UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(X) Quarterly report under section 13 or 15(d) of the Securities Exchange Act of
1934 for the quarterly period ended March 31, 1996.
or
( ) Transition report under section 13 or 15(d) of the Securities Exchange Act
of 1934 for the transition period from ___________to_____________.
Commission File Number: 0-20432.
ONGARD SYSTEMS, INC.
--------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 84-1149380
- ----------------------------------- -----------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
40 Commerce Drive, Hauppauge, NY 11788
- ------------------------------------------- --------------
(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code: (516) 231-8989
--------------
2323 Delgany Street, Denver, Colorado 80216
- --------------------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed since last
report)
Check whether the issuer: (1) filed all reports required to be filed by Section
13 or 15(d) of the Securities Exchange Act of 1934 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 ____
State the number of shares outstanding of each of the issuer's classes of common
equity, as of March 31, 1996: 6,314,733
Transitional Small Business Disclosure Format:
Yes ____ No [X]
<PAGE>
PART I. ITEM 1. FINANCIAL STATEMENTS
ONGARD SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
March 31, December 31
1996 1995
----------- -----------
(Unaudited) (Audited)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 5,803,382 $ 3,693,303
Restricted Cash 99,133 97,363
Trade accounts receivable, net of
allowance of $119,000 at December 31,
1995 and $114,000 at March 31, 1996 673,042 656,274
Inventory 1,806,886 1,481,847
Prepaid expenses and other 255,866 77,881
----------- -----------
Total current assets 8,638,309 6,006,668
----------- -----------
PROPERTY AND EQUIPMENT, net 1,977,740 1,152,573
EQUIPMENT UNDER OPERATING LEASES, net 248,000 134,440
----------- -----------
OTHER ASSETS:
Excess cost over net tangible assets
acquired, net 2,364,653 2,396,608
Intangible and other assets, net 249,938 238,258
Deposits 111,897 51,151
Debt guarantee fee, net 16,551 140,740
----------- -----------
Total other assets 2,743,039 2,826,757
----------- -----------
TOTAL ASSETS $13,607,088 $10,120,438
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statement
2
<PAGE>
ONGARD SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
March 31, December 31
1996 1995
----------- -----------
(Unaudited) (Audited)
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of notes payable to bank $ 1,622,322 $ 1,764,270
Trade accounts payable 696,382 839,187
Accrued liabilities 1,468,304 1,251,050
Capital leases payable 145,244 88,362
Customer deposits 78,757 89,994
----------- -----------
Total current liabilities 4,011,009 4,032,863
----------- -----------
LONG TERM LIABILITIES:
Capital leases payable, net of current portion 333,568 --
Noncurrent trade accounts payable 293,386 50,735
----------- -----------
Total long term liabilities 626,954 50,735
----------- -----------
Total liabilities $ 4,637,963 $ 4,083,598
----------- -----------
STOCKHOLDERS' EQUITY:
Convertible Series A Preferred stock; $.001
par value, 3,000,000 shares authorized,
378,292 issued and outstanding at
December 31, 1995 and March 31, 1996;
aggregate liquidation preference
of $1,513,168 $ 1,228,167 $ 1,228,167
Series B Redeemable Preferred Stock, no
par value; 100 shares issued and
outstanding 10 10
Common stock; $.001 par value,
10,000,000 shares authorized, 5,355,281
shares issued and outstanding at December
31, 1995 and 6,314,733 shares issued and
outstanding at March 31, 1996 6,315 5,355
Additional paid-in capital, common stock 28,531,648 23,983,803
Deferred compensation (1,044,188) (1,189,500)
Accumulated deficit (19,752,827) (17,990,995)
----------- -----------
Total stockholders' equity $ 8,969,125 $ 6,036,840
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY $13,607,088 $10,120,438
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
<PAGE>
ONGARD SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Ended
March 31
1996 1995
----------- -----------
(Unaudited) (Unaudited)
REVENUES $ 727,750 $ 1,292,218
COST OF SALES 887,289 1,388,173
----------- -----------
Operating margin (deficit) (159,539) (95,955)
----------- -----------
COSTS AND EXPENSES:
General and administrative 879,480 623,518
Sales and Marketing 425,756 251,078
Depreciation and amortization 73,946 77,963
Research and development 68,396 131,142
----------- -----------
Total expenses 1,447,578 1,083,701
----------- -----------
LOSS FROM OPERATIONS (1,607,117) (1,179,656)
INTEREST INCOME 41,628 574
OTHER INCOME 1,292 5,635
INTEREST EXPENSE (186,448) (83,639)
OTHER EXPENSES (12,735) (80)
----------- -----------
NET LOSS $(1,761,439) $(1,257,166)
=========== ===========
NET LOSS PER SHARE $ (.32) $ (.41)
=========== ===========
WEIGHTED AVERAGE NUMBER
OF SHARES OUTSTANDING 5,515,190 3,065,318
=========== ===========
4
<PAGE>
The accompanying notes are an integral part of these financial statements.
