** **

**U.S.SECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON, D.C. 20549**

** **

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**FORM 10-QSB**

QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF

**THE SECURITIESEXCHANGE ACT OF 1934**

 

**FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2001**

** **

**Commission file number 0-5460**

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** **

** **

**STOCKERYALE,INC.**

(Name of small business issuer in its charter)

 

 

| **Massachusetts**                                               |   | **04-2114473**                       |
|-----------------------------------------------------------------|--------|--------------------------------------|
| (State of other jurisdiction of incorporation or  organization) |   | (I.R.S. employer identification no.) |
|                                                            |   |                                 |
| **32  Hampshire Road**                                          |   |                                 |
| **Salem, New  Hampshire**                                       |   | **03079**                            |
| (Address of principal executive offices)                        |   | (Zip Code)                           |

 

**(603) 893-8778**

(Issuer’s telephone number)

 

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Check whether the issuer (1)filed all reports required to be filed by Section 13 or 15(d) of the ExchangeAct during the past 12 months (or for such shorter period that the registrantwas required to file such reports), and

(2) has been subject to suchfiling requirements for the past 90 days.   ýYes   o    No

 

As of October 31, 2001 therewere 10,735,460 shares of the issuer’s common stock outstanding.

 

Transitional Small BusinessDisclosure Format (check one):  o    Yes     ý    No

 

 

**PART IFINANCIAL STATEMENTS**

**    Item 1.1 CONSOLIDATED BALANCE SHEETS**

**STOCKER****YALE, INC.**

(Inthousands)

 

**                                                                                    ****Assets**
|                                                                                                                    |   | **September 30, 2001** |   | **December 31, 2000** |   |
|-------------------------------------------------------------------------------------------------------------------------|--------|------------------------|--------|-----------------------|--------|
|                                                                                                                    |   | **(Unaudited)**        |   | **(Audited)**         |   |
| Current  Assets:                                                                                                        |   |                   |   |                  |   |
| Cash and cash equivalents                                                                                               |   | $                      | 9,569  |                  | $      | 12,487 |   |
| Restricted cash                                                                                                         |   | 2,000                  |   | 500                   |   |
| Accounts receivable, net of  reserves of $100,000 and $151,000 in 2001 and 2000 respectively                            |   | 2,728                  |   | 2,946                 |   |
| Inventories                                                                                                             |   | 6,457                  |   | 5,196                 |   |
| Prepaid expenses and other  current assets                                                                              |   | 1,729                  |   | 587                   |   |
|                                                                                                                    |   |                   |   |                  |   |
| Total current assets                                                                                                    |   | 22,483                 |   | 21,716                |   |
|                                                                                                                    |   |                   |   |                  |   |
| Property,  Plant and Equipment, net                                                                                     |   | 20,817                 |   | 8,338                 |   |
| Notes  Receivable                                                                                                       |   | 275                    |   | 90                    |   |
| Goodwill,  net of accumulated amortization                                                                              |   | 2,501                  |   | 2,746                 |   |
| Identified  intangible assets, net                                                                                      |   | 2,462                  |   | 2,675                 |   |
| Long-Term  Investments                                                                                                  |   | 632                    |   | 250                   |   |
| Other  Assets                                                                                                           |   | 66                     |   | 66                    |   |
| Net  Assets of Discontinued Operations                                                                                  |   | -                      |   | 1,100                 |   |
|                                                                                                                    |   | $                      | 49,236 |                  | $      | 36,981 |   |
|                                                                                                                    |   |                   |   |                  |   |
| **Liabilities  and Stockholders’ Investment**                                                                      |   |                   |   |                  |   |
|                                                                                                                    |   |                   |   |                  |   |
| Current  Liabilities:                                                                                                   |   |                   |   |                  |   |
|                                                                                                                    |   |                   |   |                  |   |
| Current portion of  long-term debt                                                                                      |   | $                      | 1,895  |                  | $      | 1,328 |   |
| Accounts payable                                                                                                        |   | 6,495                  |   | 1,636                 |   |
| Accrued expenses                                                                                                        |   | 685                    |   | 1,332                 |   |
| Short-term lease obligation                                                                                             |   | 103                    |   | 119                   |   |
|                                                                                                                    |   |                   |   |                  |   |
| Total current liabilities                                                                                               |   | 9,178                  |   | 4,415                 |   |
|                                                                                                                    |   |                   |   |                  |   |
| Long-Term  Debt and Capital Lease Obligations                                                                           |   | 2,630                  |   | 2,779                 |   |
|                                                                                                                    |   |                   |   |                  |   |
| Other  Long-Term Liabilities                                                                                            |   | 929                    |   | 929                   |   |
|                                                                                                                    |   |                   |   |                  |   |
| Deferred  Income Taxes                                                                                                  |   | 864                    |   | 959                   |   |
|                                                                                                                    |   |                   |   |                  |   |
| Stockholders’  Investment:                                                                                         |   |                   |   |                  |   |
| Common stock, par value  $0.001                                                                                         |   |                   |   |                  |   |
| Authorized—100,000,000                                                                                             |   |                   |   |                  |   |
| Issued and  outstanding—  11,365,025 and 9,385,656  at September 30, 2001 and December 31, 2000, respectively |   | 11                     |   | 9                     |   |
| Paid-in capital                                                                                                         |   | 58,375                 |   | 42,071                |   |
| Accumulated other  comprehensive loss                                                                                   |   | (385                   | )      | (129                  | )      |
| Accumulated deficit                                                                                                     |   | (22,366                | )      | (14,052               | )      |
| Total stockholders’  investment                                                                                    |   | 35,635                 |   | 27,899                |   |
|                                                                                                                    |   |                   |   |                  |   |
|                                                                                                                    |   | $                      | 49,236 |                  | $      | 36,981 |   |

