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U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
FORM 10-KSB
/X/ Annual report under section 13 or 15(d) of the Securities Exchange Act of
1934
For the Fiscal Year ended DECEMBER 31, 1998
/_/ Transition report under section 13 or 15(d) of the Securities Exchange Act
of 1934
For the transition period from_______to_______.
Commission file number: 333-39253
ONTRO, INC.
(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)
13250 GREGG STREET, POWAY, CALIFORNIA 92064
(Address of principal executive offices) (Zip code)
(619) 486-7200
(Issuer's telephone number)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock no par
value
Warrants
(Title of Class)
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
----- -----
Check if disclosure of delinquent filers in response to Item 405 of Regulation
S-B is not contained in this form, and no disclosure will be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB. /X/
State issuer's revenues for its most recent year: $0.00
State the aggregate market value of the voting and non-voting common equity held
by non-affiliates of the registrant computed by reference to the price at which
the stock was sold, or the average bid and ask prices of such stock equity, as
of a date within the past 60 days: $11,971,200 as of March 22, 1999.
State the number of shares outstanding of each of the issuer's classes of common
equity, as of latest practicable date: As of March 22, 1999:
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<S> <C>
Common Stock: 6,489,478
Warrants to purchase Common Stock: 3,980,587
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DOCUMENTS INCORPORATED BY REFERENCE
The Issuer's definitive Proxy Statement for its Annual Meeting of Shareholders
to be submitted to the Commission on or before April 30, 1999 is incorporated by
reference in Part III of this Form 10-KSB to the extent stated herein.
Transitional Small Business Disclosure Format:
Yes No X
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PART I
ITEM 1. BUSINESS
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 discussed under the caption "Risk
Factors," and elsewhere in this Form 10-KSB and in the Company's Securities and
Exchange Commission filings.
OVERVIEW
Ontro, Inc. (the "Company" or "Ontro") is engaged in the research and
development of integrated thermal containers. The Company has the rights to 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. These
containers are similar to typical beverage containers in size and shape, and are
activated by the consumer to heat the contents within a few minutes. The Company
seeks to market its container technology to develop and expand a consumer market
for remote and mobile heating of beverages and other products.
The Company's products are still in development and are not currently sold
commercially. The Company's first anticipated commercial product is a
self-heating beverage container which will likely require final design
improvements, testing, and marketing studies before it will be manufactured and
marketed. The Company's other potential products will require additional
research and development before they will be ready for testing and further
market studies. There can be no assurance these efforts will be successfully
completed.
While the Company believes it is in the final stages of completing
development of its self-heating beverage container, production equipment is
currently being installed in order to complete additional testing and
improvements to different aspects of the containers before the current
demonstration models are intended to be put into commercial production.
Additional refinements which the Company anticipates completing include, but are
not limited to, the areas of seam failure, heat transfer, content related
issues, heating control, sterilization, timing and temperature ranges,
appearance, and packaging. There can be no assurance these refinements will be
successfully concluded.
The Company believes substantial market opportunities exist for the
exploitation of the Company's integrated thermal container technology. The
Company believes as society has become more mobile, demand has risen for remote
heating of goods, and conventional heating sources do not supply truly remote
consumption due primarily to inconvenience and the inability of consumers to
access these sources in a mobile environment. The Company's self-heating
containers are expected to meet the needs of consumers such as mothers requiring
warmed baby formula, commuters, mobile professionals, sports enthusiasts and
others without quick and convenient access to conventional heating sources.
The Company intends to become a leading provider of integrated thermal
containers and related technology to food, beverage and other manufacturers. In
order to do so the Company will have to complete the development of its proposed
products and successfully manufacture and market them. The Company's principal
strategies include:
SUB-LICENSE AGREEMENTS WITH MAJOR FOOD, BEVERAGE AND CONTAINER COMPANIES.
The Company's principal marketing strategy is to target major food,
beverage and container manufacturers for the sub-licensing of its integrated
thermal container technologies. These manufacturers are expected to manufacture,
label, fill, market and distribute containers under their own brand name or for
third parties in exchange for providing the Company royalties and/or research
and development and marketing assistance. Management believes this approach
should allow the Company to access the manufacturing, marketing, name brand and
distribution capabilities of potential licensees without the high overhead costs
of plant, equipment and labor. The Company believes its integrated thermal
containers could assist manufacturers in offering a value-added product to
complement existing product lines and assist in expanding market share. To
successfully implement this strategy, the Company will have to complete its
product
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development, and market the proposed products to potential sublicensees who
will have to be independently satisfied with the products and the market
opportunity. There can be no assurance the Company will be able to complete
these objectives. The evaluation agreement the Company previously had with
Nestle, USA expired according to its terms.
STRATEGIC MANUFACTURING AND MARKETING.
Concurrently with seeking sub-license agreements, the Company plans to
directly produce and market self-heating beverage containers to selected niche
markets. The Company believes such manufacturing and marketing should provide
substantial benefits including: (i) additional revenues to fund marketing
efforts to major food, beverage and container companies as described above; (ii)
demonstration of product feasibility and the manufacturing process; and (iii)
providing evaluation units for use in conducting marketing and product
feasibility studies by the Company and others. The Company plans to selectively
market to customers and distributors whom the Company believes would not
interfere with potential sublicenses the Company intends to seek with major food
and beverage container manufacturers. The Company is in the process of
completing its development of a full-scale production facility for these
purposes. In addition to completing its manufacturing facility and successfully
demonstrating its capacity to manufacture commercial quantities of completed
products, the Company will have to identify and obtain distribution channels in
such niche markets. There can be no assurance the Company will be able to
complete these objectives.
DEVELOP INTEGRATED THERMAL TECHNOLOGY FOR OTHER APPLICATIONS.
The Company plans to develop additional integrated thermal containers
to further access the beverage market. The Company is designing a proprietary
reusable thermos-Registered Trademark- type container with insertable thermal
cartridges, which would allow the consumer to heat and re-heat, an integrated
thermal container filled by the consumer with the liquid of his/her choice.
The Company is developing a disposable self-heating baby bottle, which could
be pre-filled with formula and heated on demand. The Company's plans also
include additional research and development into designs and potential uses
of integrated thermal containers for medical, pharmaceutical, health, and
beauty products, as well as other potential industrial applications. The
Company intends to utilize the expertise of its management to identify market
opportunities for its technology. There can be no assurance the Company will
be able to complete the design and development of or market any such
integrated thermal containers.
PRODUCTS
SELF-HEATING BEVERAGE CONTAINERS
The Company's first product is a fully contained, disposable, self-heating
beverage container similar in size and shape to an ordinary 16-ounce beverage
can. The containers are being designed to be heated by pushing a button on the
bottom of the container. Activating the heating mechanism by pressing the button
causes the contents in the container, such as approximately 10 ounces of coffee,
soup, tea, hot chocolate or baby formula, to safely warm to a predetermined
range of temperatures within a specified range of time periods. The container
can then be opened by a typical style pop top for immediate consumption. At its
current stage of development the Company's initial proposed product has been
manufactured, and test marketed in limited quantities. The product will likely
require further design improvements, testing and marketing studies before it is
introduced into the marketplace.
The Company's proposed self-heating containers heat the contents inside
the container through a patented and patent pending process developed by the
Company. The process utilizes two separate compartments in the container. One
compartment holds the beverage or food. The second compartment contains
non-toxic heat activating ingredients and water which are segregated into two
component areas.
Pressing the button causes the water to be mixed with the active
ingredients and heat develops from the resulting chemical reaction.
To date, the Company has developed several prototypes which it believes
demonstrate the feasibility of its self-heating beverage container technology.
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Management believes the key attributes of its systems are the following:
EASE OF USE -- This system is designed so that a consumer can activate the
system merely by pushing a button; the contents are heated to a predetermined
range of temperatures within a specified range of time periods.
EASE OF USE BY MANUFACTURER -- The Company's products are designed to be
easily integrated into a manufacturer's existing production system. The current
design of the self-heating container is similar to a 16 oz. beverage container,
which configuration should allow manufacturers to integrate containers on an
existing assembly line for filling without substantial modification to their
existing manufacturing processes.
In addition, the Company's product is designed to be easily modified to
provide heated contents at a pre-determined range of temperatures within a
specified range of time periods. By varying the amount of heat activating
ingredients in the heating compartment, the manufacturer can tailor the time and
temperature required to heat the contents without altering the container itself.
EASE OF DISPLAY BY RETAIL DISTRIBUTORS -- The container's current 16 oz.
style beverage configuration should allow distributors the ability to easily
integrate the product in space and point of purchase displays at supermarkets
and convenience stores without substantial modification to existing displays.
PRICING -- The Company has designed the product to be easily and simply
manufactured, with readily available components. The Company believes that
manufacturers are more likely to integrate the process with existing products so
long as the incorporation of such technology does not result in substantial
price increases to consumers.
USE OF NON-TOXIC MATERIALS -- The Company's products utilize non-toxic,
natural materials in its heating process. Management believes that consumers
could be more likely to purchase the Company's products if they believe the
beverage contents are not subject to toxic contamination from the heating
source.
The Company is continually evaluating certain design features of its
self-heating containers to refine such items as: the speed and efficiency of the
heat transfer; suitability for high viscosity contents; maintaining structural
integrity of the container; temperature control; and ease of use. Certain
aspects of its proposed products are still under development.
OTHER PROPOSED PRODUCTS
The Company is developing a self-heating food container which could be
pre-filled with items such as chili, soups, stews, and other food products.
The Company is also designing a proprietary reusable thermos-Registered
Trademark- type container with insertable thermal cartridges, which would
allow the consumer to heat and re-heat, or cool and re-cool, an integrated
thermal container filled by the consumer with the beverage of his/her choice.
The Company plans to develop similar containers of differing designs,
which may be able to be used for beverages or food. For example, the Company is
developing a disposable self-heating baby bottle, which could be pre-filled with
formula and heated on demand. The Company plans on conducting additional
research and development into designs and potential uses of integrated thermal
containers for medical, pharmaceutical, health and beauty products, and other
potential industrial applications.
The Company believes it can formulate differing active ingredients to
enable the contents of its integrated thermal containers to be cooled. The
Company is currently investigating the development of self-cooling technology.
Currently the Company has not expended substantial research and development
efforts toward and has not produced any prototypes of a self-cooling container.
For the years ended December 31, 1998 and 1997, the Company expended
$754,200 and $580,100, respectively, on research and development.
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MARKETING
The Company's principal marketing strategy is to sub-license to major
manufacturers rights to integrated thermal container technologies developed by
or licensed to the Company. The initial focus of the Company's marketing efforts
will be on food and beverage and container manufacturers who the Company
believes may choose to package or sell containers, including such contents as
coffee, tea, hot chocolate, low-viscosity soups, and baby formula. The Company
is targeting companies which have large operations in an effort to take
advantage of their marketing and distribution capabilities and brand name
recognition.
Since the Company believes securing such sub-license agreements may be a
very time consuming process, the Company also plans to produce and sell
self-heating beverage containers to customers and distributors. The Company
believes this secondary marketing strategy may assist in generating revenues
prior to the time larger volume sub-license agreements, if any, are obtained.
The Company plans to select such customers and distributors who the Company
believes would not interfere with sub-licenses the Company intends to seek with
major food and beverage container manufacturers.
There can be no assurance this secondary marketing strategy of direct
sales or distribution arrangements will be successful, or if it is, that such
agreements will not preclude or impede sub-license agreements, if any, with
major food and beverage or container manufacturers. The Company intends to
retain a small sales staff to pursue such direct sale and distribution
opportunities. To assist in securing sublicense candidates and to determine the
potential market for its proposed containers, the Company intends to continue
conducting marketing studies in the next year. It is anticipated such marketing
studies will be contracted from third parties; however, the Company may conduct
a portion of such marketing studies internally. There can be no assurance the
results of such marketing studies will be favorable to the Company. If they are
not, they could have a material adverse impact on the business, financial
condition, and results from operations of the Company.
MANUFACTURING AND PRODUCTION
The Company intends to sub-license most of its integrated thermal
container technology to large food, beverage, and container manufacturers. The
Company believes this strategy could provide material benefits, including use of
the greater manufacturing, marketing, and distribution expertise of such
companies, and potential reduction of substantial manufacturing costs. While no
sub-license agreements have been executed to date, the Company anticipates
entering into sub-licenses where the sub-licensees are responsible for
purchasing the raw materials, manufacturing or contracting for the manufacture
of the container, labeling, filling, marketing, selling, and distributing the
integrated thermal container technology or any other related technologies
licensed to them by the Company. There can be no assurance the Company will be
able to license its technology to anyone including such companies, or on what
terms.
In January 1999 the Company moved into its administration offices and
production facility and is currently installing additional integrated thermal
container manufacturing equipment. The Company's new facility will be dedicated
to research and development and to manufacturing and assembling integrated
thermal containers. The purpose of the manufacturing and assembly facilities is
to demonstrate the commercial viability of the Company's manufacturing
processes, to supply enough self-heating containers for additional testing and
market studies, and to produce self-heating beverage containers which can be
sold directly or to distributors. It is anticipated containers sold directly or
to distributors will be filled, packaged, and distributed by the customer, the
distributor or their contract manufacturer. The Company may, on a limited basis,
fill the contents of containers at its facilities. The Company's semi-automated
production facility is designed to allow most of the component parts of the
Company's self-heating beverage container to be manufactured on the Company's
premises. Certain components, including the activation device, are purchased
from third party vendors. The Company believes its production facility will
assist commercialization efforts as it is anticipated such production efforts
will assist in further refinement of the Company's integrated thermal containers
following future testing and marketing studies.
