<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1999
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
9,050,114 as of May 11, 1999.
This Report on Form 10-Q includes 32 of pages with the Index to Exhibits
located on page 21.
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FUSION MEDICAL TECHNOLOGIES, INC.
INDEX TO
REPORT ON FORM 10-Q
FOR QUARTER ENDED MARCH 31, 1999
Page
----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements:
Condensed Consolidated Balance Sheets - March 31, 1999
(unaudited) and December 31, 1998............................ 3
Condensed Consolidated Statements of Operations - Three
Months Ended March 31, 1999 (unaudited) and 1998 (unaudited). 4
Statements of Condensed Consolidated Cash Flows - Three
Months Ended March 31, 1999 (unaudited) and 1998 (unaudited). 5
Notes to Condensed Consolidated Financial Statements.......... 6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations......................................... 9
Item 3. Quantitative and Qualitative Disclosures About Market Risk..... 20
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.............................................. 21
Item 2. Changes in Securities.......................................... 21
Item 6. Exhibits and Reports on Form 8-K............................... 21
Signatures..................................................... 22
2
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PART I-FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
FUSION MEDICAL TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
(unaudited)
March 31, December 31,
1999 1998 (1)
-------- -----------
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 3,660 $ 4,151
Available-for-sale-securities 1,507 3,013
Inventory 76 -
Other assets 448 135
-------- --------
Total current assets 5,691 7,299
Property and equipment, net 859 735
Long-term assets 43 54
-------- --------
Total assets $ 6,593 $ 8,088
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities $ 1,079 $ 1,057
Long-term obligations 175 204
-------- --------
Total liabilities 1,254 1,261
-------- --------
Common stock and other equity 36,153 36,059
Accumulated deficit (30,814) (29,232)
-------- --------
Total stockholders' equity 5,339 6,827
-------- --------
Total liabilities and stockholders' equity $ 6,593 $ 8,088
======== ========
</TABLE>
The accompanying notes are an integral part of these condensed
consolidated financial statements.
(1) Data extracted from audited consolidated financial statements dated
December 31, 1998 of Fusion Medical Technologies, Inc.
3
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<TABLE>
<CAPTION>
FUSION MEDICAL TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands except per share amounts)
(unaudited)
Three Months Ended
March 31,
--------------------
1999 1998
-------- --------
<S> <C> <C>
Costs and expenses:
Research and development $ 1,127 $ 1,572
Marketing, general and administrative 534 581
-------- --------
Total costs and expenses 1,661 2,153
-------- --------
Operating loss (1,661) (2,153)
Interest income 79 157
Interest expense (7) (38)
Other income 7 -
-------- --------
Net loss $ (1,582) $ (2,034)
======== ========
Basic and diluted net loss per share $ (0.22) $ (0.29)
======== ========
Shares used in computing basic and diluted net
loss per share 7,159 7,125
======== ========
</TABLE>
The accompanying notes are an integral part of these condensed
consolidated financial statements.
4
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<TABLE>
<CAPTION>
FUSION MEDICAL TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
Three Months Ended
March 31,
--------------------
1999 1998
-------- --------
<S> <C> <C>
Cash flows used for operating activities:
Net loss $ (1,582) $ (2,034)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 86 81
Accretion of available-for-sale securities 6 3
Amortization of deferred compensation 26 43
Interest on notes receivable from stockholder - (1)
Change in assets and liabilities:
Accounts receivable (2) 18
Prepaids and other current assets (312) 7
Inventory (76) -
Other assets 11 (8)
Accounts payable 76 95
Accrued expenses (54) (329)
-------- --------
Net cash used in operating activities (1,821) (2,125)
-------- --------
Cash flows from investing activities:
Acquisition of property and equipment (210) (4)
Purchases of available-for-sale securities - (1,511)
Sales and maturities of available-for-sale securities 1,500 3,453
-------- --------
Net cash provided by investing activities 1,290 1,938
-------- --------
Cash flows from financing activities:
Proceeds from issuance of note - 408
Repayment of notes payable (29) (33)
Proceeds from exercise of common stock options 69 7
-------- --------
Net cash provided by financing activities 40 382
-------- --------
Net increase (decrease) in cash and cash equivalents (491) 195
Cash and cash equivalents, beginning of period 4,151 7,473
-------- --------
Cash and cash equivalents, end of period $ 3,660 $ 7,668
======== ========
Supplemental disclosure of cash flow information:
Cash paid for interest $ 7 $ 11
======== ========
</TABLE>
The accompanying notes are an integral part of these condensed
consolidated financial statements.
5
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FUSION MEDICAL TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1999
(Unaudited)
1. Basis of presentation
The accompanying condensed consolidated 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 condensed consolidated balance sheet as of March 31,
1999, and the condensed consolidated statements of operations for the three
months ended March 31, 1999 and 1998, and the condensed consolidated
statements of cash flows for the three month periods ended March 31, 1999 and
1998 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 consolidated
operating results and cash flows for those periods. Although the Company
believes that the disclosures in these condensed consolidated 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
condensed consolidated 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, 1998.
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
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 1,106,013 and 912,501 shares of
common stock at prices ranging from $.16 to $11.50 per share were outstanding
at March 31, 1999 and 1998, 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.
6
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FUSION MEDICAL TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
March 31, 1999
(Unaudited)
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. Inventory
As of March 31, 1999, the Company began capitalizing its inventories of raw
materials related to FloSeal. Inventory is recorded at the lesser of cost or
market using the LIFO method. For purposes of presentation, those materials
and related production items consumed by the Research and Development process
have been expensed and are thus excluded from the Condensed Consolidated
Balance Sheet.
5. Debt
In December 1997, the Company signed an agreement for a bank loan facility to
finance existing equipment up to a total of $1,000,000, and future equipment
purchases for up to a total facility limit of $2,500,000. The facility is
secured by the equipment financed. The loan balance is subject to a floating
interest rate equal to the bank's prime rate plus 1.5% per annum (9.25% at
March 31, 1999). The unused portion of the total loan facility commitments
are subject to a 0.5% quarterly commitment fee. As of March 31, 1999, the
Company had drawn down $291,953 on the existing equipment loan facility and
had no draw down on the new equipment loan facility. In connection with this
loan facility, Fusion issued a warrant to purchase 4,500 shares of common
stock at an exercise price of $4.00 per share. This warrant expires in
December 2002. These facilities are subject to specific positive and negative
covenants that include restrictions on the declaration or payment of any
dividend or any other distribution on any of its capital stock. The Company
was in compliance with those covenants at March 31, 1999.
6. Segment Reporting
The Company operates in one reportable segment: surgical sealants and topical
hemostat products. The Company is compliant with the segment reporting
requirements of 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 has not impacted the Company's consolidated financial
position, results of operations or cash flows.
