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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 June 30, 2001 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)
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)
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 - 57,039,545 shares outstanding as of August 10,
2001.
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INDEX
SUNRISE TECHNOLOGIES INTERNATIONAL, INC.
PAGE
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)
Condensed Consolidated Statements of Operations --
Three and six months ended June 30, 2001 and 2000 1
Condensed Consolidated Balance Sheets -- June 30, 2001
and December 31, 2000 2
Condensed Consolidated Statements of Cash Flows --
Six months ended June 30, 2001 and 2000 3
Notes to Condensed Consolidated Financial Statements --
June 30, 2001 5
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 8
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK 12
PART II. OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE PROCEEDS 13
ITEM 3. LEGAL PROCEEDINGS 13
ITEM 5. OTHER INFORMATION 13
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 13
SIGNATURES 14
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SUNRISE TECHNOLOGIES INTERNATIONAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Unaudited)
THREE MONTHS ENDED SIX MONTHS ENDED
------------------------- -------------------------
6/30/01 6/30/00 6/30/01 6/30/00
-------- -------- -------- --------
Revenues:
Product $ 2,718 $ 400 $ 7,858 $ 400
Procedure 290 -- 492 --
Service and other 484 24 859 42
-------- -------- -------- --------
Total revenues 3,492 424 9,209 442
-------- -------- -------- --------
Cost of revenues:
Product 2,374 158 5,987 158
Procedure 9 -- 9 --
Service and other 405 1,256 693 1,975
-------- -------- -------- --------
Total cost of revenues 2,788 1,414 6,689 2,133
-------- -------- -------- --------
Gross profit (loss) 704 (990) 2,520 (1,691
-------- -------- -------- --------
Operating expenses:
Research and development 734 945 1,685 1,963
Sales, marketing and regulatory 2,493 3,382 4,881 5,963
General and administrative 1,291 5,599 2,715 7,031
Restructuring 19 -- 723 --
Legal settlement 385 -- 385 --
-------- -------- -------- --------
Total operating expenses 4,922 9,926 10,389 14,957
-------- -------- -------- --------
Operating loss (4,218) (10,916) (7,869) (16,648)
Interest income 1 174 24 418
Interest expense (1,220) (1,119) (2,303) (11,664)
Other income (expense) (57) -- 643 --
-------- -------- -------- --------
Net loss $ (5,494) $(11,861) (9,505) $(27,894)
======== ======== ======== ========
Net loss per share, basic and diluted $ (0.10) $ (0.25) $ (0.18) $ (0.60)
======== ======== ======== ========
Weighted average shares outstanding,
basic and diluted 52,491 46,752 51,757 46,579
-------- -------- -------- --------
The accompanying notes are an integral part of
these consolidated financial statements.
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SUNRISE TECHNOLOGIES INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share data)
(Unaudited)
JUNE 30, DECEMBER 31,
2001 2000
------------ ------------
ASSETS
Current assets:
Cash and cash equivalents $ 1,486 $ 975
Accounts receivable, net 3,294 3,268
Inventories, net 9,056 11,981
Other current assets 97 405
------------ ------------
Total current assets 13,933 16,629
Property and equipment, net 2,735 2,528
Intangibles, net 7,720 7,995
Other non-current assets 4,385 1,374
------------ ------------
Total assets $ 28,773 $ 28,526
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Borrowings under a line of credit $ 5,428 $ 3,034
Current portion of capital leases and
convertible notes 8,064 307
Accounts payable 1,627 3,162
Accrued liabilities 1,505 1,564
Deposits 678 1,047
Deferred revenue 1,624 1,183
------------ ------------
Total current liabilities 18,926 10,297
Long-term debt, net of current portion 3,784 7,175
Capital lease obligations, net of current portion 364 479
Deferred revenue, net of current portion 1,077 1,077
Other long-term liabilities 146 136
------------ ------------
Total liabilities 24,297 19,164
------------ ------------
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, 56,726,611 issued and 52,726,611
outstanding at June 30, 2001 and 50,867,848
issued and outstanding at December 31, 2000 53 51
Additional paid-in capital 133,313 129,116
Accumulated other comprehensive loss (31) --
Deferred compensation (279) (730)
Accumulated deficit (128,580) (119,075)
------------ ------------
Total stockholders' equity 4,476 9,362
------------ ------------
Total liabilities and stockholders' equity $ 28,773 $ 28,526
============ ============
The accompanying notes are an integral part of
these consolidated financial statements.
