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U.S.
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB/A-2
/x/ |
QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2001
Commission file number 0-5460
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)
Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes /x/ No / /
As of July 31, 2001 there were 10,578,236 shares of the issuer's common stock outstanding.
Transitional Small Business Disclosure Format (check one): Yes / / No /x/
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND OPERATING RESULTS
This Quarterly Report on Form 10-QSB contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Our actual results could differ materially from those set forth in the forward-looking statements. When we use words such as "anticipate," "believe," "estimate," "expect," "intend," and other similar expressions, they generally identify forward-looking statements. Forward-looking statements include, for example, statements relating to acquisitions and related financial information, development activities, business strategy and prospects, future capital expenditures, sources and availability of capital, environmental and other regulations and competition. Investors should exercise caution in interpreting and relying on forward-looking statements since they involve known risks, uncertainties and other factors which are, in some cases, beyond our control and could materially affect our actual results, performance or achievements. Such factors include, without limitation: market conditions that could make it more difficult or expensive for the Company to obtain the necessary capital to finance its joint ventures and facilities expansion; the existence of other independent suppliers of optical fiber, who may have greater resources than the Company; the existence and availability of acquisition and joint venture opportunities that will compliment our existing product lines; and the uncertainty that the Company's significant investments in R&D will result in products that achieve market acceptance. Additional such factors are discussed in the Section entitled "Certain Factors Affecting Future Operating Results" on page 12 of the Company's Annual Report on Form 10-KSB for the fiscal year ended December 31, 2000.
Results of Operations
The following discussion should be read in conjunction with the attached consolidated financial statements and notes thereto and with our audited financial statements and notes thereto included in our Annual Report on Form 10-KSB for the year ended December 31, 2000.
Fiscal Quarters Ended June 30, 2001 and 2000
Net Sales
Net sales were $3.6 million in the three months ended June 30, 2001 compared to $5.0 million in the second fiscal quarter of 2000, a decrease of 28% or $1.4 million.
Net sales from our specialized illumination products were $2.7 million in the second quarter of 2001 compared to $3.7 million in the comparable quarter in 2000, a decrease of 27.0% or $1.0 million. The decrease was primarily caused by a reduction in demand due to a general slow-down in the semi-conductor and related industries. The majority of our sales of specialized illumination products are made to companies in these industries who use specialized lighting for industrial inspection and machine vision applications.
Net sales from our optical sub-component products were $715,000 in the second quarter of 2001 compared to $736,000 in the comparable quarter in 2000, a decrease of 2.9% or $21,000. The decrease was largely due to the shut down of phase mask production in order to complete construction of a state of the art clean room, which will provide improved quality and efficiency in the phase mask manufacturing process. Accordingly, our backlog for phase masks from $1.6 million prior to the shut-down to approximately $2.5 million as of June 30, 2001. At this point, we anticipate filling the orders which comprise the backlog, but we cannot guarantee that certain of these orders will not be canceled. In addition, a general slow-down in the telecommunications industry also contributed to lower than expected sales of our optical sub-component products.
Net sales from printer and recorder products decreased from $535,000 in the second quarter of fiscal 2000 to $225,000 in the comparable quarter of fiscal 2001, a 58.0% decrease. As previously disclosed, we plan to discontinue these product lines by the end of 2001.
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Cost of Sales
Cost of sales were $2.4 million in the second quarter of fiscal 2001 compared to $3.1 million in the comparable quarter of fiscal 2000, a decrease of 23.7% or $734,000. The decrease in cost of sales resulted from the decrease in net sales during the same period.
Gross profit was $1.2 million in the second quarter of fiscal 2001 compared to $1.9 million in the comparable quarter of 2000 as a result of decreased net sales. Gross margin decreased from 38.3% in 2000 to 34.6% in 2001. The decrease in gross margin resulted primarily from increased unabsorbed manufacturing costs due to the shortfall of shipments during the quarter combined with the expansion of our manufacturing capacity.
