<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
{ X } QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1996
OR
{ } TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER: 0-28460
FUSION MEDICAL TECHNOLOGIES, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
Delaware 94-3177221
-------- ----------
(STATE OR OTHER JURISDICTION OF (IRS EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
1615 PLYMOUTH STREET
MOUNTAIN VIEW, CA 94043
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
(415) 903-4000
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS REQUIRED
BY SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 DURING THE
PRECEDING 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.
(Item 1) [ X ] Yes [ ] No
(Item 2) [ ] Yes [ X ] No
THE NUMBER OF OUTSTANDING SHARES OF THE REGISTRANT'S COMMON STOCK, $.001 PAR
VALUE, WAS 6,898,577 AS OF AUGUST 2, 1996.
<PAGE>
FUSION MEDICAL TECHNOLOGIES, INC.
INDEX
PART I: FINANCIAL INFORMATION Page
----
Item 1. Condensed financial statements - unaudited
Condensed statements of operations - three months ended 3
June 30, 1996 and 1995 and six months ended June 30, 1996
and 1995
Condensed balance sheets - June 30, 1996 and
December 31, 1995 4
Condensed statement of cash flows - six months ended 5
June 30, 1996 and 1995
Notes to condensed financial statements 6
Item 2. Management's discussion and analysis of financial 8
condition and results of operations
PART II: OTHER INFORMATION
Item 1. Legal Proceedings 16
Item 2. Changes in Securities 16
Item 3. Defaults Upon Senior Securities 16
Item 4 Submission of Matters to a Vote of Security Holders 17
Item 5 Other Information 17
Item 6 Exhibits and Reports on Form 8-K 17
Signatures 18
2
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PART I: FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
FUSION MEDICAL TECHNOLOGIES, INC.
(A COMPANY IN THE DEVELOPMENT STAGE)
CONDENSED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
June 30, December 31,
1996 1995
-------------- -----------------
(unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 25,362 $ 4,382
Available-for-sale securities 2,481 1,536
Prepaids and other current assets 90 68
-------------- ----------------
Total current assets 27,933 5,986
Property and equipment, net 797 611
Other assets 33 33
-------------- ----------------
Total assets $ 28,762 $ 6,629
-------------- ----------------
-------------- ----------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities $ 1,475 $ 672
Long-term obligations 122 189
-------------- ----------------
Total liabilities 1,597 861
Common stock and other stockholders' equity 35,099 10,406
Deficit accumulated during the development stage (7,935) (4,637)
-------------- ----------------
Total stockholders' equity 27,164 5,768
-------------- ----------------
Total Liabilities and stockholders' equity $ 28,762 $ 6,629
-------------- ----------------
-------------- ----------------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONDENSED FINANCIAL
STATEMENTS
<PAGE>
FUSION MEDICAL TECHNOLOGIES, INC.
(A COMPANY IN THE DEVELOPMENT STAGE)
CONDENSED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended Cumulative Period
June 30, June 30, from October 14, 1992
------------------------------ --------------------------- (date of inception)
1996 1995 1996 1995 to June 30, 1996
------------------------------ --------------------------- -------------------
(unaudited) (unaudited) (unaudited)
<S> <C> <C> <C> <C> <C>
Operating expenses
Research and development $ 1,215 $ 683 $ 2,278 $ 978 $ 5,788
Marketing, general and administrative 628 211 1,182 358 2,684
------------------------------- ---------------------------- --------------
Total expenses 1,843 894 3,460 1,336 8,472
Interest income, net (105) (101) (163) (184) (537)
------------------------------- ---------------------------- --------------
Net loss $ (1,738) $ (793) $ (3,297) $ (1,152) $ (7,934)
------------------------------- ---------------------------- --------------
------------------------------- ---------------------------- --------------
Net loss per share $ (0.53) $ (0.41) $ (1.26) $ (0.59) $ (4.96)
------------------------------- ---------------------------- --------------
------------------------------- ---------------------------- --------------
Shares used in net loss per share 3,294,856 1,942,637 2,618,746 1,942,637 1,601,061
------------------------------- ---------------------------- --------------
------------------------------- ---------------------------- --------------
Pro forma net loss per share $ (0.31) $ (0.16) $ (0.61) $ (0.23) $ (2.57)
------------------------------- ---------------------------- --------------
------------------------------- ---------------------------- --------------
Pro forma shares outstanding 5,630,829 5,115,376 5,373,103 5,115,376 3,092,950
------------------------------- ---------------------------- --------------
------------------------------- ---------------------------- --------------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONDENSED FINANCIAL
STATEMENTS
<PAGE>
FUSION MEDICAL TECHNOLOGIES, INC.
