<PAGE> 1
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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 PERIOD ENDED SEPTEMBER 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ____________ TO ____________ .
COMMISSION FILE NO. 1-10428
SUNRISE TECHNOLOGIES INTERNATIONAL, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C>
DELAWARE 77-0148208
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
3400 WEST WARREN AVENUE, FREMONT, CALIFORNIA 94538
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
</TABLE>
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (510) 623-9001
47265 FREMONT BLVD, FREMONT, CALIFORNIA
(FORMER ADDRESS, CHANGED SINCE LAST REPORT)
------------------------
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 [ ]
Number of shares of Common stock, $0.001 par value, outstanding as of
October 31, 1998: 34,499,002.
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<PAGE> 2
SUNRISE TECHNOLOGIES INTERNATIONAL, INC.
INDEX
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets -- September 30, 1998
and December 31, 1997....................................... 1
Condensed Consolidated Statements of Operations -- Three
months and Nine months ended September 30, 1998 and 1997.... 2
Condensed Consolidated Statements of Cash Flows -- Nine
months ended September 30, 1998 and 1997.................... 3
Notes to Condensed Consolidated Financial
Statements -- September 30, 1998............................ 4
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 7
Item 3. Quantitative and Qualitative Disclosures About Market
Risk........................................................ 11
PART II. OTHER INFORMATION
Item 1. Legal Proceedings........................................... 12
Item 4. Submission of Matters to a Vote of Security Holders......... 12
Item 6. Exhibits and Reports on Form 8-K............................ 12
SIGNATURES........................................................... 13
</TABLE>
i
<PAGE> 3
SUNRISE TECHNOLOGIES INTERNATIONAL, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
(UNAUDITED)
ASSETS
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1998 1997
------------- ------------
<S> <C> <C>
Current assets:
Cash and cash equivalents................................. $ 5,783 $ 1,958
Accounts receivable, net.................................. 196 312
Inventories, net.......................................... -- 127
Other current assets...................................... 457 140
-------- --------
Total current assets.............................. 6,436 2,537
Property and equipment, net............................... 552 204
Other non-current assets.................................. 245 208
-------- --------
Total assets...................................... $ 7,233 $ 2,949
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt......................... $ 688 $ 31
Accounts payable.......................................... 549 284
Deferred revenues......................................... 160 --
Accrued payroll and related expenses...................... 302 221
Other accrued expenses.................................... 1,010 619
-------- --------
Total current liabilities......................... 2,709 1,155
Long-term debt, net of current portion...................... 6,867 945
Other long term liabilities................................. 244 --
-------- --------
Total liabilities................................. 9,820 2,100
-------- --------
Stockholders' equity (deficit):
Preferred Stock, $0.001 par value, 2,000,000 shares
authorized, none issued or outstanding................. -- --
Common Stock, $0.001 par value, 75,000,000 shares
authorized, 34,499,000 and 32,308,000 shares issued and
outstanding at September 30, 1998 and December 31,
1997, respectively..................................... 34 32
Additional paid-in capital................................ 47,595 38,151
Deferred compensation..................................... (219) (272)
Accumulated deficit....................................... (49,997) (37,062)
-------- --------
Total stockholders' equity (deficit).............. (2,587) 849
-------- --------
Total liabilities and stockholders' equity
(deficit)....................................... $ 7,233 $ 2,949
======== ========
</TABLE>
See accompanying notes.
1
<PAGE> 4
SUNRISE TECHNOLOGIES INTERNATIONAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------ -------------------
1998 1997 1998 1997
------- ------- -------- -------
<S> <C> <C> <C> <C>
Net revenues....................................... $ 180 $ 76 $ 504 $ 2,539
Cost of revenues................................... 615 200 1,499 2,159
------- ------- -------- -------
Gross profit............................. (435) (124) (995) 380
Other costs and expenses:
Engineering and development...................... 621 226 1,618 570
Sales, marketing and regulatory.................. 822 413 2,480 2,046
General and administrative....................... 1,060 704 4,909 2,606
------- ------- -------- -------
Total other costs and expenses........... 2,503 1,343 9,007 5,222
------- ------- -------- -------
Loss from operations............................... (2,938) (1,467) (10,002) (4,842)
Gain on sale of dental assets...................... -- -- -- 1,740
Interest income.................................... 89 42 289 74
Interest expense................................... (719) (132) (3,222) (1,080)
------- ------- -------- -------
Net loss................................. $(3,568) $(1,557) $(12,935) $(4,108)
======= ======= ======== =======
Net loss per share, basic and diluted.... $ (0.10) $ (0.06) $ (0.38) $ (0.15)
======= ======= ======== =======
Shares used in calculation of basic and diluted net
loss per share................................... 34,311 27,932 33,707 27,896
======= ======= ======== =======
</TABLE>
See accompanying notes.