ONGARD SYSTEMS, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
Three Months Ended
March 31
1996 1995
(Unaudited) (Unaudited)
----------- -----------
<S> <C> <C>
CASH FLOWS USED IN OPERATING ACTIVITIES:
Net Loss $(1,761,439) $(1,257,166)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization and non-cash interest 260,268 190,130
Compensation expense related to stock options 145,312 9,375
Allowance for doubtful accounts (5,118) --
Changes in assets and liabilities:
Increase in restricted cash (1,770) --
(Increase) decrease in accounts receivable (11,649) 568,041
(Increase) in inventory (441,624) (337,272)
(Increase ) decrease in prepaid expenses (177,985) (34,560)
(Increase) decrease in deposits (60,746) --
Increase (decrease) in customer deposits (11,237) 42,641
(Decrease) increase in accounts payable
and accrued liabilities (32,882) (71,818)
----------- -----------
Net cash flows used in operating activities (2,098,870) (890,629)
----------- -----------
CASH FLOWS USED IN INVESTING ACTIVITIES:
Purchase of property and equipment (139,265) (18,142)
Increase in patent, patents pending and trademark (17,568) (3,971)
----------- -----------
Net cash flows used in investing activities $ (156,833) $ (22,113)
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
5
<PAGE>
ONGARD SYSTEMS, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
Three Months Ended
March 31
1996 1995
(Unaudited) (Unaudited)
----------- -----------
<S> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Payment of notes payable to bank $ (141,948) $ (106,884)
Payment of lease obligations (41,072) (15,900)
Net proceeds from issuance of common stock 4,548,802 296,431
Net proceeds from issuance of preferred stock -- 450,000
----------- -----------
Net cash flows from financing activities 4,365,782 623,647
----------- -----------
NET INCREASE (DECREASE) IN CASH 2,110,079 (289,095)
CASH and cash equivalents, beginning of year 3,693,303 68,714
----------- -----------
CASH and cash equivalents, end of the period $ 5,803,382 $ (220,381)
=========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid for interest $ 30,583 $ 40,884
=========== ===========
SUPPLEMENTAL SCHEDULE OF NON-CASH
FINANCING AND INVESTING ACTIVITIES:
Stock subscription receivable $ 513,719 --
Conversion of convertible debentures to preferred stock -- $ 769,997
Conversion of vendor payables to common stock -- $ 170,248
Leasehold improvements financed by others $ 350,000 --
Acquisition of equipment through capital leases $ 431,112 $ 82,000
Reclassification of finished goods inventory to
equipment, currently under lease $ 116,584 --
</TABLE>
The accompanying notes are an integral part of these financial statements.
6
<PAGE>
ONGARD SYSTEMS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The information in this Form 10-QSB includes the results of the Company and
its wholly owned subsidiary, OnGard Sterilization Technology ("OST"), for
the periods ended March 31, 1996 and 1995. The data is unaudited, but
includes all adjustments including the elimination of intercompany accounts
and transactions which are, in the opinion of management, necessary for a
fair presentation of the interim periods presented. The accounting policies
utilized in the preparation of financial information are the same as set
forth in the Company's annual financial statements and should be read in
conjunction with the Company's Form 10-KSB. Certain prior period balances
have been reclassified to conform to the current period classification.