(A COMPANY IN THE DEVELOPMENT STAGE)
CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Cumulative Period
Six Months Ended from October 14, 1992
June 30, (date of inception)
1996 1995 to June 30, 1996
(unaudited) (unaudited) (unaudited)
---------------- --------------- --------------------
<S> <C> <C> <C>
CASH FLOWS USED FOR OPERATING ACTIVITIES:
Net loss $ (3,297) $ (1,152) $ (7,934)
Adjustments to reconcile net loss to net cash
used for operating activities:
Depreciation and amortization 100 31 224
Amortization of deferred compensation 189 - 198
Changes in assets and liabilities 781 38 1,112
-------------- -------------- ------------
Net cash used in operating services (2,227) (1,083) (6,400)
CASH FLOWS FROM INVESTING ACTIVITIES:
Expenditures for property and equipment (286) (251) (912)
Purchases of available-for-sale securities (2,481) (4,972)
Sales of available-for-sale securities 1,536 - 2,491
-------------- -------------- ------------
Net cash used in investing activities (1,231) (251) (3,393)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of preferred stock -- 8,914 10,224
Proceeds from issuance of common stock 24,504 - 24,510
Repayment of notes payable (67) (200) (144)
Proceeds from notes payable and bank
line of credit -- 400 565
-------------- -------------- ------------
Net cash provided by financing activities 24,438 9,114 35,155
Net increase in cash and cash equivalents 20,980 7,781 25,362
Cash and cash equivalents at the beginning
of the period 4,382 222 --
-------------- -------------- ------------
Cash and cash equivalents at the end of
the period $ 25,362 $ 8,003 $ 25,362
-------------- -------------- ------------
-------------- -------------- ------------
Supplemental schedule of non-cash
investing and financing activities:
Conversion of preferred equity to common stock 8 8
Deferred compensation relating to the
issuance of stock options 1,361 1,389
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONDENSED FINANCIAL
STATEMENTS
<PAGE>
FUSION MEDICAL TECHNOLOGIES, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
June 30, 1996
(Unaudited)
1. BASIS OF PRESENTATION
The accompanying condensed financial statements of Fusion Medical Technologies,
Inc. (the "Company" or "Fusion") have been prepared in accordance with generally
accepted accounting principles for interim financial information and with the
instructions for Form 10-Q and Article 10 of Regulation S-X. The balance sheet
as of June 30, 1996 and the statements of operations for the three and six
months periods ended June 30, 1996 and 1995, and for the period from October 14,
1992 (date of inception) to June 30, 1996, and the statement of cash flows for
the six month periods ended June 30, 1996 and 1995, and for the period from
October 14, 1992 (date of inception) to June 30, 1996 are unaudited but include
all adjustments (consisting of normal recurring adjustments) which the Company
considers necessary for a fair presentation of the financial position at such
dates and the operating results and cash flows for those periods. Although the
Company believes that the disclosures in these financial statements are adequate
to make the information presented not misleading, certain information normally
included in financial statements and related footnotes prepared in accordance
with generally accepted accounting principles have been condensed or omitted
pursuant to the rules and regulations of the Securities and Exchange Commission.
The accompanying financial statements should be read in conjunction with the
financial statements and notes thereto included in the Company's registration on
Form SB-2 (No. 333-3970-LA), which became effective June 7, 1996, and the
related prospectus contained therein.
Results for any interim period are not necessarily indicative of results for any
other interim period or for the entire year.
2. NET LOSS PER SHARE
Net loss per share is computed using the weighted average number of shares of
common stock outstanding during the periods presented. Common equivalent shares
are excluded from the computation as their effect is antidilutive, except that,
pursuant to the Securities and Exchange Commission Staff Accounting Bulletins,
common and common equivalent shares (stock options, warrants and preferred
stock) issued during the 12 month period prior to the Company's initial public
offering (IPO) have been included in the calculation as if they were outstanding
for all periods through June 7, 1996 (using the treasury stock method for
stock options and warrants and the if-converted method for preferred stock).
3. PRO FORMA NET LOSS PER SHARE
The pro forma calculation of net loss per share has been computed as described
above but also gives retroactive effect from the date of issuance to the
conversion of the convertible preferred stock which automatically converted to
common shares upon closing of the Company's initial public offering.
6
<PAGE>
4. INITIAL PUBLIC OFFERING
On June 7, 1996, the Company's registration statement for its initial public
offering of 2,100,000 shares of common stock at $13.00 per share, was declared
effective by the Securities and Exchange Commission. The Company received
proceeds of approximately $24,500,000 after deducting underwriting discounts,
commissions and offering costs.
