<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1997
COMMISSION FILE NUMBER: 0-28460
FUSION MEDICAL TECHNOLOGIES, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 94-3177221
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(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
1804 N. SHORELINE BOULEVARD
MOUNTAIN VIEW, CA 94043
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
(415) 903-4000 UNTIL SEPTEMBER 1, 1997 (650) 903-4000 THEREAFTER
(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) ( X ) YES ( ) NO
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THE NUMBER OF OUTSTANDING SHARES OF THE REGISTRANT'S COMMON STOCK, $.001 PAR
VALUE, WAS 7,063,000 AS OF JUNE 30, 1997.
- -----------------------------------------------------------------------------
FloSeal Matrix-TM-, FloSeal-TM-RapiSeal-TM-, SilverBullet-TM-, Fusion
Medical Technologies-TM- and Fusion-TM and the stylized Fusion logo are
trademarks of the Company.
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FUSION MEDICAL TECHNOLOGIES, INC.
INDEX
PART I: FINANCIAL INFORMATION
Item 1. Condensed financial statements - unaudited
Condensed balance sheets - June 30, 1997 and December 31, 1996
Condensed statements of operations - three months and six months
ended June 30, 1997 and 1996
Condensed statements of cash flows - six months ended June 30, 1997
and 1996
Notes to condensed financial statements
Item 2. Management's discussion and analysis of financial condition and
results of operations for the three months and six months ended June
1997 and 1996
PART II: OTHER INFORMATION
Item 1. Legal Proceedings
Item 2. Changes in Securities
Item 3. Defaults Upon Senior Securities
Item 4. Submission of Matters to a Vote of Security Holders
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
Signatures
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FUSION MEDICAL TECHNOLOGIES, INC.
(a company in the development stage)
CONDENSED BALANCE SHEETS
(in thousands)
<TABLE>
<CAPTION>
June 30, December 31,
1997 1996
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(unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 12,077 $ 10,778
Available-for-sale securities 5,107 11,145
Other assets 251 414
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Total current assets 17,435 22,337
Available-for-sale securities 1,562 1,562
Property and equipment, net 1,230 1,121
Other assets 44 44
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Total assets $ 20,271 $ 25,063
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LIABILITIES
Current liabilities $ 941 $ 1,265
Long-term obligations - 56
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Total liabilities 941 1,321
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STOCKHOLDERS' EQUITY
Common stock and other stockholders' equity 35,497 35,335
Deficit accumulated during the development stage (16,167) (11,593)
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Total stockholders' equity 19,330 23,742
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Total liabilities and stockholders' equity $ 20,271 $ 25,063
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</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONDENSED FINANCIAL
STATEMENTS.
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FUSION MEDICAL TECHNOLOGIES, INC.
(a company in the development stage)
CONDENSED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
--------------------------- -------------------------
1997 1996 1997 1996
----------- ------------ ------------- -----------
<S> <C> <C> <C> <C>
Net sales $ 28 - $ 78 -
Cost of sales and start-up manufacturing
costs 224 - 382 -
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Gross profit (loss) (196) - (304) -
----------- ------------ ------------- -----------
Operating expenses:
Research and development 1,342 $ 1,215 2,583 $ 2,278
Marketing, general and administrative 1,242 628 2,286 1,182
----------- ------------ ------------ ----------
Total operating expenses 2,584 1,843 4,869 3,460
----------- ------------ ------------ ----------
Loss from operations (2,780) (1,843) (5,173) (3,460)
Interest income 303 105 630 163
Other expense (7) - (31) -
----------- ------------ ------------ ----------
Net loss $ (2,484) $ (1,738) $ (4,574) $ (3,297)
----------- ------------ ------------ ----------
----------- ------------ ------------ ----------
Net loss per share $ (0.35) $ (0.53) $ (0.65) $ (0.61)
----------- ------------ ------------ ----------
----------- ------------ ------------ ----------
Shares used in computing net loss per
share 7,063 3,295 7,044 5,373
----------- ------------ ------------ ----------
----------- ------------ ------------ ----------
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONDENSED FINANCIAL STATEMENTS.
