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 June 30, 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 June 30, 1996: 6,488,722
Transitional Small Business Disclosure Format:
Yes No X
---
<PAGE>
PART I. ITEM 1. FINANCIAL STATEMENTS
ONGARD SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30 December 31
1996 1995
------------ ------------
(Unaudited) (Audited)
ASSETS
- ------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 3,117,241 $ 3,693,303
Restricted Cash 53,540 97,363
Trade accounts receivable net of
allowance of $119,000 at December 31,
1995 and $128,000 at June 30, 1996 1,127,658 656,274
Inventory 1,706,032 1,481,847
Prepaid expenses and other 177,560 77,881
----------- -----------
Total current assets 6,182,031 6,006,668
----------- -----------
PROPERTY AND EQUIPMENT, net 2,061,820 1,152,573
EQUIPMENT UNDER OPERATING LEASES, net 244,622 134,440
----------- -----------
OTHER ASSETS:
Excess cost over net tangible assets acquired, net 2,332,698 2,396,608
Intangible and other assets, net 244,399 238,258
Deposits 73,396 51,151
Debt guarantee fee, net -- 140,740
----------- -----------
Total other assets 2,650,493 2,826,757
----------- -----------
TOTAL ASSETS $11,138,966 $10,120,438
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements
2
<PAGE>
<TABLE>
<CAPTION>
ONGARD SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
June 30 December 31
1996 1995
------------ ------------
(Unaudited) (Audited)
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
<S> <C> <C>
CURRENT LIABILITIES:
Current portion of notes payable to bank $ -- $ 1,764,270
Trade accounts payable 678,455 839,187
Accrued liabilities 1,092,665 1,251,050
Capital leases payable 268,883 88,362
Customer deposits 38,922 89,994
------------ ------------
Total current liabilities 2,078,925 4,032,863
------------ ------------
LONG TERM LIABILITIES:
Capital leases payable, net of current portion 232,949 --
Noncurrent trade accounts payable 459,737 50,735
------------ ------------
Total long term liabilities 692,686 50,735
------------ ------------
Total liabilities $ 2,771,611 $ 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
June 30, 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 6,488,722 shares issued and
outstanding at June 30, 1996 6,490 5,355
Additional paid-in capital, common stock 29,709,297 23,983,803
Deferred compensation (898,875) (1,189,500)
Accumulated deficit (21,677,734) (17,990,995)
------------ ------------
Total stockholders' equity $ 8,367,355 $ 6,036,840
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY $ 11,138,966 $ 10,120,438
============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
<PAGE>
<TABLE>
<CAPTION>
ONGARD SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Ended Six Months Ended
June 30 June 30
------------------------------- -------------------------------
1996 1995 1996 1995
----------- ----------- ----------- -----------
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
REVENUES $ 1,087,475 $ 1,486,709 $ 1,815,216 $ 2,778,927
COST OF SALES 1,503,991 1,504,723 2,333,875 2,909,041
Start up production costs 70,237 -- 147,052 --
----------- ----------- ----------- -----------
Operating margin (deficit) (486,753) (18,014) (665,711) (130,114)
----------- ----------- ----------- -----------
COSTS AND EXPENSES:
General and administrative 647,631 512,546 1,353,107 1,110,540
Sales and marketing 402,329 311,210 837,564 562,288
Research and development 67,722 109,868 136,118 241,010
Deferred compensation 145,314 9,375 290,628 18,750
Depreciation and amortization 143,980 85,918 217,920 163,881
----------- ----------- ----------- -----------
Total expenses 1,406,976 1,028,917 2,835,337 2,096,469
----------- ----------- ----------- -----------
LOSS FROM OPERATIONS (1,893,729) (1,046,931) (3,501,048) (2,226,583)
INTEREST INCOME 43,026 358 84,654 932
OTHER INCOME 30,139 8,125 31,139 13,760
INTEREST EXPENSE (62,892) (175,227) (249,340) (258,866)
OTHER EXPENSES (41,452) (4,043) (51,751) (4,123)
----------- ----------- ----------- -----------
NET LOSS $(1,924,908) $(1,217,718) $(3,686,346) $(2,474,880)
=========== =========== =========== ===========
NET LOSS PER SHARE $ (.30) $ (.39) $ (.62) $ (.80)
=========== =========== =========== ===========
WEIGHTED AVERAGE NUMBER
OF SHARES OUTSTANDING 6,430,726 3,125,898 5,974,323 3,098,438
=========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
<PAGE>
<TABLE>
<CAPTION>
ONGARD SYSTEMS, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
Six Months Ended
June 30
-----------------------------------
1996 1995
----------- -----------
(Unaudited) (Unaudited)
<S> <C> <C>
CASH FLOWS USED IN OPERATING ACTIVITIES:
Net Loss $(3,686,346) $(2,474,880)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization and non-cash interest 437,855 427,478
Compensation expense related to stock options 290,625 18,750
Allowance for doubtful accounts 8,879 5,687
Changes in assets and liabilities:
Decrease in restricted cash 43,823 --
(Increase) decrease in accounts receivable (480,265) 566,100
