-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, G4t9lNOG4rPhTM6psFh8M8zgL8rNTeCFhNw+23tOzlYxOljPrUaNJouxc4zgbI+M uCOs2ufhLvnmKgGr6y74bQ== 0000811779-98-000019.txt : 19981019 0000811779-98-000019.hdr.sgml : 19981019 ACCESSION NUMBER: 0000811779-98-000019 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980831 FILED AS OF DATE: 19981016 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: EXTEN INDUSTRIES INC CENTRAL INDEX KEY: 0000811779 STANDARD INDUSTRIAL CLASSIFICATION: FINANCE SERVICES [6199] IRS NUMBER: 521412493 STATE OF INCORPORATION: DE FISCAL YEAR END: 1130 FILING VALUES: FORM TYPE: 10QSB SEC ACT: SEC FILE NUMBER: 001-10221 FILM NUMBER: 98726689 BUSINESS ADDRESS: STREET 1: 9625 BLACK MOUNTAIN RD STE 218 CITY: SAN DIEGO STATE: CA ZIP: 92126 BUSINESS PHONE: 6195789784 MAIL ADDRESS: STREET 1: 9625 BLACK MOUNTAIN RD STE 218 CITY: SAN DIEGO STATE: CA ZIP: 92126 FORMER COMPANY: FORMER CONFORMED NAME: EXTEN VENTURES INC DATE OF NAME CHANGE: 19910923 10QSB 1 U. S. SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 FORM 10-QSB [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE ACT OF 1934 For the quarterly period ended August 31, 1998. [ ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE ACT OF 1934 For the transition period from ________ to ________ . Commission File Number: 0-16354 EXTEN INDUSTRIES, INC. (Exact name of registrant as specified in its charter) Delaware 52-1412493 (State or other jurisdiction (IRS Employer of incorporation or organization) identification No.) 9625 Black Mountain Road, Suite 218 San Diego, California, 92126 (Address of principal executive offices) (619) 578-9784 (Issuer's telephone number) Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] State the number of shares outstanding of each of the issuer's classes of common equity, as of the latest practicable date: 43,594,192 as of September 30, 1998 Common Stock, $0.01 Par Value Exten Industries, Inc. Form 10-QSB Table of Contents Page Part I: Financial Information 2 Item 1: Condensed Consolidated Balance Sheets as of August 31, 1998 (unaudited) and November 30, 1997 2 Condensed Consolidated Statement of Operations (unaudited) for the Nine Months Ended August 31, 1998 and August 31, 1997 3 Condensed Consolidated Statement of Operations (unaudited) for the Three Months Ended August 31, 1998 and August 31, 1997 4 Condensed Consolidated Statement of Cash Flows (unaudited) for the Nine Months Ended August 31, 1998 and August 31, 1997 5 Notes to Condensed Consolidated Financial Statements (unaudited) 6 Item 1a: Factors Which May Affect Future Results 10 Item 2: Management's Discussion and Analysis of Financial Condition and Results of Operations 13 Overview 14 Results of Operations 16 Liquidity and Capital Resources 17 Part II: Other Information 19 Item 1: Legal Proceedings 19 Item 2: Changes in Securities 19 Item 3: Defaults Upon Senior Securities 19 Item 4: Submission of Matters to a Vote of Security Holders 19 Item 5: Other Information 19 Item 6(a): Exhibits 19 Item 6(b): Reports on Form 8-K 19 SIGNATURES 19 EXTEN INDUSTRIES, INC. PART I - FINANCIAL INFORMATION CONDENSED CONSOLIDATED BALANCE SHEETS AS OF August 31, 1998 AND November 30, 1997 August 31, November 30, 1998 1997 (unaudited) ----------- ----------- ASSETS CURRENT ASSETS-Cash (including restricted cash of $0 and $17,601, respectively) $ 7,236 $ 22,915 PROPERTY AND EQUIPMENT, net 1,742 - PREPAID EXPENSES, net - - OTHER ASSETS Real Estate Held For Sale 47,200 47,200 Patent Costs and other 41,666 37,226 ----------- ----------- TOTAL OTHER ASSETS 88,866 84,426 ----------- ----------- $ 97,844 $ 107,341 =========== =========== LIABILITIES AND STOCKHOLDER'S EQUITY (DEFICIENCY) CURRENT LIABILITIES Accounts Payable $ 64,776 $ 61,776 Accrued Expenses 419,763 275,817 Refunds Payable to Stock Subscribers - 17,601 Notes Payable, In Default 160,072 160,072 ----------- ----------- TOTAL CURRENT LIABILITIES 644,611 515,266 ----------- ----------- ESTIMATED LIABILITY UNDER SETTLEMENT AGREEMENT 30,000 30,000 NOTES PAYABLE 401,500 313,545 ----------- ----------- TOTAL LIABILITIES 1,076,111 858,811 ----------- ----------- STOCKHOLDERS DEFICIT Common Stock, $0.01 par value; 50,000,000 shares authorized; 43,594,182 & 37,136,642 issued & outstanding, respectively 435,942 371,366 Receivable from Stock Sale (281,821) (140,040) Additional Paid-in Capital 9,358,069 9,106,023 Accumulated Deficit (10,490,457) (10,088,819) ----------- ----------- TOTAL STOCKHOLDERS' DEFICIENCY (978,267) (751,470) ----------- ----------- $ 97,844 $ 107,341 =========== =========== Footnote: The accompanying notes are integral part of these financial statements EXTEN INDUSTRIES, INC. PART I - FINANCIAL INFORMATION CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS (UNAUDITED) AS OF August 31, 1998 AND 1997 Nine Months Ended August 31, 1998 1997 -------- -------- REVENUE Sales $ - $ - Royalties - - -------- -------- Total Revenue - - -------- -------- OPERATING EXPENSES General & Administrative 201,309 245,103 Consulting Fee Expense 109,245 45,350 Research and Development 50,000 - Depreciation and Amortization - 35,214 Interest, net 30,282 14,312 -------- -------- Total Operating Expenses 400,836 339,979 -------- -------- Net Operating Loss Before Extraordinary Item (400,836) (339,979) Extraordinary Item - Gain on Extinguishment of Debt - 325,142 -------- -------- Net Operating Income (Loss) Before Income Taxes (400,836) (14,837) Provision for Income Taxes 800 800 -------- -------- Net Income (Loss) $(401,636) $ (15,637) ======== ======== Net Operating Loss Before Extraordinary Item per Average Common Share $ ( 0.01) $ (0.01) Extraordinary Item 0.00 0.01 -------- -------- Net Income (Loss) per Average Common Share $ ( 0.01) $ 0.00 ======== ======== Weighted Average Common Share Outstanding 40,831,409 30,912,032 ========== ========== Footnote: The accompanying notes are integral part of these financial statements EXTEN INDUSTRIES, INC. PART I - FINANCIAL INFORMATION CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS (UNAUDITED) AS OF August 31, 1998 AND 1997 Three Months Ended August 31, 1998 1997 -------- -------- REVENUE Sales $ - $ - Royalties - - -------- -------- Total Revenue - - -------- -------- OPERATING EXPENSES General & Administrative 62,686 90,049 Consulting Fee Expense 62,500 32,850 Research and Development 50,000 - Depreciation and Amortization - 11,736 Interest, net 15,133 5,793 -------- -------- Total Operating Expenses 190,319 140,428 -------- -------- Net Operating Loss Before Extraordinary Item (190,319) (140,428) Extraordinary Item - Gain on Extinguishment of Debt - 42,142 -------- -------- Net Operating Income (Loss) Before Income Taxes (190,319) (98,286) Provision for Income Taxes - - -------- -------- Net Income (Loss) $(190,319) $ (98,286) ======== ======== Net Operating Loss Before Extraordinary Item per Average