Operating Expenses
Selling expenses were $1.0 million in the three months ended June 30, 2001, or 27.9% of net sales, compared to $433,000 in the comparable quarter in 2000, or 8.6% of net sales. General and administrative expenses were $2.5 million in the second quarter of fiscal 2001, or 70.4% of net sales, compared to $822,000, or 16.4% of net sales in the comparable quarter of fiscal 2000. Selling expenses increased due to the additional staffing and associated expenses related to the specialty optical fiber sales and marketing group of approximately $200,000, and an increase in provision for bad debts of $100,000; the balance of the increase primarily resulted from higher advertising and other marketing related expenses. General and administrative expenses increased primarily due to growth in staffing levels of administrative personnel and associated salaries and benefits of approximately $500,000, non-recurring charges of approximately $350,000 relating to legal and professional fees associated with our joint ventures, filing fees associated with the increase in authorized shares and moving costs associated with our new Montreal facility; the balance of the increase, approximately $828,000; primarily resulted from increases in other administrative expenses, including information technology services, investor relations services, insurance and occupancy costs. Research and development expenses were $1.1 million in the second quarter of fiscal 2001 compared to $275,000 in the comparable quarter of 2000; reflecting our strategy of making significant investments in research and development for our specialty optical fiber and optical sub-component products. The increase in research and development expenses related to our joint ventures was approximately $92,000.
Interest Expense
Interest expense was $178,000 in the second quarter of fiscal 2001 compared to $121,000 in 2000. The increase in interest expense resulted primarily from borrowings to fund operating losses and working capital.
Net Income
Net loss for the three months ended June 30, 2001 was $3.6 million compared to a net loss of $395,000 for the same period in 2000. Net loss from continuing operations for the second quarter of 2001 was $3.6 million compared to a net loss from continuing operations of $250,000 in the comparable quarter of 2000. Net loss from discontinued operations for the second quarter of 2000 was $145,000. These operations were discontinued as of December 31, 2000.
Provision for Income Taxes
We recorded a benefit for income taxes of $158,000 in the fiscal quarter ended June 30, 2001 compared to a tax provision of $113,000 in the comparable quarter in 2000. The tax benefit for the current quarter is a result of operating losses generated in Canada which offset a previously recorded tax provision. The tax provision in the comparable quarter is a result of taxable income generated in Canada that could not be used to offset operating losses in the United States.
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First Six Months of Fiscal 2001 and 2000
Net Sales
Net sales were $8.5 million in the six months ended June 30, 2001 compared to $8.9 million in the comparable period of fiscal quarter of 2000, a decrease of 4.6% or $414,000.
Net sales from our specialized illumination products were $6.3 million in the first six months of 2001 compared to $6.8 million in the comparable period of the prior year, a decrease of 7.7% or $530,000. The decrease was primarily caused by a reduction in demand due to a general slow-down in the semi-conductor and related industries. The majority of our sales of specialized illumination products are made to companies in these industries who use specialized lighting for industrial inspection and machine vision applications.
Net sales from our optical communication sub-component products were $1.7 million in the first six months of 2001 compared to $1.2 million in the comparable period of the prior year, an increase of 43.2% or $508,000. The increase was primarily due to strong demand for our phase mask products. In order to meet current demand, we have completed construction of a state of the art clean room that will increase production capacity and improve quality.
Net sales from printer and recorder products decreased from $923,000 in the first six months of 2000 to $531,000 in the first six months of fiscal 2001, a 42.5% decrease. As previously disclosed, we plan to discontinue these product lines by the end of 2001.
Cost of Sales
Cost of sales was $5.1 million in the first six months of fiscal 2001 compared to $5.4 million in the comparable period of fiscal 2000, a decrease of 6.7% or $363,000. The decrease in cost of sales resulted from a decrease in net sales during the same period.
Gross profit was $3.5 million in the first six months of fiscal 2001 compared to $3.5 million in the comparable period of fiscal 2000. Gross margin increased from 39.4% in fiscal 2000 to 40.7% in fiscal 2001 resulting from a favorable product mix, which was partially offset by higher manufacturing costs.
