<PAGE>
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, 1997.
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.
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(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
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(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, 1997: 6,613,722
Transitional Small Business Disclosure Format:
Yes _____ No __X__
<PAGE>
PART I. ITEM 1. FINANCIAL STATEMENTS
ONGARD SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
September 30, December 31,
1997 1996
ASSETS (Unaudited) (Audited)
- ------ ----------- ------------
CURRENT ASSETS:
Cash and cash equivalents $ 73,812 $ 885,552
Restricted cash 50,000 50,000
Trade accounts receivable, net of
allowance of $20,000 and $40,000, respectively 420,142 744,856
Receivables, other 56,808 ---
Inventory, net 3,046,169 2,102,380
Prepaid expenses and other 112,781 203,712
---------- ----------
Total current assets 3,759,712 3,986,500
---------- ----------
PROPERTY AND EQUIPMENT, net 1,503,123 1,836,056
---------- ----------
EQUIPMENT UNDER OPERATING LEASES, net --- 237,594
---------- ----------
OTHER ASSETS:
Excess cost over net tangible assets acquired, net 2,172,920 2,268,788
Intangible and other assets, net 214,174 303,359
Debt guarantee fee and issuance costs, net 132,903 ---
Deposits 66,068 95,241
---------- ----------
Total other assets 2,586,065 2,667,388
---------- ----------
TOTAL ASSETS $7,848,900 $8,727,538
---------- ----------
---------- ----------
The accompanying notes are an integral part of these financial statement
2
<PAGE>
ONGARD SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
September 30 December 31
LIABILITIES AND STOCKHOLDERS' EQUITY 1997 1996
------------ ------------
(Unaudited) (Audited)
<S> <C> <C>
CURRENT LIABILITIES:
Notes payable to bank $ 1,000,000 ---
Trade accounts payable 1,481,301 $ 541,604
Accrued liabilities 1,175,462 1,242,257
Capital leases payable 192,479 186,741
Customer deposits 209,339 221,359
Current portion of notes payable 106,512 98,847
Notes payable, related parties 40,000 ---
------------ ------------
Total current liabilities 4,205,093 2,290,808
------------ ------------
CAPITAL LEASES PAYABLE, NET OF CURRENT PORTION 134,309 198,051
NONCURRENT PORTION OF NOTES PAYABLE 28,716 109,520
------------ ------------
Total liabilities $ 4,368,118 $ 2,598,379
------------ ------------
STOCKHOLDERS' EQUITY:
Convertible Series A Preferred stock; $.001 par
value, 3,000,000 shares authorized, 253,292 issued
and outstanding at September 30, 1997 and December
31, 1996, aggregate liquidation preference
of $1,013,168 $ 778,167 $ 778,167
Series B Redeemable Preferred Stock, no par value;
100 shares issued and outstanding at September 30,
1997 and December 31, 1996 10 10
Common stock; $.001 par value,
25,000,000 shares authorized, 6,613,722
shares issued and outstanding at September 30, 1997
and December 31, 1996 6,614 6,614
Additional paid-in capital 30,445,661 30,212,161
Deferred compensation (147,375) (589,500)
Accumulated deficit (27,602,295) (24,278,293)
------------ ------------
Total stockholders' equity $ 3,480,782 $ 6,129,159
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY $ 7,848,900 $ 8,727,538
------------ ------------
------------ ------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
<PAGE>
ONGARD SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
Three Months Ended Nine Months Ended
September 30 September 30
------------------------- ---------------------------
1997 1996 1997 1996
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
REVENUES $ 817,425 $ 729,444 $ 3,363,564 $ 2,544,660
COST OF SALES 1,168,704 1,157,773 3,847,038 3,638,700
----------- ----------- ----------- -----------
Operating margin (deficit) (351,279) (428,329) (483,474) (1,094,040)
----------- ----------- ----------- -----------
COSTS AND EXPENSES:
Sales and marketing 297,247 446,254 1,260,807 1,283,818
General and administrative 362,750 430,105 1,091,456 1,735,699
Research and development 5,201 15,705 40,030 151,823
Deferred compensation 147,375 145,314 442,125 435,937
Depreciation and amortization 104,608 54,726 324,108 304,601
