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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to .
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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)
1615 Plymouth Street
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. Yes { X } 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. Yes { X } No { }
The number of outstanding shares of the registrant's Common Stock, $.001
par value, was 7,152,565 as of May 11, 1998.
This Report on Form 10-Q includes 17 pages with the Index to Exhibits
located on page 15.
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FUSION MEDICAL TECHNOLOGIES, INC.
INDEX
PART I-FINANCIAL INFORMATION
<S> <C> <C>
Item 1. Financial Statements: Page
Condensed Balance Sheets - March 31, 1998 (unaudited)
and December 31, 1997 ...................................... 3
Condensed Statements of Operations - Three Months Ended
March 31, 1998 and 1997 (unaudited) ........................ 4
Condensed Statements of Cash Flows - Three Months Ended
March 31, 1998 and 1997 (unaudited) ........................ 5
Notes to Condensed Financial Statements ...................... 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations .................................. 7
PART II-OTHER INFORMATION
Item 1. Legal Proceedings ............................................15
Item 2. Changes in Securities ........................................15
Item 3. Defaults Upon Senior Securities ..............................15
Item 4. Submission of Matters to a Vote of Security Holders...........15
Item 5. Other Information ............................................15
Item 6. Exhibits and Reports on Form 8-K .............................15
SIGNATURES ..................................................16
</TABLE>
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PART I-FINANCIAL INFORMATION
Item 1. Financial Statements
<TABLE>
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FUSION MEDICAL TECHNOLOGIES, INC.
CONDENSED BALANCE SHEETS
(in thousands)
(unaudited)
March 31, December 31,
1998 1997
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ASSETS
Current assets:
Cash and cash equivalents $ 7,668 $ 7,473
Available-for-sale-securities 4,029 5,465
Other assets 201 228
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Total current assets 11,898 13,166
Long term assets 1,066 1,565
Property and equipment, net 731 809
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Total assets $ 13,695 $ 15,540
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities $ 1,165 $ 1,316
Long-term obligations 292 -
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Total liabilities 1,457 1,316
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Common stock and other equity 35,817 35,769
Accumulated deficit (23,579) (21,545)
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Total stockholders' equity 12,238 14,224
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Total liabilities and stockholders'
equity $ 13,695 $ 15,540
======== ========
The accompanying notes are an integral part of these condensed financial
statements.
</TABLE>
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<TABLE>
<CAPTION>
FUSION MEDICAL TECHNOLOGIES, INC.
CONDENSED STATEMENTS OF OPERATIONS
(in thousands except per share amounts)
(unaudited)
Three Months Ended
March 31,
--------------------
1998 1997
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Net sales $ 50
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Costs and expenses:
Cost of goods 158
Research and development $ 1,572 1,241
Marketing, general and administrative 581 1,044
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Total costs and expenses 2,153 2,443
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Operating loss (2,153) (2,393)
Interest income 157 327
Other expense (38) (24)
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Net loss $ (2,034) $ (2,090)
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Basic and diluted net loss per share $ (0.29) $ (0.30)
======== ========
Shares used in computing basic and diluted
net loss per share 7,125 7,025
======== ========
</TABLE>
The accompanying notes are an integral part of these condensed financial
statements.
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<TABLE>
<CAPTION>
FUSION MEDICAL TECHNOLOGIES, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
Three Months Ended
March 31,
----------------------
1998 1997
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<S> <C> <C>
Cash flows used for operating activities:
Net loss $ (2,034) $ (2,090)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 81 101
Accretion of available-for-sale securities 3 -
Amortization of deferred compensation 43 94
Interest on notes receivable from stockholder (1) -
Change in assets and liabilities:
Accounts receivable 18 (115)
Prepaids and other current assets 7 187
Other assets (8) -
Accounts payable 95 126
Accrued expenses (329) (398)
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Net cash used in operating activities (2,125) (2,095)
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Cash flows from investing activities:
Acquisition of property and equipment (4) (199)
Purchases of available-for-sale securities (1,511) (14,294)
Sales of available-for-sale securities 3,453 19,172
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Net cash provided by investing activities 1,938 4,679
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Cash flows from financing activities:
Proceeds used from issuance of note 408 49
Repayment of notes payable (33) (33)
Proceeds from exercise of common stock 7 -
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Net cash provided by financing activities 382 16
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Net increase in cash and cash equivalents 195 2,600
Cash and cash equivalents, beginning of period 7,473 10,778
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Cash and cash equivalents, end of period $ 7,668 $ 13,378
========= =========
Supplemental disclosure of cash flow information:
Cash paid for interest $ 11 $ 5
========= =========
Cash paid for taxes $ 19
=========
Supplemental disclosure of noncash investing and
financing activities:
Adjustment for cancellation of stock options $ 275
=========
</TABLE>
The accompanying notes are an integral part of these condensed financial
statements.
