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, 2006
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 Exchange Act during the preceding 12
months and (2) has been subject to such filing requirements for the past 90
days. Yes [X] No [ ]
Indicate by check mark whether the Registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes [X] No[ ]
State the number of shares outstanding of each of the Registrant's classes of
common equity, as of the latest practicable date:
Class Outstanding at April 10. 2006
----- -----------------------------
Common Stock 7,995,000
Transitional Small Business Disclosure format: Yes [ ] No [X}
EMBRYO DEVELOPMENT CORPORATION
TABLE OF CONTENTS
Page
Part I - Financial Information
Item 1. Financial Statements:
Condensed Balance Sheet.............................................1
Condensed Statements of Operations..................................2
Condensed Statements of Cash Flows..................................3
Notes to Condensed Financial Statements..........................4-10
Item 2. Management's Discussion and Analysis
or Plan of Operations.........................................11-13
Item 3. Controls and Procedures................................ ..13
Part II. - Other Information............................................... 14
Signatures..................................................................15
Part I - FINANCIAL INFORMATION
- ------------------------------
Item 1. Financial Statements
EMBRYO DEVELOPMENT CORPORATION
CONDENSED BALANCE SHEET
January 31, 2006
(Unaudited)
ASSETS
CURRENT ASSETS - Cash $ 5,000
-------------
OTHER ASSETS - Deposit on asset acquisition 55,000
-------------
Total Assets $ 60,000
=============
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES:
Accounts payable and accrued expenses $ 444,000
Notes and interest payable 119,000
Convertible bridge loans and interest payable 824,000
-------------
Total Current Liabilities 1,387,000
-------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' DEFICIT:
Preferred stock, $.0001 par value; total authorized
15,000,000 shares, 6,000,000 Series A, 3,000,000 Series B;
120,000 Series B issued and outstanding, liquidation
preference $4,800 -
Common stock, $.0001 par value; authorized 30,000,000
shares; 7,995,000 issued and outstanding 1,000
Additional paid-in-capital 10,635,000
Accumulated deficit (11,963,000)
-------------
Total Stockholders' Deficit (1,327,000)
-------------
Total Liabilities and Stockholders' Deficit $ 60,000
=============
See accompanying Notes
1
EMBRYO DEVELOPMENT CORPORATION
CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
Nine Months ended Three months ended
January 31, January 31,
------------------ --------------------
2006 2005 2006 2005
---- ---- ---- ----
OPERATING EXPENSES:
General and administrative $ 165,000 $ 52,000 $ 56,000 $ 24,000
OTHER (INCOME) EXPENSES:
Interest income - related party - (9,000) - (3,000)
Interest and other 52,000 8,000 16,000 6,000
Amortization of debt discount 89,000 69,000 1,000 52,000
Amortization of financing costs 61,000 25,000 4,000 25,000
Merger expenses - 33,000 - 33,000
Loss on extinguishment of debt - 187,000 - -
Gain on forgiveness of debt-royalty - (354,000) - -
Provision for loss on investment in unconsolidated investee 39,000 - - -
Provision for loss on promissory notes and interest - 12,000 - 4,000
Cost of failed asset acquisition 138,000 - 4,000 -
---------- ---------- ---------- ----------
Total Other (Income) Expenses 379,000 ( 29,000) 25,000 117,000
---------- ---------- ---------- ----------
NET LOSS ($544,000) ($ 23,000) $ (81,000) ($ 141,000)
========== ========== ========== ==========
BASIC AND DILUTED NET LOSS
PER COMMON SHARE $ (0.07) $ (0.00) $ (0.01) $ (0.01)
========== ========== ========== ==========
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES USED IN COMPUTING
BASIC AND DILUTED NET LOSS
PER COMMON SHARE 7,995,000 7,995,000 7,995,000 7,995,000
========== ========== ========== ==========
See accompanying Notes
2
EMBRYO DEVELOPMENT CORPORATION
CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine months ended
January 31,
------------------
2006 2005
---- ----
OPERATING ACTIVITIES:
Net loss $(544,000) ($ 23,000)
Adjustments to reconcile net loss
to net cash used in operating activities:
Depreciation 1,000 1,000
Amortization of debt discount 89,000 69,000