7. Recent Accounting Pronouncements
In June 1998, the FASB issued Statement of Financial Accounting Standards
(SFAS) No. 133, "Accounting for Derivative Instruments and Hedging
Activities", which establishes accounting and
7
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FUSION MEDICAL TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
March 31, 1999
(Unaudited)
reporting standards for derivative instruments and hedging activities. It
requires that an entity recognize all derivatives as either assets or
liabilities in the statement of financial position and measure those
instruments at fair value. The Company, to date, has not engaged in
derivative and hedging activities. The Company will adopt SFAS No. 133 as
required for its first quarterly filing of calendar year 2000.
8. Subsequent Event
On April 6, 1999, the Company closed a follow-on offering of 1.8 million
shares of its common stock that resulted in net proceeds to the Company of
approximately $8.7 million.
8
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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 Form 10-K for the Year Ended December 31, 1998.
OVERVIEW
Since inception in October 1992, we have been primarily engaged in the
research and development of surgical sealants and topical hemostats. As of
March 31, 1999, we had an accumulated deficit of $30.8 million. Operating
losses are expected to continue at least through 2001.
We commenced selling our first product, the RapiSeal patch, in late
1996. After careful consideration, we reallocated our capital resources to
the development of FloSeal and in late 1997 discontinued sales of the
RapiSeal patch and disbanded our test sales force
In 1998, we conducted a ten-center, 309-patient pivotal clinical trial
to demonstrate the safety and effectiveness of FloSeal. We filed for European
regulatory clearance and received CE mark clearance on April 20, 1999. We
have completed submission of our premarket approval application for FloSeal
with the FDA and the application was accepted for filing by the FDA and given
streamlined review status on April 27, 1999. In addition, we have been
expanding our manufacturing capacity in order to be able to meet the
anticipated product supply requirements for commercial sale of FloSeal. We
expect to complete the expansion of our manufacturing facility by the end of
the second quarter of 1999. In conjunction with this expansion, we anticipate
spending a total of approximately $250,000 for the purchase of production
equipment and $275,000 for the facilities' upgrade.
Future revenues, if any, and our results of operations may fluctuate
significantly from quarter-to-quarter and will depend upon, among other
factors:
o our ability to obtain regulatory clearances for FloSeal
o our ability to successfully commercialize the product
o the speed with which the Company's product or products proceed
through clinical trials and the preparation of related regulatory
submissions,
o the speed with which regulatory agencies review and potentially
clear the Company's products,
o the rate at which the Company or its corporate partners for
distribution establish product distribution networks and mobilize
the available sales forces,
o the rate at which the Company's products gain market acceptance,
o the timing and impact of the introduction of competitive products
for surgical sealant functions,
o the regulation and setting of relevant reimbursement levels and
o other factors relating to the commercialization of medical products.
9
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
RESULTS OF OPERATIONS
Three Months Ended March 31, 1999 and 1998
- ------------------------------------------
NET SALES
Due to the Company's exit of the RapiSeal Patch business and current
focus on the development of our new product, FloSeal, the Company had no
revenues in the three months ended March 31, 1999 and 1998, respectively.
RESEARCH AND DEVELOPMENT
Research and development expenses decreased 28% to $1,127,000 in the
three months ended March 31, 1999 compared to $1,572,000 in the three months
ended March 31, 1998. The decrease for the first quarter of 1999 is
attributable to reduced development expenses related to clinical and
preclinical activities for development of FloSeal Matrix. For the full fiscal
year 1999, the Company believes research and development expenses are likely
to exceed those of 1998 as the Company devotes more resources to the support
of new products based on the FloSeal Matrix technology.
MARKETING, GENERAL AND ADMINISTRATIVE
Marketing, general and administrative expenses decreased 8% to $534,000
in the three months ended March 31, 1999, compared to $581,000 for the three
months ended March 31, 1998. The decrease for the first quarter of calendar
year 1999, compared to the year earlier period, was primarily the result of
decreases in expenses associated with external professional resources,
primarily legal expenses.
INTEREST INCOME
Net interest income decreased 50% to $79,000 for the three months ended
March 31, 1999 compared to $157,000 for the three months ended March 31,
1998. The decrease was attributable primarily to the declining balance of
the Company's investment portfolio.
NET LOSS
As a net result of the items discussed above, net loss was $1,582,000
for the three months ended March 31, 1999. This is an improvement of 22% or
$452,000 over the net loss of $2,034,000 for the three months ended March 31,
1998.
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 1999, the Company's cash, cash equivalents and available-
for-sale securities were $5,167,000 compared to $7,167,000 at December 31,
1998.
For the three months ended March 31, 1999 and 1998 the Company's
operations consumed cash of $1,821,000 and $2,125,000, 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
calendar year 1999 and into
10
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
2000 as it continues to devote resources to the commercialization of FloSeal
Matrix and develops other products based on the FloSeal Matrix technology.
In December 1997, we signed an agreement for a bank loan facility to
finance existing equipment up to a total of $1,000,000, and future equipment
purchases for up to a total facility limit of $2,500,000. The facility is
secured by the equipment financed. The loan balance is subject to a floating
interest rate equal to the bank's prime rate plus 1.5% per annum (9.25% at
March 31, 1999). The unused portion of the total loan facility commitments
are subject to a 0.5% quarterly commitment fee. As of March 31, 1999, we had
drawn down $291,953 on the existing equipment loan facility and had no draw
down on the new equipment loan facility. In connection with this loan
facility, we issued a warrant to purchase 4,500 shares of common stock at an
exercise price of $4.00 per share. This warrant expires in December 2002.
These facilities are subject to specific positive and negative covenants that
include restrictions on the declaration or payment of any dividend or any
other distribution on any of its capital stock. The Company was in compliance
with those covenants at March 31, 1999.
We closed a follow-on offering of 1.8 million shares of our common stock
on April 6, 1999. The follow-on offering resulted in net proceeds to us of
approximately $8.7 million. We believe that net proceeds from the follow-on
offering, together with existing cash, cash equivalents and available-for-
sale securities will be sufficient to fund our operations through the year
2000. However, the amount and timing of our capital requirements cannot be
predicted with certainty. Our future capital requirements will depend on
numerous factors, including the following:
o timing of regulatory actions on FloSeal,
o our ability to enter into strategic marketing arrangements,
o the timing of our manufacturing scale-up,
o the extent and timing of any future FloSeal sales, and
o the nature, timing and success of other products under development.
We expect to commit substantial capital resources to the development of
commercial-scale manufacturing for FloSeal. The working capital requirements
for the development and commercial launch of our other products are also
expected to be substantial. If we are unable to secure corporate partners to
distribute our products, we will incur substantial additional expenditures in
sales and marketing capability
ADDITIONAL FACTORS THAT MIGHT AFFECT FUTURE RESULTS
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 Form 10-K for the Year Ended December 31, 1998.
The Year 2000 Computer Problem
We may be adversely affected by the Year 2000 computer problem.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
Beginning on January 1, 2000, computer systems and software will produce
erroneous results or fail unless they have been modified or upgraded to
process date information correctly. Our primary exposure with respect to this
problem involves third party software we have purchased or licensed for our
financial systems, network and telecommunications equipment. Our financial
systems software is Year 2000 compliant. We have obtained the software needed
to make our network Year 2000 compliant. We have analyzed the Year 2000 risk
with regard to our telecommunications equipment and have concluded that there
is no material Year 2000 risk. We have expended approximately $12,000 in
our internal review and will continue to make certain investments, estimated
not to exceed $50,000, in our software systems and applications to ensure our
information systems are ready for the year 2000. The necessary funds to
support these renovations have come from our operating budget and we do not
anticipate that we will need to allocate special future funding outside of
historical levels for this item. The financial impact of our year 2000
readiness effort has not been and is not anticipated to be material to our
financial position or results of operations in any given year.
