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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
FORM 10-QSB
/X/ Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the Quarterly Period ended SEPTEMBER 30, 2000
/_/ Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
Commission file number: 333-39253
ONTRO, INC.
(Exact name of small business issuer as specified in its charter)
CALIFORNIA 33-0638356
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
13250 GREGG STREET, POWAY, CALIFORNIA 92064
(Address of principal executive offices)
(858) 486-7200
(Issuer's telephone number)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes [ ] No [ ]
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS
Check whether the registrant filed all documents and reports required to be
filed by Sections 12, 13 or 15(d) of the Exchange Act after the distribution of
securities under a plan confirmed by a court.
Yes [ ] No [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuers classes of common
equity, as of latest practicable date:
As of November 7, 2000, there are 6,688,931 shares of common stock outstanding.
Transitional Small Business Disclosure Format (check one):
Yes [ ] No [X]
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ONTRO, INC.
INDEX TO FORM 10-QSB
PART L FINANCIAL INFORMATION
Item 1 - Consolidated Financial Statements
Consolidated Balance Sheets 3
Consolidated Statements of Operations 4
Consolidated Statements of Cash Flows 5
Notes to Consolidated Financial Statements 6
Item 2 - Management's Discussion and
Analysis or Plan of Operations 6
PART LL OTHER INFORMATION
Item 1 - Legal Proceedings 15
Item 2 - Changes in Securities 15
Item 3 - Defaults upon Senior Securities 15
Item 4 - Submission of Matters to a Vote of
Security Holders 15
Item 5 - Other Information 16
Item 6 - Exhibits and Reports on Form 8-K 16
Signatures 16
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PART I FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
ONTRO, INC.
(A Development Stage Enterprise)
Consolidated Balance Sheets
<CAPTION>
September 30, December 31,
2000 1999
--------------- ---------------
ASSETS (unaudited) Note
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 1,122,900 $ 2,848,800
Investments held to maturity -- 698,300
Prepaid expenses and other current assets 176,300 284,100
--------------- ---------------
Total current assets 1,299,200 3,831,200
--------------- ---------------
Property and equipment, net 3,188,800 3,790,500
Deposits and other assets 138,800 152,700
Intangible assets, net 391,100 389,300
--------------- ---------------
$ 5,017,900 $ 8,163,700
=============== ===============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accrued expenses and other liabilities $ 257,600 $ 256,200
Capital lease obligations, current portion 3,100 28,000
Notes payable, current portion 15,600 83,600
--------------- ---------------
Total current liabilities 276,300 367,800
Capital lease obligations, excluding current portion 9,100 11,500
Accrued rent 25,700 18,100
--------------- ---------------
Total liabilities 311,100 397,400
--------------- ---------------
Shareholders' equity:
Preferred stock, no par value, 5,000,000 shares authorized, no shares issued -- --
Common stock, no par value, 20,000,000 shares authorized
6,688,931 and 6,539,145 shares issued and outstanding as of
September 30, 2000 and December 31, 1999, respectively 17,576,000 17,478,300
Additional paid-in capital 1,157,800 1,054,500
Deficit accumulated during the development stage (13,971,200) (10,719,800)
Deferred compensation (55,800) (46,700)
--------------- ---------------
Total shareholders' equity 4,706,800 7,766,300
--------------- ---------------
$ 5,017,900 $ 8,163,700
=============== ===============
Note: The consolidated balance sheet at December 31, 1999 has been derived from
the audited consolidated financial statements at that date but does not include
all the information and footnotes required by generally accepted accounting
principles for complete financial statements.
See accompanying notes to consolidated financial statements
</TABLE>
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ONTRO, INC.