Upon completion of the IPO all outstanding shares of convertible preferred stock
were automatically converted into 3,172,739 shares of common stock.
5. CASH AND CASH EQUIVALENTS AND AVAILABLE-FOR-SALE SECURITIES
The Company considers all highly liquid investments purchased with an original
maturity of three months or less to be cash equivalents. Cash and cash
equivalents include money market funds and various deposit accounts.
The Company has classified its investments as available-for-sale. Such
investments are recorded at fair value and unrealized gains and losses, if
material, are recorded as a separate component of equity until realized.
Interest income is recorded using an effective interest rate, with associated
premium or discount amortized to "investment income." The cost of securities
sold is based upon the specific identification method.
6. CONTINGENCIES
On May 30, 1996, a complaint was filed against the Company, two of its founders,
Dr. Philip N. Sawyer and Philip M. Sawyer, and Interface Biomedical Laboratories
Corporation in California Superior Court by an individual stockholder and former
marketing consultant of the Company. The suit seeks general, special and
punitive damages in unspecified amounts as well as rescission of a stock
purchase agreement and a consulting agreement entered into by the Company and
the individual pursuant to which the individual purchased shares of Common Stock
of the Company. Based upon the facts known to date, the Company and the
founders believe that the claims are without merit and intend to vigorously
contest this suit. There can be no assurance, however, that the Company will
prevail in such litigation or that an adverse outcome would not result in a
material adverse effect on the Company's business, financial condition and
results of operations.
7
<PAGE>
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion of the Financial Condition and Results of Operations of
the Company for the three and six months ended June 30, 1996, should be read in
conjunction with the Management's Discussion and Analysis of Financial Condition
and Results of Operations included in the Company's Registration Statement and
Prospectus dated June 7, 1996 relating to the Company's initial public offering.
The following discussion contains forward-looking statements which involve risks
and uncertainties. The Company's actual results could differ materially from
those anticipated by these forward-looking statements as a result of certain
factors, including those set forth in "Additional Factors That Might Affect
Future Results" below.
OVERVIEW
Since its inception in October 1992, Fusion has been primarily engaged in the
research and development of its wound closure products. To date, the Company
has not generated any revenue and, at June 30, 1996, had an accumulated deficit
of approximately $7.9 million. Operating losses are expected to continue for at
least through 1998 as the Company continues to expend substantial resources to
fund clinical trials in support of regulatory approvals and clearances, research
and development and expansion of sales and marketing activities.
The Company commenced clinical trials of its first product, RapiSeal, in the
United States in November 1995. In April 1996, the Company filed a 510(k) pre-
market notification with the FDA seeking clearance to market RapiSeal in the
United States and received such clearance in June 1996. The Company expects to
file an application for CE Mark approval in the third quarter of 1996 for the
sale of RapiSeal in Europe. The Company expects to generate all of its revenue
from RapiSeal for the next several years. The Company has also been engaged in
research and development of the Fusion liquids. The Company currently
anticipates commencing initial human clinical trials with this product in 1997.
There can be no assurance that the Company's products will be cleared or
approved for marketing by the appropriate United States or foreign regulatory
authorities or that such products will achieve market acceptance.
In November 1995, the Company received a manufacturing license from the CDHS and
began manufacturing RapiSeal for use in its clinical trial. Since receiving
United States market clearance in June 1996, the Company has commenced
manufacturing RapiSeal internally in order to better manage product costs. The
Company believes its current manufacturing facility will be adequate to meet
manufacturing requirements at least through 1998. The current lease on the
facility expires in June 1998, and the Company has an option to extend the lease
for an additional six months. The Company is developing its own direct sales
force in order to market RapiSeal in the United States. The timing of this
hiring will depend upon the rate of market acceptance of RapiSeal.
Future revenues, if any, and results of operations may fluctuate significantly
from quarter to quarter and will depend upon, among other factors, approval of
the RapiSeal for sale in Europe, other actions relating to regulatory and
reimbursement matters, the extent to which the Company's product or products
gain market acceptance, the rate at which the Company establishes its
distribution network, the timing and size of any distributor purchases, the
progress of clinical trials, and the introduction of competitive products for
wound sealing.
8
<PAGE>
RESULTS OF OPERATIONS
Three Months and Six Months Ended June 30, 1995 and 1996
- --------------------------------------------------------
REVENUES
No revenues were recorded for either of the quarters ended June 30, 1995 or
1996, or for either of the six month periods ended June 30, 1995 or 1996.
RESEARCH AND DEVELOPMENT
Research and development expenses increased 78% to $1,215,000 in the three
months ended June 30, 1996 from $683,000 in the three months ended June 30,
1995. For the six months ended June 30, 1996 research and development expenses
increased 133% to $2,278,000 from $978,000 in the same period in 1995. The
increase in both the three month and six month periods of 1996 were attributable
to an increased number of employees and related use of supplies, consultants and
laboratory research as the Company substantially increased its activities.
