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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2007
Commission file number: 000-27372
StockerYale, Inc.
(Exact name of small business issuer as specified in its charter)
Massachusetts | 04-2114473 | |
(State or 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) |
Issuer’s telephone number: (603) 893-8778
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 ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x
As of November 14, 2007, there were 38,098,177 shares of the issuer’s common stock outstanding.
Transitional Small Business Disclosure Format (Check one): Yes ¨ No x
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INDEX TO FORM 10-QSB
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PART I – FINANCIAL INFORMATION
CONDENSED CONSOLIDATED BALANCE SHEETS
In thousands except share and per share data
Unaudited
September 30, 2007 | December 31, 2006 | |||||||
Assets | ||||||||
Current assets: | ||||||||
Cash and cash equivalents | $ | 2,480 | $ | 1,366 | ||||
Restricted cash | 17 | 11 | ||||||
Accounts receivable less allowances of $58 at September 30, 2007 and $54 at December 31, 2006 | 4,924 | 3,868 | ||||||
Inventories | 4,205 | 4,015 | ||||||
Prepaid expenses and other current assets | 621 | 536 | ||||||
Current assets – discontinued operations | — | 36 | ||||||
Total current assets | 12,247 | 9,832 | ||||||
Net property, plant and equipment | 10,882 | 11,255 | ||||||
Goodwill | 8,197 | 7,957 | ||||||
Acquired intangible assets, net | 3,931 | 4,691 | ||||||
Other long-term assets | 1,023 | 1,244 | ||||||
Total assets | $ | 36,280 | $ | 34,979 | ||||
Current liabilities: | ||||||||
Current portion of long-term debt, net of unamortized discount of $569 at September 30, 2007 and $247 at December 31, 2006 | $ | 1,855 | $ | 2,322 | ||||
Current portion of capital lease obligations | 154 | 124 | ||||||
Current portion of financing lease obligation | 507 | 507 | ||||||
Accounts payable | 3,300 | 3,136 | ||||||
Accrued expenses | 2,260 | 2,411 | ||||||
Current liabilities – discontinued operations | — | 41 | ||||||
Total current liabilities | 8,076 | 8,541 | ||||||
Long-term debt, net of unamortized discount of $871 at September 30, 2007 and $1,505 at December 31, 2006 | 10,992 | 9,512 | ||||||
Capital lease obligations | 406 | 313 | ||||||
Financing lease obligation | 3,143 | 3,171 | ||||||
Deferred income taxes | 1,094 | 1,252 | ||||||
Total liabilities | 23,711 | 21,537 | ||||||
Stockholders’ equity: | ||||||||
Common stock, par value $0.001; shares authorized 100,000,000; 35,884,606 shares issued and outstanding at September 30, 2007 (excluding 1,995,615 of unvested restricted stock) and 31,960,462 at December 31, 2006 (excluding 1,272,088 of unvested restricted stock) | 36 | 32 | ||||||
Paid-in capital | 98,987 | 94,700 | ||||||
Accumulated other comprehensive income | 3,447 | 2,269 | ||||||
Accumulated deficit | (89,901 | ) | (84,811 | ) | ||||
Total stockholders’ equity | 12,569 | 12,190 | ||||||
Total liabilities and stockholders’ equity | $ | 36,280 | $ | 34,979 | ||||
See notes to unaudited condensed consolidated financial statements.
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CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Unaudited
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2007 | 2006 | 2007 | 2006 | |||||||||||||
In thousands except per share data | ||||||||||||||||
Net sales | $ | 7,917 | $ | 4,534 | $ | 22,343 | $ | 13,528 | ||||||||
Cost of sales | 5,261 | 2,974 | 14,822 | 8,552 | ||||||||||||
Gross profit | 2,656 | 1,560 | 7,521 | 4,976 | ||||||||||||
Operating expenses: | ||||||||||||||||
Selling expenses | 1,045 | 558 | 3,031 | 1,808 | ||||||||||||
General and administrative expenses | 1,469 | 1,020 | 4,443 | 3,312 | ||||||||||||
Research and development expenses | 665 | 646 | 2,249 | 2,054 | ||||||||||||
Amortization expense | 313 | 80 | 931 | 239 | ||||||||||||
Total operating expenses | 3,492 | 2,304 | 10,654 | 7,413 | ||||||||||||
Loss from operations | (836 | ) | (744 | ) | (3,133 | ) | (2,437 | ) | ||||||||
Interest (income) and other (income) expense, net | (6 | ) | 130 | 253 | 98 | |||||||||||
Amortization of debt discount and financing costs | 226 | 211 | 1,049 | 512 | ||||||||||||
Interest expense | 356 | 179 | 955 | 501 | ||||||||||||
Loss from continuing operations before income taxes | (1,412 | ) | (1,264 | ) | (5,390 | ) | (3,548 | ) | ||||||||
Income tax provision (benefit) | (74 | ) | — | (211 | ) | — | ||||||||||
Loss from continuing operations | $ | (1,338 | ) | $ | (1,264 | ) | $ | (5,179 | ) | $ | (3,548 | ) | ||||
Income from discontinued operations | 28 | 24 | 89 | 9 | ||||||||||||
Net loss | (1,310 | ) | (1,240 | ) | (5,090 | ) | (3,539 | ) | ||||||||
Basic and diluted net loss per share from continuing operations | $ | (0.04 | ) | $ | (0.04 | ) | $ | (0.15 | ) | $ | (0.12 | ) | ||||
Basic and diluted net loss per share from discontinued operations | $ | 0.00 | $ | 0.00 | $ | 0.00 | $ | 0.00 | ||||||||
Basic and diluted net loss per share | $ | (0.04 | ) | $ | (0.04 | ) | $ | (0.15 | ) | $ | (0.12 | ) | ||||
Weighted average shares outstanding: | ||||||||||||||||
Basic and diluted | 35,124 | 29,251 | 34,479 | 28,817 | ||||||||||||
See notes to unaudited condensed consolidated financial statements.
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CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Unaudited
Nine Months Ended September 30, | ||||||||
2007 | 2006 | |||||||
In thousands | ||||||||
Operations | ||||||||
Net loss | $ | (5,090 | ) | $ | (3,539 | ) | ||
Income (Loss) from discontinued operations | 89 | 9 | ||||||
Loss from continuing operations | $ | (5,179 | ) | $ | (3,548 | ) | ||
Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||
Stock based compensation | 365 | 286 | ||||||
Depreciation and amortization | 2,385 | 1,628 | ||||||
Amortization of debt discount and financing costs | 1,049 | 512 | ||||||
Non-cash interest expense | 227 | 161 | ||||||
Other changes in assets and liabilities: | ||||||||
Accounts receivable | (633 | ) | (302 | ) | ||||
Inventories | 252 | 187 | ||||||
Prepaid expenses and other current assets | (21 | ) | (140 | ) | ||||
Accounts payable | (117 | ) | 251 | |||||
Accrued expenses | (532 | ) | (456 | ) | ||||
Other assets and liabilities | 29 | 264 | ||||||
Net cash used in continuing operations | (2,175 | ) | (1,157 | ) | ||||
Net cash provided by discontinued operations | 84 | 352 | ||||||
Net cash used in operating activities | (2,091 | ) | (805 | ) | ||||
Financing | ||||||||
Net proceeds from exercise of stock options | 104 | 20 | ||||||
Net proceeds from sale of common stock | 2,233 | — | ||||||
Net proceeds from exercise of warrants | 1,227 | — | ||||||
Proceeds from revolving credit facility, net | 174 | 2,528 | ||||||
Proceeds from issuance of note payable | 2,343 | — | ||||||
Principal repayment of short-term debt | (692 | ) | (2,302 | ) | ||||
Principal repayment of long-term debt | (1,171 | ) | (1,091 | ) | ||||
Restricted cash related to credit facilities | (6 | ) | — | |||||
Debt issuance costs | (121 | ) | (210 | ) | ||||
Net cash provided by (used in) continuing operations | 4,091 | (1,055 | ) | |||||
Net cash provided by (used in) discontinued operations | — | — | ||||||
Net cash provided by (used in) financing activities | 4,091 | (1,055 | ) | |||||
Investing | ||||||||
Net proceeds from sale of assets | — | 90 | ||||||
Payments of financing obligation | (254 | ) | (254 | ) | ||||
Purchases of property, plant and equipment | (520 | ) | (242 | ) | ||||
Net cash used in continuing operations | (774 | ) | (406 | ) | ||||
Net cash provided by discontinued operations | 63 | 331 | ||||||
Net cash provided by (used in) investing activities | (711 | ) | (75 | ) | ||||
Effect of exchange rates | (175 | ) | 190 | |||||
Net change in cash and cash equivalents | 1,114 | (1,745 | ) | |||||
Cash and cash equivalents, beginning of period | 1,366 | 3,427 | ||||||
Cash and cash equivalents, end of period | $ | 2,480 | $ | 1,682 | ||||
Supplemental disclosure of cash flow information: | ||||||||
Interest paid | $ | 949 | $ | 468 | ||||
Supplemental disclosure on non-cash investing and financing activities: | ||||||||
Common stock issued with note payable | 362 | 758 | ||||||
Acquisition of equipment under capital lease | 196 | — | ||||||
Issuance of restricted stock | 1,549 | 1,032 |
See notes to unaudited condensed consolidated financial statements.
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NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(1) ORGANIZATION AND BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have been prepared by StockerYale, Inc. (the “Company”) and, in the opinion of management, reflect all adjustments of a normal recurring nature necessary for a fair statement of (a) the results of operations for the three and nine month periods ended September 30, 2007 and 2006, (b) the financial position at September 30, 2007 and December 31, 2006, and (c) the cash flows for the nine month periods ended September 30, 2007 and 2006. These interim results are not necessarily indicative of results for a full year or any other interim period.
