** **

**U.S. SECURITIES AND EXCHANGECOMMISSION**

**WASHINGTON, D.C. 20549**

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**FORM 10-Q**

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

**THE SECURITIES EXCHANGE ACT OF 1934**

 

**FOR THEQUARTERLY PERIOD ENDED MARCH 31, 2002**

**Commissionfile number 0-5460**

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** **

**STOCKERYALE, INC.**

(Exact name of registrantas specified in its charter)

 

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

 

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Indicate by check mark whether the registrant (1) has filed all reportsrequired to be filed by Section 13 or 15 (d) of the Exchange Act of 1934 duringthe preceding 12 months (or for such shorter period that the registrant wasrequired to file such reports), and (2) has been subject to such filingrequirements for the past 90 days. ýYes oNo

 

As of April 30, 2002 there were 12,055,048 shares of the issuer’scommon stock outstanding.

 

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**STOCKERYALE, INC.**

**INDEX TO FORM 10-Q**
| **PART I – FINANCIAL INFORMATION** |                                                                                                |
|-----------------------------------------|-----------------------------------------------------------------------------------------------------|
|                                    |                                                                                                |   |
| Item 1                                  | Financial Statements  (Unaudited)                                                                   |   |
|                                    |                                                                                                |   |
|                                    | Condensed  Consolidated Balance Sheets at March 31, 2002 and December 31, 2001                      |   |
|                                    |                                                                                                |   |
|                                    | Condensed  Consolidated Statement of Operations for the three months ended March 31,  2002 and 2001 |   |
|                                    |                                                                                                |   |
|                                    | Condensed  Consolidated Statement of Cash Flows for the three months ended March 31,  2002 and 2001 |   |
|                                    |                                                                                                |   |
|                                    | Notes  to Condensed Consolidated Financial Statements                                               |   |
|                                    |                                                                                                |   |
| Item  2                                 | Management’s  Discussion and Analysis of Financial Condition                                   |   |
|                                    | and  Results of Operations                                                                          |   |
| **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)                                                                                       |   |
|                                    |                                                                                                |   |
|                                         |                                                                                                     |  |  |

 

2

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            **ITEM 1 – FINANCIALSTATEMENTS**

** **

**STOCKERYALE, INC.**

**CONDENSED CONSOLIDATED BALANCE SHEETS**

(In thousands, exceptshare and per share data)