Amortization of financing costs 61,000 25,000
Loss on extinguishment of debt - 187,000
Gain on forgiveness of debt-royalty - (354,000)
Provision for loss on investment in unconsolidated investee 39,000 -
Write-off of deferred asset acquisition costs 38,000 -
Provision for loss on promissory notes and interest - 12,000
Changes in operating assets and liabilities, (Increase) Decrease:
Interest receivable - (19,000)
Accounts payable and accrued expenses (including interest) 245,000 17,000)
Royalty payable - (25,000)
---------- ----------
Net cash used in operating activities ( 71,000) (144,000)
---------- ----------
INVESTING ACTIVITIES:
Loan receivable - merger candidate - (300,000)
Repayment of loans from unconsolidated investee - 15,000
Payment of asset acquisition deposit (100,000) -
Return of asset acquisition deposit 45,000 -
---------- ----------
Net cash used in investing activities ( 55,000) (285,000)
---------- ----------
FINANCING ACTIVITIES:
Purchase and retirement of Series A preferred stock - (20,000)
Net proceeds from convertible bridge loan - 636,000
Proceeds from advances on convertible bridge loan -
Deferred financing costs (5,000) -
---------- ----------
Net cash provided by (used in) financing activities (5,000) 616,000
---------- ----------
NET INCREASE (DECREASE) IN CASH (131,000) 187,000
CASH at beginning of period 136,000 -
---------- ----------
CASH at end of period $ 5,000 $187,000
========== ==========
See accompanying Notes
3
EMBRYO DEVELOPMENT CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS (unaudited)
1. Organization and Nature of Operations; Liquidity and Going Concern:
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, 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 were effectively terminated in 2001 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.
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 May 25, 2004, the Company held 11.4% of the common
stock of HDS and 10.3% of total voting shares. On that date, Nesco Industries,
Inc. ("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 Share Exchange Agreement, dated as of April 29, 2004 (the "Exchange
Agreement"), whereby HDS became a majority owned subsidiary of Nesco and the
holders of HDS common stock and debt hold a majority interest of Nesco. Prior to
the merger, Nesco was engaged primarily in asbestos abatement contracting but
had ceased these operations in 2003.
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 issued 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
proper notification of shareholders and 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 as well as disposition of other matters
including the filing of delinquent SEC filings by Nesco, each share of the
Preferred Stock would be automatically converted into shares of Nesco Common
Stock.
As a result of the Company exchanging the HDS shares it owned for Nesco
shares, the Company now holds the equivalent of approximately 4,837,500 shares
or 4.41% of Nesco Common Stock as of January 31, 2006.
On September 9, 2004, the Company entered into an investment banking
agreement with a third party pursuant to which it obtained bridge financing of
$750,000 ($637,000 net of financing costs) in connection with a proposed
acquisition transaction (see Notes 3 and 6). The Company made advances in the
aggregate of $300,000 to the possible merger candidate under the terms of a
4
EMBRYO DEVELOPMENT CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS (unaudited)
secured promissory note dated September 28, 2004 (see Note 3). On March 30,
2005, the Company terminated its efforts to complete a definitive transaction.
This secured note became due, as amended, in June 2005 but remains unpaid, see
Note 3.
On April 22, 2005, the Company entered into an investment banking agreement
with a third party to obtain bridge financing of $42,000,000 in connection with
a proposed asset purchase transaction. On June 6, 2005, the Company deposited
$100,000 into an escrow account, which amount was subsequently transferred to
the prospective seller. A principal of the investment banking firm has
personally guaranteed repayment to us of the escrow deposit. As of January 31,
2006, the principal of the investment banking firm repaid $45,000 of the deposit
to the Company and $55,00 remains to be repaid, see Note 5.