(A Development Stage Enterprise)
Consolidated Statements of Operations
(unaudited)
<CAPTION>
From inception
(November 8,
For the three months For the nine months ended 1994)
ended September 30, September 30, through
------------------------------ ----------------------------- September 30,
2000 1999 2000 1999 2000
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Revenue $ 3,000 42,800 13,000 42,800 56,100
------------ ------------ ------------ ------------ ------------
Operating expenses:
Research and development 676,400 741,000 1,930,400 1,751,500 5,969,400
Marketing, general and administrative 539,900 664,200 1,429,700 1,604,900 8,338,900
------------ ------------ ------------ ------------ ------------
Total operating expense 1,216,300 1,405,200 3,360,100 3,356,400 14,308,300
------------ ------------ ------------ ------------ ------------
Other (expense) income:
Interest expense (1,700) (5,300) (6,500) (13,800) (488,700)
Interest income 21,600 62,800 102,200 241,300 769,700
------------ ------------ ------------ ------------ ------------
Total other (expense) income 19,900 57,500 95,700 227,500 281,000
------------ ------------ ------------ ------------ ------------
Net loss $ 1,193,400 1,304,900 3,251,400 3,086,100 13,971,200
============ ============ ============ ============ ============
Basic and diluted net loss per share $ (0.18) (0.20) (0.49) (0.47)
============ ============ ============ ============
Weighted average shares
outstanding 6,674,213 6,526,979 6,650,304 6,502,996
============ ============ ============ ============
See accompanying notes to consolidated financial statements.
</TABLE>
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ONTRO, INC.
(A Development Stage Enterprise)
Consolidated Statements of Cash Flows
(unaudited)
<CAPTION>
From inception
For the nine months ended (November 8, 1994)
September 30, Through
----------------------------- September 30,
2000 1999 2000
------------ ------------ ------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss $(3,251,400) (3,086,100) (13,971,200)
Adjustments to reconcile net loss to cash used in operating
activities, excluding effect of acquisition:
Depreciation and amortization 690,300 528,000 1,670,000
Amortization of deferred financing costs -- -- 195,800
Issuance of common stock for services 97,700 2,400 327,400
Compensation for stock options and certain warrants 94,200 198,000 854,100
(Increase) decrease in prepaid expenses and other
current assets 107,800 (108,400) (176,300)
(Increase) decrease in deposits and other assets 13,900 1,014,500 (138,800)
Increase (decrease) in accrued expenses and other
liabilities 1,400 (272,900) 235,600
Increase in accrued rent 7,600 -- 25,700
------------ ------------ ------------
Net cash used in operating activities (2,238,500) (1,724,500) (10,977,700)
------------ ------------ ------------
Cash flows from investing activities:
Acquisition of business -- -- (481,200)
Intangible assets (20,100) (55,500) (337,100)
Purchase of property and equipment and leasehold improvements (65,500) (3,183,600) (4,581,800)
Purchase of investments held to maturity (1,089,400) (3,346,600) (15,775,000)
Proceeds from sale of investments held to maturity 1,782,900 4,374,100 15,771,200
------------ ------------ ------------
Net cash provided by (used in) investing activities 607,900 (2,211,600) (5,403,900)
------------ ------------ ------------
Cash flows from financing activities:
Net proceeds from issuance of common stock and warrants -- 400 18,047,900
Deferred offering costs -- -- (349,300)
Proceeds from notes payable -- 147,500 2,252,500
Payments on notes payable (68,000) (42,200) (2,236,900)
Payments on capital lease obligations (27,300) (16,200) (209,700)
------------ ------------ ------------
Net cash provided by (used in) financing activities (95,300) 89,500 17,504,500
------------ ------------ ------------
Net increase (decrease) in cash and cash equivalents (1,725,900) (3,846,600) 1,122,900
Cash and cash equivalents, beginning of period 2,848,800 6,279,000 --
------------ ------------ ------------
Cash and cash equivalents, end of period $ 1,122,900 2,432,400 1,122,900
============ ============ ============
Supplemental disclosure of cash flow information:
Cash paid during the period for interest $ 6,500 8,200 249,800
Supplemental disclosure of non-cash transactions:
Equipment acquisitions under capital lease -- 16,900 221,900
Warrants issued in connection with debt -- -- 195,800
Detail of acquisition:
Patents acquired -- -- 105,300
Liabilities assumed -- -- (22,000)
Return of equity to IHI Shareholders -- -- 397,900
------------ ------------ ------------
Cash paid for acquisition $ -- -- 481,200
============ ============ ============
See accompanying notes to consolidated financial statements
</TABLE>
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ONTRO, INC.
(A Development Stage Enterprise)
Notes To Consolidated Financial Statements
(unaudited)
September 30, 2000
THE COMPANY
Ontro, Inc. (the "Company" or "Ontro") is engaged in the research and
development of integrated thermal containers. The Company has unique proprietary
technology which it has incorporated into a proposed product line of fully
contained self-heating beverage containers designed to heat liquid contents such
as coffee, tea, hot chocolate, soups, and baby formula.