 

 

 

**PART I FINANCIAL STATEMENTS**

**Item 1.2     CONSOLIDATED STATEMENTS OF OPERATIONS**

**STOCKERYALE,INC.**

(Inthousands)

 
|                                                               |   | *** Three Months Ended September  30,*** |   | ***Nine Months Ended September 30,*** |   |
|--------------------------------------------------------------------|--------|-----------------------------------------------|--------|---------------------------------------|--------|
|                                                               |   | **2001**                                      |   | **2000**                              |   | **2001** |   | **2000** |   |
|                                                               |   |                                          |   |                                  |   |   |   |   |   |
| Net Sales                                                          |   | $                                             | 3,663  |                                  | $      | 5,047 |   | $ | 12,183 |   | $ | 13,990 |   |
|                                                               |   |                                          |   |                                  |   |   |   |   |   |
| Cost of Sales                                                      |   | 2,692                                         |   | 3,017                                 |   | 7,723 |   | 8,436 |   |
|                                                               |   |                                          |   |                                  |   |   |   |   |   |
| Gross  profit                                                      |   | 971                                           |   | 2,030                                 |   | 4,460 |   | 5,554 |   |
|                                                               |   |                                          |   |                                  |   |   |   |   |   |
| Selling Expenses                                                   |   | 1,178                                         |   | 542                                   |   | 3,122 |   | 1,401 |   |
| General and Administrative Expenses                                |   | 2,226                                         |   | 910                                   |   | 5,997 |   | 2,321 |   |
| Amortization and Goodwill Expense                                  |   | 171                                           |   | 170                                   |   | 509 |   | 411 |   |
| Charge for Acquired In-Process Research and  Development           |   | -                                             |   | -                                     |   | - |   | 402 |   |
| Research and Development                                           |   | 1,293                                         |   | 336                                   |   | 2,986 |   | 839 |   |
| Total  Operating Expenses                                          |   | 4,868                                         |   | 1,958                                 |   | 12,614 |   | 5,374 |   |
|                                                               |   |                                          |   |                                  |   |   |   |   |   |
| Operating  income/(loss)                                           |   | (3,897                                        | )      | 72                                    |   | (8,154 | ) | 180 |   |
|                                                               |   |                                          |   |                                  |   |   |   |   |   |
| Other Income                                                       |   | 67                                            |   | 41                                    |   | 63 |   | 98 |   |
| Interest Income                                                    |   | 155                                           |   | 60                                    |   | 385 |   | 163 |   |
| Interest Expense                                                   |   | 224                                           |   | 116                                   |   | 513 |   | 365 |   |
|                                                               |   |                                          |   |                                  |   |   |   |   |   |
| Income/(Loss) from Continuing Operations  before Income Taxes |   | (3,899                                        | )      | 57                                    |   | (8,219 | ) | 76 |   |
|                                                               |   |                                          |   |                                  |   |   |   |   |   |
| Provision /(Benefit) for INCOME TAXES                              |   | (30                                           | )      | 57                                    |   | (96 | ) | 189 |   |
|                                                               |   |                                          |   |                                  |   |   |   |   |   |
| Loss From  Continuing Operations                                   |   | $                                             | (3,869 | )                                     | $      | - |   | $ | (8,123 | ) | $ | (113 | ) |
|                                                               |   |                                          |   |                                  |   |   |   |   |   |
| Loss on  Disposal of Discontinued Operations                       |   | $                                             | (191   | )                                     | $      | (58 | ) | $ | (191 | ) | $ | (365 | ) |
|                                                               |   |                                          |   |                                  |   |   |   |   |   |
| Net loss                                                           |   | $                                             | (4,060 | )                                     | $      | (58 | ) | $ | (8,314 | ) | $ | (478 | ) |
|                                                               |   |                                          |   |                                  |   |   |   |   |   |
| Loss per Share from Continuing Operations-Basic and  Diluted       |   | $                                             | (0.34  | )                                     | $      | - |   | $ | (0.78 | ) | $ | (0.02 | ) |
|                                                               |   |                                          |   |                                  |   |   |   |   |   |
| Loss per Share from Discontinued Operations-Basic and  Diluted     |   | $                                             | (0.02  | )                                     | $      | (0.01 | ) | $ | (0.02 | ) | $ | (0.04 | ) |
|                                                               |   |                                          |   |                                  |   |   |   |   |   |
| Net Loss  per Share-Basic and Diluted                              |   | $                                             | (0.36  | )                                     | $      | (0.01 | ) | $ | (0.80 | ) | $ | (0.06 | ) |
|                                                               |   |                                          |   |                                  |   |   |   |   |   |
| Weighted Average Common Shares-Basic and Diluted                   |   | 11,336,592                                    |   | 8,826,524                             |   | 10,446,697 |   | 8,502,180 |   |