To date, we have not encountered any material Year 2000 problems with
software and information systems provided to us by third parties. We have
contacted our suppliers of bovine hides and thrombin, the two essential
supplies we require for FloSeal and have confirmed that there is no material
Year 2000-associated risk of a delay in supply from these sources. We could
be materially adversely affected if third parties, upon whom we depend in
order to run our day-to-day business, experience Year 2000 problems. A worst
case scenario would involve a complete disruption in the delivery of materials,
power, heat and water to our facilities, which would prevent us from being able
to manufacture and ship our products. We have not developed contingency plans
for operation of our business in the event of a complete disruption of
utilities and other services nor do we believe that it is feasible to do so.
Other than problems that would be experienced by businesses generally, we do
not anticipate any Year 2000 problems unique to our company.
We did not generate any revenues in 1998 and 1999; we have a history of
losses and we expect losses to continue in the future.
We have not achieved profitability and expect to incur net losses
through at least 2001. We incurred net losses of $7.0 million, $10.0 million
and $7.7 million for the years ended December 31, 1996, 1997 and 1998,
respectively. As of March 31, 1999, we had an accumulated deficit of $30.8
million. We have not had significant revenues in any period since our
inception. We expect to increase our operating expenses in the near future,
including sales and marking, manufacturing and research and development
expenses, as we approach commercialization of FloSeal and continue
development of our other products. As a result, we will need to generate
significant revenues to achieve and maintain profitability. The amount of
future net losses and the time required to achieve profitability are highly
uncertain. If we do achieve profitability in any period, we cannot be certain
that we will sustain or increase such profitability on a quarterly or annual
basis.
If we do not successfully commercialize FloSeal, our business will suffer.
We are dependent upon the success of our lead product under development,
FloSeal. We have not yet received necessary regulatory approval for the
commercial sale of FloSeal in the United States or Europe. We have filed for
European regulatory clearance and received CE mark clearance on April 20,
1999. We have completed submission of our premarket approval application for
FloSeal with the FDA and the application was accepted for filing by the FDA
and given streamlined review status on April 27, 1999. Our success after
regulatory approval, if any, will depend on the medical community's
acceptance of FloSeal and our ability to successfully scale up commercial
manufacturing and develop an effective sales, marketing and distribution
capability. We cannot predict how quickly, if at all, the medical community
will accept FloSeal, or if accepted, the extent of its use. A surgeon's use
of FloSeal will require the
12
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
surgeon to change from his or her usage of currently available products with
which they are familiar. For FloSeal to achieve market acceptance, it will have
to be priced competitively and offer clinically significant advantages over
other commercially available products. Even if the market generally accepts
FloSeal, surgeons may choose to use it in fewer procedures than projected. If
FloSeal does not achieve significant market adoption, our business will be
materially and adversely affected.
Significant increases in operating expenses in the future may adversely
effect our operating results and financial condition.
We plan to significantly increase our operating expenses to expand our
sales and marketing operations and broaden our customer support capabilities
as we approach commercial introduction of FloSeal and fund greater levels of
product development. Our operating expenses, which include sales and
marketing, research and development and general and administrative expenses,
are based on our expectations of future revenues and are relatively fixed in
the short term. If revenues fall below our expectations, we will not be able
to quickly reduce our spending in response, which would materially adversely
affect our operating results and financial condition.
Our limited operating history, dependence upon an unapproved product and lack
of experience in manufacturing and marketing FloSeal may result in
significant fluctuations of our financial results.
Our limited operating history, dependence upon FloSeal, an unapproved
medical device, to provide revenue and our lack of experience in
manufacturing and marketing FloSeal may likely cause our operating results to
fluctuate dramatically. As a result of these fluctuations and uncertainties
in our operating results, we believe that quarter-to-quarter or annual
comparisons of our operating results are not a good indication of our future
performance. In addition at some point in the future, these fluctuations may
likely cause us to perform below the expectations of public market analysts
and investors. If our results were to fall below market expectations, the
price of our common stock would likely fall. Our limited operating results
have varied widely in the past, and we expect that they will continue to vary
significantly from quarter-to-quarter as we attempt to commercially produce
and establish our products in the market, after the appropriate governmental
approvals, if any, are received.
We received net proceeds of approximately $8.7 million from our
secondary offering of common stock. In addition to our current cash and cash
equivalents, these proceeds should be sufficient to fund our planned operations
through the year 2000, which is prior to the time that we expect to achieve
profitability. As a result, we must raise additional funds in the year
2001 in order to be successful. Alternative financing strategies may include,
but are not limited to:
o partnering relationships with larger medical device companies,
o bank facilities, or
o debt or additional equity offerings.
If we are unable to raise additional funds when needed, we may not be
able to market FloSeal as planned, or continue development of our other
products, which would materially and adversely affect our business.
13
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
Additional funding may not be available to us or, if available, may not be
available on commercially reasonable terms.
When we need to raise additional money to fund our operations, we cannot
be certain that funding from any source will be available to us on acceptable
terms, or at all. The amount and the timing of raising additional funds will
depend primarily upon our ability to obtain needed regulatory clearances and
generate revenues from the sale of FloSeal. Our inability to obtain any
additional funding on reasonable terms will materially and adversely affect
our business.
If we do not obtain FDA approval, we cannot sell FloSeal in the United
States, which would significantly harm our business.
FloSeal is considered to be a medical device and will be subject to
extensive regulation in the United States. Before we can market FloSeal or
any of our other products under development in the United States, we must
show in clinical trials that our products are safe and effective, and obtain
approval from the FDA, which cannot be guaranteed. Clinical trial data can
also be the subject of differing interpretation. There is no assurance that
FDA will interpret our clinical data the same way we do, or that FDA will not
require additional clinical data to support approval.
We must obtain premarket approval from the FDA for FloSeal before we can
market it. We have recently completed submission of our full premarket
approval application. In 1998, we conducted a ten-center, 309-patient pivotal
clinical trial to demonstrate the safety and effectiveness of FloSeal. We
have completed submission of our premarket approval application for FloSeal
with the FDA and the application was accepted for filing by the FDA and given
streamlined review status on April 27, 1999. We cannot guarantee either the
timing or receipt of approval. The FDA may also limit the uses of FloSeal or
any of our other products during the approval process. Delays in the FloSeal
approval process, limitation of its labeling claims or denial of our
premarket approval application would cause our business to be materially and
adversely affected. We will face a similar process and similar risks for each
product that we wish to market, including SinuSeal.
We may have to incur significant costs in obtaining and maintaining
compliance with regulations governing our manufacturing operations.