The Company is a development stage enterprise. Accordingly, the Company's
operations have been directed primarily toward raising capital, marketing to
potential customers, research and development, acquiring operating assets, and
production of sample and prototype containers.
Ontro has been unprofitable and has generated limited revenues from the sale of
products or other sources since inception. The Company expects to incur losses
as it continues its development activities and pursues commercialization of its
technologies. The future success of the Company is dependent upon its ability to
raise additional capital to maintain its efforts to develop, manufacture and
market its products and, ultimately, upon its ability to attain profitable
operations.
BASIS OF PREPARATION
The accompanying unaudited consolidated financial statements have been prepared
by the Company in accordance with generally accepted accounting principles for
interim financial information. Certain information and disclosures normally
included in financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted. In the opinion of the
Company's management, the unaudited consolidated financial statements contain
all adjustments necessary (consisting of normal recurring accruals) for a fair
presentation of the financial position as of September 30, 2000, and the results
of operations for the three and nine month periods ended September 30, 2000 and
1999. The results of operations for the period ended September 30, 2000, are not
necessarily indicative of the results to be expected for the full year. For
further information, refer to the consolidated financial statements and
footnotes thereto included in Ontro's Form 10-KSB for the year ended December
31, 1999.
The consolidated financial statements include the accounts of Ontro, Inc. and
its wholly-owned subsidiary. All significant intercompany accounts and
transactions have been eliminated.
NET LOSS PER SHARE
The impact of outstanding stock options and warrants during the periods
presented did not create a difference between basic net loss per share and
diluted net loss per share. Stock options and warrants totaling 6,471,967 and
6,146,967 shares were excluded from the computations of diluted net loss per
share for the three and nine months ended September 30, 2000 and 1999
respectively, as their effect is anti-dilutive.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
CERTAIN FORWARD-LOOKING INFORMATION
INFORMATION PROVIDED IN THIS QUARTERLY REPORT ON FORM 10-QSB MAY CONTAIN
FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF SECTION 21E OF THE SECURITIES
EXCHANGE ACT OF 1934 THAT ARE NOT HISTORICAL FACTS AND INFORMATION. THESE
STATEMENTS REPRESENT THE COMPANY'S EXPECTATIONS OR BELIEFS, INCLUDING, BUT NOT
LIMITED TO, STATEMENTS CONCERNING THE FUTURE FINANCIAL AND OPERATING RESULTS,
STATEMENTS CONCERNING INDUSTRY PERFORMANCE, THE COMPANY'S OPERATIONS, ECONOMIC
PERFORMANCE, FINANCIAL CONDITION, MARGINS AND GROWTH IN SALES OF THE COMPANY'S
PRODUCTS, CAPITAL EXPENDITURES, FINANCING NEEDS, AS WELL AS ASSUMPTIONS RELATED
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TO THE FOREGOING. FOR THIS PURPOSE, ANY STATEMENTS CONTAINED IN THIS QUARTERLY
REPORT THAT ARE NOT STATEMENTS OF HISTORICAL FACT MAY BE DEEMED TO BE
FORWARD-LOOKING STATEMENTS. WITHOUT LIMITING THE GENERALITY OF THE FOREGOING,
WORDS SUCH AS "MAY", "WILL", "EXPECT", "BELIEVE", "ANTICIPATE", "INTEND",
"COULD", "ESTIMATE" OR "CONTINUE" OR THE NEGATIVE OR OTHER VARIATIONS THEREOF OR
COMPARABLE TERMINOLOGY ARE INTENDED TO IDENTIFY FORWARD-LOOKING STATEMENTS.
THESE FORWARD-LOOKING STATEMENTS ARE BASED ON CURRENT EXPECTATIONS AND INVOLVE
VARIOUS RISKS AND UNCERTAINTIES THAT COULD CAUSE ACTUAL RESULTS AND OUTCOMES FOR
FUTURE PERIODS TO DIFFER MATERIALLY FROM ANY FORWARD-LOOKING STATEMENT OR VIEWS
EXPRESSED HEREIN. THE COMPANY'S FINANCIAL PERFORMANCE AND THE FORWARD-LOOKING
STATEMENTS CONTAINED HEREIN ARE FURTHER QUALIFIED BY OTHER RISKS INCLUDING THOSE
SET FORTH FROM TIME TO TIME IN THE DOCUMENTS FILED BY THE COMPANY WITH THE
SECURITIES AND EXCHANGE COMMISSION, INCLUDING THE COMPANY'S MOST RECENT FORM
10-KSB.