(Increase) in inventory (340,770) (548,983)
(Increase ) in prepaid expenses (121,924) (41,480)
(Increase) in deposits -- (1,688)
(Decrease) in customer deposits (51,072) --
(Decrease) increase in accounts payable
and accrued liabilities (138,980) 588,296
----------- -----------
Net cash flows used in operating activities (4,038,175) (1,460,720)
----------- -----------
CASH FLOWS USED IN INVESTING ACTIVITIES:
Purchase of property and equipment (251,979) (33,972)
Increase in patent, patents pending and trademark (17,918) (8,522)
----------- -----------
Net cash flows used in investing activities $ (269,897) $ (42,494)
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
5
<PAGE>
<TABLE>
<CAPTION>
ONGARD SYSTEMS, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
Six Months Ended
June 30
-----------------------------------
1996 1995
----------- -----------
(Unaudited) (Unaudited)
<S> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of notes payable related party $ (7,500) $ --
Repayment of notes payable stockholders -- (210,960)
(Decrease) Increase in notes payable to bank (1,764,270) 1,000,000
Payment of lease obligations (153,048) (61,291)
Payment of leaseholds financed by others (69,798) --
Net proceeds from conversion of warrants to
common stock 5,726,629 --
Net proceeds from issuance of common stock -- 296,431
Net proceeds from issuance of preferred stock -- 450,000
----------- -----------
Net cash flows from financing activities 3,732,013 1,474,180
----------- -----------
NET INCREASE (DECREASE) IN CASH (576,062) (29,034)
CASH and cash equivalents, beginning of year 3,693,303 68,714
----------- -----------
CASH and cash equivalents, end of the period $ 3,117,241 $ 39,680
=========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid for interest $ 113,895 $ 101,399
=========== ===========
SUPPLEMENTAL SCHEDULE OF NON-CASH
FINANCING AND INVESTING ACTIVITIES:
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 $ 517,657 $ 141,944
Reclassification of finished goods inventory to
equipment, currently under lease $ 116,584 --
Conversion of notes payable and interest to
common stock -- $ 44,923
Fair value of warrants issued to guarantor of line of credit -- $ 200,000
</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 June 30, 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 six months ended June 30, 1996 may not
necessarily be indicative of the full year results.
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 six
months ended June 30, 1996, no material operating data is reflected in
the financial statements from the packaging assets, while such data is
included for the comparable six months ended June 30, 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 1996 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 June 30, 1996:
Raw materials $ 1,648,060
Work in process 24,280
Finished goods 57,920
-----------
$ 1,706,032
===========
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 June
30, 1996:
Furniture and fixtures $ 82,825
Leasehold improvements 854,895
Machinery and equipment 2,078,311
-----------
3,016,032
Less accumulated depreciation (954,212)
-----------
and amortization
$ 2,061,820
===========
Intangible and other assets, at cost, consist of the following as of
June 30, 1996:
Patents and trademarks $ 263,050
Other intangible assets 56,662
-----------
319,712
Less accumulated amortization (75,313)
-----------
$ 244,399
===========
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 guarantee. The amount was 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).
8
<PAGE>
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 interest
on the loan was at the prime rate plus 2% and provided 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 $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%. 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. Warrants included with the Company's initial
public offering expired on April 30, 1996, and generated $6.0 million
in gross proceeds from their exercise, as described in Note 2, prior to
their expiration.
Warrant prices and expiration periods of remaining warrants 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 June 30, 1996 and potential maximum gross proceeds to the
Company are as follows:
<TABLE>
<CAPTION>
Class B
Class A Guarantor's Underwriter's Debenture
Warrants Warrants Warrants Warrants Total
----------- ---------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Number of shares 228,571 (b) 600,000 250,000 375,000 1,453,571
Original price $ 6.00 $ 4.00 $3.50-$9.45 $ 6.00 --
Dilution adjusted shares 268,341 692,780 345,260 428,531 1,734,912
Dilution adjusted price $ 5.20 $3.41-$3.57 $3.01-$6.25 $5.23-$5.31 --
Maximum potential gross $ 1.4 $ 2.4 $ 1.6 $ 2.3 $ 7.7
proceeds ($ millions)(a)
Expiration date 4-20-97, 10-24-99, 08-11-97, 2-28-98
7-18-97 5-31-00 07-20-97
Redemption provision Yes No No Yes
</TABLE>
(a) There is no assurance that the full amount, if any, of these
proceeds will be received by the Company in the future.
