<PAGE>
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 the Quarterly Period ended SEPTEMBER 30, 1998
/_/ Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
Commission file number: 333-39253
ONTRO, INC.
(Exact name of small business issuer as specified in its charter)
CALIFORNIA 33-0638356
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
12675 DANIELSON COURT, SUITE 401, POWAY, CALIFORNIA 92064
(Address of principal executive offices)
(619) 486-7200
(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 for
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
----- -----
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS
Check whether the registrant filed all documents and reports required to be
filed by Sections 12, 13 or 15(d) of the Exchange Act after the distribution
of securities under a plan confirmed by a court.
Yes _____ No _____
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuers classes of
common equity, as of latest practicable date:
As of November 5, 1998, there are 6,489,478 shares of common stock outstanding.
Transitional Small Business Disclosure Format (check one):
Yes No X
----- -----
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ONTRO, INC.
INDEX TO FORM 10-QSB
<TABLE>
<S> <C>
PART I FINANCIAL INFORMATION
Item 1--Financial Statements
Consolidated Balance Sheets 3
Consolidated Statements of Operations 4
Consolidated Statements of Cash Flows 5
Notes to Consolidated Financial Statements 6
Item 2--Management's Discussion and
Analysis or Plan of Operation 7
PART II OTHER INFORMATION
Item 1--Legal Proceedings 9
Item 2--Changes in Securities and Use of Proceeds 9
Item 3--Defaults upon Senior Securities 9
Item 4--Submission of Matters to a Vote of
Security Holders 9
Item 5--Other Information 9
Item 6--Exhibits and Reports on Form 8-K 9
SIGNATURES 9
</TABLE>
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PART I FINANCIAL INFORMATION
Item 1. Financial Statements
ONTRO, INC
(A Development Stage Enterprise)
Consolidated Balance Sheets
<TABLE>
<CAPTION>
December 31, September 30,
1997 1998
------------ -------------
Note (unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 5,100 709,600
Investments held to maturity -- 8,310,800
Prepaid expenses and other current assets 9,800 129,400
----------- ----------
Total current assets 14,900 9,149,800
Investments held to maturity -- 2,090,300
Property and equipment, net 398,900 410,400
Deferred offering costs 349,300 --
Deferred financing costs 61,100 --
Deposits and other assets 62,500 689,600
Intangible assets, net 8,500 276,300
----------- ----------
$ 895,200 12,616,400
----------- ----------
----------- ----------
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Other accrued expenses $449,000 65,000
Accrued interest 103,700 --
Current portion of capital lease obligations 44,100 18,800
Notes payable 1,395,000 --
----------- ----------
Total current liabilities 1,991,800 83,800
Capital lease obligations, excluding current portion 100,900 27,500
----------- ----------
Total liabilities 2,092,700 111,300
----------- ----------
Shareholders' equity (deficit):
Preferred stock, no par value, 5,000,000 shares
authorized, no shares issued -- --
Common stock, no par value, 20,000,000 shares
authorized; 3,089,478 and 6,489,478 shares
issued and outstanding in 1997 and 1998, respectively 2,047,200 17,464,500
Additional paid-in capital 965,600 616,100
Deficit accumulated during the development stage (3,812,000) (5,562,700)
Deferred compensation (398,300) (12,800)
----------- ----------
Total stockholders' equity (deficit) (1,197,500) 12,505,100
----------- ----------
Commitments and contingencies
$ 895,200 12,616,400
----------- ----------
----------- ----------
</TABLE>
Note: The balance sheet at December 31, 1997 has been derived from the
audited financial statements at that date but does not include all the
information and footnotes required by generally accepted accounting
principles for complete financial statements.
The accompanying notes are an integral part of these consolidated
financial statements.
3
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ONTRO, INC.