</TABLE>
<PAGE>
FUSION MEDICAL TECHNOLOGIES, INC.
(a company in the development stage)
STATEMENTS OF CASH FLOWS
(in thousands)
(UNAUDITED)
<TABLE>
<CAPTION>
Six Months Ended June 30,
-------------------------
1997 1996
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<S> <C> <C>
Cash flows from operating activities:
Net loss $ (4,574) $ (3,297)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 216 100
Amortization of deferred compensation 189 189
Accretion of Available-for-sale securities (78)
Changes in assets and liabilities:
Accounts receivable (14)
Inventories 25
Prepaids and other current assets 151
Accounts payable (474)
Accrued expenses 173 781
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Net cash used in operating activities (4,385) (2,227)
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Cash flows from investing activities:
Acquisition of property and equipment (326) (286)
Purchases of short-term investments (2,557) (2,481)
Sales of short-term investments 8,595 1,536
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Net cash provided by investing activities 5,712 (1,231)
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Cash flows from financing activities:
Proceeds from issuance of common stock 51 24,504
Proceeds from notes payable (1)
Repayment of notes payable (78) (66)
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Net cash provided (used) by financing activities (28) 24,438
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Net increase in cash and cash equivalents 1,299 20,980
Cash and cash equivalents, beginning of period 10,778 4,382
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Cash and cash equivalents, end of period $ 12,077 $ 25,362
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THE ACCOMPANYING NOTES ARE AN ITEGRAL PART OF THESE CONDENSED FINANCIAL
STATEMENTS.
</TABLE>
<PAGE>
FUSION MEDICAL TECHNOLOGIES, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
JUNE 30, 1997
(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 sheets as of June 30, 1997, and the statements
of operations for the three month periods ended June 30, 1997 and 1996 and six
months ended June 30, 1997 and 1996, and the statement of cash flows for the
six month periods ended June 30, 1997 and 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 as contained in the Company's
Annual Report on Form 10-K for the year ended December 31, 1996 and its
Quarterly Report on Form 10-Q for the quarter ended March 31, 1997.
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 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. CASH AND CASH EQUIVALENTS AND AVAILABLE-FOR-SALE SECURITIES
The Company classifies all highly liquid investments purchased with an
original maturity of three months or less as cash equivalents. Cash and cash
equivalents include money market funds and various deposit accounts.
The Company classifies both short term and long term investments as
available-for-sale. Such investments are recorded at fair market 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
interest income. The cost of securities sold is based upon the specified
identification method.
4. INVENTORY
As of December 31, 1996, the Company began capitalizing its inventories of
raw materials, work-in-process materials and finished goods related to the
RapiSeal. Inventory is recorded at the lesser of cost or market using the
LIFO method. For purposes of presentation, those materials and related
production items consumed by the Research and Development process have been
expensed and are thus excluded from the Balance Sheet.
5. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
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In February 1997, the Financial Accounting Standards Board (FASB) issued
Statement No. 128 ("SFAS 128"), "Earnings per Share", which specifies the
computation, presentation and disclosure requirements for income per share of
common stock. SFAS 128 will become effective for the Company's year ending
December 31, 1997. The Company believes that the adoption of SFAS 128 will
have no material impact on the Company's financial statements and results of
operations.
In June 1997, FASB issued Statement No. 130 ("SFAS 130"), "Reporting
Comprehensive Income", which establishes standards for the reporting and
display of comprehensive income and its components in a full set of general
purpose financial statements. Comprehensive income is defined as the change
in equity of a business enterprise during a period from transactions and
other events and circumstances from non-owner sources. The Company believes
that the adoption of SFAS 130 will have no material impact on the Company's
financial statements and results of operations for the foreseeable future.
The Company has not determined if SFAS 13 would be applicable in the current
year, if at all, or if at any time in the forseeable future.