 
| **Assets**                                                                                                                                        |   | **March 31,  2002** |   | **December  31, 2001** |   |
|---------------------------------------------------------------------------------------------------------------------------------------------------|--------|---------------------|--------|------------------------|--------|
| Current Assets:                                                                                                                                   |   |                |   |                   |   |
| Cash and cash  equivalents                                                                                                                        |   | $                   | 6,195  |                   | $      | 1,576 |   |
| Restricted cash                                                                                                                                   |   | 2,000               |   | 2,000                  |   |
| Trade  receivables, less reserves of approximately $142 and $128 at March 31, 2002  and December 31, 2001, respectively                           |   | 2,547               |   | 2,091                  |   |
| Inventories                                                                                                                                       |   | 5,009               |   | 5,224                  |   |
| Prepaid expenses  and other current assets                                                                                                        |   | 763                 |   | 1,078                  |   |
| Total current  assets                                                                                                                             |   | 16,514              |   | 11,969                 |   |
|                                                                                                                                              |   |                |   |                   |   |
| Property, Plant and Equipment, net                                                                                                                |   | 25,471              |   | 25,813                 |   |
| Goodwill, net of accumulated amortization                                                                                                         |   | 2,677               |   | 2,419                  |   |
| Identified intangible assets, net of accumulated amortization                                                                                     |   | 2,027               |   | 2,373                  |   |
| Other Long-Term Assets                                                                                                                            |   | 656                 |   | 786                    |   |
|                                                                                                                                              |   |                |   |                   |   |
|                                                                                                                                              |   | $                   | 47,345 |                   | $      | 43,360 |   |
|                                                                                                                                              |   |                |   |                   |   |
| **Liabilities and Stockholders’ Equity**                                                                                                     |   |                |   |                   |   |
| Current Liabilities:                                                                                                                              |   |                |   |                   |   |
| Current portion  of long-term debt                                                                                                                |   | $                   | 420    |                   | $      | 339 |   |
| Short-term debt                                                                                                                                   |   | 4,018               |   | 3,566                  |   |
| Accounts payable                                                                                                                                  |   | 2,121               |   | 3,791                  |   |
| Accrued expenses                                                                                                                                  |   | 1,468               |   | 1,438                  |   |
| Short-term lease  obligation                                                                                                                      |   | 92                  |   | 147                    |   |
| Total current  liabilities                                                                                                                        |   | 8,119               |   | 9,281                  |   |
|                                                                                                                                              |   |                |   |                   |   |
| Long-Term Debt and Capital Lease obligations                                                                                                      |   | 2,714               |   | 2,862                  |   |
|                                                                                                                                              |   |                |   |                   |   |
| Other Long-Term Liabilities                                                                                                                       |   | 891                 |   | 929                    |   |
|                                                                                                                                              |   |                |   |                   |   |
| Deferred Income Taxes                                                                                                                             |   | 208                 |   | 263                    |   |
|                                                                                                                                              |   |                |   |                   |   |
| Stockholders’ Investment:                                                                                                                    |   |                |   |                   |   |
| Common stock,  par value $0.001                                                                                                                   |   |                |   |                   |   |
| Authorized—100,000,000,  Issued and outstanding — 12,004,784 and  11,391,825 at March 31, 2002 and December 31, 2001, respectively |   | 12                  |   | 11                     |   |
| Paid-in capital                                                                                                                                   |   | 68,032              |   | 58,309                 |   |
| Accumulated  other comprehensive loss                                                                                                             |   | (222                | )      | (381                   | )      |
| Accumulated  deficit                                                                                                                              |   | (32,409             | )      | (27,914                | )      |
| Total  stockholders’ equity                                                                                                                  |   | 35,413              |   | 30,025                 |   |
|                                                                                                                                              |   |                |   |                   |   |
|                                                                                                                                              |   | $                   | 47,345 |                   | $      | 43,360 |   |

 

*The accompanyingnotes are an integral part of these consolidated financial statements.*

 

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**STOCKERYALE, INC.**

**CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS**

 (In thousands, except per share data)

 
|                                              |   | **Three Months  Ended March 31,** |   |
|---------------------------------------------------|--------|-----------------------------------|--------|
|                                              |   | **2002**                          |   | **2001** |   |
|                                              |   |                              |   |   |   |
| Net Sales                                         |   | $                                 | 2,908  |   | $ | 4,925 |   |
| Cost of Sales                                     |   | 2,584                             |   | 2,701 |   |
| Gross Profit                                      |   | 324                               |   | 2,224 |   |
|                                              |   |                              |   |   |   |
| OPERATING EXPENSES:                               |   |                              |   |   |   |
| Selling Expenses                                  |   | 1,034                             |   | 764 |   |
| General and  Administrative Expenses              |   | 1,857                             |   | 1,336 |   |
| Amortization Expense                              |   | 88                                |   | 171 |   |
| Research and Development  Expenses                |   | 1,764                             |   | 611 |   |
| Total Operating Expenses                          |   | 4,743                             |   | 2,882 |   |
|                                              |   |                              |   |   |   |
| Operating   Loss                             |   | (4,419                            | )      | (658 | ) |
|                                              |   |                              |   |   |   |
| INTEREST AND OTHER  INCOME                        |   | 9                                 |   | 236 |   |
| INTEREST EXPENSE                                  |   | (85                               | )      | (110 | ) |
|                                              |   |                              |   |   |   |
| Loss from operations before income tax provision  |   | (4,495                            | )      | (532 | ) |
|                                              |   |                              |   |   |   |
| Income tax provision                              |   | 0                                 |   | 93 |   |
|                                              |   |                              |   |   |   |
| Net Loss                                          |   | $                                 | (4,495 | ) | $ | (625 | ) |
|                                              |   |                              |   |   |   |
| Net Loss per Share-Basic  and Diluted             |   | $                                 | (0.36  | ) | $ | (0.07 | ) |
|                                              |   |                              |   |   |   |
| Weighted Average Common  Shares-Basic and Diluted |   | 12,475                            |   | 9,405 |   |

* *

*The accompanying notes are an integral part of theseconsolidated financial statements.*

 

