<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 June 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.
---------------------------------------------------------
(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, 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
June 30, December 31,
1997 1996
ASSETS (Unaudited) (Audited)
------------ -------------
CURRENT ASSETS:
Cash and cash equivalents $ 287,005 $ 885,552
Restricted cash 50,000 50,000
Trade accounts receivable, net of
allowance of $40,000, respectively 1,045,069 744,856
Receivables, other 103,903 ---
Inventory, net 2,909,737 2,102,380
Prepaid expenses and other 194,955 203,712
----------- -----------
Total current assets 4,590,669 3,986,500
----------- -----------
PROPERTY AND EQUIPMENT, net 1,552,772 1,836,056
----------- -----------
EQUIPMENT UNDER OPERATING LEASES, net --- 237,594
----------- -----------
OTHER ASSETS:
Excess cost over net tangible assets acquired, net 2,204,877 2,268,788
Intangible and other assets, net 188,697 303,359
Debt guarantee fee and issuance costs, net 202,908 ---
Deposits 91,751 95,241
----------- -----------
Total other assets 2,688,233 2,667,388
----------- -----------
TOTAL ASSETS $8,831,674 $8,727,538
----------- -----------
----------- -----------
The accompanying notes are an integral part of these financial statement
2
<PAGE>
ONGARD SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
June 30 December 31
LIABILITIES AND STOCKHOLDERS' EQUITY 1997 1996
------------ -----------
(Unaudited) (Audited)
CURRENT LIABILITIES:
Noted payable to bank $ 1,000,000 ---
Trade accounts payable 1,110,781 $ 541,604
Accrued liabilities 1,319,176 1,242,257
Capital leases payable 184,690 186,741
Customer deposits 301,024 221,359
Current portion of notes payable 95,222 98,847
Noted payable, related parties 85,000 ---
------------ ------------
Total current liabilities 4,095,893 2,290,808
------------ ------------
CAPITAL LEASES PAYABLE, NET OF CURRENT PORTION 126,295 198,051
NONCURRENT PORTION OF NOTE PAYABLE 65,017 109,520
------------ ------------
Total liabilities $ 4,287,205 $ 2,598,379
------------ ------------
STOCKHOLDERS' EQUITY:
Convertible Series A Preferred stock; $.001 par
value, 3,000,000 shares authorized, 253,292
issued and outstanding at June 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 June 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 June 30, 1997
and December 31, 1996 6,614 6,614
Additional paid-in capital 30,388,161 30,212,161
Deferred compensation (294,750) (589,500)
Accumulated deficit (26,333,733) (24,278,293)
------------ ------------
Total stockholders' equity $ 4,544,469 $ 6,129,159
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 8,831,674 $ 8,727,538
------------ ------------
------------ ------------
The accompanying notes are an integral part of these financial statements.