Common Share $ ( 0.00) $ (0.01) Extraordinary Item 0.00 0.01 -------- -------- Net Income (Loss) per Average Common Share $ ( 0.00) $ (0.00) ======== ======== Weighted Average Common Share Outstanding 42,155,762 31,620,192 ========== ========== Footnote: The accompanying notes are integral part of these financial statements EXTEN INDUSTRIES, INC. PART I - FINANCIAL INFORMATION CONDENSED CONSOLIDATED STATEMENT OF CASH FLOW (UNAUDITED) AS OF August 31, 1998 and 1997 Nine months Ended August 31, 1998 1997 --------- --------- CASH FLOWS FROM OPERATING ACTIVITIES Net Income (Loss) $(401,636) $ (15,637) Adjustments to Reconcile Net Income (Loss) to Net Cash Provided By (Used In) Operating Activities Depreciation and Amortization - 35,214 Extinguishment of Debt - (325,142) Issuance of Common Stock for Services 132,240 357,664 (Increase) Decrease in: Prepaid Expense - (8,217) Other Assets (4,440) (42,426) Increase (Decrease) in: Accounts Payable 3,000 (44,426) Accrued Expenses 143,944 (125,974) --------- --------- NET CASH USED IN OPERATING ACTIVITIES (126,892) (168,744) --------- --------- CASH FLOWS FROM INVESTING ACTIVITIES Purchase of Equipment (1,742) - Advances from officer - 23,487 --------- --------- NET CASH USED INVESTMENT ACTIVITIES (1,742) 23,487 --------- --------- CASH FLOW FROM FINANCING ACTIVITIES Issuance of Common Stock 25,000 - Increase in Long Term Debt, net 87,955 145,000 --------- --------- NET CASH PROVIDED BY FINANCING ACTIVITIES 112,955 145,000 --------- --------- NET INCREASE (DECREASE) IN CASH (15,679) (257) CASH AT BEGINNING OF PERIOD 22,915 579 --------- --------- CASH AT END OF PERIOD $ 7,236 $ 322 ========= ========= Footnote: The accompanying notes are integral part of these financial statements EXTEN INDUSTRIES, INC. PART I - FINANCIAL INFORMATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 1. Summary of Significant Accounting Policies Business: Exten Industries, Inc. ("Exten") is a holding company that is in the business of developing, through one of its wholly-owned subsidiaries, Xenogenics Corporation ("Xenogenics"), a synthetic bio-liver technology ("SYBIOL"). In 1993 ,the Company acquired all of the rights to the SYBIOL technology developed under its contract with Cedars-Sinai Medical Center. The rights to the technology were transferred to Xenogenics when it was formed in 1997. A patent application is currently pending on the process utilized by the SYBIOL device and the Company has applied for trademark protection for the SYBIOL trade name. The Company has begun research and development of the SYBIOL at Loyola University (Loyola) in Chicago. Basis of consolidation: The consolidated financial statements include the accounts of Exten and its subsidiaries (together the "Company"). All significant intercompany balances and transactions have been eliminated in consolidation. Use of estimates: The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect certain reported amounts and disclosures. Accordingly, actual results may differ from those estimates. Income taxes: The Company accounts for income taxes pursuant to the asset and liability method which requires deferred income tax assets and liabilities to be computed annually for temporary differences between the financial statement and tax bases of assets and liabilities that will result in taxable or deductible amounts in future periods based on enacted laws and rates applicable to the periods in which the temporary differences are expected to affect taxable income. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized. The income tax provision or credit is the tax payable or refundable for the period plus or minus the change during the period in deferred tax assets and liabilities. Net loss per common share: Net loss per share is calculated using the weighted average number of outstanding common shares. Common stock equivalents, consisting of stock options outstanding, have not been considered because the impact of the assumed exercise of such options is antidilutive. In February 1997, the FASB issued Statement of Financial Accounting Standards No. 128, "Earnings per Share," ("SFAS 128") which replaces the presentation of primary earnings per share required under previously promulgated accounting standards with a presentation of basic and diluted earnings per share on the face of the statement of operations for all entities with complex capital structures and provides guidance on other computational changes. SFAS 128 is effective for financial statements for both interim and annual periods ending after December 15, 1997. Management believes that the adoption of SFAS 128 will not have a material impact on the Company's reported net loss per share. Other recent accounting pronouncements: In June 1997, the FASB issued Statements of Financial Accounting Standards No. 130, "Reporting Comprehensive Income," ("SFAS 130") and No. 131, "Disclosures about Segments of an Enterprise and Related Information," ("SFAS 131") which could require the Company to make additional disclosures in its financial statements no later than for the fiscal year ending November 30, 1999. SFAS 130 defines comprehensive income, which includes items in addition to those reported in the statement of operations and requires disclosures about its components. SFAS 131 requires disclosures for each segment of a business and the determination of segments based on its internal management structure. Management believes that the adoption of SFAS 130 and SFAS 131 will not have a material impact on the Company's disclosures. Basis of accounting: The Company's policy is to use the accrual method of accounting and to prepare and present financial statements that conform to generally accepted accounting principles. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates. Basis of presentation: The accompanying unaudited condensed financial statements and related notes have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission for Form 10-QSB. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments, consisting of a normal recurring nature and considered necessary for a fair presentation, have been included. It is suggested that these financial statements are read in conjunction with the financial statements and notes thereto included in the Company's annual report on Form 10-KSB for the year ended November 30, 1997. The results of operations for the three and nine month periods ended August 31, 1998 are not necessarily indicative of the operating results for the year ended November 30, 1998. For further information, refer to the financial statements and notes thereto included in the Company's Annual Report on Form 10-KSB for the fiscal year November 30, 1997. Reclassifications: Certain August 31, 1997 balances have been reclassified to conform to the August 31, 1998 condensed financial statement presentation. 