\ 

**U.S. SECURITIES AND EXCHANGECOMMISSION**

**WASHINGTON, D.C. 20549**

** **

----

** **

**FORM 10-Q**

** **

**QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF**

**THE SECURITIES EXCHANGE ACT OF 1934**

 

**FOR THEQUARTERLY PERIOD ENDED JUNE 30, 2002**

** **

**Commissionfile number****0-5460**

** **

----

** **

 

| **STOCKERYALE,  INC.**                                     |
|------------------------------------------------------------|
| (Exact name of  registrant as specified in its charter)    |
|                                                       |   |   |
| **Massachusetts**                                          |   | **04-2114473** |
| (State of  Incorporation)                                  |   | (I.R.S. Employer  Identification Number) |
|                                                       |   |   |
| **32 Hampshire Road,  Salem, New Hampshire 03079**    |
| (Address of  registrant’s principal executive office) |
|                                                       |   |   |
| **(603) 893-8778**                                         |
| (Registrant’s telephone  number)                      |

 

----

 

Indicate by check markwhether the registrant (1) has filed all reports required to be filed bySection 13 or 15 (d) of the Exchange Act of 1934 during the preceding 12 months(or for such shorter period that the registrant was required to file suchreports), and (2) has been subject to such filing requirements for the past 90days.  ý   Yes   o   No

 

As of July 31, 2002 therewere 12,453,475 shares of the issuer’s common stock outstanding.

 

 

----

 

**STOCKERYALE, INC.**

**INDEX TO FORM 10-Q**

** **
| **PART I – FINANCIAL INFORMATION** |
|-----------------------------------------|
|                                    |   |
| Item 1                                  | Financial Statements  (Unaudited) |
|                                    |   |
|                                    | Condensed  Consolidated Balance Sheets at June 30, 2002 and December 31, 2001 |
|                                    |   |
|                                    | Condensed  Consolidated Statement of Operations for the three and six months ended June  30, 2002 and 2001 |
|                                    |   |
|                                    | Condensed  Consolidated Statement of Cash Flows for the six months ended June 30, 2002  and 2001 |
|                                    |   |
|                                    | Notes to  Condensed Consolidated Financial Statements |
|                                    |   |
| Item  2                                 | Management’s  Discussion and Analysis of Financial Condition and Results of Operations |
|                                    |   |
| Item  3                                 | Quantitative  and Qualitative Disclosure About Market Risk |
|                                    |   |
| **PART II – OTHER INFORMATION**    |
|                                    |   |
| Item 1                                  | Legal Proceedings |
|                                    |   |
| Item  2                                 | Changes  in Securities |
|                                    |   |
| Item 3                                  | Defaults Upon  Senior Securities |
|                                    |   |
| Item  4                                 | Submission  of Matters to a Vote of Security Holders |
|                                    |   |
| Item 5                                  | Other Information |
|                                    |   |
| Item 6                                  | Exhibits and Reports on Form 8-K |
|                                    |   |
|                                    | Signature (s) |

 

----

 

FORM  10 - Q

PART  I

ITEM  1

**ITEM 1 – FINANCIAL STATEMENTS**

** **

**STOCKERYALE, INC.**

**UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS**

 (In thousands, except share and per sharedata)

 
|                                                                                                                                             |   | **June 30, 2002** |   | **December  31, 2001** |   |
|--------------------------------------------------------------------------------------------------------------------------------------------------|--------|-------------------|--------|------------------------|--------|
| **ASSETS**                                                                                                                                       |   |              |   |                   |   |
| CURRENT ASSETS:                                                                                                                                  |   |              |   |                   |   |
| Cash and cash  equivalents                                                                                                                       |   | $                 | 3,277  |                   | $      | 1,576 |   |
| Restricted cash                                                                                                                                  |   | 2,000             |   | 2,000                  |   |
| Trade  receivables, less reserves of $156 and $128 at June 30, 2002 and December 31,  2001, respectively                                         |   | 3,072             |   | 2,091                  |   |
| Inventories                                                                                                                                      |   | 5,062             |   | 5,224                  |   |
| Prepaid expenses  and other current assets                                                                                                       |   | 952               |   | 1,078                  |   |
| Total current  assets                                                                                                                            |   | 14,363            |   | 11,969                 |   |
|                                                                                                                                             |   |              |   |                   |   |
| PROPERTY, PLANT  AND EQUIPMENT, NET                                                                                                              |   | 26,250            |   | 25,813                 |   |
| GOODWILL, NET                                                                                                                                    |   | 2,677             |   | 2,677                  |   |
| IDENTIFIED  INTANGIBLE ASSETS, NET                                                                                                               |   | 1,948             |   | 2,115                  |   |
| OFFICER NOTE  RECEIVABLE                                                                                                                         |   | 250               |   | —                 |   |
| OTHER LONG-TERM  ASSETS                                                                                                                          |   | 469               |   | 786                    |   |
|                                                                                                                                             |   | $                 | 45,957 |                   | $      | 43,360 |   |
|                                                                                                                                             |   |              |   |                   |   |
| **LIABILITIES  AND STOCKHOLDERS’ EQUITY**                                                                                                   |   |              |   |                   |   |
| CURRENT  LIABILITIES:                                                                                                                            |   |              |   |                   |   |
| Current portion  of long-term debt                                                                                                               |   | $                 | 427    |                   | $      | 339 |   |
| Short-term debt                                                                                                                                  |   | 5,863             |   | 3,566                  |   |
| Accounts payable                                                                                                                                 |   | 1,889             |   | 3,791                  |   |
| Accrued expenses                                                                                                                                 |   | 1,537             |   | 1,438                  |   |
| Short-term lease  obligation                                                                                                                     |   | 96                |   | 147                    |   |
| Total current  liabilities                                                                                                                       |   | 9,812             |   | 9,281                  |   |
|                                                                                                                                             |   |              |   |                   |   |
| LONG-TERM DEBT  AND CAPITAL LEASE OBLIGATIONS                                                                                                    |   | 2,692             |   | 2,862                  |   |
|                                                                                                                                             |   |              |   |                   |   |
| OTHER LONG-TERM  LIABILITIES                                                                                                                     |   | 935               |   | 929                    |   |
|                                                                                                                                             |   |              |   |                   |   |
| DEFERRED INCOME  TAXES                                                                                                                           |   | 172               |   | 263                    |   |
|                                                                                                                                             |   |              |   |                   |   |
| COMMITMENTS AND  CONTINGENCIES (SEE NOTE 5)                                                                                                      |   |              |   |                   |   |
|                                                                                                                                             |   |              |   |                   |   |
| STOCKHOLDERS’  EQUITY:                                                                                                                      |   |              |   |                   |   |
| Common stock,  par value $0.001                                                                                                                  |   |              |   |                   |   |
| Authorized—100,000,000,  Issued and outstanding — 12,751,062 and  11,391,825 at June 30, 2002 and December 31, 2001, respectively |   | 13                |   | 11                     |   |
| Paid-in capital                                                                                                                                  |   | 68,326            |   | 58,309                 |   |
| Accumulated  other comprehensive loss                                                                                                            |   | 85                |   | (381                   | )      |
| Accumulated  deficit                                                                                                                             |   | (36,078           | )      | (27,914                | )      |
| Total  stockholders’ equity                                                                                                                 |   | 32,346            |   | 30,025                 |   |
|                                                                                                                                             |   | $                 | 45,957 |                   | $      | 43,360 |   |