3
<PAGE>
ONGARD SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30 June 30
----------------------- ----------------------
1997 1996 1997 1996
---------- ----------- ---------- ----------
<S> <C> <C> <C> <C>
REVENUES $ 1,257,815 $ 1,087,475 $ 2,546,139 $ 1,815,216
COST OF SALES 1,370,584 1,574,228 2,678,334 2,480,927
----------- ----------- ----------- -----------
Operating margin (deficit) (112,769) (486,753) (132,195) (665,711)
----------- ----------- ----------- -----------
COSTS AND EXPENSES:
Sales and marketing 483,905 402,329 963,560 837,564
General and administrative 336,832 647,631 728,706 1,353,107
Research and development 8,763 67,722 34,829 136,118
Deferred compensation 147,385 145,314 294,750 290,628
Depreciation and amortization 110,075 143,980 219,500 217,920
----------- ----------- ----------- -----------
Total expenses 1,086,950 1,406,976 2,241,345 2,835,337
----------- ----------- ----------- -----------
LOSS FROM OPERATIONS (1,199,719) (1,893,729) (2,373,540) (3,501,048)
INTEREST INCOME 1,010 43,026 7,158 84,654
OTHER INCOME (Note 2) 406,436 30,139 406,787 31,139
INTEREST EXPENSE (71,869) (62,892) (90,646) (249,340)
OTHER EXPENSES (3,132) (41,452) (5,204) (51,751)
----------- ----------- ----------- -----------
NET LOSS $ (867,274) $(1,924,908)$(2,055,444) $(3,686,346)
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
NET LOSS PER SHARE $ (.13) $ (.30)$ (.31) $ (.62)
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
WEIGHTED AVERAGE NUMBER
OF SHARES OUTSTANDING 6,613,722 6,430,726 6,613,722 5,974,323
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
<PAGE>
ONGARD SYSTEMS, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
Six Months Ended
June 30
----------------------------
1997 1996
------------- -------------
(Unaudited) (Unaudited)
CASH FLOWS USED IN OPERATING ACTIVITIES:
Net Loss $(2,055,444) $(3,686,346)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization and
non-cash interest 329,261 437,855
Compensation expense related to stock options 294,750 290,625
Gain on sale of Mailback assets (400,153) ---
Allowance for doubtful accounts --- 8,879
Changes in assets and liabilities:
(Increase) in restricted cash --- 43,823
(Increase) in accounts receivable, trade
and other (404,116) (480,265)
(Increase) in inventory (576,989) (340,770)
(Increase) in prepaid expenses 8,757 (121,924)
Decrease (increase) in deposits 3,490 ---
Increase (decrease) in customer deposits 79,665 (51,072)
Increase (decrease) in accounts payable
and accrued liabilities 646,096 (138,980)
----------- -----------
Net cash used in operating activities (2,074,683) (4,038,175)
----------- -----------
CASH FLOWS USED IN INVESTING ACTIVITIES:
Purchase of property and equipment (28,602) (251,979)
Increase in patent, patents pending and trademark (10,559) (17,918)
Proceeds from sale of Mailback assets 625,000 ---
Increase in debt issuance costs (45,355) ---
----------- -----------
Net cash (used in) investing activities $ 540,484 $ (269,897)
----------- -----------
----------- -----------
The accompanying notes are an integral part of these financial statements.
5
<PAGE>
ONGARD SYSTEMS, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
Six Months Ended
June 30
---------------------------
1997 1996
------------ ------------
(Unaudited) (Unaudited)
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase (Decrease) in notes payable related party $ 85,000 $ (7,500)
Increase (Decrease) in notes payable Bank 1,000,000 (1,764,270)
Payment of capital lease obligations (101,220) (153,048)
Payment of leasehold improvements financed by owner (48,128) (69,798)
Net proceeds from issuance of common stock --- $ 5,726,629
---------- ------------
Net cash provided by financing activities $ 935,652 $ 3,732,013
---------- ------------
NET INCREASE (DECREASE) IN CASH (598,547) (576,062)
CASH and cash equivalents, beginning of year 885,552 3,693,303
---------- ------------
CASH and cash equivalents, end of the period $ 287,005 $ 3,117,241
---------- ------------
---------- ------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid for interest $ 55,000 $ 113,895
---------- ------------
---------- ------------
SUPPLEMENTAL SCHEDULE OF NON-CASH
FINANCING AND INVESTING ACTIVITIES:
Leasehold improvements financed by owner $ 22,902 $ 350,000
Acquisition of equipment through capital leases $ 27,413 $ 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
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 June 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 six months ended June 30, 1997 may not necessarily be indicative of the
full year results.
2. 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 June 30, 1997 approximately $101,000 of the sale price was
included in Other Receivables in the accompanying balance sheet. The
Company reported a gain on the sale of approximately $400,000. Revenues
for this product line were $438,000 for the six month periods ending June
30, 1997 and $895,000 for the twelve months ended December 31, 1996.
3. 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.
In May 1997, the Company elected not to proceed with this offering of
Debentures. No Debentures were sold pursuant to the offering nor were any
transactions effected relating to this arrangement.