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SUNRISE TECHNOLOGIES INTERNATIONAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
SIX MONTHS ENDED
JUNE 30,
-------------------------
2001 2000
-------- --------
Cash flows from operating activities:
Net loss $ (9,505) $(27,894)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 906 345
Amortization of deferred compensation 454 4,360
Amortization of debt issuance costs 796 1
Warrant accretion and interest on
beneficial conversion features 560 11,156
Issuance of warrants for legal settlement 385 --
Issuance of warrants and stock options 1,031 --
Conversion of accrued interest on notes
payable 342 193
Non-cash restructuring charge 723 --
Inventory valuation reserve (9) (72)
Accounts receivable reserve 81 --
Changes in assets and liabilities:
Accounts receivable (107) (624)
Inventories 4,147 (5,875)
Other current assets 226 (1,257)
Non-current assets (1,030) (43)
Accounts payable (1,535) 1,159
Deferred revenue and deposits 72 --
Accrued liabilities (59) (146)
Other long-term liabilities 11 152
-------- --------
Net cash used in operating activities (2,511) (18,545)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (830) (865)
Investment in common stock (2,400) --
Proceeds from sale of investment in common stock 80 --
-------- --------
Net cash used in investing activities (3,150) (865)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of common stock 155 2,823
Proceeds from convertible notes, net of
issuance cost -- 11,217
Proceeds from line of credit 3,600 --
Proceeds from long-term debt 3,775
Proceeds from issuance of debt obligations -- 126
Repayment of debt obligations (92) --
Repayments on line of credit (1,235) (87)
-------- --------
Net cash provided by financing activities 6,203 14,079
-------- --------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 542 (5,331)
Effect of foreign currency translation (31) --
Cash and cash equivalents at beginning period 975 10,643
-------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 1,486 $ 5,312
======== ========
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NONCASH FINANCING ACTIVITIES:
Issuance of warrants to guarantor $ 174 $ --
Issuance of common stock to vendors $ 1,363 $ --
Issuance of warrants and common stock for
financial services $ 191 $ --
Warrants issued to acquire patents $ -- $ 8,271
Conversion of 2000 Notes into common stock $ -- $ 558
======== ========
The accompanying notes are an integral part of
these consolidated financial statements.
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
JUNE 30, 2001
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,
2001 and 2000 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, 2000 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 June 30, 2001 has an accumulated deficit of $128,580,000. In order to
continue its operations, the Company must achieve profitable operations or
obtain additional funds through equity or debt financing, collaborative or other
arrangements with other companies, bank financing, and other sources. Management
believes that its existing cash balances and other potential financing
alternatives, if realized, will be sufficient to meet the Company's near-term
capital and operating requirements. On June 25, 2001, the Company entered into
an Extension and Modification Agreement ("Extension Agreement") with Silicon
Valley Bank ("SVB") and David A. Brewer, an individual and guarantor (the
"Guarantor") of the loan with SVB. Under the terms of the Extension Agreement,
the Company received an extension of the maturity of the loan with SVB from June
26, 2001 to August 26, 2001. The Company was also required (i) to pay SVB on or
before June 25, 2001, a pre-payment of $1,200,000 of principal, which was paid
in June 2001, (ii) 70% of any additional funds (net of finder's fees) received
by the Company as a result of equity investments, debt, or other sources of
funding, and (iii) an amount equal to 100% of any outstanding accounts
receivable which were 90 days or more past due as of June 20, 2001, except for
the receivable owing from the University of California - San Francisco.
The Extension Agreement also called for the Company to pledge 2,000,000
freely-tradeable shares with SVB as additional collateral if the Company is
unable to obtain financing of $1,500,000 on or before June 26, 2001. The
Extension Agreement also required the Guarantor to pledge certain accounts, real
estate and stock, and for the Company to enter into control agreements with
financial institutions where the Company keeps its deposits. The control
agreements provide that upon the occurrence of an event of default in the SVB
loan documents, SVB shall have the right to demand delivery of all funds held on
the Company's behalf by the financial institutions.