2
<PAGE> 5
SUNRISE TECHNOLOGIES INTERNATIONAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
-------------------
1998 1997
-------- -------
(IN THOUSANDS)
<S> <C> <C>
CASH FLOWS FOR OPERATING ACTIVITIES:
Net loss.................................................. $(12,935) $(4,108)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization.......................... 121 120
Amortization of deferred compensation.................. 2,815 --
Amortization of debt issuance costs.................... 195 --
Gain on sale of dental assets.......................... -- (1,740)
Warrant accretion and beneficial conversion features
associated with 1997 and 1998 Notes................... 2,186 991
Issuance of common stock for services.................. 150 --
Provision for excess and obsolete inventory............ (161) 210
Provision for doubtful accounts........................ -- 176
Conversion of accrued interest to notes payable........ 403 --
Changes in assets and liabilities:
Accounts receivable.................................... 116 92
Inventories............................................ 288 120
Other current assets................................... (317) 41
Other non-current assets............................... (218) --
Accounts payable....................................... 265 (1,446)
Other accrued liabilities and deferred revenues........ 632 75
Other long term liabilities............................ 244 --
-------- -------
Total adjustments........................................... 6,719 (1,361)
-------- -------
Net cash used in operating activities....................... (6,216) (5,469)
-------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment........................ (469) (75)
-------- -------
Net cash used in investing activities....................... (469) (75)
-------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payment on capital lease obligations...................... (26) --
Issuance of common stock, net of offering costs........... 1,200 256
Issuance of redeemable convertible notes.................. 9,350 3,743
Proceeds from sale of dental assets....................... -- 4,000
Costs associated with sale of dental assets............... -- (411)
Capitalization of debt issuance costs..................... (14) --
-------- -------
Net cash provided by financing activities................... 10,510 7,588
-------- -------
NET INCREASE IN CASH AND CASH EQUIVALENTS................... 3,825 2,044
Cash and cash equivalents at beginning of period............ 1,958 647
-------- -------
CASH AND CASH EQUIVALENTS AT END OF PERIOD.................. $ 5,783 $ 2,691
======== =======
</TABLE>
See accompanying notes.
3
<PAGE> 6
SUNRISE TECHNOLOGIES INTERNATIONAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
SEPTEMBER 30, 1998
1. BASIS OF PRESENTATION
The Company develops, manufactures and markets laser systems for
applications in ophthalmology. Prior to June 26, 1997, the Company had also
developed, manufactured and marketed lasers and air abrasive cavity preparation
systems for use in dentistry. A substantial portion of the Company's revenues
(80% for the first six months of 1997) were derived from the domestic and
international sales of the Company's dental laser and air abrasive products.
The condensed consolidated financial statements include the accounts of the
Company and its wholly-owned subsidiaries after elimination of all material
intercompany balances and transactions. Certain reclassifications have been made
to prior year amounts in order to conform to the current presentation.
The condensed consolidated financial data for the three and nine-month
periods ended September 30, 1998 and 1997 are unaudited, but include all
adjustments (consisting only of normal recurring adjustments) that management of
the Company believes to be necessary for fair presentation of the financial
position and results of operations for 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, 1997 included in the Company's Annual Report on
Form 10-K filed with the Securities and Exchange Commission.
The preparation of unaudited financial statements in conformity with
generally accepted accounting principles requires management to make certain
estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from those
estimates.
2. NET LOSS PER COMMON SHARE
Effective December 31, 1997, the Company adopted the Statement of Financial
Accounting Standards No. 128, "Earnings Per Share" ("SFAS 128") and,
accordingly, all prior periods have been restated. Basic earnings per share is
computed as net income or loss divided by the weighted average number of common
shares oustanding for the period. Diluted earnings per share reflects the
potential dilution that could occur from common shares issuable through stock
options, warrants and other convertible securities. As of September 30, 1998 and
1997, common equivalent shares of 6,889,621 and 2,964,124, respectively, have
been excluded from the shares used to calculate diluted earnings per share as
their effect is anti-dilutive.
3. REVENUE RECOGNITION
Revenues are recognized at time of shipment, net of any allowances for
future obligations or trade-in rights. A provision for the estimated future cost
of warranty is made at the time a sale is recorded.
