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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, 1998
OR
[ ] 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)
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 was
7,173,616 as of October 31, 1998.
This Report on Form 10-Q includes 18 of pages with the Index to Exhibits
located on page 16.
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FUSION MEDICAL TECHNOLOGIES, INC.
INDEX TO
REPORT ON FORM 10-Q
FOR QUARTER ENDED SEPTEMBER 30, 1998
<TABLE>
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Page
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements:
Condensed Balance Sheets - September 30, 1998 (unaudited)
and December 31, 1997..................................... 3
Condensed Statements of Operations - Three Months and
Nine Months ended September 30, 1998 (unaudited)
and 1997 (unaudited)...................................... 4
Statements of Cash Flows - Nine Months ended September
30, 1998 (unaudited) and 1997 (unaudited)................. 5
Notes to Condensed Financial Statements.................... 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations....................... 8
PART II. OTHER INFORMATION
Item 2. Changes in Securities...................................... 16
Item 6. Exhibits and Reports on Form 8-K........................... 16
Signature.................................................. 17
</TABLE>
2
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FUSION MEDICAL TECHNOLOGIES, INC.
CONDENSED BALANCE SHEETS
(in thousands)
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997 (1)
------------- ------------
(unaudited)
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 5,870 $ 7,473
Available-for-sale-securities 3,030 5,465
Other assets 169 228
--------- ---------
Total current assets 9,069 13,166
Long term assets 54 1,565
Property and equipment, net 737 809
--------- ---------
Total assets $ 9,860 $ 15,540
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities $ 1,290 $ 1,316
Long-term obligations 234 -
--------- ---------
Total liabilities 1,524 1,316
--------- ---------
Common stock and other equity 36,001 35,769
Accumulated deficit (27,665) (21,545)
--------- ---------
Total stockholders' equity 8,336 14,224
--------- ---------
Total liabilities and stockholders' equity $ 9,860 $ 15,540
========= =========
</TABLE>
The accompanying notes are an integral part of these condensed financial
statements.
(1) Data extracted from audited financial statements dated December 31,
1997 of Fusion Medical Technologies, Inc.
3
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FUSION MEDICAL TECHNOLOGIES, INC.
CONDENSED STATEMENTS OF OPERATIONS
(in thousands except per share amounts)
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ ------------------
1998 1997 1998 1997
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net Sales $ 66 $ 144
-------- --------
Costs and expenses:
Cost of goods 194 576
Research and development $ 1,654 1,441 $ 4,875 4,024
Marketing, general and
administrative 474 1,109 1,671 3,395
-------- -------- -------- --------
Total costs and expenses 2,128 2,744 6,546 7,995
-------- -------- -------- --------
Operating loss (2,128) (2,678) (6,546) (7,851)
Interest income 156 282 485 912
Interest expense ( 6) (3) ( 59) (34)
-------- -------- -------- --------
Net loss $ (1,978) $ (2,399) $ (6,120) $ (6,973)
======== ======== ======== ========
Net loss per share - basic and
diluted $ (0.28) $ (0.34) $ (0.86) $ (0.99)
======== ======== ======== ========
Shares used in computing net loss
per share - basic and diluted 7,172 7,066 7,157 7,052
======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these condensed
financial statements.
4
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FUSION MEDICAL TECHNOLOGIES, INC.
STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
------------------
1998 1997
-------- --------
<S> <C> <C>
Cash flows used for operating activities:
Net loss $ (6,120) $ (6,973)
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation and amortization 219 339
Accretion of available-for-sale securities 29 128
Amortization of deferred compensation 125 285
Change in assets and liabilities:
Accounts receivable 21 (58)
Inventories - (17)
Prepaids and other current assets (17) 196
Other assets 46 -
Accounts payable (21) (348)
Accrued expenses (79) 242
-------- --------
Net cash used in operating activities (5,797) (6,206)
-------- --------
Cash flows from investing activities:
Acquisition of property and equipment (147) (415)
Purchases of available-for-sale securities (2,025) (5,055)
Sales of available-for-sale securities 5,952 11,783
-------- --------
Net cash provided by investing activities 3,780 6,313
-------- --------
Cash flows from financing activities:
Proceeds from issuance of note payable 408 -
Proceeds from issuance of shareholder note receivable 54 -
Accrued interest from shareholder notes receivable (4)
Repayment of notes payable (101) (111)
Proceeds from issuance of common stock 53 111
-------- --------
Net cash provided by (used in) financing activities 414 (4)
-------- --------
Net increase (decrease) in cash and cash equivalents (1,603) 103
Cash and cash equivalents, beginning of period 7,473 10,778
-------- --------
Cash and cash equivalents, end of period $ 5,870 $ 10,881
======== ========
Supplemental disclosure of cash flow information:
Cash paid for interest $ 80 $ -
======== ========
</TABLE>
The accompanying notes are an integral part of these condensed
financial statements.
5
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FUSION MEDICAL TECHNOLOGIES, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
September 30, 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 September 30, 1998, and the
statements of operations for the three and nine months ended September 30,
1998 and 1997, and the statements of cash flows for the nine month periods
ended September 30, 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 antidilutive. No
additional shares are considered to be outstanding for either computation
under the provisions of SAB No. 98. Stock options to purchase 1,252,469
and 997,872 shares of common stock at prices ranging from $0.16 to $11.50
per share were outstanding at September 30, 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.
6
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FUSION MEDICAL TECHNOLOGIES, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
September 30, 1998
(Unaudited)
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, 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 September 30, 1998, the Company has
an outstanding balance of $350,000. The current interest rate on the note
is 10%. The note is scheduled to be retired in October, 2001.
5. Comprehensive Income
Effective March 31, 1998, the Company adopted Statement of Financial
Accounting Standards ("SFAS) No. 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.
6. Effect Of Changes In Accounting Principles
In June 1997, the Financial Accounting Standards Board issued SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related Information,"
which establishes annual and interim reporting standards for an
enterprise's business segments and related disclosures about its products,
services, geographic areas and major customers. Adoption of this statement
will not impact the Company's consolidated financial position, results of
operations or cash flows. The Company will adopt this statement in its
financial statements for the year ending December 31, 1998.
7
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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 10 and those set forth under Item 1 in the Company's
Annual Report filed on 10K. Certain sections in this report have been
identified as containing forward-looking statements (designated by an *).
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 committed to
developing and commercializing innovative biomaterials for treating
surgical wounds. As of September 30, 1998, the Company had an accumulated
deficit of approximately $27,665,000 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 started clinical trials in the United States under an IDE in
1998 at ten medical centers in the areas of cardiac, vascular, and spinal
surgery. At the end of September 1998, over 80% of the 300 patients in the
study, have been enrolled.
In addition, the Company has been engaged in research to expand the
potential applications of FloSeal. The Company has demonstrated in pre-
clinical models that FloSeal is effective for sealing vascular access
sites, especially in the femoral artery. The Company is now in the process
of developing a specialized applicator for use with FloSeal in this
indication. A patent has been filed, and prototypes are currently being
tested in pre-clinical models.
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 and Nine Months Ended September 30, 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 and nine months ended September
30, 1998 as compared to $66,000 and $144,000 in revenues for the three and
nine months ended September 30, 1997, respectively.
8
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
RESEARCH AND DEVELOPMENT
Research and development expenses increased 15% to $1,654,000 in the three
months ended September 30, 1998 compared to $1,441,000 in the three months
ended September 30, 1997. For the nine months ended September 30, 1998,
research and development expenses increased 21% to $4,875,000 as compared
to expenses of $4,024,000 for the nine months ended September 30, 1997.
The increase for the third quarter and the nine months ended September 30,
1998 is attributable to expenses related to clinical and preclinical
activities necessary to support ongoing product development activities for
FloSeal. 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 for market introduction *.
MARKETING, GENERAL AND ADMINISTRATIVE
Marketing, general and administrative expenses decreased 57% to $474,000 in
the three months ended September 30, 1998, compared to $1,109,000 for the
three months ended September 30, 1997. For the nine months ended September
30, 1998 marketing, general and administrative expenses decreased 51% to
$1,671,000 as compared to $3,395,000 for the nine months ended September
30, 1997. The decrease for the third quarter, compared to the year earlier
period, and the nine months ended September 30, 1998 compared to the nine
months ended September 30, 1997, was primarily the result of decreases in
sales and administrative personnel.