Results of operations for the three months ended March 31, 1996 may not
necessarily be indicative of the full year results.
On October 1, 1994 the Company completed a merger with Pharmetics, Inc.
(Pharmetics), now known as OST. The transaction was effected through the
exchange of the Company's common stock for all of the outstanding common
and preferred stock of OST. The aggregate purchase price, including the
value of shares exchanged, merger expenses plus advances made to fund OST's
operations prior to the acquisition, which ultimately became part of
OnGard's investment, was $3,910,870. The Company has consolidated the
results of this acquisition since the effective date.
In December, 1995, the Company sold selected assets of its packaging line
to Oliver Products including its customer accounts; proceeds from the sale
aggregated $620,500. As a result of this sale, through the three months
ended March 31, 1996, no material operating data is reflected in the
financial statements from the packaging assets, while such data is included
for the comparable quarter ended March 31, 1995.
2. EQUITY TRANSACTIONS
During August and September, 1995 the Company obtained $7.7 million from
the private placement of 2,204,021 shares of its common stock at a price of
$3.50 per share. The Company also issued 100 shares of its Series B
preferred stock to the largest investor in the private placement, at a cost
of $10.00. The Series B preferred shares carry no dividend or voting rights
but provides for the right to elect one member of the Company's board of
directors so long as at least 5% of the Company's common stock is owned by
the investor. The investor exercised this right in December, 1995.
During March, 1995 holders of the Company's Common Stock Purchase Warrants,
which were then due to expire on March 29, 1996, excercised 755,694
warrants converting into 957,952 shares of the Company's common stock
providing $5.1 million (gross proceeds) from their exercise. The Company
then extended the expiration date (but no other terms of these Common Stock
Purchase Warrants) until April 30, 1996. An additional, 134,541 warrants,
converting to 170,193 shares were exercised generating an additonal $.9
million (gross proceeds), for an aggregate total of $6.0 million in gross
proceeds. The warrants expired on April 30, 1996 (Note 7).
The impact of outstanding warrants has not been included in earnings per
share as such inclusion would be antidilutive.
7
<PAGE>
3. INVENTORY
Inventory consists of the following as of March 31, 1996:
Raw materials $1,044,958
Work in process 692,608
Finished goods 69,320
----------
$1,806,886
==========
The December 31, 1995 inventory balance consisted of the following:
Raw materials $ 905,886
Work in process 477,901
Finished goods 98,060
----------
$1,481,847
==========
4. PROPERTY AND EQUIPMENT AND INTANGIBLE AND OTHER ASSETS
Property and equipment, at cost, consist of the following as of
March 31, 1996:
Furniture and fixtures $ 74,131
Leasehold improvements 840,451
Machinery and equipment 1,902,192
----------
2,816,774
Less accumulated depreciation
and amortization (839,034)
----------
$1,977,740
==========
Intangible and other assets, at cost, consist of the following as of
March 31, 1996:
Patents and trademarks $262,700
Other intangible assets 56,662
--------
319,362
Less accumulated amortization (69,424)
--------
$249,938
========
5. DEBT GUARANTEE FEE
Debt guarantee fees reflect the estimated fair value of 600,000 warrants
issued to the guarantor of the Company's $2.5 million bank indebtedness in
exchange for the guaranty. The amount is being amortized over the term of
the note, as a non-cash charge against earnings and is included in interest
expense (Note 6). The Company obtained an investment banking opinion for
the fair value assigned to the first 400,000 warrants granted, and applied
the same value for the subsequent 200,000 warrants which were granted under
the same terms and conditions. The guarantee fee was fully amortized upon
the repayment of the debt in April, 1996 (Note 6).