Clinical trial costs also increased in the quarter and the six-months ended June
30, 1996 compared to the year earlier periods reflecting the commencement of the
clinical trial for RapiSeal in November 1995.
GENERAL AND ADMINISTRATIVE
Marketing, general and administrative expenses increased 198% to $628,000 in the
three months ended June 30, 1996 from $211,000 for the three months ended June
30, 1995. For the six months ended June 30, 1996 marketing, general and
administrative expenses increased 230% to $1,182,000 from $358,000 for the six
months ended June 30, 1995. The increases in the quarter ended June 30, 1996
and in the six month period then ended, compared to the year earlier period,
were primarily the result of increases in sales and administrative personnel,
expanded marketing activities and occupancy related costs.
Net interest income increased 4% to 105,000 for the three months ended June 30,
1996 from $101,000 for the three months ended June 30, 1995. For the six months
ended June 30, 1996 net interest income decreased 11% to $163,000 from $184,000
for the six months ended June 30, 1995. The decrease was attributable to the
reduced average cash balance during the six months ended June 30, 1996.
As a result of the items discussed above, net loss was $1,738,000 for the three
months ended June 30, 1996 and $3,297,000 for the six months ended June 30,
1996. These compare to $793,000 for the three months ended June 30, 1995, and
$1,152,000 for the six months then ended.
9
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 1996 the Company's cash, cash equivalents and available-for-sale
securities were $27,843,000, compared to $5,918,000 for December 31, 1995. On
June 7, 1996 the Company completed its initial public offering of 2,100,000
shares of common stock at a price of $13.00 per share. The net proceeds to the
Company from the IPO were approximately $24,500,000.
During the six months ended June 30, 1996 and 1995, Fusion's operations consumed
cash of $2,227,500 and $1,083,000, respectively. The changes in cash used in
operations were due primarily to funding increased levels of research and
development of RapiSeal and Fusion's liquids, including a multi-site clinical
trial in the United States, as well as increased marketing activities and
associated personnel costs. The Company expects the increased use of cash will
continue in the second half of 1996 as it further increases its operations to
reflect the sales and marketing of RapiSeal and the continued expansion of
research and development activities.
Although Fusion believes that the proceeds from its initial public offering,
augmented by cash generated by sales of the RapiSeal product, will be sufficient
to meet the Company's operating and capital requirements at least through 1997,
there can be no assurance that the Company will not require additional financing
within this time frame. Fusion's future liquidity and capital requirements will
depend on numerous factors, including market acceptance of RapiSeal, the receipt
of and the time required to obtain regulatory clearances and approvals for other
products or other uses of RapiSeal, the resources the Company devotes to
developing, manufacturing and marketing its products and other factors. There
can be no assurance that additional financing, if required, will be available on
satisfactory terms or at all. Any additional equity financing may be dilutive
to stockholders, and debt financing, if available, may include restrictive
covenants.
10
<PAGE>
ADDITIONAL FACTORS THAT MIGHT AFFECT FUTURE RESULTS
Since the second quarter of 1996 was Fusion's first quarter as a public company,
included here are certain risk factors as updated from the Company's Prospectus
dated June 7, 1996. The following factors represent some of the current
challenges to the Company which create risk and uncertainty. Failure to
adequately overcome any of the following changes, either singly or in
combination, could have a materially adverse effect on the Company's results of
operations, business, or financial position.
NEAR-TERM DEPENDENCE UPON RAPISEAL. In June 1996, the Company received
clearance from the FDA to market the RapiSeal Patch for lung surgery, including
lung cancer and lung volume reduction ("LVR") surgeries. The Company
anticipates that, for the foreseeable future, it will be substantially dependent
on the successful commercialization of this product. The Company would
experience a material adverse effect on its business, financial condition and
results of operations if the RapiSeal Patch is not successfully commercialized.