On August 3, 2001, the Company entered into Amendment Number One to the
Extension and Modification Agreement (the "Amendment") with SVB and the
Guarantor. The purpose of the Amendment, was to acknowledge the payment of an
additional $600,000 of principal to SVB, which was paid on or before July 11,
2001, and to provide additional time to complete certain requirements that were
not timely done pursuant to the Extension Agreement Under the terms of the
Amendment, by August 15, 2001, the Company is required to pledge as additional
collateral 2,000,000 freely-tradeable shares of registered common stock pursuant
to the arrangements in the above paragraph. Upon payment to SVB of $300,000, SVB
will release the pledge and the stock will return to the Company. If there is a
default on the SVB loan, SVB will be free to sell these shares into the market.
Under the Amendment, the Company is obligated to cooperate with SVB to put
control agreements in place with the Company's depositary institutions. As of
August 10, 2001, the outstanding principal balance on the SVB loan is $4,788,900
and, as of this date, there are no defaults or events of defaults under the SVB
loan documents.
On June 1, and on June 26, 2001 the Company entered into an agreement
with International Mercantile Holding Group to borrow $2,675,000 and $1,100,000,
respectively. The loans were each collateralized with a pledge of 2,000,000
shares of the Company's common stock. The shares will be returned to the Company
once the loans are repaid. The terms of the loans are five years and may be
extended to seven years with the mutual consent of both parties. The loans may
also be repaid at any time with a 30-day notice to the lender. The loans carry a
rate
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of interest equal to twenty-five basis points below the prevailing one month
London Interbank Offered Rate ("LIBOR"). The net cash proceeds to the Company
after fees and expenses were $3,253,000. Part of the proceeds from these loans
was used to repay the one-year SVB revolving credit line. The Company is also
engaged in discussions with alternative financing sources. Funds from these
alternative sources could be utilized to repay all or a portion of the Company's
current line of credit as well as provide additional working capital.
Consummation of these alternative financings may or may not result in a
reduction in the conversion prices of debentures and the exercise price of
warrants issued by the Company in January 2000. There can be no assurance that
the Company will be able to successfully complete alternative financings. The
Company's independent accountants have issued a "going" concern opinion on the
Company's financial statements at December 31, 2000 stating that recurring
losses and negative cash flows from operations raise substantial doubt about the
Company's ability to continue as a going concern.
2. 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. 10,685,464 and 6,272,615 common
equivalent shares as of June 30, 2001 and 2000 respectively, have been excluded
from the shares used to calculate diluted EPS, as their effect is anti-dilutive.
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:
JUNE 30, DECEMBER 31,
2001 2000
-------- ------------
(In thousands)
Raw materials $ 6,694 $ 7,019
Work-in-process 1,416 1,510
Finished goods 946 3,452
------- -------
Inventories, net $ 9,056 $11,981
======= =======
4. DISTRIBUTION AND STOCK PURCHASE AGREEMENT AND RELATED PARTY TRANSACTIONS
On December 28, 2000, the Company signed a Distribution and Stock
Purchase Agreement with U.S. Medical, Inc., a Colorado Corporation. Under the
terms of the Distribution Agreement the Company appointed U.S. Medical as its
exclusive distributor of its products in the Territory as defined within the
Agreement. Total revenues through U.S. Medical totaled $2,083,000 and $5,485,000
during the second quarter and year-to-date of 2001. On January 13, 2001 the
Company purchased 480,000 shares of common stock of U.S. Medical at a price of
$5.00 per share that equates to 4% of their outstanding common shares. On May 8,
2001 the Company sold 16,000 shares back to U.S. Medical for $5.00 per share.
The Company accounts for this investment under the cost method.
5. REDUCTION IN FORCE ("RIF")
On January 3, March 15, and April 6, 2001 the Company completed a
"reduction in force" (RIF) covering a total of 41 employees. Of the employees,
27 were in production, 2 in research and development, 6 in sales and marketing,
and 6 in general and administrative. Each employee was entitled to receive a
severance payment as follows: hourly employees - 2 weeks plus a total of 2 weeks
for every year worked, salary employees - four weeks plus a total of 2 weeks for
ever year worked, managers - 12 weeks plus a total of 2 weeks for every year
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worked, and directors - 20 weeks plus a total of 2 weeks for every year worked.