 

 

**PART I  FINANCIAL STATEMENTS**

**Item 1.3       CONSOLIDATED STATEMENTS OF CASH FLOWS**

**STOCKERYALE, INC.**

(Inthousands)
|                                                                                     |   | ***Nine Months Ended September 30,*** |           |
|------------------------------------------------------------------------------------------|--------|---------------------------------------|----------------|
|                                                                                     |   | **2001**                              |           | **2000** |   |
|                                                                                     |   | **(unaudited)**                       |           | **(unaudited)** |   |
| CASH  FLOWS FROM OPERATING ACTIVITIES:                                                   |   |                                  |           |   |   |
| Net loss                                                                                 |   | $                                     | (8,314         | ) | $ | (478 | ) |
| Less: net loss on disposal  of discontinued operations                                   |   | (191                                  | )              | (365 | ) |
|                                                                                     |   | (8,123                                | )              | (113 | ) |
| Adjustments to reconcile  net loss to net cash used in/provided by operating activities- |   |                                  |      |   |      |
| Charge for acquired  in-process research and development                                 |   | -                                     |           | 402 |   |
| Depreciation and  amortization                                                           |   | 1,336                                 |           | 717 |   |
| Deferred income taxes                                                                    |   | (95                                   | )              | (150 | ) |
| Other changes in assets and  liabilities                                                 |   |                                  |           |   |   |
| Accounts receivable, net                                                                 |   | 218                                   |           | (992 | ) |
| Inventories                                                                              |   | (1,261                                | )              | (315 | ) |
| Prepaid expenses and other  current expenses                                             |   | (1,142                                | )              | (1,211 | ) |
| Accounts payable                                                                         |   | 4,859                                 |           | (1,472 | ) |
| Accrued expenses                                                                         |   | (647                                  | )              | 140 |   |
| Net cash used in operating  activities, continuing operations                            |   | (4,855                                | )              | (2,994 | ) |
| Net cash used in operating  activities, discontinued operations                          |   | -                                     |           | (735 | ) |
| Net cash used in operating  activities                                                   |   | (4,855                                | )              | (3,729 | ) |
|                                                                                     |   |                                  |           |   |   |
| Cash Flows from Investing  Activities:                                                   |   |                                  |           |   |   |
| Purchases of property,  plant and equipment                                              |   | (13,357                               | )              | (1,060 | ) |
| Long term investment                                                                     |   | -                                     |           | (250 | ) |
| Investment in joint venture                                                              |   | (382                                  | )              | - |   |
| Net proceeds from sale of  discontinued operations                                       |   | 659                                   |           | - |   |
| Restricted cash related to  line of credit                                               |   | (1,500                                | )              | (500 | ) |
| Business acquired, net of  cash acquired                                                 |   | -                                     |           | (2 | ) |
| Net cash used in investing  activities                                                   |   | (14,580                               | )              | (1,812 | ) |
|                                                                                     |   |                                  |           |   |   |
| Cash Flows from Financing  Activities:                                                   |   |                                  |           |   |   |
| Proceeds from sale of  common stock                                                      |   | 16,306                                |           | 8,761 |   |
| Payment on notes receivable                                                              |   | 65                                    |           | - |   |
| Payments of bank debt                                                                    |   | 402                                   |           | (1,138 | ) |
| Net cash provided by  financing activities                                               |   | 16,773                                |           | 7,623 |   |
|                                                                                     |   |                                  |           |   |   |
| exhange rate effects on  cash                                                            |   | (256                                  | )              | (129 | ) |
|                                                                                     |   |                                  |           |   |   |
| Net Increase/(Decrease) in Cash  and Cash Equivalents                                    |   | (2,918                                | )              | 1,953 |   |
|                                                                                     |   |                                  |           |   |   |
| Cash and Cash Equivalents,  beginning OF PERIOD                                          |   | 12,487                                |           | 85 |   |
| Cash and Cash Equivalents, end of  period                                                |   | $                                     | 9,569          |   | $ | 2,038 |   |
|                                                                                     |   |                                  |           |   |   |
| Supplemental Disclosure of  Cash Flow Information:                                       |   |                                  |           |   |   |
| Cash paid for interest                                                                   |   | $                                     | 513            |   | $ | 448 |   |
| Cash paid for taxes                                                                      |   | $                                     | -              |   | $ | 42 |   |
|                                                                                     |   |                                  |           |   |   |
| Supplemental Disclosure OF  NONCASH Investing Activities:                                |   |                                  |           |   |   |
| Note receivable received as  proceeds from discontinued operations                       |   | $                                     | 250            |   | $ | - |   |
|                                                                                     |   |                                  |           |   |   |
| Supplemental Disclosure OF  NONCASH Financing Activities:                                |   |                                  |           |   |   |
| Conversion of subordinated  debt to common stock                                         |   | $                                     | -              |   | $ | 1,350 |   |
| Fair value of shares used  for acquisition of CorkOpt Ltd.                               |   | $                                     | -              |   | $ | 2,194 |   |
| Liabilities assumed in acquisition                                                       |   | $                                     | -              |   | $ | 717 |   |

