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 September 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 September 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>
September 30 December 31
1996 1995
------------ -----------
(Unaudited) (Audited)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 2,029,108 $ 3,693,303
Restricted cash 53,540 97,363
Trade accounts receivable net of
allowance of $119,000 at December 31,
1995 and $88,000 at September 30, 1996 498,574 656,274
Inventory 1,909,959 1,481,847
Prepaid expenses and other 163,684 77,881
----------- -----------
Total current assets 4,654,865 6,006,668
----------- -----------
PROPERTY AND EQUIPMENT, net 1,925,628 1,152,573
----------- -----------
EQUIPMENT UNDER OPERATING LEASES, net 241,531 134,440
----------- -----------
OTHER ASSETS:
Excess cost over net tangible assets acquired, net 2,300,742 2,396,608
Intangible and other assets, net 270,993 238,258
Deposits 98,738 51,151
Debt guarantee fee, net 140,740
----------- -----------
Total other assets 2,670,473 2,826,757
----------- -----------
TOTAL ASSETS $ 9,492,497 $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>
September 30 December 31
1996 1995
------------ -----------
(Unaudited) (Audited)
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of notes payable to bank $ -- $ 1,764,270
Trade accounts payable 622,161 839,187
Accrued liabilities 987,188 1,251,050
Capital leases payable 227,321 88,362
Customer deposits 51,206 89,994
------------ ------------
Total current liabilities 1,887,876 4,032,863
------------ ------------
LONG TERM LIABILITIES:
Capital leases payable, net of current portion 213,423 --
Noncurrent trade accounts payable 398,550 50,735
------------ ------------
Total long term liabilities 611,973 50,735
------------ ------------
Total liabilities $ 2,499,849 $ 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
September 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,
25,000,000 shares authorized, 5,355,281
shares issued and outstanding at December
31, 1995 and 6,488,722 shares issued and
outstanding at September 30, 1996 6,489 5,355
Additional paid-in capital, common stock 29,684,277 23,983,803
Deferred compensation (753,563) (1,189,500)
Accumulated deficit (23,172,732) (17,990,995)
------------ ------------
Total stockholders' equity $ 6,992,648 $ 6,036,840
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY $ 9,492,497 $ 10,120,438
============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
<PAGE>
ONGARD SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30 September 30
1996 1995 1996 1995
-------------- ------------- ----------- -----------
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
REVENUES $ 729,444 $ 1,057,753 $ 2,544,660 $ 3,836,680
COST OF SALES 1,087,536 1,264,422 3,491,648 4,173,463
Start up production costs 70,237 -- 147,052 --
----------- ----------- ----------- -----------
Operating margin (deficit) (428,329) (206,669) (1,094,040) (336,783)
----------- ----------- ----------- -----------
COSTS AND EXPENSES:
General and administrative 430,105 571,183 1,735,699 1,681,723
Sales and marketing 446,254 341,918 1,283,818 904,206
Research and development 15,705 61,188 151,823 302,198
Deferred compensation 145,314 9,375 435,937 28,125
Depreciation and amortization 54,726 78,334 304,601 242,215
----------- ----------- ----------- -----------
Total expenses 1,092,104 1,061,998 3,911,878 3,158,467
----------- ----------- ----------- -----------
LOSS FROM OPERATIONS (1,520,433) (1,268,667) (5,005,918) (3,495,250)
INTEREST INCOME 38,692 15,288 123,346 16,220
OTHER INCOME 7,920 119,244 39,349 133,004
INTEREST EXPENSE (35,046) (183,183) (284,386) (442,049)
OTHER EXPENSES (147) (2,901) (54,128) (7,024)
----------- ----------- ----------- -----------
NET LOSS $(1,509,014) $(1,320,219) $(5,181,737) $(3,795,099)
=========== =========== =========== ===========
NET LOSS PER SHARE $ (.23) $ (.36) $ (.84) $ (1.15)
=========== =========== =========== ===========
WEIGHTED AVERAGE NUMBER
OF SHARES OUTSTANDING 6,488,722 3,656,611 6,145,789 3,286,448
=========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
<PAGE>
ONGARD SYSTEMS, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
Nine Months Ended
September 30
------------
1996 1995
----------- -----------
