<PAGE> 1
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-Q
------------------------
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934.
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 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 NO. 0-10428
------------------------
SUNRISE TECHNOLOGIES INTERNATIONAL, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C>
DELAWARE 77-0148208
(STATE OR OTHER JURISDICTION OF (IRS EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER)
3400 W. WARREN AVENUE, FREMONT, CALIFORNIA 94538
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
</TABLE>
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 [ ]
Common Stock, $0.001 Par Value, 45,779,514 shares outstanding as of July
30, 1999.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 2
INDEX
SUNRISE TECHNOLOGIES INTERNATIONAL, INC.
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Statements of Operations-Three and
six months ended June 30, 1999 and 1998..................... 3
Condensed Consolidated Balance Sheets-June 30, 1999 and
December 31, 1998........................................... 4
Condensed Consolidated Statements of Cash Flows-Six months
ended June 30, 1999 and 1998................................ 5
Notes to Condensed Consolidated Financial Statements-June
30, 1999.................................................... 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 11
Item 3. Quantitative and Qualitative Disclosures About Market
Risk........................................................ 14
PART II. OTHER INFORMATION
Item 1. Legal Proceedings........................................... 15
Item 2. Changes in Securities and Use of Proceeds................... 15
Item 4. Submission of Matters to a Vote of Security Holders......... 15
Item 6. Exhibits and Reports on Form 8-K............................ 16
SIGNATURES........................................................... 17
</TABLE>
2
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SUNRISE TECHNOLOGIES INTERNATIONAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
------------------ -------------------
1999 1998 1999 1998
------- ------- -------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Net revenues....................................... $ 3 $ 222 $ 16 $ 324
Cost of revenues................................... 542 625 925 884
------- ------- -------- -------
Gross margin....................................... (539) (403) (909) (560)
Other costs and expenses:
Engineering and development...................... 1,144 515 2,511 997
Sales, marketing and regulatory.................. 1,692 1,165 3,072 1,658
General and administrative....................... 1,270 2,917 3,691 3,849
------- ------- -------- -------
Total other costs and expenses..................... 4,106 4,597 9,274 6,504
------- ------- -------- -------
Loss from operations............................... (4,645) (5,000) (10,183) (7,064)
Interest income.................................... 246 99 523 200
Interest expense................................... (1,434) (712) (4,640) (2,503)
------- ------- -------- -------
Net loss........................................... $(5,833) $(5,613) $(14,300) $(9,367)
======= ======= ======== =======
Net loss per share, basic and diluted.............. $ (0.14) $ (0.17) $ (0.34) $ (0.28)
======= ======= ======== =======
Shares used in calculation of basic and diluted net
loss per share................................... 43,106 33,801 41,757 33,404
======= ======= ======== =======
</TABLE>
See accompanying notes.
3
<PAGE> 4
SUNRISE TECHNOLOGIES INTERNATIONAL, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
ASSETS
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1999 1998
--------- -------------
(IN THOUSANDS, EXCEPT PER
SHARE DATA)
<S> <C> <C>
Current assets:
Cash and cash equivalents................................. $ 19,636 $ 9,889
Accounts and other receivables, net....................... 247 135
Inventories, net.......................................... 564 11
Other current assets...................................... 463 314
-------- --------
Total current assets.............................. 20,910 10,349
Property and equipment, net............................... 1,222 900
Other non-current assets.................................. 222 230
-------- --------
Total assets...................................... $ 22,354 $ 11,479
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt......................... $ 35 $ 730
Accounts payable.......................................... 915 694
Accrued liabilities....................................... 1,768 2,152
-------- --------
Total current liabilities......................... 2,718 3,576
Notes payable and other long-term liabilities............... 9,563 7,703
-------- --------
Total liabilities................................. 12,281 11,279
Commitments and contingencies
Stockholders' equity:
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, 44,966,865 and 38,160,720 shares issued and
outstanding at June 30, 1999 and December 31, 1998,
respectively........................................... 45 38
Additional paid-in capital................................ 81,757 60,087
Notes receivable from common stock........................ (2,206) (5,000)
Deferred compensation..................................... (340) (42)
Accumulated deficit....................................... (69,183) (54,883)
-------- --------
Total stockholders' equity........................ 10,073 200
-------- --------
Total liabilities and stockholders' equity.................. $ 22,354 $ 11,479
======== ========
</TABLE>
See accompanying notes.
