<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 QUARTERLY PERIOD ENDED SEPTEMBER 30, 2000
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 (I.R.S. 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 -- 50,724,914 shares as of November 10,
2000.
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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 Statements of Operations -- Three and
nine months ended September 30, 2000 and 1999............... 1
Condensed Consolidated Balance Sheets -- September 30, 2000
and December 31, 1999....................................... 2
Condensed Consolidated Statements of Cash Flows -- Nine
months ended September 30, 2000 and 1999.................... 3
Notes to Condensed Consolidated Financial
Statements -- September 30, 2000............................ 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 2. Changes in Securities and Use Proceeds...................... 12
Item 6. Exhibits and Reports on Form 8-K............................ 13
SIGNATURES........................................................... 14
EXHIBIT INDEX........................................................ 15
</TABLE>
i
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SUNRISE TECHNOLOGIES INTERNATIONAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS EXCEPT FOR PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------ --------------------
2000 1999 2000 1999
------- ------- -------- --------
<S> <C> <C> <C> <C>
Revenues:
Equipment....................................... $ 8,405 $ -- $ 8,817 $ --
Procedure....................................... 1,167 -- 1,167 --
Service and other............................... 419 6 449 21
------- ------- -------- --------
Total revenues.......................... 9,991 6 10,433 21
------- ------- -------- --------
Cost of revenues:
Equipment....................................... 4,217 -- 5,478 --
Procedure....................................... 1 -- 1 --
Service and other............................... 669 616 1,541 1,540
------- ------- -------- --------
Total cost of revenues.................. 4,887 616 7,020 1,540
------- ------- -------- --------
Gross margin (loss)............................... 5,104 (610) 3,413 (1,519)
------- ------- -------- --------
Operating expenses:
Research and development........................ 1,162 954 3,749 3,465
Sales, marketing and regulatory................. 4,155 2,023 10,816 5,094
General and administrative...................... 2,654 1,330 8,363 5,022
------- ------- -------- --------
Total operating expenses.......................... 7,971 4,307 22,928 13,581
------- ------- -------- --------
Loss from operations.............................. (2,867) (4,917) (19,515) (15,100)
Interest income................................. 83 181 501 704
Interest expense................................ (1,350) (1,048) (13,014) (5,687)
------- ------- -------- --------
Net loss.......................................... $(4,134) $(5,784) $(32,028) $(20,083)
======= ======= ======== ========
Net loss per share, basic and diluted............. $ (0.09) $ (0.13) $ (0.68) $ (0.47)
======= ======= ======== ========
Shares used in calculation of basic and diluted
net loss per share.............................. 48,399 45,746 47,190 43,101
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements
1
<PAGE> 4
SUNRISE TECHNOLOGIES INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS EXCEPT FOR SHARE DATA)
ASSETS
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
2000 1999
------------- ------------
(UNAUDITED) (AUDITED)
<S> <C> <C>
Current assets:
Cash and cash equivalents................................. $ 2,296 $ 10,643
Accounts receivable, net.................................. 7,591 3
Inventories, net.......................................... 9,687 1,973
Other current assets...................................... 1,617 786
--------- --------
Total current assets.............................. 21,191 13,405
Property and equipment, net............................... 2,076 1,280
Intangibles, net.......................................... 8,133 --
Other non-current assets.................................. 225 220
--------- --------
Total assets...................................... $ 31,625 $ 14,905
========= ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt......................... $ 1,290 $ 5,028
Accounts payable.......................................... 3,472 416
Accrued liabilities....................................... 2,138 2,205
Deferred revenue and deposits............................. 1,484 --
--------- --------
Total current liabilities......................... 8,384 7,649
Deferred revenue............................................ 1,030 --
Notes payable and other long-term liabilities............... 2,944 5,155
--------- --------
Total liabilities................................. 12,358 12,804
--------- --------
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, 50,689,025 and 46,321,157 shares issued and
outstanding at September 30, 2000 and December 31,
1999, respectively..................................... 51 46
Additional paid-in capital................................ 135,692 85,139
Notes receivable for common stock......................... (1,550) (1,550)
Deferred compensation..................................... (1,870) (506)
Accumulated deficit....................................... (113,056) (81,028)