INTEREST INCOME
Interest income decreased 45% to $156,000 for the three months ended
September 30, 1998 compared to $282,000 for the three months ended
September 30, 1997 and by 47% to $485,000 in the first nine months of 1998
from $912,000 in the first nine months of 1997. The decrease was
attributable primarily to the declining balance of the Company's investment
portfolio.
INTEREST EXPENSE
Interest expense increased 200% to $6,000 for the three months ended
September 30, 1998 compared to $3,000 for the three months ended September
30, 1997 and by 74% to $59,000 for the first nine months of 1998 from
$34,000 for the first nine months of 1997. The increase was attributable
to the financing of the Company's Directors and Officers insurance and the
expense on the loan facility agreement that the Company agreed to in
December of 1997.
NET LOSS
As a net result of the items discussed above, net loss was $1,978,000 for
the three months ended September 30, 1998. This is an improvement of 18%
or $421,000 over the net loss of $2,399,000 for the three months ended
September 30,1997. The net loss for the nine months ended September 30,
1998 was $6,120,000. This is an improvement of 12% or $853,000 over the
net loss of $6,973,000 for the nine months ended September 30, 1997.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 1998, the Company's cash, cash equivalents and available-
for-sale securities were $8,900,000 compared to $14,460,000 at December 31,
1997.
For the nine months ended September 30, 1998 and 1997 the Company's
operations consumed cash of $5,797,000 and $6,206,000, respectively. The
decrease in cash consumed by operations was due primarily to a decrease in
personnel costs, and a reduction in overall administrative spending.
9
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
Although Fusion believes that current cash balances, augmented by
investment income, and the balance of its loan facility (the balance
available for use is $2,150,000) will be sufficient to meet the Company's
operating and capital requirements at least until 2000, the Company may
decide to seek additional financing within this time frame *. After
lengthy discussions with the U.S. Food and Drug Administration (FDA), the
Company has determined that FloSeal will follow the Pre-Market Approval
(PMA) regulatory pathway *. A PMA is a lengthy and expensive process.
Thus, the PMA determination will significantly increase the cash required
before commercialization of 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
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.
ADDITIONAL FACTORS THAT MIGHT AFFECT FUTURE RESULTS
Technology and Development Risk. To be successful, the Company's products
under development including FloSeal, 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
10
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
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 patents or any patents that may issue in the future will
provide any competitive advantages for the Company's products or that they
will not be successfully challenged, invalidated or circumvented in the
future. Moreover, litigation or interference proceedings associated with
enforcing or defending patents or trade secrets is expensive and can divert
the efforts of technical and management personnel. The Company has filed
certain corresponding patent applications in certain foreign countries and
may file additional patent applications outside the United States. The
Company believes that obtaining foreign patents may be more difficult than
obtaining domestic patents because of differences in patent laws and
believes the protection provided by foreign patents, if obtained, and any
other foreign intellectual property protection may be weaker than that
provided domestically. In addition, there can be no assurance that
competitors will not seek to apply for and obtain patents that will
prevent, limit or interfere with the Company's ability to make, use and
sell its products. A number of medical device and other companies,
universities and research institutions have filed patent applications or
have issued patents relating to the compositions and methods for 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. Subsequently, the Company decided to exit the RapiSeal
business and to disband its small test sales force. FloSeal, 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 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 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.
11
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
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.
FloSeal will follow the PMA pathway. A PMA pathway, in general, is
significantly longer and more expensive than a 510(K) pathway. 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 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
FloSeal. 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 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,
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. 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 FloSeal
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.
12
<PAGE> 12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
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 FloSeal. 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 September 30, 1998, the Company had not
entered into any such agreements or arrangements with respect to FloSeal 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 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 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 California Department of Health Services
(CDHS) and commenced shipment of FloSeal to Canada and Europe for
13
<PAGE> 13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
use in its application evaluation cases in December 1997. However, the
Company has no experience manufacturing FloSeal 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
Quality System Regulations (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.