In full payment of the severance awards the Company granted 365,156 shares out
of the Supplemental Employee Stock Plan in lieu of cash. The total estimated
cost of the RIF, all severance related, was $704,000 of non-cash expenses and
was recorded on the Company's books and records as a restructuring charge during
the first quarter of 2001. The Company expensed an additional $19,000 in the
second quarter of 2001 when common stock was actually issued to employees. Also
included in the total amount was $132,000 of employee receivables that were
forgiven by the Company.
6. LEGAL SETTLEMENT
On June 25, 2001 the Company entered an agreement to settle a legal
dispute in which the company issued to the Plaintiff a warrant to purchase
250,000 shares of the Company's common stock at $1.79 per share. The warrant has
a five-year life and was valued using the Black-Scholes valuation method for a
total value of $385,000.
7. COMPREHENSIVE LOSS
The following table sets forth changes in comprehensive loss for the
six-month period ending June 30, 2001 (in thousands, unaudited):
Balance at December 31, 2000 $ --
Unrealized translation loss (31)
----
Balance at June 30, 2001 $(31)
----
8. RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 133 ("SFAS 133"), "Accounting
for Derivative Instruments and Hedging Activities," which establishes accounting
and reporting standards for derivative instruments and hedging activities. It
requires that an entity recognize all derivatives as either assets or
liabilities on the balance sheet and measure those instruments at fair value.
The Company, to date, has not engaged in derivative and hedging activities, and
accordingly, the adoption of SFAS 133 did not have a material impact on the
financial reporting and related disclosures of the Company.
In July 2001, the FASB issued Statements of Financial Accounting
Standards No. 141 ("SFAS 141"), "Business Combinations," and No. 142 ("SFAS
142"), "Goodwill and Other Intangible Assets." SFAS 141 requires that all
business combinations initiated after June 30, 2001 be accounted for under a
single method--the purchase method. Use of the pooling-of-interests method is no
longer permitted. SFAS 142 requires that goodwill no longer be amortized to
earnings, but instead be reviewed for impairment upon initial adoption of the
Statement and on an annual basis going forward. The amortization of goodwill
will cease upon adoption of SFAS 142. The provisions of SFAS 142 will be
effective for fiscal years beginning after December 15, 2001. The Company
believes that SFAS 141 and 142 will not have a material effect on the financial
position or results of operation of the Company.
9. SUBSEQUENT EVENT
On August 2, 2001, the Company entered into a Manufacturing Agreement
with C-MAC West Coast Operations, Inc. in which C-MAC has agreed to become the
Company's sole source manufacturing provider for the HYPERION(TM) LTK System.
Under the terms of the agreement the Company will transfer all of its
manufacturing employees, including assembly and test personnel to C-MAC. In
addition, C-MAC will purchase approximately $6,000,000 in raw material and
work-in-process inventory which will be paid on fixed dates between August 2,
2001 and January 30, 2002. C-MAC will begin manufacturing operations for the
HYPERION(TM) LTK System in August with first deliveries estimated to take place
in the fourth quarter. The Company has agreed to a minimum purchase commitment
of 24 units per quarter for eight consecutive quarters beginning in the fourth
quarter of 2001. The agreement has a duration of three years.
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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 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 Food and Drug Administration ("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 had received the FDA's
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.
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.
The Company's working capital is seriously depleted due to our
substantial losses in the past eight years. The Company has been able to raise
additional working capital for all aspects of our business through the private
placements of our common stock, convertible notes with warrants, and loans. The
Company 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, the Company raised
$10,000,000, net of offering costs, in the form of promissory notes with
warrants (the "1999 Notes Placement"). In January 2000, the Company 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, the Company secured a $10,000,000 revolving line of credit with a
commercial banking company guaranteed by certain of the Company's assets and the
assets of one of the Company's investors. On June 25, 2001, the Company entered
into an Extension and Modification Agreement ("Extension Agreement") with
Silicon Valley Bank ("SVB") and David A. Brewer, an individual and guarantor
(the "Guarantor") of the loan with SVB. Under the terms of the Extension
Agreement, the Company received an extension of the maturity of the loan with
SVB from June 26, 2001 to August 26, 2001. The Company was also required (i) to
pay SVB on or before June 25, 2001, a pre-payment of $1,200,000 of principal,
which was paid in June 2001, (ii) 70% of any additional funds (net of finder's
fees) received by the Company as a result of equity investments, debt, or other
sources of funding, and (iii) an amount equal to 100% of any outstanding
accounts receivable which were 90 days or more past due as of June 20, 2001,
except for the receivable owing from the University of California - San
Francisco.