The accompanying consolidated financial statements and notes are condensed as permitted by Form 10-QSB and do not contain certain information included in the annual financial statements and notes of the Company. These unaudited condensed consolidated financial statements and notes should be read in conjunction with the consolidated financial statements and notes included in the Company’s Annual Report on Form 10-KSB for the year ended December 31, 2006.
The Company’s current forecast for the remainder of 2007 and 2008, call for increased revenue, improved cash flow and improved asset turnover. It also calls for continued investments in sales and marketing, production and information technology that may or will impact near-term profitability. The Company intends to pursue various options to finance any acquisitions and also to fund operations, as necessary. On January 26, 2007, the Company sold and issued 2,000,000 shares of its common stock at a per share purchase price of $1.15 and a warrant to purchase 1,000,000 shares of its common stock at an exercise price of $1.72 per share to Smithfield Fiduciary LLC for an aggregate purchase price of $2,300,000. On June 19, 2007, the Company and Laurus entered into a Note Amendment Agreement to the secured term note, which is fully described in Note 12. The amendment extended the maturity date of the December 30, 2005 note from December 30, 2008 to June 30, 2010.
(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 nine months ended September 30, 2007 and 2006 is calculated by dividing the net loss applicable to common stockholders by the weighted average number of vested common shares outstanding.
Common stock equivalents that were outstanding as of September 30, 2007 and 2006, but were considered anti-dilutive securities and excluded from the diluted net loss per share calculations, were as presented below:
September 30, | ||||
2007 | 2006 | |||
Options outstanding | 2,480,901 | 3,381,321 | ||
Warrants outstanding | 6,448,316 | 4,589,058 | ||
Unvested restricted stock grants | 1,995,615 | 1,309,728 | ||
Total anti-dilutive common stock equivalents | 10,924,832 | 9,280,107 | ||
(3) REVENUE RECOGNITION
The Company recognizes revenue from sales of standard and customized products and funded research and development and product development for commercial companies and government agencies. The Company recognizes revenue in accordance with SEC Staff Accounting Bulletin No. 101,“Revenue Recognition in Financial Statements”(“SAB 101”) as updated by Staff Accounting Bulletin (“SAB”) 104,Revenue Recognition and Emerging Issues Task Force (“EITF”) 00-21,Revenue Arrangements with Multiple Deliverables.
The Company recognizes revenue from product sales at the time of shipment and when persuasive evidence of an arrangement exists, performance of the Company’s obligation is complete, the price to the buyer is fixed or determinable, and collectibility is reasonably assured. The Company’s non-standard products are limited to components supplied to original equipment manufacturers and produced in accordance with a customer-approved design. Non-standard product revenue is recognized when the criteria for acceptance has been met. Title to the product generally passes upon shipment, as products are generally shipped FOB shipping point. In certain limited situations, distributors have the right to return products. Such rights of return have not precluded revenue recognition because the Company has a long history with such returns and accordingly is able to estimate a reserve for their cost.
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Revenues from funded research and development and product development for is recognized based on contractual arrangements, which may be based on cost reimbursement or fixed fee-for-service models. Revenue from reimbursement contracts is recognized as services are performed. On fixed-price contracts, revenue is generally recognized on a percentage of completion basis based on proportion of costs incurred to the total estimated costs of the contract. When the current estimates of total contract revenue and contract costs indicate a loss, a provision for the entire loss on the contract is recorded.
If a contract involves the provision of multiple elements and the elements qualify for separation under EITF 00-21, total estimated contract revenue is allocated to each element based on the relative fair value of each element provided. The amount of revenue allocated to each element is limited to the amount that is not contingent upon the delivery of another element in the future. Revenue is then recognized for each element as described above.
(4) WARRANTY
The Company provides warranties on most of its products for periods of between one to two years. The warranty is limited to the cost of the product and the Company will repair or replace the product as required. The Company monitors the actual warranty repair costs and trends versus the reserve as a percent of sales. The Company annually adjusts the warranty provision based on the actual experience and for any particular known instances.
Warranty Reserves:
Nine Months Ended September 30 | ||||||||
2007 | 2006 | |||||||
In thousands | ||||||||
Balance at beginning of period | $ | 231 | $ | 208 | ||||
Charges to costs and expenses | 80 | 149 | ||||||
Account write-offs and other deductions | (85 | ) | (123 | ) | ||||
Balance at end of period | $ | 226 | $ | 234 | ||||
(5) ACQUISITION
Acquisition of Photonic Products Ltd.
On October 31, 2006, the Company entered into a Stock Purchase Agreement with the stockholders of Photonic Products Ltd. to acquire all of the outstanding stock of privately held Photonic Products Ltd., a provider of laser diode modules and laser diodes for industrial, medical and scientific markets. Under the terms of the transaction, StockerYale paid to the stockholders of Photonics Products Ltd. an aggregate of $9.4 million for 100% of the outstanding stock of Photonic Products Ltd. consisting of (i) US$4,250,000 of cash in the aggregate from StockerYale (UK) Ltd. to the stockholders of Photonic Products Ltd., (ii) bonds issued by StockerYale (UK) Ltd. to each of the stockholders of Photonic Products Ltd. with an aggregate initial principal amount equal to US$2,400,000, and (iii) 2,680,311 shares of the Company’s common stock, valued at approximately $2,780,000. The Company also agreed to an earnout agreement with some of the stockholders of Photonic Products Ltd. contingent upon specified financial targets being met over the three years following the acquisition in an amount up to 439,966 pounds sterling to be made in either cash or common stock of the Company, at the sole discretion of StockerYale. The Company filed a registration statement on Form S-3 on January 29, 2007 to register the shares of its common stock issued to the stockholders of Photonic Products Ltd. The registration statement became effective February 14, 2007. The results of Photonic Products Ltd. have been included in the Company’s financial statements from the date of acquisition.
The valuation of the Company’s stock was set using an average closing price of the Company’s common stock on the Nasdaq Stock Market over the five trading days immediately preceding and including the acquisition date. See details of the financing for this acquisition at Note 12.
Based on a valuation prepared by an independent third-party appraisal firm using assumptions provided by management, the purchase price for Photonic Products Ltd. was allocated among the tangible assets and its intellectual property. The fair value of brand and trade names was based on the relief from royalty method; the fair value of designs and development and other technology was based on replacement cost and distributor and customer contracts and relationships were valued using the discounted cash flow method. The rate used to discount the cash flows of 26.65% was based on the forecast figures and assumptions provided by management and the risk associated with achieving the growth forecast.
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The total purchase price, which included the related acquisition costs of approximately $332,000, exceeded the appraised fair value of the acquired identified net assets by $5.1 million, which was allocated to goodwill. Goodwill is not deductible for tax purposes. The change in the gross carrying amount of goodwill from December 31, 2006 is due to the foreign exchange impact of the British pound currency. The following represents the allocation of the aggregate purchase price to the acquired net assets of Photonic Products Ltd.:
Purchase Price: | ||||
Cash | $ | 4,250,000 | ||
Amount due seller | 2,400,000 | |||
Direct acquisition costs | 332,113 | |||
Value of common stock issued | 2,779,482 | |||
Total purchase consideration paid | $ | 9,761,595 | ||
Fair value of assets acquired and liabilities assumed: | ||||
Cash | $ | 202,454 | ||
Accounts receivable | 1,361,703 | |||
Inventory | 1,447,560 | |||
Property, plant and equipment | 751,073 | |||
Goodwill | 5,124,300 | |||
Identifiable intangible assets | 4,193,654 | |||
Accounts payable and accrued expenses | (1,591,602 | ) | ||
Term loan | (88,062 | ) | ||
Capital lease obligations | (381,389 | ) | ||
Deferred tax liability | (1,258,096 | ) | ||
Total Purchase consideration made | $ | 9,761,595 | ||
The acquired intangible assets that are subject to amortization have a weighted average useful life of approximately 5.6 years. These assets will be amortized over their respective useful lives.
Pro Forma Financial Information
The following unaudited pro forma financial information presents the combined results of operations of StockerYale, Inc. and Photonic Products Ltd. as if the acquisition had occurred as of the beginning of fiscal 2006, after giving effect to certain adjustments, including amortization of intangibles. The unaudited pro forma financial information may not reflect the results of operations that would have occurred had the combined companies constituted a single entity during such periods, and may not be indicative of the results which may be obtained in the future.
Three months September 30, 2006 | Nine months ended | |||||||
(in thousands except per share data) | ||||||||
Pro forma revenues | $ | 6,788 | $ | 20,424 | ||||
Pro forma loss from continuing operations | (1,836 | ) | (3,971 | ) | ||||
Pro forma net loss | (1,812 | ) | (3,962 | ) | ||||
Pro forma earnings per share from continuing operations | ||||||||
Basic | (0.06 | ) | (0.13 | ) | ||||
Diluted | (0.06 | ) | (0.13 | ) | ||||
Pro forma earnings per share, net | ||||||||
Basic | $ | (0.06 | ) | $ | (0.13 | ) | ||
Diluted | $ | (0.06 | ) | $ | (0.13 | ) |
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(6) 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:
September 30, 2007 | December 31, 2006 | |||||
(In thousands) | ||||||
Finished goods | $ | 979 | $ | 412 | ||
Work-in-process | 682 | 548 | ||||
Raw materials | 2,544 | 3,055 | ||||
Net Inventories | $ | 4,205 | $ | 4,015 | ||
(7) STOCK-BASED COMPENSATION PLANS AND STOCK-BASED COMPENSATION EXPENSE
The Company has stock-based compensation plans for its employees, officers, and directors. The plans permit the grant of a variety of awards with various terms and prices as determined by the Governance, Nominating and Compensation committee of the Company’s Board of Directors. Generally the grants vest over a period of four years and are priced at fair market value, or in certain circumstances 110% of the fair market value, of the common stock on the date of the grant. The options are generally exercisable after the period or periods specified in the option agreement, but no option may be exercised after 10 years from the date of grant.