 

** **

**Notes to FinancialStatements**

 

1.     Basis ofPresentation

 

Theinterim consolidated financial statements presented have been prepared byStockerYale, Inc. (the “Company”) without audit and, in the opinion of themanagement, reflect all adjustments of a normal recurring nature necessary fora fair statement of (a) the Company’s results of operations for the three andnine months ended September 30, 2001 and 2000, (b) the Company’s financialposition at September 30, 2001, and (c) the Company’s cash flows for the ninemonth periods ended September 30, 2001 and 2000.  These interim results are not necessarily indicative of resultsfor a full year or any other period.

 

The consolidated balancesheet presented as of December 31, 2000, has been derived from the consolidatedfinancial statements that have been audited by the Company’s independent publicaccountants. The consolidated financial statements and notes are condensed aspermitted by Form 10-QSB and do not contain certain information included in theannual financial statements and notes of the Company. The consolidatedfinancial statements and notes included herein should be read in conjunctionwith the financial statements and notes included in the Company’s Annual Reporton Form 10-KSB for the year ended December 31, 2000.

 

2.     Earningsper Share

 

In accordance with Statementof Financial Accounting Standards (“SFAS”) No. 128, Earnings per Share, basicand diluted net loss per common share for the three and nine months endedSeptember 30, 2001 and 2000 is calculated by dividing the net loss applicableto common stockholders by the weighted average number of common sharesoutstanding. Diluted net loss per share excludes the effect of stock optionsand warrants of 2,259,091 shares in 2001 and 1,244,500 shares in 2000 becauseto include such shares would have been antidilutive.

 

3.      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 loss isas follows:

 

                                                                                         **(In thousands)**

 
|                              |   | **Three Months Ended** |   | **Nine Months Ended** |   |
|-----------------------------------|--------|------------------------|--------|-----------------------|--------|
|                              |   | **Sept. 30, 2001**     |   | **Sept. 30, 2000**    |   | **Sept. 30 , 2001** |   | **Sept. 30 , 2000** |   |
|                              |   | **(Unaudited)**        |   | **(Unaudited)**       |   | **(Unaudited)** |   | **(Unaudited)** |   |
|                              |   |                   |   |                  |   |   |   |   |   |
| Net loss                          |   | $                      | (4,060 | )                     | $      | (58 | ) | $ | (8,314 | ) | $ | (478 | ) |
| Other comprehensive loss:         |   |                   |   |                  |   |   |   |   |   |
| Cumulative translation adjustment |   | (259                   | )      | (178                  | )      | (256 | ) | (160 | ) |
| Comprehensive  loss               |   | $                      | (4,319 | )                     | $      | (236 | ) | $ | (8,570 | ) | $ | (638 | ) |

4.      Joint Ventures

 

InOctober 2000, the Company entered into a research and development joint ventureagreement, Optune Technologies, Inc., with Dr. Nicolae Miron, a scientistemployed by the Company, to develop a tunable optical filter. In exchange for a49% ownership interest in Optune Technologies, the Company has committed tofund up to $4.0 million over a two year period to cover all operating costs ofthe joint venture including salaries, equipment and facility costs. The Companyis recording 100% of the losses associated with the research and developmentjoint venture in the accompanying statement of operations as research anddevelopment expense. As of September 30, 2001, the Company has providedapproximately $930,000 CDN ($600,000 USD) of funding to the joint venture andrecorded approximately $218,000 of research and development expenses related tothe operating losses incurred for the nine months ended September 30, 2001.

 

In April 2001, the Company entered into a researchand development joint venture agreement to form Innovative Specialty OpticalFiber Components LLC with Dr. Danny Wong, a scientist employed by the Company,to develop 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 joint venture including salaries, equipment and facilitycosts.  Innovative Specialty OpticalFiber Components LLC will be consolidated by the Company and the Company willrecord 100% of the losses associated with Innovative Specialty Optical FiberComponents LLC as research and development expense in the accompanyingstatement of operations. As of September 30, 2001, the Company has not providedany funding to the joint venture and the joint venture has not incurred anyoperating losses**.**

 

5.    Use of Estimates

 

The preparation of financialstatements in conformity with accounting principles generally accepted in theUnited States requires management to make estimates and assumptions that affectthe reported amounts of assets and liabilities and disclosure of contingentassets and liabilities at the date of the financial statements and the reportedamounts of revenues and expenses during the reporting period. Actual resultscould differ from those estimates.

