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 QUARTER ENDED SEPTEMBER 30, 1995 OR
Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 (no fee required) for the transition period from
_______________ to _______________.
COMMISSION FILE NO. 0-17816
SUNRISE TECHNOLOGIES INTERNATIONAL, INC.
(Exact name of Registrant as specified in its charter)
DELAWARE 77-0148208
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
47257 FREMONT BOULEVARD, FREMONT, CALIFORNIA 94538
(Address of principal executive offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (510) 623-9001
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed 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
--------- ----------
There were 25,280,056 of the Registrant's Common Stock issued and outstanding on
October 31, 1995.
<PAGE>
INDEX
SUNRISE TECHNOLOGIES INTERNATIONAL, INC.
<TABLE>
<CAPTION>
PAGE
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited)
Consolidated Statements of Operations--Three and nine months ended 1
September 30, 1995 and 1994
Consolidated Balance Sheets--September 30, 1995 and December 31, 1994 2
Consolidated Statements of Cash Flows--Nine months ended September 30, 1995 3
and 1994
Notes to consolidated financial statements--September 30, 1995 4
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 5
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 7
Item 4. Submission of Matters to Vote of Security Holders 7
Item 6. Exhibits and Reports on Form 8-K 8
SIGNATURES 9
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i
<PAGE>
PART I. FINANCIAL INFORMATION
<TABLE>
ITEM 1. FINANCIAL STATEMENTS
SUNRISE TECHNOLOGIES INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
<CAPTION>
THREE MONTHS ENDED SEPT. 30, NINE MONTHS ENDED SEPT. 30,
1995 1994 1995 1994
--------------------------------------------------------------------
(In thousands, except per share amounts)
<S> <C> <C> <C> <C>
Net revenues $387 $1,802 $3,680 $6,388
Cost of revenues 440 1,356 2,411 4,648
--------------------------------------------------------------------
Gross profit (53) 446 1,269 1,740
Other costs and expenses:
Engineering and development 119 282 351 1,193
Sales, marketing and regulatory 533 599 2,093 2,871
General and administrative 734 470 1,646 1,777
--------------------------------------------------------------------
Total other costs and expenses 1,386 1,351 4,090 5,841
Loss from operations (1,439) (905) (2,821) (4,101)
Interest income 2 3 6 5
--------------------------------------------------------------------
Loss before taxes (1,437) (902) (2,815) (4,096)
Income tax expense (benefit) ---- ---- ---- ----
--------------------------------------------------------------------
Net loss $(1,437) $(902) $(2,815) $(4,096)
====================================================================
Net loss per share $(0.11) $(0.09) $(0.24) $(0.41)
====================================================================
Shares used in calculation of
net loss per share 13,234 10,264 11,487 9,994
====================================================================
<FN>
See accompanying notes.
</TABLE>
1
<PAGE>
SUNRISE TECHNOLOGIES INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS
SEPT. 30, DEC. 31,
1995 1994
-------------------------
(unaudited) (note)
(In thousands)
ASSETS
Current assets:
Cash $ 5,625 $ 559
Accounts receivable, net of allowance 333 770
Inventories 1,671 1,955
Prepaid expenses 363 282
-------------------------
Total current assets 7,992 3,566
Property and equipment, net 217 256
-------------------------
Total assets $ 8,209 $ 3,822
=========================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,345 $ 1,375
Accrued payroll and related expenses 175 150
Accrued warranty 324 324
Current portion of capital lease obligations 6 18
Other accrued expenses 299 598
-------------------------
Total current liabilities 2,149 2,465
Commitments and contingencies
Stockholders' equity:
Preferred Stock, $.001 par value,
2,000,000 shares
authorized, none issued or outstanding -- --
Common Stock, $.001 par value;
40,000,000 shares authorized,
25,280,056 and 10,459,286 shares
issued and outstanding at September 30,
1995 and December 31, 1994, respectively 25 10
Additional paid-in-capital 29,196 22,312
Less treasury stock at cost, none
and 275,000 shares at
September 30, 1995 and December 31, 1994, -- (619)
respectively
Accumulated deficit (23,161) (20,346)
-------------------------
Total stockholders' equity 6,060 1,357
-------------------------
Total liabilities and stockholders' equity $ 8,209 $ 3,822
=========================
NOTE: The consolidated balance sheet at December 31, 1994 has been derived from
the audited financial statements at that date but does not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements.