RISKS ASSOCIATED WITH LVR. To date, a statistically significant body of
clinical data does not currently exist from which to draw final conclusions
concerning the efficacy and long-term outcomes associated with the LVR
procedure. Independent studies of patients who have undergone the LVR procedure
reported that patients experienced reduced shortness of breath, improved
exercise tolerance and improved quality of life. However, the number of
patients who have undergone the LVR procedure in the United States and for whom
a clinically acceptable post-operative evaluation period has elapsed is
relatively small. As a result, there can be no assurance concerning the safety,
effectiveness and long-term outcomes associated with the LVR procedure. The
Health Care Financing Administration ("HCFA") has suspended payment for, and is
reviewing the appropriate reimbursement, if any, for LVR. In connection with
such review, HCFA has announced its intention to collaborate with the National
Institutes of Health ("NIH") on a large-scale, multi-center clinical trial to be
conducted by the NIH to evaluate the long-term benefits of the LVR procedure for
patients with late-stage emphysema. There can be no assurance as to when this
trial will be completed or whether the results of the trial will demonstrate the
safety or long-term efficacy of LVR. It is not known when HCFA will make a
final determination as to reimbursement for LVR, and it may be several years
before a determination is made. There can be no assurance that reimbursement
for LVR will be reinstated or, if reinstated, that HCFA will not impose
limitations on reimbursement. The Company believes a significant portion of the
candidates for the LVR procedure could be affected by HCFA's determination with
respect to reimbursement. Failure to reinstate reimbursement or the imposition
of limitations on reimbursement would have a material adverse effect on the
Company's business prospects. If reimbursement is not available for LVR
procedures, if the LVR procedure is not widely adopted or if RapiSeal cannot be
used successfully in LVR procedures, it would have a material adverse effect on
the Company's business, financial condition and results of operations.
11
<PAGE>
UNCERTAINTY OF MARKET ACCEPTANCE. The Company's success will be dependent upon
the medical community's active sponsorship and ultimate acceptance of the
RapiSeal Patch and the Fusion liquids. The Company is unable to predict how
quickly, if at all, its products will be accepted by the medical community or,
if accepted, the number of products that will be used. Use of the Company's
products may require changes in surgical practices, and there can be no
assurance that surgeons will be willing to make such changes. To achieve market
acceptance of its products, the Company must also demonstrate that is products
offer clinically significant advantages. The Company conducted its multi-center
clinical trial of RapiSeal in support of its 510k application in only 26
patients, which may not provide sufficient data to demonstrate clinically
significant advantages, if any, to surgeons. Moreover, this limited experience
with patients may initially make it difficult for the Company to ascertain those
factors most relevant to the surgeon's decision whether to use the Company's
products. Air leaks associated with lung resections require the insertion of
chest tubes in the patient. While the Company believes that the RapiSeal patch
may reduce hospital costs by shortening the duration of patient dependence on
chest tubes, RapiSeal will not eliminate the need for chest tubes. In addition,
air leaks may occur in the patient after the lung resection procedure, and
RapiSeal cannot address such leaks. Failure of the RapiSeal Patch and the
Fusion liquids to achieve significant clinical adoption would have a material
adverse effect on the Company's business, financial condition and results of
operations.
DEPENDENCE ON PATENTS AND PROPRIETARY TECHNOLOGY. The Company's ability to
compete effectively will depend in part on its ability to develop and maintain
the proprietary aspects of its technology. The Company owns one issued United
States patent and has eight pending United States patent applications related to
its patch technology and has one pending United States patent application
relating to its liquid formulations. There can be no assurance that the pending
patent applications will issue, or that the issued patent or any patents that
may issue in the future will provide any competitive advantages for the
Company's products or that they will not be successfully challenged, invalidated
or circumvented in the future. Moreover, litigation or interference proceedings
associated with enforcing or defending patents or trade secrets is expensive and
can divert the efforts of technical and management personnel. The Company has
filed certain corresponding patent applications in certain foreign countries and
may file additional patent applications outside the United States. The Company
believes that obtaining foreign patents may be more difficult than obtaining
domestic patents because of differences in patent laws and believes the
protection provided by foreign patents, if obtained, and any other foreign
intellectual property protection may be weaker than that provided domestically.
In addition, there can be no assurance that competitors will not seek to apply
for and obtain patents that will prevent, limit or interfere with the Company's
ability to make, use and sell its products. A number of medical device and
other companies, universities and research institutions have filed patent
applications or have issued patents relating to the compositions and methods for
wound closure. In addition, the medical device industry has been characterized
by extensive litigation regarding patents and other intellectual property
rights, and many companies in the medical device industry have employed
intellectual property litigation to gain a competitive advantage. There can be
no assurance that suits will not be brought against the Company in the future
challenging its patent rights or claiming infringement on patents held by third
parties.
12
<PAGE>
An adverse determination in litigation or interference proceedings to which the
Company may become a party could subject the Company to significant liabilities
to third parties, require disputed rights to be licensed from third parties or
require the Company to cease using such technology. Although patent and
intellectual property disputes in the medical device area have often been
settled through licensing or similar arrangements, costs associated with such
arrangements may be substantial and could include ongoing royalties.