Additionally, in the case of incentive stock options, the exercise price may not be less than 100% of the fair market value of the Company’s common stock on the date of grant. However, there is an exception in the case of a grant to an employee who owns or controls more than 10% of the combined voting power of all classes of the Company’s stock or the stock of any parent or subsidiary. In that case, the exercise price shall not be less than 110% of the fair market value on the date of grant. In the case of non-qualified stock options, the exercise price shall not be less than 85% of the fair market value of the Company’s common stock on the date of grant, except in the case of a grant to an independent director, in which case the exercise price shall be equal to fair market value determined by reference to market quotations on the date of grant.
Effective January 1, 2006, the Company adopted the provisions of Statement of Financial Accounting Standards (“SFAS”) No. 123(R),Share-Based Payment, (“SFAS 123(R)”) and Staff Accounting Bulletin No. 107 (“SAB 107”). SFAS 123(R) establishes accounting for stock-based awards issued for employee services, while SAB 107 provides guidance regarding the interaction of SFAS 123(R) and certain SEC rules and regulations. Accordingly, stock-based compensation cost is measured at grant date, based on the fair value of the award, and is recognized as an expense over the employee’s requisite service period. The Company previously applied Accounting Principles Board (“APB”) Opinion No. 25,Accounting for Stock Issued to Employees, and related Interpretations and provided the required pro forma disclosures of SFAS No. 123,Accounting for Stock-Based Compensation (“SFAS 123”). The Company elected to adopt the modified prospective application method as provided by SFAS 123(R), and, accordingly, the Company recorded compensation costs as the requisite service was rendered for the unvested portion of previously issued awards that remain outstanding at the initial date of adoption and any awards issued, modified, repurchased, or cancelled after the effective date of SFAS 123(R). Periods prior to adoption have not been restated.
In March 2005, the Securities and Exchange Commission (SEC) issued Staff Accounting Bulletin No. 107 (SAB 107) which provides guidance regarding the interaction of SFAS 123(R) and certain SEC rules and regulations. The new guidance includes the SEC’s view on the valuation of share-based payment arrangements for public companies and clarifies some of SFAS 123(R)’s implementation for registrants. The Company adopted the provisions of SAB 107 on January 1, 2006.
On November 10, 2005, the Financial Accounting Standards Board (the “FASB”) issued FASB Staff Position SFAS 123(R)3 “Transition Election Related to Accounting for Tax Effects of Share-Based Payment Awards.” The Company has elected to adopt the alternative transition method provided the FASB Staff Position for calculating the tax effects (if any) of stock-based compensation expense pursuant to SFAS 123(R). The alternative transition method includes simplified methods to establish the beginning balance of the additional paid-in capital pool related to the tax effects of employee stock-based compensation, and to determine the subsequent impact to the additional paid-in capital pool and the consolidated statement of operation and cash flows of the tax effects of employee stock-based compensation awards that are outstanding upon adoption of SFAS 123(R).
Stock Option Awards—The fair value of each stock option is estimated using the Black-Scholes option-pricing model. The fair value is then amortized on a straight-line basis over the requisite service periods of the awards, which is generally the vesting period. Use of a valuation model requires management to make certain assumptions with respect to selected model inputs. Expected volatility was calculated based on the historical volatility of the Company’s stock, at the time of the award. The average expected option term was estimated at 5 years. The risk-free interest rate is based on U.S. Treasury zero-coupon issues assumed at the date of grant and no dividends were assumed in the calculation. The compensation expense recognized for all equity-based awards is net of estimated forfeitures for the nine months ending September 30, 2007. Forfeitures are estimated based on the historical trends. The fair value of options at the date of grant was estimated using the Black-Scholes option-pricing model. There were no options granted during 2006 or during the nine months of 2007.
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A summary of option activity as of September 30, 2007 and changes during the first nine months is presented below:
Options Outstanding | Weighted Average Exercise Price per Share | Weighted Average Remaining Contractual Term (in Years) | Aggregate Intrinsic Value (in thousands) | ||||||
Balance at December 31, 2006 | 2,859,083 | 4.86 | 5.18 | 490 | |||||
Granted | — | — | |||||||
Exercised | (133,752 | ) | 0.78 | ||||||
Cancelled | (244,430 | ) | 7.60 | ||||||
Balance at September 30, 2007 | 2,480,901 | 4.81 | 4.42 | 529 | |||||
Vested and Exercisable at September 30, 2007 | 2,368,219 | 4.98 | 4.10 | 512 | |||||
As of September 30, 2007, there was approximately $25,000 of total unrecognized compensation cost related to non-vested stock options granted. The cost is expected to be recognized over the next 1.00 years. The intrinsic value of the options exercised in the nine months ended September 30, 2007 was approximately $93,000.
Restricted Share Awards – The Company grants awards to a number of key employees and directors restricted shares of the Company’s common stock. The awards vest in equal annual installments over a period of four years, assuming continued employment or board service, with some exceptions. The fair market value of the award at the time of the grant is amortized over the vesting period. The fair value of awards of shares of restricted stock is based on the fair market value of the stock on the date of grant. A summary of the status of the Company’s restricted shares of common stock as of September 30, 2007 and changes during the period are presented below:
Shares | Weighted Average Grant-Date Fair Value | ||||
Non-vested at December 31, 2006 | 1,272,088 | 1.03 | |||
Granted | 1,135,428 | 1.36 | |||
Vested | (308,030 | ) | 1.01 | ||
Cancelled | (103,871 | ) | 0.73 | ||
Non-Vested at September 30, 2007 | 1,995,615 | 1.23 | |||
As of September 30, 2007, there was approximately $2 million of total unrecognized compensation cost related to non-vested shares of restricted stock. The Company expects to recognize the costs over the next 3.31 years.
On May 22, 2007, the shareholders of the Company approved the adoption of the Company’s 2007 Stock Incentive Plan. Under this plan, the Company may issue options, restricted stock, restricted stock units and other stock-based awards to its employees, officers, directors, consultants and advisors. An aggregate of 5,300,000 shares of the Company’s common stock are reserved for issuance under the 2007 plan. In addition, there will be an annual increase to the number of shares reserved for issuance under the Plan equal to the lesser of (i) 1,000,000 shares of common stock, (ii) 5% of the outstanding shares of common stock of the Company, or (iii) an amount determined by the Board of Directors of the Company. The Company’s executive officers are eligible to receive stock based awards under the Plan on the terms and conditions determined by the Governance, Nominating and Compensation Committee of the Board of Directors of the Company.
The foregoing description is qualified in its entirety by reference to the full text of the 2007 Stock Incentive Plan, and the forms of non-statutory stock option agreement, incentive stock option agreement and restricted stock agreement for usage under the plan, which are filed or incorporated by reference as exhibits hereto and are incorporated herein by reference.
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Also on May 22, 2007, the Board of Directors of the Company approved an amendment to the Company’s Policy Regarding Compensation of Independent Directors, which provides that all awards of stock shall be made under the 2007 plan, instead of the Company’s 2004 Stock Option and Incentive Plan.
On June 30, 2007, the Company’s Governance, Nominating and Compensation Committee (the “GNC Committee”) of the Board of Directors approved the StockerYale, Inc. Management Incentive Plan. The Management Incentive Plan is designed to recognize and reward the achievement of financial, business and management goals that are essential to the success of StockerYale and its subsidiaries. The incentive plan covers certain executive and senior employees of StockerYale, as determined by the GNC Committee.
Upon satisfaction and achievement of EBITDA and cash flow targets, as determined by the Board of Directors or the GNC Committee based on the financial results of the target period, each participant shall receive a grant of fully-vested shares of the Company’s common stock, $.001 par value per share. Mark Blodgett, StockerYale’s Chairman, President and Chief Executive Officer, is eligible to receive up to 1,012,000 shares of StockerYale’s Common Stock under the Plan. Marianne Molleur, StockerYale’s Senior Vice President and Chief Financial Officer, is eligible to receive up to 392,000 shares of StockerYale’s common stock under the incentive plan. As of September 30, 2007, no shares have been earned or issued related to the management incentive plan.
This incentive plan and all grants and awards made under the plan shall be made under the terms of the Company’s 2007 Stock Incentive Plan.
(8) COMPREHENSIVE LOSS
SFAS No. 130,Reporting Comprehensive Income,requires disclosure of all components of comprehensive income (loss) on an annual and interim basis. Comprehensive income (loss) is defined as the change in equity of a business enterprise during a period from transactions and other events and circumstances from non-owner sources. The Company’s total comprehensive loss is as follows:
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2007 | 2006 | 2007 | 2006 | |||||||||||||
In thousands | ||||||||||||||||
Net loss | $ | (1,310 | ) | $ | (1,240 | ) | $ | (5,090 | ) | $ | (3,539 | ) | ||||
Other comprehensive income (loss): | ||||||||||||||||
Cumulative translation adjustment | 531 | 28 | 1,178 | 263 | ||||||||||||
Comprehensive loss | $ | (779 | ) | $ | (1,212 | ) | $ | (3,912 | ) | $ | (3,276 | ) | ||||
(9) INTANGIBLE ASSETS
Intangible assets consist of trademarks, acquired patents and patented technologies, distributor and customer relationships and related contracts, trade and brand names and associated logos, technology design and programs, non-compete agreements and other intangible assets. There are no intangible assets with indefinite lives. Acquired patented technologies and trademarks are amortized over their useful lives of between 10 to 16 years.