4
<PAGE> 5
SUNRISE TECHNOLOGIES INTERNATIONAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
-------------------
1999 1998
-------- -------
(IN THOUSANDS)
<S> <C> <C>
CASH FLOWS FOR OPERATING ACTIVITIES:
Net loss.................................................. $(14,300) $(9,367)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization.......................... 189 75
Amortization of deferred compensation.................. 315 2,622
Amortization of debt issuance costs.................... 8 182
Warrant accretion and beneficial conversion features
associated with 1997, 1998 and 1999 Notes............. 4,160 1,950
Issuance of common stock for services.................. -- --
Warrants issued to consultants in lieu of cash......... 1,081 150
Increase in inventory reserve.......................... 28 --
Conversion of accrued interest on notes payable........ 578 --
Changes in assets and liabilities:
Accounts receivable.................................... (112) (62)
Inventories............................................ (581) 85
Other current assets................................... (149) (119)
Accounts payable....................................... 221 135
Other accrued liabilities.............................. (383) 285
Other long-term liabilities............................ (386) 432
-------- -------
Total adjustments........................................... 4,969 5,735
-------- -------
Net cash used in operating activities....................... (9,331) (3,632)
-------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment........................ (511) (329)
-------- -------
Net cash used in investing activities....................... (511) (329)
-------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payment on capital lease obligations...................... (17) (13)
Issuance of common stock, net of offering costs........... 5,606 1,128
Issuance of redeemable convertible notes, net of issuance
costs.................................................. 10,000 9,350
Proceeds from promissory notes............................ 4,000 --
Capitalization of debt issuance costs..................... 0 (14)
-------- -------
Net cash provided by financing activities................... 19,589 10,451
-------- -------
Net increase in cash and cash equivalents................... 9,747 6,490
Cash and cash equivalents at beginning of period............ 9,889 1,958
-------- -------
Cash and cash equivalents at end of period.................. $ 19,636 $ 8,448
======== =======
</TABLE>
See accompanying notes.
5
<PAGE> 6
SUNRISE TECHNOLOGIES INTERNATIONAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
JUNE 30, 1999
1. BASIS OF PRESENTATION
The condensed consolidated financial statements include the accounts of the
Company and its wholly owned subsidiary after elimination of all inter-company
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 periods ended June 30,
1998 and 1999 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, 1998 included in the Company's Annual Report on Form 10-K filed with the
Securities and Exchange Commission and the Amendment No. 1 to the Form 10-K/A
filed with the Securities and Exchange Commission.
The Company has incurred significant losses for the last several years and
at June 30, 1999 has an accumulated deficit of $69,183,000. The accompanying
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
pursuing Food and Drug Administration ("FDA") approval for the Company's Laser
Thermal Keratoplasty ("LTK System") for the treatment of hyperopia
(farsightedness) and increasing sales efforts in international markets to
broaden the customer base for its new instrument, the Hyperion(TM) LTK System,
which is in final stages of development. Management also recognizes that
additional cash may be needed although at this juncture, neither the amount nor
the timing has been contemplated and there can be no assurance that additional
funds can be raised on terms acceptable to the Company if at all. The Company
raised approximately $10,000,000, net of offering costs, in the form of
convertible promissory notes with warrants in January, 1999.
2. CONCENTRATION OF RISK
Financial instruments, which potentially subject the Company to
concentration of credit risk, consist principally of cash investments and trade
receivables. The Company invests its excess cash in deposits with major banks,
in the United States, in U.S. Treasury and U.S. Agency obligations. The Company
performs ongoing credit evaluations of its customers and generally does not
require collateral. The Company maintains reserves for potential credit losses
and such losses have been within management's expectations.
The Company's activities are subject to extensive regulation by the FDA and
similar health authorities in certain foreign countries. The LTK System is
regulated as a Class III medical device by the FDA under the Food, Drug &
Cosmetic Act. Class III medical devices require a Pre-Market Approval ("PMA")
application by the FDA prior to commercial sale in the United States. The PMA
process (and underlying clinical studies) is lengthy; the outcome is difficult
to predict and requires substantial commitments of the Company's financial
resources and management's time and effort. Delays in obtaining or failure to
obtain required regulatory approvals or clearances in the United States and
other countries would postpone or prevent the marketing of the LTK System and
other devices and would impair the Company's ability to generate funds from
operations, which in turn would have a material adverse effect on the Company's
business, financial condition and results of operations. There can be no
assurance that the Company will be able to obtain in a timely manner, if at all,
the final FDA approval in the United States for intended uses of the LTK System,
or for any other devices which the Company may seek approvals or clearances.