The Company will utilize the blow-molding process to produce the main
component of the Company's self-heating beverage containers. In the blow-molding
process, pellets of plastic resin are heated and extruded into a tube of
plastic. A two-piece metal mold is then closed around the plastic tube, and high
pressure air is blown into it, causing a plastic container to form in
conformance to the mold's shape. The Company believes the blow-molding method is
an established process in the plastic beverage container
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industry. The Company believes the blow-molding process offers certain
advantages, including the following: it is less expensive than injection
molding; it is expected to allow the Company to more accurately control the
thickness of the inner and outer walls of the container thereby assisting in
heat retention and heat transfer; it generally results in a strong oxygen
barrier which could increase shelf stability; and all equipment used in the
process is generally available and can be purchased with little, if any, custom
parts or conversions.
The Company has implemented certain quality control procedures for its
production facility. The Company's quality control personnel now regularly
monitor the manufacturing process and the Company anticipates they will monitor
additional items in the future such as blow-molding to assure the plastic
containers and component parts are free from defects. At such time, when the
Company sells integrated thermal containers produced by its facilities, if ever,
the Company expects some or all of its customers will impose additional quality
control standards. It is possible such customer or other required quality
control standards will require the expenditure of substantial resources over a
long period of time, or that the Company will determine such measures are not
cost-effective.
To ensure contents are not contaminated during or after packaging and to
comply with food and beverage manufacturers' requirements, the Company has
refined the design of its containers so they may be filled by the various
sterilization processes generally in use today for food and beverage containers.
The design of its containers currently allows them to be processed through all
but one (hot fill, aseptic, ultra high temperature, pasteurization, and
irradiation) method of sterilization. The Company is continuing to further the
development of its designs to enable its containers to also be suitable for the
"retort" method of sterilization. Sterilization methods generally expose the
containers to high temperatures and/or pressures, for a designated period of
time to sterilize the container of microorganisms which could have an effect
upon the contents therein. Some sterilization processes place a great deal of
stress on a container because the process subjects the container to high
pressure and/or high temperature for a period of time which can challenge the
seams or compromise the integrity of a plastic container. The Company believes
its self-heating beverage containers will be able to satisfactorily endure the
various sterilization processes with a liquid beverage or other food product
inside. There can be no assurance the Company will resolve these design issues
or resolve other design issues which may appear during testing or commercial
use.
To ensure licensees, if any, comply with the level of quality control
standards the Company anticipates will be essential for its success, the Company
intends to require its licensees to comply with what are known as the ISO 9000
standards. The Company plans to actively review the production processes and to
routinely test the goods produced by its licensees. The Company also plans on
requiring any contract manufacturers to also comply with ISO 9000 standards. The
Company believes ISO 9000 standards are generally regarded as fairly rigorous.
There can be no assurance the Company will be able to successfully require
licensees or contractors to comply with these standards, or any specific quality
control standards.
The Company intends to design all integrated thermal containers used by
its licensees or contract manufacturers, and intends to participate in the
design of such parties' production tooling and molds. The Company plans on
requiring molds and tooling used for the manufacture of containers utilizing its
technologies to comply with specifications and quality control parameters
established by the Company. There can be no assurance the Company will be able
to adequately monitor, require or assure such parameters are met, or otherwise
adequately control the manufacturing processes of any licensee or contract
manufacturer.
The Company estimates its improved production facility utilizing a single
blow-molder and one eight hour shift should be able to produce approximately
2,000,000 containers per year, and using a double shift should be able to
produce approximately 4,000,000 containers per year. It is anticipated these
production figures could be increased with the installation of additional
equipment. There can be no assurance the proposed production facility, if
completed, will produce the estimated number of containers or if this number of
containers is produced, it will be sufficient to supply the demand, if any,
which may result for containers manufactured by the Company.
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RAW MATERIALS AND SUPPLIERS
The primary raw materials used by the Company in the manufacture of its
integrated thermal containers are plastic resins, polyvinyl chloride (plastic),
calcium oxide, water, and foil seal lids. The Company does not currently have
agreements with any of its suppliers for the purchase of its raw materials.
The Company believes increases in the prices of its raw materials should
be able to be passed along to its licensees and customers. The inability to pass
on increased raw material costs could have a material adverse impact on the
Company's business, financial condition, and results from operations,
particularly if the Company is not able to pass on such price increases in the
license agreements, if any, with its intended market of food, beverage or
container manufacturers.
The primary plastic resins used by the Company are produced from
petrochemical intermediates derived from products of the natural gas and crude
oil refining processes. Natural gas and crude oil markets in the past have
experienced substantial cyclical price fluctuations as well as other market
disturbances, including shortages of supply and crises in some of the larger oil
producing regions of the world. The capacity, supply, and demand for plastic
resins and the petrochemical intermediates from which they are produced are also
subject to cyclical and other market factors. Consequently, plastic resin prices
may fluctuate as a result of natural gas and crude oil prices, as well as the
capacity, supply and demand for resin and petrochemical intermediates.
PATENTS AND PROPRIETARY TECHNOLOGY
The Company's integrated thermal container technology was developed by
Insta-Heat, Inc ("IHI") which is a wholly-owned subsidiary of the Company.
To date, IHI has four issued patents and one patent application pending in
the United States, each one relating to various aspects of the Company's
integrated thermal container technology. Patent No. 5,461,867 was issued to IHI
on October 31, 1995 and includes 39 claims regarding a container with an
integral module for heating or cooling contents. Patent No. DES 371,513 was
issued to IHI on July 9, 1996, and includes one claim regarding an end cap for a
container. Patent No. 5,626,022 was issued to IHI on May 6, 1997, and is a
continuation in part of Patent No. 5,461,867 and includes 25 claims regarding a
container with an integral module for heating or cooling the contents. Patent
No. 5,809,786 was issued to IHI on September 22, 1998 and is a continuation of
Part of Patent No. 5,626,022 and includes seven claims regarding a container
with an integral module for heating or cooling the contents. There can be no
assurance any patents will be issued to IHI as a result of IHI's pending
application, or if issued, such patents combined with existing patents will be
sufficiently broad to afford protection against competitors using similar
technology. The Company's success will depend in large part on its ability to
obtain patents for integrated thermal container technologies and related
technologies, if any, to defend patents once obtained, to maintain trade secrets
and to operate without infringing upon the proprietary rights of others, both in
the United States and in foreign countries. IHI also has foreign patents pending
for certain elements of the current and earlier designs of its integrated
thermal containers, and has received approval of certain of these applications.
There can be no assurance any patents issued to IHI or to the Company will
not be challenged, invalidated, or circumvented, or that the rights granted
thereunder will provide competitive advantages to the Company. Litigation over
patent or other intellectual property claims could result in substantial costs
to the Company. U.S. patents do not provide any remedies for infringement
occurring before a patent is granted. Because patent rights are territorial, the
Company may not have an effective remedy against use of its patented technology
in any country in which IHI does not, at the time, have an issued patent.
The commercial success of the Company may also depend upon avoiding the
infringement of patents issued to competitors. If competitors prepare and file
patent applications in the United States claiming technology also claimed as
proprietary by the Company, the Company may be forced to participate in
interference proceedings declared by the United States Patent and Trademark
Office ("PTO") to determine the priority of the invention. Such proceedings
could result in substantial costs to the Company, even if the outcome is
favorable to the Company. An adverse outcome of such proceedings could subject
the Company to significant liabilities to third parties and could require the
Company to license disputed rights from third parties or cease using the
infringing technology. The Company is aware of U.S. patents issued to third
parties that broadly claim self-heating technology similar to the Company's.
Although the Company believes its
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current and proposed activities do not and will not infringe upon these patents,
there can be no assurance the Company's belief would be affirmed in any
litigation over any patent or the Company's future technological developments
will be outside the scope of these patents. A U.S. patent application is
maintained under conditions of confidentiality while the application is pending
in the PTO, so the Company cannot determine the inventions being claimed in
pending patent applications filed by its competitors. U.S. patents do not
provide remedies for infringement occurring before the patent is granted.
The Company relies on certain technologies which are not patentable and
are therefore potentially available to the Company's competitors. The Company
also relies on certain proprietary trade secrets and know-how which may not be
patentable. Although the Company has taken steps to protect its unpatented
technologies, trade secrets, and know-how, in part through the use of
confidentiality agreements with certain employees, consultants, and contractors,
there can be no assurance these agreements will not be breached, the Company
would have adequate remedies for any breach, or the Company's trade secrets will
not otherwise become known or be independently developed or discovered by
competitors.
TRADEMARKS
The Company has two registered trademarks for the name "Ontro" and the
Company logo. IHI has two registered trademarks, "Anytime Anywhere," and
"Insta-Heat."
COMPETITION
The Company believes the market for integrated thermal containers is an
emerging market. There can be no assurance there will be sufficient demand for a
producer of such containers to profit therefrom. The plastic and beverage
container industry is highly competitive and sensitive to changing consumer
preferences and demands. The Company is aware of six firms that currently
manufacture or market self-heating containers or products sold in self-heating
containers. The Company believes two of these firms manufacture and market
containers in the U.S. and the other four currently manufacture and market
exclusively in foreign countries. The Company is not aware of any other current
direct competition for integrated thermal containers in the U.S. marketplace.
The Company believes the other competitors manufacture self-heating
containers for beverages, meals, a single serving espresso and hot sake. The
Company believes each of the foreign firms holds one or more U.S. patents on
their designs. The Company believes at least three of the known competitors use
a reactant system similar to the Company's proposed self-heating containers.
The Company believes competition among marketers of self-heating beverage
containers will be based primarily on price, product safety, ease of use,
quality, product recognition, access to distribution channels, product
innovation, and packaging. The competitive position of the Company will in part
depend on the ability of the Company to remain current in plastics manufacturing
technology and to anticipate innovations in integrated thermal container
technology as well as changes in consumer preferences. If the Company's
integrated thermal containers are successfully received in the market, increased
competition is probable. Increased competition is likely to result in price
reductions, reduced operating margins, and loss of market share, any of which
could materially and adversely affect the Company's business, operating results,
and financial condition. There can be no assurance the Company will be able to
compete successfully, keep pace with technological developments, or have
sufficient funds to invest in new technologies, products, or processes.
There also can be no assurance companies in the food and beverage or
container industry, or other companies, will not enter the market for integrated
thermal containers with products that are superior to, less expensive, or which
achieve greater market acceptance than the Company's proposed containers. The
majority of food and beverage and container manufacturers are substantially
larger and more diversified than the Company; have substantially greater
financial and marketing resources than the Company; have greater name
recognition and distribution channels than the Company; and may have the ability
to develop competitively priced integrated thermal containers.
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LIABILITY INSURANCE
The Company's proposed containers expose it to possible product liability
claims if, among other things, the use of its proposed containers results in
personal injury, death or property damage. There can be no assurance the Company
will have sufficient resources to satisfy any liability resulting from such
claims or will be able to cause its customers to indemnify or insure the Company
against such claims. The Company intends to obtain increased product liability
insurance prior to the commencement of commercial shipment of its products.
There can be no assurance such insurance coverage will be adequate in terms and
scope to protect the Company against material adverse effects in the event of a
successful claim, or that such insurance will be renewed, or the Company will be
able to acquire additional coverage when it deems it desirable to do so.
ENVIRONMENTAL MATTERS AND GOVERNMENT REGULATIONS
All of the currently projected uses for the Company's integrated thermal
containers presently fall under the authority in the United States of the United
States Food and Drug Administration ("FDA") and the United States Department of
Agriculture ("USDA"). The FDA regulates the material content of direct-contact
food containers and packages, including certain thin wall containers
manufactured by the Company. The Company expects that licensees or distributors
will be responsible for filling the containers with beverages and complying with
appropriate FDA regulations. However, in the event containers are filled at its
own facility, the Company expects to comply with such FDA regulations. The
Company uses approved resins and pigments in its direct-contact food products
and believes its proposed containers will be in material compliance with all
applicable FDA and USDA regulations.
The Company, like all companies in the plastics industry, is also subject
to federal, state, and local legislation designed to reduce solid wastes by
requiring, among other things, plastics to be degradable in landfills, minimum
levels of recycled content, various recycling requirements, disposal fees and
limits on the use of plastic products. In addition, various consumer and special
interest groups have lobbied from time to time for the implementation of
additional environmental protection measures. The Company does not know of any
legislation promulgated to date or similar initiatives that would, if enacted,
have a material adverse effect on its business. There can be no assurance future
legislative or regulatory enactments or other similar initiatives would not have
a material adverse effect on the Company's business, financial condition, and
results from operations.
EMPLOYEES
As of March 22, 1999, the Company employs twenty full-time employees. None
of the Company's employees are represented by a labor union or bound by a
collective bargaining agreement. The Company anticipates it will hire an
undetermined number of new employees over the next 12 to 18 months.
RISK FACTORS
NO OPERATING REVENUES; ACCUMULATED DEFICIT; EXPECTATION OF FUTURE LOSSES
The Company has experienced operating losses in each fiscal period since
its inception in 1994. As of December 31, 1998, the Company had a deficit
accumulated in the development stage of approximately $6.5 million. The Company
expects to incur additional operating losses through at least 1999 and possibly
thereafter. The Company has generated no revenues from operations. The
development of the Company's integrated thermal containers will require the
commitment of substantial resources in order to make it feasible for such
containers to be sold, or for the underlying technology to be licensed to third
parties, and/or for the Company to sell its proposed containers to distributors
or others who may be responsible for the manufacture and marketing of the
proposed containers, or to establish commercial scale manufacturing processes
and facilities for such manufacturing, and to establish additional quality
control, marketing, sales and administrative capabilities. There can be no
assurance the Company will be successful in any of these endeavors. There can be
no assurance the Company will enter into arrangements with third parties for
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product development and commercialization, or will successfully market or
license any containers. To achieve profitable operations, the Company, alone or
with others, must successfully develop, manufacture and market its proprietary
containers or technologies. There can be no assurance the Company will be able
to accomplish these tasks. Significant delays in any of these matters could have
a material adverse impact on the Company's business, financial condition and
results of operations.