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FUSION MEDICAL TECHNOLOGIES, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
March 31, 1998
(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 March 31, 1998, and the
statements of operations for the three months ended March 31, 1998 and
1997, and the statements of cash flows for the three month periods ended
March 31, 1998 and 1997 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, 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
The Company adopted SFAS No. 128 "Earnings Per Share" and the Securities
and Exchange Commission Staff Accounting Bulletin No. 98 ("SAB No. 98")
effective December 31, 1997; accordingly, all prior periods have been
restated. Basic and diluted loss per common share are computed using the
weighted average number of shares of common stock outstanding. Common
equivalent shares from stock options are excluded from the computation of
diluted net loss per common share as their effect is anti-dilutive. No
additional shares are considered to be outstanding for either computation
under the provisions of SAB No. 98. Stock options to purchase 912,501 and
864,485 shares of common stock at prices ranging from $0.16 to $11.50 per
share were outstanding at March 31, 1998 and 1997, respectively, but were
not included in the computation of diluted income per share because they
were antidilutive.
3. Cash, 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 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 specific
identification method.
4. Debt
In December 1997, the Company signed an agreement with Imperial Bank for a
loan facility to finance existing equipment and future equipment purchases
up to a total of $2,500,000. Subject to certain terms and conditions,
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the facility finances a percentage of the invoice cost of existing
equipment and all of the invoice cost of future equipment purchases. The
equipment purchased serves as collateral. As of March 31, 1998, the
Company has an outstanding balance of $408,734.
5. Comprehensive Income
Effective March 31, 1998, the Company adopted 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. As the components of comprehensive income are not material, the
Company has not reflected the additional reporting and display provisions
of SFAS 130 in the accompanying financial statements.
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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 9. 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
Since its inception in October 1992, Fusion has been primarily engaged in
the research and development of surgical sealants. As of March 31, 1998,
the Company had an accumulated deficit of approximately $23.6 million.
Operating losses are expected to continue at least through 2000 as the
Company continues to fund early research, product development, clinical
trials, regulatory submissions, and related administrative and support
services.
The Company made continued progress in the first quarter of 1998 on the
development of FloSealTM Matrix (FloSeal Matrix). Beginning in December
1997, FloSeal Matrix was utilized in an applications evaluation series of
patients to stop bleeding within a wide variety of major surgical
procedures and bleeding conditions. FloSeal Matrix successfully stopped
bleeding in 72 of 74 discrete applications (97%) in its first thirty-five
patients. Thirty (86%) of the patients had impaired coagulation due to
anti-coagulant drug regimens, heart-lung machine stress or hemophilia.
The patients underwent twenty different types of surgeries, which were
performed at four medical centers in Canada and one medical center in the
Netherlands. The Company started clinical trials in the United States
under an IDE in March 1998.
In addition, the Company is conducting an early stage research program to
develop liquid adhesives for applications such as physical sealants during
surgery.
Future revenues, if any, and the results of operations may fluctuate
significantly from quarter to quarter and will depend upon, among other
factors, the speed with which the Company's product or products proceed
through clinical trials and the preparation of related regulatory
submissions, the speed with which regulatory agencies review and
potentially clear the Company's products, the rate at which the Company or
its corporate partners for distribution establish product distribution
networks and mobilize the available sales forces, the rate at which the
Company's products gain market acceptance, the timing and impact of the
introduction of competitive products for surgical sealant functions, the
regulation and setting of relevant reimbursement levels and other factors
relating to the commercialization of medical products.
RESULTS OF OPERATIONS
Three Months Ended March 31, 1998 and 1997
NET SALES
Due to the Company's exit of the RapiSeal Patch business in December 1997,
the Company had no revenues in the three months ended March 31, 1998 as
compared to $50,000 in revenues for the three months ended March 31, 1997.
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RESEARCH AND DEVELOPMENT
Research and development expenses increased 27% to $1,572,000 in the three
months ended March 31, 1998 compared to $1,241,000 in the three months
ended March 31, 1997. The increase for the first quarter of 1998 is
attributable to expenses related to clinical and preclinical activities
necessary to support ongoing product development activities for FloSeal
Matrix. In 1998, research and development expenses are expected to be
higher than those of 1997, as the Company supports its clinical trials and
prepares FloSeal Matrix for market introduction.