See accompanying notes.
2
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SUNRISE TECHNOLOGIES INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
INCREASE(DECREASE) IN CASH
(unaudited)
NINE MONTHS ENDED SEPT. 30,
1995 1994
---------------------------
(In thousands)
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $(2,815) $(4,096)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 78 395
Loss on sale of subsidiary -- 14
Changes in assets and liabilities:
Accounts receivable 437 (188)
Inventories 284 (401)
Prepaid expenses (81) (76)
Accounts payable (30) (1,332)
Accrued payroll and related expenses 25 (1)
Accrued warranty -- 160
Other accrued expenses (299) 39
---------------------------
Total adjustments 414 (1,390)
---------------------------
Net cash used in operating activities (2,401) (5,486)
---------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment (39) --
Purchase of short-term investments -- (24)
---------------------------
Net cash used in investing activities (39) (24)
---------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Payment on capital lease obligations (12) (57)
Issuance of common stock, net of offering costs 7,573 6,231
Purchase of Treasury Stock (55) --
---------------------------
Net cash provided by financing activities 7,506 6,174
---------------------------
NET INCREASE IN CASH 5,066 664
Cash at beginning of period 559 536
---------------------------
CASH AT END OF PERIOD $ 5,625 $ 1,200
===========================
See accompanying notes.
3
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
SEPTEMBER 30, 1995
1. BASIS OF PRESENTATION
The consolidated financial statements include the accounts of the Company and
its wholly-owned subsidiaries after elimination of all material intercompany
balances and transactions.
The consolidated financial data for the periods ended September 30, 1995 and
1994 are unaudited, but include all adjustments (consisting only of normal
recurring adjustments) that the management of Sunrise Technologies
International, Inc. believes to be necessary for fair presentation of the
periods presented. Interim results are not necessarily indicative of results
for the full year. The financial statements should be read in conjunction
with the audited financial statements for the year ended December 31, 1994
included in the Company's annual report on Form 10-K filed with the
Securities and Exchange Commission.
Certain prior year balances have been reclassified to conform with current
year presentation.
The Company has incurred significant losses for the last several years and at
September 30, 1995 has an accumulated deficit of $23,161,000. The
accompanying condensed financial statements have been prepared assuming the
Company will continue as a going concern. The Company's long term ability to
continue as a going concern is dependent upon returning to profitable
operations. Management's plans include increasing sales through increased
direct sales and marketing efforts on existing products and pursuing timely
regulatory approval for certain products under development.
2. NET LOSS PER SHARE
Net loss per share for the periods ended September 30, 1995 and 1994 is based
solely on weighted average shares of common stock outstanding during the
period. Common equivalent shares have not been considered in the computation
since their inclusion would have an antidilutive effect.
3. REVENUE RECOGNITION
Revenues are recognized at time of shipment. A provision for the estimated
future cost of warranty is made at the time a sale is recorded.
4. INVENTORIES
Inventories are stated at the lower of cost (first-in, first-out) or market
and consisted of the following on the dates indicated:
SEPT. 30, DEC. 31,
1995 1994
--------------------
(In thousands)
Raw materials $1,008 $1,262
Work-in-process 160 377
Finished goods 503 316
--------------------
$1,671 $1,955
====================
4
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5. INCOME TAXES
Due to the Company's losses from operations, all deferred tax assets, which
primarily result from net operating loss carry forwards, have been offset in
full by a valuation allowance in accordance with SFAS No. 109.