Any products manufactured or distributed by the Company will be subject to
pervasive and continuing regulation by the FDA.
6
<PAGE> 7
SUNRISE TECHNOLOGIES INTERNATIONAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
JUNE 30, 1999
In addition, the introduction of the Company's products in foreign
countries may require obtaining both U.S. and individual foreign regulatory
clearances in numerous countries. Although the Company's products have been sold
in approximately 15 countries, sales of the LTK System require rigorous
regulatory approvals before being sold in the United States and certain other
countries. There can be no assurance that the Company will be able to obtain
regulatory clearances for its products in the United States or foreign markets.
The Company has developed to date a large amount of clinical data on the
safety and efficacy of the LTK System in correcting hyperopia and it continues
to develop additional data on the long-term safety and efficacy. The FDA has not
yet determined whether the LTK System will prove to be safe or effective for the
predictable and reliable treatment of hyperopia or other common vision problems.
There can be no assurance that long-term safety and efficacy data, when
collected, will be consistent with the clinical trial results previously
obtained or will demonstrate that the LTK System can be used safely and
successfully to treat hyperopia in a broad segment of the population on a
long-term basis.
The PMA for the LTK System was filed with the FDA in December 1998. We
appeared before the Ophthalmic Devices Panel ("Panel"), an advisory committee of
the FDA, on July 22, 1999 to present the results of our clinical trial for the
correction of hyperopia from +0.75 to +2.50 diopters. The Panel requested
additional long-term data and did not make a recommendation for approval at that
time. While we are disappointed with the Panel's recommendation, we are working
with the FDA staff to determine what information and additional data are needed
to advance the regulatory review.
3. USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
4. NET LOSS PER SHARE
Basic Earnings Per Share ("EPS") is computed as net income (loss) divided
by the weighted average number of common shares outstanding for the period.
Diluted EPS reflects the potential dilution that could occur from common shares
issuable through stock options, warrants and other convertible securities.
Common equivalent shares are excluded from the computation of net loss per share
if their effect is anti-dilutive. 8,372,519 and 7,580,557 common equivalent
shares as of June 30, 1999 and 1998 respectively, have been excluded from the
shares used to calculate diluted EPS, as their effect is anti-dilutive.
5. REVENUE RECOGNITION
Revenues are recognized at time of shipment. A provision for the estimated
future cost of product warranty is made at the time a sale is recorded.
7
<PAGE> 8
SUNRISE TECHNOLOGIES INTERNATIONAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
JUNE 30, 1999
6. INVENTORIES
Inventories are stated at the lower of cost (first-in, first-out) or market
value and consisted of the following on the dates indicated:
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1999 1999
-------- ------------
(IN THOUSANDS)
<S> <C> <C>
Raw materials............................................... $ 394 $ 11
Work-in-process............................................. 65 20
Finished goods.............................................. 319 166
----- -----
778 197
Less reserves............................................... (214) (186)
----- -----
Inventory, net.............................................. $ 564 $ 11
===== =====
</TABLE>
Most components used in the Company's laser systems are purchased from
outside sources. Although some of the parts and components used by the Company
for the manufacture of its products are available from multiple sources, many of
the Company's purchased components are from a single source in an effort to
establish strong vendor relationships and long term supplier commitments. The
lack of availability of any of these parts and components could result in
production delays, increased costs or costly redesign of the Company's products.
7. ISSUANCE OF 1999 CONVERTIBLE NOTES ("1999 NOTES")
In January 1999, the Company completed a $10,000,000 private placement of
convertible notes with warrants. The 1999 Notes are convertible into shares of
the Company's Common Stock at predetermined prices, bear interest at the rate of
5% payable semi-annually in cash or by the issuance of additional convertible
notes at the Company's option, and contain certain conversion features. The
single purchaser of the 1999 Notes will be required to convert one-half of the
principal amount of the 1999 Notes into shares of the Company's Common Stock, at
a conversion price of $4.00 per share, on the date the Company receives
conditional approval for the PMA application from the Ophthalmic Devices Panel
of the FDA. The investor will also be required to convert the remaining portion
of the 1999 notes into shares of Common Stock at a conversion price $8.00 per
share, on the date the Company receives FDA approval to market the LTK System in
the United States.