6. DEBT
In October 1994, the Company entered into a $1.5 million term loan with a
bank which was facilitated by a third party guarantor. The loan bears
interest at the prime rate plus 2% (11% at March 31, 1996) and provides for
a 36 month amortization schedule with a balloon payment at the end of one
and a half years from inception. In April and May 1995, the guarantor of
the $1.5 million note and another guarantor ("the guarantors"), facilitated
an additional $1.0 million in indebtedness with the same bank. Two notes of
8
<PAGE>
$500,000 each were executed with the principal amount due in April 1996;
interest was payable monthly. In exchange for their guarantees, the Company
granted the guarantors options to acquire a total of 200,000 shares at an
exercise price of $4.00 per share(Note 5). These two notes bear interest at
11 %. At March 31, 1996 the aggregate indebtedness on these notes was
$1,622,000. The three notes were paid in full in April, 1996, in accordance
with the maturity payment terms described above.
7. WARRANTS
The Company has issued warrants in connection with the securities
transactions which have financed its operations since its initial public
offering, other than the September 1995 private placement described in Note
2.
Warrant prices and expiration periods vary but key terms, shown below, are
included in each transaction. A summary of the key warrant terms, Company
calculation of dilution adjusted prices and shares at March 31, 1996 and
potential maximum gross proceeds to the Company are as follows:
<TABLE>
<CAPTION>
Common
Stock Class B
Purchase Class A Guarantor's Underwriter's Debenture
Warrants Warrants Warrants Warrants Warrants Total
-------- -------- -------- -------- -------- -----
<S> <C> <C> <C> <C> <C> <C>
Number of shares (a) 160,940 228,571 600,000 250,000 375,000 1,614,511
Original price $6.75 $6.00 $4.00 $3.50-$9.45 $6.00 --
Dilution adjusted shares 203,589 268,341 692,780 345,260 428,531 1,938,501
Dilution adjusted price $5.34 $5.20 $3.41- $3.57 $3.01-$6.25 $5.23-$5.31 --
Maximum potential gross $1.1 $1.4 $2.4 $1.6 $2.3 $8.8
proceeds ($ millions) (b)
Expiration date (c) 04-30-96 4-20-97, 10-24-99, 08-11-97, 2-28-98
7-18-97 5-31-00 07-20-97
Redemption provision Yes Yes No No Yes
</TABLE>
(a) Through March 31, 1996, 757,794 Common Stock Purchase Warrants and 71,429
Class A Warrants were exercised.
(b) There is no assurance that the full amount, if any, of these proceeds will
be received by the Company in the future. However, prior to their
expiration on April 30, 1996, an additional 134,541 Common Stock Purchase
Warrants were exercised generating $.9 million (Note 9).
(c) On March 31, 1995, the Company extended until April 30, 1996, the
expiration date of its Common Stock Purchase Warrants, which were
previously set to expire on December 31, 1995 and prior to that on August
15, 1995. Other than the extended expiration period, no other terms,
including anti-dilution provisions, were extended.
8. DISTRIBUTION AGREEMENT
On March 6, 1996, the Company announced it had completed an agreement with
Baxter V. Mueller ("Baxter"), a division of the Baxter Healthcare
Corporation of Deerfield Illinois, for the exclusive marketing and
distribution of a series of sterilization packaging products developed by
OnGard. Baxter Healthcare Corporation is the principal domestic operating
subsidiary of Baxter International, Inc. Through its subsidiaries, Baxter
is a leader in the manufacture and marketing of healthcare products,
systems and services worldwide offering products to healthcare providers in
100 countries. The Baxter V. Mueller group markets a complete line of
high-quality specialized surgical instruments and surgical-use products to
healthcare companies and hospitals.
9
<PAGE>
The initial sterilization product covered by the scope of this agreement is
OnGard's Autopak(TM). The agreement also calls for other sterile packaging
products developed by OnGard to be marketed exclusively by Baxter and for
the two companies to jointly address market opportunities in rapid
reprocessing and management of surgical instruments. The territory covered
by the exclusive agreement encompasses the United States and Canada. The
agreement is a buy-sell distribution arrangement whereby Baxter will
purchase directly from OnGard for resale to the market.