Gross carrying amounts and accumulated amortization of intangible assets were as follows as of September 30, 2007 for each intangible asset class.
Gross Carrying Amount | Accumulated Amortization | Net Balances | ||||||||
(in thousands) | ||||||||||
Acquired patents and patented technology | $ | 3,089 | $ | (2,804 | ) | $ | 285 | |||
Trademarks | 471 | (471 | ) | — | ||||||
Acquired trade name | 619 | (71 | ) | 548 | ||||||
Acquired distributor and customer contracts and relationships | 2,516 | (475 | ) | 2,040 | ||||||
Acquired non compete agreement | 815 | (249 | ) | 567 | ||||||
Acquired technology design and programs | 425 | (49 | ) | 376 | ||||||
Other | 147 | (32 | ) | 115 | ||||||
Total | $ | 8,082 | $ | (4,151 | ) | $ | 3,931 | |||
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Gross carrying amounts and accumulated amortization of intangible assets were as follows as of December 31, 2006 for each intangible asset class.
Gross Carrying Amount | Accumulated Amortization | Net Balances | ||||||||
(in thousands) | ||||||||||
Acquired patents and patented technology | $ | 3,088 | $ | (2,574 | ) | $ | 514 | |||
Trademarks | 471 | (467 | ) | 4 | ||||||
Acquired trade name | 592 | (12 | ) | 580 | ||||||
Acquired distributor and customer contracts and relationships | 2,407 | (83 | ) | 2,324 | ||||||
Acquired non compete agreement | 780 | (43 | ) | 737 | ||||||
Acquired technology design and programs | 407 | (9 | ) | 398 | ||||||
Other | 140 | (6 | ) | 134 | ||||||
Total | $ | 7,885 | $ | (3,194 | ) | $ | 4,691 | |||
Amortization of intangible assets was $313,000 and $80,000 for the three months ended September 30, 2007 and 2006, and $931,000 and $239,000 for the nine months ended September 30, 2007 and 2006.
As of September 30, the estimated future amortization expense of intangible assets, in thousands, is as follows:
Estimated Future Expense | |||||||||||||||
2007 | 2008 | 2009 | 2010 | 2011+ | |||||||||||
Amortization expense of intangible assets | $ | 312 | $ | 1,120 | $ | 851 | $ | 468 | $ | 1,180 |
(10) USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the financial statements and the reported amounts of income and expenses during the reporting periods. Actual results in the future could vary from the amounts derived from management’s estimates and assumptions.
(11) RECENT ACCOUNTING PRONOUNCEMENTS
FIN48 “Accounting for Uncertainty in Income Taxes”
On January 1, 2007, the Company adopted FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes” (FIN 48). FIN 48 clarifies the accounting for uncertainty in income tax positions recognized in accordance with SFAS No. 109, “Accounting for Income Taxes.” FIN 48 requires that an enterprise must determine whether it is more-likely-than-not that a tax position will be sustained upon examination, including resolution of any related appeals or litigation processes, based on the technical merits of the position. A tax position that meets the more-likely-than-not threshold is then measured to determine the amount of benefit to recognize in the financial statements. Based on its assessment, the Company has concluded that there are no significant uncertain tax positions that require recognition in the financial statements.
The Company had net deferred tax assets totaling $23.6 million as of December 31, 2006. Realization of the deferred tax assets is dependent upon the Company’s ability to generate sufficient future taxable income and, if necessary, execution of tax planning strategies.
The Company’s historical operating losses raise considerable doubt as to when, if ever, any of the deferred tax assets will be realized. As a result, management has provided a full valuation allowance for the net deferred tax assets. In the event management determines that sufficient future taxable income may be generated in subsequent periods and the previously recorded valuation allowance is no longer needed, the Company will decrease the valuation allowance by providing an income tax benefit in the period that such a determination is made.
With respect to any future uncertain tax positions, the Company intends to record interest and penalties, if any, as a component of income tax expense.
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The Company is subject to taxation in the U.S. and various states and foreign jurisdictions. As a result of the Company’s tax loss position, the tax years 1999 through 2006 remain open to examination by the federal and most state tax authorities. In addition, the tax years 2002 through 2006 are open to examination in foreign jurisdictions.
SFAS 157 “Defining Fair Value Measurement”
In September 2006, the FASB issued Statement of Financial Accounting Standards No. 157 “Defining Fair Value Measurement” (FAS 157) which defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles and expands disclosures about fair value measurements. FAS 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007, which is the beginning of the Company’s fiscal 2008. The Company is currently evaluating the impact of adopting FAS 157 on its financial statements.
FAS 159 “The Fair Value Option for Financial Assets and Financial Liabilities-Including an amendment of FASB Statement No. 115”
In February 2007, the FASB issued Statement of Financial Accounting Standards (“FAS 159”) “The Fair Value Option for Financial Assets and Financial Liabilities-Including an amendment of FASB Statement No. 115”. FAS 159 provides entities with an option to choose to measure eligible items at fair value at specified election dates. If elected, an entity must report unrealized gains and losses on the item in earnings at each subsequent reporting date. The fair value option may be applied instrument by instrument, with a few exceptions, such as investments otherwise accounted for by the equity method, is irrevocable (unless a new election date occurs), and is applied only to entire instruments not to portions of instruments. The Company is currently evaluating the impact of adopting FAS 159 on its financial statements, which is effective beginning in fiscal year 2008.
EITF 00-19-2 “Accounting for Registration Payment Arrangements”
In December 2006, the FASB issued FASB Staff Position EITF 00-19-2, “Accounting for Registration Payment Arrangements” (“FSP”), which addresses an issuer’s accounting for registration payment arrangements. This FSP specifies that the contingent obligation to make future payments or otherwise transfer consideration under a registration payment arrangement, whether issued as a separate agreement or included as a provision of a financial instrument or other agreement, should be separately recognized and measured in accordance with FASB Statement No. 5, “Accounting for Contingencies”. For registration payment arrangements and financial instruments subject to those arrangements this guidance is effective for financial statements issued for fiscal years beginning after December 15, 2006. On January 1, 2007 the Company adopted this FSP, which had no material impact.
(12) DEBT
Photonic Products Ltd.
StockerYale (UK) Ltd., a wholly owned subsidiary of the Company, issued bonds to each of the stockholders of Photonic Products Ltd. with an aggregate initial principal amount equal to US$2,400,000. The outstanding principal under the bonds issued to the stockholders of Photonic Products Ltd. accrues interest at an annual rate of 1% above the LIBOR rate as determined on the first business day of each month. StockerYale (UK) Ltd. may elect to prepay the bonds at any time, in whole or in part, without penalty or premium. If the stockholders of Photonic Products Ltd. breach any representation, warranty, covenant or agreement made in the acquisition agreement, StockerYale (UK) Ltd. or the Company may make a claim and the amounts outstanding under the bonds will be reduced by an amount equal to any damages, claims, demands, losses, expenses, costs, obligations and liabilities reasonably and foreseeably arising to the Company and/or StockerYale (UK) Ltd. If StockerYale (UK) Ltd. fails to make any payments under the bonds, the stockholders of Photonic Products Ltd. will then have the right to require payment from the Company in the form of newly issued shares of the Company’s common stock. All unpaid principal plus accrued but unpaid interest under the bonds is due and payable on October 31, 2009.
As of September 30, 2007 and December 31, 2006, $2,400,000 was outstanding under the bonds issued to the stockholders of Photonic Products Ltd.
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Laurus Master Fund
On August 3, 2007, Laurus Master Fund notified StockerYale that it had sold a portion of the Company’s debt owed to Laurus Master Fund to PSource Structured Debt Limited and the Valens U.S. SPV I, LLC. However, Laurus Master Fund continues to act as the sole agent in the collection of principal and interest.
Security Agreement and Credit Facility:
On June 28, 2006, the Company entered into a Security and Purchase Agreement with Laurus Master Fund, Ltd. (Laurus). Under the Security Agreement, a three-year revolving line of credit was established. The proceeds from this line of credit were used to pay in full the outstanding amount under the credit facility between StockerYale Canada Inc. and National Bank of Canada as described below. Additional amounts borrowed under the line of credit from time to time may be used for the Company’s and StockerYale Canada Inc.’s working capital needs. The Security Agreement provides for a revolving line of credit not to exceed an aggregate principal amount of $4 million and grants a security interest in and lien upon all of the Company’s assets in favor of Laurus. The Company may borrow a total amount at any given time up to $4,000,000, limited to qualifying receivables and inventories (as defined).
The Company began making monthly payments to Laurus of accrued interest only on August 1, 2006. Principal payments are required from time to time when the outstanding balance exceeds the collateral availability. The outstanding principal under the note accrues interest at an annual rate of 1% above the prime rate. The interest rate was 8.75% as of September 30, 2007. The Company may elect to prepay the note at any time, in whole or in part, without penalty or premium. All unpaid principal plus accrued but unpaid interest is due and payable on June 28, 2009.