FUTURE CAPITAL REQUIREMENTS UNCERTAIN; NO ASSURANCE OF FUTURE FUNDING
The Company will be required to make substantial expenditures to conduct
existing and planned research and development, to manufacture or contract for
the manufacture of, and to market its proposed containers. 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 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 12 to 18 months at its anticipated level of operations. However, the
Company may seek additional funding during the next 18 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. 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.
The Company has limited established bank financing arrangements, and it is
not anticipated the Company will secure any bank financing in the foreseeable
future. The Company intends to finance the development and marketing of its
proposed containers through license agreements, distribution agreements,
strategic alliances and other arrangements with third parties. There can be no
assurance such license, distribution, marketing, strategic, or other
collaborative arrangements will be obtained, or that additional funds will be
available when needed, or on terms acceptable to the Company. If adequate funds
are not available, the Company may be required to relinquish rights to certain
of its technologies or potential products the Company would not otherwise
relinquish. The Company's future cash requirements will be affected by results
of research and development, collaborative relationships, if any, changes in the
focus and direction of the Company's research and development programs,
competitive and technological advances, and other factors.
EARLY STAGE OF DEVELOPMENT; ABSENCE OF PRODUCTS
The Company is a development stage company. It has not completed the final
development of any product and, has not begun to market or generate revenues
from operations. The Company's first anticipated commercial product is a
self-heating beverage container which will require final design improvements,
testing, and marketing studies before it will likely be introduced in the
marketplace. There can be no assurance such efforts will be successful, and the
self-heating beverage container or any of the Company's other potential products
under development will be able to be manufactured at acceptable costs and
quality standards. The Company cannot predict with certainty when, if ever, it
will begin to market the proposed self-heating beverage container or any other
integrated thermal container it is developing, and currently does not expect
them to be available to consumers prior to the third quarter of 1999.
While the Company believes it is in the final stages of completing
development of its self-heating beverage container, additional work testing or
verifying different aspects of the containers is planned before the prototypes
will likely be put into commercial production. Such aspects include, but are not
limited to, the areas of seam failure, heat transfer, type of content issues,
heating control, pasteurization, timing and temperature ranges, appearance, and
packaging. The Company has identified certain unusual circumstances where the
self-heating container could heat to unacceptably high levels and jeopardize the
structural integrity of the container to the extent it might not withstand the
market reliability and quality control standards generally required of
containers for food and beverage products. The Company is currently researching
the use of moderating agents and other design refinements to inhibit such
potential reactions. The Company is also researching different compositions of
the active ingredients to increase the predictability of the heating
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reaction and simplify the manufacturing process. There can be no assurance the
Company will be successful in completing such design refinements or achieve
significant commercial distribution of its proposed products.
COMPLETE DEPENDENCE ON MARKET ACCEPTANCE OF INTEGRATED THERMAL CONTAINERS
The Company has not yet commenced sales of its self-heating beverage
container, which is currently the Company's only substantially developed
product. The Company anticipates it will derive substantially all of its
revenues from the sale of licenses of its integrated thermal container
technology. Consequently, the Company is entirely dependent on the successful
introduction and commercial acceptance of this technology. Unless and until such
integrated thermal containers receive market acceptance, the Company will not
likely have any material source of revenue. There can be no assurance that
integrated thermal containers will achieve market acceptance. The Company's
ability to license its technology or sell its containers will be substantially
dependent on the results of certain market studies, and there can be no
assurance the studies currently underway or to be conducted in the future will
demonstrate the level of probable market acceptance sufficient to interest
licensees and distributors to enter into agreements with the Company regarding
its products and technologies. Commercial acceptance of its containers will
require the Company to successfully establish sales through distribution
channels, of which there can be no assurance. Any such failure will likely have
a material adverse effect on the Company's business, financial condition and
results of operations. Failure of the Company's integrated thermal containers to
achieve significant market acceptance will have a material adverse effect on the
Company's business, financial condition and results of operations.
NEW PRODUCTS AND RAPID TECHNOLOGICAL CHANGE
If the Company's proposed integrated thermal containers are commercially
accepted, such markets are expected to be characterized by rapid technological
advances, evolving industry standards, and frequent new product introductions
and enhancements. The introduction by competitors of containers embodying new
integrated thermal technologies and the emergence of industry standards could
render the Company's containers currently under development obsolete or
unmarketable. The Company's future success may depend upon its ability to keep
pace with technological development and respond to evolving consumer demands.
Failure by the Company to anticipate or respond adequately to technological
developments or changes in consumer tastes, or significant delays in product
development, could damage the Company's potential position in the marketplace
and could result in less revenues and/or lack of profits. The Company may need
to increase the size of its product development staff in the near term to meet
these challenges. There can be no assurance the Company will be successful in
hiring and training adequate product development personnel to meet its needs or
that it will have the resources to do so. There can be no assurance the Company
will be successful in developing and marketing its proposed containers, new
products, or product enhancements, or will not experience significant delays in
such endeavors in the future. Any failure to successfully develop and market its
integrated thermal containers or other products and product enhancements could
have a material adverse effect on the Company's financial condition, business,
and results from operations.
PATENTS AND PROPRIETARY RIGHTS
The Company's success will depend, in large part, on the Company's
ability to obtain patent protection for the proposed containers, both in the
United States and in foreign countries. Ontro's wholly owned subsidiary, IHI
currently has four patents issued, and one additional patent application
pending in the United States. There have been foreign counterparts to certain
of these applications filed in other countries on behalf of IHI. The Company
intends to file or have IHI file additional applications as appropriate for
patents covering one or more proposed containers and related processes. There
can be no assurance patents will issue from any of the pending applications,
or for patents that have been issued or may be issued, that the claims
allowed will be sufficiently broad to protect the Company's technology. In
addition, there can be no assurance any patents issued to IHI or to the
Company will not be challenged, invalidated or circumvented, or that the
rights granted thereunder will provide adequate proprietary protection to IHI
or to the Company. In addition, any patents obtained by the Company will be
of limited duration. All United States patents issuing from patent
applications filed June 8, 1995 or thereafter will have a term of 20 years
from the date of filing. All United States patents in force before June 8,
1995 will have a term of the longer of: (i) 17 years from the date of
issuance; or (ii) 20 years from the date of filing. All United States patents
issuing from patent applications applied for before June
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8, 1995 will have a term equal to the longer of: (i) 17 years from the date
of issuance; or (ii) 20 years from the date of filing. All United States
design patents have a 14 year life from the date of issuance.
The commercial success of the Company may also depend upon avoiding
infringing on patents issued to competitors. If competitors prepare and file
patent applications in the United States that claim technology also claimed by
the Company or IHI, the Company may have to participate in interference
proceedings declared by the PTO to determine the priority of invention, which
could result in substantial cost, even if the outcome is favorable to the
Company. An adverse outcome could subject the Company to significant liabilities
to third parties, and could require the Company to license disputed rights from
third parties or cease using all or part of the licensed technology. The Company
is aware of U.S. and foreign patents issued to third parties that broadly claim
self-heating technology similar to the Company's. Although the Company believes
its current activities do not infringe on these patents, there can be no
assurance the Company's belief would be affirmed in any infringement litigation
over the patents, or that the Company's future technological developments would
be outside the scope of these patents. A U.S. patent application is maintained
under conditions of confidentiality while the application is pending in the PTO,
so the Company cannot determine the inventions being claimed in pending patent
applications filed by its competitors in the PTO. Further, U.S. patents do not
provide any remedies for infringement that occurred before the patent is
granted.
The Company also attempts to protect its proprietary and its licensed
technology and processes by seeking to obtain confidentiality agreements with
its contractors, consultants, employees, potential collaborative partners,
licensees, licensors and others. There can be no assurance these agreements will
adequately protect the Company, will not be breached, the Company will have
adequate remedies for any breach, or that the Company's trade secrets will not
otherwise become known or be independently discovered by competitors. This
approach could increase the risk to the Company which may not be able to protect
its proprietary and licensed technology.
There can be no assurance others will not independently develop similar or
more advanced technologies or design around aspects of IHI's technology which
may be patented, or duplicate the Company's trade secrets. In some cases, the
Company may rely on trade secrets to protect IHI or its inventions. There can be
no assurance trade secrets will be established, secrecy obligations will be
honored, or that others will not independently develop similar or superior
technology. To the extent consultants, key employees, or other third parties
apply technological information independently developed by them or by others to
Company projects, disputes may arise as to the proprietary rights to such
information, which may not be resolved in favor of the Company.
LIMITED MANUFACTURING FACILITIES; PROBABLE SIGNIFICANT DEPENDENCE ON
SUB-LICENSEES FOR MANUFACTURE, MARKETING, AND SALE OF PROPOSED PRODUCTS
The Company's strategy is to sub-license its integrated thermal
technologies to major food, beverage, and container companies. The Company
anticipates requiring such companies to be responsible for the manufacture,
marketing, and sale of the overwhelming majority of the Company's proposed
containers. The Company has purchased equipment which will enable it to
manufacture self-heating beverage containers for testing and marketing studies,
and to sell limited quantities of certain self-heating containers to
distributors or other customers. The Company intends to require most of its
distributors and other customers to manufacture and market the containers they
purchase or sub-license, or to contract for the manufacture, marketing, and
distribution of the containers. There can be no assurance the Company will enter
into satisfactory license agreements with any parties for the manufacture,
marketing, or sale of its integrated thermal containers; that such licenses, if
any, will result in revenues to the Company; the Company will enter into any
agreements with distributors or others for the manufacture, marketing, or sale
of its proposed containers, or that parties who do enter into such agreements
will perform adequately. In the event the Company is unable to license its
technology to third parties or is unable to require third parties to
manufacture, market, and sell substantial quantities of its proposed containers,
the Company could be required to develop adequate manufacturing facilities to
fulfill any demand for its containers. The development of such facilities could
require additional capital, personnel, and other resources beyond any available
resources of the Company at this time. There can be no assurance the Company
will be able to successfully establish such manufacturing operations or obtain
any additional capital.
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PROBABLE DEPENDENCE ON OUTSIDE PARTIES FOR MARKETING AND DISTRIBUTION
If the Company is successful in completing the development of its proposed
integrated thermal containers the Company intends to primarily market its
proposed products through contractual arrangements with others such as
sub-licensing, distribution or similar collaborative agreements. This may result
in a lack of control by the Company over some or all of the material marketing
and distribution aspects of its potential products. There can be no assurance
the Company will be able to maintain the quality of its products when they are
manufactured by unrelated parties. Any significant quality control problems
could result in excessive recalls, increased product liability exposure, and
reduced market acceptance.
There can be no assurance the Company will enter into any marketing and
related arrangements on terms acceptable to the Company, or that any marketing
efforts undertaken on behalf of the Company by third parties will be successful.
The inability of the Company to license its products to others for their
distribution, or inadequacy of such licensees' distribution, or the inability of
the Company to enter into distributorship or similar agreements to market
products produced by the Company would likely have a material adverse impact on
the ability of the Company to market its products.
The Company may, in the future, determine to directly market certain of its
proposed containers. The Company has a limited marketing budget and resources.
Additional capital expenditures and management resources would be required to
develop more complete marketing and distribution capabilities. In the event the
Company elects to engage in broader or more direct marketing activities, there
can be no assurance the Company will be able to obtain the requisite funds, or
attract and retain the human and other resources necessary to successfully
expand its marketing plans for any of its potential products.
The Company's future growth and profitability is expected to depend, in
large part, on the success of its licensees, sub-licensees and distributors, if
any, and others who may participate in marketing efforts on behalf of the
Company. Success in marketing the Company's containers will be substantially
dependent on educating the targeted markets as to the distinctive
characteristics and perceived benefits of the Company's proposed containers.
COMPETITION
The Company believes competition among marketers of self-heating beverage
containers will be based primarily on price, product safety, ease of use,
quality, product recognition, access to distribution channels, product
innovation, and packaging. The competitive position of the Company will in part
depend on the ability of the Company to remain current in plastics manufacturing
technology and to anticipate innovations in integrated thermal container
technology, as well as changes in consumer preferences. If the Company's
integrated thermal containers are successfully received in the market, increased
competition is probable. Increased competition is likely to result in price
reductions, reduced operating margins, and loss of market share, any of which
could materially and adversely affect the Company's business, operating results,
and financial condition. There can be no assurance the Company will be able to
compete successfully, keep pace with technological developments, or have
sufficient funds to invest in new technologies, products, or processes.
There also can be no assurance companies in the food and beverage or
container industry, or other companies, will not enter the market for integrated
thermal containers with products that are superior to, less expensive, or which
achieve greater market acceptance than the Company's proposed containers. The
majority of food and beverage and container manufacturers are substantially
larger and more diversified than the Company; have substantially greater
financial and marketing resources than the Company; have greater name
recognition and distribution channels than the Company; and may have the ability
to develop competitively priced integrated thermal containers.
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DEPENDENCE UPON KEY PERSONNEL
The Company's success in developing marketable containers and achieving a
competitive position will depend, in large part, on its ability to attract and
retain qualified management personnel, and in particular to retain Mr. Scudder
and Mr. Berntsen. The Company's technology was primarily developed by Mr.
