STOCKERYALE INC - 10-Q Quarterly Report

U.S. SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF

THE SECURITIES EXCHANGE ACT OF 1934

FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2003

Commission File Number: 0-27372

STOCKERYALE, INC.
(Exact name of registrant as specified in its charter)

Massachusetts		04-2114473
(State of Incorporation)		(I.R.S. Employer Identification Number)

32 Hampshire Road, Salem, New Hampshire 03079
(Address of registrant's principal executive office)

(603) 893-8778
(Registrant's telephone number)

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

As of April 30, 2003 there were 12,696,633 shares of the issuer's common stock outstanding.

STOCKERYALE, INC.

INDEX TO FORM 10-Q

PART I - FINANCIAL INFORMATION

Item 1	Financial Statements (Unaudited)

	Unaudited Condensed Consolidated Balance Sheets at March 31, 2003 and December 31, 2002	1

	Unaudited Condensed Consolidated Statement of Operations for the three months ended March 31, 2003 and 2002	2

	Unaudited Condensed Consolidated Statement of Cash Flows for the three months ended March 31, 2003 and 2002	3

	Notes to Unaudited Condensed Consolidated Financial Statements	4

Item 2	Management's Discussion and Analysis of Financial Condition and Results of Operations	7

Item 3	Quantitative and Qualitative Disclosure About Market Risk	11

Item 4	Controls & Procedures	11


PART II - OTHER INFORMATION

Item 1	Legal Proceedings	11

Item 2	Changes in Securities	11

Item 3	Defaults Upon Senior Securities	11

Item 4	Submission of Matters to a Vote of Security Holders	11

Item 5	Other Information	11

Item 6	Exhibits and Reports on Form 8-K	11

	Signature (s)	12

i / STKR

2003 Form 10-Q

Table of Contents

Part I

Item 1

ITEM 1. FINANCIAL STATEMENTS

UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS

In thousands
	March 31, 2003		December 31, 2002
Assets
Current assets:
Cash and cash equivalents	$	674	$	3,070
Restricted cash		2,000		2,000
Accounts receivable, less reserves of approximately $95 in 2003 and $155 in 2002		2,479		2,200
Inventories		4,871		4,478
Prepaid expenses and other current assets		625		747
Total current assets		10,649		12,495
Property, plant and equipment, net		23,332		23,650
Goodwill, net of accumulated amortization		2,677		2,677
Identified intangible assets, net		1,705		1,785
Officer note receivable		249		249
Other long-term assets		363		464
Total assets	$	38,975	$	41,320
Liabilities and stockholders' equity
Current liabilities:
Current portion of long-term debt, including obligations in default, net of unamortized discount of $239 in 2003 and $269 in 2002	$	6,175	$	5,306
Short-term debt		6,329		7,446
Accounts payable		1,646		2,050
Accrued expenses		1,292		1,399
Short-term portion of capital lease obligation		65		61
Total current liabilities		15,507		16,262
Long-term debt and capital lease obligations		81		96
Commitments and contingencies
Stockholders' equity:
Common stock, par value $0.001-shares authorized 100,000,000; Shares issued and outstanding 12,782,070 and 12,771,524 at March 31, 2003 and December 31, 2002, respectively		13		13
Paid-in capital		68,650		68,637
Accumulated other comprehensive income (loss)		283		(266)
Accumulated deficit		(45,559)		(43,422)
Total stockholders' equity		23,387		24,962
Total liabilities and stockholders' equity	$	38,975	$	41,320

See notes to unaudited condensed consolidated financial statements.

1 / STKR

2003 Form 10-Q

Table of Contents

Part I

Item 1

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

In thousands, except earnings per share

Quarter Ended March 31,



2003



2002

Net sales



$
3,584



$
2,908

Cost of sales

2,635

2,584

Gross profit



949



324

Operating expenses:





Selling expenses



776



1,034

General and administrative



1,228



1,857

Amortization expense



80



88

Research and development



890



1,764

Total operating expenses



2,974



4,743

Operating loss



(2,025
)



(4,419
)

Interest and other income/(expense)



(78 )


9

Interest expense



184


85

Loss from continuing operations before income tax provision (benefit)



(2,287 )


(4,495 )

Income tax expense (benefit)



(150 )


0

Net loss



$
(2,137
)



$
(4,495
)

Basic and diluted loss per share:





Net loss per share



$
(0.17 )
$
(0.36 )

Weighted average shares outstanding:





Basic and diluted



12,782



12,475

See notes to unaudited condensed consolidated financial statements.

2 / STKR

2003 Form 10-Q

Table of Contents

Part I

Item 1

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

In thousands
	Quarter Ended March 31,
	2003			2002
Operations
Net loss	$	(2,137	)	$	(4,495	)

Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization		730			618
Deferred income taxes and other charges		-			(55	)
Other changes in assets and liabilities:
Accounts receivable, net		(279	)		(456	)
Inventories		(393	)		215
Prepaid expenses and other current assets		122			315
Accounts payable		(404	)		(1,670	)
Accrued expenses		(108	)		30
Other assets and liabilities		49			(49	)
Net cash used in operating activities		(2,420	)		(5,547	)
Financing
Proceeds from sale of common stock		13			9,724
Proceeds from term note		985			-
Repayments of bank debt		(1,265	)		330
Decrease in note receivable		31				-
Net cash provided by financing activities		(236	)		10,054
Investing
Proceeds from land sale		306			-
Purchases of property, plant and equipment		(56	)		(188	)
Net investment in joint venture		-			141
Net cash used for investing		250			(47	)
Effect of exchange rates		10			159
Net change in cash and equivalents		(2,396	)		4,619
Cash and equivalents, beginning of year		3,070			1,576
Cash and equivalents, end of year	$	674		$	6,195
Supplemental disclosure of cash flow information:
Interest paid		184			85
Taxes paid		-			52

See notes to unaudited condensed consolidated financial statements.