The Extension Agreement also called for the Company to pledge 2,000,000
freely-tradeable shares with SVB as additional collateral if the Company was
unable to obtain financing of $1,500,000 on or before June 26, 2001. The
Extension Agreement also required the Guarantor to pledge certain accounts, real
estate and stock, and for the Company to enter into control agreements with
financial institutions where the Company keep its deposits. The control
agreements provide that upon the occurrence of an event of default in the SVB
loan documents, SVB shall have the right to demand delivery of all funds held on
the Company's behalf by the financial institutions.
On August 3, 2001, the Company entered into Amendment Number One to the
Extension and Modification Agreement (the "Amendment") with SVB and the
Guarantor. The purpose of the Amendment was
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to acknowledge the payment of an additional $600,000 of principal to SVB, which
was paid on or before July 11, 2001, and to provide additional time to complete
certain requirements that were not timely done pursuant to the Extension
Agreement. Under the terms of the Amendment, by August 15, 2001, the Company is
required to pledge as additional collateral 2,000,000 freely-tradeable shares of
the Company's registered common stock. Upon payment to SVB of $300,000 SVB will
release the pledge and the stock will pursuant to the arrangements in the above
paragraph. return to the Company. If there is a default on the SVB loan, SVB
will be free to sell these shares into the market. Under the Amendment, the
Company is obligated to cooperate with SVB to put control agreements in place
with the Company's depositary institutions. As of August 6, 2001, the
outstanding principal balance on the SVB loan is $4,788,900 and, as of this
date, there are no defaults or events of defaults under the SVB loan documents.
On June 1, and on June 26, 2001 the Company entered into an agreement
with International Mercantile Holding Group to borrow $2,675,000 and $1,100,000,
respectively. The loans were each secured by a pledge of 2,000,000
freely-tradeable shares of the Company's common stock. The shares will be
returned to the Company once the loans are repaid. The terms of the loans are
five years and maybe extended to seven years with the mutual consent of both
parties. The loans may also be repaid at any time with a 30-day notice to the
lender. The loans carry a rate of interest equal to twenty-five basis points
below the prevailing one month London Interbank Offered Rate ("LIBOR"). The net
cash proceeds to the Company after fees and expenses were $3,253,000. Part of
the proceeds from these loans was used to repay the one-year SVB revolving
credit line.
The Company's second quarter operations were cash flow negative by
$586,000 inclusive of cash loan fees of $647,000, thereby further straining our
working capital resources. At our current rate of cash expenditures, we need to
raise additional working capital during the balance of 2001 to fund operations
if sales of our product do not provide sufficient cash resources. 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 repay our revolving line of credit on August 26, 2001, finance
the Company's operations and bridge its working capital needs until revenues and
profits are achieved, we may need to scale back expenditures and limit our
operational capacity until such financing or other alternative business
solutions are implemented. The Company has incurred significant losses for the
last several years and at June 30, 2001 has an accumulated deficit of
$128,580,000. In order to continue its operations, the Company must achieve
profitable operations and obtain additional funds through equity or debt
financing, collaborative or other arrangements with other companies, bank
financing, vendors, and other sources.
FINANCIAL CONDITION
As of June 30, 2001, the Company had $1,486,000 in cash and cash
equivalents.
Cash used for operating activities was $2,511,000 for the six- months
ended June 30, 2001 as compared to $18,545,000 for the same period in 2000. The
major difference is due to the build up in inventory during the first six-months
of 2000. The majority of the cash used for operating activities for the
six-months ended June 30, 2001 was used to fund the net loss of $9,505,000
partially offset by depreciation and amortization, non-cash interest and
compensation and legal settlement expense of $5,198,000. Operating cash was also
realized in the decrease of inventory, other current assets, as well as
increases in deferred revenue and deposits, and long-term liabilities totaling
$4,445,000. Operating cash was utilized by the increase of accounts receivable
and other non-current assets and the decrease in accounts payable and other
accrued expenses totaling $2,649,000.