Scudder and Mr. Berntsen. Messrs. Scudder and Berntsen have entered into
employment agreements obligating them to provide services to the Company through
August 1999. The loss of either of these individuals could have a material
adverse impact on the business and operations of the Company. The Company
maintains life insurance policies on Messrs. Scudder and Berntsen, but no
assurance can be given that the proceeds from any such policy will be adequate
to offset the loss of their services. The Company will need to hire additional
management, administrative and engineering personnel in the next year to meet
its plans. Competition for such personnel is intense and no assurance can be
given that the Company will be able to hire and/or retain adequate personnel.
The Company's potential growth and any expansion into areas and activities
requiring additional expertise, such as expanded programs for manufacturing and
marketing, would be expected to place increased demands on the Company's human
resources. These demands are expected to require the addition of new management
personnel and the development of additional expertise by existing management
personnel. The failure to acquire such services or to develop such expertise
could have a material adverse effect on the Company's prospects for success. In
addition, the Company relies on consultants and advisors to assist the Company
from time to time in reviewing its marketing, management, research and
development strategies. Most if not all of the Company's consultants and
advisors are self-employed or are employees of other companies, and may have
commitments to, or consulting or advisory contracts with, more than one other
entity that may affect their ability to contribute to the Company.
EXPOSURE TO FLUCTUATIONS IN RESIN PRICES AND SUPPLY
The Company intends to manufacture certain parts of the proposed integrated
thermal containers using plastic resins. The Company does not currently have
agreements with any raw material suppliers, including suppliers of resins. The
Company intends to enter into agreements with resin and other raw material
suppliers. There can be no assurance the Company will obtain supply agreements
on acceptable terms and conditions. Since plastic resin is anticipated to be a
principal component in the Company's proposed containers, the Company's
financial performance could become materially dependent on its ability, and the
ability of its licensees and/or distributors, if any, to acquire resin in
acceptable amounts and at acceptable costs, and to pass resin price increases on
to its future customers through contractual agreements or otherwise. The
capacity, supply, and demand for plastic resins and the petrochemical
intermediates from which they are produced are subject to cyclical price
fluctuations, including those arising from supply shortages. There can be no
assurance a significant increase in resin prices or a shortage of supply would
not have a material adverse impact on the business, financial condition, and
results from operations of the Company.
SUPPLY OF RAW MATERIALS
The Company does not have agreements with the suppliers of any of its raw
materials or component parts. The Company believes certain components can be
obtained from numerous suppliers and as a result thereof the Company believes it
is not materially dependent upon any single source for any of its raw materials
or components. However, if the Company were to experience delays in raw
materials or component parts, it could delay the Company's ability to supply
containers to potential customers or its ability to conduct market research
studies, which in turn, could adversely impact the Company's business, financial
condition, and results of operations.
ENVIRONMENTAL MATTERS
Federal, state, and local governments or regulatory agencies could enact
laws or regulations concerning environmental matters that may increase the cost
of producing, or otherwise adversely affect the demand for plastic products such
as those proposed by the Company. A decline in consumer preference for plastic
products due to environmental considerations could have a material adverse
effect upon the Company's business, financial condition, and results of
operations. In addition, certain of the Company's operations are subject to
federal, state, and local environmental laws and regulations that impose
limitations on the discharge of pollutants into the air and water, and establish
standards for the treatment, storage, and disposal of solid and hazardous
wastes. While the Company has not been required, in its limited history of
assembling
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integrated thermal containers, to make significant capital expenditures in order
to comply with applicable environmental laws and regulations, the Company may
have to make substantial future capital expenditures due to changing compliance
standards and environmental technology. Furthermore, unknown contamination of
sites currently or formerly owned or operated by the Company (including
contamination caused by prior owners and operators of such sites) and off-site
disposal of hazardous substances may give rise to additional compliance costs.
In addition the principal components of the Company's products are made
from plastic. Although the Company's products use all recyclable plastics they
cannot generally be recycled into the same component parts, and there are likely
fewer potential uses for the recycled plastic used in the Company's products
than there were for the original raw materials. Therefore the Company would be
expected to be contributing to an increasing supply of plastic needing to be
recycled into fewer uses or simply an increasing amount of plastic, which
although recyclable, may not be recycled. Similar factors have been the source
of increasing environmental concern by some and increasing legislative and
regulatory activity. The Company cannot predict the nature of future
legislation, regulation or liability exposure which may evolve from these
environmental concerns or the adverse impact it may have on the Company. The
Company does not have insurance coverage for environmental liabilities and does
not anticipate obtaining such coverage in the future.
LIABILITY INSURANCE
The Company's proposed containers expose it to possible product liability
claims if, among other things, the use of its proposed containers results in
personal injury, death or property damage. There can be no assurance the Company
will have sufficient resources to satisfy any liability resulting from such
claims or will be able to cause its customers to indemnify or insure the Company
against such claims. The Company intends to obtain additional product liability
insurance prior to the commencement of commercial shipment of its products.
There can be no assurance such insurance coverage will be adequate in terms and
scope to protect the Company against material adverse effects in the event of a
successful claim, or that such insurance will be renewed, or the Company will be
able to acquire additional coverage when it deems it desirable to do so.
IMMEDIATE AND SUBSTANTIAL DILUTION
To the extent that any warrants, options or other securities convertible
into shares of Common Stock currently outstanding or subsequently granted to
purchase shares of Common Stock are exercisable at a price less than the net
tangible book value per share, there will be dilution upon the exercise of such
securities to existing shareholders.
CONTROL BY PRESENT SHAREHOLDERS; POSSIBLE DEPRESSIVE EFFECT ON THE COMPANY'S
SECURITIES
The Company's officers and directors currently own 1,070,347 of the
outstanding shares representing 16.5% of the currently outstanding Common Stock.
The Company's officers and directors also have the right to acquire an
additional 400,000 shares of Common Stock, which are reserved for issuance upon
the exercise of existing options. Accordingly, if the Company's officers and
directors exercised all of the options they currently hold, they could own up to
21.3% of the Company's outstanding Common. The price range for the officers' and
directors' options is $1.00 to $3.38 per share. The concentration of ownership
by the Company's officers and directors may discourage potential acquirers from
seeking control of the Company through the purchase of Common Stock, and this
possibility could have a depressive effect on the price of the Company's
Securities.
DILUTIVE AND OTHER ADVERSE EFFECTS OF OUTSTANDING OPTIONS AND WARRANTS
Under the terms of the options issued under the Company's 1996 Stock Plan,
and other outstanding options and warrants, the holders thereof are given an
opportunity to profit from a rise in the market price of the Common Stock with a
resulting dilution in the interests of the other shareholders. The terms on
which the Company may obtain additional financing may be adversely affected by
the existence of such options and warrants. For example, the holders of the
Warrants could exercise them at a time when the Company was attempting to obtain
additional capital through a new offering of securities on terms more favorable
than those provided by the Warrants.
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POSSIBLE DEPRESSIVE EFFECT ON PRICE OF SECURITIES OF FUTURE SALES OF COMMON
STOCK
The sale or other disposition of 3,018,891 of the currently
outstanding shares of Common Stock is restricted by the Securities Act. Unless
such sale is registered, these shares may only be sold in compliance with Rule
144 promulgated under the Securities Act or some other exemption from
registration thereunder. Actual sales or the prospect of sales of Common Stock
under Rule 144 or otherwise in the future may depress the prices of the
Company's publicly traded securities or any market that may develop, and may
also make it difficult for existing shareholders to sell the securities. All
officers and directors and substantially all shareholders prior to the Company's
initial public offering agreed not to offer, sell, assign, transfer, pledge or
otherwise hypothecate without the prior written consent of Cohig & Associates,
Inc., any of his/her securities of the Company for a period of 12 months from
May 11, 1998. The sale or availability for sale of substantial amounts of Common
Stock in the public market after May 11, 1999 could adversely affect the
prevailing market price of the securities and could impair the Company's ability
to raise additional capital through the sale of its equity securities.
POSSIBLE ADVERSE EFFECTS OF AUTHORIZATION AND ISSUANCE OF PREFERRED STOCK
The Company's Board of Directors is authorized to issue up to 5,000,000
shares of preferred stock. The Board of Directors has the power to establish the
dividend rates, liquidation preferences, voting rights, redemption and
conversion terms, and all other rights, preferences and privileges with respect
to any series of preferred stock. The issuance of any series of preferred stock
having rights superior to those of the Common Stock may result in a decrease in
the value or market price of the Common Stock and could be used by the Board of
Directors as a means to prevent a change in control of the Company. Future
issuances of preferred stock may provide for dividends, certain preferences in
liquidation, as well as conversion rights. Such preferred stock issuances could
make the possible takeover of the Company, or the removal of management of the
Company, more difficult. The issuance of such preferred stock could discourage
hostile bids for control of the Company in which shareholders could receive
premiums for their Common Stock or Warrants, could adversely affect the voting
and other rights of the holders of the Common Stock, or could depress the market
price of the Common Stock or Warrants.
ANTI-TAKEOVER PROVISIONS; LIMITATION ON VOTING RIGHTS
The Company's Amended and Restated Articles of Incorporation ("Articles")
and its Bylaws contain provisions that may make it more difficult to acquire
control of the Company by means of tender offer, over-the-counter purchases, a
proxy fight, or otherwise. The Articles also include provisions restricting
shareholder voting rights. The Company's Articles include a provision
prohibiting action by written consent of the shareholders. The Company's
Articles provide that certain provisions of the Articles may only be amended by
a vote of 66 2/3% of the shareholders. The Company's Articles also require that
shareholders give advance notice to the Company of any nomination for election
to the Board of Directors, or other business to be brought at any shareholders'
meeting. This provision makes it more difficult for shareholders to nominate
candidates to the Board of Directors who are not supported by management. In
addition, the Articles require advance notice for shareholder proposals to be
brought before a meeting of shareholders and requires the notice to specify
certain information regarding the shareholder and the proposal. This provision
makes it more difficult to implement shareholder proposals even if a majority of
shareholders are in support thereof. Each of these provisions may also have the
effect of deterring hostile take-overs or delaying changes in control or
management of the Company. In addition, the indemnification provisions of the
Company's Articles and Bylaws may represent a conflict of interest between
management and the shareholders since officers and directors may be indemnified
prior to any judicial determinations as to their conduct. The Articles provide
that the shareholders' right to cumulative voting will terminate automatically
when the Company's shares are listed on the New York Stock Exchange ("NYSE") or
the American Stock Exchange ("AMEX"), or if listed on the Nasdaq National Market
System ("Nasdaq NMS") and the Company has at least 800 shareholders as of the
record date for the most recent meeting of shareholders. Cumulative voting is
currently in effect for the Company. When and if the Company so qualifies, the
absence of cumulative voting may have the effect of limiting the ability of
minority shareholders to effect changes in the Board of Directors and, as a
result, may have the effect of deterring hostile takeovers or delaying or
preventing changes in control or management of the Company.
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The Company's Articles also include a provision ("Fair Price Provision")
requiring the approval of the holders of 66 2/3% of the Company's voting
stock as a condition to a merger or certain other business transactions with,
or proposed by, a holder of 15% or more of the Company's voting stock (an
"Interested Shareholder"), except in cases where the continuing directors
approve the transaction or certain minimum price criteria and other
procedural requirements are met. A "Continuing Director" is a director who is
not affiliated with an Interested Shareholder and was elected prior to the
time such Interested Shareholder became an Interested Shareholder, or any
successor chosen by a majority of the Continuing Directors. The minimum price
criteria generally require that, in a transaction in which shareholders are
to receive payments, holders of Common Stock must receive a value equal to
the highest price of: (i) the price paid by the Interested Shareholder for
Common Stock during the prior two years; (ii) the Fair Market Value (as
defined) at the time; or (iii) the amount paid in the transaction in which
such person became an Interested Shareholder. In addition, such payment must
be made in cash or in the type of consideration paid by the Interested
Shareholder for the greatest portion of the Interested Shareholder's shares.
The Company's Board of Directors believes the Fair Price Provision will help
assure similar treatment for all of the Company's shareholders if certain
kinds of business combinations are effected. However, the Fair Price
Provision may make it more difficult to accomplish certain transactions
potentially beneficial to shareholders, but opposed by the incumbent Board of
Directors.
The Company's Articles provide for a classified Board of Directors to
automatically become effective when the Company's shares are listed on NYSE or
AMEX, or if listed on Nasdaq NMS and the Company has at least 800 shareholders
as of the record date for the most recent meeting of shareholders. The
classified Board of Directors provisions, when and if effective, divides the
Board of Directors into two or more classes of directors serving staggered
two-year terms, with one director to be elected at each annual meeting of
shareholders. The classification of directors would extend the time required to
change the composition of the Board of Directors. The Common Shares and Warrants
are listed on Nasdaq which results in no classified Board of Directors until
potentially some time in the future.
NO DIVIDENDS
The Company has never paid cash or other dividends on its Common Stock. It
is the Company's intention to retain earnings, if any, to finance the operation
and expansion of its business, and therefore, it does not expect to pay any cash
dividends in the foreseeable future.
POSSIBLE DELISTING OF SECURITIES FROM NASDAQ AND POSSIBLE MARKET ILLIQUIDITY
While the Company's Common Stock and Warrants are currently listed on Nasdaq
there can be no assurance the Company will meet the criteria for continued
listing of these securities on Nasdaq. Based on existing listing criteria, a
Nasdaq listing will generally require the Company to have total assets
(excluding goodwill) which are $2,000,000 in excess of its total liabilities,
plus have a minimum public distribution of 500,000 shares of Common Stock with a
minimum of 300 public holders of 100 shares or more, a minimum bid price of
$1.00 per share, and aggregate market value of publicly held shares of
$1,000,000. Nasdaq has recently promulgated new rules which make continued
listing of companies on Nasdaq more difficult and Nasdaq has significantly
increased its enforcement efforts with regard to Nasdaq listing standards.