 

6.     Revenue Recognition

 

The Securities and ExchangeCommission released Staff Accounting Bulletin (SAB) No. 101, *Revenue Recognition in Financial Statements*,on December 3, 1999. This SAB provides additional guidance on the accountingfor revenue recognition, including both broad conceptual discussions as well ascertain industry specific guidance. The adoption of SAB 101 did not have amaterial impact on the Company’s results of operations.

 

7.     Business Combinations

 

In June 2001, the FinancialAccounting Standards Board issued SFAS No. 141, “Business Combinations.” SFASNo. 141 requires that all business combinations in the scope of this Statementare to be accounted for using one method, the purchase method.  SFAS No. 141 supersedes AccountingPrinciples Board Opinion No. 16, “Business Combinations,” and SFAS No. 38,“Accounting for Preacquisition Contingencies of Purchased Enterprises.” The provisionsof this Statement apply to all business combinations initiated after June 30,2001.

 

In June 2001, the Financial Accounting Standards Boardalso issued SFAS No. 142, “Goodwill and Other Intangible Assets.” SFAS No. 142addresses financial accounting and reporting for acquired goodwill and otherintangible assets.  It addresses howintangible assets that are acquired individually or with a group of otherassets (but not those acquired in a business combination) should be accountedfor in financial statements upon their acquisition. It also addresses howgoodwill and other intangible assets should be accounted for after they havebeen initially recognized in the financial statements. SFAS No. 142 supersedesAccounting Principles Board Opinion No. 17, “Intangible Assets.” The Companywill adopt SFAS No. 142 in fiscal 2002. The provisions of SFAS No. 142 will beapplied to all goodwill and other intangible assets recognized in the financialstatements at that date.  Impairmentlosses for goodwill and indefinite-lived intangible assets that arise due tothe initial application of SFAS No. 142 will be reported as resulting from achange in accounting principle.

 

The Company has not determined if the adoption of SFAS141 and SFAS 142 will have a material impact on its financial position or resultsof operations.

 

8.     Discontinued Operations

 

During 2000, the Company decided to discontinue itsmachine components and accessories division. On March 6, 2001, the Company signed a letter of intent to sell the netassets of the division for $1.1 million. Accordingly, the Company reported the results of the operations of themachine tool and accessories division and the associated impairment charges asdiscontinued operations. On September 20, 2001 the Company completed the saleof this division and recorded a loss of $191,000. The loss was a result of theCompany paying the remaining lease obligations on equipment that was includedin the net assets of the discontinued operations.

 

9.     Line of Credit

 

On May 19, 2001, the Company entered into a credit agreementwith 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. As of September30, 2001, $1,462,000 was outstanding under the reducing revolver andapproximately $4,538,000 was available for additional borrowings. Theoutstanding principal balance of all advances under this credit facility bearsinterest at 2.5% over the one month LIBOR rate. The obligations under thiscredit facility are secured by substantially all of the Company’s assets,excluding real property, as well as a pledge of restricted cash in the amountof $2,000,000. These restrictions will lapse when the Company achievesprofitability or at such time as no balances are outstanding.

 

 

**ITEM 2. MANAGEMENT’SDISCUSSION AND ANALYSIS**

**OF FINANCIALCONDITION AND OPERATING RESULTS**

** **

***ThisQuarterly Report on Form 10-QSB contains forward-looking statements within themeaning of Section 27A of the Securities Act of 1933 and Section 21E of theSecurities Exchange Act of 1934.  Ouractual results could differ materially from those set forth in theforward-looking statements****. **When we usewords such as “anticipate,” “believe,” “estimate,” “expect,” “intend,” andother similar expressions, they generally identify forward-lookingstatements.  Forward-looking statementsinclude, for example, statements relating to acquisitions and related financialinformation, development activities, business strategy and prospects, futurecapital expenditures, sources and availability of capital, environmental andother regulations and competition. Investors should exercise caution in interpreting and relying onforward-looking statements since they involve known risks, uncertainties andother factors which are, in some cases, beyond our control and could materiallyaffect our actual results, performance or achievements.******Such factors include, without limitation:market conditions that could make it more difficult or expensive for theCompany to obtain the necessary capital to finance its joint ventures andfacilities expansion; the existence of other independent suppliers of opticalfiber, who may have greater resources than the Company; the existence andavailability of acquisition and joint venture opportunities that willcompliment our existing product lines; and the uncertainty that the Company’ssignificant investments in R&D will result in products that achieve marketacceptance.  Additional such factors arediscussed in the Section entitled “Certain Factors Affecting Future OperatingResults” on page 12 of the Company’s Annual Report on Form 10-KSB for thefiscal year ended December 31, 2000.***

*** ***

### Results ofOperations

 

Thefollowing discussion should be read in conjunction with the attachedconsolidated financial statements and notes thereto and with our auditedfinancial statements and notes thereto included in our Annual Report on Form10-KSB for the year ended December 31, 2000.

 

### Comparison of FiscalQuarters Ended September 30, 2001 and 2000

 

#### Net Sales

 

Net sales were $3,663,000in the three months ended September 30, 2001 compared to $5,047,000 in thethird fiscal quarter of 2000, a decrease of 27.4% or $1,384,000.