Warrants to purchase 148,950 shares of the Company's Common Stock were
issued in conjunction with the 1999 Notes with an exercise price of $0.01 per
share and an expiration date of December 31, 2003. The warrants issued in
connection with the 1999 Notes had a fair market value of approximately $5.93
per warrant at the time of issuance based on the Black Scholes valuation Model.
The fair market value of the 1999 warrants will be reflected as additional
consideration for the 1999 Notes, recorded as a discount on the debt and
accreted as interest expense to be amortized over the life of the 1999 Notes.
The Company recorded approximately $2,523,000 as non-cash expenses
associated with the debt financing costs and amortization of deferred
compensation of warrants issued in connection with the 1999 financings.
On June 1, 1999 the Company announced a warrant acceleration program to all
of the Company's warrant holders pursuant to which the holders were able to
exercise all or part of their warrants in exchange for an unsecured promissory
note instead of cash. The note matures on October 15, 1999 and bears interest at
the
8
<PAGE> 9
SUNRISE TECHNOLOGIES INTERNATIONAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
JUNE 30, 1999
rate of 8%, and 12% if the note is not paid when due. To date, 150,000 warrants
have been exercised pursuant to this program and $656,250 in notes have been
issued to the Company by warrant holders.
8. AUTOMATIC CONVERSION OF 1998 CONVERTIBLE NOTES ("1999 NOTES")
On April 22, 1999, the Company elected to exercise the automatic conversion
feature of the 1998 12% Convertible Notes and paid its final interest payment to
note-holders pro-rata in cash, instead of in Common Stock. The Company had the
right to convert the notes into Common Stock when the share price of the
Company's Common Stock averaged over $10.00 per share for 30 consecutive trading
days.
9. COMPREHENSIVE INCOME
The Company has adopted the Statement of Financial Accounting Standards No.
130, "Reporting Comprehensive Income" (SFAS 130) effective December 31, 1998.
SFAS 130 establishes standards for reporting and display of comprehensive income
and its components for general-purpose financial statements. Comprehensive
income is defined as net income plus all revenues, expenses, gains and losses
that are excluded from net income in accordance with generally accepted
accounting principles. For the three- and six-month periods ended June 30, 1998
and 1999 there were no material differences between comprehensive income and net
income.
10. NEW ACCOUNTING PRONOUNCEMENT
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Investments and Hedging Activities." The statement
establishes accounting and reporting standards requiring that every derivative
instrument be recorded in the balance sheet as either an asset or liability
measured at its fair value. The statement also requires that changes in the
derivative's fair value be recognized currently in earnings unless specific
hedge accounting criteria are met. SFAS No. 133 is effective for fiscal years
beginning after June 15, 1999. The Company does not expect the adoption of SFAS
No. 133 to have a material effect on the Company's consolidated financial
statements.
11. 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.
(Danville Manufacturing, Inc. d/b/a/ Danville Engineering v. Sunrise
Technologies International, Inc. C98-02123) The Company entered into a
settlement agreement with Danville Engineering on April 21, 1999. Pursuant to
this agreement, the Company agreed to pay to Danville $120,000 and assign to
Danville a secured promissory note in the principal amount of $1,500,000 issued
by Lares Research, a California corporation, in connection with the sale of the
Company's dental business on June 26, 1997. The note is subject to offset for
certain claims by Lares Research and Danville has a 90 day option either to
reject the note and reassign it to the Company, in which event the Company will
pay Danville an additional $200,000, or accept the note, in which event the
proceeds, less any costs of collection, will be split equally between the
Company and Danville.