Removal from Nasdaq, if it were to occur, could affect the ability or
willingness of broker-dealers to sell and/or make a market in the Company's
Common Stock and the ability of purchasers of the Company's Common Stock to sell
their securities in the secondary market. Trading, if any, in the Common Stock
would then be conducted in the over-the-counter market on an electronic bulletin
board established for securities that do not meet the Nasdaq listing
requirements, or in what are commonly referred to as the "pink sheets." As a
result, an investor would find it more difficult to dispose of, or to obtain
accurate quotations as to the price of, the Company's Common Stock. There is no
assurance the Company will be successful in maintaining its listing.
17
<PAGE>
DISCLOSURES RELATING TO LOW PRICED STOCKS; POSSIBLE RESTRICTIONS ON RESALE OF
LOW PRICED STOCKS AND ON BROKER-DEALER SALES; POSSIBLE ADVERSE EFFECT OF "PENNY
STOCK" RULES ON LIQUIDITY FOR THE COMPANY'S SECURITIES
If the Common Stock and/or warrants (collectively "Securities") were
delisted from Nasdaq at a time when the Company had net tangible assets of
$2,000,000 or less, further transactions in the Securities would become subject
to Rule 15g-9 under the Securities Exchange Act of 1934 (the "Exchange Act").
Rule 15g-9 imposes additional sales practice requirements on broker-dealers who
sell such securities to persons other than established customers and "accredited
investors" (generally, individuals with a net worth in excess of $1,000,000 or
annual income exceeding $200,000 individually, or $300,000 together with their
spouse). For transactions covered by this Rule, a broker-dealer must make a
special suitability determination for the purchaser and have received the
purchaser's written consent to the transaction prior to the sale. Consequently,
this Rule could affect the ability of broker-dealers to sell the Securities, and
may affect the ability of the Common Stock and Warrant holders to sell any of
the Securities acquired in the secondary market.
The Commission has adopted regulations which generally define a "penny
stock" to be any security of a company that has a market price (as therein
defined) less than $5.00 per share, or with an exercise price of less than $5.00
per share subject to certain exceptions, and which is not traded on any exchange
or quoted on Nasdaq. For any transaction by broker-dealers involving a penny
stock, unless exempt, the rules require delivery of a risk disclosure document
relating to the penny stock market prior to a transaction in a penny stock.
Disclosure is also required to be made about compensation payable to both the
broker-dealer and the registered representative and current quotations for the
securities. Finally, monthly statements are required to be sent disclosing
recent price information for the penny stock held in an account and information
on the limited market in penny stocks.
The foregoing restrictions will not apply to the Securities if the
Securities are listed on Nasdaq or another exchange, and have certain price and
volume information provided on a current and continuing basis, or if the Company
meets certain minimum net tangible asset requirements, or certain average annual
revenue criteria over specific periods. There can be no assurance the Securities
will continue to qualify for exemption from these restrictions. If the
Securities were subject to these restrictions, the market liquidity for the
Securities could be materially and adversely affected.
ITEM 2. PROPERTIES
The Company leases approximately 42,000 square feet of space for its
production facility located at 13250 Gregg Street, Poway, California, 92064. The
lease has an initial term of five years with a renewal option to the Company for
an additional three years. Base rent for the initial term is $0.445 per square
foot (approximately $18,700 per month) with yearly increases of 4%. Base rent
for the extension term is $0.56 per square foot (approximately $23,500 per
month) with yearly increases of 4%. In addition, the lease calls for Ontro to
establish a letter of credit for two years to the benefit of the landlord in an
amount representing two years' rent.
The Company has entered into a short-term sublease for approximately 10,000
square feet of its space, not currently needed for manufacturing purposes to an
unrelated third party.
ITEM 3. 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 Initial Public Offering, 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.
18
<PAGE>
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The Company's Common Stock and Common Stock Warrants are traded on the
Nasdaq Small Cap Market under the symbols, "ONTR" and "ONTRW", respectively. The
Company's Units sold as part of the initial public offering were separated into
Common Stock and Warrants on May 11, 1998. The over-the-counter quotation
provided reflect inter-dealer prices, without retail mark-ups, mark-down or
commission and may not reflect actual transaction. The following table sets
forth the range of high and low sales prices for the Common Stock on the Nasdaq
Small Cap Market for the periods indicated:
<TABLE>
<CAPTION>
BEGIN DATE ENDING DATE HIGH LOW
---------- ----------- ---- ---
<S> <C> <C> <C>
May 12 June 30 $8.50 3.44
July 1 Sept 30 4.88 1.25
Oct 1 Dec 31 4.38 0.94
</TABLE>
During the last two fiscal years the Company did not declare or pay any
cash dividends on its common stock. The Company currently plans to retain all of
its earnings, if any, to support the development and expansion of its business,
and has no present intention on paying any dividends on the Common Stock in the
foreseeable future.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION OVERVIEW
Ontro, Inc. is engaged in the research and development of integrated thermal
containers. The Company, through a wholly-owned subsidiary, has worldwide rights
to patented and patent pending products and technology for self-heating and
self-cooling containers. The Company plans on licensing its integrated thermal
containers to food, beverage, and container manufacturers who will manufacture,
market, and sell the containers under their own brand names or to third parties.
At this time the Company is still in its development stage with no commercially
available products and there can be no assurance that the Company will
successfully develop, manufacture, and market its proprietary containers or
technologies.
The Company has never generated any revenue from product sales or through
licensing agreements and has relied on public and private equity financing as
well as bridge loans. The Company has been unprofitable since its inception and
expects to incur additional operating losses in 1999. As of December 31, 1998,
the Company's accumulated deficit was $6.5 million.
RESULTS OF OPERATIONS
The Company incurred losses of $2,691,700, or $0.51 per share, and $2,167,000,
or $0.75 per share, for the years ended December 31, 1998 ("1998") and December
31, 1997 ("1997"), respectively.
Research and development costs increased $174,100 to $754,200 in 1998
compared to $580,100 in 1997. This increase is due to increased salaries, the
addition of new employees, temporary help to manufacture and assemble
containers to continue the Company's development of its manufacturing
capabilities, the use of additional materials and supplies for research and
development activities and increased equipment rentals.
The Company's marketing, general and administrative expenses increased
$636,500 to $2,048,500 in 1998 compared to $1,412,000 in 1997. This increase
is due to increases in employee salaries, the hiring of additional employees,
additional marketing activities, increased consulting fees including
compensation for a stock option grant, as well as an overall increase in
corporate expenses due to increased business activities of the Company.
19
<PAGE>
Interest expense was $259,100 in 1998 compared to $179,900 in 1997. The
increase was due in part to the recognition of $94,300 from the
re-negotiation of certain bridge loan warrants. Subsequent to the Company's
Initial Public Offering ("IPO") all loans were repaid as well as certain of
the Company's capital lease obligations.
Interest income increased from $5,000 in 1997 to $370,100 in 1998 due to
investment of proceeds from the Company's IPO.
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 bridge
financing. As of December 31, 1998, the Company's cash and cash equivalents
and investments totaled approximately $9.3 million.
Primary uses of cash during the year included $3,690,600 for the Company's
operations and working capital requirements, patent costs of $253,300, repayment
of debt of approximately $2.1 million, payments on capital lease obligations of
$103,800, the acquisition of IHI for $481,200, and purchase of equipment and
leasehold improvements of $934,800. The Company plans to continue its policy of
investing excess funds in short- and long-term, investment-grade,
interest-bearing instruments.
The Company's future cash 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 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 12 to 18 months at its anticipated level of
operations. However, the Company may seek additional funding during the next 18
months and could seek additional funding after such time. There can be no
assurance any additional funding 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 production 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 ("SFAS No. 133"), 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 of 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 the 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.
20
<PAGE>
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 developing a program to address year 2000
issues and anticipates such program to be completed by the end of the second
quarter of 1999. The Company does not believe the costs required to address
year 2000 issues will be material and that the program should be completely
implemented by the end of the third quarter of 1999. The Company recently
purchased and installed hardware and software to manage its information
technology. The Company believes such technology is year 2000 compliant. In
addition, the Company has non-information technology in the form of
manufacturing equipment. As the Company placed orders for equipment in its
manufacturing and research and development facility, the Company required
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. The Company anticipates that a contingency plan addressing
the worst case scenario will be completed by the end of the second quarter of
1999.
21
<PAGE>
ITEM 7. FINANCIAL STATEMENTS
ONTRO, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
<S> <C>
Independent Auditors' Report 2
Consolidated Balance Sheets
December 31, 1997 and 1998 3
Consolidated Statements of Operations:
For the years ended December 31, 1997 and 1998
Period from inception (November 8, 1994) to December 31, 1998 4
Consolidated Statements of Shareholders' Equity (Deficit):
Period from inception (November 8, 1994) to December 31, 1998 5
Consolidated Statements of Cash Flows:
For the years ended December 31, 1997 and 1998
Period from inception (November 8, 1994) to December 31, 1998 7
Notes to Consolidated Financial Statements 8
</TABLE>
22
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders
Ontro, Inc.:
We have audited the consolidated financial statements of Ontro, Inc. and
subsidiary (a development stage enterprise) as listed in the accompanying index.
These consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Ontro, Inc. and
subsidiary (a development stage enterprise) as of December 31, 1997 and 1998,
and the results of their operations and their cash flows for each of the years
in the two-year period ended December 31, 1998 and for the period from November
8, 1994 (inception) to December 31, 1998, in conformity with generally accepted
accounting principles.
San Diego, California
February 12, 1999
23
<PAGE>
ONTRO, INC.
(A Development Stage Enterprise)
Consolidated Balance Sheets
December 31, 1997 and 1998
<TABLE>
<CAPTION>
1997 1998
------------ ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 5,100 6,279,000
Investments held to maturity -- 2,009,400
Prepaid expenses and other current assets 9,800 222,000
------------ ------------
Total current assets 14,900 8,510,400
Investments held to maturity -- 1,026,700
Property and equipment, net 398,900 1,246,700
Deferred offering costs 349,300 --
Deferred financing costs 61,100 --
Deposits and other assets 62,500 1,194,300
Intangible assets, net 8,500 348,500
------------ ------------
$ 895,200 12,326,600
------------ ------------
------------ ------------
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accrued expenses $ 449,000 519,600
Accrued interest 103,700 --
Current portion of capital lease obligations 44,100 16,100
Notes payable 1,395,000 --
------------ ------------
Total current liabilities 1,991,800 535,700
Capital lease obligations, excluding current portion 100,900 25,100
------------ ------------
Total liabilities 2,092,700 560,800
------------ ------------
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 17,471,600
Additional paid-in capital 965,600 808,300
Deficit accumulated during the development stage (3,812,000) (6,503,700)
Deferred compensation (398,300) (10,400)
------------ ------------
Total shareholders' equity (deficit) (1,197,500) 11,765,800
------------ ------------
Commitments and contingencies
$ 895,200 12,326,600
------------ ------------
------------ ------------
</TABLE>
See accompanying notes to consolidated financial statements.
24
<PAGE>
ONTRO, INC.
(A Development Stage Enterprise)
Consolidated Statements of Operations
<TABLE>
<CAPTION>
FROM
INCEPTION
(NOVEMBER 8,
1994) TO
YEAR ENDED DECEMBER 31, DECEMBER 31,
1997 1998 1998
------------------ ------------------ ------------------
<S> <C> <C> <C>
Operating expenses:
Marketing, general and administrative $ 1,412,000 2,048,500 4,777,000
Research and development 580,100 754,200 1,638,100
------------------ ------------------ ------------------
Total operating expenses 1,992,100 2,802,700 6,415,100
------------------ ------------------ ------------------
Other expense (income):
Interest expense 179,900 259,100 463,700
Interest income (5,000) (370,100) (375,100)
------------------ ------------------ ------------------
Total other expense (income) 174,900 (111,000) 88,600
------------------ ------------------ ------------------
Net loss $ 2,167,000 2,691,700 6,503,700
------------------ ------------------ ------------------
------------------ ------------------ ------------------
Basic and diluted net loss per share $ (0.75) (0.51)
------------------ ------------------
------------------ ------------------
</TABLE>
See accompanying notes to consolidated financial statements.
25
<PAGE>
ONTRO, INC.