(Unaudited) (Unaudited)
<S> <C> <C>
CASH FLOWS USED IN OPERATING ACTIVITIES:
Net Loss $(5,181,737) $(3,795,099)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization and non-cash interest 530,171 657,694
Compensation expense related to stock options 435,937 28,125
Allowance for doubtful accounts (30,683) 13,335
Changes in assets and liabilities:
Decrease in restricted cash 43,823 --
(Increase) decrease in accounts receivable 188,384 727,798
(Increase) in inventory (544,697) (585,253)
(Increase) in prepaid expenses (85,803) (50,996)
(Increase) in deposits (47,587) (6)
(Decrease) increase in customer deposits (38,788) 142,580
(Decrease) increase in accounts payable
and accrued liabilities (405,757) (948,795)
----------- -----------
Net cash flows used in operating activities (5,136,737) (3,810,617)
----------- -----------
CASH FLOWS USED IN INVESTING ACTIVITIES:
Purchase of property and equipment (166,691) (74,417)
Increase in patent, patents pending and trademark (55,532) (11,852)
----------- -----------
Net cash flows used in investing activities $ (222,223) $ (86,269)
----------- -----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
5
<PAGE>
ONGARD SYSTEMS, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
Nine Months Ended
September 30
-----------------
1996 1995
----------- -----------
(Unaudited) (Unaudited)
<S> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of notes payable related party $ (7,500) $ (21,833)
Repayment of notes payable Bank -- (248,031)
(Decrease) Increase in notes payable to bank (1,764,270) 1,000,000
Payment of lease obligations (165,275) (51,041)
Payment of leaseholds financed by others (69,798) --
Net proceeds from conversion of warrants to
common stock 5,701,608 --
Net proceeds from issuance of common stock -- 7,807,147
Net proceeds from issuance of preferred stock -- 450,010
----------- -----------
Net cash flows from financing activities 3,694,765 8,936,252
----------- -----------
NET INCREASE (DECREASE) IN CASH (1,664,195) 5,039,366
CASH and cash equivalents, beginning of year 3,693,303 68,715
----------- -----------
CASH and cash equivalents, end of the period $ 2,029,108 $ 5,108,081
=========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid for interest $ 142,204 $ 177,932
=========== ===========
SUPPLEMENTAL SCHEDULE OF NON-CASH
FINANCING AND INVESTING ACTIVITIES:
Stock Subscription Receivable $ 126,025
Conversion of convertible debentures to preferred stock -- $ 769,997
Conversion of vendor payables to common stock -- $ 228,061
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 $ 116,584 139,076
Conversion of related party notes payable and interest to
common stock -- $ 59,922
Fair value of warrants issued to guarantor of line of credit -- $ 200,000
</TABLE>
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 Sepember 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 nine months ended September 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 nine months
ended September 30, 1996, no material operating data is reflected in the
financial statements from the packaging assets, while such data is included
for the comparable nine months ended September 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. Any unexercised warrants expired on April 30, 1996 (Note 7).
The impact of outstanding warrants has not been included in the calculation
of loss per share as such inclusion would be antidilutive.
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.
7
<PAGE>
3. INVENTORY
Inventory consists of the following as of September 30, 1996:
Raw materials $1,537,199
Work in process 297,396
Finished goods 75,364
----------
$1,909,959
==========
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
September 30, 1996:
Furniture and fixtures $ 85,405
Leasehold improvements 784,142
Machinery and equipment 2,061,198
-----------
2,930,745
Less accumulated depreciation (1,005,117)
and amortization -----------
$ 1,925,628
===========
Intangible and other assets, at cost, consist of the following as of
September 30, 1996:
Patents and trademarks $ 300,664
Other intangible assets 56,662
---------
357,326
Less accumulated amortization (86,333)
---------
$ 270,993
=========
5. DEBT GUARANTEE FEE
Debt guarantee fees reflected 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.