We are also required to demonstrate compliance with Quality System
regulations before approval of FloSeal, and maintain compliance after
approval. The Quality System regulations are similar to good manufacturing
practices and relate to product testing and quality assurance, as well as the
maintenance of records and documentation. The FDA enforces the Quality System
regulations through pre-approval and periodic post-approval inspections. We
have never been through a Quality System inspection by the FDA, and we can
provide no assurance that we will be able to pass such an inspection or
maintain compliance. If we or any third party manufacturer of our products do
not conform to the Quality System regulations and cannot be brought up to
such a standard, we will be required to find alternative manufacturers that
do conform. This may be a long and difficult process. We may have to incur
significant costs to comply with such laws and regulations and our failure to
comply with them could lead to penalties that could have a material and
adverse affect on our business.
International sales of our products will also be subject to extensive
regulation. In order to market FloSeal and other products in the member
countries of the European Union, we obtained required CE mark certification
in April 1999. CE mark certification is an international symbol of adherence
to certain quality
14
<PAGE> 14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
assurance standards and compliance with the European Medical Devices
Directives. In February 1997, we received ISO 9001 and EN 46001 qualification
of our processes, which is one of the principal steps in the CE mark
certification process.
If we fail to maintain regulatory approvals after FloSeal is commercialized,
our business will suffer.
If we get approval, whether in the United States or internationally, we
will continue to be subject to extensive regulatory requirements. These
regulations are wide-ranging and govern, among other things:
o product changes or modifications,
o product manufacturing,
o Quality System requirements,
o Medical Device Reporting regulations,
o FDA's restrictions on promoting products for unapproved, off-label
uses, and
o product sales and distribution.
If we fail to comply or maintain compliance with medical device laws or
regulations, we may be fined and barred from selling our products. If the FDA
believes that we are not in compliance with the law, it can:
o retain or seize our products,
o issue a recall,
o stop future violations, and
o assess civil and criminal penalties against us.
Our failure to comply with regulatory requirements could have a material
adverse effect on our business. Regulations are also subject to change. We
cannot predict the effect, if any, that such changes might have on our
business.
Our ability to achieve any significant revenue will depend on our ability to
establish effective sales, marketing and distribution capabilities.
If we fail to establish a sufficient marketing and distribution or
direct sales force to commercialize FloSeal or any of our other products, our
ability to enter new or existing markets will be impaired. Our inability to
effectively enter these markets would materially and adversely affect our
business. The alternatives for selling our products are:
o distribution agreements,
o collaborative arrangements with corporate strategic partners, or
o our own direct sales force.
We have not and we cannot be certain that we will be able to enter into
distribution agreements or collaborative arrangements on a timely basis or at
all, or that these relationships will be successful. We have only limited
experience in establishing and managing a direct sales force, from selling
the RapiSeal
15
<PAGE> 15
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
patch, a prior product line, and we cannot be certain that we
can establish and manage a direct sales force for FloSeal. Our ability to
achieve any significant revenue will depend heavily upon our success in
establishing effective sales and market capabilities, either through
distribution or collaboration arrangements, a direct sales force or a
combination of these.
We may be unable to effectively commercialize FloSeal because the market for
surgical bleeding control products is highly competitive.
The market for products that control surgical bleeding is highly
competitive. A wide variety of approved products such as Gelfoam plus
thrombin and fibrin glues, exist today that will compete directly with
FloSeal, which has not yet received approval for domestic or international
sale. Many competitive products are produced by companies that have
competitive advantages over us, such as:
o greater name recognition,
o broader product lines,
o greater distribution capabilities,
o substantially greater capital resources, and
o larger marketing, research and development staffs and facilities.
Such companies include, for example Upjohn, Inc. and Johnson & Johnson.
We cannot be certain FloSeal or our other products will be able to
successfully compete against these products and companies, or any other
companies which may enter the marketplace. In addition, we cannot be certain
that current competitors or other companies will not succeed in developing
technologies and other products that are more effective or that would render
our technology or products obsolete or unable to compete.
We have five pending patent applications. Our failure to obtain issued
patents and, consequently, to protect our proprietary technology, could
impair our competitive position.
We regard elements of FloSeal as proprietary and we attempt to protect
them through patent and trade secret laws and restrictions, as well as
licenses and contractual confidentiality provisions. Any steps that we take
to protect our intellectual property may be inadequate and expensive. Despite
our efforts, we may be unable to prevent third parties from infringing upon
or misappropriating our intellectual property. We have five pending U.S.
patent applications relating to FloSeal and other products under development,
but no issued patents. We also have two corresponding international patent
applications filed under the Patent Cooperation Treaty and may file
additional patent applications outside the United States at a later date.
Obtaining foreign patents may be more difficult than obtaining domestic
patents because of differences in patent laws. Protection provided by foreign
patents, if obtained, and any other foreign intellectual property protection
may be weaker than that provided domestically. Any existing or new patent
applications, domestic or international, may not result in:
o the priority of our patent applications over others' applications or
issued patents,
o the issuance of any patents, or
o any competitive advantage.
Furthermore, our competitors may independently develop similar
technology in the future that substantially limits the value of our
intellectual property.
16
<PAGE> 16
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
We may not be able to commercialize FloSeal or our other products under
development if they infringe existing patents or patents that have not yet
issued, which would materially harm our business.
We have conducted searches to determine whether our patent applications
interfere with existing patents. Based upon these searches, we believe that
our patent applications and products do not interfere with existing patents.
However, we cannot be sure that relevant patents have not been issued that
could block our ability to obtain patents or commercialize our products.
Moreover, since U.S. patent applications are not a matter of public record, a
patent application could currently be on file that would stand in our way of
obtaining an issued patent. In addition, a number of medical device and other
companies, universities and research institutions have filed patent
applications or have issued patents relating to compositions and methods for
surgical sealing. The issuance of any of these potentially competing patents
could materially and adversely affect our business.
The European fear of "mad cow disease" could adversely impact acceptance of
our products in Europe.
There is uncertainty as to the European acceptance of products that
incorporate elements derived from cows. This uncertainty is due to concerns
over transmission of disease from cows to humans. This disease in cows is
commonly referred to as "mad cow disease." Transmission of this disease to
humans may cause serious illness or death. FloSeal and our other products
under development contain thrombin and gelatin derived from bovine tissue
only from traceable U.S. herds. There have been no cases of mad cow disease
associated with cattle from traceable U.S. herds. Despite this fact, concerns
over transmission of this disease to humans may prevent or substantially
delay the acceptance of FloSeal in Europe. A delay could materially and
adversely affect our business.
We cannot be certain that we will be able to manufacture FloSeal in high
volumes at commercially reasonable costs.
We have produced FloSeal for use in Canada and for our U.S. clinical
trial. However, we have no experience manufacturing FloSeal or any of our
other products under development in the amounts necessary to achieve
significant commercial sales. We are currently expanding our manufacturing
capacity, but we cannot be certain that we will be capable of reliable, high-
volume manufacturing at commercially reasonable costs. We believe that our
manufacturing capacity will be sufficient through 2000. However, we could
encounter problems related to:
o capacity constraints,
o production yields,
o quality control, and
o shortages of qualified personnel.