--------- --------
Total stockholders' equity........................ 19,267 2,101
--------- --------
Total liabilities and stockholders' equity........ $ 31,625 $ 14,905
========= ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements
2
<PAGE> 5
SUNRISE TECHNOLOGIES INTERNATIONAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
--------------------
2000 1999
-------- --------
<S> <C> <C>
CASH FLOWS FOR OPERATING ACTIVITIES:
Net loss.................................................. $(32,028) $(20,083)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization.......................... 750 306
Amortization of deferred compensation.................. 5,020 335
Amortization of debt issuance costs.................... 1 8
Warrant accretion and interest on beneficial conversion
features.............................................. 12,314 5,072
Issuance of warrants and non-qualified stock options... -- 1,081
Conversion of accrued interest on notes payable........ 484 578
Increase/(decrease) in inventory reserve............... (238) 12
Changes in assets and liabilities:
Accounts receivable.................................... (7,588) (121)
Inventories............................................ (7,476) (1,313)
Other current assets................................... (831) (779)
Non-current assets..................................... (6) --
Accounts payable....................................... 3,056 114
Deferred revenue and deposits.......................... 2,515 --
Other accrued liabilities.............................. (39) (129)
Other long-term liabilities............................ 35 (255)
-------- --------
Net cash used in operating activities............. (24,031) (15,174)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment........................ (1,408) (691)
-------- --------
Net cash used in investing activities............. (1,408) (691)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of common stock, net of offering costs........... 4,754 6,644
Issuance of redeemable convertible notes, net of issuance
costs.................................................. 11,217 10,000
Proceeds from short-term loans............................ 1,000 --
Proceeds from issuance of promissory notes................ -- 4,000
Proceeds from issuance of debt obligations................ 285 --
Repayments of debt obligations............................ (164) (29)
-------- --------
Net cash provided by financing activities......... 17,092 20,615
-------- --------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS........ (8,347) 4,750
Cash and cash equivalents at beginning of period............ 10,643 9,889
-------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD.................. $ 2,296 $ 14,639
======== ========
NON-CASH INVESTING AND FINANCING ACTIVITIES:
Warrants issued to acquire patents.......................... $ 8,271 $ --
======== ========
Conversion of 1999 and 2000 Notes into common stock......... $ 10,980 $ --
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements
3
<PAGE> 6
SUNRISE TECHNOLOGIES INTERNATIONAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2000
(UNAUDITED)
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 September
30, 2000 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, 1999 included in the Company's Annual Report on Form 10-K filed with the
Securities and Exchange Commission.
The Company has incurred significant losses for the last several years and
at September 30, 2000 has an accumulated deficit of $113,056,000. The
accompanying financial statements have been prepared assuming the Company will
continue as a going concern. The Company's ability to continue as a going
concern is dependent upon attaining profitable operations. Management's plans
include increasing sales through increased direct sales and marketing efforts on
existing products and pursuing timely regulatory approval for other certain
products under development. Management also recognized the need for infusion of
cash. In January 2000, the Company raised approximately $11,217,000, net of
offering costs, in the form of convertible debentures and warrants. In June
2000, the Company secured a $10,000,000 revolving line of credit from a
commercial banking company guaranteed by certain Company assets and assets of
one of the Company's investors. As of September 30, 2000, $1,000,000 of the
revolving line of credit has been drawn.
The Company recognizes product revenue after shipment of the product, upon
customer confirmation of installation and acceptance, provided there are no
significant contractual obligations remaining, signed agreements are in place
and collection of receivables is deemed probable. A provision for the estimated
future cost of warranty is made at the time a sale is recorded. Procedure
revenue is recorded upon shipment of key cards that have been loaded with a
specified number of procedures. Service and other revenues are recognized either
ratably over the period that the services are performed or as products are
provided.
2. NET LOSS PER SHARE
Basic Earnings Per Share ("EPS") is computed as net 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. 5,527,002 and 7,596,433 common equivalent shares
as of September 30, 2000 and 1999 respectively, have been excluded from the
shares used to calculate diluted EPS, as their effect is anti-dilutive.