* *

Net sales from theCompany’s specialized illumination products were $2,247,000 in the thirdquarter of 2001 compared to $3,684,000 in the comparable quarter in 2000, adecrease of 39.0% or $1,437,000. The decrease was primarily caused by areduction in demand due to a general slow down in the semi-conductor andrelated industries. The majority of theCompany’s sales of specialized illumination products are made to companies inthese industries who use specialized lighting for industrial inspection andmachine vision applications.

 

Net sales from theCompany’s optical sub-component products were $1,188,000 in the third quarterof 2001 compared to $784,000 in the comparable quarter in 2000, an increase of51.5% or $404,000. The increase was due to increased sales of the Company’sphasemasks products.

 

Net sales from printer andrecorder products decreased from $579,000 in the third quarter of fiscal 2000to $228,000 in the comparable quarter of fiscal 2001, a decrease of 60.6% or$351,000. As previously disclosed, the Company plans to discontinue theseproduct lines by the end of 2001.

 

#### Cost of Sales

 

Cost of sales were$2,692,000 in the third quarter of fiscal 2001 compared to $3,017,000 in thecomparable quarter of fiscal 2000, a decrease of 10.8% or $325,000. Thedecrease in cost of sales resulted from a decrease in net sales during the sameperiod.

 

Gross profit was $971,000in the third quarter of fiscal 2001 compared to $2,030,000 in the comparablequarter of 2000 as a result of decreased net sales. Gross margin decreased from40.2% in 2000 to 26.6% in 2001. The decrease in gross margin resulted primarilyfrom the decrease in illumination sales and increased unabsorbed manufacturingcosts due to the expansion of the Company’s specialty optical fiber andsub-component manufacturing capacity.

####  

#### Operating Expenses

 

Selling expenses were$1,178,000 in the three months ended September 30, 2001, or 32.2% of net sales,compared to $542,000 in the comparable quarter in 2000, or 10.7% of net sales.Selling expenses increased due to additional staffing and associated expensesrelated to the specialty optical fiber sales and marketing group ofapproximately $215,000 coupled with higher advertising and other marketingrelated expenses. General and administrative expenses were $2,226,000 in thethird quarter of fiscal 2001, or 60.7% of net sales, compared to $910,000 or18.0% of net sales in the comparable quarter of fiscal 2000. General andadministrative expenses increased primarily due to growth in staffing levels ofadministrative personnel of approximately $281,000 as well as legal andprofessional fees associated with our joint ventures of approximately $219,000.The balance of the general and administrative increase primarily resulted fromincremental spending in other administrative services including informationtechnology services, investor relations, insurances and occupancy costs.Research and development expenses were $1,293,000 in the third quarter offiscal 2001 compared to $336,000 in the comparable quarter of 2000; reflectingthe Company’s strategy of making significant investments in research anddevelopment for the Company’s specialty optical fiber and optical sub-componentproducts. The increase in research and development expenses related to theCompany’s joint ventures was approximately $104,000.

 

#### Interest Expense

 

Interest expense was$224,000 in the third quarter of fiscal 2001 compared to $116,000 in 2000.  The increase in interest expense resultedprimarily from borrowings to fund operating losses and working capital.

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#### Net Income

 

Net loss for the three months ended September 30, 2001was $4,060,000 compared to a net loss of $58,000 for the same period in 2000.Net loss from continuing operations for the third quarter of 2001 was$3,869,000 compared to breakeven in the comparable quarter of 2000. Net lossfrom discontinued operations for the third quarter was $191,000 and $58,000 for2001 and 2000 respectively. The loss in 2001 was a result of the Company payingthe remaining lease obligations on equipment that was included in the netassets of the discontinued operations.

** **

 

** **

#### Provision for IncomeTaxes

 

The Company recorded abenefit for income taxes of $30,000 in the fiscal quarter ended September 30,2001 compared to a tax provision of $57,000 in the comparable quarter in 2000.The tax benefit for the current quarter is a result of operating lossesgenerated in Canada which offset a previously recorded tax provision. The taxprovision in the comparable quarter is a result of taxable income generated inCanada that could not be used to offset operating losses in the United States.

 

 

**Comparison of the FirstNine Months of Fiscal 2001 and 2000**

 

#### Net Sales

 

Net sales were $12,183,000in the nine months ended September 30, 2001 compared to $13,990,000 in thecomparable period of fiscal quarter of 2000, a decrease of 12.9% or $1,807,000.

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Net sales from theCompany’s specialized illumination products were $8,553,000 in the first ninemonths of 2001 compared to $10,528,000 in the comparable period of the prioryear, a decrease of 18.8% or $1,977,000. The decrease was primarily caused by areduction in demand due to a general slowdown in the semi-conductor and relatedindustries. The majority of theCompany’s sales of specialized illumination products are made to companies inthese industries who use specialized lighting for industrial inspection andmachine vision applications.

 

Net sales from theCompany’s optical sub-component products were $2,871,000 in the first ninemonths of 2001 compared to $1,960,000 in the comparable period of the prioryear, an increase of 46.5% or $911,000. The increases were largely due toincreased sales of the Company’s phase masks products.