4
<PAGE> 7
SUNRISE TECHNOLOGIES INTERNATIONAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
SEPTEMBER 30, 1998
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:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1998 1997
------------- ------------
(IN THOUSANDS)
<S> <C> <C>
Raw materials...................................... $ 210 $ 416
Work-in-process.................................... 41 167
Finished goods..................................... 235 190
----- -----
486 773
Less reserves...................................... (486) (646)
----- -----
Inventory, net..................................... $ -- $ 127
===== =====
</TABLE>
5. COMPREHENSIVE INCOME
The Company has adopted the provisions of Statement of Financial Accounting
Standards No. 130, "Reporting Comprehensive Income," ("SFAS 130") effective
January 1, 1998. This statement requires the disclosure of comprehensive income
and its components in a full set of general purpose financial statements.
Comprehensive income is defined as net income plus revenues, expenses, gains and
losses that, under generally accepted accounting principles, are excluded from
net income. The Company does not have any components of comprehensive income
which are excluded from net income for the three and nine months ended September
30, 1998 and 1997 and, as such, no separate statement of comprehensive income
has been presented.
6. ISSUANCE OF REDEEMABLE CONVERTIBLE NOTES
In January 1998, the Company completed a private placement of convertible
notes (convertible into the Company's common stock) with warrants, raising
approximately $9,300,000. The promissory notes (the "Primary Notes") are
convertible at any time, at the option of the holder. The notes bear a stated
interest rate of 12%, payable-in-kind semi-annually (additional convertible
notes) and convert at a price of $3.00 per share. The effective interest rate,
which includes the amortization of the fair value of the warrants, is
approximately 26%. The Primary Notes have a maturity date of January 2001 and
the Company has an option to extend the maturity date of the notes for an
additional two years for additional warrant consideration. On July 15, 1998, the
Company issued additional convertible notes in the amount of approximately
$557,000 (the "Secondary Notes") to the holders of the Primary Notes to fulfil
its interest obligations pursuant to the terms of the Primary Notes. The
Secondary Notes also bear interest at the rate of 12%, payable-in-kind
semi-annually and contain the same features as the Primary Notes, including a
maturity date of January 2001.
Warrants to purchase 1,870,000 shares of the Company's common stock were
issued as part of this private placement with an exercise price of $3.00 per
share and an expiration date of January 2003. The warrants issued had a fair
value of approximately $1.87 per warrant at the time of issuance. The fair value
of these warrants has been reflected as additional consideration for the
convertible notes, recorded as a discount on the debt and accreted as interest
expense to be amortized over the life of the convertible notes.
On September 29, 1998, the Company filed a Registration Statement on Form
S-2 for the registration of 6,807,915 shares of its common stock, par value
$0.001, to be sold by certain stockholders, noteholders and warrantholders of
the Company (collectively, the "Selling Securityholders"). The Company will not
receive any of the proceeds from the sale of the offered shares by the Selling
Securityholders. These shares were acquired by the Selling Securityholders.
These shares were acquired by the Selling Securityholders through
5
<PAGE> 8
SUNRISE TECHNOLOGIES INTERNATIONAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
SEPTEMBER 30, 1998
warrant grants subsequent to October 1997 or an investment in the convertible
notes with warrants the Company issued in January 1998.
7. SALE OF DENTAL ASSETS
In June 1997, the Company completed the sale of the Company's assets
associated with the Company's dental laser, air abrasive and composite curing
systems (the "Dental Assets") to Lares Research. The purchase price paid for the
Dental Assets was $5,500,000, consisting of $4,000,000 in cash paid at closing
and $1,500,000 in the form of a promissory note, bearing interest at 8% per
annum, with installments of $1,000,000 of principal plus accrued interest and
$500,000 of principal plus accrued interest, due in June 2000 and June 2001,
respectively (the "Lares Note"). Although the Company anticipates collecting
interest and principal on the Lares Note, due to subordination of the Lares Note
to Lares' Bank, collection is not reasonably assured and the Company intends to
recognize proceeds from the sale and interest on the Lares Note as cash is
received.
Revenues from the dental business were $1,968,000 through June 1997. Cost
of revenues were approximately $1,738,000, and operating expenses through June
1997 were $1,980,000. Interest expense and interest income were $11,000 and
$10,000 respectively, through June 1997. The operating loss from the dental
business and the gain on the sale of the dental business were $1,750,000 and
$1,740,000 respectively, in 1997.