(b) Number of shares have been adjusted to reflect 71,429 exercised
warrants.
9
<PAGE>
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.
The initial sterilization product covered by the scope of this
agreement is OnGard's Autopak(R). 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. The Company anticipates that initial
purchasing of Autopak(R) by Baxter will occur during the third quarter.
9. SUBSEQUENT EVENTS
In July 1996, the Company obtained a line of credit from a bank in the
aggregate amount of $500,000. The line bears interest at the prime rate
plus one percent and is collateralied by outstanding receivables, when
and if drawn upon. The line expires June 30, 1997; no funds have been
drawn upon the line to date.
On July 16, 1996 the shareholders approved, among other matters, an
increase in authorized common shares to 25,000,000 from 10,000,000 and
an increase in the number of shares authorized under the Stock Option
Plan to 1,500,000 from 600,000.
10
<PAGE>
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.
<TABLE>
<CAPTION>
Three Months Six Months
Ended June 30 Ended June 30
----------------------- -------------------------
1996 1995 1996 1995
----- ----- ----- -----
<S> <C> <C> <C> <C>
Revenues .............................. 100.0 % 100.0 % 100.0 % 100.0 %
Cost of sales ......................... 144.8 101.1 136.7 104.7
----- ----- ----- -----
Operating Margin (deficit) ........... (44.8) (1.1) (36.7) (4.7)
----- ----- ----- -----
Operating Expenses:
General and administrative .......... 59.6 34.5 74.5 40.6
Sales and marketing ................. 37.0 20.9 46.1 20.2
Depreciation and amortization ....... 13.2 5.8 7.5 5.9
Deferred compensation ............... 13.4 .6 16.1 --
Research and development ............ 6.2 7.4 12.0 8.7
----- ----- ----- -----
Total ................................. 129.4 69.2 156.2 75.4
----- ----- ----- -----
Loss from operations .................. (174.2) (70.3) (192.9) (80.1)
Interest and other expenses ........... (9.6) (12.1) (16.6) (9.4)
Interest and other income ............. 6.7 .6 6.4 .5
----- ----- ----- -----
Net loss .............................. (177.1) (81.9) (203.1) (89.0)
====== ===== ====== =====
</TABLE>
Three months ended June 30, 1996 compared to three months ended June 30, 1995
Revenues for the three months ended June 30, 1996 decreased $400,000 or
27%, to $1,087,000 from $1,487,000 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 long term strategic
plans. Packaging revenues in the second quarter 1995 were $633,000; there were
only $3,000 of such revenues in the comparable period in 1996. The offsetting
increase in sales of approximately $230,000 occurred substantially in the
equipment line.
Operating margin decreased to a deficit of $487,000 (a deficit of 45%
of revenues) for the three months ended June 30, 1996 compared to a decifit of
$18,000 (1.1% of revenues) for the same period in 1995. The decrease in margin
resulted in part from a decrease in revenues of $400,000 described above, and
from production start-up costs associated with relocating Autopak(R) operations
to the New York facility, and related production and material restructuring
costs, totalling $70,000, and to an increase in the level of overhead costs
associated with engineering, purchasing, and quality control ($154,000) which
were required to upgrade the performance and quality of the Company's product
lines. Revenues, which were insufficient to offset fixed factory overhead,
resulted in an operating margin deficiency.
11
<PAGE>
General and administrative expenses increased $135,000, or 26% from
$513,000 to $647,000 for the respective three month periods ended June 30, 1995
and 1996. Approximately $20,000 is attributable to payroll, and approximately
$89,000 for increased costs resulting from the relocation of the Denver facility
including higher insurance, building and personnel restructuring and travel.
Deferred compensation, the non-cash charges which reflect the
difference between market and exercise prices of stock options granted,
increased $136,000 from $9,000 to $145,000 in the respective quarters ended June
30, 1995, and 1996. These options were granted to directors, officers and
consultants in December 1995.