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** **

**STOCKERYALE, INC.**

**CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS**

 (In thousands)

 
|                                                                                          |   | **Three Months  Ended  March 31** |       |
|-----------------------------------------------------------------------------------------------|--------|----------------------------------------|------------|
|                                                                                          |   | **2002**                               |       | **2001** |   |
|                                                                                          |   |                                   | ** ** |   | ** ** |
| Cash Flows from  Operating Activities:                                                        |   |                                   |       |   |   |
| Net loss                                                                                      |   | $                                      | (4,495     | ) | $ | (625 | ) |
| Adjustments to reconcile net loss to net cash  used in/provided by operating activities— |   |                                   |       |   |   |
| Depreciation and amortization                                                                 |   | 618                                    |       | 313 |   |
| Deferred income taxes                                                                         |   | (55                                    | )          | (33 | ) |
| Other changes in assets and liabilities–                                                 |   |                                   |       |   |   |
| Accounts receivable, net                                                                      |   | (456                                   | )          | (379 | ) |
| Inventories                                                                                   |   | 215                                    |       | (385 | ) |
| Prepaid expenses and other current assets                                                     |   | 315                                    |       | (470 | ) |
| Accounts payable                                                                              |   | (1,670                                 | )          | 509 |   |
| Accrued expenses                                                                              |   | 30                                     |       | (382 | ) |
| Other assets and liabilities                                                                  |   | (49                                    | )          | — |   |
| Net cash used in operating activities                                                         |   | (5,547                                 | )          | (1,452 | ) |
|                                                                                          |   |                                   |       |   |   |
| Cash Flows from  Investing Activities:                                                        |   |                                   |       |   |   |
| Purchases of property, plant and equipment                                                    |   | (188                                   | )          | (1,641 | ) |
| Net investment in joint venture                                                               |   | 141                                    |       | — |   |
| Net cash used in investing activities                                                         |   | (47                                    | )          | (1,641 | ) |
|                                                                                          |   |                                   |       |   |   |
| Cash Flows from  Financing Activities:                                                        |   |                                   |       |   |   |
| Proceeds from sale of common stock                                                            |   | 9,724                                  |       | 41 |   |
| Borrowings (repayments) of bank debt                                                          |   | 330                                    |       | 617 |   |
| (Increase) decrease in note receivable                                                        |   | —                                 |       | 25 |   |
| Net cash provided by (used in) financing  activities                                          |   | 10,054                                 |       | 683 |   |
|                                                                                          |   |                                   |       |   |   |
| Effect of exchange rate  on changes in cash                                                   |   | 159                                    |       | (224 | ) |
|                                                                                          |   |                                   |       |   |   |
| Net (Decrease)  increase  in Cash and Cash Equivalents                                   |   | 4,619                                  |       | (2,634 | ) |
|                                                                                          |   |                                   |       |   |   |
| Cash and Cash  Equivalents, beginning of period                                               |   | 1,576                                  |       | 12,987 |   |
|                                                                                          |   |                                   |       |   |   |
| Cash and Cash  Equivalents, end of period                                                     |   | $                                      | 6,195      |   | $ | 10,353 |   |
|                                                                                          |   |                                   |       |   |   |
| Supplemental Disclosure  of Cash Flow Information:                                            |   |                                   |       |   |   |
| Cash paid for interest                                                                        |   | $                                      | 85         |   | $ | 92 |   |
| Cash paid for taxes                                                                           |   | $                                      | 52         |   | $ | 37 |   |
|                                                                                          |   |                                   |       |   |   |

** **

*The accompanying notes are an integral part of theseconsolidated financial statements.*

 

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** **

**STOCKERYALE, INC.**

**Notes to Condensed ConsolidatedFinancial Statements**

**March 31, 2002**

** **

 

1.             BASIS OFPRESENTATION

 

The interimconsolidated financial statements presented have been prepared by StockerYale,Inc. (the “Company”) without audit and, in the opinion of the management,reflect all adjustments of a normal recurring nature necessary for a fairstatement of (a) the results of operations for the three months ended March 31,2002 and 2001, (b) the financial position at March 31, 2002 and 2001, and (c)the cash flows for the three month periods ended March 31, 2002 and 2001. Theseinterim results are not necessarily indicative of results for a full year orany other interim period.