 

Net sales from printer andrecorder products decreased from $1,502,000 in the first nine months of fiscal2000 to $759,000 in the first nine months of fiscal 2001, a decrease of 49.5%or $743,000. As previously disclosed, the Company plans to discontinue theseproduct lines by the end of 2001.

 

#### Cost of Sales

 

Cost of sales was$7,723,000 in the first nine months of fiscal 2001 compared to $8,436,000 inthe comparable period of fiscal 2000, a decrease of 8.5% or $713,000. Thedecrease in cost of sales resulted from a decrease in net sales during the sameperiod.

 

Gross profit was $4,460,000in the first nine months of fiscal 2001 compared to $5,554,000 in thecomparable period of fiscal 2000. Gross margin decreased from 39.7% in fiscal2000 to 36.6% in fiscal 2001. Gross margin decreased primarily because of thedecrease in illumination sales and increased unabsorbed manufacturing costsrelated to the expansion of the Company’s specialty optical fiber andsub-component manufacturing capacity.

 

####  

#### Operating Expenses

 

Selling expenses were$3,122,000 in the nine months ended September 30, 2001, or 25.6% of net sales,compared to $1,401,000 in the comparable period in fiscal 2000, or 10.0% of netsales. Selling expenses increased due to additional staffing and associatedexpenses related to the specialty optical fiber sales and marketing group ofapproximately $385,000 plus higher advertising and other marketing relatedexpenses. General and administrative expenses were $5,997,000 in the first ninemonths of fiscal 2001, or 49.2% of net sales, compared to $2,321,000, or 16.6%of net sales in the comparable period of fiscal 2000. General andadministrative expenses increased primarily due to growth in staffing levels ofadministrative personnel of approximately $827,000 as well as legal andprofessional fees associated with our joint ventures of approximately $720,000.The balance of the general and administrative increase primarily resulted fromhigher spending for administrative services including information technologyservices, investor relations, insurances and occupancy costs. Research anddevelopment expenses were $2,986,000 in the first nine months of fiscal 2001compared to $1,241,000 in the comparable period of fiscal 2000. The researchand development increase represents the Company’s strategy to invest in thespecialty optical fiber and sub-component sector. The increase in research anddevelopment expenses related to our joint ventures was approximately $218,000.

 

#### Interest Expense

 

Interest expense was $513,000in the first nine months of fiscal 2001 compared to $365,000 in 2000. Theincrease in interest expense resulted primarily from borrowings to fund workingcapital.

** **

#### Net Income

 

Net loss for the nine months ended September 30, 2001was $8,314,000 compared to a net loss of $478,000 for the same period in 2000.Net loss from continuing operations for the nine months ended September 30,2001 was $8,123,000 compared to a net loss from continuing operations of$113,000 in the comparable period in 2000. Net loss from discontinuedoperations was $191,000 and $365,000 for the nine months ended September 30,2001 and 2000 respectively.

** **

#### Provision for IncomeTaxes

 

The Company recorded abenefit for income taxes of $96,000 in the nine months ended September 30, 2001compared to a provision of $189,000 in the comparable quarter in 2000. The taxbenefit for the current quarter is a result of operating losses generated inCanada which offset a previously recorded tax provisions in prior years. Thetax provision in the comparable quarter is a result of taxable income generatedin Canada that could not be used to offset operating losses in the UnitedStates.

 

### Liquidity andCapital Resources

 

For the nine months endedSeptember 30, 2001, cash and cash equivalents decreased $2,918,000. Cash usedin operating activities was $4,855,000 in the first nine months of fiscal 2001which primarily resulted from an operating loss of $8,123,000, an increase inpre-paid expenses of $1,142,000 which was partially offset by an increase inaccounts payable of $4,859,000 and depreciation and amortization charges of$1,336,000.

 

Cash of $16,773,000 wasprovided by financing activities, primarily due to the sale of 1,700,000 sharesof common stock at price of $10.25 per share in a May 2001 private placement.Cash used in investing activities was $14,580,000 in the nine months endedSeptember 30, 2001 primarily resulting from purchases of specialty opticalfiber and sub-component production and development equipment, facilityexpansion and an increase in restricted cash required by the Company’s newcredit facility. These increases were partially offset by the net proceeds fromthe sale of the Company’s machine tool and accessories division of $659,000.

 

On May 19, 2001, theCompany entered into a credit agreement with Merrill Lynch Financial Services,Inc. providing total borrowing availability up to $6,000,000. Initial proceedswere used to pay off the credit agreement between the Company and Wells FargoBusiness Credit, Inc. The new credit facility with Merrill Lynch consists of aline of credit of up to $2,500,000 and a reducing revolver in the amount of$3,500,000. As of September 30, 2001, $1,462,000 was outstanding under thereducing revolver and approximately $4,538,000 was available for additionalborrowings. The outstanding principal balance of all advances under this creditfacility bears interest at 2.5% over the one month LIBOR rate. The Company’sobligations under this credit facility are secured by substantially all of theCompany’s assets, excluding real property, as well as a pledge of restrictedcash in the amount of $2,000,000. Theserestrictions will lapse when the Company achieves profitability or at such timeas no balance is outstanding.