Operating Expenses
Selling expenses were $1.8 million in the six months ended June 30, 2001, or 21.6% of net sales, compared to $858,000 in the comparable period in fiscal 2000, or 9.6% of net sales. General and administrative expenses were $3.9 million in the first six months of fiscal 2001, or 45.4% of net sales, compared to $1.4 million, or 15.8% of net sales in the comparable period of fiscal 2000. Selling expenses increased due to the additional staffing and associated expenses related to the specialty optical fiber sales and marketing group of approximately $260,000 and an increase in provision for bad debts of $150,000; the balance of the increase primarily resulted from higher advertising, travel and other marketing related expenses. General and administrative expenses increased primarily due to growth in staffing levels of administrative personnel and associated salaries and benefits of approximately $955,000, non-recurring charges of approximately $500,000 relating to legal and professional fees associated with our joint ventures and other transactions, filing fees associated with the increase in authorized shares and moving costs associated with our new Montreal facility; the balance of the increase, approximately $1,045,000, primarily resulted from increases in other administrative expenses, including information technology services, investor relations services, insurance and occupancy costs. Research and development expenses were $1.7 million in the first six months of fiscal 2001 compared to $504,000 in the comparable period of fiscal 2000, reflecting our strategy of making significant investments in research and development for our specialty optical fiber and optical sub-component products. The increase in research and development expenses related to our joint ventures was approximately $110,000.
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Interest Expense
Interest expense was $289,000 in the first six months of fiscal 2001 compared to $249,000 in 2000. The increase in interest expense resulted primarily from borrowings to fund operating losses and working capital.
Net Income
Net loss for the six months ended June 30, 2001 was $4.3 million compared to a net loss of $421,000 for the same period in 2000. Net loss from continuing operations for the six months ended June 30, 2001 was $4.3 million compared to a net loss from continuing operations of $114,000 in the comparable period in 2000. Net loss from discontinued operations for the six months ended June 30, 2000 was $307,000. These operations were discontinued as of December 31, 2000.
Provision for Income Taxes
We recorded a benefit for income taxes of $64,000 in the six months ended June 30, 2001 compared to a tax provision of $132,000 in the comparable quarter in 2000. The tax benefit is a result of certain research and development tax credits from our Canadian operations. The tax provision in the comparable quarter is a result of taxable income generated in Canada that could not be used to offset operating losses in the United States.
Liquidity and Capital Resources
On May 31, 2001, the Company completed a private placement of 1,700,000 shares of common stock at a price of $10.25 per share with net proceeds of approximately $16.1 million. We intend to use the proceeds of this private placement to partially fund operating losses, capital expenditures related to the expansion of our facilities (described in greater detail below), fund our obligations to joint ventures and for general working capital purposes. For the six months ended June 30, 2001, cash and cash equivalents increased $3.8 million. Cash used in operating activities was $5.8 million in the first six months of fiscal 2001, which primarily resulted from an operating loss of $4.3 million and an increase in inventories of $1.1 million, which was partially offset by depreciation and amortization and changes in working capital to fund our continued strategic investment in specialty optical fiber and optical sub-components.
Due to declines in the semi-conductor and related industries and in the telecommunication industry, some of our customers postponed the delivery dates for their orders, resulting in an increase in our inventory. Currently, we do not anticipate that these delayed orders will be canceled but we cannot guarantee that such customers will not cancel a portion of these orders. 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.
Cash of $18.3 million was provided by financing activities, primarily due to the receipt of $16.1 million from the sale of common stock in the above private placement and net proceeds from bank debt of $2.1 million. Cash used in investing activities was $8.7 million in the six months ended June 30, 2001; primarily resulting from the purchase of production and development equipment and facility expansion and increased restricted cash related to the line of credit.
As part of our strategic plan to expand our specialty optical fiber production capabilities, we have begun the construction of a 14,000 square foot addition to our existing Salem facility. This building will be used for research and development of specialty optical fiber and optical sub-components, and will house equipment such as MCVD systems, drawing towers and other optical measuring equipment. We anticipate that the project will cost approximately $7 million, which will need to be funded within the next twelve months. We believe that we will be able to finance a significant portion of this project through long-term financing arrangements, although we can have no assurance at this time as to the availability and terms of any such financing.
