<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 JUNE 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 August 12, 1998, there are 6,489,478 shares of common stock outstanding.
Transitional Small Business Disclosure Format (check one):
Yes_____ No X
1
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ONTRO, INC.
INDEX TO FORM 10-QSB
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
Operations 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
2
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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, June 30,
1997 1998
------------ -----------
Note (unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 5,100 12,774,300
Prepaid expenses and other current assets 9,800 71,300
---------- ----------
Total current assets 14,900 12,845,600
Property and equipment, net 398,900 346,700
Deferred offering costs 349,300 -
Deferred financing costs 61,100 -
Other assets 62,500 166,200
Intangible assets, net 8,500 264,300
---------- ----------
$ 895,200 13,622,800
---------- ----------
---------- ----------
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Other accrued expenses $ 436,200 423,200
Accrued interest 103,700 -
Current portion of capital lease obligations 44,100 19,100
Payroll taxes payable 12,800 6,200
Notes payable 1,395,000 -
---------- ----------
Total current liabilities 1,991,800 448,500
Capital lease obligations, excluding
current portion 100,900 31,900
---------- ----------
Total liabilities 2,092,700 480,400
---------- ----------
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 17,518,300
Additional paid-in capital 965,600 529,700
Deficit accumulated during the
development stage (3,812,000) (4,890,300)
Deferred compensation (398,300) (15,300)
---------- ----------
Total stockholders' equity (deficit) (1,197,500) 13,142,400
---------- ----------
Commitments and contingencies
$ 895,200 13,622,800
---------- ----------
---------- ----------
</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 Six months ended November 8, 1994
June 30, June 30, (Inception)
--------------------- -----------------------
1997 1998 1997 1998 to June 30,1998
--------- ------- ---------- ----------- ----------------
<S> <C> <C> <C> <C> <C>
Operating expenses:
Marketing, general and administrative $ 346,900 584,100 786,200 738,500 3,063,900
Research and development 103,400 64,500 258,900 265,400 1,149,300
Compensation for stock options and
certain warrants 6,700 2,500 17,200 5,000 408,100
--------- -------- ---------- ---------- ------------
Total operating expense 457,000 651,100 1,062,300 1,008,900 4,621,300
--------- -------- ---------- ---------- ------------
Other expense (income):
Interest expense 30,900 92,800 54,700 161,100 360,700
Interest income - (91,700) - (91,700) (91,700)
--------- -------- ---------- ---------- ------------
Total other expense 30,900 1,100 54,700 69,400 269,000
--------- -------- ---------- ---------- ------------
Net Loss $(487,900) (652,200) (1,117,000) (1,078,300) (4,890,300)
--------- -------- ---------- ---------- ------------
--------- -------- ---------- ---------- ------------
Basic and dilutive net loss per share $ (0.17) (0.13) (0.40) (0.27)
--------- -------- ---------- ----------
--------- -------- ---------- ----------
Weighted average shares outstanding 2,815,877 4,920,247 2,772,231 4,009,920
</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>
Six months ended November 8, 1994
June 30, (Inception)
--------------------------
1997 1998 to June 30, 1998
----------- ---------- ----------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net Loss $(1,117,000) (1,078,300) (4,890,300)
Adjustments to reconcile net loss to cash used in
operating activities, excluding effect of acquisition:
Depreciation and amortization 30,900 50,700 193,400
Amortization of deferred financing costs 15,100 61,100 101,500
Issuance of common stock for services 8,000 - 223,400
Compensation related to grant of stock options
and certain warrants 17,200 5,000 408,100
Increase in prepaid and other current assets (7,000) (61,500) (71,300)
(Increase) decrease in other assets 4,000 (103,700) (166,200)
Increase (decrease) in accrued expenses (11,500) (145,300) 407,400
----------- ---------- ----------
Net cash used in operating activities (1,060,300) (1,272,000) (3,794,000)
----------- ---------- ----------
Cash flows from investing activities:
Acquisition of business - (481,200) (481,200)
Intangible assets (4,700) (151,900) (165,600)
Purchase of property and equipment (64,100) (5,500) (353,800)
----------- ---------- ----------
Net cash used in investing activities (68,800) (638,600) (1,000,600)
----------- ---------- ----------
Cash flows from financing activities:
Net proceeds from issuance of common stock
and warrants 512,000 16,160,400 17,697,600
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 (15,100) (85,600) (128,700)
----------- ---------- ----------
Net cash provided by financing activities 1,631,900 14,679,800 17,568,900
----------- ---------- ----------
Net increase in cash and cash equivalents 502,800 12,769,200 12,774,300
Cash and cash equivalents, beginning of period 12,000 5,100 -
----------- ---------- ----------
Cash and cash equivalents, end of period $ 514,800 12,774,300 12,774,300
----------- ---------- ----------
----------- ---------- ----------
Supplemental disclosure of cash flow information:
Cash paid during the period for interest $ 18,200 188,400 248,400
Supplemental disclosure of non-cash investing and
financing activities:
Equipment acquisitions under capital lease $ 48,100 - 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 unique 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. On
May 11, 1998 the Company completed its Initial Public Offering ("IPO")
whereby the Company sold 3,400,000 units at $5.50 per unit resulting in gross
proceeds of $18,700,000. The aggregate proceeds to the Company, net of
Underwriters' discount and offering costs were approximately $15.8 million.