Also under the terms of this Security Agreement and in consideration of the line of credit, the Company issued and sold to Laurus 642,857 shares of its common stock at a per share purchase price of $.001, for an aggregate purchase price of $643. The Company recorded debt acquisition costs relating to the line of credit for cash fees paid of $209,487 and an additional amount as debt acquisition costs of $757,925 representing the fair market value of the stock issued. The debt acquisition charges are being amortized over the life of the line of credit using the effective interest method.
There was approximately $2,592,000 and $2,418,000 outstanding under the line of credit, which has been classified as long-term debt, as of September 30, 2007 and December 31, 2006, respectively. Credit line availability was approximately $651,000 as of September 30, 2007.
In addition, the Company entered into a Registration Rights Agreement under which it agreed to register for resale within 60 days the shares of common stock issued and sold to Laurus. On July 21, 2006, the Company filed a registration statement on Form S-3 (declared effective on August 25, 2006) with the SEC for the resale of the shares.
Term Note
On December 30, 2005, under the terms of a Securities Purchase Agreement, the Company issued a secured term note in the aggregate principal amount of $4,000,000 to Laurus (December note). The note was originally due on December 30, 2008 and is collateralized by U.S. accounts receivable, inventory and equipment, and a second security interest in accounts receivable, inventory and equipment in Montreal, Canada. The Company began making monthly payments of principal and interest on the note on April 1, 2006. The outstanding principal on the note accrues interest at an annual rate of 2% above the prime rate, subject to a minimum annual interest rate of 8% (subject to certain adjustments). The Company could elect to prepay the note provided that (i) if prepayment occurred during the first year of the date of issuance, the Company would pay a 15% prepayment penalty, (ii) if prepayment occurred during the second year of the date of issuance, the Company would pay a 10% prepayment penalty, and (iii) if prepayment occurred during the third year of the date of issuance, the Company would pay a 5% prepayment penalty.
Also, under the terms of the Securities Purchase Agreement, the Company sold and issued to Laurus an aggregate of 750,000 shares of common stock of the Company at a per share purchase price of $.001, for an aggregate purchase price of $750, related to the prepayment of certain convertible notes. The Company recorded debt acquisition costs of $102,650 and a debt discount of $720,000 representing the fair market value of the stock issued. The debt acquisition and debt discount charges were being amortized over the life of the note using the effective interest method.
The Company has registered for resale under the Securities Act of 1933, as required by the agreement, the shares of common stock sold and issued to Laurus by filing a registration statement on Form S-3 on January 27, 2006 and declared effective on February 14, 2006. Because of certain provisions contained in the agreement, the Company initially classified the amounts allocated to the common stock as a liability. This amount was reclassified to equity on February 14, 2006 when the shares were registered. The Company reclassified the market value of the stock on this date of $660,000 as equity and recorded a $60,000 gain to other income (expense).
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Amendment to the Term Note and Security Purchase Agreement:
On June 19, 2007, the Company and Laurus entered into a Note Amendment Agreement to the secured term note discussed above. The amendment extended the maturity date of the December 30, 2005 note, as described above, from December 30, 2008 to June 30, 2010. In connection with the amendment, the Company entered into a Securities Purchase Agreement with Laurus under which the Company borrowed $2,318,180 and issued a Secured Term Note to Laurus. The note is due on June 30, 2010. The Company agreed to make monthly payments of principal and interest on the note beginning on July 1, 2007. The outstanding principal on the note accrues interest at an annual rate of 2% above the prime rate, subject to a minimum annual interest rate of 8% (subject to certain adjustments). The Company may elect to prepay the note provided that (i) if such prepayment occurs during the first year of the date of issuance, the Company shall pay a 15% prepayment penalty, (ii) if such prepayment occurs during the second year of the date of issuance, the Company shall pay a 10% prepayment penalty and (iii) if such prepayment occurs during the third year of the date of issuance, the Company shall pay a 5% prepayment penalty. Laurus holds a security interest in certain assets of the Company. The monthly principal payment on the revised combined note is $125,000. The interest rate is prime plus 2% and was 9.75% as of September 30, 2007.
Under the Securities Purchase Agreement, the Company sold and issued to Laurus an aggregate of 300,000 shares of common stock of the Company at a per share purchase price of $.01, for an aggregate purchase price of $3,000. The Company will use the net proceeds from the Securities Purchase Agreement for general corporate purposes. In conjunction with the 300,000 shares of common stock issued to Laurus, the Company recorded a debt discount of approximately $362,000, which represented the approximate fair value of the stock as of the date of issuance.
The amended agreement resulted in an extinguishment of debt under EITF 96-19,Debtor’s Accounting for a Modification or Exchange of Debt Instrument. As a result, the Company accelerated the existing debt discount and financing costs associated with the original note and certain other costs paid with the financing totaling approximately $290,000 during the second quarter of 2007.
At September 30, 2007, $4,125,000 was outstanding under the combined notes, which has been classified as $1,500,000 short-term debt and $2,625,000 long term debt and reported net $294,434 of unamortized debt discount, which has been classified as $179,457 short term and $114,977 long term.
At December 31, 2006, $2,909,092 was outstanding under the December 30, 2005 note, which has been classified as $1,454,546 short-term debt and $1,454,546 long term debt and reported net of $316,164 of unamortized debt discount, which has been classified as $240,761 short term and $75,403 long term.
The Company and Laurus also entered into a Registration Rights Agreement on June 19, 2007, under which the Company agreed to file a registration statement with the SEC to register the shares of common stock for resale within 135 days under the Securities Act of 1933, as amended which has been since extended until November 30, 2007.
National Bank of Canada
The Company had a revolving line of credit with the National Bank of Canada. The original agreement, dated May 26, 2003, was amended and renewed in March 2004 and March 2005. On March 29, 2006, the Company entered into a new, six-month agreement with the National Bank of Canada under which the bank effectively waived the Company’s noncompliance with the terms of the previous amended agreement. The bank’s waiver remained in effect only during the term of the new agreement. All outstanding amounts under the new agreement were payable on demand, but in any event no later than September 30, 2006, the date on which the agreement automatically expired. The new agreement specifically provided that (i) the bank will not renew the line of credit upon expiration of the agreement on September 30, 2006, and (ii) the Company must seek alternative financing and use the funds from the financing to pay all amounts owed to National Bank of Canada under the agreement.
The new agreement provided a line of credit of CAD $2,725,000 ($2,338,000 US, converted at the December 31, 2005 rate of $0.858) restricted by the borrowing base, as defined. The new agreement was collateralized by the Company’s accounts receivable, inventory and equipment in Montreal and bore interest at the Canadian prime rate plus 2.50%. The credit facility required the maintenance of certain financial covenants, including working capital, net worth, limitations on capital expenditures, restrictions on dividends, a financial coverage ratio and maximum inventory levels.
On June 28, 2006, this revolving line of credit was paid in full with the proceeds from the new line of credit from Laurus as described above.
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Private Investor Notes and Bond
On August 16, 2007, the Eureka Interactive Fund Ltd. (Eureka) agreed to transfer the promissory notes and bonds listed below, as well as all of the unexercised warrants previously issued to Eureka, to a private investor.
On May 12, 2005, the Company issued a note to Eureka Interactive Fund, Ltd. The $1,500,000 note was initially due and payable in full on September 12, 2005. The note accrues interest on the outstanding principal balance at the rate of 10% per year, payable on the last day of each month. The Company also issued to Eureka five-year common stock warrants to purchase 250,000 shares at an exercise price per share of $0.90. The aggregate purchase price of the note and warrants ($1,500,000) was allocated between the note and warrants based upon their relative fair market value. The difference between the face amount of the note of $1,500,000 and the aggregate purchase price of the note of $1,341,362 was recorded as a debt discount of $158,638 and is being amortized over the life of the note. The Company used the Black-Scholes Model to calculate the fair value of the warrants. The underlying assumptions included in the Black-Scholes Model were: a risk-free interest rate of 3.87%, an expected life of five years and an expected volatility of 116% with no dividend yield. These warrants were exercised during the quarter ended September 30, 2007.
On August 26, 2005, the Company entered into an amendment to the note in which the maturity date of the note was extended to December 31, 2005. On December 15, 2005, the maturity date of the note was extended to January 15, 2007. The note accrues interest on the outstanding principal balance at the rate of 10% per year. The aggregate outstanding principal amount of the note and accrued interest was payable in equal installments of $50,000 on the 15th day of each month, with the entire balance of unpaid principal and interest previously due on January 15, 2007. As a part of the December 15, 2005 agreement, the Company issued to the holder additional five-year common stock warrants to purchase 150,000 shares at an exercise price per share of $0.90. An additional debt discount was recorded in the amount of $90,149 and is being amortized over the life of the note. The Company used the Black-Scholes Model to calculate the fair value of the warrants. The underlying assumptions included in the Black-Scholes Model were: a risk-free interest rate of 4.40%, an expected life of five years and an expected volatility of 92% with no dividend yield. These warrants were exercised during the quarter ended September 30, 2007.
On December 27, 2006, the Company entered into Amendment No. 3 to the note. The amendment extended the maturity date of the note from January 15, 2007 to January 15, 2008. The aggregate outstanding principal amount of the note as of the date of the amendment along with accrued interest is payable in equal installments of $50,000 on the 15th day of each month beginning on January 15, 2007 and continuing until March 15, 2007, and in equal installments of $100,000 on the 15th day of each month beginning on April 15, 2007 and continuing until December 15, 2007. The entire balance of unpaid principal and interest thereafter shall be paid on January 15, 2008.
At September 30, 2007, $329,009 was outstanding under the note, which has been classified as short-term debt.