4. INVENTORY
Inventory consists of the following:
June 30, 1997 December 31, 1996
------------- -----------------
Raw materials $ 1,891,362 $ 1,356,476
Work in process 872,936 629,280
Finished goods 145,439 116,624
----------- -----------
$ 2,909,737 $ 2,102,380
----------- -----------
----------- -----------
7
<PAGE>
5. PROPERTY AND EQUIPMENT AND INTANGIBLE AND OTHER ASSETS
Property and equipment, at cost, consist of the following:
June 30, 1997 December 31, 1996
---------------- -----------------
Furniture and fixtures $ 86,558 $ 86,080
Leasehold improvements 814,694 784,140
Machinery and equipment 1,567,211 2,079,400
---------- -----------
2,468,463 2,949,620
Less accumulated depreciation (915,692) (1,113,564)
and amortization ---------- -----------
$1,552,771 $ 1,836,056
---------- -----------
---------- -----------
Intangible and other assets, at cost, consist of the following:
June 30, 1997 December 31, 1996
---------------- -----------------
Patents and trademarks $ 201,924 $ 338,150
Other intangible assets --- 20,000
---------- -----------
201,924 358,150
Less accumulated amortization (13,228) (54,791)
---------- -----------
$ 188,696 $ 303,359
---------- -----------
---------- -----------
6. 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 (Note 7). 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 7). These warrants were valued pursuant to SFAS No. 123
according to the Black Scholes valuation method.
8
<PAGE>
7. 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 June 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. The
amount will be included as interest expense, and amortized over the
one-year life of the loan.
8. 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 June 30, 1997 and potential maximum gross proceeds to the Company are as
follows:
<TABLE>
<CAPTION>
Guarantor's Underwriter's Class B Guarantor's
Warrants Warrants Warrants Warrants Total
-------- -------- -------- -------- -----
(1994-1995) (1997)
<S> <C> <C> <C> <C> <C>
Number of shares 600,000 250,000 375,000 375,000 1,600,000
Original price $4.00 $3.50-$9.45 $6.00 $1.25 -
Dilution adjusted shares 712,377 356,453 443,073 375,000 1,886,903
Dilution adjusted price $3.32- $3.47 $2.94-$6.05 $5.06-$5.14 $1.25 -
Maximum potential gross
proceeds ($ millions) (a) $2.4 $1.6 $2.3 $ .5 $6.8
Expiration date 10-24-99, 08-11-97, 2-28-98 5-29-02
5-31-00 07-20-97
Redemption provision No No Yes No
</TABLE>
(a) There is no assurance that the full amount, if any, of these proceeds
will be received by the Company in the future.
9
<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
------------- -------------
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues .............................. 100.0 % 100.0 % 100.0 % 100.0 %
Cost of sales.......................... 109.0 144.8 105.2 136.7
------ ------- ------ -------
Operating Margin (deficit)............. ( 9.0) (44.8) (5.2) (36.7)
------ ------- ------ -------
Operating Expenses:
General and administrative .......... 26.8 59.5 28.7 74.5
Sales and marketing.................. 38.5 37.0 37.8 46.1
Depreciation and amortization ....... 8.8 6.2 8.6 7.5
Deferred compensation 11.7 13.4 11.6 16.1
Research and development ............ .6 13.2 1.4 12.0
------ ------- ------ -------
Total ................................ 86.4 129.3 88.1 156.2
------ ------- ------ -------
Loss from operations .................. (95.4) (174.1) (93.3) (192.9)
Interest and other expenses............ (6.0) (9.6) (3.8) (16.6)
Interest and other income ............. 32.4 6.7 16.3 6.4
------ ------- ------ -------
Net loss .............................. (69.0) % (177.0) % (80.8) % (203.1) %
------ ------- ------ -------
------ ------- ------ -------
</TABLE>
THREE MONTHS ENDED JUNE 30, 1997 COMPARED TO THREE MONTHS ENDED JUNE 30, 1996
Revenues for the three months ended June 30, 1997 increased 16% or $170,000
from $1,087,000 to $1,257,000 in the same period in 1996. The increase is
primarily attributable to sales in the Company's equipment business line.