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 financial
statements contain all adjustments necessary (consisting of normal recurring
accruals) for a fair presentation of the financial position as of June 30,
1998, and the results of operations for the three and six month periods ended
June 30, 1997 and 1998. The results of operations for the three and six
months ended June 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.
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):
Patents $ 105,300
Liabilities assumed (22,000)
Return of equity to IHI shareholders 397,900
---------
Purchase Price $ 481,200
---------
---------
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 six months
ended June 30, 1997 and 4,636,252 shares of common stock for the six months
ended June 30, 1998 at exercise prices ranging from $0.001 to $3.00 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.
6
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SUBSEQUENT EVENTS
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 option by the underwriters of the Company's IPO.
On August 10, 1998 the Board of Directors accepted the resignation of
Louis L. Knickerbocker as a Board member effective immediately.
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 SIX MONTHS ENDED JUNE 30, 1997 AND 1998
Operating expenses increased to $651,100 for the quarter ended June 30,
1998 from $457,000 for the same period in 1997 but decreased to $1,008,900
for the six months ended June 30, 1998 compared to $1,062,300 for the same
period ending in 1997. Marketing, general and administrative expense was
$584,100 and $738,500 for the quarter and six months ended June 30, 1998,
respectively compared to $346,900 and $786,200 for the same periods ending in
1997. The increase for the quarter in 1998 compared to 1997 was due to
increased salaries to employees and additional marketing research expense in
1998 as compared to 1997. This increase was offset in part during the quarter
by decreased consulting fees in 1998 compared to 1997. The decrease for the
six months ended June 30, 1998 was due to decreases in the first quarter of
1998 compared to 1997 as discussed in the Company's Form 10-QSB for the
quarter ended March 31, 1998. Research and development expense was $64,500
and $265,400 for the quarter and six months ended June 30, 1998, respectively
compared to $103,400 and $258,900 for the same periods ending in 1997. The
decrease for the quarter was due to decreased consulting fees as compared to
the same period in 1997.
7
<PAGE>
Interest expense was $92,800 for the quarter ended June 30, 1998,
compared to $30,900 for the same period in 1997, and was $161,100 for the six
months ended June 30, 1998 compared to $54,700 for the same period ending in
1997. The increases in interest expense are due to increased borrowings by
the Company throughout 1997 and the first four months of 1998. Interest
income was $91,700 during the quarter ended June 30, 1998 resulting from the
investment of proceeds from the Company's IPO.
The net loss for the quarter ended June 30, 1998 was $652,200, or $0.13
per share, compared to a net loss of $487,900, or $0.17 per share, for the
same period ending in 1997. The net loss for the six months ended June 30,
1998 was $1,078,300, or $0.27 per share compared to $1,117,000, or $0.40 per
share for the same period ending in 1997.
LIQUIDITY AND CAPITAL RESOURCES
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 June 30, 1998 the Company's cash and cash equivalents
totaled approximately $12.8 million. The Company received net proceeds from
its IPO of approximately $15.8 million of which approximately $2.3 million
was used to pay off principal and interest on bridge loans. In addition the
Company purchased the outstanding common stock of Insta-Heat, Inc. ("IHI")
for a total of $481,200.
The primary uses of cash and cash equivalents during the six months
ended June 30, 1998, include $1,272,000 to finance the Company's operations and
working capital requirements, increase in patent costs of $151,900, repayment
of debt and interest of approximately $2.3 million, decrease in capital
leases of $85,600, purchase of IHI stock for $481,200 and deposits on
equipment of $100,000. The Company plans to continue its policy of investing
excess funds in short-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 anticipates the proceeds of the IPO,
together with 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 18 to 24 months at its anticipated level of operations.
However, the Company may seek additional funding during the next 24 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 continue to 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.
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
systems and accordingly does not anticipate any internal Year 2000 issues
from its own information systems databases or programs. However, 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.
8
<PAGE>
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Not applicable
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 six months
ended June 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
August 14, 1998 By: /s/ JAMES A. SCUDDER
----------------------------------
James A. Scudder
President and Chief Executive Officer
(Principal Executive Officer)
August 14, 1998 By: /s/ KEVIN A. HAINLEY
----------------------------------
Kevin A. Hainley
Chief Financial Officer
(Principal Financial and Accounting
Officer)
9
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<RESTATED>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> APR-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 12,774,300
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 12,845,600
<PP&E> 539,400
<DEPRECIATION> 192,700
<TOTAL-ASSETS> 13,622,800
<CURRENT-LIABILITIES> 448,500
<BONDS> 0
0
0
<COMMON> 17,518,300
<OTHER-SE> (4,375,900)
<TOTAL-LIABILITY-AND-EQUITY> 13,622,800
<SALES> 0
<TOTAL-REVENUES> 0
<CGS> 0
<TOTAL-COSTS> 1,008,900
<OTHER-EXPENSES> 69,400
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 161,100
<INCOME-PRETAX> (1,078,300)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,078,300)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,078,300)
<EPS-PRIMARY> (.27)
<EPS-DILUTED> (.27)
</TABLE>