PART I. ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, certain items
from the Company's Statements of Operations expressed as a percentage of
revenues.
Three Months
Ended March 31
1996 1995
----- -----
Revenues 100.0% 100.0%
Cost of sales 121.9 107.4
----- -----
Operating Margin (deficit) (21.9) (7.4)
----- -----
Operating Expenses:
General and administrative 120.8 48.3
Sales and Marketing 58.5 19.4
.....
Depreciation and amortization 10.2 6.0
Research and development 9.4 10.2
----- -----
Total 198.9 83.9
----- -----
Loss from operations (220.8) (91.3)
Interest and other expenses (27.3) (6.5)
Interest and other income 5.9 .5
----- -----
Net loss (242.2) (97.3)
===== =====
Three months ended March 31, 1996 compared to three months ended March 31,
1995
Revenues for the three months ended March 31, 1996 decreased $564,000
or 44%, to $728,000 from $1,292,000 in the same period in 1995. The
decrease is primarily attributable to the sale of selected assets of the
packaging business, in December 1995, which no longer fit with the
Company's longterm strategic plans. Packaging revenues in the first quarter
1995 were $438,000; there were only $20,000 of such revenues in the
comparable quarter in 1996. The remaining decrease of $146,000 in sales
occurred in the equipment line; sufficient open orders were in place to
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<PAGE>
meet or exceed prior years sales but start-up issues with new production
equipment impeded such shipments.
Operating margin decreased to a deficit of $160,000 (a deficit of
21.9% of revenues) for the three months ended March 31, 1996 compared to a
decifit of $96,000 (7.4% of revenues) for the same period in 1995. The
decrease in margin resulted from production start-up costs associated with
relocating Autopak operations to the New York facility, and related
internal restructuring costs, totalling $77,000. Revenues, however, were
insufficient to offset fixed factory overhead resulting in an operating
margin deficiency.
General and administrative expenses increased $255,000, or 41% from
$624,000 to $879,000 for the respective three month periods ended March 31,
1995 and 1996. Of this increase, $135,000 is attributable to non-cash
charges for deferred compensation expense resulting from stock options
granted to certain officers and directors; approximately $60,000 is
attributable to payroll, and approximately $56,000 for travel and
relocation expenses.
Sales and marketing expenses increased to $426,000 in the three months
ended March 31, 1996 versus $251,000 in the comparable period in 1995, or
70%. The Company has increased its direct selling efforts, including
manpower and collateral materials, in both its equipment and Autopak
product lines.
Research and development expenses decreased $63,000 to $68,000 from
$131,000, a 48% decrease, from the first quarter ended March 31, 1995 to
the comparable quarter in 1996. The decrease relates to the completion of
Autopak development ($31,000), and scaling down the development of the
Company's tabletop sterilizer ($32,000), as it reached commercialization.
Interest expense increased $102,000 to $186,000 for the three months
ended March 31, 1996 from $84,000 in the comparable period in 1995, or
121.4%. This results from increased indebtedness on the Company's bank line
(the note was increased $1.0 million in April/May 1995) accounting for
$27,000 and amortization of debt issuance costs accounting for $75,000. The
notes were due on April 15, 1996 and were paid in full at that time.
Liquidity and Capital Resources
The Company's working capital at March 31, 1996, increased to
$4,627,000 from $1,974,000 at December 31, 1995. Cash and cash equivalents
were $5,803,000 at March 31, 1996 versus $3,693,000 at December 31, 1995.
Accounts receivable increased $17,000 to $673,000 at March 31, 1996, from
$656,000 at December 31, 1995. Inventory increased $ 325,000 to $1,807,000
at March 31, 1996 from $1,482,000 at December 31, 1995.