6. FINANCES
In September 1995, the Company completed a private placement of 13,000,000
shares of the Company's common stock for $0.56 per share for net proceeds of
$6.6 million. In addition, the Company provided the placement agent with
warrants to purchase 650,000 shares of common stock for a nominal fee. The
warrants are exercisable at $0.55 per share (subject to adjustment under
certain circumstances). The warrants have a term of five years from September
1995, the final closing date of the offering. Proceeds of the offering were
used to repay outstanding accounts payable of approximately $800,000, with
the remainder available to fund FDA clinical trials, research and
development, increased marketing and sales capabilities as well as general
corporate purposes.
In June 1995, the Company completed a private placement of 2,100,000 shares
of common stock at an approximate price of $0.47 per share, resulting in net
proceeds of $984,000.
In February 1994, the Company completed a private placement of 1,250,000
shares of the Company's common stock for $4.80 per share for net proceeds of
$5.5 million. In addition, the Company provided the placement agent with a
warrant to purchase 62,500 shares of common stock for a nominal fee. The
warrant is exercisable at $6.00 per share (subject to adjustment under
certain circumstances). The warrant has a term of five years from February
1994, the final closing date of the offering. Proceeds of the offering were
used to repay outstanding accounts payable of approximately $1,800,000, with
the remainder available to fund research and development, increased marketing
and sales capabilities as well as general corporate purposes.
ITEM 2. MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
Revenues of $387,000 for the three months ended September 30, 1995 represents
a 79% decrease from revenues of $1,802,000 for the same period in 1994. The
decrease in revenues is related to both the international and domestic
markets. Sunrise's exclusive German distributor did not purchase product and
defaulted on its agreement during the third quarter of 1995. The Company is
currently negotiating with other distributors for distribution rights
throughout Germany. During the third quarter, the Company completely changed
its domestic sales strategy moving from use of distributor channels to
marketing of its products directly to dentists. In connection with this
change the company replaced its complete sales department late in the
quarter. At September 30, 1995 the company had ten direct sales persons. The
implementation of these changes adversely affected third quarter domestic
revenues. The 1995 quarter also showed lower sales of ophthalmic lasers, when
compared to 1994.
Gross profit decreased as a percentage of revenues from approximately 25% for
the three months ended September 30, 1994 to (14)% for the same period in
1995. This reduction is due to under absorption of fixed overhead due to low
sales and production volumes.
Engineering and development expenses totaled $119,000 for the three months
ended September 30, 1995 as compared to $282,000 for the same period in 1994.
The decline in costs is principally related to the disposition of the
surgical product line in August 1994.
Sales, marketing and regulatory costs were $533,000 for the three months
ended September 30, 1995, compared to $599,000 for the same period in 1994.
The decrease of $66,000 reflects lower sales commissions as a result of
decreased revenues.
General and administrative expenses were $734,000 for the three months ended
September 30, 1995, compared to $470,000 for the same period in 1994. The
increase reflects higher legal fees in 1995, compared to 1994 and the absence
of exchange gains in 1995.
Principal components of general and administrative costs are legal expenses,
director and officer insurance and salaries and related expenses.
5
<PAGE>
The Company reported a net loss for the three months ended September 30, 1995
of $1,437,000, compared to a net loss of $902,000 for the same period in
1994. This increase in operating losses reflects the effect of the
substantial drops in revenues in the current quarter as compared to the
similar quarter from last year.
LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 1995 the Company had $5,625,000 in cash. The Company's
operating activities used $2,401,000 in the nine months ended September 30,
1995 as compared to $5,486,000 for the same period in 1994. A substantial
portion of the losses for both periods were funded by proceeds from private
placements. In September 1995, the Company received $6,560,000 in net
proceeds from the completion of a private placement of common stock at $0.56
per share. In June 1995, the Company received $984,000 in net proceeds from a
private placement of 2,100,000 shares of common stock at a price of
approximately $0.47 per share. In February, 1994, the Company received $5.5
million from the completion of a private placement of 1,250,000 shares of the
Company's common stock for $4.80 per share.