3 / STKR

2003 Form 10-Q

Table of Contents

Part I

Item 1

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2003

(1) ORGANIZATION AND BASIS OF PRESENTATION

The interim condensed consolidated financial statements presented have been prepared by StockerYale, Inc. (the "Company") are unaudited and, in the opinion of the management, reflect all adjustments of a normal recurring nature necessary for a fair statement of (a) the results of operations for the three months ended March 31, 2003 and 2002, (b) the financial position at March 31, 2003 and December 31, 2002, and (c) the cash flows for the three month periods ended March 31, 2003 and 2002. These interim results are not necessarily indicative of results for a full year or any other interim period.

The unaudited consolidated balance sheet presented as of December 31, 2002, has been derived from the consolidated financial statements that have been audited by the Company's independent auditors. The accompanying financial statements and notes are condensed as permitted by Form 10-Q and do not contain certain information included in the annual financial statements and notes of the Company. The condensed consolidated financial statements and notes included herein should be read in conjunction with the consolidated financial statements and notes included in the Company's Annual Report on Form 10-K for the year ended December 31, 2002.

The Company has prepared the unaudited condensed financial statements on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. The Company is not in compliance with several provisions of its loan agreements and the loans have been classified as current liabilities as of March 31, 2003. The Company will be required to generate sufficient cash flow to meet its obligations on a timely basis through improved operations, refinancing of existing debt and/or additional financing.

The Company has taken action to address these financing issues and expects to close a new credit facility in Canada in May, which, when closed, will bring it into compliance with all debt agreements. Furthermore, the Company is actively pursuing additional financing options, including: a Canadian government development loan, the sale of real estate and a private placement of equity or debt securities.

(2) LOSS PER SHARE

In accordance with Statement of Financial Accounting Standards ("SFAS") No. 128, Earnings per Share, basic and diluted net loss per common share for the three months ended March 31, 2003 and 2002 is calculated by dividing the net loss applicable to common stockholders by the weighted average number of vested common shares outstanding. There were 3,315,943 and 2,311,499 options and 269,500 and 19,500 warrants outstanding as of March 31, 2003 and 2002, respectively, which were not included in the diluted per share calculation because their inclusion would be anti-dilutive.

4 / STKR

2003 Form 10-Q

Table of Contents

Part I

Item 1

(3) INVENTORIES

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

	For the Quarter Ended
(in thousands)	March 31, 2003		December 31, 2002
Finished goods	$	860	$	1,028
Work-in-process	134		101
Raw materials	3,877		3,349
	$	4,871	$	4,478

Management performs periodic reviews of inventory and disposes of items not required by their manufacturing plan and reduces the carrying cost of inventory to the lower of cost or market.

(4) STOCK BASED COMPENSATION

The Company accounts for employee stock options and share awards under the intrinsic-value method prescribed by Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, (APB 25). Accordingly, no compensation cost has been recognized for stock option grants since the options granted to date have exercise prices per share of not less than the fair value of the Company's stock at the date of the grant. Had the Company determined the stock-based compensation expense for the Company's stock options under the provisions of Statement of Financial Accounting Standards No. 123, Accounting for Stock Based Compensation, the Company's net loss and net loss per share based upon the fair value at the grant date for stock options awards for the quarter ended in 2003 and 2002, would have increased the pro-forma amounts as indicated below:


(in thousands)	For the Quarter Ended March 31,
Net loss		2003			2002
As reported	$	(2,137	)	$	(4,495	)
Additional compensation expense		(1,076	)		(850	)
Pro forma	$	(3,213	)		(5,345	)
Net loss per share (basic and diluted)
As reported	$	(0.17	)	$	(0.36	)
Pro forma		(0.25	)		(0.43	)

The fair value of options at the date of grant were estimated using the Black-Scholes option pricing model with the following assumptions:


	For the Quarter Ended March 31,
	2003	2002
Volatility	114%	112%
Expected option life-years from vest

In thousands, except earnings per share
	Quarter Ended March 31,
	2003			2002
Net sales	$	3,584		$	2,908

Cost of sales		2,635			2,584
Gross profit		949			324
Operating expenses:
Selling expenses		776			1,034
General and administrative		1,228			1,857
Amortization expense		80			88
Research and development		890			1,764
Total operating expenses		2,974			4,743
Operating loss		(2,025	)		(4,419	)
Interest and other income/(expense)		(78	)		9
Interest expense		184			85
Loss from continuing operations before income tax provision (benefit)		(2,287	)		(4,495	)
Income tax expense (benefit)		(150	)		0
Net loss	$	(2,137	)	$	(4,495	)
Basic and diluted loss per share:
Net loss per share	$	(0.17	)	$	(0.36	)
Weighted average shares outstanding:
Basic and diluted		12,782			12,475