8. FACILITY LEASE
In July 1998, the Company entered into a sublease for additional office
space to accommodate the anticipated growth in the Company's operations. The
sublease encompasses a facility of an approximately 55,000 square feet in
Fremont, California. The Company is responsible for rent, property taxes and
other expenses. The sublease term commenced on August 15, 1998 and is expected
to run through April 7, 2004, and the total expected lease payments, excluding
operating costs, will total approximately $5,359,000 through this period. The
Company currently leases a facility of approximately 10,400 square feet in
Fremont, California and the lease expires on this property in January 2001.
9. NEW ACCOUNTING PRONOUNCEMENT
In June 1997, the FASB issued Statement of Financial Accounting Standards
No. 131 ("SFAS 131"), "Disclosures about Segments of an Enterprise and Related
Information." This statement establishes standards for disclosure about
operating segments in annual financial statements and selected information in
interim financial reports. It also establishes standards for related disclosures
about products and services, geographic areas and major customers. This
statement supersedes Statement of Financial Accounting Standards No. 14,
"Financial Reporting for Segments of a Business Enterprise." The new standard
becomes effective for the Company's 1999 fiscal year, and requires that
comparative information from earlier years be restated to conform to the
requirements of this standard. The Company is evaluating the requirements of
SFAS 131 and the effects, if any, on the Company's current reporting and
disclosures.
10. LITIGATION
Danville Manufacturing, Inc. (d.b.a. Danville Engineering) ("Danville")
filed a suit in the Superior Court of California, County of Contra Costa,
against the Company, claiming monetary damages for disputed invoices of
approximately $200,000 and alleging misappropriation of intellectual property,
the dollar amount of such claim has not yet been determined (Danville
Manufacturing, Inc. d.b.a. Danville Engineering v. Sunrise Technologies
International, Inc. C98-02123). The Company is vigorously defending against this
lawsuit. The Company does not believe that the outcome of this matter will have
a material adverse effect on the financial condition and results of operations
of the Company. There can be no assurance, however, that the Company will
prevail in its defense of the claims asserted by Danville.
6
<PAGE> 9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION
OVERVIEW
All statements contained herein that are not historical facts including,
but not limited to, statements regarding the Company's plans for future
development and operation of its business, are based on current expectations.
These statements are forward-looking in nature and involve a number of risks and
uncertainties. Actual results may differ materially. Among the factors that
could cause actual results to differ materially are the following: a lack of
sufficient capital to finance the Company's business plan on terms satisfactory
to the Company; changes in labor, equipment and capital costs; the Company's
inability to obtain the necessary authorizations from the Food and Drug
Administration ("FDA") to enable it to market its products domestically;
competitive factors, such as the introduction of new technologies and
competitors into the ophthalmic laser business; general business and economic
conditions; and the other risk factors described in the Company's 1997 Annual
Report on Form 10-K and the Registration Statement on Form S-2 filed with the
Securities and Exchange Commission. The Company wishes to caution readers not to
place undue reliance on any such forward-looking statements, which statements
are made pursuant to the Private Securities Litigation Reform Act of 1995 and,
as such, speak only as of the date made.
The Company develops, manufacturers and markets laser systems for
applications in ophthalmology. Prior to June 26, 1997, the Company had
developed, manufactured and marketed lasers and air abrasion cavity preparation
systems for use in dentistry. A substantial portion of the Company's revenues
(80% for the first six months of 1997) were derived from the domestic and
international sales of the Company's dental laser and air abrasive products.
Since mid-1992, the Company has focused a portion of its efforts on
engineering and development of its laser corneal shaping product, known as Laser
Thermal Keratoplasty (the "LTK System") for the treatment of refractive errors
of the eye, such as hyperopia (farsightedness) and presbyopia. The LTK System,
which is based upon patented technology acquired in the Company's acquisitions
of in-process technology from Laser Biotech, Inc. and Emmetropix Corporation in
1992, currently is undergoing pre-market clinical studies in the United States
for hyperopia and presbyopia, as required by the FDA. The Company expects to
file its pre-market approval application ("PMA") with the FDA for approval to
sell its LTK System in the United States for hyperopia by the end of the fourth
quarter of 1998 and to file its PMA for the treatment of presbyopia in the
second half of 1999. The Company expects no significant revenue from this
product until the product is approved for sale in the United States. Therefore,
the Company expects to continue to have net losses at least through the year the
LTK System is approved for sale in the United States. There can be no assurance
that the LTK System will be approved for sale in the United States or that the
Company will successfully develop or market the LTK System.