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 no
revenues and at January 31, 2006, it has incurred cumulative losses of
approximately $11,963,000, has a working capital deficit of approximately
$1,382,000 and has used cash of approximately $71,000 to fund operations for the
nine months ended January 31, 2006. The Company has $5,000 cash on hand at
January 31, 2006 and expects to incur 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 for legal and professional
expenses in connection with such SEC reporting and the settlement of obligations
so that the Company may pursue a possible acquisition or other form of
reorganization. These factors, among others, raise substantial doubt about the
Company's ability to continue as a going concern.
The Company's plan to deal with this uncertainty has been to effectively
eliminate or defer most of its ongoing expenses, inclusive of rent and salaries
while it continues to pursue an acquisition or other strategic transaction.
Although expenses are being accrued, they are not currently being paid. The
Company's management believes that the repayment of the monies advanced as an
escrow deposit as described above, if necessary, and the possible collection of
a promissory note (see Note 3) may be available to fund the Company's
operations. However realization of the Company's plans, including the collection
of such amounts receivable, is uncertain. As such, the Company may be unable to
continue operations.
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 was not successful and was terminated in September
2004. 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 had entered into an investment
banking agreement (see Note 5) and was in discussions with a merger candidate
(see Note 3) in order to resolve this issue. This effort was terminated on March
30, 2005. The Company entered into an investment banking agreement on April 22,
2005 in connection with a potential acquisition transaction. Although
discussions in connection with this transaction have terminated, and the Company
cannot give any assurance that it will be successful in entering into a merger
5
EMBRYO DEVELOPMENT CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS (unaudited)
or other reorganization, the Company is seeking to resolve the investment
company issue in the near future. 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.
In the event the Company is unable to satisfy its capital needs or settle
its current obligations to pursue an acquisition or other form or
reorganization, management may pursue the sale of some or all of the Company's
assets or seek additional financing. The primary asset has been the Company's
equity position in Nesco. As of January 31, 2006, the Company held the
equivalent of 4,837,500 shares of Nesco common stock representing 4.41% of the
outstanding equity securities of Nesco. Although these shares may be sold one
year from the exchange date (after May 25, 2005), the Company does not have
actual common shares at this time; as noted above, Nesco issued Series B
Preferred shares which will be automatically converted to common shares at such
time that authorization is received to issue these shares. Pursuant to SFAS No.
115, Accounting for Certain Investments in Debt and Equity Securities and FSP
FAS 115-1 and FAS 124-1, The Meaning of Other Than-Temporary Impairment and Its
Application to Certain Investments, the Company has recorded a 100% valuation
allowance on this investment in light of Nesco's deteriorated financial
condition as reflected in its public filings (see Note 4).
No assurance can be made as to the success of a future acquisition
transaction or other type of reorganization 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 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 January 31, 2006 and for
the nine and three month periods ended January 31, 2006 and 2005. 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, 2005. The results of operations
for the nine month period ended January 31, 2006 are not necessarily indicative
of the results to be expected for the full year.
3. Loan Receivable - Failed Merger Candidate:
On September 28, 2004, the Company, under the terms of a secured promissory
note, made advances of $300,000 to a possible acquisition candidate. The note,
as amended, bears interest at 8% and was due on the earlier of (a) one year or
(b) on April 15, 2005 if a definitive agreement between the parties was not
entered into by March 15, 2005. On March 30, 2005, the Company terminated its
efforts to complete a definitive transaction with this party due to the
inability of the candidate to cure defaults on certain of its outstanding
indebtedness owing to a third party. On April 11, 2005, the Company agreed to
extend the due date of the note to June 15, 2005 subject to the Company
receiving a principal payment of $50,000, which was subsequently received on
April 19, 2005. This note is secured by the assets of the borrower. Through
January 31, 2006, the note has not been paid and the Company continues to pursue
collection. At January 31, 2006, the amount due on the note and accrued interest
aggregates approximately $280,000. The Company considers collection uncertain
and has provided a valuation allowance to write the balance down to zero in the
financial statements. In February and March 2006, the Company received an
aggregate $10,000 in payments of this note.