In July 1996, the Company obtained a line of credit from a different bank
in the aggregate amount of $500,000. The line bears interest at the prime
rate plus one percent and is collateralized by outstanding receivables,
when and if drawn upon. No guarantees were required. The line expires June
30, 1997; no funds have been drawn upon the line to date.
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 September 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. In October 1996, Baxter spun-off $4.5 billion of its
operations into Allegiance Healthcare, which included its distribution
businesses. Thereafter, Autopak will be integrated into the Allegiance
distribution network. The V. Mueller group, now a part of Allegiance,
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 Allegiance 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 Allegiance will
purchase directly from OnGard for resale to the market. The initial
purchases of Autopak(R) by Allegiance occured during the third quarter, and
totalled approximately $205,000.
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 Nine Months
Ended September 30 Ended September 30
------------------ ------------------
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues ...................... 100.0% 100.0% 100.0% 100.0%
Cost of sales.................. 158.7 119.5 143.0 108.8
----- ----- ----- -----
Operating Margin (deficit)..... (58.7) (19.5) (43.0) (8.8)
----- ----- ----- -----
Operating Expenses:
General and administrative .. 58.9 54.0 68.2 43.8
Sales and marketing.......... 61.2 32.3 50.5 23.6
Depreciation and amortization 7.5 7.4 12.0 6.3
Deferred compensation ....... 19.9 0.9 17.1 0.7
Research and development .... 2.2 5.8 6.0 7.9
----- ----- ----- -----
Total ......................... 149.7 100.4 153.8 82.3
----- ----- ----- -----
Loss from operations .......... (208.4) (119.9) (196.8) (91.1)
Interest and other expenses ... (4.8) (17.6) (13.3) (11.7)
Interest and other income ..... 6.3 12.7 6.5 3.9
----- ----- ----- -----
Net loss ...................... (206.9) (124.8) (203.6) (98.9)
===== ===== ===== =====
</TABLE>
Three months ended September 30, 1996 compared to three months ended
September 30, 1995
Revenues for the three months ended September 30, 1996 decreased $329,000
or 31%, to $729,000 from $1,058,000 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 third quarter 1995 were $490,000; there were
only $3,000 of such revenues in the comparable period in 1996. In addition, the
equipment line revenues decreased by $37,000 from $182,000 to $145,000 in the
respective quarters. The offsetting increase in sales was $213,000 for the
Autopak(R) product line, which began commercial shipments to Allegiance in the
third quarter, there was no comparable revenues in the third quarter of 1995.
Operating margin decreased to a deficit of $428,000 (a deficit of 59% of
revenues) for the three months ended September 30, 1996 compared to a deficit of
$207,000 (20% of revenues) for the same period in 1995. The decrease in margin
resulted in part from a decrease in revenues of $329,000 described above and to
an increase in the level of overhead costs associated with engineering,
purchasing, and quality control ($100,000) which were required to upgrade the
performance and quality of the equipment product line. Revenues, which were
insufficient to offset fixed factory overhead, resulted in an operating margin
deficiency.
11
<PAGE>
General and administrative expenses decreased $141,000, or 25% from
$571,000 to $430,000 for the respective three month periods ended September 30,
1995 and 1996. The decrease is the result of cost containment measures initiated
late in the second quarter of 1996, resulting in decreases in, a broad category
of expenses including, legal, professional fees, travel and office supplies. As
a result of the decrease in sales, general and administrative expenses increased
as a percentage of sales from 54% to 59% from the respective quarters in 1995 to
1996.
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 September 30, 1995, and
1996. These options were granted to directors, officers and consultants in
December 1995.
Sales and marketing expenses increased $104,000 to $446,000 in the three
months ended September 30, 1996 versus $342,000 in the comparable period in
1995, or 30% (and from 32% to 61% as a percent of sales in the comparative
quarters). 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 $46,000 to $16,000 from
$62,000, a 74% decrease, from the third quarter ended September 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 from $183,000 to $35,000 for the comparable
quarters ended September 30, 1995 and 1996, a decrease of 148,000 or 81%. This
results from the payment in full of the Company's bank line, on April 15, 1996
offset by increases for interest related to assets procured under capital lease
obligations.