 

On December 5, 2000,StockerYale Canada amended its credit agreement with Toronto DominionBank.  The credit agreement provides for(a) a $2,000,000 CDN operating line of credit; (b) a mortgage loan and (c)various term notes totaling up to $1,049,000 CDN. The line of credit bearsinterest at 1% over Toronto Dominion’s prime rate, requires monthly payments ofinterest only, and is payable on demand. As of September 30, 2001,  $3,700,000 CDN ($2,300,000 US) had beenborrowed on the line of credit. The mortgage requires monthly principalpayments of $10,797 CDN (approximately $7,200 US) plus interest at prime rateplus 0.875% and matures in December 2005. As of September 30, 2001, theoutstanding balance on the mortgage was $1,861,778 CDN ($1,179,000 US). Theterm loans require aggregate monthly principal payments of approximately$25,000 CDN ($16,750 US) plus interest ranging from the prime rate plus 1.25%to 2.0% and mature between May 2002 and December 2005. On September 30, 2001,the outstanding aggregate balance on the term loans was $490,000 CDN ($311,000US).

 

The Company’s headquartersin Salem, New Hampshire is subject to a mortgage and note issued to GraniteBank on August 26, 1996 (the “Granite Note”). The Granite Note, in an initialprincipal amount of $1,500,000 is due August 29, 2011. The Granite Note bearsinterest at a rate of 7.50% per annum and is reviewed annually in August. Theprincipal and interest are repayable in 180 equal monthly installments. Inaccordance with the terms of the Granite Note, the Company may prepay amounts outstandingthereunder, in whole or in part, at any time without premium or penalty. As ofSeptember 30, 2001, the outstanding balance on the Granite Note was $1,216,000.

 

On May 20, 1997 the Companyentered into an equipment line of credit agreement with Granite Bank to financecapital equipment related to new product development. The line of creditprovides that equipment purchases will be converted quarterly into a series offive year notes, not to exceed $500,000 in the aggregate, bearing interest atthe bank’s prime rate plus .75%.  As ofSeptember 30, 2001, the Company had borrowed $116,000 pursuant to such line ofcredit.

 

Fromtime to time, the Company explores possible acquisitions of companies orproduct lines and investments in joint ventures with third parties that webelieve will fit with our strategic plan and complement our existing productlines. On October 12, 2000, the Company entered into a joint venture with Dr.Nicolae Miron and formed Optune Technologies, Inc., a Quebec corporation, to developa new class of tunable optical filters. Under the terms of this joint venturearrangement, the Company has a 49% equity interest in Optune and the Companyagreed to fund up to $4.0 million over a two year period pursuant to a fixedschedule. Of this $4,000,000commitment, the Company anticipates funding $1.3 million within the next twelvemonths and $2.1 million over the following twelve months. On April 25,2001, the Company formed Innovative Specialty Optical Fiber Components LLC,(“ISOFC”) with Dr. Danny Wong. ISOFC will pursue the research anddevelopment of new products and technologies involving specialty optical fiberfor telecommunication applications. Under the terms of the agreement, theCompany acquired a 60% equity interest in the entity and agreed to contributeup to $7,000,000 in financing over a two year period. The Company currently anticipates funding approximately$2.2 million of this commitment over the next twelve months and $4.8 millionover the following twelve months. These arrangements will require theCompany to fund a significant amount of research and development costs at bothjoint ventures, which may require the Company to obtain additional financingthrough the future issuance of equity or debt securities or future borrowings.

 

Periodically, the Company considers raising additionalcapital by the issuance of equity securities or debt financing, the proceeds ofwhich may be used, among other things, to fund working capital needs or futureacquisitions and joint ventures. Assuming the Company’s borrowing base remainsat its current level or higher, the Company believes, that its availablefinancial resources are adequate to meet foreseeable working capital, debtservice and capital requirements through the next twelve months.

 

 

**PART II**

** **

**ITEM1.  LEGALPROCEEDINGS**

 

At times the Company may beinvolved in disputes and/or litigation with respect to its products andoperations in its normal course of business. The Company does not believe thatthe ultimate impact of the resolution of such matters would have a materialadverse effect on the Company’s financial condition or results of operations.

** **

** **

**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-QSB:

 

Exhibit

Number                               Description

 

 

(b)   No reportswere filed on Form 8-K

 

 

**SIGNATURES**

** **

** **

In accordance with the requirements of the Exchange Act,the registrant caused this report to be signed on its behalf by theundersigned, thereto duly authorized.

 
| StockerYale, Inc. |                                              |
|-------------------|---------------------------------------------------|
|              |                                              |
|              |                                              |
| November 14, 2001 | /s/ Mark W. Blodgett                              |
|              | Mark W. Blodgett,                                 |
|              | Chairman and Chief  Executive Officer             |
|              |                                              |
| November 14, 2001 | /s/ Francis J. O’Brien                       |
|              | Francis J. O’Brien                           |
|              | Executive Vice  President-Chief Financial Officer |

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