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. 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. The Year 2000 computer issue
refers to a condition where a two digit field rather than a four digit
field is used to distinguish a calendar year. Unless corrected some
computers and software applications could be unable to function on January
1, 2000 (and thereafter until corrected), as they will be unable to
distinguish the correct date. Such an uncorrected condition could
significantly interfere with the conduct of the Company's business, could
result in disruption of its operations, and could subject it to potentially
significant legal liabilities.
The Company is in the process of assessing its exposure to the Year 2000
problem. The Company is upgrading its current third party software for
Year 2000 compliance. While the Company believes it has made progress in
resolving known Year 2000 issues, sufficient testing has not been completed
to fully validate the readiness of the Company's
14
<PAGE> 14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
systems. Additional testing and upgrades are planned during fiscal 1999 to
reasonably ensure Year 2000 compliance *.
The Company is also assessing the possible effect on its operations of the
Year 2000 readiness of critical suppliers of products and services. The
Company's reliance on its key suppliers, and therefore on the proper
functioning of their information systems and software, is increasing, and
there can be no assurance that another company's failure to address Year
2000 issues could not have an adverse effect on the Company. To date, The
Company has not contacted its suppliers to determine their Year 2000
readiness.
The Company expects to complete an estimate of Year 2000 project costs
during the first half of fiscal 1999 *. The Company believes that it is
unlikely to experience a material adverse impact on its financial condition
or results of operations due to Year 2000 compliance issues. However,
since the assessment process is ongoing, year 2000 complications are not
fully known, and potential liability issues are not clear, the full
potential impact of the Year 2000 on the Company is not known at this time.
The Company will be developing a contingent plan for Year 2000 issues as it
determines its Year 2000 exposure *.
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.
15
<PAGE> 15
PART II-OTHER INFORMATION
<TABLE>
<CAPTION>
Item 2. Changes in Securities and Use of Proceeds.
The net proceeds to the Company after deducting expenses
associated with the Company's initial public offering in June
of 1996 was $24,418,512. From June 7, 1996 to September 30,
1998 the Company used such net offering proceeds, in direct or
indirect payments to others, as follows:
<S> <C>
Purchase and installation of machinery
and equipment $ 676,964
Working capital 15,024,428
Repayment of debt 336,168
Investments in short term,
interest-bearing obligations 8,380,952
------------
Total $ 24,418,512
============
</TABLE>
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
---------
<TABLE>
<CAPTION>
Exhibit
Number Description
------ --------------------------------------
<S> <C>
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 September 30, 1998.
16
<PAGE> 16
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: November 13, 1998 By: /s/ PHILIP M. SAWYER
------------------------------
Philip M. Sawyer
President, Chief Executive Officer,
Principal Financial Officer
17
<PAGE> 17
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS RESTATED SUMMARY FINANCIAL INFORMATION EXTRACTED
FROM FORM 10-Q FOR THE PERIOD ENDED SEPTEMBER 30, 1998 AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 5,870
<SECURITIES> 3,030 <F1>
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 9,069
<PP&E> 737 <F2>
<DEPRECIATION> 0
<TOTAL-ASSETS> 9,860
<CURRENT-LIABILITIES> 1,290
<BONDS> 0
0
0
<COMMON> 7
<OTHER-SE> 35,994
<TOTAL-LIABILITY-AND-EQUITY> 9,860
<SALES> 0
<TOTAL-REVENUES> 0
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 4,875 <F3>
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 59
<INCOME-PRETAX> (6,120)
<INCOME-TAX> 0
<INCOME-CONTINUING> (6,120)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (6,120)
<EPS-PRIMARY> (0.86) <F4>
<EPS-DILUTED> (0.86)
<FN>
<F1> Securities, item 5-02(2) are net of accrued interest and unrealized
gain/loss.
<F2> Item shown net of allowance, consistent with the balance sheet
presentation.
<F3> Item consists of research and development.
<F4> Item consists of basic earnings per share.
</FN>
</TABLE>