MARKETING, GENERAL AND ADMINISTRATIVE
Marketing, general and administrative expenses decreased 44% to $580,000
in the three months ended March 31, 1998, compared to $1,044,000 for the
three months ended March 31, 1997. The decrease for the first quarter,
compared to the year earlier period, was primarily the result of decreases
in sales and administrative personnel as a part of the restructuring in
the fourth quarter associated with the exit of the RapiSeal Patch
business.
INTEREST INCOME
Net interest income decreased 52% to $157,000 for the three months ended
March 31, 1998 compared to $327,000 for the three months ended March 31,
1997. The decrease was attributable primarily to the declining balance of
the Company's investment portfolio.
NET LOSS
As a net result of the items discussed above, net loss was $2,034,000 for
the three months ended March 31, 1998. This is an improvement of 3% or
$56,000 over the net loss of $2,090,000 for the three months ended March
31,1997.
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 1998, the Company's cash, cash equivalents and available-for-
sale securities (classified as both long term and short term) were
$12,709,000 compared to $14,460,000 at December 31, 1997.
For the three months ended March 31, 1998 and 1997 the Company's operations
consumed cash of $2,125,000 and $2,095,000, respectively. The increase in cash
consumed by operations was due primarily to an increase in research and
development spending to support clinical and preclinical activities necessary
for ongoing FloSeal Matrix development. The Company expects the use of cash in
operating activities to continue through 1998 and into 1999 as it continues
clinical trials of FloSeal Matrix and develops other products.
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 decide to seek
additional financing within this time frame. After lengthy discussion
with the FDA, the Company has determined that the FloSeal Matrix will
follow the PMA regulatory pathway. Although a PMA has the substantial
commercial advantage of broader labeling, it is also a lengthy and
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 cost and time
to conduct clinical trials, 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.
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ADDITIONAL FACTORS THAT MIGHT AFFECT FUTURE RESULTS
Technology and Development Risk. To be successful, the Company's products
under development including FloSeal Matrix, must act effectively in humans
in comparison to current standard of care control products. The
physiological processes, which must be favorably altered, are very
complex. The 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 rate of the technological 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, the desired physiological effects or product specifications
may not be fully achieved, if at all. Even if the products are
successfully developed, there can be no assurance that clinically relevant
effects will be achieved, that successful regulatory clearances will be
secured, or that the products will become economically viable. If the
Company is not successful in developing its planned products, its business
prospects, financial condition and results of operations would be
materially and adversely affected.
Competition and Uncertainty as to Technological Change. The surgical
sealant market is highly competitive, and the Company expects competition
in its targeted markets to intensify. The Company expects to encounter
direct competition from companies (or medical institutions) offering a
wide variety of competing products including but not limited to topical
hemostats, fibrin glues, home-brew cryoprecipitates, synthetic adhesives,
synthetic hydrogels, pericardial strips, synthetic strips, synthetic
fibrin glues and femoral artery closure systems/devices. In addition,
several large companies targeting the surgical sealant market may be
developing products (unknown to the market at present) 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 unable to compete.
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 three issued
United States patents, and has 20 pending United States patent
applications relating to its patch, gel and liquid formulations. There
can be no assurance that the pending surgical sealant 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
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domestically. In addition, there can be no assurance that competitors
will not seek to apply for and obtain patents that will prevent, limit or
interfere with the Company's ability to make, use and sell its products.
A number of medical device and other companies, universities and research
institutions have filed patent applications or have issued patents
relating to the compositions and methods for surgical sealants. 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 prospects, financial condition
and results of operation.
Risks Related to FloSeal Matrix. Following the end of the third quarter
1997, the Company decided to shift essentially all discretionary resources
then committed to the support of the RapiSeal patch to its hemostatic
sealant, FloSeal Matrix. Subsequently, the Company decided to exit the
RapiSeal business and to disband its small test sales force. FloSeal
Matrix, which the Company believes to have substantially greater market
potential than RapiSeal, thus was reinforced as the Company's lead product
in terms of potential strategic impact on the Company's operations.