At December 31, 2006, $1,021,415 was outstanding under the note, which has been classified as $988,618 short-term debt and $34,796 long-term debt and reported net of $5,138 of unamortized debt discount.
On October 31, 2006, StockerYale (UK) Ltd. issued a 10% Senior Fixed Rate Secured Bond to The Eureka Interactive Fund Ltd. in the original principal amount of US$4,750,000. The bond is due on October 31, 2011. StockerYale (UK) Ltd. agreed to make payments of principal and interest over the term; however, during the first twelve months of the term of the bond, only accrued interest will be required to be paid (no payments of principal will be required) and an amount equal to 50% of the original principal sum of US$4,750,000 will be paid on October 31, 2011. The outstanding principal on the bond accrues interest at an annual rate of 10%. StockerYale (UK) Ltd. may prepay the bond at any time, in whole or in part, without penalty or premium. The bond is secured by all of the equity interests of Photonic Products Ltd. owned by the Company and StockerYale (UK) Ltd. as stated in the Charge Over Shares by and among the Company, StockerYale (UK) Ltd. and The Eureka Interactive Fund Ltd., which was entered into in connection with the financing. The Company used the net proceeds to make the cash payment for the acquisition of Photonic Products Ltd. The remaining proceeds will be used for transaction fees and working capital.
In connection with the issuance of the bond on October 31, 2006, the Company issued a Common Stock Purchase Warrant to Eureka to purchase 2,375,000 shares of its common stock for a purchase price of $1.15 per share. The warrant expires on the tenth anniversary of the date of issuance. If StockerYale (UK) Ltd. prepays all amounts outstanding under the bond prior to the third anniversary of the date of issuance, then the number of shares of the Company’s common stock purchasable upon exercise of the warrant shall be changed to the following numbers: (i) 1,900,000 if the bond is repaid in full prior to the first anniversary of the date of issuance; (ii) 2,018,750 if the bond is repaid in full prior to the second anniversary of the date of issuance; and (iii) 2,137,500 if the bond is repaid in full prior to the third anniversary of the date of issuance. The aggregate purchase price of the bond and warrants of $4,750,000 was allocated between the bond and the common stock warrants based upon their relative fair market value. The purchase
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price allocated to the bond was $3,255,349 and the purchase price allocated to the common stock warrants was $1,494,651. The difference between the aggregate face amount of the bond of $4,750,000 and the aggregate purchase price of the bond was recorded as a debt discount of $1,494,651 and will be amortized over the life of the bond. The Company used the Black-Scholes Model to calculate the fair value of the warrants. The underlying assumptions included in the Black-Scholes Model were: a risk-free interest rate of 4.61%, an expected life of ten years and an expected volatility of 102% with no dividend yield.
At September 30, 2007, $4,750,000 remained outstanding under the note which has been classified as $540,271 short-term debt and $4,209,729 long term and reported net of $1,145,635 of unamortized debt discount, which has been reported as $389,479 as short-term and $756,156 as long-term.
On September 25, 2007, the private investor exercised warrants for the purchase of 1,140,741 shares of the Company’s common stock at an average per share price of $1.08 per share, or approximately $1,226,667.
(13) STOCK AND WARRANT PURCHASE AGREEMENT
On January 26, 2007, the Company entered into a Securities Purchase Agreement with Smithfield Fiduciary LLC, a fund that is managed by Highbridge Capital Management, LLC. Under the terms of the agreement, the Company sold and issued to Smithfield Fiduciary LLC for an aggregate purchase price of $2,300,000, (i) 2,000,000 shares of common stock of the Company at a per share purchase price of $1.15 (a discount to the 30 day trading average) and (ii) a warrant to purchase 1,000,000 shares of common stock of the Company at an exercise price of $1.72 per share. The warrant expires on the tenth anniversary of the date of issuance.
The Company used the Black-Scholes Model to calculate the fair value of the warrants, which totaled $1,292,814. The underlying assumptions included in the Black-Scholes Model were: a risk-free interest rate of 4.88%, an expected life of ten years and an expected volatility of 101% with no dividend yield.
The warrant and the shares of common stock issued and sold under the agreement were issued and sold under the exemption from the registration and prospectus delivery requirements of the Securities Act of 1933 under Section 4(2) and Rule 506 of Regulation D as a sale by the Company not involving a public offering. No underwriters were involved with the issuance and sale of the securities.
The Company and Smithfield Fiduciary LLC also entered into a Registration Rights Agreement under which the Company agreed, at its sole expense, to file a registration statement within seven business days to register for resale under the Securities Act of 1933, as amended, the shares issuable upon exercise of the warrant and the shares of common stock issued and sold to Smithfield Fiduciary LLC under the Securities Purchase Agreement. The Company filed a registration statement that was declared effective February 14, 2007.
The Company used the net proceeds from the transaction with Smithfield Fiduciary LLC for general corporate purposes, including to invest in its information technology infrastructure and to accelerate operational improvements.
(14) DISCONTINUED OPERATIONS
In December 2005, the Company’s management and the Board of Directors made a decision to sell or close its Singapore operation as well as its fiber optic illumination and galvanometer product lines including a planned workforce reduction of 11%. Accordingly, the results of those operations have been reclassified and are included in discontinued operations.
On February 15, 2006, the Company completed the sale of 100% of its stock ownership in its StockerYale Asia subsidiary to Radiant Scientific Pte. Ltd. for the consideration of $1 and a note for $250,000, which was initially recorded at $0 value. The Company recorded $76,000 as income during 2006 for cash collected on the note. Radiant assumed all obligations and liabilities of approximately $465,000 and assets of approximately $466,000. The assets were mainly accounts receivable and inventory. The Company has no contractual arrangements with Radiant Scientific Pte., Ltd. The Company expects to continue to sell an insignificant amount of product to previous customers of StockerYale Asia. The Company recorded income of approximately $28,000 for the third quarter of 2007 and approximately $63,000 for the nine months ended September 30, 2007 from payments made on the note payable.
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(15) COMMITMENTS AND CONTINGENCIES
Lease obligation treated as financing
On December 30, 2005, the Company closed a sale-leaseback transaction on the Company’s Salem, New Hampshire headquarters with 55 Heritage LLC. The terms of the Real Estate Purchase Agreement dated November 29, 2005, as amended on December 22, 2005 between the Company and the buyer were that (i) the Company agreed to sell the property to the buyer, for $4,700,000, and (ii) the Company agreed to lease from the buyer (a) approximately 32,000 square feet of the property for an initial term of five years with a rental rate during such period of $192,000 per year in base rent and (b) approximately 63,000 square feet of the property for an initial term of five years with rental rates during such period ranging from approximately $220,500 to $315,000 per year in base rent, plus a pro rata share of all operating costs of the property. The Company plans to sublease all or part of the 63,000 square feet block of space. At the time an opportunity arises to enter into a sublease agreement with a third party, either (i) the Company will enter into a sublease agreement with such third party or (ii) the buyer will enter into a direct lease with such third party. The lease agreement grants the Company the option to extend the initial term for a period of five years. Because the transaction did not qualify as a sale for Generally Accepted Accounting Principles (GAAP) reporting purposes under SFAS 66, “Accounting for Sales of Real Estate” and SFAS 98, “Accounting for Leases,” the net proceeds were classified as a financing obligation. This was primarily due to the terms of the lease agreement. Additionally, the Company continues to carry the value of the building on its balance sheet and record depreciation expense until the criteria to record a sale are met. The Company continues to account for the financing lease in accordance with the provisions of SFAS 98. During the first nine months of 2007, the Company recorded $227,000 as a non-cash interest expense and $27,000 as a reduction of the lease obligation. During the first nine months of 2006, the Company recorded $240,000 as non-cash interest expense and $14,000 as a reduction of the lease obligation.
At September 30, 2007, $3,650,000 was recorded on the balance sheet as a financing lease obligation, which has been classified as $507,000 short-term obligation and $3,143,000 long-term obligation.
At December 31, 2006, $3,678,000 was recorded on the balance sheet as a financing lease obligation, which has been classified as $507,000 short-term obligation and $3,171,000 long-term obligation.
On October 26, 2005, the Company signed a sub-lease agreement with Onvio Servo, LLC for approximately 17,000 square feet of its Salem facility at a rate of $10.00 per square foot, or for $14,166.67 per month. The commencement date of the lease was November 15, 2005 for a term of twelve months. The lease was effective for a minimum of six months. The agreement also provided for either party to terminate the sub-lease after six months upon sixty days notice to the other party. The Company received $149,900 in the first nine months of 2006 for sublease income. This sub-lease to Onvio Servo, LLC ended in November 2006.
Other obligations
StockerYale Canada, Inc. conducts research and development, manufacturing, sales and administration from a property located at 275 Kesmark Street, Montreal, Quebec, Canada. StockerYale Canada leases 59,433 square feet for an initial term of ten years. StockerYale Canada paid a security deposit in the amount of CAD $502,915. The rent during the ten-year term ranges from approximately CAD $416,031 to CAD $469,521 per year plus all operating costs. StockerYale Canada has the option to extend the initial term of the lease for an additional term of five years.
On May 1, 2006, the Company signed a sub-lease agreement with PyroPhotonics Lasers, Inc. for approximately 3,000 square feet of its Montreal facility at a rate of CAD $12.58 per square foot, or for CAD $3,146 per month. The commencement date of the lease was May 1, 2006 and the term is twelve months. The agreement also provides the tenant with an option to renew for one additional year upon ninety days written notice to the Company.