Furthermore, there can be no assurance that necessary licenses would be
available to the Company on satisfactory terms, if at all. Adverse
determinations in a judicial or administrative proceeding or failure to obtain
necessary licenses on satisfactory terms, if at all, could prevent the Company
from manufacturing and selling its products, which would have a material adverse
effect on the Company's business, financial condition and results of operation.
UNCERTAINTY RELATING TO THIRD-PARTY REIMBURSEMENT. In the United States, health
care providers that purchase medical devices, such as the RapiSeal Patch and the
Fusion liquids, generally rely on third-party payors, principally federal
Medicare, state Medicaid and private health insurance plans to reimburse all or
part of the cost of the procedure in which the medical device is being used.
The Company's success will be dependent, in part, upon its ability to obtain
satisfactory third-party reimbursement from health care payors for surgical
procedures that may use RapiSeal and the Fusion liquids. HCFA has suspended
payment for, and is reviewing the appropriate reimbursement, if any, for LVR.
See "Risks Associated with LVR." The Company anticipates that in a prospective
payment system, such as the Diagnostic Related group system utilized by
Medicare, and in many managed care systems used by private health care payors,
the cost of the Company's additional reimbursement for the Company's products.
Regardless of the type of reimbursement system, the Company believes that
surgeon advocacy of the RapiSeal Patch and the Fusion liquids will be required
to obtain reimbursement. There can be no assurance that any reimbursement will
be sufficient to assure profitability. Failure by physicians, hospitals and
other users of the Company's products to obtain sufficient reimbursement from
health care payors for procedures in which the Company's products are used or
adverse changes in governmental and private third-party payors' policies toward
reimbursement for such procedures would have a material adverse effect on the
Company's business, financial condition and results of operations.
If the Company obtains the necessary foreign regulatory approvals, market
acceptance of the Company's products in international markets would be
dependent, in part, upon the availability of reimbursement within prevailing
health care payment systems for the Company's products or the procedures in
which the products are used. Reimbursement and health care payment systems in
international markets vary significantly by country, and include both government
sponsored health care and private insurance. The Company intends to seek
international reimbursement approvals. There can be no assurance that any such
approvals will be obtained in a timely manner, if at all, and failure to receive
international reimbursement approvals could have a material adverse effect on
market acceptance of the Company's products in the international markets in
which such approvals are sought.
13
<PAGE>
LIMITED MANUFACTURING EXPERIENCE; SCALE-UP RISK. The Company received a
manufacturing license from the CDHS and commenced shipment of RapiSeal for use
in its clinical trial in November 1995. However, the Company has no experience
manufacturing RapiSeal or any other products in the volumes necessary to achieve
significant commercial sales, and there can be no assurance that reliable, high-
volume manufacturing can be achieved at a commercially reasonable cost. The
Company may encounter difficulties in scaling up production, including problems
involving production yield, quality control and assurance, and shortages of
qualified personnel. The Company's manufacturing facilities will be subject to
GMP regulations, international quality standards and other regulatory
requirements. Difficulties encountered by the Company in manufacturing scale-up
or failure by the Company to implement and maintain its facilities in accordance
with GMP regulations, international quality standards or other regulatory
requirements would entail a delay or termination of production, which could have
a material adverse effect on the Company's business, financial condition and
results of operations. Any manufacturing difficulties involving production
yields, quality control and assurance, supplies of components or shortages of
qualified personnel encountered by the Company could also have a material
adverse effect on its business, financial condition and results of operations.
There can be no assurance that the Company will be able to manufacture and
supply sufficient quantities of products to meet product requirements for United
States and international clinical trials and commercial sales.
DEPENDENCE ON SINGLE SOURCE SUPPLIERS. The Company acquires several components
of its products from single source suppliers. Generally, the Company believes
that there are alternative suppliers of identical materials available, and that
the company could substitute suppliers without any regulatory consequences from
this substitution. However, there can be no assurance that such substitute
suppliers will be available, that such substitutions could be made in a timely
manner or on commercially reasonable terms. In the case of collagen, there are
only a few suppliers that could meet the Company's requirements. The Company
currently relies exclusively on one supplier of collagen, Kensey Nash
Corporation, and expects to continue to do so through at least the end of 1996.
Fusion and this supplier have entered into a long-term supply agreement.
However, if this supplier were unable to meet the Company's demands there can be
no assurance that the Company would be able to secure alternative sources of
collagen to produce sufficient product to meet its customers' needs. A
transition to alternate arrangements could involve additional costs and delays
in production. There can be no assurance that such transition would be
successful in entering into alternate arrangements on commercially reasonable
terms if at all. Sterilization of the Company's product is out-sourced to a
single vendor. While the Company believes alternative sterilization vendors are
readily available, there can be no assurance that such vendors would be
available or that such a transition could be made in a timely, cost-effective
manner. In the event the Company is not able to acquire sufficient supplies
from its current sources or to locate alternate sources on commercially
reasonable terms, the Company may not be able to manufacture its products on a
timely and cost-competitive basis, or at all, which would have a material
adverse effect on the Company's business, financial condition and results of
operations.