2. Supplemental Cash Flow Information Supplemental disclosures of cash flow information for the nine-month periods ended August 31, 1998 and 1997 are summarized as follows: Nine Months Ended August 31, 1998 1997 (unaudited) (unaudited) ----------- ----------- Cash paid for interest and income taxes: Interest $ 19,784 $ 7,698 Income taxes $ 800 $ 800 3. Earnings Per Share Certain options granted and outstanding as of August 31, 1998 (unaudited) are antidilutive for the purposes of calculating primary and fully diluted earnings per share and therefore are not included in the earnings per share calculations. 4. Going Concern Matters In 1997 and 1996, the Company incurred net losses of $104,834 and $950,222, respectively. Management does not expect the Company to generate significant revenues in the near future. At November 30, 1997, the Company's accumulated deficit and stockholders' deficiency were $10,088,819 and $751,470 respectively, and its current liabilities exceeded its current assets by $492,351. Additionally, even though the Company has been able to satisfy obligations for certain operating expenses by issuing shares of the Company's common stock, operating activities still resulted in negative cash flows aggregating $59,039 in 1997. Furthermore, judgments and claims against the Company relating to loan guarantees, and amounts owed current and former suppliers continue to accumulate and it was in default under the terms of certain loan agreements. These factors, among others, raise substantial doubt about the Company's ability to continue as a going concern. In order to continue as a going concern, develop and commercialize its technology and, ultimately, achieve a profitable level of operations, the Company will need, among other things, additional capital resources. Management's plans to obtain such resources for the Company include (1) raising additional capital through sales of common stock, the proceeds of which would be used to perfect the Company's patent position in its SYBIOL technology and satisfy immediate operating needs; (2) continuing to use common stock to pay for consulting and professional services; (3) negotiating reductions in existing liabilities; and (4) selling non-productive assets. In addition, management is continually seeking other potential joint venture partners or merger candidates that would provide financial, technical and/or marketing resources to enable the Company to realize the potential value of its technology. However, management cannot provide any assurances that the Company will be successful in accomplishing any of its plans. The ability of the Company to continue as a going concern is dependent upon its ability to successfully accomplish the plans described in the preceding paragraph and eventually secure other sources of financing and attain profitable operations. The accompanying consolidated financial statements do not include any adjustments that might be necessary should the Company be unable to continue as a going concern. 5. Extinguishments of debt During 1997 the Company extinguished debts that had carrying values in excess of the fair value of the consideration transferred to the creditors and realized gains as shown below, which were classified, in accordance with generally accepted accounting principles, as extraordinary items in the accompanying consolidated statements of operations: In 1997, a judgment payable by the Company to a bank of $333,000, which arose from a prior settlement of a note payable, was settled and released through a cash payment of $50,000. On October 21, 1997, the Company entered into an agreement with a creditor to settle an account payable with a balance of approximately $100,000 for total initial consideration of $50,000, comprised of a cash payment of $20,000, and the issuance of 750,000 shares of the Company's common stock with a market value of $30,000 or $.04 per share (see Note 8). If the market value of the Company's common stock at December 10, 1998 is less than $.10 per share, the creditor will be entitled to file, without notification or objection from the Company, a stipulated judgment for a cash payment (the "Contingent Payment") equal to the lesser of (i) the excess of $75,000 over the market value of 750,000 shares as of that date, or (ii) $45,000. Accordingly, at November 30, 1997, the Company accrued a liability of $30,000 for the Contingent Payment equal to the excess of $75,000 over the market value of the 750,000 shares which was $45,000; it also recognized the extraordinary gain of $20,000 based on the excess of the balance of the account payable over the total of the initial consideration paid and the value of the Contingent Payment at year end. 6. Real Estate Held For Sale Real estate as of August 31, 1998 consists of a parcel of undeveloped land near the Grand Canyon. The land was originally purchased in February 1992 for $1,654,000 and written down to its estimated fair market value of $47,200 in 1995. 7. Notes Payable In Default Notes payable in default at August 31, 1998 consist of the following: Agreement payable to a former president of the Company, with interest at 10%(see Item 5 other information) $150,000 Note payable to attorneys for professional services 10,072 ------- Total $160,072 ======= 8. Notes Payable Notes payable at August 31, 1998 consist of the following: Note payable to officer, with interest at 8.5%, due in full on May 31, 1999 $206,500 Notes payable to unrelated parties with interest at the prime rate (8.5% at November 30, 1997), due in full on March 7, 1999 195,000 ------- Total $401,500 ======= ITEM IA. FACTORS AFFECTING FUTURE OPERATING RESULTS An investment in the Common Stock of the Company involves a high degree of risk. In addition to the other information contained in this Form 10-KSB, prospective investors should carefully consider the following risk factors: 1. Significant and Repeated Losses. During fiscal 1997, the Company's most recent fiscal year, the Company's losses were ($104,834). The Company faces all the risks inherent in a new business. The Company's Xenogenics subsidiaries is without any record of earnings and sales. There can be no assurance that any of the Company's business activities will result in any operating revenues or profits. Investors should be aware that they might lose all or substantially all of their investment. 2. Qualified Opinion. The Company's independent public accountants issued a qualified opinion on the Company's financial statements for the years ended November 30, 1997 and 1996 with respect to uncertainties concerning the Company's ability to continue as a going concern. 