Sales and marketing expenses increased $91,000 to $402,000 in the three
months ended June 30, 1996 versus $311,000 in the comparable period in 1995, or
29%. The Company has increased its direct selling efforts, including manpower
and collateral materials, in both its equipment and Autopak(R) product lines.
Research and development expenses decreased $42,000 to $68,000 from
$110,000, a 38% decrease, from the second quarter ended June 30, 1996 to the
comparable quarter in 1995. The decrease relates to the completion of Autopak(R)
development, and scaling down the development of the Company's tabletop
sterilizer, as it reached commercialization.
Interest expense decreased $112,000 to $63,000 for the three months
ended June 30, 1996 from $175,000 in the comparable period in 1995, or 64%. This
results primarily from the payment in full of Company's bank line on April 15,
1996, an interest decrease of $121,000, offset by increases of $9,000 for
interest related to assets procured under capital leases.
Six months ended June 30, 1996 compared to six months ended June 30, 1995
Revenues for the six months ended June 30, 1996 decreased $964,000 or
35%, to $1,815,000 from $2,779,000 in the same period in 1995. The decrease is
attributable to the sale of selected assets of the packaging business, in
December 1995, which no longer fit with the Company's long term strategic plans.
Packaging revenues in the six months ended June 30, 1995 were $1,071,000; there
were only $23,000 of such revenues in the comparable period in 1996. The
offsetting increase in sales occurred in the equipment line.
Operating margin decreased to a deficit of $666,000 (a deficit of 37%
of revenues) for the six months ended June 30, 1996 compared to a decifit of
$130,000 (5% of revenues) for the same period in 1995. The decrease in margin
resulted from: (1) decreased sales of $964,000, described above; (2) production
start-up costs associated with relocating Autopak(R) operations to the New York
facility, production equipment and material modifications, and related internal
personnel and facility restructuring costs, totalling $147,000 and (3) increased
factory overheads in engineering and quality control to enhance product
performance of $233,000. Revenues, were insufficient to offset fixed factory
overhead resulting in an operating margin deficiency.
General and administrative expenses increased $242,000, or 22% from
$1,111,000 to $1,353,000 for the respective six month periods ended June 30,
1995 and 1996. Of this increase, approximately $107,000 is attributable to
payroll, and approximately $121,000 for travel, relocation related costs
including personnel and computer upgrades, and increased insurance expenses for
assets relocated to New York.
12
<PAGE>
Deferred compensation, the non-cash charges which reflect the
difference between market and exercise prices of stock options granted,
increased $272,000 to $291,000 from $19,000 for the six month periods ended June
30, 1996 and 1995 respectively, due to options granted to directors, consultants
and officers in December 1995.
Sales and marketing expenses increased $276,000 or 49% to $838,000 in
the six months ended June 30, 1996 versus $562,000 in the comparable period in
1995. The Company has increased its direct selling efforts, including manpower
and collateral materials, in both its equipment and Autopak(R) product lines.
Research and development expenses decreased $105,000 to $136,000 from
$241,000, a 44% decrease, from the six months ended June 30, 1996 to the
comparable quarter in 1996. The decrease relates to the completion of Autopak(R)
development, and scaling down the development of the Company's tabletop
sterilizer, as both reached commercialization.
Interest expense decreased $10,000 to $249,000 for the six months ended
June 30, 1996 from $259,000 in the comparable period in 1995, or 4%. The
decrease results from reduced interest related to the Company's bank line of
$47,000, and $37,000 increased interest costs primarily from capital equipment
leases and financed leasehold obligations. The Company's outstanding bank line
was paid in full in April, 1996 but was outstanding for the entire six month
period ended June 30, 1995. New lease obligations for plant equipment were
initiated in March 1996.
Liquidity and Capital Resources
The Company's working capital at June 30, 1996 increased to $4,103,000
from $1,974,000 at December 31, 1995. Cash and cash equivalents were $3,117,000
at June 30, 1996 versus $3,693,000 at December 31, 1995. Accounts receivable
increased $486,000 to $1,127,000 at June 30, 1996, from $656,000 at December 31,
1995. Inventory increased $224,000 to $1,706,000 at June 30, 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 transactions since that date, however,
as working capital at December 31, 1994 amounted to a 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 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,
13
<PAGE>
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 $6.0 million in gross
proceeds through the expiration date of the Common Stock Purchase Warrants,
April 30, 1996. 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 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,
14
<PAGE>
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(R).
15
<PAGE>
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
None
16
<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: August 15, 1996
/s/ Phil B. Kart
----------------------------------------------
Phil B. Kart
Vice President and Principal Financial Officer
17
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