Such problems could affect our ability to adequately scale-up production
of our products and fulfill customer orders on a timely basis, which could
materially and adversely affect our business.
17
<PAGE> 17
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
Our manufacturing facilities will be subject to Quality System
regulations, international quality standards and other regulatory
requirements, including preapproval inspection for FloSeal and periodic post-
approval inspections for all products. We have never undergone a Quality
System inspection by FDA, and cannot guarantee we will pass such an
inspection. Our failure to implement and maintain our facilities in
accordance with these regulatory requirements and standards will result in a
delay or termination of production. Any delay or termination of production
would materially and adversely affect our business.
We do not have long-term supply arrangements with our key suppliers. There is
a risk that we could lose one or more of our key suppliers, which would
disrupt our business.
We currently purchase bovine hides and thrombin, essential elements of
FloSeal, as well as sterilization services for the end product, from single
suppliers. We purchase bovine hides from Spear Products and thrombin from
GenTrac, Inc. We do not have long-term supply arrangements with any of these
suppliers. In the event that any of our current single source suppliers
become unavailable for any reason, we will be required to obtain regulatory
approval of alternative suppliers and our business would be disrupted. Any
disruption caused by a loss of one of these suppliers could materially and
adversely affect our business.
Failure of our end-users to obtain adequate third party reimbursement for the
procedures utilizing FloSeal or our other products could adversely affect our
business.
In the United States, health care providers that purchase medical
devices, such as FloSeal and our other products under development, generally
rely on third party payors, such as federal Medicare, state Medicaid and
private health insurance plans, to reimburse some or all of the cost of the
procedure in which the medical device was used. We expect that in a
prospective payment system, such as the one utilized by the Health Care
Financing Administration which manages the federal Medicare program, and
whose polices are followed by state Medicaid and private third party payors,
that our products' costs will be incorporated into the overall cost of the
procedures, and there will not be separate reimbursement for our products.
Our success depends, in part, upon health care providers obtaining
satisfactory reimbursement from third party payors for surgical procedures
that may use FloSeal and our other products under development. Failure by our
products' users to obtain sufficient reimbursement from third party payors
for procedures in which our products are used or adverse changes in
governmental and private third party payors' policies toward reimbursement
for such procedures could mean that they reduce or eliminate purchases of our
products, which would materially and adversely affect our business.
If we obtain the necessary foreign regulatory approvals, international
market acceptance of our products would be dependent, in part, upon the
availability of reimbursement for our products or procedures that use our
products by the prevailing health care payment systems. Reimbursement and
health care payment systems in international markets vary significantly by
country and include both government-sponsored health care and private
insurance. We intend to seek international reimbursement approvals where
applicable. We cannot be certain that any such approvals will be obtained in
a timely manner, if at all. Failure to receive international reimbursement
approvals could materially and adversely affect our business.
We may face product liability claims related to the use or misuse of our
products.
We face an inherent business risk of product liability claims in the
event that the use or misuse of our products results in personal injury or
death. We have not experienced any such claims to date, but we cannot be
certain, in particular after commercial introduction of our products, that we
will not experience
18
<PAGE> 18
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
losses due to product liability claims. We currently maintain liability
insurance with combined coverage limits of $3.0 million on a claims-made basis.
We cannot be certain that the insurance policies' coverage limits are adequate.
The insurance is expensive, difficult to obtain and may not be available in the
future on acceptable terms, or at all. Any claims against us, regardless of
their merit, could materially and adversely affect our business.
Trading in our shares could be subject to extreme price fluctuations which
could adversely affect your investment.
The market price of our common stock has fluctuated widely in the past
and is likely to fluctuate in the future. We discuss the fluctuations in the
price of our stock in the section entitled "Price Range of Common Stock." The
stock prices of medical device companies over the last few years have been
volatile and difficult to predict.
We have implemented anti-takeover provisions, any of which may reduce the
market price of our common stock.
Provisions of our Certificate of Incorporation and Bylaws and Delaware
law, as well as our Preferred Shares Rights Agreement could make it more
difficult for a third party to acquire us, even if the acquisition would be
beneficial to our stockholders. We discuss these provisions in detail in the
section entitled "Description of Capital Stock."
The issuance of preferred stock with special voting and dividend
privileges under the terms of the Preferred Shares Rights Agreement may have
the effect of delaying, deferring or preventing a change in control without
any further action by the stockholders. Any such issuance may materially and
adversely affect the price of the common stock. The preferred stock may also
result in the loss of the voting control of the holders of common stock to
the holders of the preferred stock.
We also have a staggered board of directors. The board of directors
consists of seven authorized members and three classes with only one class
being elected in any one year. This staggered board could make it more
difficult for a third party to acquire us, even if the acquisition would be
beneficial to our stockholders.
Your investment will be diluted if we raise additional funding by issuing
equity securities, the voting power of your investment will be diluted
further.
If we raise additional funding by issuing more equity securities, the
new shares will dilute the voting power of your investment on a percentage
basis. Any additional issuance of equity securities may also result in the
value of your investment declining.
Because stock ownership is concentrated, you and other investors will have
minimal influence on stockholder decisions.
Officers, directors and their affiliates beneficially own approximately
50% of our outstanding common stock. As a result, these persons, individually
and as a group, may be able to significantly influence the management of our
company and all matters requiring stockholder approval, including the
election of directors. Such concentration of ownership may also have the
effect of delaying, deferring or preventing a change in control of our
company.
19
<PAGE> 19
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
Our actual results could differ materially from those anticipated in our
forward-looking statements.
This Report on Form 10-Q contains forward-looking statements that
involve risks and uncertainties. Discussions containing forward-looking
statements may be found in the material set forth under the sections entitled
"Business" and "Management's Discussion and Analysis of Financial Condition
and Results of Operations" as well as in the report generally. We used words
such as "believes," "intends," "expects," "anticipates," "plans," and similar
expressions identify forward-looking statements. This Report on Form 10-Q
also contains statements regarding the cardiovascular, spinal and vascular
surgery markets, as well as the suture and staples market and topical
hemostat market. You should not place undue reliance on these forward-looking
statements. Our actual results could differ materially from those anticipated
in the forward-looking statements for the reasons described above and
elsewhere in this prospectus.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
No change has occurred since the filing by the Registrant on Form 10-K
for the year ended December 31, 1998. Reference is made to Part II, Item 7A,
Quantitative and Qualitative Disclosures About Market Risk, in the
Registrant's Annual Report on Form 10-K for the year ended December 31, 1998.
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.
20
<PAGE> 20
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 March 31, 1999, the
Company used such net offering proceeds, in direct or indirect
payments to others, as follows:
<TABLE>
<S> <C>
Purchase and installation of machinery and equipment $ 1,353,000
Working capital 22,791,512
Repayment of debt 274,000
Investments in short term, interest-bearing obligations -
-----------
Total $24,418,512
===========
</TABLE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
--------
Exhibit
Number Description
------ ------------------------------------------------
10.1 Purchase Agreement dated March 9, 1999 between
Registrant and Spear Products.