Cash used for investing activities was $3,150,000 for the six-months
ended June 30, 2001 for purchase of property and equipment and the investment in
common stock of U.S. Medical. Capital expenditures were comprised of
manufactured Hyperion units transferred to rental equipment and computer
software.
Cash provided by financing activities was $6,203,000 for the six-months
ended June 30, 2001, comprised primarily of the net proceeds from the long-term
loans and line of credit offset by the payments made on of the line of credit.
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The Company's second quarter operations were cash flow negative by
$586,000 inclusive of cash loan fees of $647,000, thereby limiting the Company's
working capital resources. Working capital at June 30, 2001 amounted to a
deficit of approximately $4,993,000 due, in part, to the reclassification of the
January 2000 Notes of approximately of $7,733,000 from long-term to short-term
liabilities. At December 31, 2000, working capital amounted to approximately
$6,332,000.
RESULTS OF OPERATIONS
Revenues from the sale of equipment for the three and six-month periods
ended June 30, 2001 were $2,718,000 and $7,858,000 to customers in the United
States, Europe and South Korea. Procedure revenue totaled $290,000 and $492,000
for the three and six-month periods ended June 30, 2001. Service and other
revenues were $484,000 and $859,000 for the three and six-month periods ended
June 30, 2001. Total revenues of $3,492,000 and $9,209,000 represent an increase
of $3,068,000 and $8,767,000 from revenues of $424,000 and $442,000 for the same
periods in 2000. The increase in revenues is due to the launch of the Hyperion
(TM) LTK System in July of 2000. 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.
Revenues from a related party, U.S. Medical, totaled $2,083,000 and $5,485,000
during the second quarter and year-to-date of 2001.
Cost of revenue for equipment sales totaled $2,374,000 and $5,987,000
for the three and six-month period ended June 30, 2001. Cost of procedure
revenues totaled $9,000 for the three and six-month period ended June 30, 2001.
Cost of revenues for service and other revenues totaled $405,000 and $693,000
for the three and six-month periods ended June 30, 2001. Gross margins totaled
$704,000 and $2,520,000 for the three and six-month periods ended June 30, 2001.
Costs of revenues for equipment sales reflect charges for production costs
inclusive of manufacturing labor and overhead and unabsorbed overheads. Cost of
revenues for procedures reflect an allocation of the patent amortization and
charges for the cards utilized to ship the procedures to the end customer. Cost
of revenues for service and other revenues include costs of the company's
technical and service department and other direct costs associated with
miscellaneous revenues. Cost of revenues and the resulting negative margins for
the three and six-month periods ended June 30, 2000 reflect charges of
unabsorbed manufacturing labor and overhead. The increase in cost revenues and
gross margins are due to the launch of the Hyperion (TM) LTK System in July of
2000.
Research and development expenses totaled $734,000 and $1,685,000 for
the three and six-month periods ended June 30, 2001, compared to $945,000 and
$1,963,000 for the same period in 2000. 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. Included in the research and
development expenses for the three and six-month periods ended June 30, 2001
were non-cash charges of $4,000 and $8,000 related to the fair market value of
warrants and non-qualified stock options issued to consultants and employees in
lieu of cash. The 22% and 14% reduction for the three and six-month periods in
research and development expenses compared to those of 2000 were primarily due
to the completion of the initial development for the LTK System in 2000 and the
reduction in force that took place in the first and second quarters of 2001.
Sales, marketing and regulatory expenses were $2,512,000 and $4,900,000
for the three and six-month period ended June 30, 2001, compared to $3,382,000
and $5,963,000 for the same periods in 2000. Included in the sales, marketing
and regulatory expenses for the three and six-month periods ended June 30, 2001
was $98,000 and $188,000, respectively of non-cash charges related to the fair
market value of warrants and non-qualified stock options issued to consultants
and employees in lieu of cash. Sales and marketing expenses consist primarily of
advertising and other marketing expenses, compensation and employee related
expenses, sales commissions, and travel costs. The 26% and 18% reduction in
sales, marketing and regulatory expenses in 2001 as compared to 2000
respectively, was due to the decrease in launch expenses of the Hyperion(TM) LTK
System that was launched in July 2000 and the reduction in force that took place
in the first and second quarters of 2001.
