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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 SEPTEMBER 30, 1997
OR
{ X } TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ________ TO ________
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 (I.R.S. EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
1804 N. SHORELINE BOULEVARD
MOUNTAIN VIEW, CA 94043
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
(650) 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. { X } YES { } NO
INDICATE BY CHECK MARK WHETHER THE REGISTRANT HAS FILED ALL DOCUMENTS AND
REPORTS REQUIRED BY SECTION 12, 13, OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934 SUBSEQUENT TO THE DISTRIBUTION OF THE SECURITIES UNDER A PLAN CONFIRMED
BY THE COURT. { X } YES { } NO
The number of outstanding shares of the registrant's Common Stock, $.001 par
value, was 7,068,742 as of September 30, 1997.
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FUSION MEDICAL TECHNOLOGIES, INC.
INDEX
PART I: FINANCIAL INFORMATION
Item 1. Condensed financial statements:
Condensed balance sheets - September 30, 1997 (unaudited) and December
31, 1996 (audited)
Condensed statements of operations - three months and nine months
ended September 30, 1997 and 1996 (unaudited)
Condensed statements of cash flows - nine months ended September 30,
1997 and 1996 (unaudited)
Notes to condensed financial statements
Item 2. Management's discussion and analysis of financial condition and
results of operations for the three months and nine months ended
September 30, 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
II
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PART I: FINANCIAL INFORMATION
III
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FUSION MEDICAL TECHNOLOGIES, INC.
CONDENSED BALANCE SHEETS
(in thousands)
September 30, December 31,
1997 1996
------------- ------------
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 10,881 $ 10,778
Available-for-sale securities 2,921 11,145
Other assets 403 414
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Total current assets 14,205 22,337
Available-for-sale securities, long term 3,058 1,562
Property and equipment, net 1,197 1,121
Other assets 43 43
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Total assets $ 18,503 $ 25,063
------------ ------------
------------ ------------
LIABILITIES
Current liabilities $ 1,048 $ 1,265
Long-term obligations 56 56
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Total liabilities 1,104 1,321
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STOCKHOLDERS' EQUITY
Common stock and other stockholders' equity 35,965 35,335
Accumulated deficit (18,566) (11,593)
------------ ------------
Total stockholders' equity 17,399 23,742
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Total liabilities and
stockholders' equity $ 18,503 $ 25,063
------------ ------------
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FUSION MEDICAL TECHNOLOGIES, INC.
CONDENSED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended September 30, Nine Months Ended September 30,
-------------------------------- -------------------------------
1997 1996 1997 1996
----------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Net sales $ 66 $ 8 $ 144 $ 8
Cost of sales and start-up manufacturing
costs 194 7 576 7
----------- ---------- ---------- ----------
Gross profit (loss) (128) 1 (432) 1
----------- ---------- ---------- ----------
Operating expenses:
Research and development 1,441 1,241 4,024 3,519
Marketing, general and administrative 1,109 843 3,395 2,025
----------- ---------- ---------- ----------
Total operating expenses 2,550 2,084 7,419 5,544
----------- ---------- ---------- ----------
Loss from operations (2,678) (2,083) (7,851) (5,543)
Interest income 282 265 912 428
Other expense (3) - (34) -
----------- ---------- ---------- ----------
Net loss $ (2,399) $ (1,818) $ (6,973) $ (5,115)
----------- ---------- ---------- ----------
----------- ---------- ---------- ----------
Net loss per share $ (0.34) $ (0.26) $ (0.99) $ (1.26)
----------- ---------- ---------- ----------
----------- ---------- ---------- ----------
Shares used in computing net loss per
share 7,066 6,937 7,052 4,058
----------- ---------- ---------- ----------
----------- ---------- ---------- ----------
</TABLE>
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FUSION MEDICAL TECHNOLOGIES, INC.
STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
Nine Months Ended September 30,
-------------------------------
1997 1996
----------- ----------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (6,973) $ (5,115)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 339 145
Amortization of deferred compensation 285 283
Accretion of Available-for-sale securities 128
Change in assets and liabilities 15 426
----------- ----------
Net cash used in operating activities (6,206) (4,261)
----------- ----------
Cash flows from investing activities:
Acquisition of property and equipment (415) (545)
Purchases of Available-for-sale securities (5,055) (18,123)
Sales of Available-for-sale securities 11,783 19,722
----------- ----------
Net cash provided by investing activities 6,313 1,054
----------- ----------
Cash flows from financing activities:
Proceeds from issuance of common stock 111 24,506
Accrued interest from shareholder notes receivable (4) -
Repayment of notes payable (111) (100)
Proceeds from notes payable and bank line of credit (133)
----------- ----------
Net cash provided (used) by financing activities (4) 24,273
----------- ----------
Net increase in cash and cash equivalents 103 21,066
Cash and cash equivalents, beginning of period 10,778 4,382
----------- ----------
Cash and cash equivalents, end of period $ 10,881 $ 25,448
----------- ----------
----------- ----------
</TABLE>
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FUSION MEDICAL TECHNOLOGIES, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
September 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 sheet
as of September 30, 1997, and the statements of operations for the three months
ended September 30, 1997 and 1996 and nine months ended September 30, 1997 and
1996, and the statement of cash flows for the nine month periods ended September
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
June 30, 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
IV
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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
Patch. Inventory is recorded at the lesser of cost or market using the LIFO
method. 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
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 and that it will not be
applicable for the remainder of the current fiscal year.
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
segments 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 is 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
This report on Form 10-Q contains, in addition to historical information,
forward-looking statements that 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"
commencing on page 8. Certain sections in this report have been identified as
containing forward-looking statements. The reader is cautioned that other
sections not so identified may also contain forward-looking statements.
OVERVIEW
Fusion Medical Technologies, Inc. ("Fusion" or the "Company") was incorporated
in Delaware in 1993. The Company is developing proprietary wound closure
products it believes may have broad application in a variety of surgical
procedures, including procedures requiring anastomoses and minimally invasive
surgeries. The Company's 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 complications associated with bleeding and
fluid leaks during and after surgery. As a result, the Company believes its
products will reduce hospital costs.
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The Company is developing a collagen-based flowable gel product -
FloSeal-TM-("FloSeal" or "FloSeal Matrix")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 bleeding control in open surgery. The Company expects to begin
applications evaluation testing in humans and human clinical trials in the
United States under an Investigational Device Exemption (IDE) and
Pre-Marketing Approval (PMA) regulatory pathway in the near future.
The Company has determined, following four complete quarters of selling and
marketing effort, that its RapiSeal product has not achieved the level of
sales performance, using its direct sales-force, to indicate that it would
become a self-sustaining product for the Company. Subsequent to this
determination, the Company began to evaluate how to minimize further
investment in the product, including the process whereby its small
sales-force will be disbanded. As of the filing date, no specific
determinations had been made regarding what charges, if any, will be related
to this action and no reserve was made as of the Balance Sheet date.
Future revenues, if any, and results of operations may fluctuate
significantly from quarter to quarter and will depend upon, among other
factors; the progress of clinical trials, 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 a
distribution network or other selling agreements, the timing and size of any
distributor purchases, and the introduction of competitive products.
RESULTS OF OPERATIONS
THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
REVENUES
The Company recorded revenues from product sales of $66,000 for the quarter
ended September 30, 1997 and $144,000 in the first nine months of 1997 in
comparison to revenues for the three and nine months ended September 30, 1996 of
$8,000. September 30, 1996 represented the first full quarter of selling
following the Company receiving clearance from the FDA to commence selling the
RapiSeal patch. Gross margins were negative as a result of low unit sales
volume and manufacturing start-up costs.
