UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 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, $.001 par
value, was 7,171,490 as of August 11, 1998.
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FUSION MEDICAL TECHNOLOGIES, INC.
INDEX
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PART I-FINANCIAL INFORMATION
<S> <C>
Item 1. Financial Statements: Page
Condensed Balance Sheets - June 30, 1998 (unaudited)
and December 31, 1997 ....................................... 3
Condensed Statements of Operations - Three Months Ended
June 30, 1998 and 1997 and six months ended June 30, 1998
and 1997 (unaudited) ........................................ 4
Condensed Statements of Cash Flows - Six Months ended
June 30, 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 ......................... 8
PART II-OTHER INFORMATION
Item 1. Legal Proceedings ........................................... 16
Item 2. Changes in Securities ...................................... 16
Item 3. Defaults Upon Senior Securities ............................ 16
Item 4. Submission of Matters to a Vote of Security Holders ........ 16
Item 5. Other Information .......................................... 17
Item 6. Exhibits and Reports on Form 8-K ........................... 17
SIGNATURES .................................................. 18
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2
<PAGE> 2
PART I-FINANCIAL INFORMATION
Item 1. Financial Statements
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FUSION MEDICAL TECHNOLOGIES, INC.
CONDENSED BALANCE SHEETS
(in thousands)
June 30, December 31,
1998 1997(1)
----------- ------------
(unaudited)
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 7,641 $ 7,473
Available-for-sale-securities 3,035 5,465
Other assets 175 228
-------- --------
Total current assets 10,851 13,166
Long term assets 54 1,565
Property and equipment, net 753 809
-------- --------
Total assets $ 11,658 $ 15,540
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities $ 1,121 $ 1,316
Long-term obligations 263 -
-------- --------
Total liabilities 1,384 1,316
-------- --------
Common stock and other equity 35,961 35,769
Accumulated deficit (25,687) (21,545)
-------- --------
Total stockholders' equity 10,274 14,224
-------- --------
Total liabilities and stockholders' equity $ 11,658 $ 15,540
======== ========
</TABLE>
(1) Data extracted from audited financial statements dated December 31, 1997
of Fusion Medical Technologies, Inc.
The accompanying notes are an integral part of these condensed financial
statements.
3
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<TABLE>
<CAPTION>
FUSION MEDICAL TECHNOLOGIES, INC.
CONDENSED STATEMENTS OF OPERATIONS
(in thousands except per share amounts)
(unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
------------------- -----------------
1998 1997 1998 1997
------- -------- ------- --------
<S> <C> <C> <C> <C>
Net Sales $ 28 $ 78
------- -------
Costs and expenses:
Cost of goods 224 382
Research and development $ 1,648 1,342 $ 3,220 2,583
Marketing, general and
administrative 616 1,242 1,197 2,286
------- ------- ------- -------
Total costs and expenses 2,264 2,808 4,417 5,251
------- ------- ------- -------
Operating loss (2,264) (2,780) (4,417) (5,173)
Interest income, net 170 303 327 630
Other expense (14) (7) (52) (31)
------- ------- ------- -------
Net loss $(2,108) $(2,484) $(4,142) $(4,574)
======= ======= ======= =======
Net loss per share -
basic and diluted $ (0.29) $ (0.35) $ (0.58) $ (0.65)
======= ======= ======= =======
Shares used in computing net
loss per share - basic and diluted 7,153 7,063 7,149 7,044
======= ====== ======= =======
</TABLE>
The accompanying notes are an integral part of these condensed financial
statements.
4
<PAGE> 4
<TABLE>
<CAPTION>
FUSION MEDICAL TECHNOLOGIES, INC.
STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
Six Months Ended
June 30,
------------------------
1998 1997
----------- ----------
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Cash flows used for operating activities:
Net loss $ (4,142) $ (4,574)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 160 216
Accretion of available-for-sale securities 23 (78)
Amortization of deferred compensation 80 189
Change in assets and liabilities:
Accounts receivable 21 (14)
Inventories -- 25
Prepaids and other current assets (23) 151
Other assets 45 --
Accounts payable (94) (474)
Accrued expenses (175) 173
-------- --------
Net cash used in operating activities (4,105) (4,385)
-------- --------
Cash flows from investing activities:
Acquisition of property and equipment (104) (326)
Purchases of available-for-sale securities (2,025) (2,557)
Sales of available-for-sale securities 5,953 8,595
-------- --------
Net cash provided by investing activities 3,824 5,712
-------- --------
Cash flows from financing activities:
Proceeds used from issuance of note 462 (1)
Repayment of notes payable (72) (78)
Proceeds from exercise of common stock options 59 51
-------- --------
Net cash provided by (used in) financing
activities 449 (28)
-------- --------
Net increase in cash and cash equivalents 168 1,299
Cash and cash equivalents, beginning of period 7,473 10,778
-------- --------
Cash and cash equivalents, end of period $ 7,641 $ 12,077
======== ========
Supplemental disclosure of cash flow information:
Cash paid for interest $ 80 $ 5
======== ========
Cash paid for taxes -- $ 19
======== ========
Supplemental disclosure of noncash investing and
financing activities:
Adjustment for cancellation of stock options $ 300 $ --
======== ========
The accompanying notes are an integral part of these condensed financial
statements.
</TABLE>
5
<PAGE> 5
FUSION MEDICAL TECHNOLOGIES, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
June 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 June 30, 1998, and the statements
of operations for the three and six months ended June 30, 1998 and 1997, and
the statements of cash flows for the six month periods ended June 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 anti-dilutive. No additional shares are
considered to be outstanding for either computation under the provisions of
SAB No. 98. Stock options to purchase 1,251,854 and 852,786 shares of common
stock at prices ranging from $.16 to $11.50 per share were outstanding at
June 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.
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,
6
<PAGE> 6
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 June 30, 1998, the Company has an
outstanding balance of $379,539.
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.
7
<PAGE> 7
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 committed to developing
and commercializing innovative biomaterials for treating surgical wounds. As
of June 30, 1998, the Company had an accumulated deficit of approximately
$25.7 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 half of 1998 on the
development of FloSeal(tm) Matrix (FloSeal). Beginning in December 1997,
FloSeal was utilized in an applications evaluation series of patients to stop
bleeding within a wide variety of major surgical procedures and bleeding
conditions. FloSeal successfully stopped bleeding in 116 of 120 discrete
applications (97%) in its first sixty-one surgical patients. Forty (66%) of
the patients had impaired coagulation due to anti-coagulant drug regimens,
heart-lung machine stress or hemophilia. The patients underwent thirty
different types of surgeries, which were performed at seven medical centers
in Canada, two medical centers in the Netherlands and one medical center in
Switzerland. The Company started clinical trials in the United States under
an IDE in March 1998 at ten medical centers in the areas of cardiac, vascular,
and spinal surgery.
In addition, the Company is developing a specialized applicator to use
FloSeal for sealing vascular access sites, especially in the femoral artery.
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 six Months Ended June 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 six months ended June 30, 1998
as compared to $28,000 in revenues for the three months ended June 30, 1997
and $78,000 in revenues for the six months ended June 30, 1997.
8
<PAGE> 8
RESEARCH AND DEVELOPMENT
Research and development expenses increased 23% to $1,648,000 in the three
months ended June 30, 1998 compared to $1,342,000 in the three months ended
June 30, 1997. For the six months ended June 30, 1998, research and
development expenses increased 25% to $3,220,000 as compared to expenses of
$2,583,000 for the six months ended June 30, 1997. The increase for the
second quarter and the six months ended June 30, of 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 50% to $616,000 in
the three months ended June 30, 1998, compared to $1,242,000 for the three
months ended June 30, 1997. For the six months ended June 30, 1998 marketing,
general and administrative expenses decreased 48% to $1,197,000 as compared
to $2,286,000 for the six months ended June 30, 1997. The decrease for the
second quarter, compared to the year earlier period, and the six months ended
June 30, 1998 compared to the six months ended June 30, 1997, 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
Net interest income decreased 44% to $170,000 for the three months ended June
30, 1998 compared to $303,000 for the three months ended June 30, 1997 and by
48% to $327,000 in the first six months of 1998 from $630,000 in the first
six months of 1997. The decrease was attributable primarily to the declining
balance of the Company's investment portfolio. Interest expense increased
225% to $13,000 for the three months ended June 30, 1998 compared to $4,000
for the three months ended June 30, 1997 and by 550% to $52,000 for the first
six months of 1998 from $8,000 for the first six 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 $2,108,000 for the
three months ended June 30, 1998. This is an improvement of 15% or $376,000
over the net loss of $2,484,000 for the three months ended June 30,1997. The
net loss for the six months ended June 30, 1998 was $4,142,000. This is an
improvement of 9% or $432,000 over the net loss of $4,574,000 for the six
months ended June 30, 1997.