General and administrative expenses were $1,291,000 and $2,715,000 for
the three and six-month periods ended June 30, 2001, compared to $5,599,000 and
$7,031,000 for the same period of 2000. Included in the general and
administrative expenses for the three and six-month periods ended June 30, 2001
was $186,000 and $510,000 of non-cash charges related to the issuance of
non-qualified stock options issued to several employees in lieu of cash, as
compared with $4,278,000 and $4,360,000 for the same periods in 2000. General
and
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administrative expenses consist primarily of employee-related expenses, legal
fees and compensation and other fees for professional services. The 77% and 61%
decrease in general and administrative expenses for 2001 was due to the decrease
in non-cash expenses and the reduction in force that took place during the first
and second quarters of 2001.
Restructuring expense of $704,000 of non-cash expense, represent the
cost of the severance awards given to employees who were terminated as a
reduction in force that took place during the first quarter and in the first
week of April, 2001. On January 3, March 15, and April 6, 2001 the Company
completed a "reduction in force" (RIF) of 41 employees. Of these, 27 were in
production, 2, in research and development, 6 in sales and marketing, and 6 in
general and administrative. Each employee was entitled to receive a severance
payment as follows: hourly employees - 2 weeks plus a total of 2 weeks for every
year worked, salary employees - four weeks plus a total of 2 weeks for ever year
worked, managers - 12 weeks plus a total of 2 weeks for every year worked, and
directors - 20 weeks plus a total of 2 weeks for every year worked. In full
payment of the severance awards the Company granted 365,156 shares out of the
Supplemental Employee Stock Plan in lieu of cash. The total cost of the RIF, all
severance related, was $704,000 of non-cash expenses and was recorded on the
Company's books and records as restructuring charge during the first quarter of
2001. The Company booked an additional $19,000 in the second quarter of 2001
when common stock was actually issued to employees. Also included in the total
amount was $132,000 of employee receivables that were forgiven by the Company.
Legal settlement expense of $385,000 represents the value of a warrant
issued under an agreement entered into by the Company on June 25,2001 to settle
a legal dispute in which the Company issued to the Plaintiff a warrant to
purchase 250,000 shares of the Company's common stock at $1.79 per share. The
warrant has a five-year life and was valued using the Black-Scholes valuation
method.
Interest expense for the three and six-month periods ended June 30, 2001
of $1,220,000 and $2,303,000 represent primarily cash and non-cash interest
charges pursuant to the 2000 Notes Placements, the Silicon Valley Bank
line-of-credit guarantee and related warrants, as compared to $ 1,119,000 and
$11,664,000 for the periods of 2000. For the three and six-months ended June 30,
2001, approximately $892,000 or 73% and $1,682,000 or 74% of the Company's
interest expense were due to non-cash charges incurred in connection with the
2000 Notes Placement and the Silicon Valley line-of-credit guarantee as compared
with $902,000 or 81% and $11,157,000 or 96% for 2000.
Interest income for the three and six-month periods ended June 30, 2001
of $1,000 and $24,000 represent interest earned on savings accounts with several
financial institutions. Interest income for the same periods last year totaled
$174,000 and $478,000, respectively.
Other expense of $57,000 for the quarter ended June 30, 2001 mostly
represent the fees associated with the $700,000 received from the settlement
agreement with Lares Research on the payment of an outstanding debt. The other
income of $643,000 for the year-to-date as of June 30, 2001 include the above
expenses netted against the $700,000 received during the first quarter of 2001.
For the three and six-months ended June 30, 2001 the Company incurred a
net loss of $5,494,000 and $9,505,000, respectively as compared to $11,861,000
and $27,894,000 for the same periods of 2000. Included in the loss for the three
and six-months ended June 30, 2001 were $1,565,000 and $ 2,581,000, respectively
attributable to non-cash compensation and interest charges as compared with
$5,187,000 and $15,516,000 for the same periods of 2000. The Company's
Hyperion(TM) LTK System was approved by the FDA for marketing and sales in the
United States in late June 2000. Consequently, the Company had no significant
revenues to offset our expenses during the first and second quarters of the last
year.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 133 ("SFAS 133"), "Accounting
for Derivative Instruments and Hedging Activities," which establishes accounting
and reporting standards for derivative instruments and hedging activities. It
requires that an entity recognize all derivatives as either assets or
liabilities on the balance sheet and measure those instruments at fair value.