6
EMBRYO DEVELOPMENT CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS (unaudited)
4. Investment in Nesco
As of January 31, 2006, pursuant to the share exchange agreement described
in Note 1, the Company now holds the equivalent of approximately 4,837,500
shares or 4.41% of Nesco Common Stock. This investment had been valued at cost
which approximated $39,000. However, pursuant to SFAS No. 115, Accounting for
Certain Investments in Debt and Equity Securities and FSP FAS 115-1 and FAS
124-1, The Meaning of Other Than-Temporary Impairment and Its Application to
Certain Investments, the Company established a 100% valuation allowance for this
investment in light of Nesco's deteriorated financial condition as reflected in
its public filings.
5. Investment Banking Agreement:
On April 22, 2005, the Company entered into an investment banking agreement
with a third party to obtain bridge financing of $42,000,000 in connection with
a proposed asset purchase transaction whereby the Company would acquire the
assets of a nutraceutical company and negotiated agreements to complete that
transaction which was to close no later than May 25, 2005. On June 6, 2005, the
Company deposited $100,000 into an escrow account as a good faith deposit in
order to extend the closing date for the transaction until June 10, 2005. A
principal of the investment banking firm has personally guaranteed repayment of
the escrow deposit. The transaction did not close by that date and the $100,000
deposit was transferred out of escrow and delivered to the prospective seller.
We have terminated discussions regarding this transaction. The Company has not
made a demand under the personal guarantee at this time for reimbursement of the
deposit. As of January 31, 2006, the principal of the investment banking firm
repaid $45,000 of the deposit to the Company. An additional $10,000 was repaid
in April 2006. The Company had incurred additional costs in connection with this
asset acquisition of approximately $138,000 which are included in operations as
costs of failed asset acquisition at January 31, 2006.
6. Convertible Bridge Loans:
On September 9, 2004, the Company entered into an investment banking
agreement for advisory services and assistance with an acquisition transaction.
Under the terms of the agreement, as amended, bridge financing was provided to
the Company of $750,000 ($637,000 net of financing costs), by accredited
investors, in two tranches as described below. The Company made advances in the
aggregate of $300,000 to a possible merger candidate under the terms of a
secured promissory note dated September 28, 2004, which note remains unpaid (see
Note 3). On March 30, 2005, the Company terminated its efforts to complete a
definitive acquisition transaction due to the inability of the targeted
candidate to cure defaults on certain of its outstanding indebtedness owing to a
third party.
On September 29, 2004, the Company received the first tranche of bridge
financing in connection with an investment banking agreement (see Note 5). The
Company received gross proceeds of $200,000 and entered into a Note Purchase
Agreement with an investor. Pursuant to the agreement, the investor purchased
from the Company a $200,000 one year 8% convertible promissory note. The note
shall convert on a mandatory basis into 20,000,000 shares of common stock if any
time prior to maturity the Company consolidates with, or merges into, another
corporation or entity, or effects any other corporate reorganization resulting
in a change in control. The lender may exercise a discretionary conversion at
any time prior to maturity. The value of the beneficial conversion feature of
the convertible debt was in excess of the aggregate proceeds received which
resulted in the total proceeds of $200,000 being recorded as an equity
component. For the nine months ended January 31, 2006, the amortization of debt
discount was approximately $83,000. The balance due on the note at January 31,
2006 is approximately $221,000 consisting of approximately $200,000 in principal
and $21,000 in accrued interest. Interest expense for the nine months ended
January 31, 2006 and 2005 was approximately $12,000 and $6,000, respectively. At
7
EMBRYO DEVELOPMENT CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS (unaudited)
January 31, 2006, the note had not been converted. On September 8, 2005, the
lender agreed to extend the maturity date for an additional six months to March
29, 2006 with the same terms and conditions as the original note. While the
Company is attempting to negotiate a further extension of the note, these
convertible bridge notes are currently in default and there is no assurance that
the Company will be successful in its efforts to negotiate an extension.