(A Development Stage Enterprise)
Consolidated Statements of Shareholders' Equity (Deficit)
<TABLE>
<CAPTION>
DEFICIT
ACCUMULATED
COMMON STOCK ADDITIONAL DURING THE
------------------------ PAID-IN DEVELOPMENT DEFERRED
DATE SHARES AMOUNT CAPITAL STAGE COMPENSATION
-------------- ----------- ---------- ---------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balance at November 8, 1994 (inception) -- $ -- -- -- --
Issuance of common stock at $.032 per share 12/94 1,088,200 35,000 -- -- --
Net loss -- -- -- (12,500) --
----------- ---------- ---------- ----------- -------------
Balance at December 31, 1994 1,088,200 35,000 -- (12,500) --
Issuance of common stock at $.032 per share 5/95 177,100 5,700 -- -- --
Issuance of common stock at $.889 per share 6/95 - 12/95 98,400 87,500 -- -- --
Net loss -- -- -- (164,100) --
----------- ---------- ---------- ----------- -------------
Balance at December 31, 1995 1,363,700 128,200 -- (176,600) --
Issuance of common stock at $.699 per share 9/96 - 10/96 1,001,800 700,000 -- -- --
Issuance of common stock at $.71 per share
for services 10/96 42,200 29,900 -- -- --
Issuance of common stock at $.889 per share 1/96 - 6/96 119,500 106,300 -- -- --
Issuance of common stock at $.889 per share
for services 1/96 - 7/96 59,100 52,500 -- -- --
Issuance of common stock at $.889 per share
in exchange for loan guarantees 6/96, 7/96 140,600 125,000 -- -- --
Fair value of detachable warrants on debt 12/96 -- -- 7,000 -- --
Issuance of stock options -- -- 785,000 -- (405,700)
Net loss -- -- -- (1,468,400) --
----------- ---------- ---------- ----------- -------------
Balance at December 31, 1996 2,726,900 1,141,900 792,000 (1,645,000) (405,700)
Fair value of detachable warrants on debt 1/97 - 5/97 -- -- 94,500 -- --
Issuance of stock options to nonemployees 2/97 -- -- 16,400 -- (16,400)
Exercise of stock options 3/97, 7/97 17,000 12,000 -- -- --
Issuance of common stock and warrants 5/97 222,222 444,400 55,600 -- --
Issuance of common stock at $2 per share for
services 6/97, 8/97 8,000 16,000 -- -- --
Issuance of common stock at $3.13 per share 9/97 31,949 100,000 -- -- --
Issuance of common stock at $3.13 per share 10/97 12,820 40,000 -- -- --
Issuance of common stock and warrants at
$4.25 per unit 10/97 70,587 292,900 7,100 -- --
Compensation related to grant of stock options -- -- -- -- 23,800
Net loss -- -- -- (2,167,000) --
----------- ---------- ---------- ----------- -------------
Balance at December 31, 1997, carried forward 3,089,478 2,047,200 965,600 (3,812,000) (398,300)
</TABLE>
<TABLE>
<CAPTION>
TOTAL
STOCKHOLDERS'
EQUITY
(DEFICIT)
-------------------
<S> <C>
Balance at November 8, 1994 (inception) --
Issuance of common stock at $.032 per share 35,000
Net loss (12,500)
-------------------
Balance at December 31, 1994 22,500
Issuance of common stock at $.032 per share 5,700
Issuance of common stock at $.889 per share 87,500
Net loss (164,100)
-------------------
Balance at December 31, 1995 (48,400)
Issuance of common stock at $.699 per share 700,000
Issuance of common stock at $.71 per share
for services 29,900
Issuance of common stock at $.889 per share 106,300
Issuance of common stock at $.889 per share
for services 52,500
Issuance of common stock at $.889 per share
in exchange for loan guarantees 125,000
Fair value of detachable warrants on debt 7,000
Issuance of stock options 379,300
Net loss (1,468,400)
-------------------
Balance at December 31, 1996 (116,800)
Fair value of detachable warrants on debt 94,500
Issuance of stock options to nonemployees --
Exercise of stock options 12,000
Issuance of common stock and warrants 500,000
Issuance of common stock at $2 per share for
services 16,000
Issuance of common stock at $3.13 per share 100,000
Issuance of common stock at $3.13 per share 40,000
Issuance of common stock and warrants at
$4.25 per unit 300,000
Compensation related to grant of stock options 23,800
Net loss (2,167,000)
-------------------
Balance at December 31, 1997, carried forward (1,197,500)
</TABLE>
(Continued)
26
<PAGE>
ONTRO, INC.
(A Development Stage Enterprise)
Consolidated Statements of Shareholders' Equity (Deficit)
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL
---------------------------------------- PAID-IN
DATE SHARES AMOUNT CAPITAL
-------------- ------------------ ------------------- -------------------
<S> <C> <C> <C> <C>
Balance at December 31, 1997, brought forward 3,089,478 $ 2,047,200 965,600
Compensation related to modification of
detachable warrants on debt 2/98 -- -- 94,300
Cancellation of stock options 3/98 -- -- (378,000)
Issuance of common stock and warrants
at $5.50 per unit, net of issuance costs 5/98 3,400,000 15,424,400 340,000
Return of equity to IHI shareholders 5/98 -- -- (397,900)
Issuance of stock options to a nonemployee 9/98 -- -- 137,000
Issuance of warrants, net of issuance costs 7/98 -- -- 47,300
Compensation related to grant of stock options -- -- --
Net loss -- -- --
------------------ ------------------- -------------------
Balance at December 31, 1998 6,489,478 $ 17,471,600 808,300
------------------ ------------------- -------------------
------------------ ------------------- -------------------
</TABLE>
<TABLE>
<CAPTION>
DEFICIT
ACCUMULATED TOTAL
DURING THE STOCKHOLDERS'
DEVELOPMENT DEFERRED EQUITY
STAGE COMPENSATION (DEFICIT)
------------------ ------------------ -------------------
<S> <C> <C> <C>
Balance at December 31, 1997, brought forward (3,812,000) (398,300) (1,197,500)
Compensation related to modification of
detachable warrants on debt -- -- 94,300
Cancellation of stock options -- 378,000 --
Issuance of common stock and warrants
at $5.50 per unit, net of issuance costs -- -- 15,764,400
Return of equity to IHI shareholders -- -- (397,900)
Issuance of stock options to a nonemployee -- -- 137,000
Issuance of warrants, net of issuance costs -- -- 47,300
Compensation related to grant of stock options -- 9,900 9,900
Net loss (2,691,700) -- (2,691,700)
------------------ ------------------ -------------------
Balance at December 31, 1998 (6,503,700) (10,400) 11,765,800
------------------ ------------------ -------------------
------------------ ------------------ -------------------
</TABLE>
See accompanying notes to consolidated financial statements.
27
<PAGE>
ONTRO, INC.
(A Development Stage Enterprise)
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
FROM
INCEPTION
(NOVEMBER 8,
1994) TO
DECEMBER 31,
1997 1998 1998
-------------- ------------------ ------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss $ (2,167,000) (2,691,700) (6,503,700)
Adjustments to reconcile net loss to net cash used in operating
activities, excluding effect of acquisition:
Depreciation and amortization 115,100 97,800 240,600
Amortization of deferred financing costs 40,400 155,400 195,800
Issuance of common stock for services 16,000 -- 223,400
Compensation for stock options and certain warrants 23,800 146,900 550,000
Increase in prepaid expenses and other current assets (7,300) (212,200) (222,000)
Increase in deposits and other assets (48,900) (1,131,800) (1,194,300)
Increase (decrease) in accrued expenses 344,200 (55,100) 497,600
-------------- ------------------ ------------------
Net cash used in operating activities (1,683,700) (3,690,700) (6,212,600)
-------------- ------------------ ------------------
Cash flows from investing activities:
Acquisition of business -- (481,200) (481,200)
Intangible assets (4,700) (253,300) (267,000)
Purchase of property and equipment and leasehold improvements (172,200) (934,800) (1,283,100)
Purchase of investments held to maturity -- (10,351,900) (10,351,900)
Proceeds from sale of investments held to maturity -- 7,323,600 7,323,600
-------------- ------------------ ------------------
Net cash used in investing activities (176,900) (4,697,600) (5,059,600)
-------------- ------------------ ------------------
Cash flows from financing activities:
Net proceeds from issuance of common stock and warrants 952,000 16,161,000 18,047,400
Deferred offering costs (349,300) -- (349,300)
Proceeds from notes payable 1,285,000 710,000 2,105,000
Payments on notes payable -- (2,105,000) (2,105,000)
Payments on capital lease obligations (34,000) (103,800) (146,900)
-------------- ------------------ ------------------
Net cash provided by financing activities 1,853,700 14,662,200 17,551,200
-------------- ------------------ ------------------
Net increase (decrease) in cash and cash equivalents (6,900) 6,273,900 6,279,000
Cash and cash equivalents, beginning of period 12,000 5,100 --
-------------- ------------------ ------------------
Cash and cash equivalents, end of period $ 5,100 6,279,000 6,279,000
-------------- ------------------ ------------------
-------------- ------------------ ------------------
Supplemental disclosure of cash flow information - cash paid
during the period for interest $ 35,700 207,400 224,800
Supplemental disclosure of noncash transactions:
Equipment acquisitions under capital lease 52,100 -- 205,000
Warrants issued in connection with debt 94,500 -- 101,500
Detail of acquisition:
Patents acquired -- 105,300 105,300
Liabilities assumed -- (22,000) (22,000)
Return of equity to IHI shareholders -- 397,900 397,900
-------------- ------------------ ------------------
Cash paid for acquisition $ -- 481,200 481,200
-------------- ------------------ ------------------
-------------- ------------------ ------------------
</TABLE>
See accompanying notes to consolidated financial statements.
28
<PAGE>
ONTRO, INC.
(A Development Stage Enterprise)
Notes to Consolidated Financial Statements
December 31, 1997 and 1998
(1) NATURE OF OPERATIONS
Ontro, Inc. (Ontro or the Company) (formerly Self-Heating Container
Corporation of California), was incorporated on November 8, 1994 under
the laws of the state of California. Through the Company's acquisition of
Insta-Heat, Inc. (IHI) in March 1998 (Note 9), Ontro has exclusive
worldwide rights to produce, market, and distribute a self-heating
container.
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. The Company commenced operations during 1994.
Operations prior to January 1, 1995 were not significant.
(2) SIGNIFICANT ACCOUNTING POLICIES
(a) PRINCIPLE OF CONSOLIDATION
The consolidated financial statements include the financial
statements of Ontro, Inc. and its wholly owned subsidiary
Insta-Heat, Inc. All significant intercompany balances and
transactions have been eliminated in consolidation.
(b) CASH EQUIVALENTS
Cash equivalents of $4,711,100 at December 31, 1998 consist of
money market funds and U.S. Treasury securities with an initial
term of less than 3 months. For purposes of the consolidated
statements of cash flows, the Company considers all highly liquid
debt instruments with original maturities of three months or less
to be cash equivalents.
(c) INVESTMENT SECURITIES
Investment securities at December 31, 1998 consist of debentures
and commercial paper. The Company classifies its debt securities
as held-to-maturity. Held-to-maturity securities are securities in
which the Company has the ability and intent to hold the security
until maturity. Held-to-maturity securities are recorded at
amortized cost, adjusted for the amortization or accretion of
premiums or discounts. A decline in the market value of any
held-to-maturity security below cost that is deemed to be other
than temporary results in a reduction in carrying amount to fair
value. The impairment is charged to operations and a new cost
basis for the security is established. Premiums and discounts are
amortized or accreted over the life of the related
held-to-maturity security as an adjustment to yield using the
effective interest method. Interest income is recognized when
earned.
(d) PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost with depreciation
provided using the straight-line method over the estimated useful
lives of such assets, which range from 3 to 10 years. Equipment
held under capital leases and leasehold improvements are amortized
over the shorter of the lease term or estimated useful life of the
asset. Capital lease amortization is included in depreciation and
amortization expense.
29
<PAGE>
ONTRO, INC.
(A Development Stage Enterprise)
Notes to Consolidated Financial Statements
December 31, 1997 and 1998
(e) INTANGIBLE ASSETS
Intangible assets consist principally of patents and are carried
at cost less accumulated amortization. Costs are amortized on a
straight-line basis over an estimated useful life ranging from 4
to 16 years. Accumulated amortization at December 31, 1997 and
1998 was $5,200 and $17,700, respectively.
(f) STOCK-BASED COMPENSATION
The Company's stock option plan is accounted for under Accounting
Principles Board (APB) Opinion No. 25, ACCOUNTING FOR STOCK ISSUED
TO EMPLOYEES, and the Company makes pro forma footnote disclosures
of the Company's operating results as if the Company had adopted
the fair value method under Statement of Financial Accounting
Standards Board (SFAS) No. 123, ACCOUNTING FOR STOCK BASED
COMPENSATION.
(g) RESEARCH AND DEVELOPMENT COSTS
Research and development costs are expensed in the period
incurred.
(h) INCOME TAXES
Until September 1996, the Company's shareholders elected to have
the Company be treated as an S Corporation in which all income,
losses and credits passed through to the shareholders to be
reported on their personal tax returns. Thus, no deferred federal
taxes were provided since the Company was not liable for federal
income taxes, and state deferred taxes were immaterial. In
September 1996, the Company became a C Corporation.
Income taxes are accounted for under the asset and liability
method. Deferred tax assets and liabilities are recognized for the
future tax consequences attributable to differences between the
financial statement carrying amounts of existing assets and
liabilities and their respective tax bases and operating losses.
Deferred tax assets and liabilities are measured using enacted tax
rates expected to apply to taxable income in the years in which
those temporary differences are expected to be recovered or
settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that
includes the enactment date.
(i) IMPAIRMENT OF LONG-LIVED ASSETS AND LONG-LIVED ASSETS TO BE
DISPOSED OF
Long-lived assets and certain identifiable intangibles are
reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may
not be recoverable. Recoverability of assets to be held and used
is measured by a comparison of the carrying amount of an asset to
future net cash flows expected to be generated by the asset. If
such assets are considered to be impaired, the impairment to be
recognized is measured by the amount by which the carrying amounts
of the assets exceed the fair values of the assets. Assets to be
disposed of are reported at the lower of the carrying amount or
fair value less costs to sell.
30
<PAGE>
ONTRO, INC.