On January 23, 2007, the Company revised and signed a sub-lease agreement with PyroPhotonics Lasers, Inc. for approximately 9,000 square feet of its Montreal facility at a rate of CAD $11.89 per square foot, or for CAD $8,916.67 per month. The commencement date of the revised lease is February 1, 2007 and the term is eight years and nine months. The Company has received CAD $74,476 in the nine months ending September 30, 2007 for sublease income.
Indemnification Agreements
Each member of the Board of Directors and the Chief Executive Officer and Chief Financial Officer of the Company have entered into Indemnification Agreements with the Company. Each Indemnification Agreement provides that if the director or executive officer is involved in any threatened, pending or completed action, suit or proceeding, whether brought by or in the right of the Company or by any other party and whether of a civil, criminal, administrative or investigative nature, by reason of the fact that the director or executive officer is or was a director or executive officer of the Company, or is or was serving at the request of the Company as a director, officer, employee, trustee, partner or other agent of another organization or other enterprise, then the
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Company must indemnify the directors and executive officers to the fullest extent authorized or permitted by applicable law against all expenses, judgments, awards, fines and penalties provided that (i) the director or executive officer acted in good faith and in a manner in which the director or executive officer reasonably believed to be in the best interests of the Company, (ii) in a criminal matter, the director or executive officer had no reasonable cause to believe that his conduct was unlawful, and (iii) the director or executive officer is not adjudged liable to the Company. There have been no additional provisions recorded, as it is believed that the insurance coverage is adequate.
(16) LITIGATION
Beginning in May 2005, three putative securities class action complaints were filed in the United States District Court for the District of New Hampshire against the Company and Mark Blodgett, the Company’s President, Chief Executive Officer and Chairman of the Board, Lawrence Blodgett, a former director, Francis O’Brien, the Company’s former Chief Financial Officer, Richard Lindsay, the Company’s former Chief Financial Officer, and Ricardo Diaz, the Company’s former Chief Operating Officer, purportedly on behalf of some of the Company’s shareholders. The complaints, which assert claims under the Securities Exchange Act of 1934, allege that some disclosures made by the Company in press releases dated April 19, 2004 and April 21, 2004 were materially false or misleading. The complaints seek unspecified damages, as well as interest, costs, and attorney’s fees. The three complaints were consolidated into one action and assigned to a single federal judge. The Court also appointed a group of lead plaintiffs and plaintiffs’ counsel, who filed a consolidated amended complaint to supersede the previously filed complaints. Mr. Lindsay is not named as a defendant in the amended complaint; therefore, he is not a party to the currently pending proceeding. The consolidated amended complaint asserts claims under Sections 10(b), 20(a), and 20A of the Securities Exchange Act of 1934, and Rule 10b-5 promulgated thereunder. On January 31, 2006, the Company and the individual defendants moved to dismiss all claims asserted in the consolidated amended complaint. On September 29, 2006, the Court ruled against the defendants on the motions to dismiss. On October 12, 2006, the Company and the individual defendants answered the consolidated amended complaint, denying all allegations of liability and setting forth affirmative defenses to the claims. On November 17, 2006, the Court approved a plan for the conduct of discovery in this matter.
On June 26, 2007, a settlement agreement between the Company and the lead plaintiffs in the class action lawsuit was submitted to the United States District Court for the District of New Hampshire for its approval. Under the terms of the proposed settlement, which would resolve all claims asserted against the Company and the individual defendants, plaintiffs would receive $3.4 million, to be paid entirely by the Company’s insurance carrier. On August 21, 2007, the Court preliminarily approved the proposed settlement and directed plaintiffs’ counsel to provide notice of the proposed settlement to members of the class by mail and newspaper publication. The Court also scheduled a fairness hearing for December 18, 2007, at which the Court will hear from any objectors to the proposed settlement and decide whether to grant final approval. The settlement remains conditioned upon final court approval and expiration of the time for appeal from any order of the Court approving the settlement. There can be no assurance that final approval of the settlement will be obtained.
(17) DERIVATIVE FINANCIAL INSTRUMENTS
The Company has entered into forward foreign currency exchange rate contracts and option contracts with financial institutions to reduce the risk that our cash flows and earnings will be adversely affected by foreign currency exchange rate fluctuations between the U.S. dollar and the Canadian dollar. These programs are not designed for trading or speculative purposes. The Company does not believe that its Cork, Ireland subsidiary has material foreign currency exchange rate exposure. In accordance with SFAS No. 133, the Company recognizes derivative instruments as either assets or liabilities on the balance sheet at fair value. These forward contracts are not accounted for as hedges and, therefore, changes in the fair value of these instruments are recorded as interest income and other, net.
The notional principal of the Company’s forward contracts to purchase Canadian dollars with foreign currencies as of December 31, 2006 was $1,250,000. The fair value of the Company’s open forward contracts was $31,900 as of December 31, 2006 and is recorded in the accompanying condensed consolidated balance sheet and there were no open forward contracts as of September 30, 2007. The net impact of these forward contracts during 2006 was a net loss of $5,000 and it was recorded in the accompanying condensed consolidated statement of operations. The net gain recorded in the nine months ended September 30, 2007 on these remaining forward contracts was $24,768.
On December 6, 2006, the Company entered into a forward foreign currency exchange rate contract with Anglo-Irish bank to convert $500,000 U.S. dollars per month into Canadian dollars at a strike rate with a bottom end range of $1.09 Canadian dollar to the U.S. dollar, and 100% upside flexibility to market rates in excess of the $1.09 strike rate. This arrangement began on March 1, 2007 and continues until December 31, 2007. The Company paid a premium of $61,500 U.S. to the bank on this date. The Company has recorded approximately a $86,000 gain from settlement of these contracts during the nine months ended September 30, 2007. At September 30, 2007, the value of this contract was approximately $148,000 U.S. and the change in the value of the contract of approximately $86,000 was recorded as interest income and other, net during the nine months ended September 30, 2007.
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Management has determined that all of our foreign subsidiaries operate primarily in local currencies that represent the functional currencies of the subsidiaries. All assets and liabilities of foreign subsidiaries are translated into U.S. dollars using the foreign currency exchange rate prevailing at the balance sheet date, while income and expense accounts are translated at average exchange rates during the year. The Company’s operating results are affected by fluctuations in the value of the U.S. dollar as compared to currencies in foreign countries, as a result of our transactions in these foreign markets.
(18) SEGMENT INFORMATION
SFAS No. 131 (“SFAS 131”),Disclosures about Segments of an Enterprise and Related information, requires financial and supplementary information to be disclosed on an annual and interim basis of each reportable segment of an enterprise. SFAS No. 131 also establishes standards for related disclosures about product and services, geographic areas and major customers. Operating segments are identified as components of an enterprise about which separate discrete financial information is available for evaluation by the chief decision-making group, in making decisions how to allocate resources and assess performance. The Company’s chief decision-maker is the Chief Executive Officer. The Company’s accounting policies and method of presentation for segments are consistent with that used throughout the consolidated financial statements.
The Company operates in three segments: illumination, optical components and Photonic Products. In the illumination segment the Company acts as an independent designer and manufacturer of advanced illumination products, consisting of lasers, light emitting diodes and florescent lighting products for the inspection, machine vision, medical and military markets. The Company is a developer and manufacturer of specialty optical fiber (SOF) and diffractive optics such as phase masks used primarily in the telecommunications, defense, and medical markets by original equipment manufacturers. The Photonic Products segment distributes laser diodes and designs and manufactures custom laser diodes modules for industrial, commercial and medical applications. The policies relating to segments are the same as the Company’s corporate policies.
The Company evaluates performance and allocates resources based on revenues and operating income (loss). The operating loss for each segment includes selling, research and development and expenses directly attributable to the segment. In addition, the operating loss includes amortization of acquired intangible assets, including any impairment of these assets and of goodwill. Certain of the Company’s indirect overhead costs, which include corporate general and administrative expenses, are allocated between the segments based upon an estimate of costs associated with each segment. Segment assets include accounts receivable, inventory, machinery and equipment, goodwill and intangible assets directly associated with the product line segment.
All revenues and costs associated with our discontinued businesses have been eliminated from segment reporting, so that the net effect is to report from continuing operations only.