In June 1997, FASB issued Statement No. 131 ("SFAS 131"), "Disclosure about
Segments of an Enterprise and Related Information", which requires
publicly-held companies to report financial and other information about key
revenue producing statements of the entity provided such information is
available and is utilized by the chief operation decision maker. Specific
information to be reported for individual segments includes profit or loss,
certain revenue and expense items and total assets. SFAS No. 131 may be
effective for the Company in 1998 and the impact of adoption, if any, has not
been determined.
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 months ended June 30, 1997, should be read in
conjunction with the Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 1996 under the heading "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Factors Affecting
Operating Results and Market Price of Common Stock". 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
Fusion Medical Technologies, Inc. ("Fusion" or the "Company") was
incorporated in Delaware in 1993. The Company is developing proprietary wound
closure products which the Company believes may have broad application in a
variety of surgical procedures, including lung resections for cancer and
emphysema, procedures requiring anastomoses, and minimally invasive
surgeries. The Company's RapiSeal bioresorbable patch and FloSeal-TM- and
FloSeal Matrix-TM- products are designed to effectively treat surgical wounds
in a wide variety of organs and blood vessels by rapidly forming flexible
seals across the targeted tissue. The Company believes that its wound closure
products have the potential to reduce post-operative complications associated
with air and fluid leaks and bleeding and consequently reduce hospital costs.
In June 1996, the Company received 510(k) pre-market clearance from the
United States Food and Drug Administration ("FDA") to market its RapiSeal
patch in connection with lung surgery. In February 1997, the Company also
received 510(k) pre-market clearance to sell its RapiSeal patch for the
treatment of bleeding which occurs in solid organ surgeries, such as liver,
spleen and kidney surgeries. This product is designed to
<PAGE>
effectively treat surgical wounds by creating barriers for blood, fluid and
air across the targeted tissue. The Company believes that in lung surgeries,
its RapiSeal patch may reduce post-operative complications associated with
air and fluid leaks, thus reducing hospital costs.
In May 1997, the Company received 510(k) pre-market clearance from the FDA to
market in the United States the Company's SilverBullet-TM- electrode.
The SilverBullet allows surgeons to utilize standard electrosurgical
equipment readily available in the operating room as an energy source for the
application of Fusion's RapiSeal patch. The Company commenced selling the
SilverBullet electrode in June 1997.
To expand its product offerings, the Company is developing collagen-based
flowable-gel products (FloSeal-TM- and FloSeal Matrix-TM-) to enable surgeons
to quickly and easily stop bleeding occurring in connection with a wide
variety of surgeries, such as those performed by cardiac, vascular and
general surgeons. Pre-clinical tests indicate these products may be effective
in controlling active bleeding. The first version of the flowable-gel product
will be targeted for open surgery, and work has begun on a device appropriate
for use in minimally invasive surgery. The Company expects to begin clinical
evaluation of this product in open surgical procedures in the fourth quarter
1997.
Future revenues, if any, and results of operations may fluctuate
significantly from quarter to quarter and will depend upon, among other
factors; 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.
RESULTS OF OPERATIONS
Three months and six months ended June 30, 1997 and 1996
REVENUES
The Company recorded revenues from product sales of $28,000 for the quarter
ended June 30, 1997 and $78,000 in the first six months of 1997. No revenues
were recorded for the quarter ended June 30, 1996 because the Company had not
obtained clearance to market its first product until October 1996. Gross
margins remained negative as a result of start-up manufacturing costs,
primarily due to low unit sales volume.
RESEARCH AND DEVELOPMENT
Research and development expenses increased 10% to $1,342,000 in the three
months ended June 30, 1997 compared to $1,215,000 in the three months ended
June 30, 1996, and by 13% to $2,583,000 in the first six months of 1997
compared to $2,287,000 in the first six months of 1996. The increase for the
second quarter of 1997 was attributable to increased numbers of employees and
related use of supplies, consultants and laboratory research as the Company
substantially increased its activities. Expenses for the second quarter ended
June 30, 1997 included costs associated with the Company's FloSeal/FloSeal
Matrix products.