On July 13, 1999, the Company filed two suits in the United States District
Court for the Northern District of California against (i) Sturza's Institutional
Research, Inc. and Evan Sturza (Number C99-3393 CQAL); and (ii) Avalon Research
group, Inc. ("ARG") (Number C99-3394 CAL) for defamation. Sturza's Institutional
Research ("SIR") publishes a weekly newsletter to its investor-subscribers and
others. SIR analyzes publicly traded companies in the healthcare sector. SIR is
part of a family of companies under common control and in medical technology
investment. ARG specializes in writing, publishing, and selling
9
<PAGE> 10
SUNRISE TECHNOLOGIES INTERNATIONAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
JUNE 30, 1999
weekly written investment and money management reports on publicly traded
companies. ARG's reports are available to paying subscribers and others. The
complaint alleges that SIR, ARG, and others associated with them issued and
disseminated a report which defamed the Company and lead to the devaluation of
the Company's shares. Both complaints request injunctive relief, including the
cessation of the publication of all misleading statements, a retraction, and
payment of monetary damages.
10
<PAGE> 11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
All statements contained herein that are not historical facts including,
but not limited to statements regarding our plans for future development and
operation of our 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 our business on terms satisfactory to the Company; changes in labor,
equipment and capital costs; our inability to obtain the necessary
authorizations from the FDA to enable us to market our 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 from time to time in our
reports filed with the Securities and Exchange Commission ("SEC"). We wish to
caution readers not to place undue reliance on any such forward-looking
statements, which are made, based on our views as of this date.
Sunrise develops, manufactures and markets laser systems for applications
in ophthalmology. Substantially all of our business activities, including
engineering, development, manufacturing, assembly and testing take place at our
facility in Fremont, California. Prior to June 26, 1997, we developed,
manufactured and marketed lasers and air abrasion cavity preparation systems for
use in dentistry.
Over the last seven years, Sunrise has not been profitable. Since early
1997, following a management reorganization and refocus of business strategies
from the dental devices to ophthalmic devices, our Company has devoted its
capital and human resources to the development of the holmium laser corneal
shaping instrument, a process known as the LTK System. These development efforts
have consumed significant amounts of our working capital and required seeking
additional cash to support their continuation. The Company does not currently
sell its ophthalmic devices in the United States and will not be able to until
it receives approval from the FDA. Sales of our ophthalmic instruments to
international markets will not, for the near future, yield sufficient cash to
sustain our operations. Up to now we have been able to raise additional working
capital through the private placements of our Common Stock and convertible notes
with warrants. These private placements raised an aggregate of $15,296,000 in
1994, 1995 and 1996 in the form of new equity. In February and March of 1997, we
raised approximately $3,700,000 in the form of promissory notes with warrants.
Again in January, 1998, we raised approximately $9,350,000 through convertible
promissory notes with warrants (the "1998 Notes Placement")followed by another
round of financing of approximately $11,800,000 in the form of a Common Stock
offering in December of that year. Once again in January of 1999 we raised
$10,000,000 in the form of convertible promissory notes with warrants (the "1999
Notes Placement").
The Company's current operations continue to be cash flow negative, which
continues to strain our working capital resources. At our current rate of cash
expenditures, we may need to raise additional working capital to fund
operations. No assurance can be given that additional financing will be
available, or if available, that it will be available on terms favorable to our
stockholders and us. If funds are not available to satisfy both our short-term
and long-term operating requirements, we may be required to limit or suspend our
operations in their entirety or, under certain circumstances, be forced to seek
protection from creditors. Our long-term ability to continue as a going concern
is dependent upon performing profitably or obtaining further financing.
On May 10, 1999, the FDA informed us that the PMA application was
tentatively scheduled for review by the Ophthalmic Devices Panel at its
scheduled meeting to take place on July 22, 1999. At the July 22nd meeting, the
Panel requested that Sunrise provide additional long-term data and did not make
a recommendation for approval at this time. While we are disappointed with the
Panel's decision, management is working closely with the FDA staff and is intent
on resolving all issues and questions to the satisfaction of the FDA that will
lead to final approval. Following the Panel's decision we responded to
frequently asked questions from investors and the general public regarding our
regulatory and business development strategies by posting them on our website at
www.sunrise-tech.com.
11
<PAGE> 12
FINANCIAL CONDITION
As of June 30, 1999, the Company had $19,636,000 in cash and cash
equivalents. The Company's operating activities used $9,331,000 in the six
months ended June 30, 1999 and used $3,623,000 in cash during the same period in
1998. Substantial portions of the 1998 and 1999 operations were funded with the
proceeds of a series of private placements. The 1998 Notes Placement had
aggregate net proceeds of approximately $9,350,000 and the 1999 Notes Placement
generated aggregate net proceeds of $10,000,000.