FloSeal Matrix began human clinical trials in the United States in March
of 1998. The Company is in the process of scaling up production for these
trials and planning for commercial production. There can be no assurance
that production scale-up can be successfully completed, that the
product(s) will be successful in human trials, that the product(s) will
gain regulatory clearance, or that the product(s) will be accepted in the
marketplace. There can be no assurance that strategic corporate
partnerships can be concluded to aid in the development or the
distribution of the product or that such alliances 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 Matrix is successfully introduced and marketed on a timely
basis, 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 clearances are difficult to
forecast and can vary widely. In certain cases, a clearance 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 clearance to market is the type of submission required,
510(K) or PMA. While the Company generally seeks the faster 510(K)
regulatory pathway whenever it believes this pathway is appropriate, the
decision as to 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 pathway 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 for 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 can materially
increase the time and expense of the regulatory process. The FDA may
require additional clinical trials or tests and new requirements after the
initial submissions. The time required for review and clearance at the
FDA can vary widely depending on the quality of the submission, the
perceived importance of the product, and many other factors. Many of the
factors affecting the time and expense for the regulatory process
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are outside the control of the Company. Longer and more expensive
clinical trials and regulatory processes can have a material adverse
effect on the business prospects, financial condition and results of
operations of the Company. The regulatory process outside the United
States can also vary widely in the time and expense of clearance and may
result in no clearance at all. In summary, there can be no assurance that
marketing clearances will ever be granted for any of the Company's
products in the development process or that the time and expense of the
regulatory process can be reliably predicted 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 Matrix and the Fusion liquid adhesives. 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 may require changes in surgical practices, and
there can be no assurance that surgeons will be willing to make such
changes. To achieve market acceptance of its products, the Company must
also demonstrate that the Company's products offer clinically significant
advantages. Moreover, 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. Even if
generally accepted, surgeons may choose to use the Company's products in a
smaller minority of procedures than projected thus leading to lower sales.
Failure of FloSeal Matrix and the Fusion liquid adhesives to achieve
significant clinical adoption would have a material adverse effect on the
Company's business prospects, 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 FloSeal
Matrix and the Fusion liquid adhesives, generally rely on third-party
payors, principally federal Medicare, state Medicaid and private health
insurance plans to reimburse all or part of the cost of the procedure in
which the medical device is being used. The Company's success will be
dependent, in part, upon its ability to obtain satisfactory third-party
reimbursement from health care payors for surgical procedures that may use
FloSeal Matrix and the Fusion liquid adhesives. 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 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 Matrix and the Fusion liquid adhesives 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 prospects, 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. To date, the
Company has not generated any revenues from sales of either FloSeal Matrix
of Fusion liquid adhesives. The company has a small marketing
organization that provides market analysis, marketing strategy, and
expertise in product development and positioning. The Company intends to
sell its products primarily through agreements with distributors or by
means of collaborative arrangements with corporate strategic partners. As
of March 31, 1998, the Company
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had not entered into any such agreements or arrangements with respect to
FloSeal Matrix or other future products. There can be no assurance that
the Company will be able to enter into agreements with distributors or
collaborative arrangements on a timely basis or at all, or that such
distributors or collaborators will devote adequate resources to selling
the Company's products. In addition, to the extent that the Company
enters into distribution agreements or collaborative arrangements for the
sale of its products, the Company will be dependent upon the efforts of
third parties, and there can be no assurance that such efforts will be
successful. Should the Company decide to use a direct sales strategy for
general or for specialty applications, 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. Failure to build an effective sales
and marketing organization or to establish effective distribution or
collaborative arrangements would have a material adverse effect on the
Company's business prospects, 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 combined coverage limits of $3.0 million on a claims-made
basis. There can be no assurance that the coverage limits of the
Company's insurance policies will be adequate. Such insurance is
expensive, difficult to obtain and may not be available in the future as
acceptable terms, or at all. Any claims against the Company regardless of
their merit or eventual outcome, could have a material adverse impact upon
the Company's business, financial condition and results of operations.
Uncertainty as to Bovine (Animal) Sourced Products in Europe. There is
substantial uncertainty as to the acceptance of bovine sourced products in
Europe due to concerns over potential contamination with Transmissible
Spongiform Encephalopathies (TSE), which is the same or closely related to
the disease which strikes cows known as Bovine Spongiform Encephalopathies
(BSE) or commonly as "Mad Cow Disease". The first generation of FloSeal
Matrix is made from bovine-sourced thrombin and bovine-sourced gelatin.
However unscientific in the Company's judgement the fear of TSE might be,
if TSE concerns prevent or substantially delay the marketing of FloSeal
Matrix in Europe, there would be a material and adverse effect on the
Company's business prospects, financial condition and results of
operations. There can be no assurance that alternative sources of human
thrombin or alternative (non-bovine) sources of the gel component can be
obtained with the timing, cost, capacity, and other factors necessary to
support a timely introduction of a second generation product into Europe.
