<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
FORM 10-QSB
/X/ Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the Quarterly Period ended MARCH 31, 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 X No
------- ------
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS
Check whether the registrant filed all documents and reports required to be
filed by Sections 12, 13 or 15(d) of the Exchange Act after the distribution of
securities under a plan confirmed by a court.
Yes_____ No _____
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuers classes of common
equity, as of the latest practicable date:
As of May 10, 2000, there are 6,651,035 shares of common stock outstanding.
Transitional Small Business Disclosure Format (check one):
Yes No X
------ ------
<PAGE>
ONTRO, INC.
INDEX TO FORM 10-QSB
PART I 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 Operation 7
PART II OTHER INFORMATION
Item 1 - Legal Proceedings 14
Item 2 - Changes in Securities 14
Item 3 - Defaults upon Senior Securities 15
Item 4 - Submission of Matters to a Vote of
Security Holders 15
Item 5 - Other Information 15
Item 6 - Exhibits and Reports on Form 8-K 15
Signatures 15
2
<PAGE>
PART I FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
ONTRO, INC.
(A Development Stage Enterprise)
Consolidated Balance Sheets
<CAPTION>
March 31, December 31,
2000 1999
-------------- --------------
ASSETS (unaudited) Note
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 1,576,800 2,848,800
Investments held to maturity 1,196,800 698,300
Prepaid expenses and other current assets 220,300 284,100
-------------- --------------
Total current assets 2,993,900 3,831,200
Property and equipment, net 3,610,800 3,790,500
Deposits and other assets 151,300 152,700
Intangible assets, net 392,100 389,300
-------------- --------------
$ 7,148,100 8,163,700
============== ==============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accrued expenses and other liabilities $ 236,500 256,200
Current portion of capital lease obligations 2,900 28,000
Notes payable 61,400 83,600
-------------- --------------
Total current liabilities 300,800 367,800
Capital lease obligations, excluding current portion 10,700 11,500
Deferred rent 21,200 18,100
-------------- --------------
Total liabilities 332,700 397,400
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
6,648,930 and 6,539,145 shares issued and outstanding as of March 31,
2000 and December 31, 1999, respectively 17,499,800 17,478,300
Additional paid-in capital 1,126,500 1,054,500
Deficit accumulated during the development stage (11,723,700) (10,719,800)
Deferred compensation (87,200) (46,700)
-------------- --------------
Total shareholders' equity 6,815,400 7,766,300
-------------- --------------
$ 7,148,100 8,163,700
============== ==============
</TABLE>
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
3
<PAGE>
<TABLE>
ONTRO, INC.
(A Development Stage Enterprise)
Consolidated Statements of Operations
(unaudited)
<CAPTION>
From inception
For the three months (November 8,
ended March 31, 1994)
----------------------------------- to March 31,
2000 1999 2000
--------------- --------------- --------------------
<S> <C> <C> <C>
Revenues $ 10,000 -- 53,100
Operating expenses:
Research and development 600,800 403,900 4,639,800
Marketing, general and administrative 457,400 424,000 7,366,600
--------------- --------------- --------------------
Total operating expenses 1,058,200 827,900 12,006,400
--------------- --------------- --------------------
Other expense (income):
Interest expense 3,100 2,300 485,300
Interest income (47,400) (103,000) (714,900)
--------------- --------------- --------------------
Total other expense (income) (44,300) (100,700) (229,600)
--------------- --------------- --------------------
Net loss $ (1,003,900) (727,200) (11,723,700)
=============== =============== ====================
Basic and diluted net loss per share $ (0.15) (0.11)
=============== ===============
Weighted average shares outstanding 6,617,707 6,489,478
=============== ===============
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE>
<TABLE>
ONTRO, INC.