* *

*See notes to unaudited condensedconsolidated financial statements.*

 

1

----

 

**STOCKERYALE, INC.**

**UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS**

(Inthousands, except per share data)

 
|                                              |   | **Three Months Ended  June 30,** |   | **Six Months Ended  June 30,** |   |
|---------------------------------------------------|--------|----------------------------------|--------|--------------------------------|--------|
|                                              |   | **2002**                         |   | **2001**                       |   | **2002** |   | **2001** |   |
|                                              |   |                             |   |                           |   |   |   |   |   |
| NET SALES                                         |   | $                                | 3,523  |                           | $      | 3,602 |   | $ | 6,431 |   | $ | 8,529 |   |
| COST OF SALES                                     |   | 2,907                            |   | 2,355                          |   | 5,491 |   | 5,056 |   |
| Gross Profit                                      |   | 616                              |   | 1,247                          |   | 940 |   | 3,473 |   |
|                                              |   |                             |   |                           |   |   |   |   |   |
| OPERATING  EXPENSES:                              |   |                             |   |                           |   |   |   |   |   |
| Selling Expenses                                  |   | 869                              |   | 1,004                          |   | 1,903 |   | 1,842 |   |
| General and  Administrative Expenses              |   | 1,445                            |   | 2,534                          |   | 3,300 |   | 3,870 |   |
| Amortization  Expense                             |   | 79                               |   | 169                            |   | 169 |   | 340 |   |
| Research and  Development Expenses                |   | 1,987                            |   | 1,139                          |   | 3,751 |   | 1,675 |   |
| Total Operating Expenses                          |   | 4,380                            |   | 4,846                          |   | 9,123 |   | 7,727 |   |
|                                              |   |                             |   |                           |   |   |   |   |   |
| Operating Loss                                    |   | (3,764                           | )      | (3,599                         | )      | (8,183 | ) | (4,254 | ) |
|                                              |   |                             |   |                           |   |   |   |   |   |
| Interest and  other income/(expense)              |   | 180                              |   | (13                            | )      | 189 |   | 225 |   |
| Interest Expense                                  |   | 85                               |   | 178                            |   | 170 |   | 289 |   |
|                                              |   |                             |   |                           |   |   |   |   |   |
| Loss from  operations before income tax           |   | (3,669                           | )      | (3,790                         | )      | (8,164 | ) | (4,318 | ) |
|                                              |   |                             |   |                           |   |   |   |   |   |
| Income tax  (benefit)                             |   | —                           |   | (158                           | )      | — |   | (64 | ) |
|                                              |   |                             |   |                           |   |   |   |   |   |
| Net Loss                                          |   | $                                | (3,669 | )                              | $      | (3,632 | ) | $ | (8,164 | ) | $ | (4,254 | ) |
|                                              |   |                             |   |                           |   |   |   |   |   |
| Net Loss per  Share-Basic and Diluted             |   | $                                | (0.29  | )                              | $      | (0.34 | ) | $ | (0.65 | ) | $ | (0.43 | ) |
|                                              |   |                             |   |                           |   |   |   |   |   |
| Weighted Average  Common Shares-Basic and Diluted |   | 12,721                           |   | 10,599                         |   | 12,598 |   | 10,002 |   |

* *

*Seenotes to unaudited condensed consolidated financial statements.*

 

2

----

 