3.Lack of Revenues. The Company's only active business is the research and development activities from which the Company currently generates no stream of revenues and there can be no assurance that the Company will ever generate any revenues in the near future. As a result, the Company may continue to incur losses and any investor who purchases or acquires any shares of the Company's Common Stock will likely incur further substantial dilution and loss in the value of their investment. 4. Significant and Increasing Current Liabilities & Default. As of November 30, 1997, the Company had $515,266 in current debts and other obligations that are due and payable on or before November 30, 1998. Included in the amounts due by November 30, 1998 is $160,072 in notes payable currently in default together with other current liabilities of $355,194. Further, as of November 30, 1997, the Company had over 22 times as many current liabilities as it had current assets. In the event that the Company is not able to generate sufficient cash resources to pay these and other current liabilities on or before their due date, the Company will likely incur substantial additional costs and expenses and otherwise risk whatever claims creditors may assert against the Company in connection with any default thereby. This may result in an investor losing all or substantially all of their investment. 5. Need for Additional Financing & Lack of Underwriting Commitment. The Company's management recognizes that the Company needs to obtain additional external financing from the sale of the Company's debt, common stock, or preferred stock in order to support the Company and otherwise meet the Company's growing financial obligations. While the Company may attempt to obtain a commitment from an underwriter for a private placement or public offering of the Company's securities, there can be no guarantee that the Company will be successful. If the Company is not successful, the Company may suffer additional and continuing financial difficulties with consequent loss to any investor acquiring the Company's common stock. 6. Negative Working Capital & Negative Cash Flow. As of November 30, 1997, the Company had Total Current Liabilities of $515,266 and Total Current Assets of $22,915 with the result that the Company had negative working capital of ($492,351) as Total Current Liabilities exceeded Total Current Assets by that amount. While the Company's management continues to seek additional financing for the Company to complete its business plan, there can be no assurance that the Company will obtain any additional financing or, if it is obtained, that it can be obtained on terms reasonable in view of the Company's current circumstances. In addition, the Company has experienced negative cash flow for the 1996 and 1997 fiscal years. 7. Potential Dilution. Funding of the Company's proposed business plan would result in substantial and on-going dilution of the Company's existing stock-holders. During 1997, the Company issued 7,374,210 additional shares of its common stock in connection with its operations while incurring continuing and ever-increasing financial losses. While there can be no guarantee that the Company will be successful in raising additional capital, if the Company is successful in obtaining any additional capital, existing stockholders will incur substantial dilution. 8. Default on Indebtedness. The Company was in default on its repayment of a certain loan totaling $150,000 (as of November 30, 1997) with a former officer of the Company, Robert H. Goldsmith, and certain attorneys for past services. In addition, the Company had over $365,266 in other liabilities all due and payable on or before November 30, 1997. In the event that the Company is not able to generate additional cash from the sale of the Company's securities or otherwise obtain funds on some other basis, the Company will remain in default on its obligations and likely default on obligations to other creditors with the result that any investor in the Company's common stock will lose all or substantially all of their investment. 9. Government Regulation and Product Approvals. The Company's research, testing, preclinical development, clinical trials, manufacturing, and marketing of its proposed therapeutic products is subject to extensive and ever-changing regulation by numerous governmental authorities in the United States and other countries. Clinical trials, manufacturing, and marketing of products in the US will be subject to the rigorous testing and approval processes of the US Food and Drug Administration (the "FDA") and by comparable regulatory authorities in foreign countries. The testing and regulatory approval process will likely take several years and require the expenditure of substantial resources. Any testing of the Company's proposed products might not support the safety and efficacy of the Company's products. There can be no assurance that the Company will gain any regulatory approvals for the Company's proposed products or, if such approvals are obtained that such approvals may be limited and far narrower than those sought by the Company. To the extent that the above information describes statutory or regulatory provisions, it is qualified in its entirety by reference to the particular statutory and regulatory provisions currently in effect. Any change in applicable law or regulation may have a material effect on the business and prospect of the Company. 10. Lack of Independent Evaluation of Technology & Commercial Viability. The Company's current management does not possess any studies performed by an independent third party, which demonstrate that the synthetic bio-liver technology has ever been rigorously evaluated. There can be no assurance that this technology offers safe, efficacious, and cost-effective therapeutic attributes relative to those provided by competing technologies or, if it does that the technology is commercially viable. 11. Limited Management. The Company currently has only one full time officer and one full-time employee. The Company's limited cash flow and financial resources do not allow the Company to increase or add to the Company's full time management and there can be no guarantee that the Company's cash flow and financial resources will increase in the near future. As a result, the Company continues to rely upon consultants and others for a large part of its operations and the research and development work. 12. Lack of Dividends. The Company has never paid any cash dividends on its common stock. The Company's board of directors intends to retain profits, if any, to finance the Company's business. 13. Limited Market for Common Stock. The Company's Common Stock, traded on the Electronic Bulletin Board (OTC), has experienced significant price fluctuations and will likely remain highly volatile in the future. There can be no assurance that a meaningful trading market for the Company's Common Stock will be established, or, if established that it can be maintained for any significant period. 