Working capital amounted to $1,101,000 at December 31, 1994 and increased to
$5,843,000 at September 30, 1995. Working capital, including the proceeds
from the recent private placements, have been used to fund the Company's 1995
loss.
The Company's current operations continue to be cash flow negative, further
straining the Company's limited working capital resources. The level of
current product sales is not sufficient to provide enough cash over the long
term to pursue the dental business and support ongoing development and
regulatory approval of the LTK system. In order to continue its current level
of operations, it will be necessary for the Company to increase its product
sales. The Company was able to obtain additional working capital resources
from the placement of equity during the third quarter of 1995.
6
<PAGE>
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
AMERICAN DENTAL TECHNOLOGIES, INC. V. SUNRISE TECHNOLOGIES INTERNATIONAL, INC.
On October 18, 1993, the Company filed an action against American Dental
Technologies, Inc. ("ADT"), formerly American Dental Laser, Inc., in Alameda
County Superior Court (Case No. H-172132-2). The complaint asserts a cause of
action for breach of contract and seeks compensatory damages in excess of
$900,000, as well as attorneys' fees and costs. The case arises from a
dispute between the parties regarding their rights and obligations under the
terms of the settlement agreement which terminated their
manufacturing/distribution relationship for dental products. On or about
December 27, 1993, ADT filed a general answer to the complaint denying all
material allegations thereof and asserting various affirmative defenses. In
addition, ADT filed a cross-complaint against the Company asserting causes of
action for breach of contract, fraud, unfair competition, unfair trade
practices, interference with contract and prospective economic advantage,
indemnity, and injunctive and declaratory relief. The Company filed its
answer to the cross-complaint on January 31, 1994, generally denying all the
allegations thereof and asserting various affirmative defenses. Discovery in
these actions was conducted and the case went to trial on Monday, July 10,
1995. On July 31, 1995, the Jury hearing the case awarded the Company
$728,707 in damages for breach of contract by ADT. The Court also dismissed
all of ADT's claims for false advertising with unfair competition. On October
17, 1995 the Court denied ADT's motion for a new trial and awarded the
Company $211,471 in legal fees and court fees.
SUNRISE TECHNOLOGIES INTERNATIONAL, INC AND DANVILLE ENGINEERING, INC. V.
AMERICAN DENTAL TECHNOLOGIES, INC.
On May 2, 1994, the Company and Danville Engineering, Inc. filed two separate
actions against ADT in the U.S. District Court for the Northern District of
California seeking a declaration of invalidity and non-infringement of five
patents related to air-abrasive dental technology (Case Nos. C94 1512 EFL and
C94 1513 EFL). The patents at issue are either owned or exclusively licensed
by ADT. The cases have been deemed related and are before the same judge, but
have not been ordered consolidated as yet. ADT ultimately answered the
complaints on October 12, 1994. The answers assert numerous affirmative
defenses, as well as a counterclaim that the Company and Danville have
infringed one of ADT's patents by the manufacture, sale or use of the
MicroPrep. The counterclaim seeks damages, injunctive relief, attorneys'
fees, costs, and a declaration of validity and infringement. ADT also seeks a
declaration of validity for the remaining patents. On May 16, 1995, the
parties participated in a court-ordered alternative dispute resolution
procedure, which did not resolve the claims. The Company believes it has
meritorious defenses to the cross-complaint and that the outcome of these
legal proceedings will not have a material adverse affect on the financial
position, result of operations, or liquidity of the Company.
AMERICAN DENTAL TECHNOLOGIES, INC. V. SUNRISE TECHNOLOGIES INTERNATIONAL, INC.
ET AL.