14
<PAGE>
LIMITED SALES, MARKETING AND DISTRIBUTION EXPERIENCE. The Company has no sales
and only has a small sales and marketing organization. The Company intends to
sell the RapiSeal Patch for use in lung surgeries in the United States through a
direct sales force. In other markets, the Company intends to sell its products
primarily through agreements with distributors or by means of collaborative
arrangements, although the Company has not entered into any such agreements or
arrangements to date. There can be no assurance that the Company will be able
to build a direct sales force or marketing organization, that establishing a
direct sales force or marketing organization will be cost effective, or that the
Company's sales and marketing efforts will be successful. There can be no
assurance that the Company will be able to enter into agreements with
distributors or collaborative arrangements on a timely basis or at all, or that
such distributors or collaborators will devote adequate resources to selling the
Company's products. In addition, to the extent that the Company enters into
distribution agreements or collaborative arrangements for the sale of its
products, the Company will be dependent upon the efforts of third parties, and
there can be no assurance that such efforts will be successful. Failure to
build an effective sales and marketing organization or to establish effective
distribution or collaborative arrangements would have a material adverse effect
on the Company's business, financial condition and results of operations.
COMPETITION; UNCERTAINTY OF TECHNOLOGICAL CHANGE. The wound closure market is
highly competitive, and the Company expects competition in its targeted markets
to intensify. The Company expects to encounter direct competition from
companies offering pericardial strips and fibrin glues. In addition, several
large companies targeting the wound closure market may be developing products
that would compete with the Company's products. The Company is also aware of
several potential competitors that are working on biological tissue sealants and
products to prevent surgical adhesions. Many of the competitors or potential
competitors have greater name recognition, broader product lines, greater
distribution capabilities, substantially greater capital resources and larger
marketing, research and development staffs and facilities than the Company.
Broad product lines may give the Company's competitors or potential competitors
the ability to negotiate exclusive, long-term medical device supply contracts
and, consequently, the ability to offer comprehensive pricing for their
products, including those that may compete with the Company's products. By
offering a broader product line, these potential competitors may also have a
significant advantage in marketing competing products to group purchasing
organizations and other managed care organizations that increasingly seek to
reduce costs through centralization of purchasing functions. There can be no
assurance that the Company will be able to effectively compete against such
competitors or potential competitors. In addition, there can be no assurance
that the Company's current competitors or other companies will not succeed in
developing technologies and products that are more effective than the Company's
or that would render the Company's technology or products obsolete or
uncompetitive.
PRODUCT LIABILITY RISK; LIMITED INSURANCE COVERAGE. The medical device industry
has historically been litigious, and the Company faces an inherent business risk
of financial exposure to product liability claims in the event that the use of
its products results in personal injury. Although the Company has not
experienced any claims to date, there can be no assurance that the Company will
not experience losses due to product liability claims in the future. The
Company currently maintains liability insurance with coverage limits of $3.0
million on a claims-made basis. There can be no assurance that the coverage
limits of the Company's insurance policies will be adequate. Such insurance is
expensive, difficult to obtain and may not be available in the future as
acceptable terms, or at all. Any claims against the Company regardless of their
merit or eventual outcome, could have a material adverse impact upon the
Company's business, financial condition and results of operations.
15
<PAGE>
PART II: OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On May 30, 1996, a complaint was filed against the Company, two of its
founders, Dr. Philip N. Sawyer and Philip M. Sawyer, and Interface
Biomedical Laboratories Corporation in California Superior Court by an
individual stockholder and former marketing consultant of the Company.
In the complaint, this individual purports to allege contract and tort
causes of action based on the allegation that in 1993, pursuant to an
agreement with Dr. Sawyer and alleged oral representations by the
Sawyers, he was promised twenty percent (20%) of a company to be
formed to exploit certain technology developed by Dr. Sawyer or of the
consideration received for such technology. The suit seeks general,
special and punitive damages in unspecified amounts as well as
rescission of a stock purchase agreement and a consulting agreement
entered into by the Company and the individual pursuant to which the
individual purchased shares of Common Stock of the Company. The stock
purchase agreement states, which the individual alleges was
fraudulently induced, that the individual purchased such shares in
satisfaction of the Company's obligations to such individual with
regard to the issuance or sale of securities (including satisfaction
of any obligations of the Company or Dr. Sawyer pursuant to the
agreement with Dr. Sawyer). Based upon the facts known to date, the
Company and the founders believe that the claims are without merit and
intend to vigorously contest this suit. There can be no assurance,
however, that the Company will prevail in such litigation or that an
adverse outcome would not result in a material adverse effect on the
Company's business, financial condition and results of operations.