**STOCKERYALE, INC.**

**UNAUDITEDCONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS**

(Inthousands)

 
|                                                                              |   | **Six Months Ended  June 30,** |   |
|-----------------------------------------------------------------------------------|--------|--------------------------------|--------|
|                                                                              |   | **2002**                       |   | **2001** |   |
| CASH FLOWS FROM  OPERATING ACTIVITIES:                                            |   |                           |   |   |   |
| Net loss                                                                          |   | $                              | (8,164 | ) | $ | (4,254 | ) |
| Adjustments to  reconcile net loss to net cash used in operating activities– |   |                           |   |   |   |
| Depreciation and  amortization                                                    |   | 1,390                          |   | 631 |   |
| Loss on disposal  of equipment                                                    |   | —                         |   | 3 |   |
| Deferred income  taxes                                                            |   | (91                            | )      | (62 | ) |
| Loss on  investment in joint venture                                              |   | 287                            |   | 112 |   |
| Other changes in  assets and liabilities–                                    |   |                           |   |   |   |
| Accounts  receivable, net                                                         |   | (721                           | )      | (95 | ) |
| (Increase)  decrease in officer note receivable                                   |   | (250                           | )      | — |   |
| Inventories                                                                       |   | 162                            |   | (1,066 | ) |
| Prepaid expenses  and other current assets                                        |   | 126                            |   | (678 | ) |
| Accounts payable                                                                  |   | (1,902                         | )      | 336 |   |
| Accrued expenses                                                                  |   | 93                             |   | (595 | ) |
| Net cash  provided by (used in) operating activities                              |   | (9,070                         | )      | (5,668 | ) |
|                                                                              |   |                           |   |   |   |
| CASH FLOWS USED  FOR INVESTING ACTIVITIES:                                        |   |                           |   |   |   |
| Purchases of  property, plant and equipment                                       |   | (1,460                         | )      | (6,739 | ) |
| Net investment  in joint venture                                                  |   | (260                           | )      | (600 | ) |
| Restricted cash  related to line of credit                                        |   | —                         |   | (1,500 | ) |
| Net cash used in  investing activities                                            |   | (1,720                         | )      | (8,839 | ) |
|                                                                              |   |                           |   |   |   |
| CASH FLOWS FROM  FINANCING ACTIVITIES:                                            |   |                           |   |   |   |
| Proceeds from  sale of common stock                                               |   | 9,819                          |   | 16,137 |   |
| Borrowings  (repayments) of bank debt                                             |   | 2,164                          |   | 2,095 |   |
| (Increase)  decrease in note receivable                                           |   | 42                             |   | 65 |   |
| Net cash  provided by (used in) financing activities                              |   | 12,025                         |   | 18,297 |   |
|                                                                              |   |                           |   |   |   |
| EFFECT OF  EXCHANGE RATE ON CHANGES IN CASH                                       |   | 466                            |   | (11 | ) |
|                                                                              |   |                           |   |   |   |
| NET INCREASE  (DECREASE)  IN CASH AND CASH  EQUIVALENTS                      |   | 1,701                          |   | 3,779 |   |
|                                                                              |   |                           |   |   |   |
| CASH AND CASH  EQUIVALENTS, BEGINNING OF PERIOD                                   |   | 1,576                          |   | 12,487 |   |
| CASH AND CASH  EQUIVALENTS, END OF PERIOD                                         |   | $                              | 3,277  |   | $ | 16,266 |   |
|                                                                              |   |                           |   |   |   |
| SUPPLEMENTAL  DISCLOSURE OF CASH FLOW INFORMATION:                                |   |                           |   |   |   |
| Interest paid                                                                     |   | $                              | 170    |   | $ | 289 |   |
| Stock issued in  Ciena acquisition                                                |   | $                              | 200    |   | $ | — |   |

** **

*Seenotes to unaudited condensed consolidated financial statements.*

 

3

----

 

**STOCKERYALE, INC.**

**Notes to Consolidated FinancialStatements**

**June 30, 2002**

 

1.               BASIS OFPRESENTATION

 

The interim consolidated financial statements presented have beenprepared by StockerYale, Inc. (the “Company”) without audit and, in the opinionof the management, reflect all adjustments of a normal recurring naturenecessary for a fair statement of (a) the results of operations for the threeand six months ended June 30, 2002 and 2001, (b) the financial position at June30, 2002 and December 31, 2001, and (c) the cash flows for the six monthperiods ended June 30, 2002 and 2001. These interim results are not necessarilyindicative of results for a full year or any other interim period.

 

The consolidated balance sheet presented as of December 31, 2001, hasbeen derived from the consolidated financial statements that have been auditedby independent public accountants. The consolidated financial statements andnotes are condensed as permitted by Form 10-Q and do not contain certaininformation included in the annual financial statements and notes of theCompany. The consolidated financial statements and notes included herein shouldbe read in conjunction with the consolidated financial statements and notesincluded in the Company’s Annual Report on Form 10-K for the year endedDecember 31, 2001.

 

2.               EARNINGS PER SHARE

 

In accordance with Statement of Financial Accounting Standards (“SFAS”)No. 128, *Earnings per Share*,basic and diluted net loss per common share for the three and six monthsended  June 30, 2002 and 2001 iscalculated by dividing the net loss applicable to common stockholders by theweighted average number of common shares outstanding. There were 2,929,319 and2,369,214 options outstanding as of June 30, 2002 and 2001, respectively whichwere not included in the diluted per share calculation because their inclusionwould be anti-dilutive.