14. Valuations & Prior Asset Acquisitions. The Company's current management has determined that the values accorded certain assets acquired in prior years be revalued to reflect lower carrying values in light of current market circumstances. While management believes that current carrying values for these assets more accurately reflect likely recovery values, there can be no assurance that the Company will not later revalue the Company's assets further. 15. Possible Rule 144 Stock Sales. As of November 30, 1997, the Company had shares of the Company's outstanding Common Stock as "restricted securities" which may be sold only in compliance with Rule 144 adopted under the Securities Act of 1933 or other applicable exemptions from registration. Rule 144 provides that a person holding restricted securities for a period of one year may thereafter sell in brokerage transactions, an amount not exceeding in any three month period the greater of either (i) 1% of the Company's outstanding Common Stock, or (ii) the average weekly trading volume during a period of four calendar weeks immediately preceding any sale. Persons who are not affiliated with the Company and who have held their restricted securities for at least three years are not subject to the volume limitation. Possible or actual sales of the Company's Common Stock by present shareholders under Rule 144 may have a depressive effect on the price of the Company's Common Stock if any liquid trading market develops. 16. Possible Stock Sales - Regulation S & Form S-8 Registration Statement. The Company has periodically issued shares to non-US. citizens under Regulation S. In addition, the Company has utilized the services of consultants and, in this connection; the Company has issued shares of the Company's Common Stock and registered these shares for sale on Form S-8. The shares issued under Regulation S become freely tradable one year after issuance. The shares registered on Form S-8 are immediately freely tradable. As a result, the Company's issuance of shares pursuant to Regulation S and Form S-8 likely depresses the market price of the Company's Common Stock. While the Company's management intends to carefully evaluate the need to issue shares of the Company's Common Stock on this basis, the Company's meager financial resources will likely prevent the Company from limiting its use of Regulation S and Form S-8, with the result that the market price of Company's Common Stock will likely be depressed by the registration and sale of shares on an on-going basis. 17. Risks of Low Priced Stocks. Trading in the Company's Common Stock is limited. Consequently, a shareholder may find it more difficult to dispose of, or to obtain accurate quotations as to the price of, the Company's securities. In the absence of a security being quoted on NASDAQ, or the Company having $2,000,000 in net tangible assets, trading in the Common Stock is covered by Rule 3a51-1 promulgated under the Securities Exchange Act of 1934 for non-NASDAQ and non-exchange listed securities. Under such rules, broker/dealers who recommend such securities to persons other than established customers and accredited investors (generally institutions with assets in excess of $5,000,000 or individuals with net worth in excess of $1,000,000 or an annual income exceeding $200,000 or $300,000 jointly with their spouse) must make a special written suitability determination for the purchaser and receive the purchaser's written agreement to a transaction prior to sale. Securities are also exempt from this rule if the market price is at least $5.00 per share, or for warrants, if the warrants have an exercise price of at least $5.00 per share. The Securities Enforcement and Penny Stock Reform Act of 1990 requires additional disclosure related to the market for penny stocks and for trades in any stock defined as a penny stock. The Commission has recently adopted regulations under such Act which define a penny stock to be any NASDAQ or non-NASDAQ equity security that has a market price or exercise price of less than $5.00 per share and allow for the enforcement against violators of the proposed rules. In addition, unless exempt, the rules require the delivery, prior to any transaction involving a penny stock, of a disclosure schedule prepared by the Commission explaining important concepts involving a penny stock market, the nature of such market, terms used in such market, the broker/dealer's duties to the customer, a toll-free telephone number for inquiries about the broker/dealer's disciplinary history, and the customer's rights and remedies in case of fraud or abuse in the sale. Disclosure also must be made about commissions payable to both the broker/dealer and the registered representative, current quotations for the securities, and, if the broker/dealer is the sole market maker, the broker/dealer must disclose this fact and its control over the market. Monthly statements must be sent disclosing recent price information for the penny stock held in the account and information on the limited market in penny stocks. While many NASDAQ stocks are covered by the proposed definition of penny stock, transactions in NASDAQ stock are exempt from all but the sole market-maker provision for (i) issuers who have $2,000,000 in tangible assets ($5,000,000 if the issuer has not been in continuous operation for three years), (ii) transactions in which the customer is an institutional accredited investor and (iii) transactions that are not recommended by the broker/dealer. In addition, transactions in a NASDAQ security directly with the NASDAQ market maker for such securities, are subject only to the sole market-maker disclosure, and the disclosure with regard to commissions to be paid to the broker/dealer and the registered representatives. Finally, all NASDAQ securities are exempt if NASDAQ raised its requirements for continued listing so that any issuer with less than $2,000,000 in net tangible assets or stockholder's equity would be subject to delisting. These criteria are more stringent than the proposed increase in NASDAQ's maintenance requirements. The Company's securities are subject to the above rules on penny stocks and the market liquidity for the Company's securities could be severely affected by limiting the ability of broker/dealers to sell the Company's securities. 