(A Development Stage Enterprise)
Notes to Consolidated Financial Statements
December 31, 1997 and 1998
(j) FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of cash and cash equivalents, other current
assets, and accrued expenses approximate fair values due to the
short-term nature of these instruments. The carrying amount of the
notes payable at December 31, 1997 is a reasonable estimate of
fair value as terms of the notes payable are substantially similar
to terms which could be obtained by the Company from similar
parties.
(k) NET LOSS PER SHARE
Net loss per share is calculated in accordance with SFAS No. 128,
EARNINGS PER SHARE. Basic earnings per share (EPS) excludes the
dilutive effects of options, warrants and other potentially
dilutive instruments. Diluted EPS reflects the potential dilution
of securities that could share in the earnings of the Company.
Options, warrants, and other potentially dilutive instruments are
excluded from the computation of diluted EPS if their effect is
anti-dilutive
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------
1997 1998
----------- ----------
<S> <C> <C>
Numerator:
Net loss $(2,167,000) (2,691,700)
----------- ----------
----------- ----------
Denominator:
Denominator for basic and diluted EPS -
weighted-average shares outstanding 2,896,876 5,259,889
----------- ----------
----------- ----------
Basic and diluted net loss per share $ (0.75) (0.51)
----------- ----------
----------- ----------
</TABLE>
Options and warrants totaling 1,187,428 and 5,576,252 shares
were excluded from the computations of net loss per share for
the years ended December 31, 1997 and 1998, respectively, as
their effect is anti-dilutive.
(l) USE OF ESTIMATES
Management of the Company has made a number of estimates and
assumptions relating to the reporting of assets and liabilities,
the disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amount of expenses
during the reporting period to prepare these financial statements
in conformity with generally accepted accounting principles.
Actual results could differ from those estimates.
(m) RECLASSIFICATIONS
Certain reclassifications have been made to certain prior year
balances in order to conform with current year presentation.
(3) PROPERTY AND EQUIPMENT
Property and equipment at December 31, 1997 and 1998 consists of the
following:
31
<PAGE>
<TABLE>
<CAPTION>
ONTRO, INC.
(A Development Stage Enterprise)
Notes to Consolidated Financial Statements
December 31, 1997 and 1998
1997 1998
-------------------- -------------------
<S> <C> <C>
Machinery and equipment $ 377,700 506,800
Molds 93,200 175,900
Office equipment 45,200 69,200
Leasehold improvements 20,300 708,800
Transportation equipment -- 10,500
-------------------- -------------------
536,400 1,471,200
Less accumulated depreciation and amortization (137,500) (224,500)
-------------------- -------------------
$ 398,900 1,246,700
-------------------- -------------------
-------------------- -------------------
</TABLE>
(4) INVESTMENTS HELD TO MATURITY
The amortized cost, gross unrealized holding gains, gross unrealized
holding losses and fair value for held-to-maturity securities by major
security type and class of security at December 31, 1998 was as follows:
<TABLE>
<CAPTION>
GROSS UNREALIZED GROSS UNREALIZED
AMORTIZED HOLDING GAINS HOLDING LOSSES
COST FAIR VALUE
------------------- -------------------- -------------------- -------------------
<S> <C> <C> <C> <C>
Debentures $ 2,047,600 -- (3,900) 2,043,700
Commercial paper 988,500 1,700 -- 990,200
------------------- -------------------- -------------------- -------------------
$ 3,036,100 1,700 (3,900) 3,033,900
------------------- -------------------- -------------------- -------------------
------------------- -------------------- -------------------- -------------------
</TABLE>
Maturities of debt securities classified as held-to-maturity were as
follows at December 31, 1998:
<TABLE>
<CAPTION>
AMORTIZED FAIR
COST VALUE
-------------------- --------------------
<S> <C> <C>
Due in 1 year or less $ 2,009,400 2,006,400
Due after 1 year through 2 years 1,026,700 1,027,500
-------------------- --------------------
$ 3,036,100 3,033,900
-------------------- --------------------
-------------------- --------------------
</TABLE>
32
<PAGE>
ONTRO, INC.
(A Development Stage Enterprise)
Notes to Consolidated Financial Statements
December 31, 1997 and 1998
(5) INCOME TAXES
Income tax expense for the years ended December 31, 1997 and 1998
differs from the amount computed by applying the federal statutory
rate of 34% as follows:
<TABLE>
<CAPTION>
1997 1998
------------------- -------------------
<S> <C> <C>
Computed at federal statutory rate $ (736,800) (915,200)
State tax (126,500) (223,600)
Change in the valuation allowance 835,000 1,158,000
Nondeductible expenses 25,900 11,200
Other, net 2,400 (30,400)
------------------- -------------------
$ -- --
------------------- -------------------
------------------- -------------------
</TABLE>
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities as of
December 31, 1997 and 1998 are as follows:
<TABLE>
<CAPTION>
1997 1998
------------------- -------------------
<S> <C> <C>
Deferred tax assets:
Deferred financing costs $ -- 26,100
Compensation expense -- 85,300
Accrued vacation -- 22,800
Deferred compensation -- 18,000
Net operating loss carryforwards 1,068,700 2,125,700
------------------- -------------------
Total gross deferred tax assets 1,068,700 2,277,900
Valuation allowance 1,061,300 2,226,700
------------------- -------------------
Net deferred tax assets 7,400 51,200
------------------- -------------------
Deferred tax liabilities:
Property and equipment due to differences in
depreciation 7,400 21,200
Software development costs -- 26,600
Other -- 3,400
------------------- -------------------
Total deferred tax liabilities 7,400 51,200
------------------- -------------------
Net deferred income taxes $ -- --
------------------- -------------------
------------------- -------------------
</TABLE>
33
<PAGE>
ONTRO, INC.
(A Development Stage Enterprise)
Notes to Consolidated Financial Statements
December 31, 1997 and 1998
In assessing the realizability of deferred tax assets, management
considers whether it is more likely than not that some portion or all of
the deferred tax assets will not be realized. The ultimate realization of
deferred tax assets is dependent upon the generation of future taxable
income during the periods in which those temporary differences become
deductible. Management considers the scheduled reversal of deferred tax
liabilities, projected future taxable income, and tax planning strategies
in making this assessment. Based upon the historical losses incurred to
date and the uncertainty of the projections for future taxable income
over the periods which the deferred tax assets are deductible, management
believes it is more likely than not that the Company will not realize the
benefits of these deductible differences.
At December 31, 1998, the Company had available net operating loss
carryforwards of approximately $4,971,600 for Federal income tax
reporting purposes which begin to expire in 2011. The net operating loss
carryforwards for state purposes, which begin to expire in 2001,
approximate Federal net operating loss carryforwards.
In accordance with Internal Revenue Code Section 382, the annual
utilization of net operating loss carryforwards and credits existing
prior to a change in control will be limited.
(6) LEASES
The Company leases office and plant facilities in Poway, California and
office and plant equipment under noncancelable operating lease agreements
that expire at various dates during the next five years. The Company also
maintains capital leases on equipment. Assets recorded under capital
leases had a total cost of $206,200, less accumulated amortization of
$53,000 as of December 31, 1997 and $77,200, less accumulated
amortization of $25,200 as of December 31, 1998, and are included in
property and equipment in the accompanying balance sheet.
34
<PAGE>
ONTRO, INC.
(A Development Stage Enterprise)
Notes to Consolidated Financial Statements
December 31, 1997 and 1998
Future minimum lease payments under noncancelable operating leases and future
minimum capital lease payments as of December 31, 1998 are as follows:
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASE LEASE
------------------ -----------------
YEAR ENDING DECEMBER 31,
<S> <C> <C>
1999 $ 20,900 336,800
2000 13,600 334,800
2001 13,600 334,800
2002 2,200 334,800
2003 -- 334,800
------------------ -----------------
Total minimum lease commitments 50,300 $ 1,676,000
-----------------
-----------------
Less amount representing interest (at rates ranging
from 9.9% to 19.0%) (9,100)
------------------
Present value of future minimum capital lease obligations
41,200
Less current portion of capital lease obligations (16,100)
------------------
Capital lease obligations, excluding current portion $ 25,100
------------------
------------------
</TABLE>
Rent expense was $50,900 and $81,400 for the years ended December 31,
1997 and 1998, respectively.
(7) NOTES PAYABLE
During 1996 and 1997, the Company obtained loans from bridge lenders
(Bridge Loans) with an interest rate of 10% per annum and accrued
principal and interest due at the earlier of 5 days after the completion
of an initial public offering (IPO) by the Company or 24 months. Attached
to these loans were warrants to purchase 230,000 shares of common stock
of the Company at a price of $1.00 per share (Note 8). One loan for
$55,000 from a related party, also included a provision which allowed the
Company, at its discretion, to convert the amount of principal and
interest owed to common stock in the event of an IPO based on a price per
share which was 50% of the IPO price.
During 1997 and 1998, the Company borrowed a total of $860,000 from
investors. These loans included interest rates ranging from 10% to 12%
per annum with accrued principal and interest due the earlier of 120 days
or 5 days after the completion of an IPO by the Company.
In May 1998, with proceeds from the Company's IPO (Note 8), the Company
repaid all debt outstanding including principal and interest.
35
<PAGE>
ONTRO, INC.
(A Development Stage Enterprise)
Notes to Consolidated Financial Statements
December 31, 1997 and 1998
(8) SHAREHOLDERS' EQUITY
(a) PREFERRED STOCK
The Company has 5,000,000 shares of preferred stock authorized for
issuance with no par value. No shares have been issued.
(b) PUBLIC OFFERING
In May 1998, the Company completed an IPO of 3,400,000 units
consisting of one share of common stock and a warrant to purchase
one share of common stock of the Company at an IPO price of $5.50
per unit. Prior to the IPO, there was no public market for the
Company's common stock. The net proceeds of the offering, after
deducting applicable underwriting discounts and offering expenses,
were $15.8 million. The Company used approximately $2.1 million of
the net proceeds to repay outstanding debt.
(c) STOCK INCENTIVE PLANS
During the year ended December 31, 1996, the Board of Directors
adopted an incentive stock option plan for executives and key
employees (the Plan). The Plan authorizes the granting of options
to purchase shares of the Company's common stock. Options vest
evenly over 3 to 4 years from the date of grant. Options expire 10
years after the date of grant, or at the employee's termination
date, if earlier. The number of shares authorized for the Plan is
545,400. At December 31, 1998, there were 52,400 shares available
for grant under the Plan.
Using the Black-Scholes option-pricing model, the Company
determined that the per share weighted-average fair value of stock
options granted under the Plan during 1997 was $0.47 and during
1998 was $1.62 on the dates of grant. The following
weighted-average assumptions were included in this method: 1997 -
no expected dividend yield, volatility rate of 37.5%, risk-free
interest rate of 6.0%, and an expected life of 4 years; 1998 - no
expected dividend yield, volatility rate of 142.9%, risk-free
interest rate of 4.66%, and an expected life of 4 years.
36
<PAGE>
ONTRO, INC.
(A Development Stage Enterprise)
Notes to Consolidated Financial Statements
December 31, 1997 and 1998
The following is a summary of the Plan's activity for the years
ended December 31, 1997 and 1998:
<TABLE>
<CAPTION>
NUMBER WEIGHTED AVERAGE
OF SHARES EXERCISE PRICE
------------------ ------------------
<S> <C> <C>
Outstanding at January 1, 1997 120,000 $ 1.00
Exercised (12,000) 1.00
Granted 5,000 3.00
------------------ ------------------
Outstanding at December 31, 1997 113,000 1.09
Granted 190,000 1.88
------------------ ------------------
Outstanding at December 31, 1998 303,000 $ 1.69
------------------ ------------------
------------------ ------------------
Exercisable at December 31, 1998 93,338 $ 1.33
------------------ ------------------
------------------ ------------------
</TABLE>
The range of exercise prices and weighted-average remaining
contractual life for options outstanding as of December 31, 1998
was $1.00 - $3.00 and approximately 6 years, respectively.
In September 1998, the Company adopted an Executive Performance
Bonus Plan under which 190,000 performance share awards were
granted to officers and certain key employees. All of the
performance awards remained outstanding as of December 31, 1998.
These performance awards vest on July 1, 1999 upon the attainment
of performance goals as described in the Executive Performance
Bonus Plan. The performance shares are earned if certain
manufacturing, licensing and cash retention objectives are
attained. No compensation expense has been recorded to date
related to these awards as the Company does not expect to meet the
performance criteria.
The Company applies APB Opinion No. 25 in accounting for its stock
option grants to employees and directors of the Company and,
accordingly, no compensation cost has been recognized in the
financial statements for such options. Had the Company determined
compensation cost for its stock options based on the fair value at
the grant date under SFAS No. 123, the Company's net loss for the
years ended December 31, 1997 and 1998 would have been increased
to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
1997 1998
----------------- ------------------
<S> <C> <C>
Net loss, as reported $ (2,167,000) (2,691,700)
Pro forma net loss (2,195,800) (2,866,300)
Pro forma basic and diluted net loss per share (0.76) (0.54)
</TABLE>
Pro forma net loss reflects only options granted since December
31, 1995. Pro forma net loss stated in accordance with SFAS No.
123 may not be representative of the effects on reported net loss
in future years.
37
<PAGE>
ONTRO, INC.