----------- ----------- ----------- -----------
Total expenses 917,181 1,092,104 3,158,526 3,911,878
----------- ----------- ----------- -----------
LOSS FROM OPERATIONS (1,268,460) (1,520,433) (3,642,000) (5,005,918)
INTEREST INCOME 2,149 38,692 9,307 123,346
OTHER INCOME (Note 2) 89,990 7,920 496,777 39,349
INTEREST EXPENSE (84,465) (35,046) (175,111) (284,386)
OTHER EXPENSES (7,773) (147) (12,977) (54,128)
----------- ----------- ----------- -----------
NET LOSS $(1,268,559) $(1,509,014) $(3,324,004) $(5,181,737)
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
NET LOSS PER SHARE $ (.19) $ (.23) $ (.50) $ (.84)
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
WEIGHTED AVERAGE NUMBER
OF SHARES OUTSTANDING 6,613,722 6,488,722 6,613,722 6,145,789
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
<PAGE>
ONGARD SYSTEMS, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
Nine Months Ended
September 30
-------------------------
1997 1996
----------- -----------
(Unaudited) (Unaudited)
<S> <C> <C>
CASH FLOWS USED IN OPERATING ACTIVITIES:
Net Loss (3,324,004) $(5,181,737)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization and non-cash interest 311,563 530,171
Compensation expense related to stock options 442,125 435,937
Gain on sale of Mailback assets (400,153) ---
Allowance for doubtful accounts (19,736) (30,683)
Changes in assets and liabilities:
Decrease in restricted cash --- 43,823
Decrease in accounts receivable, trade and other 287,642 188,384
(Increase) in inventory (713,421) (544,697)
Decrease (Increase) in prepaid expenses 90,931 (85,803)
Decrease (increase) in deposits 29,173 (47,587)
Decrease in customer deposits (12,020) (38,788)
Increase (decrease) in accounts payable
and accrued liabilities 1,031,656 (405,757)
----------- -----------
Net cash used in operating activities (2,276,244) (5,136,737)
----------- -----------
CASH FLOWS USED IN INVESTING ACTIVITIES:
Purchase of property and equipment (32,987) (166,691)
Increase in patent, patents pending and trademark (42,021) (55,532)
Proceeds from sale of Mailback assets 676,000 ---
Increase in debt issuance costs (45,355) ---
----------- -----------
Net cash (used in) investing activities $ 555,637 $ (222,223)
----------- -----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
5
<PAGE>
ONGARD SYSTEMS, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
Nine Months Ended
September 30
-------------------------
1997 1996
---------- -----------
(Unaudited) (Unaudited)
<S> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase (decrease) in notes payable related party $ 40,000 $ (7,500)
Increase (decrease) in notes payable Bank 1,000,000 (1,764,270)
Payment of capital lease obligations (58,004) (165,275)
Payment of leasehold improvements financed by owner (73,125) (69,798)
Net proceeds from issuance of common stock --- 5,701,608
---------- -----------
Net cash provided by financing activities $ 908,867 $ 3,694,765
---------- -----------
---------- -----------
NET INCREASE (DECREASE) IN CASH (811,740) (1,664,195)
CASH and cash equivalents, beginning of year 885,552 3,693,303
---------- -----------
CASH and cash equivalents, end of the period $ 73,812 $ 2,029,108
---------- -----------
---------- -----------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid for interest $ 88,601 $ 142,204
---------- -----------
---------- -----------
SUPPLEMENTAL SCHEDULE OF NON-CASH
FINANCING AND INVESTING ACTIVITIES:
Leasehold improvements financed by owner $ 22,902 $ 350,000
Acquisition of equipment through capital leases $ 91,120 $ 517,657
Reclassification of equipment under lease to
finished goods inventory $ 230,368
Reclassification of finished goods
inventory to equipment under lease $ 116,584
Value of warrants provided for debt guarantee $ 176,000
Reversal of certain accruals and accounts payable $ 158,754
</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 operations
of the Company and its wholly-owned subsidiary, OnGard Sterilization
Technology ("OST"), for the periods ended September 30, 1997 and 1996.
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, 1997 may not
necessarily be indicative of the full year results.