Successful completion of the Company's initial public offering in 1992
provided funds to expand development efforts for the Company's existing
product line and continue product enhancement and expansion. The company
had raised additional funds through various private transaction since that
date, however, as working capital at December 31, 1994 amounted to deficit
of $1,032,000, it became necessary for the Company to obtain additional
funds. In order to align its capital structure and working capital
deficiency, on September 29, 1995, the Company completed a private
placement (the "September 1995 Private Placement") of the sale of 2,204,021
shares of the Company's common stock at a price of $3.50 per share
aggregating gross proceeds of $7,714,000. Pursuant to the September 1995
Private Placement the Company is currently registering such Common Shares
issued in this placement. The Company also sold 100 shares of its Series B
Redeemable Preferred Limited Voting Stock (the "Series B preferred stock")
in the September 1995 Private Placement. Provided that the holders of the
Series B preferred stock own in the aggregate at least 5% of the Company's
Common Stock, the holders of the Series B preferred stock were granted the
11
<PAGE>
right to elect one member to the Company's Board of Directors, which they
exercised effective December 24, 1995.
The Company had also previously generated funds through $2.5 million
in notes payable to a bank which had been facilitated by third party
guarantors (Note 6). The notes called for a 36 month amortization schedule
and a balloon payment at the end of one-and-a-half years in April, 1996.
The balloon payment ($1,622,000) was paid in full from the Company's cash
position in April, 1996.
In addition, the Company also to obtained funds through the exercise
of outstanding Common Stock Purchase Warrants. These warrants were to
expire on August 15, 1995, but were initially extended until December 31,
1995 and thereafter until March 29, 1996 and April 30, 1996. Through the
exercise of Common Stock Purchase Warrants, the Company generated $4.6
million in gross proceeds through March 31, and through the expiration date
of the Common Stock Purchase Warrants, April 30, 1996, had received, or had
stock subscriptions receivable, totalling $6.0 million in gross proceeds.
Although the Company has been successful to date in obtaining sources of
financing sufficient to meet current trade obligations and other expenses
and to enable it to pursue its business plans generally, there is no
assurance it will be successful in this regard in the future. Furthermore,
there can be no assurance that the Company will be successful in securing
other funds or, that if successful, such funds will be adequate to fund the
Company's operations until it is able to generate cash from operations
sufficient to sustain its ongoing operations without additional external
sources of capital.
Government Regulation
The Company's existing and planned products are or may be subject to
regulation by the FDA pursuant to the provisions of the Federal Food, Drug,
and Cosmetic Act ("FDC Act"). Under the FDC Act, several, if not all, of
the Company's infection control products, sterilization medical packaging
and sterilization supplies are subject to regulation as medical devices.
Medical devices are classified into either Class I, II or III. Class I
and II devices are not expressly approved by the FDA. However, pursuant to
section 510(k) of the FDC Act, the manufacturer or distributor of a Class I
or II device that is initially introduced commercially on or after May 28,
1976 must notify the FDA of its intent commercially to introduce the device
through the submission of a premarket notification (a "510(k) notice").
Before commercial distribution can commence, the FDA must review the 510(k)
notice and clear the device for commercial distribution. The FDA normally
has 90 days to review the 510(k) notice and grant or deny clearance to
market on the basis that it is substantially equivalent to a device
marketed before May 28, 1976. Alternatively, the FDA may postpone a final
decision and require the submission of additional information, which may
include clinical data. If additional information is required, review and
clearance of a 510(k) notice may be significantly delayed. In order to
clear a Class I or II device for marketing, the FDA must determine, from
the information contained in the 510(k) notice, that the device is
"substantially equivalent" to one or more Class I or II devices that are
legally marketed in the United States.
If a device is not considered "substantially equivalent," it is
regulated as a Class III medical device. In general, a Class III medical
device must be expressly approved by the FDA for commercial distribution
pursuant to the submission of a Premarket Approval Application ("PMA"). A
PMA must contain, among other information, substantial information about
the manufacture of the device and data from adequate and well controlled
clinical trials that demonstrate that the device is both safe and
12
<PAGE>
effective. The PMA approval process is substantially more complex and
lengthy than the 510(k) premarket notification process. Once a PMA is
submitted, it may take 16-24 months, or longer, for the FDA review and
approval, if such approval is granted at all.