 

4

----

 

3.                    INVENTORIES

 

Inventories are stated atthe lower of cost (first-in, first-out basis) or market and include materials,labor and overhead. Inventories are as follows:

 
|            |   | **June 30,  2002**  |   | **December  31, 2001** |   |
|-----------------|--------|---------------------|--------|------------------------|--------|
|            |   | **(in  thousands)** |   |
|            |   |                |   |                   |   |
| Finished goods  |   | $                   | 1,156  |                   | $      | 1,040 |   |
| Work-in-process |   | 144                 |   | 121                    |   |
| Raw materials   |   | 3,762               |   | 4,063                  |   |
|            |   |                |   |                   |   |
|            |   | $                   | 5,062  |                   | $      | 5,224 |   |

 

Management performsperiodic reviews of inventory and disposes of items not required

 

4.                    COMPREHENSIVEINCOME/(LOSS)

 

SFAS No. 130, *Reporting Comprehensive Income,* requiresdisclosure of all components of comprehensive income (loss) on an annual andinterim basis. Comprehensive income (loss) is defined as the change in equityof a business enterprise during a period from transactions and other events andcircumstances from non-owner sources. The Company’s total comprehensive income(loss) is as follows:

 
|                                     |   | **Three  Months Ended** |   | **Six Months  Ended** |   |
|------------------------------------------|--------|-------------------------|--------|-----------------------|--------|
|                                     |   | **June 30,  2002**      |   | **June 30,  2001**    |   | **June 30,  2002** |   | **June 30,  2001** |   |
|                                     |   | **(In  thousands)**     |   |
|                                     |   |                    |   |                  |   |   |   |   |   |
| Net (loss)                               |   | $                       | (3,669 | )                     | $      | (3,632 | ) | $ | (8,164 | ) | $ | (4,254 | ) |
| Other  comprehensive income (loss):      |   |                    |   |                  |   |   |   |   |   |
| Cumulative  translation  adjustment |   | 307                     |   | (126                  | )      | 466 |   | 3 |   |
| Comprehensive  loss                      |   | $                       | (3,362 | )                     | $      | (3,758 | ) | $ | (7,698 | ) | $ | (4,251 | ) |

 

5

----

 

5.                    JOINT VENTURES

 

On October 12, 2000, theCompany entered into a joint venture with Dr. Nicolae Miron and formed OptuneTechnologies, Inc., a Quebec corporation, to develop a new class of tunableoptical filters.  Under the terms ofthis joint venture arrangement, the Company owns a 49% equity interest inOptune and the Company agreed to contribute an aggregate of $4,000,000 to coverall operating costs of the joint venture including salaries, equipment andfacility costs. The contributions are to be made over a two-year period pursuantto a fixed milestone schedule. The Company is recording 100% of the lossesassociated with the research and development joint venture in the accompanyingstatement of operations as research and development expense. The Companyprovided approximately $936,000 CDN ($600,000 USD) through December 31, 2001.For the three months ended June 30, 2002 and 2001, the Company has provided$207,000 CDN ($137,000 USD) and $70,000 CDN ($46,000 USD) of funding to thejoint venture and recorded approximately $146,000 and $91,000 of research anddevelopment expenses related to the operating losses, respectively. The Companyhas provided $394,000 CDN ($260,000 USD) and $140,000 CDN ($92,000 USD) offunding to the joint venture and recorded approximately $287,000 USD and $112,000USD of research and development expenses related to the operating losses forthe six months ending June 30, 2002 and 2001, respectively.

 

In April 2001, theCompany entered into a research and development joint venture agreement to formInnovative Specialty Optical Fiber Components LLC with Dr. Danny Wong todevelop specialty optical fiber products. In exchange for a 60% ownershipinterest in Innovative Specialty Optical Fiber Components LLC, the Company hascommitted to fund up to $7.0 million over a two-year period to cover alloperating costs of the majority owned subsidiary, including salaries, equipmentand facility costs. Innovative Specialty Optical Fiber Components LLC has beenconsolidated by the Company and the Company has recorded 100% of the lossesassociated with Innovative Specialty Optical Fiber Components LLC as researchand development expense in the accompanying statement of operations. TheCompany provided approximately $418,000 of funding through December 31, 2001.During the three months ended June 30, 2002 and 2001, the Company has provided$8,000 and $0 of funding related to the Innovative Specialty Optical FiberComponents LLC joint venture and recorded $246,000 and $0 of research anddevelopment expenses relating to the operating losses for the three monthsending June 30, 2002 and 2001, respectively. During the six months ending June30, 2002 and 2001, the Company has provided $299,000 and $0 of funding relatedto the Innovative Specialty Optical Fiber Components LLC joint venture, andrecorded $510,000 and $0 of research and development expenses relating to theoperating losses for the six months ending June 30, 2002 and 2001,respectively.

 

6

----

 

6.                    USE OFESTIMATES

 

The preparation offinancial statements in conformity with generally accepted accountingprinciples requires management to make estimates and assumptions that affectthe reported amounts of assets and liabilities and disclosure of contingentassets and liabilities as of the date of the financial statements and thereported amounts of income and expenses during the reporting periods. Actualresults in the future could vary from the amounts derived from management’sestimates and assumptions.

 

7.                    REVENUERECOGNITION

 

The Company recognizesrevenue from product sales at the time of shipment and when persuasive evidenceof an arrangement exists, performance of seller’s obligation is complete,seller's price to the buyer is fixed or determinable, and collectibility isreasonably assured.  If a loss isanticipated on any contract, a provision for the entire loss is madeimmediately.

 

8.                    RECENTACCOUNTING PROUNCEMENTS

 

In June 2001, the FASBissued SFAS No. 141, *Business Combinations*.SFAS No. 141 requires that all business combinations be accounted for under thepurchase method only and that certain acquired intangible assets in a businesscombination be recognized as assets apart from goodwill. SFAS No. 141 iseffective for all business combinations initiated after June 30, 2001 and forall business combinations accounted for by the purchase method for which thedate of acquisition is after June 30, 2001. The adoption of SFAS No. 141 didnot have a material effect on the Company’s financial position or results ofoperations.