(A Development Stage Enterprise)
Consolidated Statements of Cash Flows
(unaudited)
<CAPTION>
From inception
For the three months (November 8, 1994)
ended March 31, to March 31,
------------------------------
2000 1999 2000
------------- ------------- ------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss $ (1,003,900) (727,200) (11,723,700)
Adjustments to reconcile net loss to cash used in operating
activities, excluding effect of acquisition:
Depreciation and amortization 234,200 105,300 1,213,900
Amortization of deferred financing costs -- -- 195,800
Issuance of common stock for services 21,500 -- 251,200
Compensation for stock options and certain warrants 31,500 1,400 791,400
(Increase) decrease in prepaid expenses and other current
assets 63,800 (105,800) (220,300)
(Increase) decrease in deposits and other assets 1,400 (154,700) (151,300)
Increase (decrease) in accrued expenses and other
liabilities (19,700) (269,300) 214,500
Increase in deferred rent 3,100 -- 21,200
------------- ------------- ------------------
Net cash used in operating activities (668,100) (1,150,300) (9,407,300)
------------- ------------- ------------------
Cash flows from investing activities:
Acquisition of business -- -- (481,200)
Intangible assets (7,400) (31,900) (324,400)
Purchase of property, equipment and leasehold improvements (40,800) (1,029,500) (4,557,100)
Purchase of investments held to maturity (757,100) (2,816,500) (15,442,700)
Proceeds from sale of investments held to maturity 249,500 2,975,000 14,237,800
------------- ------------- ------------------
Net cash used in investing activities (555,800) (902,900) (6,567,600)
------------- ------------- ------------------
Cash flows from financing activities:
Net proceeds from issuance of common stock and warrants -- -- 18,047,900
Deferred offering costs -- -- (349,300)
Proceeds from notes payable -- -- 2,252,500
Payments on notes payable (22,200) -- (2,191,100)
Payments on capital lease obligations (25,900) (5,600) (208,300)
------------- ------------- ------------------
Net cash provided by (used in) financing activities (48,100) (5,600) 17,551,700
------------- ------------- ------------------
Net increase (decrease) in cash and cash equivalents (1,272,000) (2,058,800) 1,576,800
Cash and cash equivalents, beginning of period 2,848,800 6,279,000 --
------------- ------------- ------------------
Cash and cash equivalents, end of period $ 1,576,800 4,220,200 1,576,800
============= ============= ==================
Supplemental disclosure of cash flow information -
cash paid during the period for interest $ 3,100 2,300 246,400
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>
5
<PAGE>
ONTRO, INC.
(A Development Stage Enterprise)
Notes To Consolidated Financial Statements
(unaudited)
March 31, 2000
THE COMPANY
Ontro, Inc. (the "Company" or "Ontro") is engaged in the research and
development of integrated thermal containers. The Company has a unique
proprietary technology which it has incorporated into a proposed product line of
fully contained self-heating beverage containers designed to heat liquid
contents such as coffee, tea, hot chocolate, soups, and baby formula.
The Company is a development stage enterprise. Accordingly, the Company's
operations have been directed primarily toward raising capital, 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
develop, manufacture and market its products and, ultimately, upon its ability
to attain future 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 March 31, 2000, and the results of
operations for the three month periods ended March 31, 2000 and 1999. The
results of operations for the period ended March 31, 2000, is 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 subsidiary. All significant intercompany accounts and transactions have been
eliminated.
NET LOSS PER SHARE
The weighted average number of shares used to calculate basic net loss per share
was 6,617,707 and 6,489,478 for the quarters ended March 31, 2000 and 1999,
respectively. 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 6,110,967
and 5,830,252 shares were excluded from the computations of diluted net loss per
share during the quarters ended March 31, 2000 and 1999, respectively, as their
effect is anti-dilutive.
6
<PAGE>
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
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 MONTHS ENDED MARCH 31, 2000 AND 1999
Net loss for the quarter ended March 31, 2000 was $1,003,900 or $0.15 per
weighted average share outstanding, compared to a net loss of $727,200, or $0.11
per weighted average share outstanding for the same period in 1999. Net loss
from inception (November 8, 1994) to March 31, 2000 was $11,723,700.
In the first quarter of 2000 the Company earned revenues of $10,000. These
revenues related to payments by a customer for research and development
services.
Operating expenses were $1,058,200 and $827,900 for the quarters ended March 31,
2000 and 1999, respectively.
Research and development expenses increased $196,900 to $600,800 for the quarter
ended March 31, 2000 compared to $403,900 for the same period in 1999. This
increase is 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 of 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, (5) increases in depreciation related
to research and development equipment, and (6) higher rent on the Company's
manufacturing facility.