A medical device, whether cleared for marketing under the 510(k)
pathway or pursuant to a PMA approval, is subject to ongoing regulatory
oversight by the FDA to ensure compliance with regulatory requirements,
including, but not limited to, product labeling requirements and
limitations, including those related to promotion and marketing efforts,
Current Good Manufacturing Practice requirements, record keeping and
medical device (adverse reaction) reporting.
FDA regulatory oversight also applies to the Company's sterile medical
packaging products, which are used by other companies in packaging their
own medical devices. Generally, FDA acceptance of the suitability of such
packaging products is made in the context of regulatory submissions of
other companies concerning the device to be packaged. Thus, the Company
requires no separate FDA clearance or approval of these packaging products.
Within this framework, the principal regulatory responsibilities of the
Company for its sterile medical packaging products are to ensure that the
packaging products are manufactured in conformity with Current Good
Manufacturing Practice requirements. Although the Company believes that all
of its manufacturing activities are in conformity with Current Good
Manufacturing Practice requirements, there can be no guarantee of
compliance.
Historically, the FDA has not exercised device regulatory authority
over some types of infection control products, such as sharps containers or
mailer packages, including those used in the Company's mail-back system,
and has allowed companies to begin commercial introduction (on or after May
28, 1976) of these types of products without a 510(k) clearance. On
February 3, 1994, the FDA issued a written policy statement which allowed
manufacturers of sharps containers a "discretionary period" of 180 days
(until August 2, 1994) to continue marketing their products already in
distribution (introduced on or after May 28, 1976) without the benefit of
510(k) clearance provided that required 501(k) notices are submitted to FDA
prior to the conclusion of the discretionary period. Manufacturers of
sharps containers also must comply with FDA device listing and
establishment registration requirements. The FDA has indicated that there
is no change in its regulatory posture toward the mailer packages used in
the mail-back system and that it does not intend to regulate this product
as a medical device. There can, however, be no assurance that the FDA will
maintain its current regulatory posture toward the mailing package.
OnGard submitted all but one of the 510(k) notices during 1994 and
expects to submit the remaining one during 1996. In June 1994, the Company
received notification that all of its 510(k) submittals for sharps
containers had been approved and cleared for marketing. The Company has an
additional submittal for one of its sharps containers which the FDA had
advised it to withhold until the others had cleared, which it is now
preparing for submission. The Company has also received a 510(k) notice for
its submission of AutoPak.
13
<PAGE>
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
None
14
<PAGE>
SIGNATURE
In accordance with to the requirements of the Exchange Act, the registrant has
caused this report to be signed on its behalf by the undersigned thereunto duly
authorized.
ON-GARD SYSTEMS, INC.
Dated: May 15, 1996 /s/ Phil B. Kart
----------------------------------------------
Phil B. Kart
Vice President and Principal Financial Officer
15
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE 3
MONTHS ENDED MARCH 31, 1996
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> MAR-31-1996
<CASH> 5,902,515
<SECURITIES> 0
<RECEIVABLES> 787,110
<ALLOWANCES> 114,068
<INVENTORY> 1,806,886
<CURRENT-ASSETS> 8,638,309
<PP&E> 2,816,774
<DEPRECIATION> 839,034
<TOTAL-ASSETS> 13,607,088
<CURRENT-LIABILITIES> 4,011,009
<BONDS> 0
0
1,228,177
<COMMON> 28,537,963
<OTHER-SE> (1,044,188)
<TOTAL-LIABILITY-AND-EQUITY> 13,607,088
<SALES> 727,750
<TOTAL-REVENUES> 734,799
<CGS> 887,289
<TOTAL-COSTS> 1,447,578
<OTHER-EXPENSES> (27,601)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 186,448
<INCOME-PRETAX> (1,761,439)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,761,439)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,761,439)
<EPS-PRIMARY> (.32)
<EPS-DILUTED> (.32)
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