RESEARCH AND DEVELOPMENT
Research and development expenses increased 16% to $1,441,000 in the three
months ended September 30, 1997 compared to $1,241,000 in the three months ended
September 30, 1996, and by 14% to $4,024,000 in the first nine months of 1997
from $3,519,000 in the first nine months of 1996. The increase for the third
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. In particular, expenses for the third
quarter ended September 30, 1997 included expenses associated with the Company's
FloSeal program.
MARKETING, GENERAL AND ADMINISTRATIVE
Marketing, general and administrative expenses increased 32% to $1,109,000 in
the three months ended September 30, 1997, compared to $843,000 for the three
months ended September 30, 1996, and by 68% to $3,395,000 in the first nine
months of 1997 from $2,025,000 in the first nine months of 1996. The increase
for
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the third quarter, compared to the year earlier period, was primarily the
result of increases in sales and administrative personnel, expanded marketing
activities and occupancy related costs, and costs associated with the
development and implementation of a shareholders' rights plan. Subsequent to
the end of the third quarter, the Company began to evaluate how to minimize
further investment in the RapiSeal Patch product and the process whereby its
small sales-force will be eliminated. As of the filing date, no specific
determination had been made regarding what charges, if any, will be related
to this action and no reserve had been made as of the Balance Sheet date.
INTEREST INCOME
Net interest income increased 6% to $282,000 for the three months ended
September 30, 1997 compared to $265,000 for the three months ended September 30,
1996, and by 113% to $912,000 in the first nine months of 1997 from $428,000 in
the first nine months of 1996. The increases were attributable to the Company's
initial public offering in June 1996, which increased its average cash balances
and improved management of the Company's investment portfolio.
NET LOSS
As a result of the items discussed above, net loss was $2,399,000 for the three
months ended September 30, 1997 and $6,973,000 for the nine months ended
September 30, 1997. This is compared to a net loss of $1,818,000 for the three
months ended September 30, 1996 and $5,115,000 for the nine months ended
September 30, 1996.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 1997, the Company's cash, cash equivalents and available-for-
sale securities (classified as both long term and short term) were $16,860,000
compared to $23,485,000 at December 31, 1996. On June 7, 1996, the Company
completed its initial public offering (IPO) selling 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 nine months ended September 30, 1997 and 1996 the Company's operations
consumed cash of $6,206,000 and $4,261,000, 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 the RapiSeal Patch and the
FloSeal. The Company expects the increased use of cash to continue through the
end of 1997 as it expands research and development of the FloSeal and other
Fusion products and, absorbs costs related to the de-emphasis of the RapiSeal
patch and the termination of its direct sales force and related selling effort.
Although Fusion believes that current cash balances, augmented by investment
income, will be sufficient to meet the Company's operating and capital
requirements at least through 1998, the Company may require additional financing
within this time frame. After lengthy discussion with the FDA, the Company has
determined that the FloSeal will follow the PMA regulatory pathway. Although a
PMA has the substantial commercial advantage of broader labeling, it is also
more lengthy and a more expensive process. Thus, the PMA determination will
significantly increase the cash required before commercialization of the
FloSeal, in comparison to a 510(k). Fusion's future liquidity and capital
requirements will depend on numerous factors, including the receipt of and the
time required to obtain regulatory clearances and approvals for the FloSeal, 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.
VII
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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 many 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 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 a
biological tissue sealant. 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 non-competitive.
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 three 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
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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 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.
RISKS RELATED TO FLOSEAL. Following the end of the third quarter, the Company
decided to shift essentially all discretionary resources then committed to
the support of the RapiSeal Patch to its flowable gel product, FloSeal.
FloSeal, which the Company believes to have substantially greater market
potential, thus was reinforced as the Company's lead product in terms of
potential strategic impact on the Company's operations. FloSeal is expected
to enter human clinical trials in the near future. The Company is in the
process of scaling-up production for application in these trials. There can
be no assurance that this product scale-up can be successfully completed,
that the resulting product(s) will be successful in human clinical trials,
that they will gain regulatory clearance, or that FloSeal will be accepted in
the marketplace as a commercially viable solution for the surgeon's
requirements to control bleeding during various surgical procedures. There
can be no assurance that corporate strategic alliances can be concluded to
aid in the development or distribution of the product or that such alliance
can be concluded on favorable terms. There can be no assurance that future
revenues, if any, will provide a reasonable return, if any, on the cost of
development. Unless FloSeal is successfully introduced and marketed, the
Company's business prospects, financial condition and results of operations
will be materially and adversely affected.