When used in this form or other filings or press releases made by the
Company regarding forward-looking comments, important factors could
arise which could cause actual results to differ from those contained in
any forward looking statement. Undue reliance should not be placed on
such statements which speak only as of the date made.
2. WORKING CAPITAL DEFICIENCY
The Company's cash position at September 30,1997 was approximately
$74,000; its working capital had declined to a deficit of $445,000 from
positive working capital of $1,696,000 at December 31, 1996. While the
Company has a significant backlog of customer orders for its equipment
products, which approximated $3.1 million, it has been unable to meet
the delivery dates requested by these customers; the Company continues
to believe that its Autopak product offerings have market potential but
it lacked the marketing structure to create the sales revenues the
Company anticipated. Both of these matters have caused considerable
amounts to be invested in inventory and resulted in recurring losses.
Further, in September 1997, new senior management voluntarily suspended
production operations due to safety concerns (see Note 3). Upon their
resignation in October 1997, remedial actions began and key departments
within the plant were reopened. However, the month-long shutdown
exacerbated the financial condition.
As a result, the Company has exhausted substantially all of its internal
funds and is unable to meet its current trade obligations. The Company
is addressing its funding requirements with its major investors for
additional financing and is also currently evaluating a plan to divest
selected assets of its equipment business and apply those proceeds to
pay its creditors or, as an alternative, sell the equipment business in
total. Thereafter, it may seek to recapitalize its disposable packaging
business. Discussions are being held with entities which have expressed
interest in acquiring the equipment business or selected assets. The
Company cannot determine, at this time, whether these entities will
provide an offer or, if an offer is received, if it will be sufficient
to meet the Company's requirements, or, whether funds received from
investors, if any, will be sufficient to meet its future obligations.
3. PLANT SHUTDOWN
In September 1997 the Company's new senior management voluntarily
suspended production operations based on an inspection of the facility
and related safety concerns. The production operations were suspended
for approximately one month. During October, subsequent to the
resignation of these individuals, remedial activities commenced based on
the advice of safety experts. At this date, most of the production
departments are operational; one department is not fully functional, but
those activities are outsourced when necessary and not precluding
production. All employees were paid in full during the supsension.
7
<PAGE>
4. SALE OF SELECTED ASSETS OF MAILBACK CONTAINER LINE
On June 30, 1997 the Company completed the sale of selected assets of
its Mailback and Container product line to Sage Products, Inc. of
Crystal Lake, Illinois. The sale included all customer account data,
patents and related intellectual property, inventory and minor office
equipment. Accounts receivables were retained by the Company. The sale
price was approximately $726,000. At September 30, 1997 approximately
$51,000 of the sale price was included in Other Receivables in the
accompanying balance sheet, of which $41,000 was paid in October, 1997.
The Company reported a gain on the sale of approximately $400,000.
Revenues for this product line were $438,000 for the six month period
ending June 30, 1997 and $895,000 for the twelve months ended December
31, 1996.
5. CONVERTIBLE DEBENTURE TRANSACTION TERMINATED
The Company had previously indicated in its first quarter 10-QSB that it
had completed the documentation for the sale of $1.5 million from the
sale of Convertible Debentures, and that it anticipated funding to occur
in May 1997. The Debentures were to be convertible into common stock of
the Company in $50,000 denominations at any time after a 45-day
restriction period at a price equal to the then fair market value of the
common stock less 22-1/2%, or the common stock price at the funding
date, whichever is lower.
As previously indicated in the Company's second quarter 10-QSB, in May
1997 the Company elected not to proceed with this offering of
Debentures. No Debentures were sold pursuant to the offering and all
transactions relating to this arrangement were terminated.