 

The consolidatedbalance sheet presented as of December 31, 2001, has been derived from theconsolidated financial statements that have been audited by the Company’sindependent public accountants. The consolidated financial statements and notesare condensed as permitted by Form 10-Q and do not contain certain informationincluded in the annual financial statements and notes of the Company.  The consolidated financial statements andnotes included herein should be read in conjunction with the consolidatedfinancial statements and notes included in the Company’s Annual Report on Form10-K for the year ended December 31, 2001.

 

2.                                       EARNINGS PER SHARE

 

In accordance withStatement of Financial Accounting Standards (“SFAS”) No. 128, *Earnings perShare*, basic and diluted net loss per common share for the three monthsended March 31, 2002 and 2001 is calculated by dividing the net loss applicableto common stockholders by the weighted average number of vested common sharesoutstanding.

 

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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:

 

|                      |   | **March 31,  2002** |   | **December  31, 2001** |   |
|---------------------------|--------|---------------------|--------|------------------------|--------|
|                      |   | **(in  thousands)** |   |
|                      |   |                |   |                   |   |
| Finished goods            |   | $                   | 934    |                   | $      | 1,040 |   |
| Work-in-process           |   | 155                 |   | 121                    |   |
| Raw materials             |   | 4,848               |   | 4,916                  |   |
|                      |   |                |   |                   |   |
| Reserve for  obsolescence |   | (928                | )      | (853                   | )      |
|                      |   |                |   |                   |   |
|                      |   | $                   | 5,009  |                   | $      | 5,224 |   |

 

Management performsperiodic reviews of inventory and disposes of items not required by theirmanufacturing plan and reduces the carrying cost of inventory to the lower ofcost or market.

 

 

4.                                       COMPREHENSIVE INCOME/(LOSS)

 

SFAS No. 130, *ReportingComprehensive Income,* requires disclosure of all components ofcomprehensive income (loss) on an annual and interim basis. Comprehensiveincome (loss) is defined as the change in equity of a business enterpriseduring a period from transactions and other events and circumstances fromnon-owner sources. The Company’s total comprehensive income (loss) is asfollows:

 

** **

|                               |   | **Three Months Ended** |    |
|------------------------------------|--------|------------------------|---------|
|                               |   | **March 31, 2002**     |    | **March 31, 2001** |   |
|                               |   | **In thousands**       |    |
| Net loss                           |   | $                      | (4,495) |   | $ | (625) |   |
|                               |   |                   |    |   |   |
| Other comprehensive income (loss): |   |                   |    |   |   |
| Cumulative translation adjustment  |   | (159                   | )       | (212 | ) |
|                               |   |                   |    |   |   |
| Comprehensive loss                 |   | $                      | (4,654  | ) | $ | (837 | ) |
|                                    |        |                        |         |  |  |  |  |  |

 

 

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 periodpursuant to a fixed milestone schedule. The Company is recording 100% of thelosses associated with the research and

 

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development joint venturein the accompanying statement of operations as research and developmentexpense. The Company has recorded approximately $141,000 USD and $19,000 USD ofresearch and development expenses related to the operating losses for thequarter ending March 31, 2002 and 2001, respectively.

 

In April 2001, the Companyentered into a research and development joint venture agreement to formInnovative Specialty Optical Fiber Components LLC with Dr. Danny Wong, ascientist employed by the Company, to develop specialty optical fiber products.In exchange 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. During the quarter ending March 31, 2002, the Companyhas provided cash of  $291,000 andrecorded an operating loss of  $317,000,related to the Innovative Specialty Optical Fiber Components LLC joint venture.

 

6.             USE OF ESTIMATES

 

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.             REVENUE RECOGNITION

 

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. The Securities and Exchange Commission released Staff AccountingBulletin (SAB) No. 101, *Revenue Recognition in Financial Statements*,on December 3, 1999.  This SAB providesadditional guidance on the accounting for revenue recognition, including bothbroad conceptual discussions as well as certain industry-specific guidance, andthe guidance was effective for the first quarter of fiscal 2000. This newguidance did not have a material effect on the Company's results of operationsor financial position for the quarter ending March 31, 2002.