The Company has incurred substantial losses in the past seven years which
have seriously depleted its working capital. Sales of its existing ophthalmic
products at current levels will not be sufficient to sustain the continued
development and regulatory licensing of the LTK System. The Company has been
able to raise additional working capital for all aspects of its business through
the private placement of its common stock and securities convertible into common
stock. These private placements raised approximately $15,296,000 in 1994, 1995
and 1996 in new equity for the Company; approximately, $3,700,000, net of
offering costs, from the 1997 Notes Placement, and approximately $9,300,000, net
of offering costs, from the 1998 Notes Placement.
THIRD QUARTER RESULTS OF OPERATIONS
Revenues for the three-month period ended September 30, 1998 increased 137%
to $180,000 compared to $76,000 for the same period in 1997. This increase was
primarily due to increased sales of the LTK Systems internationally in the third
quarter of 1998 as compared to the same period in 1997.
Cost of revenues for the quarter ended September 30, 1998 totaled $615,000,
an increase of 208%, compared to $200,000 for the same period in 1997. This
increase was primarily due to the underabsorption of manufacturing overhead in
connection with the Company's low revenue levels and fully reserved inventory in
7
<PAGE> 10
the third quarter of 1998. The Company had insufficient revenues to cover the
costs of its manufacturing operations.
Engineering and development expenses totaled $621,000 for the three-month
period ended September 30, 1998, compared to $226,000 for the same period in
1997, a 175% increase. The increase was primarily due to the increase in
expenditures related to the development of the LTK System.
Sales, marketing and regulatory expenses increased 99% to $822,000 for the
three-month period ended September 30, 1998, compared to $413,000 for the same
period in 1997. The increase was due primarily to increased marketing and
regulatory spending for the ophthalmic products, as the clinical studies have
progressed towards the filing of the PMA with the FDA.
General and administrative expenses were $1,060,000 for the quarter ended
September 30, 1998, compared to $704,000 for the same period of 1997. This 51%
increase was primarily due to the expenses associated with the NASDAQ NMS filing
fee, legal fees, and expenses associated with the annual stockholders meeting.
Interest income was $89,000 for the three-month period ended September 30,
1998, an increase of 112%, compared to $42,000 for the same period in 1997. The
increase was due to higher average balances in the Company's interest bearing
accounts.
Interest expense was $719,000 for the three-month period ended September
30, 1998, compared to $132,000 for the same period in 1997. The increase was due
to the interest expense from the convertible promissory notes issued by the
Company in January 1998 (the "1998 Notes"), at a stated interest rate of 12% per
annum and non-cash interest expense for the fair value of the warrants of the
1998 Notes. The effective interest rate of the notes, which includes the
amortization of the fair value of the warrants, is approximately 26%.
Net loss for the three-month period ended September 30, 1998 was
$3,568,000, an increase of 129% compared to $1,557,000 for the same period in
1997. This increase was due to the lack of revenue from the Company's ophthalmic
products to offset the expenses associated with the development and regulatory
approval of the LTK System and the general expenses associated with the
operations of the Company, including the non-cash expenses associated with the
various convertible notes, warrants and options issued by the Company to fund
its operations while awaiting FDA approval to market the LTK System in the
United States.
NINE MONTHS RESULTS OF OPERATIONS
Revenues for the nine-month period ended September 30, 1998 totaled
$504,000 compared to $2,539,000 for the same period in 1997. This decrease was
primarily due to the lack of revenues from the dental operations in 1998. The
Company sold its dental business in June 1997.
Cost of revenues for the nine-month period ended September 30, 1998 totaled
$1,499,000, compared to $2,159,000 for the same period in 1997. This decrease
was primarily due to the lack of cost of revenues of $1,738,000 from the dental
business, which was sold in June 1997. The decrease was offset by the increase
in manufacturing overhead in the first nine months of 1998. The Company had
insufficient revenues to cover the costs of its manufacturing operations.
Engineering and development expenses totaled $1,618,000 for the nine-month
period ended September 30, 1998, compared to $570,000 for the same period in
1997, a 184% increase. The increase was primarily due to the increase in
expenditures related to the development of the LTK System.
Sales, marketing and regulatory expenses increased 21% to $2,480,000 for
the nine-month period ended September 30, 1998, compared to $2,046,000 for the
same period in 1997. The increase was due primarily to increased marketing and
regulatory spending for the ophthalmic products, as the clinical studies have
progressed towards the filing of the PMA with the FDA.
8
<PAGE> 11
General and administrative expenses were $4,909,000 for the nine-month
period ended September 30, 1998, compared to $2,606,000 for the same period of
1997. This 88% increase was primarily due to the expenses associated with the
issuance of warrants and stock options to consultants, increased compensation
costs for certain executive officers. legal fees , and filing fees with the
NASDAQ NMS. Approximately $2,623,000 of the $4,909,000 was attributable to non
cash expenses in connection with stock and warrants issued to consultants.