MARKETING, GENERAL AND ADMINISTRATIVE
Marketing, general and administrative expenses increased 98% to $1,242,000 in
the three months ended June 30, 1997, compared to $628,000 for the three
months ended June 30, 1996, and by 93% to $2,286,000 in the first six months
of 1997 from $1,182,000 in the first six months of 1996. The increase in the
second quarter ended June 30, 1997, compared to the year earlier period, were
primarily the result of increases in sales and administrative personnel,
expanded marketing activities and occupancy related costs.
<PAGE>
INTEREST INCOME
Net interest income increased 189% to $303,000 for the three months ended
June 30, 1997 compared to $105,000 for the three months ended June 30, 1996,
and by 287% to $630,000 in the first six months of 1997 from $163,000 in the
first six months of 1996. The increases were attributable to the Company's
initial public offering in June 1996, which increased its average cash
balance.
NET LOSS
As a result of the items discussed above, net loss was $2,484,000 for the
three months ended June 30, 1997 and $4,574,000 for the six months ended June
30, 1997. This compares to a net loss of $1,738,000 for the three months
ended June 30, 1996 and $3,297,000 for the six months ended June 30, 1996.
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 1997, the Company's cash, cash equivalents and available-for-sale
securities (classified as both long term and short term) were $18,746,000
compared to $27,843,000 at June 30, 1996. On June 7, 1996, the Company
completed its initial public offering (IPO) 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.
For the six months ended June 30, 1997 and 1996, Fusion's operations consumed
cash of $4,385,000 and $2,227,000, respectively. The increase in cash
consumed by operations was due primarily to increased marketing activities
and associated personnel costs, start-up manufacturing activities, and
funding increased levels of research and development of RapiSeal and the
FloSeal and FloSeal Matrix. The Company expects the increased use of cash
will continue through the end of 1997 as it increases its operations to
reflect the sales and marketing of RapiSeal and the continued expansion of
research and development for the FloSeal and FloSeal Matrix and other Fusion
products.
Although Fusion believes that the proceeds from its IPO, 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 1998, 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 and
SilverBullet, the receipt of and the time required to obtain regulatory
clearances and approvals for other uses of RapiSeal and the FloSeal Matrix,
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.
ADDITIONAL FACTORS THAT MIGHT AFFECT FUTURE RESULTS
TECHNOLOGY AND DEVELOPMENT RISK. To be successful the Company's products
under development must act favorably in humans. The physiological processes
and effects that these products seek to provide are very difficult to achieve
and are dependent upon may independent and interacting variables which are
not fully understood. The products must be effective in treating the
substantial variations involved from patient to patient, as well as with
regard to the differing techniques and procedures employed by surgeons. The
technologies related to these potential products are evolving and are not
fully developed. As a result, the predictability and success of the technology
design process with respect to these products is highly uncertain. As a
consequence of the above factors and many additional factors, the time and
expense required to design and develop a product is highly uncertain and
cannot be predicted reliably. With respect to any particular product under
development, desired physiological effects or product specifications may not
be fully achieved, if at all. Even if the products are successfully developed
to achieve desired biological effects, there can be no assurance
<PAGE>
that successful clinical effects will be achieved, that successful regulatory
clearances will be secured or that the products will become economically
viable. If the Company were not successful in developing its planned products,
its business, financial condition and results of operations would be materially
adversely affected.
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, synthetic strips, and synthetic 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. 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.
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 has pursued its own
patents covering its technologies in various forms. In addition, the Company
has licensed technology to further broaden its patent portfolio. The Company
owns one and has licensed two issued United States patents, and has 18
pending United States patent applications related to its patch technology and
liquid formulations. The Company has also licensed one United States patent
related to the manufacture of its patch technology. 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 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 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.
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
<PAGE>
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 operations.