On November 23, 2004, the Company received the second tranche of bridge
financing in connection with the investment banking agreement (see Note 5). The
Company entered into a Securities Purchase Agreement whereby the Company offered
for sale up to $750,000 of its one year 8% senior secured convertible promissory
notes. The purchasers of the notes would also receive five year warrants to
purchase an aggregate of up to 750,000 shares of the Company's common stock at
an exercise price of $.10 per share (1 warrant for each $1 of principal amount
of note). On November 24, 2004 the offering was completed and the Company issued
notes in the principal amount of $550,000 and warrants to purchase 550,000
shares of common stock in connection with these notes. Approximately $11,000 of
the proceeds were attributed to the fair value of the warrants. This amount was
recorded as an equity component. The remaining balance of $539,000 was recorded
as long-term debt. For the nine months ended January 31, 2006 the amortization
of debt discount was approximately $8,000. The notes are convertible into common
stock on a mandatory basis if the Company consolidates with, or merges into,
another corporation or entity, or effects any other corporate reorganization
resulting in a change in control within six months from the date of the notes,
or if any time prior to the maturity date the Company consummates a private
equity financing or series of such financings in which the Company receives
gross proceeds of at last $3 million at a pre-money valuation of at least $20
million. The notes shall convert at a per share price equal to a 25% discount to
the per share price of the financing shares sold to investors in the financing.
The lenders may exercise a discretionary conversion during the last 120 days
prior to the maturity date of the notes at a conversion price of $.10 per share
or at any time prior to maturity if the Company consummates a financing but it
is at a pre-money valuation of less than $20 million dollars at a per share
price equal to a 25% discount to the per share price of financing shares
actually sold to investors in such financing. The balance due on the notes at
January 31, 2006 is approximately $603,000 consisting of approximately $550,000
in principal, $53,000 in accrued interest. Interest expense for the nine months
ended January 31, 2006 and 2005 was approximately $34,000 and $8,000,
respectively. At January 31, 2006, the notes had not been converted. On December
6, 2005, Ocean Drive Holdings, LLC, acting as appointed agent of the lenders as
per the loan documents, agreed to extend the maturity date for an additional
year to November 23, 2006 with the same terms and conditions as the original
note.
The Company paid approximately $117,000 in financing fees associated with
these transactions which are being amortized over the life of the loans. For the
nine months ended January 31, 2006, amortization approximated $61,000. At
January 31, 2006, the financing fees had been fully amortized.
7. Notes Payable:
In conjunction with a June 2001 litigation settlement 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. No default
has been declared on the note. The balance due on the note together with accrued
interest ($99,000) is included in current liabilities.
In conjunction with a failed merger in the fiscal year ended April 30,
2005, an unrelated third party loaned the Company $30,000, of which $20,000 is
outstanding at January 31, 2006. The loan is payable on demand and is
non-interest bearing.
8
EMBRYO DEVELOPMENT CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS (unaudited)
8. Stockholders' Deficit:
Issuance of Securities - On June 17, 1998, the Company issued options, to
three (3) directors and an employee, to purchase 1,650,000 shares of the
Company's common stock at an exercise price equal to the market price on the
date of the grant ($.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 $320,000 for the principal and
interest due on these notes as their collectibility is uncertain at this time.
Net Income (Loss) Per Share -Basic loss per share excludes dilution and is
calculated by dividing the net loss attributable to common shareholders by the
weighted average number of common shares outstanding for the period. Diluted
loss per share reflects the potential dilution that could occur if securities or
other contracts to issue common stock were exercised or converted into common
stock and resulted in the issuance of common stock. Because the Company incurred
a net loss, diluted net loss per share was the same as basic net loss per share
for the nine months ended January 31, 2006, since the effect of any potentially
dilutive securities would be antidilutive.
The income (loss) per common share for the nine and three months ended
January 31, 2006 includes the current outstanding common shares in the aggregate
of 7,995,000 shares. Outstanding options and warrants are not considered when
their effect is antidilutive.
During the fiscal year ended April 30, 2005, the Company issued an
aggregate of 120,000 shares of Series B preferred stock which are automatically
convertible to common stock at 100 shares of common for each share of Preferred
B stock. These shares will convert to 12,000,000 shares of common stock upon the
filing of a Certificate of Amendment to the Certificate of Incorporation to
increase the number of shares of common stock the Company is authorized to
issue.