Our current operations continue to be cash flow negative, limiting our
working capital resources. Working capital at June 30, 1999 amounted to
approximately $18,192,000. At December 31, 1998, working capital amounted to
approximately $6,773,000. Our ability to continue as a going concern is
dependent upon performing profitably or obtaining further financing. Management
believes existing working capital will provide sufficient funds for the
Company's planned operations through mid-2000.
RESULTS OF OPERATIONS
Revenues for the three- and six-month periods ended June 30, 1999 totaled
$3,000 and $16,000, respectively, compared to $222,000 and $324,000,
respectively, for the same periods of 1998. Revenues for 1998 were the result of
sales of SUN1000 ophthalmic laser units to international markets and domestic
sales of Paradigm dental units. Sunrise Technologies is no longer engaged in the
sale of dental units and the SUN1000 production was discontinued in 1999 as the
Hyperion(TM) LTK System, the Company's new Laser Thermal Keratoplasty
instrument, is in final stages of development. Revenues for 1999 represent sales
of accessory parts for older machines on the market.
The high manufacturing costs and virtually no product sales account for the
negative gross margins for the three- and six-month periods ended June 30, 1999.
These manufacturing costs are those associated with the production of initial
test units of our LTK Hyperion(TM) System.
Engineering and development expenses totaled $1,144,000 and $2,511,000,
respectively, for the three-and six-month periods ended June 30, 1999, compared
to $515,000 and $997,000, respectively, for the same period in 1998. The 122%
increase and 152% increase in engineering and development expenses for the
three-and six-month periods of 1999, respectively, over the same periods of 1998
are the result of a significant ramp-up in development costs of the
Hyperion(TM)LTK System.
Sales, marketing and regulatory costs were $1,693,000 and $3,071,000 for
the three- and six-month periods ended June 30, 1999, compared to $1,165,000 and
$1,658,000 for the same periods in 1998. These increases of 45% for the
three-month period and 85% for the six-month period ended June 30, 1999, over
the same periods of 1998, are due to an increase in regulatory activities with
the ongoing clinical trials and marketing efforts in preparation to launch the
Hyperion(TM)LTK System.
General and administrative expenses were $1,270,000 and $3,691,000 for the
three- and six-month periods ended June 30, 1999, compared to $2,917,000 and
$3,849,000 for the same periods of 1998. Of these total general and
administrative expenses, approximately $14,000 and $1,397,000 in the three- and
six-month periods ended June 30, 1999, respectively, are non-cash expenses
attributable to the costs for warrants issued and compensation charges
associated with the issuance of nonstatutory stock options. For the same periods
of 1998, $2,095,000 and $2,606,000, respectively, were attributable to the same
type of non-cash expenses. The general and administrative cash expenses for the
three- and six-month periods of 1999 are 53% and 85% higher than those for the
same periods of 1998. This increases in cash expenses is due to an increase in
personnel, facilities and general expenses associated with the Company's
expansion.
Net interest and other expense for the three- and six-month periods ended
June 30, 1999 were $1,433,000 and $4,640,000, respectively as compared to
$712,000 and $2,503,000, respectively for the same periods of 1998. Of the total
interest expense for the six months ended June 30, 1999, 90% or $4,169,000 was
the result of non-cash charges for the 1999, 1998 and 1997 financings. These
non-cash charges originate from the calculation of the fair market value of
convertible notes and the fair market value of warrants associated with the
placement of the convertible notes. The effective financing costs for the
convertible promissory notes,
12
<PAGE> 13
which include the nominal interest rates, the non cash charges associated with
the notes and warrants and the placement costs, are 21% for the 1997 Notes, 26%
for the 1998 Notes and 16% for the 1999 Notes.
The net loss for the three- and six month periods ended June 30, 1999 of
$5,833,000 and $14,300,000, respectively, was due to the significant investment
in development, marketing and regulatory activities aimed at obtaining FDA
approval and market launch of our Hyperion(TM) LTK System to treat hyperopia.
There have been no product revenues during this period to offset these expenses.
Approximately $5,566,000, or 39% of the 1999 six months net losses were due to
non-cash charges, as commented above.
The Company's current operations continue to be cash flow negative, further
straining our working capital resources. Over the coming months we will be
working very diligently together with the FDA to satisfy all of the requirements
that management believes will lead to FDA approval of our Hyperion(TM) LTK
System. We will also be concentrating marketing efforts on certain international
markets to broaden the knowledge and understanding of the Hyperion(TM) LTK
System benefits. These continued activities would require the use of cash.