(A Development Stage Enterprise)
Consolidated Statements Of Operations
(unaudited)
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30, November 8, 1994
------------------------ ------------------------ (Inception)
1997 1998 1997 1998 to September 30,1998
---------- --------- ---------- ---------- --------------------
<S> <C> <C> <C> <C> <C>
Operating expenses:
Marketing, general and administrative $ 341,500 597,600 1,127,700 1,336,100 3,661,500
Research and development 143,100 174,300 402,000 439,700 1,323,600
Compensation for stock options and
certain warrants 9,200 34,500 26,400 39,500 442,600
---------- --------- ---------- ---------- ----------
Total operating expense 493,800 806,400 1,556,100 1,815,300 5,427,700
---------- --------- ---------- ---------- ----------
Other expense (income):
Interest expense 71,400 1,900 126,100 163,000 362,600
Interest income (5,000) (135,900) (5,000) (227,600) (227,600)
---------- --------- ---------- ---------- ----------
Total other expense/(income) 66,400 (134,000) 121,100 (64,600) 135,000
---------- --------- ---------- ---------- ----------
Net Loss $ (560,200) (672,400) (1,677,200) (1,750,700) (5,562,700)
---------- --------- ---------- ---------- ----------
---------- --------- ---------- ---------- ----------
Basic and diluted net loss per share $(0.19) (0.10) (0.59) (0.36)
---------- --------- ---------- ----------
---------- --------- ---------- ----------
Weighted average shares outstanding 2,973,152 6,489,478 2,840,061 4,845,522
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
4
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ONTRO, INC.
(A Development Stage Enterprise)
Consolidated Statements Of Cash Flows
(unaudited)
<TABLE>
<CAPTION>
Nine months ended November 8, 1994
September 30, (Inception)
---------------------
1997 1998 to September 30,1998
--------------------- --------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net Loss $(1,677,200) (1,750,700) (5,562,700)
Adjustments to reconcile net loss to cash used in --
operating activities, excluding effect of acquisition:
Depreciation and amortization 47,700 65,800 208,500
Amortization of deferred financing costs 27,800 61,100 101,500
Issuance of common stock for services 16,000 -- 223,400
Compensation related to grant of stock options
and certain warrants 26,400 39,500 442,600
Increase in prepaid and other current assets (9,300) (119,600) (129,400)
Increase in deposits and other assets (40,100) (627,100) (689,600)
Increase (decrease) in accrued expenses 97,100 (509,600) 43,100
----------- ---------- ----------
Net cash used in operating activities (1,511,600) (2,840,600) (5,362,600)
----------- ---------- ----------
Cash flows from investing activities:
Acquisition of business -- (481,200) (481,200)
Intangible assets (4,700) (169,200) (182,900)
Purchase of property and equipment (146,500) (87,700) (436,000)
Purchase of investments held to maturity -- (10,384,000) (10,384,000)
----------- ---------- ----------
Net cash used in investing activities (151,200) (11,122,100) (11,484,100)
----------- ---------- ----------
Cash flows from financing activities:
Net proceeds from issuance of common stock
and warrants 612,000 16,160,900 17,698,100
Proceeds from notes payable 1,135,000 700,000 2,095,000
Payments on notes payable -- (2,095,000) (2,095,000)
Payments on capital lease obligations (24,400) (98,700) (141,800)
----------- ---------- ----------
Net cash provided by financing activities 1,722,600 14,667,200 17,556,300
----------- ---------- ----------
Net increase in cash and cash equivalents 59,800 704,500 709,600
Cash and cash equivalents, beginning of period 12,000 5,100 --
----------- ---------- ----------
Cash and cash equivalents, end of period $71,800 709,600 709,600
----------- ---------- ----------
Supplemental disclosure of cash flow information:
Cash paid during the period for interest $27,300 190,300 250,300
Supplemental disclosure of non-cash investing
and financing activities:
Equipment acquisitions under capital lease $52,100 -- 188,100
Warrants issued in connection with debt $94,500 -- 101,500
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
5
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ONTRO, INC
(A Development Stage Enterprise)
Notes To Consolidated Financial Statements
(unaudited)
THE COMPANY
Ontro, Inc. (the "Company" or "Ontro") is engaged in the research and
development of integrated thermal containers. The Company has the rights to
exploit a proprietary technology which it has incorporated into a proposed
product line of fully contained self-heating beverage containers designed to
heat liquid contents such as coffee, tea, hot chocolate, soups, and baby
formula.
The Company is a development stage enterprise. Accordingly, the
Company's operations have been directed primarily toward raising capital,
developing business strategies, research and development, establishing
sources of supply, acquiring operating assets, initial production, and
recruiting personnel.
Ontro, Inc. has not been profitable and has not generated revenue from
the sale of products or other sources since inception. The Company expects
to incur losses as it expands its development activities and pursues
commercialization of its technologies. The future success of the Company is
dependent upon its ability to develop, manufacture and market its products
and, ultimately, upon its ability to attain future profitable operations.
BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been
prepared by the Company in accordance with generally accepted accounting
principles for interim financial information. Certain information and
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been condensed or omitted.
In the opinion of the Company's management, the unaudited consolidated
financial statements contain all adjustments necessary (consisting of normal
recurring accruals) for a fair presentation of the financial position as of
September 30, 1998, and the results of operations for the three and nine
month periods ended September 30, 1997 and 1998. The results of operations
for the three and nine months ended September 30, 1998, are not necessarily
indicative of the results to be expected for the full year. For further
information, refer to the financial statements for the year ended December
31, 1997 and footnotes thereto included in Ontro's Form SB-2 dated May 11,
1998 as amended.
The consolidated financial statements include the accounts of Ontro,
Inc. and its subsidiary. All significant intercompany accounts and
transactions have been eliminated.
SALE OF WARRANTS
On July 1, 1998 the Company received net proceeds of approximately
$47,000 from the sale of 510,000 warrants. These warrants represent the
exercise of the overallotment by the underwriters of the Company's
Initial Public offering in May, 1998 ("IPO").
ACQUISITION
On May 11,1998, the Company acquired Insta-Heat, Inc. ("IHI"), an
affiliated corporation. In accordance with Staff Accounting Bulletin No. 48,
the acquisition has been accounted for as an acquisition of net assets
recorded at historical cost and a return of equity to IHI shareholders of
$397,900 for the difference between the amount paid and the historical cost
of the net assets acquired. The net assets acquired by the Company consist
primarily of intellectual property related to the Company's integrated
thermal technology. If IHI had been acquired on January 1, 1998, this
acquisition would not have had a material impact on the Company's
consolidated results of operations for any of the periods presented.
Net assets acquired are as follows (giving effect to the total purchase price):
<TABLE>
<S> <C>
Patents $ 105,300
Liabilities assumed (22,000)
Return of equity to IHI shareholders 397,900
----------
Purchase Price $ 481,200
----------
----------
</TABLE>
6
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NET LOSS PER SHARE
During the year ended December 31, 1997, the Company adopted Statement
of Financial Accounting Standards No. 128 "Earnings per Share" ("Statement
128"). As required by Statement 128, the Company must present basic earnings
per share and diluted earnings per share as defined. Accordingly basic
earnings per share has been computed based upon the weighted average number
of shares outstanding during the period and diluted earnings per share has
been computed based upon the weighted average number of shares outstanding
plus the dilutive effects of common shares contingently issuable from stock
options. Common stock options are excluded from the computation of net
earnings per share if their effect is antidilutive. Stock options and
warrants to purchase 1,155,665 shares of common stock for the nine months
ended September 30, 1997 and 5,576,252 shares of common stock for the nine
months ended September 30, 1998 at exercise prices ranging from $0.001 to
$3.76 were not included in the computation of diluted earnings per share as
their effect would have been antidilutive. All prior period information has
been restated to conform to the provisions of Statement 128.
COMPREHENSIVE INCOME
In June 1997, the FASB issued Statement of Financial Accounting
Standards No. 130, "Reporting Comprehensive Income" (SFAS 130). SFAS 130
establishes standards for reporting and display of comprehensive income
and its components in a full set of general purpose financial statements.
Under SFAS No. 130, comprehensive income is divided into net income and
other comprehensive income. Other comprehensive income includes items
previously recorded directly in equity. The Company adopted the provisions
of SFAS 130 on January 1, 1998. The adoption of this statement did not have
a material impact on the Company's financial position or results of
operations.
