet its cash requirements. The Company
may be prohibited from selling these securities for up to a year from May 25,
2004. No assurances can be made as to the success of these capital raising
alternatives.
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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.
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PART II- OTHER INFORMATION
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Item 1. - Legal Proceedings
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In June 2001, definitive settlement documents were executed in connection
with a consolidated class action in which the Company was a defendant. The
settlement documents provided that the Company would pay $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 had 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. No default has been declared on the note.
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: September 17, 2004
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