18. Competition. The Company is engaged in businesses characterized by extensive research efforts, rapid technological change, and intense competition. Competition can be expected to increase as technological advances are made and commercial applications broaden. The industries in which the Company seeks to compete are characterized by substantial competition involving biotechnology and major bio-pharmaceutical, chemical and biological testing companies. Many of the Company's existing and potential competitors have substantially greater financial, research and development, clinical, regulatory, marketing and production resources than those of the Company and may be better equipped than the Company to develop, manufacture and market competitive therapeutic products or testing services. These companies may develop and introduce products and services competitive with, superior to, or less costly than those of the Company, thereby rendering some of the Company's technologies and products and services under development less competitive or obsolete. Item 2. Management's' Discussion and Analysis of Financial Condition and Results of Operations. This Quarterly Report on Form 10-QSB contains forward-looking statements that involve risks and uncertainties. The Company's actual results may differ significantly from the results discussed in the forward-looking statements. Factors that might cause such a difference include, but are not limited to, those discussed in the section entitled "Factors Affecting Future Operating Results." Forward-Looking Information -General The following information contains certain forward-looking statements that anticipate future trends or events. These statements are based on certain assumptions that may prove to be erroneous and are subject to certain risks including, but not limited to, the Company's ability to complete and fund it research and development. Accordingly, actual results may differ, possibly materially, from the predictions contained herein. Although the Company cannot accurately anticipate the effects of inflation, the Company does not believe inflation has had or is likely to have a material effect on its results of operations or liquidity. The Company's quarterly operating results vary significantly depending on the occurrence of funding and the involvement of Company personnel in these endeavors. The results of operations for any quarter are not necessarily indicative of the results to be expected for any future period. Overview Business of Exten Industries, Inc. As of August 31, 1998, the Company's only active business is the proposed research and development activities of SYBIOLR artificial liver technology. Business of Xenogenex, Inc. Xenogenex, Inc. ("Xenogenex") was incorporated in California on July 30, 1991 for the purpose of funding biotech research. On September 11, 1991 the Company signed a research contract with Cedars-Sinai Medical Center in Los Angeles, California. The research contract was for the genetic manipulation of human to pig target antigens and xenogeneic transplants. Xenogeneic transplants involve the use of donor organs from species other than humans. The major objective of the research at that time was to discover a way to transplant organs (heart, liver, lung and kidney) from a pig into a human. In March of 1993 Xenogenex received all the rights to a synthetic bio-liver, SYBIOLR developed for Xenogenex under contract with Cedars-Sinai Medical Center. In July of 1996, Xenogenex transferred all assets and rights to the Sybiol synthetic bio-liver technology to Exten Industries, Inc., in exchange for the assumption of certain of its debts. Business of Xenogenics Corporation Xenogenics Corp. ("Xenogenics") was incorporated in Nevada on April 30, 1997 for the purpose of funding and conducting biotech research. In June 1997, Exten Industries, Inc. transferred all assets and rights to the Sybiol synthetic bio-liver technology to the new Xenogenics Corporation, a wholly owned subsidiaries. A patent application is presently pending on the process utilized by the SYBIOLR artificial liver device. The Company has received notice that the Sybiol trademark (US Trademark Application Serial No. 74/522,603) has been registered by the United States Patent and Trademark Office. Xenogenics may attempt to sell up to 20% of its Common Stock to raise up to $1,000,000 in venture capital financing. If Xenogenics were successful in raising this additional capital, the Company's ownership interests would be reduced accordingly. In addition to the other information contained in this Form 10-QSB, prospective investors should carefully consider the following risk factors: 1. PATENTS AND PROPRIETARY TECHNOLOGY. Any proprietary protection that the Company can obtain and maintain will be important to its proposed business. The Company has exchanged its U.S. patent application for a P.C.T. filing and has filed a patent application in China. The patent positions of bio-pharmaceutical and biotechnology firms, as well as academic and other research institutions, are uncertain and involve complex legal and factual questions. Accordingly, no firm predictions can be made regarding the bio-pharmaceutical and biotechnology patents or whether the Company will have the financial resources to aggressively protect its rights. 2. INTENSE COMPETITION. Competition from other biotechnology and pharmaceutical companies and from research and academic institutions is intense and is expected to increase. Competitors or potential competitors of the Company have filed applications for, or have been issued, certain patents, and may obtain additional patents and proprietary rights, relating to technologies competitive with those of the Company. Accordingly, there can be no assurance that the Company's patent applications will result in patents being issued or that, if issued, such patents will provide protection against competitive technology that circumvents such patents or will be held valid by a court of competent jurisdiction; nor can there be any assurance that others will not obtain patents that the Company would need to license or circumvent. Furthermore, there can be no assurance that licenses that might be required for the Company's processes or products would be available on reasonable terms, if at all. The Company also intends to rely upon non-patented trade secrets, know-how and continuing technological innovation to develop and maintain its competitive position. No assurance can be given that others will not independently develop substantially equivalent proprietary information and technology, or otherwise gain access to the Company's trade secrets or disclose such technology, or that the Company can meaningfully protect its rights to its non-patented trade secrets. 3. GOVERNMENT REGULATION. The Company's present and proposed activities are subject to regulation by numerous governmental authorities in the United States and other countries. To the extent that the following information describes statutory or regulatory provisions, it is qualified in its entirety by reference to the particular statutory and regulatory provisions currently in effect. Any change in applicable law or regulation may have a material effect on the business and prospects of the Company. 