THE FOLLOWING DISCUSSION CONTAINS FORWARD-LOOKING STATEMENTS WHICH
INVOLVE RISKS AND UNCERTAINTIES. SUCH FORWARD-LOOKING STATEMENTS INCLUDE,
BUT ARE NOT LIMITED TO, STATEMENTS REGARDING FUTURE EVENTS AND THE COMPANY'S
PLANS AND EXPECTATIONS. THE COMPANY'S ACTUAL RESULTS MAY DIFFER
SIGNIFICANTLY FROM THE RESULTS DISCUSSED IN THE FORWARD-LOOKING STATEMENTS AS
A RESULT OF CERTAIN FACTORS INCLUDING, BUT NOT LIMITED TO, THOSE REFERENCED
IN THE COMPANY'S FINAL PROSPECTUS DATED MAY 11, 1998, AS AMENDED AND THE
COMPANY'S OTHER SEC REPORTS. THE COMPANY DISCLAIMS ANY INTENT OR OBLIGATION
TO UPDATE THESE OR OTHER FORWARD-LOOKING STATEMENTS.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
RESULTS OF OPERATIONS
COMPARISON OF THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1998
Operating expenses increased to $806,400 for the quarter ended
September 30, 1998 from $493,800 for the same period in 1997 and increased to
$1,815,300 for the nine months ended September 30, 1998 compared to
$1,556,100 for the same period ending in 1997. Marketing, general and
administrative expense was $597,600 and $1,336,100 for the quarter and nine
months ended September 30, 1998, respectively compared to $341,500 and
$1,127,700 for the same periods ending in 1997. The increase for the quarter
and the nine months was due to increased salaries to employees, the hiring of
an additional employee, and additional marketing activities in 1998 as
compared to 1997. Research and development expense was $174,300 and $439,700
for the quarter and nine months ended September 30, 1998, respectively
compared to $143,100 and $402,000 for the same periods ending in 1997. This
increase is due primarily to (1) increased salaries (2) the hiring of
additional employees as well as employing temporary help to manufacture and
assemble containers (3) use of additional materials and supplies used for
research and development and (4) increased equipment rental.
Interest expense was $1,900 for the quarter ended September 30, 1998,
compared to $71,400 for the same period in 1997, and was $163,000 for the
nine months ended September 30, 1998 compared to $126,100 for the same period
ending in 1997. The decrease for the quarter was due to the repayment of
bridge loans with proceeds from the Company's IPO resulting in capital lease
obligations as the only debt outstanding during the quarter. The increase
in interest expense for the nine months ended September 30, 1998 as compared
to the same period in 1997 is a result of additional borrowings by the Company
from December, 1997 through April, 1998. Interest income was $135,900 and
$227,600 for the quarter and nine months ended September 30, 1998,
respectively, resulting from the investment of proceeds from the Company's IPO.
The net loss for the quarter ended September 30, 1998 was $672,400, or
$0.10 per share, compared to a net loss of $560,200, or $0.19 per share, for
the same period ending in 1997. The net loss
7
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for the nine months ended September 30, 1998 was $1,750,700, or $0.36 per
share compared to $1,677,200, or $0.59 per share for the same period ending
in 1997.
The Company has financed its operations since Inception primarily
through public and private sales of its equity securities as well as through
bridge financing. As of September 30, 1998 the Company's cash and cash
equivalents and investments totaling approximately $11.1 million.
The primary uses of cash and cash equivalents during the nine months
ended September 30, 1998, include $2,840,600 to finance the Company's
operations and working capital requirements, patent costs of $169,200,
repayment of debt of approximately $2.1 million, decrease in capital leases
of $98,700, purchase of IHI stock for $481,200, and deposits on equipment of
approximately $636,000. The Company plans to continue its policy of
investing excess funds in short-term and long-term, investment-grade,
interest-bearing instruments.
The Company's future capital requirements will depend upon numerous
factors, including the amount of revenues generated from operations (if any),
the cost of the Company's sales and marketing activities and the progress of
the Company's research and development activities, none of which can be
predicted with certainty. The Company estimates that it will spend $4.0
million in the next six months related to the acquisition of capital
equipment and improvements to its leased facility. The Company anticipates
existing capital resources and cash generated from operations, if any, will
be sufficient to meet the Company's cash requirements for at least the next
15 to 21 months at its anticipated level of operations. However, the Company
may seek additional funding during the next 21 months and could seek
additional funding after such time. There can be no assurance any additional
financing will be available on acceptable terms, or at all, when required by
the Company. Moreover, if additional financing is not available, the Company
could be required to reduce or suspend its operations, seek an acquisition
partner or sell securities on terms that may be highly dilutive or otherwise
disadvantageous to current shareholders. The Company has experienced in the
past, and may in the future, experience operational difficulties and delays
in its product development due to working capital constraints. Any such
difficulties or delays could have a material adverse effect on the Company's
business, financial condition and results of operations.