 

In June 2001, the FASBissued SFAS No. 142, *Goodwill and OtherIntangible Assets*, which requires that the ratable amortization ofgoodwill and indefinite lived intangibles be replaced with periodic impairmenttests and that most intangible assets other than goodwill be amortized overtheir useful lives. Certain intangibles will be allowed indefinite lives andwill not be amortized but rather evaluated for impairment annually based onfair market value. The provisions of SFAS No. 142 are effective for fiscal yearsbeginning after December 15, 2001. The Company has initially applied SFAS No.142 and ceased goodwill amortization as of January 1, 2002. Management hasreviewed SFAS No. 142 and performed the test during fiscal 2002 and determinedthat there has been no impairment of goodwill. In addition, the Company willcontinue to amortize definite lived intangible assets over their useful lives.Goodwill amortization was $169,000 and $340,000 for the three and six monthsended June 30, 2001, respectively. Proforma net loss for the three and sixmonths ended June 30, 2001 would have been $3.5 million and $3.9 million,respectively, excluding goodwill amortization expense. Proforma basic anddiluted loss per share for three and six months ended June 30, 2001 would havebeen $0.33 and $0.39, respectively.

 

7

----

 

In July 2001, the FASBissued SFAS No. 144, Accounting for the Impairment or Disposal of Long-LivedAssets. SFAS No. 144 supercedes SFAS No. 121, Accounting for the Impairment ofLong-Lived Assets and for Long-Lived Assets to Be Disposed Of. SFAS No. 144applies to all long-lived assets (including discontinued operations) andconsequently amends APB Opinion No. 30, Reporting Results ofOperations-Reporting the Effects of Disposal of a Segment of a Business. SFASNo. 144 is effective for financial statements issued for fiscal years beginningafter December 15, 2001 and thus will be adopted by the Company, as required,on January 1, 2002. Management is currently determining what effect, if any,SFAS No. 144 will have on its financial position and results of operations.

 

In June 2002, the FASBissued Statement No. 146, Accounting for Costs Associated with Exit or DisposalActivities. This Statement requires recording costs associated with exit ordisposal activities at their fair values when a liability has been incurred.Under previous guidance, certain exit costs were accrued upon management'scommitment to an exit plan, which is generally before an actual liability has beenincurred. Adoption of this Statement is required with the beginning of fiscalyear 2003. The Company has not yet completed its evaluation of the impact ofadopting this Statement.

 

9.                    LOANS TOOFFICERS

 

On May 31, 2002, Mark W.Blodgett, the chairman and chief executive officer of the Company, issued apromissory note to the Company in the principal amount of $250,000. The note ispayable upon demand with interest on the unpaid principal accruing at a rateper annum equal to 4.5%. As of June 30, 2002 the total principal amount plusaccrued interest of $938 remains outstanding. The Board of Directors of theCompany approved this loan transaction.

 

10.              CIENA ACQUISITION

 

On May 13, 2002, theCompany announced the acquisition of Ciena Corporation’s specialty opticalfiber (SOF) assets. StockerYale entered into the transaction to expand itscurrent product line of specialty optical fibers; become an independentsupplier to a major OEM in the telecommunications sector; and take advantage ofdistressed prices for capital assets. The acquisition included intellectualproperty related to Ciena’s specialty optical fiber technology; a fullydeveloped SOF product line; a three-year primary supply agreement between Cienaand the Company; and Ciena’s specialty fiber manufacturing equipment andrelated test and measurement assets. The purchase price of $550,000 includedcash and stock of $350,000 and $200,000, respectively.

 

8

----

 

11.              INCOME TAXES

 

In accordance with SFASNo. 109, Accounting for Income Taxes, the Company has recorded a valuationallowance against its net deferred tax assets in 2002 and 2001 after concludingthat it is not likely such deferred tax asset will be realized.

 

9

----

 

FORM 10 - Q

PART  I

ITEM  2

** **

**STOCKERYALE, INC.**

**ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIALCONDITION AND OPERATING RESULTS**

 

***This Quarterly Report on Form 10-Q contains forward-lookingstatements within the meaning of Section 27A of the Securities Act of 1933 andSection 21E of the Securities Exchange Act of 1934.  The Company’s actual results could differ materially from thoseset forth in the forward-looking statements****. **When theCompany use words such as “anticipate,” “believe,” “estimate,” “expect,”“intend,” and other similar expressions, they generally identifyforward-looking statements. Forward-looking statements include, for example, statements relating toacquisitions and related financial information, development activities,business strategy and prospects, future capital expenditures, sources andavailability of capital, environmental and other regulations andcompetition.  Investors should exercisecaution in interpreting and relying on forward-looking statements since theyinvolve known risks, uncertainties and other factors which are, in some cases,beyond the Company’s control and could materially affect our actual results,performance or achievements.******Such factors include, without limitation: market conditionsthat could make it more difficult or expensive for the Company to obtain thenecessary capital to finance its joint ventures and strategic initiatives; theexistence of other independent suppliers of optical fiber, who may have greaterresources than the Company; and the uncertainty that the Company’s significantinvestments in R&D will not result in products that achieve marketacceptance.  Additional such factors arediscussed in the Section entitled “Certain Factors Affecting Future OperatingResults” on page 25 of the Company’s Annual Report on Form 10-K for the fiscalyear ended December 31, 2001.***

*** ***

### **RESULTS OFOPERATIONS**

 

The following discussionshould be read in conjunction with the attached consolidated financialstatements and notes thereto and with our audited financial statements andnotes thereto included in the Company’s Annual Report on Form 10-K for the yearended December 31, 2001.