REGULATORY UNCERTAINTY. The regulatory processes for the approval of medical
devices, such as the Company's products, are highly uncertain. The time and
expense required to obtain approvals can vary widely. In certain cases, an
approval may not be ever gained. In particular, the regulatory process in the
United States is arduous and demanding. A major factor in the time and
expense required for a device approval to market is the type of submission
required, 510(k) or PMA. While the Company generally seeks the faster 510(k)
regulatory pathway for its products whenever it believes this pathway is
appropriate, the decision as to the pathway is essentially within the sole
discretion of the FDA and there can be no assurance that a 510(k) pathway
will be obtained. A PMA process is significantly longer and more expensive.
Likewise, the FDA sets the requirements for the size and structure of
clinical trials after input from the Company. There can be assurance that the
clinical requirements of the FDA for submissions will be favorable to the
Company or within its expense and time estimates or result in an economically
viable program. The clinical or other requirements can change during the
process resulting in new requirements or standards which materially increase
the time and expense of the regulatory process. The FDA can require
additional clinical trials or tests and requirements after the initial
submissions. The time required for review and approval at the FDA can vary
widely depending on the quality of the submittal and many other factors. Many
of the factors affecting the time and expense required within the regulatory
process are outside the control of the Company. Longer and more expensive
clinical trials can have a material adverse effect on the financial results
and operations of the Company. The regulatory processes outside the United
States also vary widely in the time and expense required for approval and may
result in no approval at all. In summary, there can be no assurance that
approvals will ever be granted for any of the Company's products currently in
the development process or that the time and expense of the regulatory
process can be reliably estimated or will result in an economically viable
investment.
UNCERTAINTY OF MARKET ACCEPTANCE. The Company's success will depend upon the
medical community's active sponsorship and ultimate acceptance of the
RapiSeal patch, FloSeal Matrix and other products. The Company is unable to
predict how quickly, if at all, the medical community will accept its
products or, if accepted, the number of products that will be used. Use of
the Company's products will 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 its 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, the FloSeal Matrix or other Fusion
products to achieve significant clinical adoption would have a material
adverse effect on the Company's business, financial condition and results of
operations.
UNCERTAINTY RELATING TO THIRD-PARTY REIMBURSEMENT. In the United States,
health care providers that purchase medical devices, such as the RapiSeal
patch, the FloSeal Matrix or other Fusion products, 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 used. The Company's success will be
dependent, in part, upon its ability to obtain satisfactory third-party
reimbursement
<PAGE>
from health care payors for surgical procedures that may use RapiSeal, the
FloSeal Matrix or other Fusion products. HCFA has suspended payment for, and
is reviewing the appropriate reimbursement, if any, for the Lung Volume
Reduction ("LVR") procedure. 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 products will
be incorporated into the overall cost of the procedures and that there will
not be separate reimbursement for the Company's products. Regardless of the
type of reimbursement system, the Company believes that surgeon advocacy of
the RapiSeal patch, the FloSeal Matrix or other Fusion products 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.
RISKS ASSOCIATED WITH LVR. The Company believes that the success of the
RapiSeal is dependent to a large degree on its successful use in conjunction
with a lung volume reduction procedure known as LVR. LVR is a procedure
wherein the surgeon removes the most diseased lung tissue, using a stapler
which simultaneously cuts the targeted tissue and staples the remaining
tissues to close the surgical wound. A statistically significant body of
clinical data does not exist from which to draw final conclusions concerning
the effectiveness 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, 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 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.
<PAGE>
LIMITED SALES, MARKETING AND DISTRIBUTION EXPERIENCE. The Company has had
limited sales to date 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 agreement with distributors or
by means of collaborative arrangements, and the Company has entered into a
limited number of 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 additional 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 selling 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.
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 on 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.