9. 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. (see
Note 7).
10. Supplementary Information - Statements of Cash Flows:
During the nine months ended January 31, 2005, the Company exchanged an
aggregate of approximately $63,000 in debt for equity. During the nine months
ended January 31, 2005, the Company issued common stock valued at approximately
9
EMBRYO DEVELOPMENT CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS (unaudited)
$173,000. This amount was previously included on the balance sheet in costs of
failed merger at April 30, 2004.
The Company has not paid interest for the nine months ended January 31,
2006 and 2005. The Company has not paid income taxes for the nine months ended
January 31, 2006 and 2005.
10
Item 2. Management's Discussion and Analysis or Plan of Operations
Factors and Risks That May Affect Future Results
Some of the statements contained in this report discuss our plans and
strategies for our business or state other forward-looking statements, as this
term is defined in the Private Securities Litigation Reform Act of 1995.
Statements that are not statements of historical facts may be deemed to be
forward- looking statements. The words "anticipate," "believe," "estimate,"
"expect," "plan," "intend," "should," "seek," "will," and similar expressions
are intended to identify these forward-looking statements, but are not the
exclusive means of identifying them. These forward-looking statements reflect
the current views of our management. However, various risks, uncertainties and
contingencies could cause our actual results, performance or achievements to
differ materially from those expressed in, or implied by, these statements.
Some of these many risks include:
* we may issue shares of our capital stock or debt securities to raise
capital and/or to complete a business combination, which would reduce
the equity interest of our stockholders and likely cause a change in
control of our ownership,
* because of our limited resources and the significant competition for
business combination opportunities, we may not be able to consummate
any viable business combination,
* we may be unable to obtain additional financing that may be needed to
fund the operations and/or growth of the target business,
* we have no full time employees and are substantially dependent on the
efforts of part-time management and members of the Board of Directors,
currently working without collecting cash compensation,
* we have incurred significant net losses in the past, and are in
default under certain financial obligations, and unless we receive
additional financing, we may be forced to cease all operations and
liquidate our company and
For a more complete listing and description of these and other risks that
the Company faces please see our filings with the Securities and Exchange
Commission including our Annual Report on Form 10-KSB for the year ended April
30, 2005. We assume no obligation to update any forward- looking statements
contained in this report, whether as a result of new information, future events
or otherwise. Any investment in our common stock involves a high degree of risk.
Overview and Background
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,
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 have
effectively been terminated in 2001 and the Company has determined that the
remaining assets it had purchased relating to medical products, due to the low
level of sales, capital constraint and price increases by the manufacturer, have
no viable marketability.
In January 1997, the Company acquired a majority interest in Hydrogel
Design Systems, Inc. ["HDS"] which was a consolidated subsidiary of the Company
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until January 21, 1998 when the Company's ownership of HDS dropped to 45.6%. In
January 1999, the Company's share of HDS dropped further to 14.4% and this
investment is accounted for at cost. The Company's investment in Nesco is
currently less than 5% and Nesco is having financial difficulties and is
delinquent in its reporting to the SEC. HDS is engaged in the manufacture,
marketing, selling and distribution of hydrogel, an aqueous polymer-based
radiation ionized medical/consumer product. The Company's investment in Nesco
has been written down to zero based on the financial and business difficulties
experienced by Nesco and the illiquidity of our ownership.
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 HDS. The Company's
response indicated that, among other things, 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. While the Company has not been able to complete a transaction in
the timeframe stated, the Company is seeking to resolve the investment company
issue. 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.
In 2004 we raised gross proceeds of $750,000 in connection with a proposed
acquisition transaction. The Company made advances of $300,000 to the
acquisition target under a secured promissory note (the "Note"). In 2005, the
Company terminated its efforts to complete a definitive transaction with this
party. This note remains payable but has not been paid. The Company has written
the note down to zero but continues to pursue collection.
In 2005 the Company entered into an investment banking agreement intended
to raise $42,000,000 in connection with a proposed asset purchase transaction.