4. THERAPEUTIC PRODUCTS. The Company's products will be subject to regulation in the U.S. by the Food and Drug Administration ("FDA") and by comparable regulatory authorities in foreign jurisdictions. The products produced will be classified as "biologics" regulated under the Public Health Service Act and the Federal Food, Drug and Cosmetic Act. Development of a therapeutic product for human use is a multi-step process. First, animal or in vitro testing must establish the potential safety and efficacy of the experimental product in a given disease. Once the product has been found to be reasonably safe and potentially efficacious in animals, suggesting that human testing would be appropriate, an Investigational New Drug ("IND") application is submitted to the FDA. FDA approval is necessary before commencing clinical investigations. That approval may, in some circumstances, involve substantial delays. Clinical investigations typically involve three phases. Phase I is conducted to evaluate the safety of the experimental product in humans, and if possible, to gain early evidence of effectiveness. Phase I studies also evaluate various routes, dosages and schedules of product administration. The demonstration of therapeutic benefit is not required in order to complete Phase I successfully. If acceptable product safety is demonstrated, the Phase II studies are initiated. The Phase II trials are designed to evaluate the effectiveness of the product in the treatment of a given disease and, typically, are well controlled closely monitored studies in a relatively small number of patients. The optimal routes and schedules of administration are determined in these studies. As Phase II trials are successfully completed, Phase III studies will be commenced. Phase III studies are expanded, controlled and uncontrolled trials which are intended to gather additional information about safety and efficacy in order to evaluate the overall risk/benefit relationship of the experimental product and provide an adequate basis for physician labeling. These studies also may compare the safety and efficacy of the experimental device with currently available products. It is not possible to estimate the time in which Phase I, II and III studies will be completed with respect to a given product, although the time period is often as long as several years. Following the successful completion of these clinical investigations, the preclinical and clinical evidence that has been accumulated is submitted to the FDA as part of a product license application ("PLA"). Approval of the PLA or IND is necessary before a company may market the product. The approval process can be very lengthy and depends upon the time it takes to review the submitted data and the FDA's comments on the application and the time required to provide satisfactory answers or additional clinical data when requested. In addition to the regulatory framework for product approvals, the Company is and may be subject to regulation under state and federal law, including requirements regarding occupational safety, laboratory practices, the use, handling and disposition of radioactive materials, environmental protection and hazardous substance control, and may be subject to other present and possible future local state, federal and foreign regulation, including future regulation of the biotechnology field. Results of Operations During 1997 the Company formed a new subsidiary, Xenogenics Corporation. With the formation of the subsidiary the Company contributed the SYBIOL technology and certain debts so as to continue the focus on the research with the artificial liver technology. Three Months Ended August 31, 1998 Compared to Three months Ended August 31, 1997 During the three months ended August 31, 1998, the Company incurred $62,500 in consulting fees compared to $32,850 for the three months ended August 31, 1997. This increase in consulting fees was due primarily to the Company's increased use of outside consultants for capital raising activities and the reliance on the roles filled by outside consultants. During the three months ended August 31, 1998, the Company incurred $62,686 in general and administrative expenses. This decreased from the three-month period ended August 31, 1997. This decrease was primarily due to officers salary (which has been accrued and not paid) offset by significant reductions in administrative, payroll, legal and accounting functions and other ancillary expenses. During the three months ended August 31, 1998 $50,000 in research and development costs were incurred. Research and development costs although minimal reflects the Company's substantially limited financial resources and the efforts expended in pursuing those financial resources. The Company's research and development efforts commenced with the signing of the Loyola research agreement and the commencement of research activities by their scientific staff. As a result, total operating expenses for the three month period ended August 31, 1998 were $190,319 compared to $140,428 for the three month period ended August 31, 1997. This resulted in the Company recording a loss from operations of $190,319 for the three month period ended August 31, 1998 compared to a loss from operations of $140,428 for the comparable period in 1997, or an increase of approximately 36%. Nine Months Ended August 31, 1998 Compared to Nine Months Ended August 31, 1997 During the nine months ended August 31, 1998, the Company incurred $109,245 in consulting fees compared to $45,350 for the nine months ended August 31, 1997. This increase of 354% in consulting fees was due primarily to the Company's continued use of outside consultants and the increased reliance on the roles filled by outside consultants. The Company has expended considerable efforts in the capital raising activities for its subsidiary, Xenogenics. The Company to date has received a slow response to these activities. During the nine months ended August 31, 1998, the Company incurred $201,309 in general and administrative expenses. This decreased from the nine-month period ended August 31, 1997. This decrease was primarily due to officers salary (which has been accrued and not paid) offset by significant reductions in administrative, payroll, legal and accounting functions and other ancillary expenses. During the nine months ended August 31, 1998 $50,000 in research and development costs were incurred by the Company in respect to its Sybiol technology. The absence of significant research and development costs reflects the Company's substantially limited financial resources. The Company's research and development efforts have commenced with the signing of the Loyola research agreement and the commencement of research activities by their scientific staff. During the nine months ended August 31, 1997, the Company incurred $35,214 in amortization expense. This amortization expense is a resultant of the Goodwill recognized