LIMITED MANUFACTURING EXPERIENCE; SCALE-UP RISK. The Company received a
manufacturing license from the California Department of Health Services
(CDHS) and commenced shipment of RapiSeal for use in its clinical trial in
November 1995. The Company commenced selling its second product, the
SilverBullet, in June 1997. In the quarter ended June 30, 1997, the Company
generated product revenues of approximately $28,000. However, the Company has
limited experience manufacturing RapiSeal and the SilverBullet, and no
experience manufacturing 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 with the scale-up of manufacturing 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 assurances, 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 purchases several
components of its products from single source suppliers. Generally, the
Company believes that there are alternative suppliers of equivalent materials
available, and that the Company could substitute suppliers with minimal
regulatory consequences from this substitution. However, there can be no
assurance that such substitute suppliers will be
<PAGE>
available, or 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 1997. 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.
PART II: OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None.
ITEM 2. CHANGES IN SECURITIES
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company Annual Meeting of Shareholders was held on May 22,
1997. The results of the voting were as follows:
Proposal 1: Election of the Board of Directors of the Company.
Nominee Votes For Votes Withheld
------- --------- --------------
Philip M. Sawyer 6,251,562 14,377
Gordon W. Russell 6,251,562 14,377
Olav B. Bergheim 6,263,989 1,950
Vaughn D. Bryson 6,263,989 1,950
Douglas E. Kelly 6,263,989 1,950
Lawrence J. Mohr 6,263,989 1,950
Richard S. Schneider, Ph.D. 6,263,989 1,950
Proposal 2: Ratify and Approve an Amendment to the Company's 1993
Stock Option Plan
Votes For: 5,383,082
<PAGE>
Votes Against: 525,287
Votes Abstaining: 260,743
Non-Vote: 96,827
Proposal 3: Ratify the appointment of Coopers & Lybrand L.L.P. as
independent auditors.
Votes For: 6,263,139
Votes Against: 1,600
Votes Abstaining: 1,200
Non-Vote: 0
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
Exhibit 11.1 Computation of net loss per share.
Exhibit 27.1 Financial Data Schedule.
<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 14, 1997 By:
----------------------------------
Philip M. Sawyer
President, Chief Executive Officer
By:
----------------------------------
Raymond W. Anderson
Vice President, Finance and
Chief Financial Officer
<PAGE>
EXHIBIT 11.1
FUSION MEDICAL TECHNOLOGIES, INC.
(A COMPANY IN THE DEVELOPMENT STAGE)
COMPUTATION OF NET LOSS PER SHARE
(IN THOUSANDS)
<TABLE>
<CAPTION>
Three Months Ended Three Months Ended Six Months Ended
June 30, June 30, June 30,
1997 1996 1997
(unaudited) (unaudited) (unaudited)
------------------- ------------------ ----------------
<S> <C> <C> <C>
Weighted average common
shares outstanding................ 7,063 1,520 7,044
Common equivalent shares
pursuant to Staff Accounting
Bulletin No. 83................... - 423 -
------- ------ -------
Shares used in computing per
share amounts (1)................. 7,063 1,943 7,044
------- ------ -------
------- ------ -------
Net loss............................ $(2,484) $ (793) $(4,574)
------- ------ -------
------- ------ -------
Net loss per share.................. $ (0.35) $(0.41) $ (0.65)
------- ------ -------
------- ------ -------
</TABLE>
(1) PRIMARY AND DILUTIVE EARNINGS PER SHARE ARE THE SAME FOR ALL PERIODS
PRESENTED.
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONDENSED FINANCIAL
STATEMENTS.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 12,077
<SECURITIES> 6,669
<RECEIVABLES> 37
<ALLOWANCES> 0
<INVENTORY> 58
<CURRENT-ASSETS> 17,000
<PP&E> 1,800
<DEPRECIATION> 600
<TOTAL-ASSETS> 20,271
<CURRENT-LIABILITIES> 941
<BONDS> 0
0
0
<COMMON> 4
<OTHER-SE> 35,493
<TOTAL-LIABILITY-AND-EQUITY> 20,271
<SALES> 28
<TOTAL-REVENUES> 28
<CGS> 224
<TOTAL-COSTS> 224
<OTHER-EXPENSES> 2,584
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (2,780)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,780)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,484)
<EPS-PRIMARY> (.35)
<EPS-DILUTED> (.35)
</TABLE>