Gain on sale of dental assets for the nine-month period ended September 30,
1997 of $1,740,000 was due to the cash proceeds of $4,000,000 from the sale,
less cost of assets sold and the transfer fee, transaction fees and other costs
of approximately $762,000. Approximately $211,000 of the total costs remain
unpaid as of September 30, 1998. The Company intends to recognize the gain on
the remaining $1,500,000 of the sale price as cash is collected.
Interest income was $289,000 for the nine-month period ended September 30,
1998, an increase of 291%, compared to $74,000 for the same period in 1997. The
increase was due to higher average balances in the Company's interest bearing
accounts.
Interest expense was $3,222,000 for the nine-month period ended September
30, 1998 compared to $1,080,000 for the same period in 1997. The increase was
due to the interest expense from the 1998 Notes, at a stated interest rate of
12% per annum, and non-cash interest expense for the fair value of the warrants
issued in connection with the promissory notes issued by the Company in the 1997
Notes Placement (the "1997 Notes") and the 1998 Notes, and the placement costs
attendant to the 1997 Notes. The effective rates of interest of the 1997 Notes
and 1998 Notes, which include the amortization of the fair value of the
warrants, are approximately 21% and 26%, respectively.
Net loss for the nine-month period ended September 30, 1998 of $12,935,000,
an increase of 215% compared to $4,108,000 for the same period in 1997. This
increase was due to the lack of revenue from the Company's ophthalmic products
to offset the expenses associated with the development and regulatory approval
of the LTK System and the general expenses associated with the operations of the
Company, including the non-cash expenses associated with the various convertible
notes, warrants and options issued by the Company to fund its operations while
awaiting FDA approval to market the LTK System in the United States.
Revenues from the dental business were $1,968,000 through June 1997. Cost
of revenues were approximately $1,738,000, and operating expenses through June
1997 were $1,980,000. Interest expense and interest income were $11,000 and
$10,000 respectively, through June 1997. The operating loss from the dental
business and the gain on the sale of the dental business were $1,750,000 and
$1,740,000 respectively, in 1997.
The Company's current operations continue to be cash flow negative, further
straining the Company's working capital resources. The level of current product
sales is not sufficient to provide enough cash to support the ongoing
development and regulatory approval of the LTK System, as well as maintain the
Company's basic corporate infrastructure. In order to continue its current level
of operations beyond early 1999 and have sufficient funds to launch the LTK
System in the United States, it will be necessary for the Company to obtain
additional working capital resources, whether from debt or equity sources. If
the Company is unable to obtain additional working capital resources from the
placement of debt or equity instruments or the sale of some of its assets, it
may be necessary for the Company to curtail spending or suspend operations in
their entirety.
LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 1998, the Company had $5,783,000 in cash and cash
equivalents. The Company's operating activities used $ 6,216,000 in cash during
the nine months ended September 30, 1998 and $5,469,000 during the same period
in 1997. Substantial portions of the 1997 and 1998 losses were funded with the
proceeds of a series of private placements. The 1997 Notes Placement had
aggregate net proceeds of approximately $3,700,000 and the 1998 Notes Placement
generated aggregate proceeds of approximately $9,300,000.
9
<PAGE> 12
The Company's current operations continue to be cash flow negative,
limiting the Company's working capital resources. Working capital at September
30, 1998 amounted to approximately $3,727,000. At December 31, 1997, working
capital amounted to approximately $1,382,000. At the Company's current rate of
cash expenditures, the Company anticipates that it will be required to raise
additional working capital during the second quarter of 1999 to fund operations.
Any additional equity or debt offerings will dilute the holdings of the
Company's stockholders, however, the potential dilution to the Company's
stockholders cannot be determined at this time. No assurance can be given that
additional financing will be available, or if available, that it will be
available on terms favorable to the Company and its stockholders. If funds are
not available to satisfy the Company's short-term and long-term operating
requirements, the Company may be required to limit or suspend its operations in
their entirety or, under certain circumstances, be forced to seek protection
from creditors. The Company's long-term ability to continue as a going concern
is dependent upon performing profitably or obtaining further financing.