RESULTS OF OPERATIONS
COMPARISON OF THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
Net loss for the quarter ended September 30, 2000 was $1,193,400 or $0.18 per
weighted average share outstanding, compared to a net loss of $1,304,900 or
$0.20 per weighted share outstanding for the same period in 1999. Net loss for
the nine months ended September 30, 2000 was $3,251,400 or $0.49 per weighted
average share outstanding compared to $3,086,100 or $0.47 per weighted average
share outstanding in 1999. Net loss from inception (November 8, 1994) through
September 30, 2000 was $13,971,200.
During the nine months ended September 30, 2000 the Company earned revenues of
$13,000. These revenues related to payments by a customer for research and
development services.
Operating expenses were $1,216,300 and $1,405,200 for the quarters ended
September 30, 2000 and 1999, respectively. Operating expenses were $3,360,100
and $3,356,400 for the nine months ended September 30, 2000 and 1999,
respectively.
Research and development expenses decreased to $676,400 for the quarter ended
September 30, 2000 from $741,000 for the same period in 1999, and increased to
$1,930,400 for the nine month period ended September 30, 2000 compared to
$1,751,500 for the same period in 1999. The decrease for the quarter was
primarily due to compensation expense for stock options granted in 1999 but not
in 2000. For the nine month comparison the increase was due to: (1) additional
costs of outside consultants and companies hired by the Company to aid in its
research and development efforts, (2) increase in salaries from hiring
additional full-time employees and increases in wages to existing employees, (3)
increases related to testing prototypes of self-heating containers as well as
laboratory testing of various elements of the container, materials, and the
self-heating process, (4) increase in uses of supplies and other operational
expenses, and (5) increases in depreciation related to manufacturing and
research and development equipment.
Marketing, general and administrative expenses decreased to $539,900 for the
quarter ended September 30, 2000 from $664,200 for the same period in 1999, and
decreased to $1,429,700 for the nine month period ended September 30, 2000
compared to $1,604,900 for the same period in 1999. These decreases were due to
reductions in consulting fees as well as marketing research fees incurred in
1999 but not in 2000.
Interest expense was $1,700 for the quarter ended September 30, 2000 compared to
$5,300 for the same period in 1999 and was $6,500 for the nine months ended
September 30, 2000 compared to $13,800 in 1999.
Interest income was $21,600 for the quarter ended September 30, 2000 compared to
$62,800 for the same period in 1999, and was $102,200 for the nine months ended
Sept 30, 2000, compared to $241,300 for the same period in 1999. Interest income
continues to decrease as a result of decreasing cash balances available for
investment.
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LIQUIDITY AND CAPITAL RESOURCES
The Company has financed its operations since inception primarily through public
and private sales of equity securities, as well as through bridge financing. As
of September 30, 2000, the Company's cash and cash equivalents and investments
totaled approximately $1.12 million.
Primary uses of cash and cash equivalents for the nine months ended September
30, 2000 included $2,238,500 for the Company's operations and working capital
requirements, patent costs of $20,100, payments on capital lease obligations of
$27,300, payments on note payable of $68,000, and purchase of equipment and
leasehold improvements of $65,500. 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 three months at its anticipated level of
operations. The Company believes, however, that it could implement cost saving
measures in order to meet the Company's cash requirements for the next six
months. The Company is currently seeking additional funding. There can be no
assurance that any additional funding will be available on acceptable terms, or
at all. Moreover, if additional financing is not available, the Company could be
required to reduce or suspend its operations or seek an acquisition partner. In
any case the Company may 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 operation.
RISK FACTORS THAT MAY AFFECT
FUTURE OPERATING RESULTS
IN ADDITION TO THE OTHER INFORMATION INCLUDED IN THIS REPORT, THE FOLLOWING
FACTORS SHOULD BE CONSIDERED IN EVALUATING THE COMPANY'S BUSINESS AND FUTURE
PROSPECTS. THE COMPANY'S BUSINESS AND RESULTS OF OPERATIONS COULD BE SERIOUSLY
HARMED BY ANY OF THE FOLLOWING RISKS. IN ADDITION, THE MARKET PRICE OF OUR
COMMON STOCK COULD DECLINE DUE TO ANY OF THESE RISKS.