 

8

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8.             RECENT ACCOUNTINGPROUNCEMENTS

 

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 fiscalyears beginning after December 15, 2001. The Company has initially applied SFASNo. 142 and ceased goodwill amortization during the quarter ended March 31,2002. Management has reviewed SFAS No. 142 and will perform the impairmenttests during fiscal 2002 to determine if there has been or will be animpairment of goodwill. In addition, the Company will continue to amortizedefinite lived intangible assets over their useful lives. Goodwill amortizationwas $171,000 for the quarter ended March 31, 2001. Proforma net loss for thequarter ended March 31, 2001 would have been $454,000, excluding goodwillamortization expense after tax. Proforma basic and diluted loss per share forthe quarter ended March 31, 2001 would have been $0.05.

 

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.

 

9

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9.             PRIVATE PLACEMENT

 

On March 8, 2002, theCompany completed a private placement of 1,242,600 shares at $7.76 per share,which resulted in net proceeds to the Company of approximately $9.7 million.The Company did not engage either an underwriter or agent in this transaction.In connection with the private placement, the Company granted registrationrights to investors. The registration rights granted to certain investorsprovide for liquidated damages, in the form of additional shares of theCompany’s common stock in an amount equal to 15% of the total number of sharespurchased by such investor, in the event that the registration statement filedwith respect to such investor’s shares is not effective within 90 days afterthe closing of the purchase of such investor’s shares. The registration wasfiled on March 5, 2002 and became effective April 4, 2002; therefore, noliquidated damages were required.

** **

** **

10.           SUBSEQUENT EVENTS

 

On May 13, 2002, theCompany announced the acquisition of Ciena Corporation’s speciality opticalfiber (SOF) group. The acquisition included intellectual property related toCiena’s specialty optical fiber technology; a fully-developed SOF product line;a three-year primary supply agreement between Ciena and the Company; andCiena’s specialty fiber manufacturing equipment and related test andmeasurement assets. The purchase price of $550,000 included cash and stock of$350,000 and $200,000, respectively.

 

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** **

**STOCKERYALE, INC.**

**ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS**

**OF FINANCIAL CONDITION AND OPERATINGRESULTS**

** **

***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 the Company use words such as “anticipate,”“believe,” “estimate,” “expect,” “intend,” and other similar expressions, theygenerally identify forward-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 conditions that couldmake it more difficult or expensive for the Company to obtain the necessarycapital to finance its joint ventures and strategic initiatives; the existenceof other independent suppliers of optical fiber, who may have greater resourcesthan 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 followingdiscussion should be read in conjunction with the attached consolidatedfinancial statements and notes thereto and with our audited financialstatements and notes thereto included in the Company’s Annual Report on Form10-K for the year ended December 31, 2001.

 

### **Fiscal QuartersEnded March 31, 2002 and 2001**

 

#### Net Sales

 

For the quarter ended March 31, 2002, net salesdeclined $2 million or 41% from $4.9 million in 2001 to $2.9 million. Theslowdown in the semiconductor, electronic assembly, and telecommunicationindustries, which impacted StockerYale beginning in the second quarter of 2001,resulted in revenue declines in the illumination and optical componentbusinesses.

 

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** **

 

#### Gross Profits

 

Gross profits declined from 45% in the first quarterof 2001 to 11% in the first quarter of 2002 due to unabsorbed overhead costsrelated to the revenue decline as well as higher depreciation and staffingcosts directly associated with our investment in the optical componentsbusiness.

 

#### Operating Expenses

 

Operating expenses increased from $2.9 million in thefirst quarter of 2001 to $4.7 million in the first quarter of 2002 primarilydue to salaries, benefits and prototype development costs associated with anincrease in headcount and infrastructure to support the R&D efforts in thespecialty optical fiber and optical components businesses.

 

#### Interest Expense

 

Interest expense was $85,000 in the first quarter offiscal 2002 compared to $110,000 in 2001. The decrease in interest expenseresulted primarily from a decrease in borrowings to fund operating losses and workingcapital due to the funds raised in the private placement.

 

#### Net Loss

 

Net loss for the threemonths ended March 31, 2002 was $4.5 million compared to a net loss of $.6million for the same period in 2001.

####  

#### Provision (Benefit) for Income Taxes

 

The Company did not record a net tax benefit from theoperating loss in the current quarter. Based upon historical losses, theCompany has provided a valuation allowance for a portion of the deferred taxassets that may not be realized.