Although we believe we have sufficient working capital for the continued
development of our Hyperion(TM) LTK System through mid-2000, in order to launch
the System in the United States once we have obtained final approval from the
FDA, we most probably will need additional funds. Additional working capital
resources may come from debt or equity offerings. If we are unable to raise the
necessary working capital in a timely fashion, it may be necessary for us to
curtail or suspend operations in their entirety.
YEAR 2000 COMPLIANCE
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. The Company utilized both internal and external resources to identify,
correct or reprogram, and test its systems for Year 2000 compliance. As of June
30, 1999, the estimated costs of these reprogramming efforts have been
approximately $250,000. All of the Company's reprogramming efforts and testing
were completed by July 1, 1999. This process included 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 were sent to all primary vendors and the majority has replied with
written confirmations. However, there can be no assurance that the systems of
other companies, and especially a single source primary vendor, 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 a material adverse
effect on the Company's business, financial condition or results of operations.
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 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 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.
We are not expecting to have material accounts receivable exposure, or a
significant amount of pending revenues with any one customer on 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 could have material adverse effects on the Company's
business, financial condition or results of operations.
The Company believes that it has reviewed adequately, together with its
most significant suppliers, the issues related to Year 2000 such that it
believes no contingency plan is required at this time. Management will
13
<PAGE> 14
continue to evaluate its status regarding Year 2000 compliance to assess whether
a contingency plan will be required.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to financial market risks due primarily to changes
in interest rates. The Company does not use derivatives to alter the interest
characteristics of its investment securities or its debt instruments. The
Company has no holdings of derivative or commodity instruments and does not
transact business in foreign currencies.
The fair value of the Company's investment portfolio or related income
would not be significantly impacted by changes in interest rates since the
investment maturities are short and the interest rates are primarily fixed.
The Company anticipates interest on cash balances for 1999 to be
approximately $710,000 at an estimated average interest rate of 5%. It is not
possible to anticipate the level of interest and the rates past 1999. Changes in
interest rates have no impact on our debt as all notes are at fixed interest
rates between 5% and 12%.
14
<PAGE> 15
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.
(Danville Manufacturing, Inc. d/b/a/ Danville Engineering v. Sunrise
Technologies International, Inc. C98-02123) The Company entered into a
settlement agreement with Danville Engineering on April 21, 1999. Pursuant to
this agreement, the Company agreed to pay to Danville $120,000 and assign to
Danville a secured promissory note in the principal amount of $1,500,000 issued
by Lares Research, a California corporation, in connection with the sale of the
Company's dental business on June 26, 1997. The note is subject to offset for
certain claims by Lares Research and Danville has a 90 day option either to
reject the note and reassign it to the Company, in which event the Company will
pay Danville an additional $200,000, or accept the note, in which event the
proceeds, less any costs of collection, will be split equally between the
Company and Danville.
On July 13, 1999, the Company filed two suits in the United States District
Court for the Northern District of California against (i) Sturza's Institutional
Research, Inc. and Evan Sturza (Number C99-3393 CQAL); and (ii) Avalon Research
group, Inc. ("ARG") (Number C99-3394 CAL) for defamation. Sturza's Institutional
Research ("SIR") publishes a weekly newsletter to its investor-subscribers and
others. SIR analyzes publicly traded companies in the healthcare sector. SIR is
part of a family of companies under common control and in medical technology
investment. ARG specializes in writing, publishing, and selling weekly written
investment and money management reports on publicly traded companies. ARG's
reports are available to paying subscribers and others. The complaint alleges
that SIR, ARG, and others associated with them issued and disseminated a report
which defamed the Company and lead to the devaluation of the Company's shares.
Both complaints request injunctive relief, including the cessation of the
publication of all misleading statements, a retraction, and payment of monetary
damages.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
The Company, as a Delaware corporation, is subject to Chapter 1, Title 8,
Section 170 of the Delaware Corporation Law which provides that the directors of
every corporation may declare and pay dividends either out of surplus or, in the
event that there is no surplus, out of the net profits for the fiscal year in
which the dividend is declared and/or the preceding fiscal year. The Company has
not had surplus during the past fiscal year and did not have surplus during the
first two quarters of fiscal year 1999 and, therefore, the Company does not plan
to declare and pay dividends on its Common Stock.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company held its annual meeting of shareholders on April 30, 1999. At
the annual meeting, the following matters were considered and voted upon:
1. The election of two Class III directors, each to serve a three-year term
expiring upon the annual meeting of stockholders to be held in the year
2002, or until his respective successor is elected and qualified.