4
<PAGE> 7
SUNRISE TECHNOLOGIES INTERNATIONAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 2000
(UNAUDITED)
3. 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>
SEPTEMBER 30, DECEMBER 31,
2000 1999
------------- ------------
(IN THOUSANDS)
<S> <C> <C>
Raw materials...................................... $4,840 $1,589
Work-in-process.................................... 4,027 344
Finished goods..................................... 820 40
------ ------
Inventories, net................................... $9,687 $1,973
====== ======
</TABLE>
4. PATENT
On June 16, 2000, we entered into an Amended and Restated Patent and
Technology Assignment Agreement whereby Dr. Bruce J. Sand, M.D., F.A.C.S. agreed
to assign to the Company irrevocably and on an exclusive basis the Patent Rights
and Related Technology of Dr. Sand's patent application for the prevention of
regression of refractive keratoplasty. Included in the agreement is the purchase
of all patents and future royalty obligations related to the previously licensed
"Sand" patents, the result of which will be the avoidance of future cash
outflows related to these royalty obligations. As part of this agreement, the
Company issued to Dr. Sand a warrant to purchase 750,000 shares of our common
stock at an exercise price of $0.01 per share, exercisable at any time prior to
June 16, 2005. Dr. Sand agreed that he would sell no more than 250,000 of such
shares in any of our fiscal quarters. In addition, for legal services rendered
by Edward Vincent King, Jr., Dr. Sand's attorney, we issued a warrant to
purchase 67,500 shares of our Common Stock on the same terms as the warrant
issued to Dr. Sand and Mr. King, Jr. agreed not to sell more than 22,500 shares
in any of our fiscal quarters. The $8,271,000 value of this patent was based on
the fair value of the warrants issued, calculated using the Black Scholes
Valuation Model and will be amortized over the life of the patent, estimated to
be fifteen years. On June 21, 2000 Dr. Sand and Mr. King exercised all of their
respective warrants to purchase shares of common stock.
5. ISSUANCE OF 2000 CONVERTIBLE DEBENTURES AND CONVERSION OF 1998 AND 1999
CONVERTIBLE FINANCINGS
On January 11, 2000, the Company completed an $11,700,000 ($11,217,000 net
of offering costs) private placement of convertible debentures with warrants.
These debentures are convertible into the Company's common stock at a conversion
price of $5.916 per share, at the option of the holder, and mature in June 2002.
The debentures bear an interest rate of 7% per annum, payable in kind or cash at
the option of the Company, and are payable quarterly. There are two types of
associated warrants issued in connection with the debentures. Type A warrants
have five-year terms with an exercise price of $6.803 per share. Type B warrants
are two-year terms with an exercise price of $6.803 per share and were called by
the Company on June 28, 2000 when the provision was met of the Company's closing
stock price closing equal to or higher than $7.823 for a continuous period of
twenty trading days.
In May 2000 approximately $2,000,000 of the January 2000 Convertible Debt
financing was converted into 388,088 shares of common stock at a conversion
price of $5.916 per share. In July 2000 approximately $300,000 of the January
2000 Convertible Debt financing was converted into 50,713 shares of common stock
at a conversion price of $5.916 per share. In September 2000 approximately
$300,000 of the January 2000 Convertible Debt financing was converted into
50,713 shares of common stock at a conversion price of $5.916 per share.
Approximately 443,741 Type B warrants associated with the January 2000
Convertible Debt financing were exercised at an exercise price of $6.803 per
share by September 30, 2000.
5
<PAGE> 8
SUNRISE TECHNOLOGIES INTERNATIONAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 2000
(UNAUDITED)
In September 2000 approximately $50,000 of the 1998 Convertible Financing
was converted into 16,667 shares of common stock at a conversion price of $3.00
per share.
In September 2000 approximately $10,000,000 of the 1999 Convertible
Financings was converted into 1,875,000 shares of common stock at a conversion
price of $4.00 for 1,250,000 shares and $8.00 per share for 625,000 shares.
6. NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Standards No. 133 ("SFAS 133"), "Accounting for
Derivative Investments and Hedging Activities" which is effective for all fiscal
quarters of fiscal years beginning after June 15, 1999. It requires that an
entity recognize all derivatives as either assets or liabilities in the
statement of financial position and measure those instruments at fair value. In
July of 1999, the FASB issued Statement of Financial Standards No. 137 ("SFAS
137"), "Accounting for Derivative Instruments and Hedging Activities -- Deferral
of the Effective Date of FASB Statement No. 133," which defers the effective
date to all fiscal quarters of fiscal years beginning after June 15, 2000. The
Company has not yet evaluated the effects of this change on its operations. The
Company will adopt SFAS 133 as required for its first quarterly filing of the
fiscal year 2001.
In December 1999, the SEC issued Staff Accounting Bulletin No. 101 ("SAB
101"), "Revenue Recognition" which outlines the basic criteria that must be met
to recognize revenue and provides guidance for presentation of revenue and for
disclosure related to revenue recognition policies in financial statements filed
with the SEC. In June 2000, the SEC issued SAB 101B which delays the
implementation of SAB 101 until no later than the fourth fiscal quarter of
fiscal years beginning after December 15, 1999. The Company believes that its
current revenue recognition policy is in compliance with SAB 101.