27.1 Financial Data Schedule.
(b) Reports on Form 8-K. The Company did not file any Reports on Form
-------------------
8-K during the quarter ended March 31, 1999.
21
<PAGE> 21
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto.
FUSION MEDICAL TECHNOLOGIES, INC.
Date: May 17, 1999 By: /s/ PHILIP M. SAWYER
--------------------------------
Philip M. Sawyer
President, Chief Executive Officer,
Principal Financial Officer
22
<PAGE> 22
<PAGE>
EXHIBIT 10.1
[LETTERHEAD OF FUSION MEDICAL TECHNOLOGIES, INC.]
PURCHASE AGREEMENT
This Agreement effective this 9th day of March, 1999 and is by and between
Spear Products a _________ Corporation, (hereinafter "Seller") and Fusion
Medical Technologies, Inc., a Delaware Corporation, (hereinafter "Buyer").
WHEREAS, Buyer desires to purchase from Seller and Seller desire to sell to
Buyer under the terms and conditions set forth, herein.
NOW THEREFORE, the parties wishing to be legally bound by this contract, agree
as follows:
1. PRODUCT: Spear Products' Product Name, Bovine Calf Corium, meeting the
-------
specifications set forth in Schedule A ("Product"), which is attached to and
made part of this Agreement. Such specifications may be changed from time to
time only as agreed to in writing by the parties.
2. DURATION: Subject to Section 23 below, From March 9, 1999 and for the
--------
following two (2) years, unless otherwise agreed in writing by the parties.
This Agreement shall be automatically renewed for successive one (l) years
terms thereafter unless either party notifies the other party to the contrary
not less than ninety (90) days prior to the expiration of the then current
term.
3. QUANTITIES: Subject only to other provisions of this Agreement, Seller
----------
shall sell Buyer, and Buyer shall purchase from Seller the minimum quantities
of product in each calendar quarter of this Agreement, set forth in Schedule B
attached hereto Thirty (30) days prior to the expiration of the last quarter of
Schedule B, Buyer will supply a non-binding forecast to Seller for the amount
of Product Buyer anticipates purchasing during the subsequent four quarter
period ("Forecast"). The Forecast will be updated semi-annually by Buyer. The
first two quarters of the Forecast presented to Seller shall be binding ("the
Binding Forecast"). Buyer will supply a semi-annual forecast to Seller not less
than fourteen (14) days prior to the end of the preceding six month period for
Product to be purchased during the subsequent six months.
4. ORDER AND DELIVERY: Buyer shall issue a purchase order for each delivery of
------------------
Product under this Agreement. Each purchase order shall state the desired
shipment date and the quantity being ordered. Buyer shall also state what
percentage of the quantity is to be shipped. Seller shall acknowledge promptly
each purchase order issued by Buyer in writing and confirm delivery dates to
destinations specified by Buyer; however, delivery dates must not conflict with
Seller's normal manufacturing lead times which shall not exceed 2 weeks. If any
terms and conditions contained in such purchase order or acknowledgment
conflict with the terms of the Agreement, the terms and conditions of this
Agreement shall apply to the transaction.
ADDITIONAL QUANTITIES: During the initial term of this Agreement (which expires
- ---------------------
2 years after execution), Seller will supply in any given year up to 200% of
the expected semi-annual
<PAGE> 23
purchase quantities indicated in Buyer's semi-annual forecast without further
Agreement. Following the initial term of this Agreement, Seller will supply in
any given period up to 200% of the expected semi-annual purchase quantities
indicated in Buyer's semi-annual forecast without further agreement. In the
event that Buyer requires in any period quantities which exceed 200% of the
forecasted semi-annual quantity, Buyer shall so notify Seller in writing at
least ninety (90) days in advance of Buyer's desired shipping date. Seller
shall use its reasonable efforts (consistent with good business practice) to
meet Buyer's requirements for such additional Product and shall inform Buyer
within 30 days of notice whether or not Seller will supply all or a portion of
such requirements.
6. FAILURE TO PURCHASE MINIMUM QUANTITIES: In the event that Buyer fails to
--------------------------------------
purchase in a given 6 month period the forecasted semi-annual purchase
quantity, Buyer will pay to Seller within 60 days of the close of the period in
which the shortfall occurs an amount equal to 100% of the contract price for
the unpurchased Product, which is the difference between the forecasted semi-
annual quantity and the quantity actually purchased during such year. Buyer's
obligations under this Section 6 are conditioned upon Seller's delivery to
Buyer within sixty (60) days after the end of any such 6 month period of an
amount of Product equal to the difference between the Binding Forecast quantity
and the quantity actually purchased by Buyer during such calendar year.
7. PRICE: The price for the Product shall be forty-two dollars per pound
-----
($42/1b) of product plus the appropriate shipping costs. Buyer will be invoiced
for the Product and shipping costs upon shipment. The price may be adjusted by
Seller annually by so notifying Buyer in writing at least thirty (30) days
prior to the effective date of such change. Such Price shall be paid for all
Product shipped hereunder on and after the date it becomes effective, unless
subsequently again revised by Seller as provided herein. The total cumulative
price increase may not exceed on a percentile basis the cumulative increase in
the CPPI (i.e., Products Price Index for Chemicals and Allied Products, as
published by the United States Department of Labor, Bureau of Labor Statistics)
between the effective date of this Agreement and the date of the proposed price
increase. If other cost factors such as, without limitation, raw material
costs, regulatory costs, or product liability costs, elicit a price increase
greater than that permitted by this Section, Seller will give written notice to
Buyer at least ninety (90) days in advance of the effective date of such
increase. Buyer may accept such price increase or elect to terminate this
Agreement. If Buyer elects to terminate according to the terms of this section,
Seller will continue to provide Buyer with product hereunder at the current
contract price for ninety (90) days.
8. WARRANTY: Seller warrants that the Product shipped hereunder meets the
--------
specifications set forth in Schedule A. Other than the foregoing, SELLER MAKES
NO WARRANTIES OF MERCHANTABILITY OR OF FITNESS FOR A PARTICULAR PURPOSE EVEN IF
THAT PURPOSE IS KNOWN TO SELLER, NOR ANY OTHER EXPRESS OR IMPLIED WARRANTY.
Buyer assumes all risk and liability for results obtained by the use of Product
(provided they meet Specifications as defined in Schedule A herein) covered by
this Agreement, whether used singly or in combination with other products.