The Company, to date, has not engaged in derivative and hedging activities, and
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accordingly, the adoption of SFAS 133 did not have a material impact on the
financial reporting and related disclosures of the Company.
In July 2001, the FASB issued Statements of Financial Accounting
Standards No. 141 ("SFAS 141"), "Business Combinations," and No. 142 ("SFAS
142"), "Goodwill and Other Intangible Assets." SFAS 141 requires that all
business combinations initiated after June 30, 2001 be accounted for under a
single method--the purchase method. Use of the pooling-of-interests method is no
longer permitted. SFAS 142 requires that goodwill no longer be amortized to
earnings, but instead be reviewed for impairment upon initial adoption of the
Statement and on an annual basis going forward. The amortization of goodwill
will cease upon adoption of SFAS 142. The provisions of SFAS 142 will be
effective for fiscal years beginning after December 15, 2001. The Company
believes that SFAS 141 and 142 will not have a material effect on the financial
position or results of operation of the Company.
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.
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 and the rates
past 2001. Changes in interest rates would impact the revolving line of credit
since the rate of interest of that facility is at the prime rate. The 2000
Notes, however bear a fixed interest rate of 7% while the International
Mercantile Holding Group long-term loans bear a rate of interest equal to
twenty-five basis points below the prevailing one month London Interbank Offered
Rate ("LIBOR").
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PART II. OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None
ITEM 3: LEGAL PROCEEDINGS
On June 25, 2001 the Company entered an agreement to settle a legal
dispute in which the company issued to the Plaintiff a warrant to purchase
250,000 shares of the Company's common stock at $1.79 per share. The warrant has
a five-year life and was valued using the Black-Scholes valuation method for a
total value of $385,000.
ITEM 5: OTHER INFORMATION
On April 16, 2001, the Company filed Amendment No. 1 to its Form S-3
Registration Statement under the Securities Act of 1933, which was declared
effective by the Securities and Exchange Commission on April 19, 2001. The Form
S-3 registered 2,800,000 shares of the Company's common stock for issuance in
the future. On June 8, 2001 the Company filed another Form S-3 Registration
Statement under the Securities Act of 1933, which was declared effective by the
Securities and Exchange Commission on June 15, 2001. The Form S-3 registered an
additional 6,000,000 shares bringing the total shares to be offered to
8,800,000. As of July 18, 2001, 5,003,873 shares have been issued out of the
shelf registration including the 4,000,000 shares pledged as collateral in the
International Mercantile Holding Group long-term loan agreements. The weighted
average impact of these 4,000,000 shares are included in the calculation of net
loss per share. In January 2000 the Company issued its 7% Convertible Debenture
in the amount of $11,700,000. With certain exceptions, if the Company issues
additional shares of its common stock below the conversion price of $5.92 per
share, the conversion price applicable to the Convertible Debenture and the
exercise price of the related warrants will be reduced to the price at which
such additional securities are sold.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
A. EXHIBITS
Exhibit 10.1 Amendment Number One to the Extension and Modification
Agreement with Silicon Valley Bank, the Guarantor and Sunrise Technologies
International, Inc.
----------------------
B. REPORTS ON FORM 8-K
Report 8-K, dated June 26, 2001, detailing the extension agreement signed
with commercial lender of the Company's revolving line-of-credit.
Report 8-K, dated August 13, 2001, detailing the Manufacturing Agreement
signed with C-MAC West Coast Operations, Inc.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SUNRISE TECHNOLOGIES INTERNATIONAL, INC.
Date: August 14, 2001 By: /S/ C. RUSSELL TRENARY, III
------------------------------------
President and Chief Executive
Officer
(Principal Executive Officer)
Date: August 14, 2001 By: /S/THOMAS LA ROSE
------------------------------------
Vice President, Finance and
Acting Chief Financial Officer
(Principal Financial Officer)
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INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
------ -----------
10.1 Amendment Number One to the Extension and
Modification Agreement with Silicon Valley Bank,
the Guarantor and Sunrise Technologies
International, Inc.