6
<PAGE> 9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
The Company develops, manufactures and markets laser systems for
applications in ophthalmology. Substantially all of our business activities,
including engineering and development, manufacturing, assembly and testing take
place at our facility in Fremont, California.
On January 27, 2000 the Company announced that it had passed its
ISO9001/EN46001 certification audit for the Company's quality system and
therefore is certified for the International Organization for Standards ISO
9001, European Commission EN 46001 and CE marking (European Community Seal of
Approval).
On June 30, 2000 the Food and Drug Administration ("FDA") gave final
approval for Sunrise's Hyperion(TM) LTK System in the United States for the
temporary reduction of low to moderate hyperopia, where some patients retain
some or all of their refractive correction, with conditions relating to labeling
regarding patient symptoms, longevity of effect and the effect of re-treatment.
The Company immediately began selling the Hyperion(TM) LTK System in the United
States on June 30, 2000.
Our working capital has been depleted due to our substantial losses in the
past eight years as we have developed our technology. We have been able to raise
additional working capital for all aspects of our business through the private
placements of our common stock and convertible notes with warrants. We raised
approximately $3,700,000 in the form of promissory notes with warrants in
February and March 1997 (the "1997 Notes Placement"). We raised approximately
$9,300,000, net of offering costs, in the form of promissory notes with warrants
in January 1998 (the "1998 Notes Placement"), and approximately $11,800,000, net
of offering costs, from the sale of common stock in December 1998 (the "1998
Equity Offering"). In January 1999, we raised $10,000,000, net of offering
costs, in the form of promissory notes with warrants (the "1999 Notes
Placement"). In January 2000, we raised $11,217,000, net of offering costs, in a
private placement in the form of convertible debentures and warrants (the "2000
Notes Placement"). In addition, in June 2000, we secured a $10,000,000 revolving
line of credit with a commercial banking company.
FINANCIAL CONDITION
As of September 30, 2000, the Company had $2,296,000 in cash and cash
equivalents. The Company's operating activities used $24,031,000 in the nine
months ended September 30, 2000 and $15,174,000 in cash for the same period of
1999. Substantial portions of the 1999 and 2000 losses were funded with the
proceeds of a series of private placements. The 1999 Notes Placement had
aggregate net proceeds of approximately $10,000,000 and the 2000 Notes Placement
generated aggregate net proceeds of $11,217,000.
The Company's current operations continue to be cash flow negative,
limiting the Company's working capital resources. Working capital at September
30, 2000 amounted to approximately $12,807,000. At December 31, 1999, working
capital amounted to approximately $5,756,000. The Company's ability to continue
as a going concern is dependent upon performing profitably or obtaining further
financing. The Company has invested a significant portion of its working capital
during the first three quarters of 2000 in the ramp-up of manufacturing
capabilities, build-up of materials and components for the production of the
Hyperion(TM) LTK System and its market preparation for the launch on the
domestic and international markets. The Company believes that its current
working capital, together with the $10,000,000 revolving line of credit of which
$1,000,000 has been used to date, is sufficient to support our operational needs
over the coming months. We also believe that the revenue and influx of cash from
the sale of our recently approved Hyperion(TM) LTK System will steadily
replenish our working capital over the coming months. Sales to the domestic
market have begun subsequent to June 30, 2000 following the final FDA approval.
However, given that this technology is new to the market, and therefore
unproven, there is no assurance that expected results will be attained. Sales of
the Hyperion(TM) LTK System can also be made to certain international markets
where it is approved by the local regulatory authorities. There is no assurance
the Company will be able to raise sufficient working capital, if needed, from
the capital markets or through debt instruments. Management believes that if
revenues from sales or new funds from debt or equity instruments are
insufficient to maintain
7
<PAGE> 10
the current expenditure rate, it will be necessary to extensively curtail its
operations until an appropriate solution is implemented.
Cash used for operating activities was $24,031,000 for the nine months
ended September 30, 2000. The majority of the cash used for operating activities
was used to fund the net loss of $32,028,000 offset by depreciation and
amortization and non-cash interest and compensation expense of $18,568,000.
Operating cash was also utilized in the growth of inventory and accounts
receivable of $15,064,000 offset by the growth of accounts payable and deferred
revenue and deposits of $5,571,000.