2. The ratification of the appointment of PricewaterhouseCoopers LLP as
independent accountants for the Company for the year ending December 31,
1999.
3. The approval of the adoption of the 1999 Long-term Equity Compensation
Plan which reserved 2.1 million shares of the Company's Common Stock for
issuance thereunder.
With respect to the election of directors, the following votes were cast
for each nominee:
<TABLE>
<CAPTION>
FOR WITHHELD
---------- --------
<S> <C> <C>
Joseph D. Koenig............................................ 33,535,602 696,276
Russell Trenary III......................................... 33,564,535 667,343
</TABLE>
There were 7,870,418 broker non-votes.
15
<PAGE> 16
With respect to the ratification of the appointment of independent
accountants, 33,700,245 shares voted FOR the ratification of independent
accountants, 371,893 shares voted AGAINST the ratification of independent
accountants, 159,740 shares ABSTAINED from voting on the ratification of
independent accountants, and there were no broker non-votes.
With respect to the approval of the adoption of the 1999 Long-Term Equity
Compensation Plan, 30,385,789 shares voted FOR the adoption of the plan,
2,951,080 shares voted AGAINST the adoption of the plan, 895,009 shares
ABSTAINED from voting on the adoption of the plan, and there were no broker non-
votes.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
A. EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
27 Financial Data Schedule
</TABLE>
B. REPORTS ON FORM 8-K
The Company filed the following reports on Form 8-K during the period ended
June 30, 1999:
(a) Report on Form 8-K dated April 6, 1999 to report an amendment and
restatement of the Company's 1999 Long-Term Equity Compensation Plan (the
"Plan"), established as of March 20, 1999, in order to decrease the number
of shares available under the Plan from 2,600,000 to 2,100,000. As a result
of the approval by the Company's shareholders at the 1999 Annual Meeting of
Shareholders, the Plan became effective as of April 6, 1999.
(b) Report on Form 8-K dated May 5, 1999 to announce that it will
convert its 12% Convertible Subordinated Pay-In-Kind Notes Due 2001 into
common stock effective April 22, 1999. In addition, the company will pay
its final interest payment to the note -- holders pro-rata in cash, instead
of in common stock.
(c) Report on Form 8-K dated March 20, 1999 to report the resignation
of Timothy A. Marcotte as Director of the Company. (Previously omitted from
the periodic report on Form 10-Q for the period ended March 31, 1999).
16
<PAGE> 17
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.
<TABLE>
<S> <C>
SUNRISE TECHNOLOGIES INTERNATIONAL, INC.
Date: August 13, 1999 By: /s/ C. RUSSELL TRENARY, III
-------------------------------------------------
President and Chief Executive Officer
(Principal Executive Officer)
Date: August 13, 1999 By: /s/ PETER E. JANSEN
-------------------------------------------------
Vice President, Finance and
Chief Financial Officer
(Principal Financial Officer)
</TABLE>
17
<PAGE> 18
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
- ------- -------------------
<C> <S>
27 Financial Data Schedule
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> APR-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 19,636,000
<SECURITIES> 0
<RECEIVABLES> 258,000
<ALLOWANCES> 11,000
<INVENTORY> 564,000
<CURRENT-ASSETS> 463,000
<PP&E> 1,905,000
<DEPRECIATION> 683,000
<TOTAL-ASSETS> 22,354,000
<CURRENT-LIABILITIES> 2,718,000
<BONDS> 0
0
0
<COMMON> 45,000
<OTHER-SE> 10,028,000
<TOTAL-LIABILITY-AND-EQUITY> 22,354,000
<SALES> 3,000
<TOTAL-REVENUES> 3,000
<CGS> 542,000
<TOTAL-COSTS> 542,000
<OTHER-EXPENSES> 4,106,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,188,000
<INCOME-PRETAX> (5,833,000)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (5,833,000)
<EPS-BASIC> (0.14)
<EPS-DILUTED> (0.14)
</TABLE>