Marketing, general and administrative expenses increased $33,400 to $457,400 for
the quarter ended March 31, 2000 compared to $424,000 for the same period in
1999. The increase for the quarter is due to increases in salaries of existing
employees as well as the hiring of additional employees and overall increases in
general corporate spending due to increased business activities.
Interest expense was $3,100 for the quarter ended March 31, 2000 compared to
$2,300 for the same period in 1999.
Interest income decreased $55,600 to $47,400 for the first quarter ended March
31, 2000 compared to $103,000 for the same period in 1999. Interest income
continues to decrease as a result of a decreasing cash balance available for
investment.
7
<PAGE>
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 March 31, 2000, the Company's cash and cash equivalents and investments
totaled approximately $2.8 million.
Primary uses of cash and cash equivalents for the three months ended March 31,
2000 included $668,100 for the Company's operations and working capital
requirements, patent costs of $7,400, payments on notes payable and capital
lease obligations of $48,100, and purchase of equipment and leasehold
improvements of $40,800. 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 9 months at its anticipated level of
operations, however, the Company believes it could implement cost saving
measures in order to meet the Company's cash requirements for the next 15
months. The Company will seek additional funding during the quarter and may seek
additional funding after such time. There can be no assurance 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, 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 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 March 31, 2000, the Company had a deficit accumulated
in the development stage of approximately $11.7 million. The Company expects to
incur additional operating losses through at least 2000 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 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.
8
<PAGE>
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 be sufficient to meet the Company's cash requirements for at least the
next 9 months at its anticipated level of operations, however, the Company
believes it could implement cost saving measures in order to meet the Company's
cash requirements for the next 15 months. The Company will seek additional
funding during the next 15 months and may 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 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 available to consumers in market tests and other limited venues sometime
during the current year.
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 still being completed 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, 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 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.
9
<PAGE>
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 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 which may be conducted in the future
will demonstrate a level of market acceptance sufficient to interest licensees
and distributors to enter into agreements with the Company regarding its
products and technologies. 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 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 new products, or product
enhancements. 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
maintain its patent protection for the proposed containers, both in the United
States and in foreign countries. Ontro currently has six patents issued, and
three additional patent applications pending in the United States. There have
been foreign counterparts to certain of these applications filed in other
countries. The Company intends to file for patent application. There can be no
assurance patents will issue 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 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 that occurred before the patent is granted.
10
<PAGE>
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
if they are, 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 to develop competitively
priced integrated thermal containers.
11
<PAGE>
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
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 OF RAW MATERIALS
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.
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 delivery of 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.
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 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.
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.
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.
12
<PAGE>
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 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 stock, could adversely affect the voting and other rights of
the holders of common stock, or could depress the market price of the 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 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") 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.
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
13
<PAGE>
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 listing.
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 first quarter of 2000 the Company issued 9,785 common shares at a
weighted average price of $2.19. The Company relied upon the exemptions provided
by Section 4(2) of the Securities Act and Regulation D adopted by the SEC
thereunder.
14
<PAGE>
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable
ITEM 5. OTHER INFORMATION
Not applicable
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
The Company did not file any reports on Form 8-K during the three months ended
March 31, 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
March 15, 2000 By: /S/ JAMES A. SCUDDER
---------------------
James A. Scudder
Chief Executive Officer and President
(Principal Executive Officer)
March 15, 2000 By: /S/ KEVIN A. HAINLEY
---------------------
Kevin A. Hainley
Chief Financial Officer
(Principal Financial and Accounting Officer)
15
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<CASH> 1,576,800
<SECURITIES> 1,196,800
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 2,993,900
<PP&E> 4,779,100
<DEPRECIATION> (1,168,300)
<TOTAL-ASSETS> 7,148,100
<CURRENT-LIABILITIES> 300,800
<BONDS> 0
0
0
<COMMON> 17,499,800
<OTHER-SE> (10,684,400)
<TOTAL-LIABILITY-AND-EQUITY> 7,148,100
<SALES> 10,000
<TOTAL-REVENUES> 10,000
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 1,058,200
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,100
<INCOME-PRETAX> (1,003,900)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,003,900)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,003,900)
<EPS-BASIC> (0.15)
<EPS-DILUTED> (0.15)
</TABLE>