 

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### **Liquidity andCapital Resources**

 

On March 8, 2002, the Company completed a privateplacement of 1,242,600 shares of common stock at a price of $7.76 per sharewith net proceeds of approximately $9.7 million.

 

For the three months ended March 31, 2002,unrestricted cash and cash equivalents increased $4.6 million. Cash used inoperating activities was $5.5 million in the first three months of fiscal 2002which primarily resulted from an operating loss of $4.5 million and a decreasein accounts payable of 1.7 million offset by depreciation and amortization of$.6 million.

 

Cash used in investing activities was $47,000primarily due to an increase in fixed assets, offset by the losses recognizedfor the Optune joint venture.

 

Cash of $10.1 million was provided by financingactivities primarily due to the receipt of $9.7 million from the sale of1,242,600 shares at $7.76 in a private placement of common stock.

 

On May 19, 2001, the Company entered into a creditagreement with Merrill Lynch Financial Services, Inc. providing total borrowingavailability up to $6,000,000. Initial proceeds were used to pay off the creditagreement between the Company and Wells Fargo Business Credit, Inc. The newcredit facility with Merrill Lynch consists of a line of credit of up to$2,500,000 and a reducing revolver in the amount of $3,500,000. On April 24,2002, the Company entered into an amendment of the credit agreement, whichincreased the borrowing availability up to $7,000,000 by increasing the line ofcredit to $3,500,000 and maintaining the reducing revolver at $3,500,000. As ofMarch 31, 2002, $3,239,000 was outstanding under the reducing revolver.Approximately $3,761,000 was available for additional borrowings through thereducing revolver and the line of credit. The outstanding principal balance ofall advances under this credit facility bears interest at 2.5% over the onemonth LIBOR rate. As of March 31, the interest rate was approximately 4.3%. TheCompany’s obligations under this credit facility are secured by substantiallyall the Company’s assets, excluding real property, plus a pledge of restrictedcash in the amount of $2,000,000. In addition, the Company is required tomaintain a $7.8 million Tangible Net Worth. The Company is in compliance withall provisions of the credit agreement. These restrictions will lapse when theCompany achieves profitability or at such time as no balance is outstanding.The reducing revolver is a seven-year loan with monthly principal and interestpayments. The line of credit is subject to an annual renewal.

 

The Company’s headquarters in Salem, New Hampshire issubject to a mortgage and note issued to Granite Bank on August 26, 1996 (the“Granite Note”). The Granite Note, in an initial principal amount of $1,500,000is due August 29, 2011. The Granite Note bears interest at a rate of 7.5% perannum and is reviewed annually in August. The principal and interest arerepayable in 180 equal monthly installments. In accordance with the terms ofthe Granite Note, the Company may prepay amounts outstanding thereunder, inwhole or in part, at any time without premium or penalty. As of March 31, 2002,the outstanding balance on the Granite Note was $1,173,000.

 

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On May 20, 1997, the Company entered into an equipmentline of credit agreement with Granite Bank to finance capital equipment relatedto new product development. The line of credit provides that equipmentpurchases will be converted quarterly into a series of five year notes, not toexceed $500,000 in the aggregate, bearing interest at the bank’s prime rateplus .75%.  As of March 31, 2002, theCompany had borrowed $74,000 pursuant to such line of credit.

 

On December 5, 2000, StockerYale Canada amended itscredit agreement with Toronto Dominion Bank. The credit agreement provides for (a) a $3,500,000 CDN operating line ofcredit of which $1,000,000 CDN must be offset by credit balances; (b) twomortgage loans for $2,020,000 CDN and (c) four term notes totaling up to$1,049,000 CDN. The line of credit bears interest at 1% over Toronto Dominion’sprime rate, requires monthly payments of interest only, and is payable ondemand.  As of March 31, 2002,$1,243,504 CDN ($779,925 US) was outstanding under the line of credit andapproximately $2,256,496 ($1,415,274 US) was available for additionalborrowings. The mortgage requires monthly principal payments of $10,797 CDN(approximately $7,200 US) and $1,111 CDN (approximately $698 US) plus interestat prime rate plus 0.875% and mature in December 2015 and July 2016. As ofMarch 31, 2002, the outstanding balance on the mortgage loans was $1,972,653CDN ($1,237,248 US). The four term loans require monthly principle payments ofapproximately $36,125 CDN ($22,694 US) plus interest ranging from the primerate plus 1.25% to 2.0% and mature between May 2002 and October 2006. On March31, 2002, the outstanding aggregate balance on the term loans was $769,996 CDN($482,941 US).