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 1998, the Company's cash, cash equivalents and available-for-sale
securities were $10,676,000 compared to $14,460,000 at December 31, 1997.
For the six months ended June 30, 1998 and 1997 the Company's operations
consumed cash of $4,105,000 and $4,385,000, respectively. The decrease in
cash consumed by operations was due primarily to a decrease in personnel
costs, and a reduction in overall administrative spending. The Company
expects the use of cash in operating activities to continue through 1998 and
into 1999 as it continues clinical trials of FloSeal and develops other
products.
9
<PAGE> 9
Although Fusion believes that current cash balances, augmented by investment
income, and the balance of its loan facility (the balance available for use
is $2,000,000) 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 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
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.
10
<PAGE> 10
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
<PAGE> 11
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
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 June 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
13
<PAGE> 13
and Europe for 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. 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
14
<PAGE> 14
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.
15
<PAGE> 15
PART II-OTHER INFORMATION
Item 1. Legal Proceedings.
None.
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 June 30, 1998 the Company used
such net offering proceeds, in direct or indirect payments to
others, as follows:
<TABLE>
<CAPTION>
<S> <C>
Purchase and installation of machinery and equipment $ 629,937
Working capital 13,338,226
Repayment of debt 306,973
Investments in short term, interest-bearing
Obligations 10,143,376
------------
Total $ 24,418,512
============
</TABLE>
Item 3. Defaults upon Senior Securities.
None.
Item 4. Submission of Matters to a Vote of Security Holders.
The Company Annual Meeting of Stockholders was held May 21, 1998.
The results of the voting were as follows:
Proposal 1: Election of the Board of Directors of the Company.
<TABLE>
<CAPTION>
<S> <C> <C>
Election of Class I
Directors:
Nominee Votes For Votes Withheld
------- --------- --------------
Lawrence G. Mohr Jr. 6,404,611 30,850
Olav B. Bergheim 6,404,811 30,650
Election of Class II
Directors:
Nominee Votes For Votes Withheld
------- --------- --------------
Douglas E. Kelly, M.D. 6,404,811 30,650
Richard S. Schneider, Ph.D. 6,404,811 30,650
Election of Class III
Directors:
Nominee Votes For Votes Withheld
------- --------- --------------
Gordon W. Russell 6,404,811 30,650
Philip M. Sawyer 6,404,811 30,650
Vaughn D. Bryson 6,404,811 30,650
Proposal II: Approve an Amendment to the 1993 Stock Option Plan:
For Against Abstain Non-Vote
--- ------- ------- --------
4,479,479 564,326 197,429 1,194,277
Proposal III: Ratify the Appointment of PricewaterhouseCoopers
LLP as Independent Accountants:
For Against Abstain Non-Vote
--- ------- ------- --------
6,429,836 4,700 925 0
</TABLE>
Item 5. Other Information.
None.
Item 6. Exhibits and Reports on Form 8-K.
Exhibit 27.1 Financial Data Schedule.
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: August 14, 1998 By: /s/ Philip M. Sawyer
-----------------------------------
Philip M. Sawyer
President, Chief Executive Officer
17
<PAGE> 17
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM
10-Q FOR THE PERIOD ENDED JUNE 30, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 7,641
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 10,851
<PP&E> 753 <F1>
<DEPRECIATION> 0
<TOTAL-ASSETS> 11,658
<CURRENT-LIABILITIES> 1,121
<BONDS> 263
0
0
<COMMON> 35,961
<OTHER-SE> (25,687)
<TOTAL-LIABILITY-AND-EQUITY> 11,658
<SALES> 0
<TOTAL-REVENUES> 0
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 3,220 <F2>
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (4,142)
<INCOME-TAX> 0
<INCOME-CONTINUING> (4,142)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,142)
<EPS-PRIMARY> (0.58)<F3>
<EPS-DILUTED> (0.58)
<FN>
<F1> Item shown net of allowance, consistent with the balance sheet
presentation.
<F2> Item consists of research and development.
<F3> Item consists of basic earnings per share.
</FN>
</TABLE>