2
<PAGE> 24
9. INDEMNIFICATION:
--------------
(a) Indemnification by Seller. Subject to the following terms and
-------------------------
conditions, Seller agrees to indemnify, defend and holds harmless Buyer and
each of its shareholders, affiliates and their respective, directors, officers,
employees, attorneys, agents, and representatives from and against any and all
claims, losses, damages, liabilities, demands, causes of action, proceedings
and suits, including all reasonable attorneys' fees and expenses ("Claims"),
arising out of, relating to or in connection with any failure to meet the
Specifications set forth in Schedule A. Buyer agrees that Seller has the right
----------
to defend, or at its option to settle, and Seller agrees, at its own expense,
to defend or at its option to settle, any Claims brought against Buyer by any
third party for infringement of any U.S. patent or worldwide copyright or trade
secret by the Product and Seller agrees to indemnify, defend and hold harmless
Buyer from and against any Claims related thereto, provided, however, that
Seller assumes no infringement liability for (x) any combination of Product
with other products not provided by Seller, which infringement would not arise
from Product standing alone, or (y) the modifications of such Product by Buyer
or any third party where such infringement would not have occurred but for such
modifications, or (z) materials furnished by Buyer. If it is adjudicatively
determined that any Product infringes a third party's U.S. patent or worldwide
copyright or trade secret, or if the sale or use of the Product is, as a
result, enjoined, then Seller may, at its option and expense either; (i)
procure for Buyer the right under such patent, copyright or trade secret to use
the Product; or (ii) replace the Product with functionally equivalent
noninfringing products; or (iii) modify the Product to make the Product
functionally equivalent and noninfringing. THE FOREGOING PROVISIONS OF THIS
SECTION STATE THE ENTIRE LIABILITY OF SELLER AND THE EXCLUSIVE REMEDY OF BUYER
WITH RESPECT TO ANY ALLEGED INFRINGEMENT OF PATENTS, COPYRIGHTS, TRADEMARKS OR
OTHER INTELLECTUAL PROPERTY RIGHTS BY THE PRODUCT.
(b) Indemnification by Buyer. Subject to the following terms and
------------------------
conditions, Buyer agrees to indemnify, defend and hold harmless Seller and
shareholders, affiliates and their respective, directors, officers, employees,
attorneys, agents and representatives from and against any and all Claims
arising out of, relating to or in connection with the use or sale of the
Product in Buyer's applications or applications development.
(c) Indemnification Procedures. In the event that any Claims are asserted
--------------------------
by any third party which may give arise to any damage, liability, loss or cost
or expense in respect of which either party has indemnified the other party
under this Section, the indemnified party shall give the indemnifying party
written notice of the institution of such proceedings, or the assertion of such
Claim promptly after the indemnified party first becomes aware thereof. The
indemnifying party shall have sole control over the defense and/or settlement
of any such Claim; provided that the indemnified party may participate in any
such proceedings with counsel of its choice at its own expense. Each of the
parties agrees to cooperate fully with each other in connection with the
defense, negotiation or settlement of any such Claim and provide full
information to the indemnifying party. Notwithstanding anything to the contrary
contained in this Section, neither party shall be liable for any costs or
expenses incurred by an indemnified party without its prior written
authorization.
3
<PAGE> 25
10. USE OF TRADEMARK: Each party agrees that it will not, without the other
----------------
party's prior written consent, use and/or associate the other party, the other
part's corporate name or any of the other party's trademarks, either orally or
in writing, with any of the other party's products, except that Buyer may use
Seller's name and associate Seller with Buyer's Application as is required by
federal or state regulation in gaining approval to market or to continue
marketing Buyer's Application.
11. QUALITY CONTROL INSPECTION AND CLAIMS: Seller will obtain from his
-------------------------------------
supplier the appropriate certifications that may be required to meet the
requirements of Buyer as outlined in Schedule A and shall be subjected to
quality control Product inspections by Buyer in accordance with CFR's, ISO 9001
or both. Buyer shall have the right to make changes to Schedule A with l0 days
written notice to Buyer. If Buyer's Product inspection shows that the Product
fails to meet the specifications contained in Schedule A, Buyer shall notify
Seller within ten (10) days of receipt of the non-conforming Product. Upon
Seller's confirmation which shall be given within ten (10) days of Buyer's
notice to Seller, Seller will provide Buyer with full credit, refund or
replacement for the shipment containing the non-conforming product, and shall
reimburse Buyer for actual costs of such inspection, including testing,
shipping and insurance in an amount up to ten (10%) percent on the purchase
price of the non-conforming Product. At any time during this Agreement, Buyer
will have the right to inspect Seller's Product production processes, and shall
have access to such documentation, personnel and facilities sufficient to
establish that Seller's Product production is in accordance with GMP. Seller
will promptly provide Buyer with all documents generated by regulatory
authorities that relate to the Product.
12. DELIVERIES: Deliveries shall be F.O.B. Lansdale, PA, U.S.A. via overnight
----------
delivery through Federal Express or other comparable delivery company. Buyer
shall be responsible for all delivery costs and will be invoiced for such by
Seller. Title to and risk of loss in all Product sold hereunder shall pass to
Buyer upon loading for shipment at Seller's plant.
13. TERMS OF PAYMENT: Buyer will pay to Seller the invoiced amount paid net
----------------
cash thirty (30) days from date of Seller's invoice. Seller may impose a late
payment service charge of 1.5% per month on invoices not paid when due. All
payments shall be in United States currency.
14. FORCE MAJEURE: No liability shall result from delay in performance, or
-------------
nonperformance, caused by circumstances beyond the control of the party
affected, included, but not limited to, Act of God, fire, flood, war.
Government action, accident, labor trouble or shortage, inability to obtain
material, utilities, equipment or transportation. Quantities so affected may be
eliminated from the Agreement without liability, but the Agreement shall remain
otherwise unaffected. Any party claiming the benefit of this Article shall
promptly so notify the other party.
15. ALLOCATION: In the event of Seller's inability for any reason to supply
----------
the total demands for Product, Seller may with sixty (60) days notice to Buyer
distribute its available supply among all purchasers, according to the
following requirements. Seller shall first supply Buyer up to 100% of its
committed order, after such order has been satisfied, Seller may then fill
4
<PAGE> 26
all other orders on such a basis as it may deem fair.. Seller shall have no
obligation to purchase supplies of Product to enable it to perform this
Agreement.
16. GOVERNMENT APPROVALS: Seller shall manufacture Product under this Agreement
--------------------
according to accepted good manufacturing practices (GMP) in accordance with the
protocols provided by the Buyer. Any changes to the manufacturing process or
specifications relating to the final product must be agreed to in writing by
both parties before such changes are implemented. Upon terms of confidentiality
acceptable to Seller, Seller agrees to cooperate with Buyer in obtaining any
such governmental approvals, including providing required information to the
FDA or any other governmental agency requesting the information to the extent
such information is readily available or can be developed at little or not cost
to Seller, unless Buyer agrees to fund such information research.
17. DOCUMENTS INCORPORATED BY REFERENCE: The following documents are hereby
-----------------------------------
incorporated by reference:
A. Schedule A entitled "Product Specifications"
dated January 1, 1997 and mutually agreed revisions.
B. Schedule B entitled "Annual Minimums"
dated January 8, 1997 and mutually agreed revisions.
18. ADVERSE EFFECTS: Buyer will investigate all adverse effects of which Buyer
---------------
has direct or indirect knowledge, in regard to any of Buyer's Application which
incorporate Product and promptly report to Seller any such effects that may
relate to Product.
19. COMPLIANCE WITH LAW: Each party represents that it is and will remain in
-------------------
compliance with all applicable federal, state and local laws, regulations and
orders.