(A Development Stage Enterprise)
Notes to Consolidated Financial Statements
December 31, 1997 and 1998
(d) NON-QUALIFIED STOCK OPTIONS
During the year ended December 31, 1997, the Board of Directors
granted and the shareholders approved 55,000 stock options outside
the Plan at a price range of $2.50 - $5.00 with vesting terms
ranging from immediate to 25% per year to nonemployees and a
director. The Company recognized $23,800 of compensation expense
to nonemployees relating to all options previously granted during
the year ended December 31, 1997 and deferred $10,600 of
compensation expense for nonemployee options granted in 1997 that
had not vested as of December 31, 1997. Using the Black-Scholes
option-pricing model, the Company determined that the per share
weighted-average fair value of stock options granted during the
year ended December 31, 1997 was $0.37 on the date of grant. The
following weighted-average assumptions were included in this
method for 1997: no expected dividend yield, volatility rate of
37.5%, risk-free interest rate of 6.0%, and an expected life
ranging from 3 to 5 years.
During the year ended December 31, 1998, the Board of Directors
granted 290,000 stock options outside the Plan at a price range of
$1.50 - $3.38 with vesting terms ranging from immediate to 20% per
year to a nonemployee and certain directors. The Company
recognized $146,900 of compensation expense to nonemployees
related to all options previously granted during the year ended
December 31, 1998. Using the Black-Scholes option-pricing model,
the Company determined that the per share weighted-average fair
value of nonemployee options granted during the year ended
December 31, 1998 was $1.37 on the date of grant. The following
weighted average assumptions were included in this method for
1998: no expected dividend yield, volatility rate of 104.6%, risk
free interest rate of 4.66%, and an expected life of 4 years.
The following is a summary of nonqualified stock option activity
for the year ended December 31, 1997 and 1998.
<TABLE>
<CAPTION>
WEIGHTED-AVERAGE
NUMBER OF SHARES EXERCISE PRICE
------------------- -------------------
<S> <C> <C>
Outstanding at January 1, 1997 672,665 $ 0.48
Exercised (5,000) 0.001
Granted 55,000 3.18
------------------- -------------------
Outstanding at December 31, 1997 722,665 0.69
Canceled (10,000) 5.00
Granted 290,000 2.34
------------------- -------------------
Outstanding at December 31, 1998 1,002,665 $ 1.13
------------------- -------------------
------------------- -------------------
</TABLE>
38
<PAGE>
ONTRO, INC.
(A Development Stage Enterprise)
Notes to Consolidated Financial Statements
December 31, 1997 and 1998
The following table summarizes information about nonqualified
stock options outstanding at December 31, 1998:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
---------------------------------------------------- --------------------------------
NUMBER WEIGHTED-AVERAGE WEIGHTED- NUMBER WEIGHTED-
RANGE OF OUTSTANDING AT REMAINING AVERAGE EXERCISABLE AT AVERAGE
EXERCISE DECEMBER 31, CONTRACTUAL EXERCISE DECEMBER 31, EXERCISE
PRICES 1998 LIFE PRICE 1998 PRICE
--------------- ----------------- --------------- ------------ ---------------- -------------
<S> <C> <C> <C> <C> <C> <C>
$ 0.001 537,665 1 year $ 0.001 537,665 $ 0.001
1.50 - 2.50 340,000 4 years 2.11 195,000 2.18
3.00 - 3.38 125,000 6 years 3.30 6,250 3.00
</TABLE>
(e) WARRANTS
In conjunction with obtaining bridge loan financing during 1996
and 1997 (Note 7), the Company granted warrants to purchase 20,000
and 210,000 shares of common stock, respectively, at an exercise
price of $1.00 per share. Using a prescribed valuation method of
SFAS No. 123, the Company determined, based upon an independent
appraisal, that the per share weighted-average value of the
warrants granted during 1996 was $0.35 on the date of grant and
these warrants were deemed to have an aggregate fair value of
$7,000. Using a prescribed valuation method of SFAS No. 123, the
Company determined that the per share weighted-average value of
the warrants granted during 1997 was $0.45 on the date of grant
and these warrants were deemed to have an aggregate fair value of
$94,500. The Black-Scholes option-pricing model used to value
these warrants assumed the following: no expected dividend yield,
volatility rate of 37.5%, risk-free interest rate of 6.0%, and an
expected life of 2 years.
In February and March of 1998, the bridge loan lenders agreed to
modifications in their loan agreements including an increase in
the exercise price of the attached bridge loan warrants from $1.00
to $3.00 and an extension of the exercise period. The Company
determined, using a prescribed valuation method of SFAS No. 123,
that the incremental value of the bridge loan warrants resulting
from the modification of the terms was $94,300. The Black-Scholes
option pricing model used to value the modified warrants assumed
the following: no expected dividend yield, volatility rate 37.5%,
risk free interest rate of 5.97%, and an expected life of 2 years.
The Company had recorded the value ascribed to the warrants of
$195,800 as deferred financing costs and was amortizing the amount
over the life of the Bridge Loans. Amortization of such costs for
the years ended December 31, 1997 and 1998 was $40,400 and
$155,400, respectively.
In May 1997, in connection with the issuance of 222,222 shares of
common stock, the Company issued warrants to purchase 100,000
shares of common stock for $3.00 per share for total consideration
for $500,000. The warrants expire May 22, 2000 and are all
exercisable.
39
<PAGE>
ONTRO, INC.
(A Development Stage Enterprise)
Notes to Consolidated Financial Statements
December 31, 1997 and 1998
In connection with the October 1997 issuance of units consisting
of 1 share of common stock and a warrant to purchase 1 share of
common stock of the Company, 70,587 warrants were issued. The
warrants have an exercise price of $8.25, are all exercisable
and expire May 11, 2001.
In February 1998, Manhattan West, Inc., a stockholder, option
holder and consultant of the Company, agreed to terminate its
consulting agreement and to forfeit any accrued consulting fees.
In addition, their option to purchase 543,841 shares of common
stock of the Company expired unexercised on January 15, 1998.
In connection with the IPO issuance of units consisting of 1 share
of common stock and a warrant to purchase 1 share of common stock
of the Company, 3,400,000 warrants were issued and the exercise
price is $8.25 per share. The warrants expire May 11, 2001. The
Company has the option to redeem the warrants at $0.05 per warrant
if the closing price of the Company's common stock equals or
exceeds $11.00 for 20 consecutive days, subject to certain
restrictions.
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.
(f) STOCK SPLIT
On December 31, 1996, the Company completed a 28.12-for-1 stock
split in the form of a stock dividend payable to all existing
shareholders. All references in the accompanying financial
statements to average number of shares outstanding and related
prices, per share amounts, stock option plan, and warrant data
have been restated to reflect the split.
(9) IHI ACQUISITION
The Company was party to a license agreement with IHI, an affiliated
company through common ownership. This agreement granted the Company an
exclusive worldwide license in perpetuity with respect to the patents and
technology developed by IHI. The Company was obligated to prosecute
infringement claims regarding the IHI technology and to defend any
infringement claims brought against IHI or the Company. The license
agreement required the Company to make annual continuing royalty payments
to IHI based on a percentage of sales but not less than a minimum annual
royalty of $25,000. In March 1997, the license agreement was amended to
increase the minimum annual royalty for future periods to $50,000 and
also requires additional royalty payments from the Company on the sale of
products utilizing IHI technology subject to the Company achieving
minimum annual net operating income after payment of all taxes of no less
than $4 million. The Company recognized the minimum royalty liability to
IHI of $25,000 and $50,000 during 1996 and 1997, respectively.
In March 1998, the Company entered into agreements with the IHI
shareholders to utilize a portion of the proceeds of the IPO to purchase
all of their shares of IHI common stock for $25 per share. The IHI
shareholders also agreed to the termination of the license agreement and
waived any royalties due.
40
<PAGE>
ONTRO, INC.
(A Development Stage Enterprise)
Notes to Consolidated Financial Statements
December 31, 1997 and 1998
On May 11, 1998, the Company acquired IHI. 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 consisted primarily of intellectual
property related to the Company's integrated thermal technology. If IHI
had been acquired on January 1, 1997 or 1998, the 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:
<TABLE>
<S> <C>
Patents $ 105,300
Liabilities assumed (22,000)
Return of equity to IHI shareholders 397,900
---------
Purchase price $ 481,200
---------
---------
</TABLE>
(10) RELATED PARTY TRANSACTIONS
The Company has entered into various consulting agreements with members
of its Advisory Board resulting in current monthly commitments of
approximately $25,000 with terms expiring on various dates between August
1997 and December 1999.
During 1997 and 1998, the Board of Directors authorized the issuance of
and granted to members of its Advisory Board and Board of Directors
55,000 and 290,000 nonqualified stock options (outside the Plan),
respectively, at prices ranging from $2.50 - $5.00 and $1.50 - $3.38,
respectively (Note 8).
During 1997 and 1998, L.L. Knickerbocker Company, Inc. (Knickerbocker), a
shareholder of the Company, paid $17,300 and $10,400, respectively, for
services on the Company's behalf which was charged to operations. There
was a $10,400 balance outstanding from the Company to Knickerbocker at
December 31, 1997.
(11) EMPLOYEE BENEFIT PLAN
Effective January 1, 1996, the Company sponsored a salary reduction
simplified employee pension plan. Full time employees who have completed
3 months of service and are 21 years of age are eligible to participate.
Eligible employees may elect to defer up to 15% of annual compensation,
subject to limitations. The Company may make discretionary contributions
to the plan. The Company made no contributions to the plan during 1997 or
1998.
(12) SUBSEQUENT EVENTS
In January 1999, the Company obtained a bank line of credit for $355,000.
The line of credit is due on demand and bears interest at 8.75% payable
monthly and secures a letter of credit which collateralizes the Company's
office and plant facility lease.
41
<PAGE>
ONTRO, INC.
(A Development Stage Enterprise)
Notes to Consolidated Financial Statements
December 31, 1998 and 1997
(13) COMMITMENTS AND CONTINGENCIES
The Company has employment agreements with certain officers which provide
such officers, at their discretion, severance payments equal to 299% of
their average annual base salary and bonuses during the preceding 5-year
period in the event of a change of control, as defined in their
employment agreements.
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 breached this
obligation when the underwriters sold Mr. Lyons a lesser 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 will not have a material adverse effect on the financial
condition of the Company.
42
<PAGE>
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS. COMPLIANCE
WITH SECTION 16(A) OF THE EXCHANGE ACT.
The information required by this item relating to the Company's directors and
nominees and disclosure relating to compliance with Section 16(a) of the
Securities Exchange Act of 1934 is included under the captions "Election of
Directors" and "Compliance with Section 16(a) of the Securities Exchange Act of
1934" in the Registrant's Proxy Statement for the 1999 Annual Meeting of
Shareholders and is incorporated herein by reference.
ITEM 10. EXECUTIVE COMPENSATION.
The information required by item 10 of Form 10-KSB is incorporated by reference
to the information contained in the section captioned "Executive Compensation"
in the Proxy Statement to be filed with the Commission on or before April 30,
1999.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information required by item 11 of Form 10-KSB is incorporated by reference
to the information contained in the section captioned "Security Ownership of
Certain Beneficial Owners and Management" in the Proxy Statement to be filed
with the Commission on or before April 30, 1999.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required by Item 12 of Form 10-KSB is incorporated by reference
to the information contained in the section captioned "Certain Relationships and
Related Transactions" in the Proxy Statement to be file with the Commission on
or before April 30, 1999.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K.
Exhibit 27
No Reports on Form 8-K.
43
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the Registrant
has caused this Report to be signed on its behalf by the undersigned, thereunto
duly authorized.
ONTRO, INC
Registrant
By: /s/ JAMES A. SCUDDER March 31, 1999
-------------------------------------
James A. Scudder
President and Chief Executive Officer
(PRINCIPAL EXECUTIVE OFFICER)
By: /S/ KEVIN A HAINLEY March 31, 1999
-------------------------------------
Kevin A. Hainley
Chief Financial Officer
(Principal Financial and Accounting
Officer)
In accordance with the Exchange Act, this report has been signed below by
the following persons on behalf of the registrant and in the capacities and on
the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ JAMES L. BERNTSEN Director March 31, 1999
- ------------------------
James L. Berntsen
/s/ ROBERT F. COSTON Director March 31, 1999
- ------------------------
Robert F. Coston
/s/ DOUGLAS W. MOUL Director March 31, 1999
- ------------------------
Douglas W. Moul
/s/ JAMES A. SCUDDER Director March 31, 1999
- ------------------------
James A. Scudder
/s/ CARROLL E. TAYLOR Director March 31, 1999
- ------------------------
Carroll E. Taylor
</TABLE>
44
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C> <C>
<PERIOD-TYPE> YEAR YEAR
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1997
<PERIOD-START> JAN-01-1998 JAN-01-1997
<PERIOD-END> DEC-31-1998 DEC-31-1997
<CASH> 6,279,000 5,100
<SECURITIES> 3,036,100 0
<RECEIVABLES> 0 0
<ALLOWANCES> 0 0
<INVENTORY> 0 0
<CURRENT-ASSETS> 8,510,400 14,900
<PP&E> 1,471,200 536,400
<DEPRECIATION> 224,491 137,500
<TOTAL-ASSETS> 12,326,600 895,200
<CURRENT-LIABILITIES> 535,700 1,991,800
<BONDS> 0 0
0 0
0 0
<COMMON> 17,471,600 2,047,200
<OTHER-SE> (5,705,800) (3,244,700)
<TOTAL-LIABILITY-AND-EQUITY> 12,326,600 895,200
<SALES> 0 0
<TOTAL-REVENUES> 0 0
<CGS> 0 0
<TOTAL-COSTS> 0 0
<OTHER-EXPENSES> 2,802,700 1,992,100
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 259,100 179,900
<INCOME-PRETAX> (2,691,700) (2,167,000)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> (2,691,700) (2,167,000)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (2,691,700) (2,167,000)
<EPS-PRIMARY> (0.51) (0.75)
<EPS-DILUTED> (0.51) (0.75)
</TABLE>