Limited Manufacturing Experience, Scale-up Risk. The Company has received
a manufacturing license from the CDHS and commenced shipment of FloSeal
Matrix for use in its application evaluation cases in December 1997.
However, the Company has no experience manufacturing FloSeal Matrix or any
other products in the volumes necessary to achieve significant commercial
sales, and there can be no assurance that reliable, high-volume
manufacturing can be achieved at a commercially viable 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 QSR, international quality standards and other regulatory
requirements. Difficulties encountered by the Company in manufacturing
scale-up or failure by the Company to implement and maintain its
facilities in accordance with QSR, 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 prospects, 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.
13
<PAGE>
Dependence on Single Source Suppliers. The Company acquires several
components of its products from single source suppliers. Generally, the
Company believes that there are alternative suppliers of 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, that
such substitutions could be made in a timely manner or on commercially
reasonable terms. In the case of hides for processing into gelatin, there
are only a few suppliers that could meet the Company's requirements. The
company currently relies exclusively on one supplier of such hides and
expects to continue to do so through at least the end of 1999. The
Company 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 hides of sufficient quality and quantity 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 performed by 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. The Company relies upon a single vendor for its bovine
thrombin, which is a critical element in the mechanism of action of
FloSeal Matrix. This supplier is currently the only FDA approved
manufacturer of bovine thrombin in the United States. While the Company
believes that this vendor is reliable and has adequate capacity to serve
the Company's requirements, there can be no assurance that this vendor
will supply adequate thrombin or that alternative vendors will enter the
market and prove to be reliable suppliers. 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 prospects, financial condition and results of
operations.
Computer Systems Readiness for Year 2000. Many existing computer systems
and applications, and other control devices, use only two digits to
identify a year in the date field, without considering the impact of the
upcoming change at the end of the millennium. They could fail or create
erroneous results unless corrected so that they can process data related
to the year 2000. The Company relies on its systems, applications and
devices in operating and monitoring all major aspects of its business,
including financial systems (such as general ledger, accounts payable and
payroll modules), manufacturing systems, customer services,
infrastructure, embedded computer chips, networks, and telecommunications
equipment. The Company also relies on external systems of business
enterprises such as customers, suppliers, creditors, financial
organizations, and of governments, both domestically and globally, for
accurate exchange of data and information. The Company's current estimate
is that the costs associated with the Year 2000 issue will not have a
material adverse affect on the result of operations or financial position
of the Company in any given year. However, despite the Company's efforts
to address the Year 2000 impact on its internal systems, the Company is
not certain that is has fully identified such impact or that the Company
can resolve the impact without disruption of its business and without
incurring significant expense. In addition, even if the internal systems
of the Company are not materially affected by the Year 2000 issue, the
Company could be affected through disruption in the operation of the
enterprises with which the Company interacts.
Fusion Medical Technologies Inc. and RapiSeal are registered trademarks of
Fusion Medical Technologies, Inc. FloSeal Matrix and FloSeal are
trademarks of Fusion Medical Technologies, Inc.
14
<PAGE>
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.
None.
Item 5. Other Information.
None.
Item 6. Exhibits and Reports on Form 8-K.
<TABLE>
(a) Exhibits.
<S> <C>
Exhibit
Number Description
-------- ----------------------------------
27.1 Financial Data Schedule.
</TABLE>
(b) Reports on Form 8-K.
The Registrant did not file any reports on Form 8-K with
the Securities and Exchange Commission during the quarter
ended March 31, 1998.
15
<PAGE>
SIGNATURES
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: May 15, 1998 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
16
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM
10-Q FOR THE PERIOD ENDED MARCH 31, 1998 AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 7,668
<SECURITIES> 4,029
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 11,898
<PP&E> 731
<DEPRECIATION> 0
<TOTAL-ASSETS> 13,695
<CURRENT-LIABILITIES> 1,165
<BONDS> 0
0
0
<COMMON> 35,817
<OTHER-SE> (23,579)
<TOTAL-LIABILITY-AND-EQUITY> 13,695
<SALES> 0
<TOTAL-REVENUES> 0
<CGS> 0
<TOTAL-COSTS> 2,153
<OTHER-EXPENSES> 38
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (2,034)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,034)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,034)
<EPS-PRIMARY> (0.29)
<EPS-DILUTED> (0.29)
</TABLE>