In connection therewith, the Company deposited $100,000 (the "Deposit") into an
escrow account. A principal of the investment banking firm guaranteed repayment
of the $100,000. The deposit has been transferred out of escrow to the
prospective seller. To date, the principal of the investment banking firm has
repaid $45,000 of the deposit to the Company and approximately $55,000 remains
to be repaid.
The Company currently has only one employee, its Chief Executive officer,
who devotes part time to the Company's affairs.
Additional background and historical information can be found in Note 1 to
the financial statements and in the Company's other reports to the Securities
and Exchange Commission including its Annual Report on Form 10-KSB for the
fiscal year ended April 30, 2005.
Plan of Operation
The Company's current activities are limited and they are focused on
pursuing an acquisition or other form of reorganization where the Company's
status as a publicly reporting entity can be combined with an operating
business. Such transaction would most likely result in a change in control of
the Company. While it pursues such opportunities, the Company's principal other
activity would be maintaining its public reporting status and corporate
existence.
At January 31, 2006, the Company had $5,000 in cash and a working capital
deficit of $1,382,000. For the nine months ended January 31, 2006, the Company
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used $71,000 in cash in operations and incurred a net loss of $544,000. The
Company's accumulated deficit at January 31, 2006 was $11,963,000. Further,
certain convertible bridge notes and related interest became due and payable on
March 29, 2006, were not paid and are now in default. As such, the Company does
not have the financial resources to continue for the next twelve months.
The Company plans to fund its operations in the short term by continuing to
request refund of the remaining $55,000 Deposit discussed above and continuing
to pursue collection of the $300,000 Note discussed above. In February and March
2006, the Company received payments aggregating $10,000 under the $300,000 Note.
In April 2006, the Company received an additional $10,000 under the Deposit
discussed above. While the Company has successfully collected an aggregate
$55,000 of the Deposit in recent months and $10,000 on the Note (which note has
been written down to zero due to the uncertainty of collection), there is no
assurance that further collections on the Deposit or the Note will be made.
Further, since significant debt is currently in default, the Company may be
forced to cease operations at any time.
Critical Accounting Principles -
We have identified critical accounting principles that affect our condensed
financial statements by considering accounting policies that involve the most
complex or subjective decisions or assessments as well as considering newly
adopted principals. They are:
Going Concern Consideration - Our condensed financial statements have been
prepared assuming we are a "going concern". Our planned activities are dependant
on collection of certain receivables until additional capital can be raised or a
strategic business arrangement consummated. There can be no assurance that our
plans to address this need can be realized. As such, we may be unable to
continue operations as a going concern. No adjustment has been made in the
condensed financial statements which could result should we be unable to
continue as a going concern.
Item 3. Controls and Procedures
Disclosure Controls and Procedures. We carried out an evaluation, under the
supervision and with the participation of the our management, including our
Chief Executive Officer and Chief Financial Officer, who is the same person, of
the effectiveness of the design and operation of our disclosure controls and
procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act
of 1934, as amended (the "Exchange Act")). Based on such evaluation, our Chief
Executive Officer and Chief Financial Officer concluded that, as of the end of
the period, our disclosure controls and procedures contained a material weakness
in that, due to financial constraints, we have been unable to file our periodic
reports under the Exchange Act on time.
Internal Controls over Financial Reporting. There have not been any changes
in our internal control over financial reporting (as defined in Rules 13a-15(f)
and 15d-15(f) under the Exchange Act) that during the fiscal quarter to which
this report relates, have materially affected, or are reasonably likely to
affect, our internal control over financial reporting.
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PART II- OTHER INFORMATION
Item 1. - Legal Proceedings
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. The
balance due on the note with accrued interest of $99,100 is included in current
liabilities.
Item 2. - Unregistered Sales of Equity Securities and Use of Proceeds.
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.
Exhibits:
--------
Exhibit 31 - Certification of Principal Executive Officer and Principal
Financial Officer pursuant to Exchange Act Rule 13a-14(a), as adopted pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002
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.
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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: April 20, 2006