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 no 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 FloSeal
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. 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. The
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failure of the FloSeal 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 FloSeal 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 from health care payors for surgical
procedures that may use the FloSeal or other Fusion products. 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 FloSeal
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.
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 market 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.
Subsequent to the end of the third quarter, the Company began to evaluate how
to minimize further investment in the RapiSeal Patch product and the process
whereby its small direct sales-force, which was testing the feasibility of
selling RapiSeal directly to medical centers, will be disbanded. As of the
filing date, no specific determinations had been made regarding what charges,
if any, will be related to this action and no reserve had been made as of the
Balance Sheet date. 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
X
<PAGE>
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 September 30, 1997, the
Company generated product revenues of approximately $66,000. However, the
Company has limited experience manufacturing RapiSeal and the SilverBullet,
and no experience manufacturing any other products, including FloSeal, 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 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 for RapiSeal. The Company currently relies
exclusively on one supplier of collagen 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. The Company has another source of collagen for
FloSeal. At this time, the Company has not entered into a long term supply
agreement with this collagen supplier. However, if these suppliers 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
XI
<PAGE>
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
None.
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.
XII
<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: November 11, 1997 By: /s/ Philip M. Sawyer
----------------------------------
Philip M. Sawyer
President, Chief Executive Officer
By: /s/ Raymond W. Anderson
----------------------------------
Raymond W. Anderson
Vice President, Finance and
Chief Financial Officer
XIII
<PAGE>
FUSION MEDICAL TECHNOLOGIES, INC.
COMPUTATION OF NET LOSS PER SHARE
(in thousands, except per share data) EXHIBIT 11.1
<TABLE>
<CAPTION>
Three Months Ended September 30, Nine Months Ended September 30,
1997 1996 1997 1996
----------- ----------- ----------- ----------
(unaudited) (unaudited) (unaudited) (unaudited)
<C> <S> <S> <S> <S>
Weighted average common
shares outstanding 7,066 6,937 7,052 3,635
Common equivalent shares
pursuant to Staff Accounting
Bulletin No. 83 - - - 423
--------- --------- --------- --------
Shares used in computing per
share amounts (1) 7,066 6,937 7,052 4,058
--------- --------- --------- --------
--------- --------- --------- --------
Net loss $ (2,399) $ (1,818) $ (6,973) $ (5,115)
--------- --------- --------- --------
--------- --------- --------- --------
Net loss per share $ (0.34) $ (0.26) $ (0.99) $ (1.26)
--------- --------- --------- --------
--------- --------- --------- --------
</TABLE>
(1) PRIMARY AND DILUTIVE EARNINGS PER SHARE ARE THE SAME FOR ALL PERIODS
PRESENTED.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 10,881
<SECURITIES> 5,979
<RECEIVABLES> 81
<ALLOWANCES> 0
<INVENTORY> 100
<CURRENT-ASSETS> 14,205
<PP&E> 1,918
<DEPRECIATION> 721
<TOTAL-ASSETS> 18,503
<CURRENT-LIABILITIES> 1,048
<BONDS> 56
0
0
<COMMON> 7,069
<OTHER-SE> 28,896
<TOTAL-LIABILITY-AND-EQUITY> 18,503
<SALES> 144
<TOTAL-REVENUES> 144
<CGS> 576
<TOTAL-COSTS> 7,419
<OTHER-EXPENSES> 34
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 11
<INCOME-PRETAX> 6,973
<INCOME-TAX> 0
<INCOME-CONTINUING> 7,851
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (6,973)
<EPS-PRIMARY> (.99)
<EPS-DILUTED> (1.01)
</TABLE>