NEW ACCOUNTING PRONOUNCEMENT
In June 1997, the FASB issued Statement of Financial Accounting Standards
No. 131 ("SFAS 131"), "Disclosures about Segments of an Enterprise and Related
Information." This statement establishes standards for disclosure about
operating segments in annual financial statements and selected information in
interim financial reports. It also establishes standards for related disclosures
about products and services, geographic areas and major customers. This
statement supersedes Statement of Financial Accounting Standards No. 14,
"Financial Reporting for Segments of a Business Enterprise." The new standard
becomes effective for the Company's 1999 fiscal year, and requires that
comparative information from earlier years be restated to conform to the
requirements of this standard. The Company is evaluating the requirements of
SFAS 131 and the effects, if any, on the Company's current reporting and
disclosures.
YEAR 2000 UPDATE
The Company is aware of the issues associated with the programming code in
existing computer systems as the millennium (Year 2000) approaches. The "Year
2000" problem is pervasive and complex, as virtually every computer operation
will be affected in the same way by the rollover of the two-digit year value to
00. The issue is whether computer systems will properly recognize date sensitive
information when the year changes to 2000. Systems that do not properly
recognize such information could generate erroneous data or cause a system to
fail.
Y2K Costs
The Company is utilizing both internal and external resources to identify,
correct or reprogram, and test the systems for Year 2000 compliance. It is
anticipated that all of the Company's reprogramming efforts will be completed by
March 31, 1999, allowing adequate time for testing. As of September 30, 1998,
the estimated costs of these reprogramming efforts have been approximately
$250,000. It is currently expected that the remaining costs to complete these
reprogramming efforts will be less than $100,000. This process includes
obtaining confirmations from the Company's primary vendors that plans are being
developed or are already in place to address processing of transactions in the
Year 2000. These confirmations are expected to be obtained in writing by the
Company prior to June 30, 1999. However, there can be no assurance that the
systems of other companies on which the Company's systems rely will also be
converted in a timely manner, or that any such failure to convert by another
company would not have material adverse effects on the Company's business,
financial condition or results of operations.
Y2K Risks
The Company believes that it does not have a Year 2000 problem with its
products that have been sold in the past, however, the Company has not performed
an extensive review of these systems and is unlikely to be able to complete a
review prior to January 1, 2000. In addition, the Company is designing a new
product to replace its existing LTK System that is being designed to properly
recognize date-sensitive information for the Year 2000 and beyond. Although the
Company plans to perform extensive testing of its new product, there can
10
<PAGE> 13
be no assurance that the new system will function properly until it is deployed
in the field and subjected to extensive use. Any malfunction of a deployed
system could have a material adverse effect on the Company's business, financial
condition or results of operations.
The Company is not expecting to have a material accounts receivable
exposure, or significant amount of revenues with any one customer after December
31, 1999 and therefore, verification of customer Year 2000 compliance is not
being pursued by the Company at this time. Any failure to pay in a timely
manner, or place orders for the Company's products, by a significant number of
individual customers or by a customer with a material accounts receivable
balance, due to Year 2000 compliance issues would have material adverse effects
on the Company's business, financial condition or results of operations.
Y2K Contingency Plan
The Company is currently developing a contingency plan to evaluate business
disruption scenarios, coordinate the establishment of Y2K contingency plans, and
identify and implement the strategies. This detailed contingency plan is
expected to be completed by June 30, 1999.
EURO CONVERSION
A single currency called the euro will be introduced in Europe on January
1, 1999. Eleven of the 15 member countries of the European Union have agreed to
adopt the euro as their common legal currency on that date. Fixed conversion
rates between these participating countries' existing currencies (the "legal
currencies") and the euro will be established as of that date. The legal
currencies are scheduled to remain legal tender as denominations of the euro
until at least January 1, 2002 (but not later than July 1, 2002). During this
transition period, parties may settle transactions using either the euro or a
participating country's legal currency.
The Company does not expect the conversion to the euro will have a material
impact on the Company's financial position or results of operations since the
majority of the Company's business transactions are recorded in U.S. currency.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company does not engage in any hedge or derivative financial instrument
transactions.
11
<PAGE> 14
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Danville Manufacturing, Inc. (d.b.a. Danville Engineering) ("Danville") filed a
suit in the Superior Court of California, County of Contra Costa, against the
Company, claiming monetary damages for disputed invoices of approximately
$200,000 and alleging misappropriation of intellectual property, the dollar
amount of such claim has not yet been determined (Danville Manufacturing, Inc.
d.b.a. Danville Engineering v. Sunrise Technologies International, Inc.
C98-02123). The Company is vigorously defending against this lawsuit. The
Company does not believe that the outcome of this matter will have a material
adverse effect on the financial condition and results of operations of the
Company. There can be no assurance, however, that the Company will prevail in
its defense of the claims asserted by Danville.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) The Company held its Annual Meeting of Stockholders on July 10, 1998.