On May 19, 2001, we entered into a credit agreement with Merrill Lynch Financial Services, Inc. providing total borrowing availability up to $6,000,000. Initial proceeds were used to pay off the credit
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agreement between us and Wells Fargo Business Credit, Inc. The new credit 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 June 30, 2001, $1,440,000 was outstanding under the reducing revolver and approximately $4,560,000 was available for additional borrowings. The outstanding principal balance of all advances under this credit facility bears interest at 2.5% over the one month LIBOR rate. Our obligations under this credit facility are secured by substantially all of our assets other than real property along with a pledge of restricted cash in the amount of $2,000,000. These restrictions will lapse when we achieve profitability or at such time as no balance is outstanding.
On December 5, 2000, StockerYale Canada amended its credit agreement with Toronto Dominion Bank. 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 bears interest at 1% over Toronto Dominion's prime rate, requires monthly payments of interest only, and is payable on demand. As of June 30, 2001, $2,869,000 CDN ($1,894,000 US) had been borrowed on the line of credit. The mortgage requires monthly principal payments of $10,797 CDN (approximately $7,200 US) plus interest at prime rate plus 0.870% and matures in December 2005. As of June 30, 2001, the outstanding balance on the mortgage was $1,878,717 CDN ($1,240,000 US).
The term loans require aggregate monthly principal payments of approximately $25,000 CDN ($16,750 US) plus interest ranging from the prime rate plus 1.20% to 2.0% and mature between May 2002 and December 2005. On June 30, 2001, the outstanding aggregate balance on the term loans was $383,124 CDN ($252,939 US).
Our headquarters in Salem, New Hampshire is subject 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 $1,500,000 is due August 29, 2011. The Granite Note bears interest at a rate of 10% per annum and is reviewed annually in August. The principal and interest are repayable in 180 equal monthly installments. In accordance with the terms of the Granite Note, we may prepay amounts outstanding thereunder, in whole or in part, at any time without premium or penalty. As of June 30, 2001, the outstanding balance on the Granite Note was $1,232,000.
On May 20, 1997 we entered into an equipment line of credit agreement with Granite Bank to finance capital equipment related to new product development. The line of credit provides that equipment purchases will be converted quarterly into a series of five year notes, not to exceed $500,000 in the aggregate, bearing interest at the bank's prime rate plus .75%. As of June 30, 2001, we had borrowed $136,000 pursuant to such line of credit.
From time to time, we explore possible acquisitions of companies or product lines and investments in joint ventures with third parties that we believe will fit with our strategic plan and complement our existing product lines. On October 12, 2000, we entered into a joint venture with Dr. Nicolae Miron and formed Optune Technologies, Inc., a Quebec corporation, to develop a new class of tunable optical filters. Under the terms of this joint venture arrangement, we own a 49% equity interest in Optune and we agreed to contribute an aggregate of $4,000,000 to be made over a two year period pursuant to a fixed schedule. Of this $4,000,000 commitment, we currently anticipate funding $1.3 million within the next twelve months and $2.1 million over the following twelve months. On April 25, 2001, we formed a limited liability company with Dr. Danny Wong called Innovative Specialty Optical Fiber Components LLC, which will pursue the research and development of new products and technologies involving specialty optical fiber for telecommunication applications. Under the terms of our agreement, we acquired a 60% equity interest in the entity and agreed to contribute up to $7,000,000 in financing. We currently anticipate funding approximately $2.2 million of this commitment over the next twelve months and $4.8 million over the following twelve months. These arrangements will require us to fund a significant amount of research and development costs at both joint ventures, which may require us to obtain additional financing through the future issuance of equity or debt securities or future borrowings.
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Periodically, we contemplate raising additional capital by the issuance of equity securities, the proceeds of which may be used, among other things, to fund working capital need or future acquisitions and joint ventures. We believe that our available financial resources are adequate to meet foreseeable working capital, debt service and capital expenditure requirements through the next twelve months.
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SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereto duly authorized.
| | STOCKERYALE, INC. |
October 10, 2001 |
/s/ MARK W. BLODGETT
Mark W. Blodgett,
Chairman and Chief Executive Officer |
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND OPERATING RESULTSSIGNATURES