ITEM 2. CHANGES IN SECURITIES
In May 1996 the Company effected a 1-for-2.414 reverse split of the
Company's common stock and a corresponding change in the preferred
stock conversion ratios. All shares of outstanding Preferred Stock
were converted into shares of Common Stock upon completion of the
Company's initial public offering. Following the offer, the Company
filed the Restated Certificate of Incorporation which eliminated the
existing convertible preferred stock and authorized preferred stock of
5,000,000, $0.001 par value, and increased the shares of common stock
authorized to 50,000,000.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
16
<PAGE>
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company solicited written consents as of April 30, 1996 from all
of the Company's stockholders. At the time of the consents, the
Company was not subject to Regulation 14A under the Securities and
Exchange Act of 1934, as amended.
Certain amendments to the charter documents of the Company including
an amendment of the Certificate of Incorporation to provide for a 1-
for-2.414 reverse stock split of the Company's outstanding capital
stock were approved with 9,369,967 votes in favor, 0 votes against and
2,077,073 abstentions.
The Company's 1996 Employee Stock Purchase Plan, under which 350,000
shares of the Company's Common Stock (after giving effect to the 1-
for-2.414 reverse stock split) are reserved for issuance, was approved
with 9,369,967 votes in favor, 0 votes against and 2,077,073
abstentions.
The Company's 1996 Director Option Plan, under which 150,000 shares
of the Company's Common Stock (after giving effect to the 1-for-2.414
reverse stock split) are reserved for issuance, was approved with
9,369,967 votes in favor, 0 votes against and 2,077,073 abstentions.
The Company's 1993 Incentive Stock Plan was amended and the number of
shares of Common Stock reserved for issuance under the plan was
increased by 795,123 shares of the Company's Common Stock (after
giving effect to the 1-for-2.414 reverse stock split), with 9,369,967
votes in favor, 0 votes against and 2,077,073 abstentions.
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
Exhibit 11.1 Computation of net loss per share
17
<PAGE>
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto.
FUSION MEDICAL TECHNOLOGIES, INC.
Date: August 12, 1996 By: /s/ Philip Sawyer
------------------------------
Philip Sawyer
President, Chief Executive Officer
Date: August 12, 1996 By: /s/ Richard Spalding
------------------------------
Richard Spalding
Chief Financial Officer (Principal
Financial and Accounting Officer)
18
<PAGE>
EXHIBIT 11.1
FUSION MEDICAL TECHNOLOGIES, INC.
(A COMPANY IN THE DEVELOPMENT STAGE)
COMPUTATION OF NET LOSS PER SHARE (1)
<TABLE>
<CAPTION>
Cumulative Period
from October 14,
Three Months Six Months 1992 (date of
Ended June 30, Ended June 30, inception) to
1996 1995 1996 1995 June 30, 1996
--------------------------- --------------------------- -----------------
(unaudited) (unaudited) (unaudited)
<S> <C> <C> <C> <C> <C>
Weighted average common shares
outstanding for the period 2,871,795 1,519,576 2,195,685 1,519,576 1,178,000
Common equivalent shares
pursuant to Staff Accounting
Bulletin No. 83 423,061 423,061 423,061 423,061 423,061
Shares used in computing per
share amounts 3,294,856 1,942,637 2,618,746 1,942,637 1,601,061
Net loss (1,738,200) (793,000) (3,297,400) (1,151,800) (7,934,600)
Net loss per share $ (0.53) $ (0.41) $ (1.26) $ (0.59) $ (4.96)
</TABLE>
(1) There is no difference between primary and fully diluted loss per share.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<CIK> 0001013466
<NAME> NONAME
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> JUN-30-1996
<CASH> 25,362
<SECURITIES> 2,481
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 27,933
<PP&E> 1,019
<DEPRECIATION> 222
<TOTAL-ASSETS> 28,762
<CURRENT-LIABILITIES> 1,475
<BONDS> 0
0
0
<COMMON> 7
<OTHER-SE> 27,157
<TOTAL-LIABILITY-AND-EQUITY> 28,762
<SALES> 0
<TOTAL-REVENUES> 0
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 3,460
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (163)
<INCOME-PRETAX> (3,297)
<INCOME-TAX> 0
<INCOME-CONTINUING> (3,297)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,297)
<EPS-PRIMARY> (1.26)
<EPS-DILUTED> (1.26)
</TABLE>