NEW ACCOUNTING STANDARDS
In February 1998, Statement of Financial Standards No. 132,
"Employers' Disclosures about Pension and Other Retirement Benefits" ("SFAS
No. 132"), was issued and is effective for fiscal years beginning after
December 15, 1997. This statement standardizes disclosure requirements for
pensions and other post retirement benefits. It does not change the
measurement or recognition provisions for those benefit plans.
In June 1998, Statement of Financial Accounting Standards No. 133,
"Accounting for Derivative Instruments and Hedging Activities", was issued and
is effective for all fiscal quarters of fiscal years beginning after June 15,
1999. This statement establishes accounting and reporting standards for
derivative instruments and hedging activities.
The Company anticipates that the adoption of SFAS Nos. 132 and 133
will not have a significant effect on the financial position, results of
operations or liquidity of the Company.
The AICPA Accounting Standards Executive Committee recently issued
Statement of Position ("SOP") 98-5, Reporting on the Costs of Start-Up
Activities. This SOP requires that costs incurred during start-up activities,
including organization costs, be expensed as incurred, and is effective
for fiscal years beginning after December 15, 1998. The adoption of this
SOP is expected to have no material impact on the Company's financial
position or results of operations.
YEAR 2000 COMPLIANCE
The "Year 2000 issue" arises because most computer systems and programs
were designed to handle only a two-digit year, not a four digit year. When
the Year 2000 begins, these computers may interpret "00" as the year 1900 and
could either stop processing date-related computations or could process them
incorrectly. The Company is in the process of obtaining a new information
system as well as developing a program to address year 2000 issues. As the
company places orders for equipment in its manufacturing and research and
development facility, the company is requiring from the manufacturers
assurances that such equipment is year 2000 compatible.
The Company could be adversely impacted by Year 2000 issues faced by
major distributors, suppliers, customers, vendors, and financial service
organizations with which the Company interacts. The Company is in the
process of developing a plan to determine the impact that parties who are not
Year 2000 compliant may have on the operations of the Company. However,
there can be no guarantee that the systems of these companies will achieve
Year 2000 compliance in a timely manner.
Recent SEC guidance for Year 2000 disclosure also calls on companies to
describe their most likely worst case Year 2000 scenario. The Company
believes that the most likely worst case scenario is that the Company will
experience manufacturing delays because of infrastructure failures or delays
from suppliers.
8
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PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company and one of its officers are defendants in a lawsuit filed
by an individual (Timothy J. Lyons) in the Superior Court of the State of
California for the County of San Diego. The complaint alleges that the
company agreed to guarantee Mr. Lyons a fixed allocation of the units sold by
the underwriters in the IPO, and the company breeched this obligation when
the underwriters sold Mr. Lyons a lessor amount. Management of the Company
believes that the suit is without merit and intends to defend it vigorously.
Although the outcome of this proceeding cannot be predicted with certainty,
the Company's management believes that the outcome should not have a material
adverse effect on the financial condition of the Company.
ITEM 2. CHANGES IN 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 AND REPORTS ON FORM 8-K
The Company did not file any reports on Form 8-K during the nine months
ended September 30, 1998.
SIGNATURES
In accordance with the requirements of the Exchange Act, the
registrant caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
ONTRO, INC
Registrant
November 16, 1998 By: /s/ JAMES A. SCUDDER
--------------------------------
James A. Scudder
President and Chief Executive
Officer
(Principal Executive Officer)
November 16, 1998 By: /s/ KEVIN A. HAINLEY
--------------------------------
Kevin A. Hainley
Chief Financial Officer
(Principal Financial and
Accounting Officer)
9
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JUL-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 709,600
<SECURITIES> 10,401,100
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 9,149,800
<PP&E> 624,200
<DEPRECIATION> 213,800
<TOTAL-ASSETS> 12,616,400
<CURRENT-LIABILITIES> 83,800
<BONDS> 0
0
0
<COMMON> 17,464,500
<OTHER-SE> (4,959,400)
<TOTAL-LIABILITY-AND-EQUITY> 12,616,400
<SALES> 0
<TOTAL-REVENUES> 0
<CGS> 0
<TOTAL-COSTS> 806,400
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,900
<INCOME-PRETAX> (672,400)
<INCOME-TAX> 0
<INCOME-CONTINUING> (672,400)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (672,400)
<EPS-PRIMARY> (.10)
<EPS-DILUTED> (.10)
</TABLE>