 

On October 12, 2000, the Company entered into a jointventure with Dr. Nicolae Miron and formed Optune Technologies, Inc., a Quebeccorporation, to develop a new class of tunable optical filters.  Under the terms of this joint venturearrangement, the Company owns a 49% equity interest in Optune and the Companyagreed to contribute an aggregate of $4,000,000 to cover all operating costs ofthe joint venture including salaries, equipment and facility costs. Thecontributions are to be made over a two-year period pursuant to a fixedmilestone schedule. The Company is recording 100% of the losses associated withthe research and development joint venture in the accompanying statement ofoperations as research and development expense. The Company has recordedapproximately $141,000 USD and $19,000 USD of research and development expensesrelated to the operating losses for quarter ending March 31, 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, ascientist employed by the Company, to develop specialty optical fiber products.In exchange 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. During the quarter ending March 31, 2002, the Companyhas provided cash of $291,000 and recorded an operating loss of  $317,000, related to the InnovativeSpecialty Optical Fiber Components LLC joint venture.

 

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From time to time, the Company contemplates raisingadditional capital by the issuance of equity securities, the proceeds of whichmay be used, among other things, to fund working capital needs and capitalexpenditures. As of March 8, 2002, the Company raised an additional $9.7million through a private placement of 1,242,600 shares. The Company believesthis additional capital coupled with its available lines of credit will besufficient to cover operating losses, working capital, debt service and capitalexpenditures through the next twelve months.

 

*Critical Accounting Policies,Commitments and Certain Other Matters*

 

The Company consideredthe disclosure requirements of FR-60 regarding critical accounting policies andFR-61 regarding liquidity and capital resources, certain trading activities andrelated party/certain other disclosures, and concluded that nothing materiallychanged during the quarter that would warrant further disclosure under thesereleases.

 

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**STOCKERYALE, INC.**

**PART II – Other Information**

**March 31, 2002**

** **

**ITEM  1 – LEGAL PROCEEDINGS**

** **

At times the Company may be involved in disputesand/or litigation with respect to its products and operations in its normalcourse of business. The Company does not believe that the ultimate impact ofthe resolution of such matters would have a material adverse effect on theCompany’s financial condition or results of operations. The Company is notcurrently involved in any legal proceedings.

** **

**ITEM2 – CHANGES IN SECURITIES AND USE OF PROCEEDS**

** **

On March 8, 2002, the Company completed a privateplacement of 1,242,600 shares of its common stock, par value $.001 per share.The Company offered these shares $7.76 per share.  The Company did not engage either an underwriter or agent in thistransaction. The private placement resulted in net proceeds to the Company ofapproximately $9.7 million. Proceeds will be used for working capital purposes.

 

**ITEM3 – DEFAULTS UPON SENIOR SECURITIES**

** **

Not applicable

 

**ITEM4 – SUBMISSION OF MATTERS TO A VOTE OF SECURITY**

 

Notapplicable

** **

**ITEM 5 –OTHER INFORMATION**

 

Notapplicable

** **

**ITEM 6 –EXHIBITS, LISTS AND REPORTS ON FORM 8-K**

** **

(a)           Thefollowing is a complete list of Exhibits filed as part of this Form 10- Q

** **
| **Exhibit Number** |   | **Description**                                                                                                                                                                             |   |
|--------------------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|
| 10.8 (a)           |   | Credit Agreement, dated as of May 3, 2001, by and  between  Merrill Lynch Financial  Services Inc. and StockerYale, Inc. as amended by letters dated April 19,  2002 and May 16, 2001. |

 

(b)           Reportson Form 8-K - None.

 

 

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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 theundersigned, thereto duly authorized.

 

StockerYale, Inc.

 

 
| May 15, 2002 | /s/ Mark W. Blodgett                  |
|--------------|---------------------------------------|
|         | Mark W. Blodgett,                     |
|         | Chairman and Chief Executive Officer  |
|         |                                  |
| May 15, 2002 | /s/ Francis J. O’Brien           |
|         | Francis J. O’Brien,              |
|         | Chief Financial Officer and Treasurer |

 

 

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