20. INDEPENDENT CONTRACTOR: The employees, methods, equipment and facilities
----------------------
of each party shall at all times be under that party's exclusive direction and
control. Buyer's relationship to Seller under the Agreement shall be that of an
independent contractor and nothing in this Agreement shall be construed to
constitute either party, or any of its employees, an agent, associate, joint
venture or partner of the other party.
21. NOTICES: All notices required hereunder shall be sent by certified mail
-------
return receipt requested, or by telex confirmed by such certified mail, to the
party to be notified at its following address or at such other address as shall
have been specified in written notice from the party to be notified. If to
"Seller", addressed to: Spear Products PO Box 1632 Lansdale, PA 19446, attn:
Jerry Spears. If to "Buyer", addressed to Fusion Medical Technologies, Inc.,
1615 Plymouth Street, Mountain View, California 94043, attn: Judy Lifrieri.
22. ASSIGNMENT: This Agreement is not assignable or transferable, in whole or
----------
in part, without the prior written consent of either party except for any
entity that acquires all or substantially all of the business or assets of a
party to which this Agreement pertains, whether by merger, reorganization,
acquisition, sale or otherwise.
5
<PAGE> 27
23. TERMINATION: If either party defaults in the performance of any material
-----------
provision of this Agreement, then the non-defaulting party may give written
notice to the defaulting party that if the default is not cured within sixty
(60) days, the agreement will be terminated. If the non-defaulting party gives
such notice and the default is not cured during the sixty-day period, then the
Agreement will automatically terminate at the end of that period. In accordance
with Section 2, either party may terminate this Agreement by giving six (6)
months written notice to the other party. Upon termination, the rights and
obligations set forth in sections 8, 9, 11, 22, 24, 26, 28 shall survive.
24. CLAUSE HEADINGS: The heading of clauses contained herein are used for
---------------
convenience and ease of reference and shall not limit the scope or intent of
the clause.
25. ENTIRETY OF AGREEMENT: This Agreement embodies the entire agreement and
---------------------
understanding between Seller and Buyer relative to the subject matter hereof
that are not merged or suspended hereby. No amendment, modification or release
from any provision hereof shall be of any force or effect unless it is in
writing, signed by the party claimed to be bound thereby, and specifically
refers to this Agreement.
26. WAIVER: No waiver by either party or any breach of the covenants herein
------
contained to be performed by the other party shall be construed as a waiver of
any succeeding breach of the same or any other covenants or conditions hereof.
27. GOVERNING LAW: This Agreement shall be governed by and interpreted in
-------------
accordance with the laws of the State of Pennsylvania. The courts of the State
of Pennsylvania shall have exclusive jurisdiction of all claims arising from
this Agreement except claims relating to payment of products.
28. SEVERABILITY. If any provision of this Agreement shall be held by a court
------------
of competent jurisdiction to be contrary to law, such provision shall be
changed and interpreted so as to best accomplish the objectives of the original
provision to the fullest extent allowed by law and the remaining provisions of
this Agreement shall remain in full force and effect.
Accepted:
Spear Product Fusion Medical Technologies, Inc.
By: /s/ Jerry Spear By: /s/ Debra Brown
------------------------------ --------------------------------
Title: President, Spear Products Title: VP, Regulatory
--------------------------- --------------------------------
Date: March 15, 1999 Date: March 10, 1999
--------------------------- --------------------------------
6
<PAGE> 28
SCHEDULE A
March 9, 1999
PRODUCT SPECIFICATIONS
SPECIFICATIONS
- --------------
Product Raw bovine calf corium
Age of animal No greater than six (6) months of age
Packaging Plastic wrapped in 51b quantities
Labeling Package marked with supplier lot number, Fusion's
purchase order number, net weight, and labeled "bovine
calf corium BCC-101"
Transportation Ship on dry ice by FED-X (or Equivalent) Overnight
Priority Delivery
Storage Store frozen
CERTIFICATION OBTAINED FROM SUPPLIER
- ------------------------------------
A SIGNED CERTIFICATION SHEET FROM SUPPLIER SHALL ACCOMPANY EACH LOT OF MATERIAL
AND CONTAIN THE FOLLOWING:
1. CERTIFICATION OF HIDE SOURCE BY SUPPLIER AS TO THE FOLLOWING ITEMS:
. USDA AND EUROPEAN STANDARDS FACILITY
. VETERINARIAN ON SITE
. HIDES OF U.S. ORIGIN
. ANIMAL AGE
. ANIMALS HAVE NOT BEEN FED RUMINANT PROTEIN or ANIMALS HAVE ONLY
BEEN FED VEGETABLE PROTEINS.
. ANIMALS HAVE BEEN CERTIFIED BY VETERINARIAN TO BE FIT FOR HUMAN
CONSUMPTION
2. SUPPLIER LOT NUMBER
7
<PAGE> 29
SCHEDULE B
ANNUAL MINIMUMS
<TABLE>
<CAPTION>
- - -----------------------------------------------------------------------------
- -----------------------------
QUARTER REQUIREMENT (LBS)
<S> <C>
- - -----------------------------------------------------------------------------
- -----------------------------
Q1'99 90lbs.
- - -----------------------------------------------------------------------------
- -----------------------------
Q2'99 90lbs.
- - -----------------------------------------------------------------------------
- -----------------------------
Q3'99 90lbs.
- - -----------------------------------------------------------------------------
- -----------------------------
Q4'99 90lbs.
- - -----------------------------------------------------------------------------
- -----------------------------
Q1'00 90lbs.
- - -----------------------------------------------------------------------------
- -----------------------------
</TABLE>
<TABLE>
<CAPTION>
<S> <C>
- - -----------------------------------------------------------------------------
- ------------
Fusion Medical Technologies, Inc. Spear Products
- - -----------------------------------------------------------------------------
- -------------
By: /s/ Debra Brown By: /s/ Jerry Spear
- - -----------------------------------------------------------------------------
- -------------
Name/Title: Debra Brown, V.P. Regulatory & Name/Title: Jerry Spear, President
- - -----------------------------------------------------------------------------
- ----------- Quality Assurance
-------------------
Date: March 9, 1999 Date: March 15, 1999
- - -----------------------------------------------------------------------------
- -------------
</TABLE>
8
<PAGE> 30
<TABLE> <S> <C>
<S> <C>
<ARTICLE> 5
<LEGEND>
EXHIBIT 27.1
THIS SCHEDULE CONTAINS RESTATED SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
FORM 10-Q FOR THE PERIOD ENDED MARCH 31, 1999 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1000
<S> <C> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 3,660
<SECURITIES> 1,507 <F1>
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 5,691
<PP&E> 859 <F2>
<DEPRECIATION> 0
<TOTAL-ASSETS> 6,593
<CURRENT-LIABILITIES> 1,079
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 5,339
<TOTAL-LIABILITY-AND-EQUITY> 5,339
<SALES> 0
<TOTAL-REVENUES> 0
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 1,127 <F3>
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (1,582)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,582)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,582)
<EPS-PRIMARY> (0.22) <F4>
<EPS-DILUTED> (0.22)
<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>
<PAGE>
</TABLE>