Nine months ended September 30, 1996 compared to nine months ended September 30,
1995
Revenues for the nine months ended September 30, 1996 decreased $1,292,000
or 34%, to $2,545,000 from $3,837,000 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 nine months ended September 30, 1995 were $1,536,000;
there were only $26,000 of such revenues in the comparable period in 1996. The
offsetting increase in sales occurred in the Autopak(R) line, which commenced
its commercial sales under a distribution agreement and accounted for an
increase of $232,000.
Operating margin decreased to a deficit of $1,094,000 (a deficit of 43% of
revenues) for the nine months ended September 30, 1996 compared to a decifit of
$337,000 (9% of revenues) for the same period in 1995. The decrease in margin
resulted from: (1) decreased sales of $1,292,000, 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 equipment product performance of $230,000. Revenues were insufficient to
offset fixed factory overhead, resulting in an operating margin deficiency.
12
<PAGE>
General and administrative expenses were relatively unchanged, increasing
$53,000, or 3% from $1,682,000 to $1,735,000 for the respective nine month
periods ended September 30, 1995 and 1996. As a result of the decrease in sales,
general and administrative expenses increased as a percentage of sales from 44%
to 68% in the nine months ended 1995 versus 1996.
Deferred compensation, the non-cash charges which reflect the difference
between market and exercise prices of stock options granted, increased $408,000
to $436,000 from $28,000 for the nine month periods ended September 30, 1996 and
1995 respectively, due to options granted to directors, consultants and officers
in December 1995.
Sales and marketing expenses increased $380,000 or 42% to $1,284,000 (51%
of sales) in the nine months ended September 30, 1996 versus $904,000 in the
comparable period in 1995 (24% of sales). 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 $150,000 to $152,000 from
$302,000, a 50% decrease, from the nine months ended September 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 $158,000 to $284,000 for the nine months ended
September 30, 1996 from $442,000 in the comparable period in 1995, or 36%. The
decrease results from reduced interest related to the Company's bank line
totalling $212,000, offset by $54,000 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 nine month period ended September 30, 1995. New lease obligations for
plant equipment and leasehold improvements were initiated in the first quarter
of 1996.
Liquidity and Capital Resources
The Company's working capital at September 30, 1996 increased to $2,767,000
from $1,974,000 at December 31, 1995. Cash and cash equivalents were $2,029,000
at September 30, 1996 versus $3,693,000 at December 31, 1995. Accounts
receivable decreased $157,000 to $499,000 at September 30, 1996, from $656,000
at December 31, 1995. Inventory increased, net, $428,000 to $1,910,000 at
September 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 registered 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.
13
<PAGE>
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 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.
14
<PAGE>
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. 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: November 12, 1996
/s/ Phil B. Kart
---------------------
Phil B. Kart
Vice President and Principal Financial Officer
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000888428
<NAME> OnGard Systems, Inc.
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> SEP-30-1996
<CASH> 2,029,108
<SECURITIES> 53,540
<RECEIVABLES> 587,077
<ALLOWANCES> 88,503
<INVENTORY> 1,909,959
<CURRENT-ASSETS> 4,654,865
<PP&E> 2,930,745
<DEPRECIATION> 1,005,117
<TOTAL-ASSETS> 9,492,497
<CURRENT-LIABILITIES> 1,887,876
<BONDS> 0
0
1,228,177
<COMMON> 6,489
<OTHER-SE> 5,757,982
<TOTAL-LIABILITY-AND-EQUITY> 9,492,497
<SALES> 2,544,660
<TOTAL-REVENUES> 2,544,660
<CGS> 3,638,700
<TOTAL-COSTS> 3,911,878
<OTHER-EXPENSES> 54,128
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 284,386
<INCOME-PRETAX> (5,181,737)
<INCOME-TAX> 0
<INCOME-CONTINUING> (5,181,737)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (5,181,737)
<EPS-PRIMARY> (.84)
<EPS-DILUTED> (.84)
</TABLE>