On October 14, 1994, ADT filed an action against the Company and several of
its distributors in the U.S. District Court for the Eastern District of
Michigan, alleging infringement of a newly-issued patent assigned to ADT,
which covers technology and uses related to air-abrasive dental products
(Case No. 94-74170). This action appears to involve substantially the same
issues as the actions filed by the Company in the Northern District of
California, but is based on a patent which has not issued at the time the
Company filed its claims. On December 16, 1994, the Company filed a motion to
dismiss this action as to one of the distributor defendants and to transfer
the remainder of the case to California for consolidation with the California
declaratory relief actions filed by the Company against ADT. On May 30, 1995,
the Eastern District of Michigan granted the Company's motion to dismiss and
transfer the action in its entirety to California. At present, this action is
in the process of being transferred to California. The Company vigorously
denies the plaintiffs allegations and believes it has meritorious defenses to
this claim and that the outcome of these legal proceedings will not have a
material adverse affect on the financial position, result of operations, or
liquidity of the Company.
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS
A. The Company's Annual Meeting of Stockholder's was held on September 19,
1995.
7
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B. The following individuals were elected to the Company's Board of Directors
and received the number of votes in favor and votes withheld as indicated:
Director Votes in favor Votes withheld
Harold F. Enright Jr. 10,147,905 132,420
Joseph W. Shaffer 10,147,394 132,931
The following directors' terms in office continued after the meeting:
Joseph D. Koenig
David W. Light
Ronald A. Slocum
C. In addition to the election of directors, the following matters were
voted upon at the meeting and received the number of affirmative votes,
negative votes, abstentions and broker non-votes indicated:
(I) Amendment of the Company's 1988 Stock Option Plan to increase the
number of shares authorized for issuance under the 1988 Stock Option
Plan from a total of 2,200,000 shares to 3,750,000 shares.
Votes in favor: 5,894,825 Votes Against: 715,649
Abstentions: 72,349 Brokers non-votes 175,400
(ii) Amendment to the Company's certificate of incorporation, increasing
the number of authorized shares of Common Stock from 20,000,000
shares to 40,000,000 shares.
Votes in favor: 9,142,603 Votes Against: 677,094
Abstentions: 65,020 Broker non-votes: 0
(iii) Approval of the Non-Employee Directors' Stock Option Plan.
Votes in favor: 5,620,960 Votes Against: 817,989
Abstentions: 83,629 Broker non-votes: 175,400
(iv) Ratify the appointment of Ernst & Young LLP as the Company's
independent auditors for the fiscal year ending December 31, 1995.
Votes in favor: 10,208,116 Votes against: 31,771
Abstentions: 40,438 Broker non-vot 0
ITEM 6. EXHIBITS AND REPORTS AND FORM 8-K.
A. Exhibits
None
B. Report on Form 8-K
Report on Form 8-K filed on October 5, 1995 reporting the closing of a
private placement of 13,000,000 shares of the Company's common stock.
The private placement resulted in net proceeds to the Company of
$6,560,000.
8
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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 duly authorized.
Date: November 11, 1995 By: /s/ David W. Light
--------------------------------
President and Chief Executive Officer
Date: November 11, 1995 By: /s/ Martin D. Meeker
--------------------------------
Vice President, Finance and Chief Financial Officer
9
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<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JUL-01-1995
<PERIOD-END> SEP-30-1995
<CASH> 5,625
<SECURITIES> 0
<RECEIVABLES> 333
<ALLOWANCES> 0
<INVENTORY> 1,671
<CURRENT-ASSETS> 7,992
<PP&E> 217
<DEPRECIATION> 0
<TOTAL-ASSETS> 8,209
<CURRENT-LIABILITIES> 2,149
<BONDS> 0
<COMMON> 29,221
0
0
<OTHER-SE> (23,161)
<TOTAL-LIABILITY-AND-EQUITY> 8,209
<SALES> 387
<TOTAL-REVENUES> 387
<CGS> 440
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 1,386
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<INTEREST-EXPENSE> (2)
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