Cash used for investing activities was $1,408,000 for the nine months ended
September 30, 2000 for purchase of capital expenditures. Capital expenditures
generally had been comprised of purchases of computer hardware and software as
well as leasehold improvements related to leased facilities.
Cash provided by the financing activities was $17,092,000 for the nine
months ended September 30, 2000 comprised primarily of the net proceed from the
January 2000 debt financing of $11,217,000, the issuance of common stock of
$4,754,000, and the proceeds from the short-term bank loan of $1,000,000.
RESULTS OF OPERATIONS
Total revenues for the three and nine-month periods ended September 30,
2000 were $9,991,000 and $10,433,000 respectively. Revenues from the sale of
equipment to customers in the United States and Europe for the three and
nine-month periods ended September 30, 2000 were $8,405,000 and $8,817,000
respectively, which represent the sale of forty-eight and fifty Hyperion units
for such periods, respectively. Procedure revenues totaled $1,167,000 for the
three and nine-month period ended September 30, 2000. Service and other revenues
of $419,000 and $449,0000 for the three and nine-month periods ended September
30, 2000 represent an increase of $413,000 and $428,000 from revenues of $6,000
and $21,000 for the same periods in 1999. Procedure revenues are comprised of
revenues from enablement fees. Service and other revenues are comprised of
revenues from the recognition of first-year service revenues and other
miscellaneous revenues.
Total cost of revenues for the three and nine-month periods ended September
30, 2000 were $4,887,000 and $7,020,000 respectively. Cost of revenue for
equipment sales totaled $4,217,000 and $5,478,000 for the three and nine-month
periods ended September 30, 2000. Cost of revenues for enablements totaled
$1,000 for the three and nine-months ended September 30, 2000. Cost of revenue
for service and other revenues totaled $669,000 and $1,541,000 for the three and
nine-month periods ended September 30, 2000. Gross margins totaled $5,104,000
and $3,413,000 for the three and nine-month periods ended September 30, 2000.
Costs of revenue for equipment sales reflect charges for production costs
inclusive of manufacturing labor and overhead. Cost of revenues for procedures
represents the cost of the media being utilized to deliver the enablements. Cost
of revenue for service and other revenues include costs of the company's
technical and service department and other direct costs associated with
miscellaneous revenues.
Research and development expenses totaled $1,162,000 and $3,749,00 for the
three and nine-month periods ended September 30, 2000, compared to $954,000 and
$3,465,000 for the same periods in 1999. Research and development expenses
consist primarily of payroll and related expenses incurred for enhancement to
and maintenance of the Hyperion(TM) LTK System, amortization of patent costs,
expenditures related to the development of other refractive applications of the
Hyperion(TM) LTK System and other operating costs. The 22% and 8% increase for
the three- and nine-month periods in research and development expenses compared
to those of 1999 was primarily due to follow-on product improvements.
Sales, marketing and regulatory costs were $4,155,000 and $10,816,000 for
the three and nine-month periods ended September 30, 2000, compared to
$2,023,000 and $5,094,000 for the same periods in 1999. Sales and marketing
expenses consist primarily of advertising and other marketing expenses,
compensation and employee related expenses, sales commissions, and travel costs.
The 105% and 112% increases in sales, marketing and regulatory expenses in the
third quarter and year-to-date of 2000, respectively, was due to the increase in
marketing efforts in preparation and market launch of the Hyperion(TM) LTK
System.
8
<PAGE> 11
General and administrative expenses were $2,654,000 and $8,363,000 for the
three and nine-month periods ended September 30, 2000, compared to $1,330,000
and $5,022,000 for the same periods of 1999. General and administrative expenses
consist primarily of compensation and fees for professional services. The 100%
and 67% increase in general and administrative expenses was due to the increase
in infrastructure expenses to support the Hyperion(TM) LTK System.
Approximately $660,000 and $5,020,000, respectively, of general and
administrative expenses in the third quarter and year-to-date of 2000 was
attributed to non-cash expense related to the fair value of warrants and
non-qualified stock options issued in lieu of cash, compared to comparable
expenses of $20,000 and $1,417,000 for the same period of 1999. Of these amounts
for the third quarter and year-to-date 2000, $46,000 and $670,000 was classified
as research and development expenses, $83,000 and $781,000 was classified as
sales and marketing expenses, and $531,000 and $3,569,000 was classified as
general and administrative expenses.