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 September 30, 2000, the Company had a deficit
accumulated during the development stage of approximately $14.0 million. The
Company expects to incur additional operating losses through at least 2001 and
possibly thereafter. The Company has generated no significant revenues from
operations. The development of the Company's integrated thermal containers will
require the commitment of substantial additional 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. 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 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.
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SUBSTANTIAL FUTURE CAPITAL REQUIREMENTS; 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 only be sufficient to meet the Company's cash requirements for the
next three months at its anticipated level of operations. The Company is
currently seeking additional funding. There can be no assurance any additional
funds will be available on acceptable terms, or at all. Moreover, if additional
funds are not available, the Company could be required to reduce or suspend its
operations or seek an acquisition partner. In any case the Company may be
required to 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 that 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 enterprise. 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 its self-heating beverage container or any other integrated
thermal container it is developing. The Company currently expects the containers
to be introduced to consumers in market tests and other limited venues during
2001.
While the Company believes it is in the final stages of completing development
of its self-heating beverage container, additional work testing and verifying
different features of the containers must be completed before the prototypes are
put into commercial production. Such features include, but are not limited to,
the areas of material failure, heat transfer, the range of beverages that can be
used with the containers, heating control, sterilization, timing and temperature
ranges, appearance, and packaging. The Company continues to work on issues
related to insuring market reliability and quality control standards generally
required of containers for food and beverage products. The Company is conducting
ongoing research to increase quality control, as well as the predictability of
the heating engine and improve 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 anticipates it will derive substantially all of its future revenues
from royalty payments, if any, by licensees 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 integrated
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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 market studies on consumer acceptability of integrated thermal
containers. There can be no assurance that any such studies will demonstrate a
level of market acceptance sufficient to generate demand for the Company's
product from food and beverage companies. If the Company's integrated thermal
containers do not achieve significant market acceptance it 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, its 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 reduced revenues 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 new products, or product
enhancements. Any failure to successfully develop and market its integrated
thermal containers or other products and product enhancements would likely have
a material adverse effect on the Company's financial condition, business, and
results from operations.
PATENTS AND PROPRIETARY RIGHTS
The Company's success may depend, in part, on the Company's ability to maintain
its patent protection for its proposed containers, both in the United States and
in foreign countries. Ontro currently has six patents issued, three additional
patent applications pending in the United States, and foreign counterparts to
certain of these applications filed in other countries. The Company intends to
file additional patent applications as appropriate. There can be no assurance
patents will be issued from any of the pending applications, or if they do, the
claims allowed will be sufficiently broad to protect the Company's technology.
In addition, there can be no assurance any patents issued will not be
challenged, invalidated or circumvented. In addition, any patents obtained by
the Company will be of limited duration.
The commercial success of the Company may also depend upon avoiding infringing
on patents issued to others. If others file patent applications in the United
States that infringe on the Company's patent, the Company may have to
participate in interference proceedings declared by the Patent Trade Office
("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 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 in the PTO. Further, U.S. patents do not
provide any remedies for infringement occurring 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, customers and others. There can be no assurance these agreements will
adequately protect the Company, that these agreements will not be breached, and
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if they are, that 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. Ultimately the Company 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 the Company's technology, and
these other technologies may be patented, or duplicate the Company's trade
secrets. In some cases, the Company may rely on trade secrets to protect 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 LICENSEES
FOR MANUFACTURE, AND SALE OF PROPOSED PRODUCTS
The Company's strategy is to license its integrated thermal technologies to
container manufacturers. The Company anticipates requiring such companies to be
responsible for the manufacture and sale of the Company's containers. There can
be no assurance the Company will enter into satisfactory license agreements with
any parties for the manufacture and sale of its integrated thermal containers;
that such licenses, if any, will result in revenues to the Company; 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, it will likely
have a material adverse impact on the Company's financial condition, business,
and results from operation.
PROBABLE DEPENDENCE ON OUTSIDE PARTIES FOR MARKETING AND DISTRIBUTION
The Company's future growth and profitability is expected to depend on the
success of its licensees, if any, and the marketing efforts of food and beverage
companies who purchase containers from those licensees to use with their
products. Success in marketing a food or beverage utilizing the Company's
containers will be substantially dependent on the efforts of those food and
beverage companies whose products are marketed in the Company's 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. 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.
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 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 and desire to develop
competitively priced integrated thermal containers.