 

10

----

 

### **ThreeMonths Ended  June 30, 2002 and 2001**

 

#### Net Sales

 

Net sales of $3.5 million declined $0.1 million or 2% compared to 2001,as illumination sales increased $.2 million or 9% to $2.9 million as asignificant increase in laser shipments for the machine inspection marketoffset moderate declines in fiber optic and LED shipments.  Optical component revenues declined $0.3million to $0.4 million as a result of a general decline in phase masksshipments.

 

#### Gross Profit

 

Gross profit in the second quarter of 2002 declined $0.6 million or 50%as a result of  lower revenue, highermanufacturing overhead and an unfavorable product mix. The higher manufacturingoverhead, especially depreciation, was due to the infrastructure build outcosts, which began in the second half of 2002.

 

#### Operating Expenses

 

Overall operating expenses declined $0.5 million or 10% to $4.4 millionas reduced selling and general and administrative expenses offset higherresearch and development costs.  Reducedtrade show and advertising accounted for the $0.1 million decrease in sellingexpenses while lower salaries, employee benefits, travel and professional feesgenerated the majority of the $1.1 million savings for general andadministrative expenses. Higher salaries, employees benefits, depreciation andjoint venture expenses were the principal factors influencing the $.8 millionincrease in research and development costs.

 

Interest expense declined $0.1 million in the second quarter as lowerinterest rates offset a higher level of borrowing.

 

#### Provision (Benefit) for Income Taxes

 

The Company did not record a net tax benefit from the operating loss inthe current quarter of 2002.  Based uponhistorical losses, the Company has provided a valuation allowance for thedeferred tax assets that may not be realized.

 

#### Net Income (Loss)

 

The net loss of $3.7 million for the second quarter of 2002 was levelwith the second quarter of 2001.

 

11

----

 

### **Six Months EndedJune 30, 2002 and 2001**

 

#### Net Sales

 

Net sales of $6.4 million declined $2.1 million or 25% as bothillumination and optical components shipments slowed by approximately $1.0million each.  The economic downturn inboth the semiconductor and telecommunications industries were the primaryfactors influencing the lower revenue performance.

 

#### Gross Profit

 

Gross profits in the second quarter of 2002 dropped  $2.5 million to $0.9 million or 15% ofrevenue compared to 40% of revenue in 2001. A lower sales volume represented$1.0 million of the decline, while higher manufacturing overhead and anunfavorable product mix accounted for $1.5 million of the margin erosion.

 

#### Operating Expenses

 

Operating expenses increased $1.4 million or 18% to $9.1 million asincreased research and development expenses offset savings in general andadministrative costs.  Increasedstaffing and depreciation costs resulted in research and development expensesrising $2.1 million to $3.8 million. Lower professional fees and reduced travel costs accounted for themajority of the general and administrative expense savings.  Selling expenses were level in both periodsat $1.9 million.

 

Interest expenses declined $0.1 million during the first half as lowerinterest rates offset a higher level of debt.

 

#### Provision (Benefit) for Income Taxes

 

The Company did not record a net tax benefit from the operating lossesduring the first half of 2002.  Basedupon historical losses, the Company has provided a valuation allowance for thedeferred tax assets that may not be realized.

 

#### Net Income (Loss)

 

The net loss of $8.2 million for the first half of 2002 was $4.3 millionhigher than the first half of 2001.

 

12

----

 

### **Liquidity andCapital Resources**

 

For the six months ended June 30, 2002, unrestricted cash and cashequivalents increased $1.7 million compared to December 31, 2001. Cash used inoperating activities was $9.1 million in the first six months of fiscal 2002which primarily resulted from an operating loss of $8.2 million and a decreasein accounts payable of $1.9 million offset by depreciation and amortization of $1.4million.

 

Cash used in investing activities was $1.7 million principally due toan increase in capital assets of $1.5 million and an investment in the Optunejoint venture of $0.2 million. Included in capital assets was approximately$0.5 million of fixed assets purchased from Ciena Corporation.

 

Cash of $12.0 million was provided by financing activities primarilydue to the receipt of $9.7 million from the sale of 1,242,600 shares at $7.76in a private placement of common stock in March of 2002 and an increase in netproceeds from bank debt  of $2.2million.

 

On May 19, 2001, the Company entered into a credit agreement withMerrill Lynch Financial Services, Inc. providing total borrowing availabilityup to $6,000,000. Initial proceeds were used to pay off the credit agreementbetween the Company and Wells Fargo Business Credit, Inc. The new creditfacility with Merrill Lynch consists of a line of credit of up to $2,500,000and a reducing revolver in the amount of $3,500,000. On April 24, 2002, theCompany entered into an amendment of the credit agreement, which increased theborrowing availability up to $7,000,000 by increasing the line of credit to$3,500,000 and maintaining the reducing revolver at $3,500,000. As of June 30,2002, $3,125,999 was outstanding under the reducing revolver and 2,000,000 wasoutstanding under the line of credit. Approximately $1,874,000 was availablefor additional borrowings through the reducing revolver and the line of credit.The outstanding principal balance of all advances under this credit facilitybears interest at 2.5% over the one month LIBOR rate. As of June 30, 2002 theinterest rate was approximately 4.3%. The Company’s obligations under thiscredit facility are secured by substantially all the Company’s assets, excludingreal property, plus a pledge of restricted cash in the amount of $2,000,000. Inaddition, the Company is required to maintain a $7.8 million Tangible NetWorth. The Company is in compliance with all provisions of the creditagreement. These restrictions will lapse when the Company achievesprofitability or at such time as no balance is outstanding. The reducingrevolver is a seven-year loan with monthly principal and interest payments. Theline of credit is subject to an annual renewal.