6. INVENTORY
Inventory consists of the following:
SEPTEMBER 30, 1997 DECEMBER 31, 1996
------------------ -----------------
Raw materials $1,915,425 $1,356,476
Work in process 888,497 629,280
Finished goods 105,814 116,624
---------- ----------
$2,909,737 $2,102,380
---------- ----------
---------- ----------
7. PROPERTY AND EQUIPMENT AND INTANGIBLE AND OTHER ASSETS
Property and equipment, at cost, consist of the following:
SEPTEMBER 30, 1997 DECEMBER 31, 1996
------------------ -----------------
Furniture and fixtures $ 86,558 $ 86,080
Leasehold improvements 815,204 784,140
Machinery and equipment 1,633,112 2,079,400
----------- -----------
2,534,874 2,949,620
Less accumulated depreciation
and amortization (1,031,751) (1,113,564)
----------- -----------
$ 1,503,123 $ 1,836,056
----------- -----------
----------- -----------
8
<PAGE>
Intangible and other assets, at cost, consist of the following:
SEPTEMBER 30, 1997 DECEMBER 31, 1996
------------------ -----------------
Patents and trademarks $230,766 $338,150
Other intangible assets --- 20,000
-------- --------
230,766 358,150
Less accumulated amortization (16,592) (54,791)
-------- --------
$214,174 $303,359
-------- --------
-------- --------
8. 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 of the Company's former bank
line. The amount was amortized over the term of the note, the period
from October 1995 through maturity in April 1996, as a non-cash charge
against earnings which was included in interest expense. 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.
The Company has also recorded $176,000 in similar charges for the value of
the 375,000 warrants granted to the guarantors in conjunction with a new
credit facility committed in April 1997 with funding occurring in June 1997.
(Note 9). These warrants were valued pursuant to SFAS No. 123 according to
the Black Scholes valuation method.
9. DEBT
In April 1997 the Company obtained a commitment for a new credit
facility with a bank, which was facilitated by the same two guarantors
of the previous bank borrowing. The credit line of $1.0 million bears
interest at the LIBOR rate plus 2%, and matures twelve months from
inception. The Company secured the credit facility with all of its
tangible and intangible assets. At September 30, 1997 $1.0 million was
outstanding on the credit line. In exchange for their guarantees the
Company granted the guarantors 375,000 warrants to purchase OnGard
common stock at a price of $1.25 per share or the price per share at the
closing date. The Warrant contains an antidilution provision which
adjusts the price per share and number of shares issueable to the price
of any subsequent financing where the price per share is lower than the
granted price. The funding occurred on May 30, 1997.
The Company has recorded the fair value of the warrants granted as a
non-cash fee with an offsetting increase to additional paid in capital
(Note 8). The amount will be included as interest expense and amortized
over the one-year life of the loan.
10. WARRANTS
The Company has issued warrants in connection with the securities
transactions which have financed its operations since its initial public
offering, other than its September 1995 private placement. 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.
Other warrants, which have expired, are excluded from the following data.
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, 1997 and potential maximum gross proceeds to the
Company are as follows:
9
<PAGE>
<TABLE>
Guarantor's Class B Guarantor's
Warrants Warrants Warrants Total
---------- --------- ----------- -----
(1994-1995) (1997)
------
<S> <C> <C> <C> <C>
Number of shares 600,000 375,000 375,000 1,350,000
Original price $4.00 $6.00 $1.25 -
Dilution adjusted shares 712,377 443,073 375,000 1,530,450
Dilution adjusted price $3.32- $3.47 $5.06-$5.14 $1.25 -
Maximum potential gross
proceeds ($ millions) (a) $2.4 $2.3 $ .5 $5.2
Expiration date 10-24-99, 2-28-98 5-29-02
5-31-00
Redemption provision No Yes No
(a) There is no assurance that the full amount, if any, of these proceeds
will be received by the Company in the future.
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 Nine Months
Ended September 30 Ended September 30
------------------ ------------------
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues ......................... 100.0 % 100.0 % 100.0 % 100.0 %
Cost of sales..................... 143.0 158.7 114.4 143.0
------ ------ ----- -----
Operating Margin (deficit)........ (43.0) (58.7) (14.4) (43.0)
------ ------ ----- -----
Operating Expenses:
Sales and marketing............. 36.4 61.2 37.5 50.5
General and administrative ..... 44.4 58.9 32.5 68.2
Research and development........ .6 2.2 1.2 6.0
Deferred compensation........... 18.0 19.9 13.1 17.1
Depreciation and amortization... 12.8 7.5 9.6 12.0
------ ------ ----- -----
Total ........................... 112.2 149.7 93.9 153.8
------ ------ ----- -----
Loss from operations.............. (155.2) (208.4) (108.3) (196.8)
Interest and other expenses....... (11.3) (4.8) (5.6) (13.3)
Interest and other income ........ 11.3 6.3 15.1 6.5
------ ------ ----- -----
Net loss.......................... (155.2)% (206.9)% (98.8)% (203.6)%
------ ------ ----- -----
------ ------ ----- -----
</TABLE>
10
<PAGE>
THREE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED TO THREE MONTHS ENDED
SEPTEMBER 30, 1996
Revenues for the three months ended September 30, 1997 increased
12% or $88,000 from $729,000 to $817,000 in the same period in 1996.