Operating margin improved to a deficit of $113,000 (a deficit of 9% of
revenues) for the three months ended June 30, 1997 compared to a deficit of
$487,000 (45% of revenues) for the same period in 1996. The improvement in
margin resulted in part from an increase in revenues of $170,000 described
above, lower direct material costs and lower overhead costs as a result of
containment measures. Revenues, which were insufficient to offset fixed factory
overhead, resulted in a minor operating margin deficiency.
General and administrative expenses decreased $311,000, or 48%, from
$648,000 (59.5% of revenues) to $337,000 (27.0% of revenues) for the respective
three month periods ended June 30, 1997 and 1996. The decrease is the result of
cost containment measures in a broad category of expenses including personnel,
legal, professional fees, travel and office supplies.
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 June 30, 1997, and
1996.
10
<PAGE>
Sales and marketing expenses increased 20%, or $69,000 to $484,000 (38.5%
of revenues) in the three months ended June 30, 1997 versus $402,000 (37.0% of
revenues) in the comparable period in 1996. The Company has increased its
direct selling efforts, including manpower and collateral materials, in its
equipment product line.
Research and development expenses decreased $59,000 to $9,000 from $68,000,
an 87% decrease, for the first quarter ended June 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 $63,000 to $72,000 for the comparable
quarters ended June 30, 1997 and 1996, or 14%. 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 .
SIX MONTHS ENDED JUNE 30, 1997 COMPARED TO SIX MONTHS ENDED JUNE 30, 1996
Revenues for the six months ended June 30, 1997 increased 40% or $731,000
from $1,815,000 to $2,546,000 in the same period in 1996. The increase is
predominantly attributable to sales in the Company's equipment business line.
Operating margin improved to a deficit of $132,000 (a deficit of 5% of
revenues) for the six months ended June 30, 1997 compared to a deficit of
$666,000 (37% of revenues) for the same period in 1996. The improvement in
margin resulted in part from an increase in revenues of $731,000 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 a minor
operating margin deficiency.
General and administrative expenses decreased $624,000, or 46% from
$1,353,000 to $729,000 for the respective six month periods ended June 30, 1997
and 1996. The decrease is the result of cost containment measures in a broad
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 $4,000
from $291,000 to $295,000 in the respective six months ended June 30, 1997, and
1996.
Sales and marketing expenses increased $126,000 to $964,000 in the six
months ended June 30, 1997 versus $838,000 in the comparable period in 1996, or
15%. The Company has increased its direct selling efforts, including manpower
and collateral materials, in its equipment product line.
Research and development expenses decreased $101,000 to $35,000 from
$136,000, a 74% decrease, for the six months ended June 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 $249,000 to $91,000 for the comparable six
month ended June 30, 1997 and 1996, a decrease of 158,000 or 63%. 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 at June 30, 1997 decreased to $495,000 from
$1,696,000 at December 31, 1996. Cash and cash equivalents were $287,000 at
June 30, 1997 versus $886,000 at December 31, 1996. Accounts receivable
increased $300,000 to $1,045,000 at June 30, 1997, from $745,000 at December 31,
1996. Inventory increased, net, $808,000 to $2,910,000 at June 30, 1997 from
$2,102,000 at December 31, 1996.
11
<PAGE>
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.
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 7). 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.
Most recently, 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 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.
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,
12
<PAGE>
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, 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-.
13
<PAGE>
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
One on May 6, 1997, Item 5 - Other Events, reflecting the
resignation of certain directors of OnGard's Board.
14
<PAGE>
SIGNATURE
In accordance with to the requirements of the Exchange Act, the registrant
has caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
ON-GARD SYSTEMS, INC.
Dated: August 13, 1997 PHIL B. KART
--------------------------------------
Phil B. Kart
Vice President and Principal Financial Officer
15
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