 

13

----

 

The Company’s headquarters in Salem, New Hampshire is subject to amortgage and note issued to Granite Bank on August 26, 1996 (the “GraniteNote”). The Granite Note, in an initial principal amount of $1,500,000 is dueAugust 29, 2011. The Granite Note bears interest at a rate of 7.5% per annumand is reviewed annually in August. The principal and interest are repayable in180 equal monthly installments. In accordance with the terms of the GraniteNote, the Company may prepay amounts outstanding there under, in whole or inpart, at any time without premium or penalty. As of June 30, 2002, theoutstanding balance on the Granite Note was $1,151,895.

 

On May 20, 1997, the Company entered into an equipment line of credit agreementwith Granite Bank to finance capital equipment related to new productdevelopment. The line of credit provides that equipment purchases will beconverted quarterly into a series of five year notes, not to exceed $500,000 inthe aggregate, bearing interest at the bank’s prime rate plus .75%.  As of June 30, 2002, the Company hadborrowed $51,941 pursuant to such line of credit.

 

On December 5, 2000, StockerYale Canada amended its credit agreementwith Toronto Dominion Bank.  The creditagreement provides for (a) a $3,500,000 CDN operating line of credit of which$1,000,000 CDN must be offset by credit balances; (b) two mortgage loans for$2,020,000 CDN and (c) four term notes totaling up to $1,049,000 CDN. The lineof credit bears interest at 1% over Toronto Dominion’s prime rate, requiresmonthly payments of interest only, and is payable on demand.  As of June 30, 2002, $1,118,153 CDN($737,869 US) was outstanding under the line of credit and approximately $2,381,847($1,571,781 US) was available for additional borrowings. The mortgage requiresmonthly principal payments of $10,797 CDN (approximately $7,200 US) and $1,111CDN (approximately $698 US) plus interest at prime rate plus 0.875% and maturein December 2015 and July 2016. As of June 30, 2002, the outstanding balance onthe mortgage loans was $1,936,931 CDN ($1,278,181 US). The four term loansrequire monthly principle payments of approximately $36,125 CDN ($22,694 US)plus interest ranging from the prime rate plus 1.25% to 2.0% and mature betweenMay 2002 and October 2006. On June 30, 2002, the outstanding aggregate balanceon the term loans was $682,455 CDN ($450,352 US).

 

On October 12, 2000, the Company entered into a joint venture with Dr.Nicolae Miron and formed Optune Technologies, Inc., a Quebec corporation, todevelop a new class of tunable optical filters.  Under the terms of this joint venture arrangement, the Companyowns a 49% equity interest in Optune and the Company agreed to contribute an aggregateof $4,000,000 to cover all operating costs of the joint venture includingsalaries, equipment and facility costs. The contributions are to be made over atwo-year period pursuant to a fixed milestone schedule. The Company isrecording 100% of the losses associated with the research and development jointventure in the accompanying statement of operations as research and developmentexpense. The Company provided approximately $936,000 CDN ($600,000 USD) throughDecember 31, 2001.

 

14

----

 

For the three months ended June 30, 2002 and 2001, the Company hasprovided $207,000 CDN ($137,000 USD) and $70,000 CDN ($46,000 USD) of fundingto the joint venture and recorded approximately $146,000 and $91,000 ofresearch and development expenses related to the operating losses,respectively. The Company has provided $394,000 CDN ($260,000 USD) and $140,000CDN ($92,000 USD) of funding to the joint venture and recorded approximately$287,000 USD and $112,000 USD of research and development expenses related tothe operating losses for the six months ending June 30, 2002 and 2001,respectively.

 

In April 2001, the Company entered into a research and developmentjoint venture agreement to form Innovative Specialty Optical Fiber ComponentsLLC with Dr. Danny Wong to develop specialty optical fiber products. Inexchange for a 60% ownership interest in Innovative Specialty Optical FiberComponents LLC, the Company has committed to fund up to $7.0 million over atwo-year period to cover all operating costs of the majority owned subsidiary,including salaries, equipment and facility costs. Innovative Specialty OpticalFiber Components LLC has been consolidated by the Company and the Company hasrecorded 100% of the losses associated with Innovative Specialty Optical FiberComponents LLC as research and development expense in the accompanyingstatement of operations. The Company provided approximately $418,000 of fundingthrough December 31, 2001. During the three months ended June 30, 2002 and2001, the Company has provided $8,000 and $0 of funding related to theInnovative Specialty Optical Fiber Components LLC joint venture and recorded$246,000 and $0 of research and development expenses relating to the operatinglosses for the three months ending June 30, 2002 and 2001, respectively. Duringthe six months ending June 30, 2002, the Company has provided $299,000 offunding related to the Innovative Specialty Optical Fiber Components LLC jointventure, and recorded $510,000 and $0 of research and development expenses relatedto the operating losses for the six months ending June 30, 2002 and 2001,respectively.

 

As a result of favorable revenue trend, including a 21% sequentialrevenue growth and a 70% increase in orders from the first quarter to thesecond quarter of 2002; a $5 million annualized cost reduction programimplemented in the second quarter; a continued reduction in capitalexpenditures; and available lines of credit, the Company expects to havesufficient resources to fund operations through year-end 2002. However, theCompany is currently reviewing several financing options to provide a buffer toits forecast and thus provide the Company with flexibility in funding its shortand long-term goals.