Net interest and other expense for the three and nine-month periods ended
September 30, 2000 of $1,267,000 and $12,513,000 represent primarily non-cash
interest charges pursuant to the 1998, 1999 and 2000 Notes Placements and
related warrants, compared to $867,000 and $4,983,000 for the same periods of
1999. For the three and nine-month periods ending September 30, 2000,
approximately $1,158,000 and $12,315,000 or 91% and 98% respectively, of the
Company's net interest expense was due to non-cash charges incurred in
connection with the 1998, 1999 and 2000 Notes Placement. The fair value of the
warrants, the conversion features and the placement costs of such notes are
recorded as non-cash interest expense in 1999 and 2000.
For the three and nine-month periods ended September 30, 2000 we incurred
net losses of $4,134,000 and $32,028,000 respectively, of which $1,818,000 and
$17,339,000 were attributable to non cash charges for each respective period.
The net loss of $4,134,000 for the third quarter compares favorably to those of
both the first and second quarters of 2000, $16,033,000 and $11,861,000
respectively. Our Hyperion(TM) LTK System was approved by the FDA for marketing
and sales in the U.S. in late June 2000. Consequently, we had no significant
revenues to offset our expenses during the first two quarters of the current
year. The third quarter was the first reporting period in which we had material
revenues from the sales of our newly approved System and for which we were able
to partially offset our operating expenses from the gross margin originating
from these sales. Our net loss of $4,134,000 for the third quarter is a
reflection of our transition from a research and development status to a fully
operational manufacturing and marketing company.
Our operating expenses for the third quarter of approximately $7,971,000
included a ramp-up of marketing and sales activities associated with the
domestic launch of the Hyperion(TM) LTK System and also included approximately
$660,000 of non-cash expenses resulting from charges associated with
non-qualified stock options and warrants granted to consultants and certain
employees. By comparison, the first and second quarters' operating expenses
amounted to $5,031,000 and $9,926,000 respectively, which expenses also included
non-cash charges of $81,600 and $4,278,000 respectively.
Our year-to-date operating expenses of approximately $22,928,000 are
significantly higher than those of the equivalent nine month period for 1999,
i.e. $13,581,000 because over the nine months of 2000, we had ramped up our
manufacturing, sales and marketing capabilities in preparation for the July 2000
launch of the Hyperion(TM) LTK System. Included in the year-to-date operating
expenses are non-cash charges of $5,020,000 associated with non-qualified stock
options and warrants granted to consultants and certain employees.
As of September 30, 2000, we had $2,296,000 in cash and $9,000,000 of
unused credit in the form of a revolving bank credit line. During the month of
September we drew down $1,000,000 from our bank revolving credit line.
Our Hyperion(TM) LTK systems are sold to our customers for cash on payment
terms of 10 to 30 days, disbursed directly to Sunrise by the customer or by the
customer's financing institution or by an independent leasing company that has
offered lease financing to the customer. The customer may elect to pre-pay
future year's extended warranty for the LTK equipment. In such cases we do not
recognize the revenues for these pre-paid services until the month and year for
which these services are rendered. These pre-paid service revenues are posted to
our balance sheet under Deferred Revenue of the long term Liabilities section
until
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<PAGE> 12
they become part of the then current year revenues. A per procedure fee is also
paid by the customer to Sunrise. The customer determines how many procedures
will be purchased at any time and they are installed on the Hyperion(TM) LTK
equipment via enablement cards. Upon installation of the enablements on the
equipment, the customer is charged the appropriate procedure fees. Our revenues
are, therefore made up of three components: proceeds from the sale of
Hyperion(TM) LTK units, proceeds from the procedure fees and proceeds from the
service fees of the units sold. As we move forward, we expect to replenish our
working capital through the receipt of cash from these three revenue sources. As
more Hyperion(TM) LTK units are placed and used in the market place, we would
expect that the number of procedures performed by the ophthalmologists -- our
customers -- will increase and the percentage of cash inflows from this revenue
source relative to our total cash inflows from all sources should also increase.