DEPENDENCE UPON KEY PERSONNEL
The Company's success will depend, in large part, on its ability to attract and
retain qualified management personnel. The Company's potential growth and any
expansion into areas and activities requiring additional expertise, 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
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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 PRICES AND SUPPLY OF RAW MATERIALS
The Company intends to manufacture certain parts of the proposed integrated
thermal containers using various materials including but not limited to plastic
resins. The Company does not currently have agreements with any raw material
suppliers, including but not limited to 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 or be able to maintain supply agreements
on acceptable terms and conditions.
The Company believes certain components can be obtained from numerous suppliers
and as a result thereof the Company believes it is not and its licensees (if
any) would not be materially dependent upon any single source for any of its raw
materials or components. However, if the Company or its licensees were to
experience delays in delivery of raw materials or component parts, it could
delay their 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.
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, if any, to acquire
resin in acceptable amounts and at acceptable costs, and to pass resin price
increases on to its potential 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 but not limited to those arising from supply
shortages. There can be no assurance a significant increase in resin prices, a
shortage of supply, or other event would not have a material adverse impact on
the business, financial condition, and results from operations of the Company.
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.
The principal components of the Company's products are made from plastic.
Although the Company attempts to use all recyclable plastics not all parts of
the Company's containers can be recycled, and the plastic parts that can be
recycled cannot generally be recycled into the same component parts, and there
are 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 containers that are not
practically recyclable, and to the extent some plastic components could be
practically recycled to an increasing supply of similar 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 and increasing legislative and regulatory
activity around the world. The Company cannot predict the nature of the market
impact of such concerns 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.
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PRODUCT LIABILITY
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.
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. In addition, the issuance of such
preferred stock 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 stock, and
could adversely affect the voting and other rights of the holders of common
stock.
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 require 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") provided 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 provided 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 class of directors 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.
POSSIBLE DELISTING OF SECURITIES FROM NASDAQ AND POSSIBLE MARKET ILLIQUIDITY
While the Company's Common Stock and Warrants are currently listed on the Nasdaq
Smallcap Market ("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 an aggregate market value of publicly held shares
of $1,000,000. Nasdaq has rules which make continued listing of companies on
Nasdaq more difficult than in the past 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
could 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 Nasdaq listing.
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PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None
ITEM 2. CHANGES IN SECURITIES
The Board of Directors authorized ongoing issuances of restricted common stock
to the Company's outside directors and legal counsel as consideration for a
portion of legal counsel's monthly legal services and any extraordinary fees
paid to outside directors for services rendered other than attending meetings.
During the third quarter of 2000 the Company issued 14,135 common shares at a
weighted average price of $1.93. In issuing such shares of common stock the
Company relied upon the exemptions provided by Section 4(2) of the Securities
Act and Regulation D adopted by the SEC thereunder, as well certain exemptions
under applicable state(s) laws.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) The Annual Meeting of Shareholders of Ontro, Inc. was held on
September 29, 2000.
(b) At the 2000 Annual Meeting of Shareholders, votes were cast on
matters submitted to the shareholders, as follows:
(1) The election of five directors:
Nominee In Favor Withheld
------- -------- --------
James L. Berntsen 5,511,766 63,700
Robert F. Coston 5,536,766 38,700
Douglas W. Moul 5,531,766 43,700
James A. Scudder 5,506,716 68,750
Caroll E. Taylor 5,536,766 38,700
(2) Approval of an amendment to the 1996 Stock Option Plan increasing
the number of shares by 500,000.
For Against Abstain Non-Voters
--- ------- ------- ----------
2,555,183 182,940 32,760 2,804,583
(3) Approval of the selection of KPMG LLP as the Company's independent
public accountants for the year ending December 31, 2000.
For Against Abstain Non-Voters
--- ------- ------- ----------
5,521,306 11,600 42,560 0
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ITEM 5. OTHER INFORMATION
Not applicable
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
The Company did not file any reports on Form 8-K during the three months ended
September 30, 2000.
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the Registrant has
duly caused this Report to be signed on its behalf by the undersigned, thereunto
duly authorized.
ONTRO, INC
Registrant
November 14, 2000 By: /S/ James A. Scudder
--------------------------------------------
James A. Scudder
Chief Executive Officer and President
(Principal Executive Officer)
November 14, 2000 By: /S/ Kevin A. Hainley
--------------------------------------------
Kevin A. Hainley
Chief Financial Officer
(Principal Financial and Accounting Officer)
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