 

*Critical Accounting Policies,Commitments and Certain Other Matters*

 

The Company considered the disclosure requirements of FR-60 regardingcritical accounting policies and FR-61 regarding liquidity and capitalresources, certain trading activities and related party/certain otherdisclosures, and concluded that nothing materially changed during the quarterthat would warrant further disclosure under these releases.

 

15

----

 

FORM10 - Q

PART  I

ITEM  3

** **

**STOCKERYALE, INC.**

**ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKETRISK**

 

Foreign Currency Exchange Risk Management has determined that all ofthe Company's foreign subsidiaries operate primarily in local currencies thatrepresent the functional currencies of the subsidiaries. All assets andliabilities of foreign subsidiaries are translated into U.S. dollars using theexchange rate prevailing at the balance sheet date, while income and expenseaccounts are translated at average exchange rates during the year. As such, theCompany's operating results are affected by fluctuations in the value of theU.S. dollar as compared to currencies in foreign countries, as a result of theCompany's transactions in these foreign markets. The Company does not operate ahedging program to mitigate the effect of a significant rapid change in thevalue of the Canadian Dollar or Euro as compared to the U.S. dollar. If such achange did occur, the Company would have to take into account a currencyexchange gain or loss in the amount of the change in the U.S. dollardenominated balance of the amounts outstanding at the time of such change.While the Company does not believe such a gain or loss is likely, and would notlikely be material, there can be no assurance that such a loss would not havean adverse material effect on the Company's results of operations or financialcondition.

 

### **Interest Rate Risk**

 

The Company is exposed to market risk from changes in interest rates,which may adversely affect its financial position, results of operations andcash flows. In seeking to minimize the risks from interest rate fluctuations,the Company manages exposures through its regular operating and financingactivities. The Company is exposed to interest rate risk primarily through itsborrowings under its $3.5 million credit line with Merrill Lynch with aninterest rate at 2.5% over the one month LIBOR and its $3.5 million CDN line ofcredit with Toronto Dominion bank with an interest rate at 1% over TorontoDominion’s prime rate. As of June 30, 2002 the fair market value of theCompany's outstanding debt approximates its carrying value.

 

16

----

 

FORM 10- Q

PART  II

ITEM  1-4 

 

**STOCKERYALE,INC.**

**PARTII – Other Information**

**June 30, 2002**

** **

**ITEM  1 – LEGAL PROCEEDINGS**

** **

At times the Company may be involved in disputes and/or litigation withrespect to its products and operations in its normal course of business. TheCompany does not believe that the ultimate impact of the resolution of suchmatters would have a material adverse effect on the Company’s financial conditionor results of operations. The Company is not currently involved in any legalproceedings.

** **

**ITEM 2 - CHANGES IN SECURITIES ANDUSE OF PROCEEDS**

** **

Not applicable

** **

**ITEM 3 - DEFAULTS UPON SENIORSECURITIES**

** **

Not applicable

** **

**ITEM 4 - SUBMISSION OF MATTERS TO AVOTE OF SECURITY HOLDERS**

** **

a)             A special meetingof stockholders of the Company in lieu of the annual meeting was held on May15, 2002.

 

b)            The followingmatters were presented and voting results were as follows:

 

PROPOSAL I – Election of Directors

 
|                   |   | **Number of  Shares/Votes** |   |
|------------------------|--------|-----------------------------|--------|
|                   |   | **For**                     |   | **Authority  Withheld** |   |   |
|                   |   |                        |   |   |   |   |
| Mark W. Blodgett       |   | 7,156,416                   |   | 126,856 |   |   |
| Alain Beauregard       |   | 7,156,916                   |   | 126,356 |   |   |
| Clifford L.  Abbey     |   | 7,280,745                   |   | 2,527 |   |   |
| Lawrence W.  Blodgett  |   | 7,280,245                   |   | 3,027 |   |   |
| Steven E. Karol        |   | 7,280,745                   |   | 2,527 |   |   |
| Dr. Herbert  Cordt     |   | 7,280,945                   |   | 2,327 |   |   |
| Raymond J.  Oglethorpe |   | 7,280,745                   |   | 2,527 |   |   |

 

17

----

 

FORM 10- Q

PART  II

ITEM  5-6

** **

**ITEM5 - OTHER INFORMATION**

 

Not applicable

** **

**ITEM 6 - EXHIBITS****, LISTS ANDREPORTS ON FORM 8-K**

** **

(a)      The following is a completelist of Exhibits filed as part of this Form 10-Q

 
| **Exhibit Number** |   | **Description**                                                                                 |   |
|--------------------|--------|-------------------------------------------------------------------------------------------------|--------|
| 99                 |   | Promissory note dated as  of May 31, 2002 by and between Mark W. Blodgett and StockerYale, Inc. |   |
|               |   |                                                                                            |   |
| 99.1               |   | Certification                                                                                   |   |
|               |   |                                                                                            |   |
| 99.2               |   | Certification                                                                                   |   |

 

(b)    Reports on Form 8-K

 

The Company filed a report of Form 8-K on July 25,2002 to report a change in its certifying accountant.

 

18

----

 

FORM 10- Q

PART II

 

**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 theundersigned, thereto duly authorized.

 
| StockerYale, Inc. |                                  |
|-------------------|---------------------------------------|
|              |                                  |
|              |                                  |
| August 14, 2002   | /s/ Mark W. Blodgett                  |
|              | Mark W. Blodgett,                     |
|              | Chairman and Chief Executive Officer  |
|              |                                  |
| August 14, 2002   | /s/ Francis J. O’Brien           |
|              | Francis J. O’Brien,              |
|              | Chief Financial Officer and Treasurer |
|              |                                  |

 

19

----