(b) The meeting involved the election of two new Class II directors. The
directors re-elected, and the tabulation of votes as to each of them, were
as follows:
<TABLE>
<CAPTION>
NAME IN FAVOR WITHHELD
---- ---------- ---------
<S> <C> <C>
Timothy A. Marcotte.................................. 28,130,785 3,524,182
Michael S. McFarland, M.D............................ 28,161,078 3,493,889
</TABLE>
The Chairman ordered the resolution in favor of election of the above
nominees as directors of the Company duly adopted based on the affirmative
vote of proxies. The following directors' terms in office continued after
the meeting: R. Dale Bowerman; Joseph D. Koenig; and C. Russell Trenary,
III.
(c) The meeting involved a vote with respect to the ratification of the
appointment of PricewaterhouseCoopers, LLP, as independent accountants for
the Company for the year ending December 31, 1998, and votes on such
proposal were cast as follows:
<TABLE>
<CAPTION>
FOR AGAINST ABSTAIN BROKER NON VOTES
- ---------- --------- ------- ----------------
<S> <C> <C> <C>
29,996,157 1,610,448 48,362 -0-
</TABLE>
Prior to the meeting, the directors of the Company decided to withdraw two
proposals from consideration at the Annual Meeting. Such proposals were an
amendment to the Company's 1997 Stock Option Plan to increase the number of the
Company's shares available for issuance thereunder and an amendment to the
Company's Certificate of Incorporation to increase the number of authorized
shares of preferred stock.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
A. EXHIBITS
<TABLE>
<CAPTION>
NUMBER DESCRIPTION
------ -----------
<S> <C>
10.1 Sublease between Avanti Corporation, as sub-landlord, the
Company, as sub-tenant, Cirrus Logic, Inc., as sub-landlord,
Avanti Corporation, as subtenant, Renco Investment Company,
as landlord, and Cirrus Logic, Inc., as tenant for the lease
facilities at 3400 West Warren Avenue, Fremont,
California(1)
27 Financial Data Schedule (For EDGAR Filing Purposes Only)
</TABLE>
- ---------------
(1) Incorporated by reference from the Company's Registration Statement on Form
S-2 dated September 29, 1998 (File No. 333-64975)
B. REPORTS ON FORM 8-K
No Form 8-K was filed during this period.
Items 2, 3, and 5 of Part II are omitted because of the absence of
conditions under which they are required.
12
<PAGE> 15
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.
SUNRISE TECHNOLOGIES
INTERNATIONAL, INC.
Date: November 13, 1998 By: /s/ C. RUSSELL TRENARY, III
------------------------------------
President and Chief Executive
Officer
Date: November 13, 1998 By: /s/ TIMOTHY A. MARCOTTE
------------------------------------
Vice President, Finance and Chief
Financial Officer
(Principal Financial Officer)
13
<PAGE> 16
EXHIBIT INDEX
<TABLE>
<CAPTION>
NUMBER DESCRIPTION
- ------ -----------
<S> <C>
10.1 Sublease between Avanti Corporation, as sub-landlord, the
Company, as sub-tenant, Cirrus Logic, Inc., as sub-landlord,
Avanti Corporation, as subtenant, Renco Investment Company,
as landlord, and Cirrus Logic, Inc., as tenant for the lease
facilities at 3400 West Warren Avenue, Fremont,
California(1)
27 Financial Data Schedule (For EDGAR Filing Purposes Only)
</TABLE>
- ---------------
(1) Incorporated by reference from the Company's Registration Statement on Form
S-2 dated September 29, 1998 (File No. 333-64975)
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JUL-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 5,783,000
<SECURITIES> 0
<RECEIVABLES> 281,000
<ALLOWANCES> 85,000
<INVENTORY> 0
<CURRENT-ASSETS> 457,000
<PP&E> 976,000
<DEPRECIATION> 424,000
<TOTAL-ASSETS> 7,233,000
<CURRENT-LIABILITIES> 2,709,000
<BONDS> 0
0
0
<COMMON> 34,000
<OTHER-SE> (2,621,000)
<TOTAL-LIABILITY-AND-EQUITY> 7,233,000
<SALES> 180,000
<TOTAL-REVENUES> 180,000
<CGS> 615,000
<TOTAL-COSTS> 615,000
<OTHER-EXPENSES> 2,503,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 630,000
<INCOME-PRETAX> (3,568,000)
<INCOME-TAX> 0
<INCOME-CONTINUING> (3,568,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,568,000)
<EPS-PRIMARY> (.10)
<EPS-DILUTED> (.10)
</TABLE>