during the year ended November 30, 1997 pursuant to the redemption of the minority shareholders interest in the subsidiary Xenogenex. There will be no additional amortization expense related to this Goodwill. As a result, total operating expenses for the nine month period ended August 31, 1998 were $400,836 compared to $339,979 for the nine month period ended August 31, 1997. This resulted in the Company recording a loss from operations of $400,836 for the nine month period ended August 31, 1998 compared to a loss from operations of $339,979 for the comparable period in 1997, or a increase of approximately 18%. Liquidity and Capital Resources The Company's principal capital requirements are to fund operations and development of new products. The Company has historically satisfied its cash requirements through cash flows from private placements and short-term borrowings. The Company's current ratio (current assets over current liabilities) is .011 to 1 as of August 31, 1998. During the first nine months of fiscal year 1998, the Company's cash requirements were met by short term borrowings from an officer of the Company and long term borrowings from two unrelated parties. The Company issued in the amount of $132,240, common stock of the Company for services performed. Several steps have been taken by the Company to reduce its liabilities, reduce cash requirements, and raise capital. The Company has been negotiating with the bank and its vendor creditors to settle its liabilities. Exten is also negotiating with investment bankers for raising of additional capital. The Company is also considering mergers with other entities. No assurances can be given that any such activity will prove successful. The Company will require substantial working capital to continued synthetic bio-liver development of Xenogenex, Inc. and there can be no guarantee that the Company will be successful in obtaining any such needed financing. The Company has also continued to pay salaries, consulting fees, and in some cases, legal fees through the issuance of the Company's Common Stock with the subsequent registration of the shares so issued on Form S-8. The Company has been forced to take these steps to conserve the Company's cash and liquid resources. The Company is raising some funds intermittently through the use of long-term debt instruments and through the payment of services with stock. The Company is also currently conducting a private placement of common stock of its wholly owned subsidiary Xenogenics. The offering is a best efforts offering with a minimum and maximum amount to be placed. There can be no assurance that the Company will be successful with this offering. On March 7, 1997, the Company borrowed $125,000 from an unrelated party. On March 18, 1997, this note was increased to $145,000 by an additional borrowing of $20,000. The terms of the note require monthly interest payments of approximately $1,000 beginning April 7, 1997. Interest will be charged at the published prime rate, which was 8.25% at March 7, 1997. On March 18, 1997, the Company entered into an agreement with a bank to settle a note payable in the amount of $333,000. The Company is in default on the note and the bank has received a judgment for the full amount of the note plus fees of $35,000 associated with the collection of the note. As stipulated by the agreement, the Company made a cash payment in the amount of $50,000 in full settlement of the note and fees. The Company entered into an agreement with a former president of the Company to settle a previously existing note in the amount of $388,000. As part of that settlement, the Company has agreed to a cash payment of $50,000, which was never made. On March 6, 1997, the Company settled that $50,000 obligation by issuing an additional 1,000,000 shares of stock with a market value of $.05 per share to the former president of the Company. This transaction was recorded within the year ending November 30, 1997 stock issuance's. The Company on Septemeber 7, 1998 entered into a settlement and mutual release with Robert H. Goldsmith. The settlement agreement requires that the Company issue 400,000 shares of common stock in settlement of the debt owed to Mr. Goldsmith. Concurrent with the execution of the agreement the Company has agreed to guarantee a market value $200,000 for the agreed to settlement. In connection with the formation and private placement of the Company's wholly owned subsidiary Xenogenics, the following transpired. Xenogenics assumed a promissory note in the amount of $162,500, plus accrued interest of $6,045 owing to an officer of the Company in connection with the transfer of the SYBIOL patents, trademarks, licenses and assets from Exten. This note matures within two years and is payable interest only at 7% per annum until maturity and is convertible into common stock of Xenogenics at $1.00 per share over its term. In addition, a grant of an option to purchase an additional 162,500 shares of common stock at $1.00 per share over a three year period. The note is secured by a security interest in the SYBIOL patents, trademarks, technology and assets. An unrelated party loaned Xenogenics (as stated above) $145,000 under a two year promissory note in June 1997, that is payable interest only and is convertible into common stock under a formula ranging from $2.00 to $3.00 per share. In addition, the unrelated party was granted an option to purchase 145,000 shares of common stock of Xenogenics at $1.00 per share over a three-year period. The note is also secured by a security interest. PART II. OTHER INFORMATION Item 1: Legal Proceedings NONE Item 2: Changes in Securities NONE Item 3: Defaults Upon Senior Securities NONE Item 4: Submission of Matters to a Vote of Security Holders NONE Item 5: Other Information The Company on Septemeber 7, 1998 entered into a settlement and mutual release with Robert H. Goldsmith. The settlement agreement requires that the Company issue 400,000 shares of common stock in settlement of the debt owed to Mr. Goldsmith. Concurrent with the execution of the agreement the Company has agreed to guarantee a market value $200,000 for the agreed to settlement. Item 6(a): Exhibits NONE Item 6(b): Reports on Form 8-K SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report be signed on its behalf by the undersigned thereunto duly authorized. EXTEN INDUSTRIES, INC. (Registrant) Date: 10/14/98 By: /s/ W. Gerald Newmin W. Gerald Newmin Chairman, Chief Executive Officer Date: 10/14/98 By: /s/ Jerry Simek Jerry Simek Director, President and Chief Operating Officer EX-27 2 FINANCIAL DATA SCHEDULE
5 YEAR NOV-30-1998 DEC-01-1997 AUG-31-1998 7,236 0 0 0 0 7,236 1,742 0 97,844 644,611 0 0 0 435,942 (1,414,209) 97,844 0 0 0 400,836 0 0 30,282 (400,836) 800 (401,836) 0 0 0 (211,317) .00 .00
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