Although we believe that our current working capital, available cash and credit
line in addition to the cash inflows from the sales of our products and services
is sufficient to support our ongoing activities, there is no assurance that we
will not be required to seek other sources of capital or that such other sources
of capital will be available to us or at prices considered reasonable by our
shareholders.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Standards No. 133 ("SFAS 133"), "Accounting for
Derivative Investments and Hedging Activities" which is effective for all fiscal
quarters of fiscal years beginning after June 15, 1999. It requires that an
entity recognize all derivatives as either assets or liabilities in the
statement of financial position and measure those instruments at fair value. In
July of 1999, the FASB issued Statement of Financial Standards No. 137 ("SFAS
137"), "Accounting for Derivative Instruments and Hedging Activities -- Deferral
of the Effective Date of FASB Statement No. 133," which defers the effective
date to all fiscal quarters of fiscal years beginning after June 15, 2000. The
Company has not yet evaluated the effects of this change on its operations. The
Company will adopt SFAS 133 as required for its first quarterly filing of the
fiscal year 2001.
In December 1999, the SEC issued Staff Accounting Bulletin No. 101 ("SAB
101"), "Revenue Recognition" which outlines the basic criteria that must be met
to recognize revenue and provides guidance for presentation of revenue and for
disclosures related to revenue recognition policies in financial statements
filed with the SEC. In June 2000, the SEC issued SAB 101B which delays the
implementation of SAB 101 until no later than the fourth fiscal quarter of
fiscal years beginning after December 15, 1999. The Company believes that its
current revenue recognition policy is in compliance with SAB 101.
FORWARD-LOOKING STATEMENTS AND ADDITIONAL RISK FACTORS
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; any restrictions
or revocations that the ("FDA") may impose on our holmium laser corneal shaping
product or process known as the Hyperion(TM) Laser Thermal Keratoplasty (the
Hyperion(TM) LTK System) that received the FDA's pre-market approval;
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 the
Company's reports filed with the Securities and Exchange Commission ("SEC"). The
Company wishes to caution readers not to place undue reliance on any such
forward-looking statements, which speak only as of the date made.
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<PAGE> 13
Our Hyperion(TM) LTK System is a new introduction to the US and
international markets. Our first full quarter of sales for this equipment was
this third quarter of 2000 where we recognized the sale of 48 units. Although
our expectations are that we should continue to see growth in our sales in the
coming quarters, we face many other uncertainties. These uncertainties include:
- Degree of usage by the ophthalmic community of the Hyperion(TM) LTK
System as a treatment alternative for hyperopia; and
- How quickly can competitive companies develop and obtain FDA approval for
novel treatment methods for hyperopia.
There can be no assurance that we can achieve continued growth in our sales,
quarter to quarter.
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 cash and cash equivalents 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.
It is not possible to anticipate the level of interest rates going forward.
Changes in interest rates have no impact on our debt as the 1998 Notes, 1999
Notes and 2000 Notes bear fixed interest rates of 12%, 5% and 7%, respectively.
Our $10,000,000 revolving line of credit with Silicon Valley Bank, of which we
have drawn down $1,000,000 as of September 30, 2000 carries an interest rate
based on the Bank's prime rate, which is currently 9.5%. If the prime rate were
to increase significantly and the Company were to draw down the entire revolving
credit line, the interest costs of such financing would be substantially higher
than our current interest costs.
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<PAGE> 14
PART II. OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
On January 11, 2000, the Company completed a private placement of
convertible debentures in the aggregate principal amount of approximately
$11,700,000 and related warrants. The proceeds of the private placement to the
Company was approximately $11,200,000 cash, net of offering costs. In May, 2000
approximately $2,000,000 was converted into 388,088 shares of common stock at a
conversion price of $5.916 per share. In July, 2000 approximately $300,000 of
the January 2000 Convertible Debt financing was converted into 50,713 shares of
common stock at a conversion price of $5.916 per share. In September, 2000
approximately $200,000 of the January 2000 Convertible Debt financing was
converted into 33,808 shares of common stock at a conversion price of $5.916 per
share. In September, 2000 approximately $50,000 of the 1998 Convertible
Financing was converted into 16,667 shares of common stock at a conversion price
of $3.00. In September, 2000 approximately $10,000,000 of the 1999 Convertible
Financings was converted into 1,875,000 shares of common stock at a conversion
price of $4.00 for 1,250,000 shares and $8.00 per share for 625,000 shares.
Investors were also issued two classes of warrants in connection with the
debentures on January 11, 2000. Class A warrants represent rights to purchase an
aggregate of 494,426 shares of the Company's Common Stock at an exercise price
of $6.803 per share and have an expiration date of January 11, 2005. Class B
warrants represent rights to purchase an aggregate of 494,426 shares of the
Company's Common Stock at an exercise price of $6.803 per share, and were called
by the Company on June 28, 2000 when the provision was met of the Company's
stock closing bid price exceeding $7.823 for a period of 20 consecutive trading
days. 443,741 Class B warrants were exercised at an exercise price of $6.803 per
share by September 30, 2000.