Excluding sales in the quarter for 1996, of the Company's Mailback business
of $207,000 (which was sold on June 30,1997), the increase for comparable
business was $295,000. The increase is primarily attributable to sales in
the Company's equipment business line. The increase was achieved despite the
third quarter revenue being the lowest in the current year due to the
voluntary suspension of production for a safety standdown. The suspension of
production took place for most of September and into October 1997. In October
1997 the Company began remedial action which was completed for all
departments but one in late October 1997.
Operating margin improved to a deficit of $351,000 (a deficit of
43% of revenues) for the three months ended September 30, 1997 compared to a
deficit of $428,000 (59% of revenues) for the same period in 1996. The
improvement in margin resulted in part from an increase in revenues of
$88,000 described above, lower direct material costs and lower overhead costs
as a result of containment measures. Revenues, which were insufficient to
offset factory overhead, resulted in an operating margin deficiency.
General and administrative expenses decreased $20,000, or 5%, from
$398,000 (59.5% of revenues) to $378,000 (46% of revenues) for the respective
three month periods ended September 30, 1997 and 1996.
Deferred compensation, the non-cash charges which reflect the
difference between market and exercise prices of stock options granted,
increased $2,000 from $145,000 to $147,000 in the respective quarters ended
September 30, 1997, and 1996.
Sales and marketing expenses decreased 33%, or $149,000 to
$297,000 (36% of revenues) in the three months ended September 30, 1997
versus $446,000 (61% of revenues) in the comparable period in 1996. The
Company has decreased its direct selling efforts, including manpower and
collateral materials, in its Autopak packaging line.
Research and development expenses decreased $11,000 to $5,000 from
$16,000, a 69% decrease, for the quarter ended September 30, 1997 to the
comparable quarter in 1996. The decrease relates to the completion of
Autopak-Registered Trademark-development, and of the Company's compact
sterilizer product line.
Interest expense increased from $35,000 to $84,000 for the
comparable quarters ended September 30, 1997 and 1996, or 140%. This
results from the payment in full of the Company's prior bank line, on April
15, 1996 offset by increases for interest related to assets financed by
capital leases, interest on the new bank line and short term loans.
NINE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED TO NINE MONTHS ENDED SEPTEMBER
30, 1996
Revenues for the nine months ended September 30, 1997 increased 32%
or $819,000 from $2,545,000 to $3,364,000 in the same period in 1996.
Excluding the revenues from the Company's Mailback business (which was sold
on June 30, 1997) during the nine months ended September 30, 1996 and for
which there were only six comparable months in 1997, sales were $1,056,000
higher for comparable business lines. The increase is predominantly
attributable to sales in the Company's equipment business line.
Operating margin improved to a deficit of $483,000 (a deficit of
14% of revenues) for the nine months ended September 30, 1997 compared to a
deficit of $1,094,000 (43% of revenues) for the same period in 1996. The
improvement in margin resulted in part from an increase in revenues of
$819,000 described above, lower overhead costs as a result of cost
containment measures and certain start-up production costs incurred in 1996,
which were not recurring. Revenues, which were insufficient to offset fixed
factory overhead, resulted in an operating margin deficiency.
General and administrative expenses decreased $645,000, or 37% from
$1,736,000 to $1,091,000 for the respective nine month periods ended
September 30, 1996 and 1997. The decrease is the result of cost containment
measures in a broad
11
<PAGE>
category of expenses including, legal, professional fees, travel, personnel
and office supplies, as well as expenditures incurred for relocation during
1996 which were not recurring.