On June 16, 2000, the Company entered into an Amended and Restated Patent
and Technology Assignment Agreement, a Royalty Acceleration Agreement and other
related agreements (the "Sand Agreements") with Bruce J. Sand, M.D., F.A.C.S.
("Dr. Sand"). Included in the agreements is the purchase of Dr. Sand's patent
application for the prevention of regression of refractive keratoplasty and all
patents and future royalty obligations related to the previously licensed Dr.
Sand patents, the result of which will be the avoidance of future cash outflows
related to these royalty obligations. Under the Sand Agreements, the Company
issued to Dr. Sand a warrant to purchase 750,000 shares of the common stock of
the Company at an exercise price of $0.01 per share, with an expiration date of
June 16, 2005. Dr. Sand agreed that he would sell no more than 250,000 of such
shares in any fiscal quarter of the Company. In addition, for legal services
rendered by Edward Vincent King, Jr., Dr. Sand's attorney, the Company issued a
warrant to purchase 67,500 shares of the Company's common stock, with the same
terms as the Sand Warrant and of which the holder agreed not to sell more than
22,500 shares in any fiscal quarter of the Company. The warrants were granted
pursuant to an exemption under Section 4(2) of the Securities Act. On June 21,
2000 Dr. Sand and Mr. King exercised all of their respective warrants to
purchase shares of common stock.
On June 29, 2000, the Company entered into a Loan and Security Agreement
with Silicon Valley Bank whereby the Bank has agreed to provide a secured
revolving credit line in an amount up to $10,000,000. The credit line has a
one-year term, and advances made under the secured credit line bear interest at
the Bank's prime rate. The line of credit is secured by all the assets of the
Company, other than the Company's intellectual property. In connection with the
secured credit line, The David A. Brewer Trust agreed to guaranty any advance
under the line. As compensation for the guaranty, pursuant to a Master Warrant
(the "Master Warrant"), which may be exercised in whole or in part at any time
and from time to time, the Trust will receive (i) 25,000 shares of Common Stock
of the Company whether or not the secured credit line is drawn upon, (ii)
0.000195 shares of Common Stock of the Company per $1.00 drawn from the line for
each day such amount remains outstanding, (iii) 25,000 shares of Common Stock of
the Company per $1,000,000 drawn by the Company up to $7,000,000 (on a prorated
basis) and (iv) 0.000289 shares Common Stock of the Company per $1.00 drawn down
by the Company in excess of $7,000,000 for each day such amount remains
outstanding. The determination of the warrants issuable under clause (iv) is
subject to offset by the warrants to be issued under clause (iii). The exercise
price of shares of the Company's Common Stock
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<PAGE> 15
issuable upon exercise of the Master Warrant is $5.00 per share, and the Master
Warrant is exercisable for five years from the date of issuance. As of September
30, 2000, $1,000,000 has been drawn down from the secured line of credit.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
A. EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
10.1 Agreement dated as of July 3, 2000 between David A. Brewer
Trust and Sunrise Technologies International, Inc.*
27 Financial Data Schedule
</TABLE>
---------------
* Incorporated by reference from the Registrant's Current Report on Form 8-K
dated July 17, 2000.
B. REPORTS ON FORM 8-K
The Company filed a Report on Form 8-K dated July 17, 2000 to report that
under Item 5, the Company received final FDA approval, secured a $10,000,000
line of credit and entered into an Amended and Restated Patent and Technology
Assignment Agreement, a Royalty Acceleration Agreement and other related
agreements with Bruce J. Sand, M.D., F.A.C.S.
13
<PAGE> 16
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SUNRISE TECHNOLOGIES
INTERNATIONAL, INC.
Date: November 14, 2000 By: /s/ C. RUSSELL TRENARY, III
---------------------------------------
President and Chief Executive Officer
(Principal Executive Officer)
Date: November 14, 2000 By: /s/ PETER E. JANSEN
---------------------------------------
Vice President, Finance and Chief
Financial Officer
(Principal Financial Officer)
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<PAGE> 17
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
10.1 Agreement dated as of July 3, 2000 between David A. Brewer
Trust and Sunrise Technologies International, Inc.*
27 Financial Data Schedule
</TABLE>
---------------
* Incorporated by reference from the Registrant's Current Report on Form 8-K
dated July 17, 2000.
15