Deferred compensation, the non-cash charges which reflect the
difference between market and exercise prices of stock options granted,
increased $6,000 from $436,000 to $442,000 in the respective nine months
ended September 30, 1997, and 1996.
Sales and marketing expenses decreased $23,000 to $1,261,000 in the
nine months ended September 30, 1997 versus $1,284,000 in the comparable
period in 1996, or 2%. The Company has decreased its direct selling efforts,
including manpower and collateral materials, in its Autopak packaging line
while increasing its direct selling efforts in the equipment line.
Research and development expenses decreased $112,000 to $40,000
from $152,000, a 74% decrease, for the nine months ended September 30, 1997
to the comparable quarter in 1996. The decrease relates to the completion
of Autopak-Registered Trademark- development, and of the Company's compact
sterilizer product line.
Interest expense decreased from $284,000 to $175,000 for the
comparable nine month ended September 30, 1997 and 1996, a decrease of
109,000 or 38%. 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
financed by capital leases.
LIQUIDITY AND CAPITAL RESOURCES
The Company's working capital decreased to a deficit of $445,000
from positive working capital of $1,696,000 at December 31, 1996. Cash and
cash equivalents were $74,000 at September 30, 1997 versus $886,000 at
December 31, 1996. Accounts receivable decreased $325,000 to $420,000 at
September 30, 1997, from $745,000 at December 31, 1996. Inventory increased,
net, $944,000 to $3,046,000 at September 30, 1997 from $2,102,000 at December
31, 1996.
Since its inception the Company has funded its operating
deficiencies and capital requirements with funds provided either from the
sale of stock or various forms of debt or lease finacing. 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 a number of private transactions after that date.
When working capital at December 31, 1994 amounted to a deficit of
$1,032,000, 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.
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 9). 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.
In April 1997, the Company obtained a commitment for a $1.0 bank
line of credit facilitated by the guarantors who had facilitated the
Company's previous bank line. The line bears interest at the LIBOR rate plus
2% and matures twelve
12
<PAGE>
months from inception. The Company provided the guarantors with warrants to
purchase 375,000 shares of common stock at a price of $1.25 or the price at
the closing date. Funds were drawn in full on May 30, 1997.
The Company also raised funds from the sale of its
Mailback/Container business assets on June 30,1997. The gross sales price was
$726,000; excluding contingent funds retained by the acquiror, the Company
has received $712,000 to date.
At September 30, 1997 the Company had exhausted substantially all
of its cash and was unable to meet its current trade obligations. The Company
is addressing its nearterm funding requirements with its major investors for
additional financing. It has also established a plan to divest selected
assets of its equipment business with the intention of paying its credit
obligations from the proceeds, or, selling the business in total. Thereafter
it could seek to recapitalize its packaging line, Autopak-Registered
Trademark-. The Company is holding discussions with companies which have
expressed an interest in acquiring a position in the steam sterilizer
equipment business. There is no assurance that the Company will be successful
in completing this transaction or that it can negotiate terms which will
enable it to satisfy its obligations or subsequently recapitalize its
business.
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
13
<PAGE>
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 which are 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.
OnGard submitted all of the 510(k) notices during 1994 and 1996.
The Company received notification that all of its 510(k) submittals for
sharps containers had been approved and cleared for marketing. The Company
sold all of its containers and Mailback business as described in Note 2. The
Company has also received a 510(k) notice for its submission of
AutoPak-Registered Trademark-.
14
<PAGE>
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
On August 28, 1997, Item 5 - Other Events, reflecting the resignation of
certain directors of OnGard's Board including the Chairman and CEO, Mark
Weiss and the hiring of both a CEO and COO and their appointment as
directors.
On September 17, 1997 Item 5 - Other Events, reflecting a voluntary
suspension of production due to safety concerns.
On October 1, 1997 Item 5 - Other Events, reflecting the resignation of
the two newly appointed directors who were the CEO and COO.
On October 8, 1997 Item 5 - Other Events, reflecting the reopening of the
production facility, and that the Company was evaluating a plan to divest
the assets of its equipment business to meet its working capital demands.
15
<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 13, 1997 PHIL B. KART
----------------------------------------------
Phil B. Kart
Vice President and Principal Financial Officer
16
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THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THIRD
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<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
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778,177
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