Three months Ended September 30, 2007 | Three months Ended September 30, 2006 | ||||||||||||||||||||||||||||||
Illumination | Optical Components | Photonic Products | Total | Illumination | Optical Components | Photonic Products | Total | ||||||||||||||||||||||||
Net sales | $ | 4,178 | $ | 1,194 | $ | 2,545 | $ | 7,917 | $ | 3,878 | $ | 656 | $ | — | $ | 4,534 | |||||||||||||||
Gross margin | 1,650 | 374 | 632 | 2,656 | 1,530 | 30 | — | 1,560 | |||||||||||||||||||||||
Operating loss | (582 | ) | 31 | (285 | ) | (836 | ) | (367 | ) | (377 | ) | — | (744 | ) | |||||||||||||||||
Nine months Ended September 30, 2007 | Nine months Ended September 30, 2006 | ||||||||||||||||||||||||||||||
Illumination | Optical Components | Photonic Products | Total | Illumination | Optical Components | Photonic Products | Total | ||||||||||||||||||||||||
Net sales | $ | 12,498 | $ | 2,714 | $ | 7,131 | $ | 22,343 | $ | 11,578 | $ | 1,950 | $ | — | $ | 13,528 | |||||||||||||||
Gross margin | 4,621 | 921 | 1,978 | 7,520 | 4,298 | 678 | — | 4,976 | |||||||||||||||||||||||
Operating loss | (2,103 | ) | (323 | ) | (710 | ) | (3,136 | ) | (1,828 | ) | (609 | ) | — | (2,437 | ) |
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September 30, 2007 | December 31, 2006 | |||||||||||||||||||||||||||||
Illumination | Optical Components | Photonic Products | Corporate | Total | Illumination | Optical Components | Photonic Products | Corporate | Total | |||||||||||||||||||||
Total current assets | $ | 6,037 | $ | 910 | $ | 2,837 | $ | 2,463 | $ | 12,247 | $ | 4,967 | $ | 444 | $ | 3,042 | $ | 1,343 | $ | 9,796 | ||||||||||
Property, plant & equipment, net | $ | 3,204 | $ | 2,862 | $ | 789 | $ | 4,027 | $ | 10,882 | $ | 3,212 | $ | 3,400 | $ | 791 | $ | 3,852 | $ | 11,255 | ||||||||||
Acquired intangible assets, net | $ | 284 | — | $ | 3,647 | — | $ | 3,931 | $ | 518 | — | $ | 4,173 | — | $ | 4,691 | ||||||||||||||
Goodwill | $ | 2,677 | — | $ | 5,520 | — | $ | 8,197 | $ | 2,677 | — | $ | 5,280 | — | $ | 7,957 | ||||||||||||||
Other long-term assets | $ | 427 | — | — | $ | 596 | $ | 1,023 | $ | 391 | — | — | $ | 853 | $ | 1,244 | ||||||||||||||
Total | $ | 12,629 | $ | 3,772 | $ | 12,793 | $ | 7,086 | $ | 36,280 | $ | 11,765 | $ | 3,844 | $ | 13,286 | $ | 6,048 | $ | 34,943 | ||||||||||
The Company’s sales by geographic region are denominated in U.S. dollars. These sales are as follows:
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||
Sales by region | 2007 | 2006 | 2007 | 2006 | ||||||||
Domestic – United States | $ | 4,077 | $ | 2,152 | $ | 10,677 | $ | 6,330 | ||||
Canada | 512 | 554 | 1,664 | 1,668 | ||||||||
Europe | 2,199 | 1,204 | 6,964 | 3,855 | ||||||||
Asia | 421 | 491 | 1,671 | 1,341 | ||||||||
Other | 708 | 133 | 1,367 | 334 | ||||||||
Total | $ | 7,917 | $ | 4,534 | $ | 22,343 | $ | 13,528 | ||||
(19) SUBSEQUENT EVENTS
On October 18, 2007, the Company acquired substantially all of the assets of Spectrode LLC (“Spectrode”) for an aggregate consideration, consisting of $100,000 in cash and 214,174 unregistered shares of the Company’s common stock.
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Item 2. | Management’s discussion of financial condition and results of operations |
The following discussion of the consolidated financial condition and results of operations of the Company should be read in conjunction with the unaudited condensed consolidated financial statements and the related notes thereto included elsewhere in this Form 10-QSB. Except for the historical information contained herein, the following discussion, as well as other information in this report, contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, and is subject to the “safe harbor” created by those sections. Some of the forward-looking statements can be identified by the use of forward-looking terms such as “believes,” “expects,” “may,” “will,” “should,” “could,” “seek,” “intends,” “plans,” “estimates,” “anticipates” or other comparable terms. Forward-looking statements involve inherent risks and uncertainties. A number of important factors could cause actual results to differ materially from those in the forward-looking statements. We urge you to consider the risks and uncertainties described in “Risk Factors” in this report and in our annual report on Form 10-KSB for the year ended December 31, 2006. We undertake no obligation to update our forward-looking statements to reflect events or circumstances after the date of this report. We caution readers not to place undue reliance upon any such forward-looking statements, which speak only as of the date made.
Overview
StockerYale, Inc. is an independent designer and manufacturer of structured light lasers, LED modules, fluorescent lighting products, and specialty optical fibers and phase masks for industry-leading original equipment manufacturers (OEMs), as well as a specialist distributor of visible, infrared and blue violet laser diodes. Our illumination products include the Lasiris and Photonic Products brands of laser diode modules, extremely bright light emitting diode (LED) illuminators and fluorescent lighting products for the machine vision, industrial inspection, defense, telecommunications, sensors, and medical markets. Our products are sold to over 2,000 customers, primarily in North America, Europe and the Pacific Rim. We sell directly to, and work with, a group of distributors and machine vision integrators to sell their specialized illumination products. In October 2006, we acquired Photonic Products Ltd., a designer and manufacturer of laser modules and a specialist distributor of laser diodes.
RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the attached unaudited condensed consolidated financial statements and notes thereto and with our audited financial statements and notes thereto included in the Company’s annual report on Form 10-KSB for the year ended December 31, 2006.
Our acquisition of Photonic Products significantly broadened our product portfolio of laser modules at all price levels. Equally important, it gave us a closer working relationship with the world’s leading laser diode manufacturers, including Opnext, Sanyo and Sony. These relationships will ultimately reduce our diode sourcing costs, reduce inventory levels and improve our product performance and market penetration.
During 2006, we completed the divestiture of three non-core product lines – our Singapore distribution subsidiary, and our fiber optic lighting and galvanometer product lines. Strategically, these actions set the stage for our increased focus on the three higher return core businesses: lasers, LEDs, and specialty optical fiber. Following these transactions we were able to increase our focus on R&D and sales and marketing on core higher margin units and accelerate our product development efforts in key areas.
Since the beginning of 2007, we launched two innovative laser products. Our Lasiris PureBeam Fiber-Coupled Laser was our largest R&D initiative over the last three years. We expect this product launch to significantly impact laser revenues over time due to new medical and biomedical applications. We also launched our Lasiris™ PowerLine Laser, a high power laser line generator for fast-speed machine vision and medical applications. In July 2006, we introduced our patent-pending Flat-Top2 Generator for our low power laser category. This is an innovative beam shaping module for laser applications in bio-detection, night vision, and optical character recognition.
The Company intends to pursue various options to finance any acquisitions and also to fund operations, as necessary, through the end of 2007.
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FISCAL QUARTERS ENDED SEPTEMBER 30, 2007 AND 2006
Net Sales
Net sales totaled $7.9 million for the third quarter of 2007, a 75% increase over $4.5 million for the third quarter of 2006, and a 14% increase compared with $7.0 million for the second quarter of 2007. Photonic Products Ltd. revenue was 33% of total revenue for the third quarter of 2007. LED revenues increased 43% year-over-year, but was approximately flat quarter-over-quarter, and laser and associated diode revenue increased 105% year-over-year and increased 13% quarter-over-quarter due to higher Photonic Products Ltd. sales. Specialty optical fiber revenues increased 96% year-over-year and 56% quarter-over-quarter mainly due to the expansion of the Company’s customer base through important vertical channels and key customer relationships.
Gross Profit
Gross profit was $2.7 million in the third quarter of 2007, an increase of 70% over $1.6 million for the third quarter of 2006, and an increase of 16% from $2.3 million for the second quarter of 2007. Gross margin percentage was flat to the third quarter of 2006 at 34% and showed a modest improvement compared to 33% for the second quarter of 2007. The gross margin increase from the year-ago period reflects shipments of specialty optical fiber products to Northrop Grumman Newport News, offset by the lower margin results from Photonic Products Ltd.’s mix of distributed and manufactured products. The quarter-over-quarter increase in gross margin is also attributable to higher revenue from specialty optical fiber, partially offset by Photonic Products Ltd.’s lower margin product mix.
Operating Expenses
Operating expenses increased 52% year-over-year to $3.5 million for the third quarter of 2007 and were approximately $97,000 lower than the second quarter of 2007, of which $56,000 was non-cash share-based compensation. The year-over-year increase was driven by consulting fees related to Sarbanes Oxley compliance and other IT expenditures as well as additional operating expenses and non-cash amortization of intangible assets related to Photonic Products Ltd. Research and development expenses were $0.7 million for the third quarter of 2007 or 8% of revenues, approximately the same as 2006 and a decrease of $149,000 quarter-over-quarter. This is mainly due to an increase in funded research and development during the third quarter. Selling, general and administrative expense totaled $2.5 million or 32% of revenues for the third quarter of 2007.
Non-Operating Expenses
Other expenses (primarily debt discount amortization, financing costs and interest expense) totaled $0.6 million for the third quarter of 2007 was flat compared to the three months ended September 30, 2006, mainly due to $148,000 foreign currency gain recorded on the cash flow hedge during the third quarter. It also represents a decrease of $0.4 million or 39% compared to the second quarter of 2007.
Net Income (Loss)
Net loss including discontinued operations was $1.3 million or $(0.04) per share for the third quarter of 2007 compared with $1.2 million or ($0.04) per share for the third quarter of 2006 and $2.1 million or ($0.06) per share for the second quarter of 2007.
Provision (Benefit) for Income Taxes
We have recorded a valuation allowance against our net deferred tax assets after concluding that it is more likely than not that we will not be able to use those deferred tax assets. The Company recorded an income tax benefit of $74,000 for the quarter ended September 30, 2007 related to one of its non-U.S. based subsidiaries.
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NINE MONTHS ENDED SEPTEMBER 30, 2007 AND 2006
Net Sales
Net sales were $22.3 million for the nine months ended September 30, 2007, a 65% increase over $13.5 million for the nine months ended September 30, 2006. LED revenues increased by 50%, laser and associated diode revenues increased by 94%, mostly due to Photonic Products Ltd., which was 33% of the total revenue for the period. Specialty optical fiber revenues increased by 53% for the period. Geographic distribution of our first nine months sales was 48% in the U.S., 7% in Canada, 31% in Europe, and 8% in Asia.
Gross Profit
Gross profit was $7.5 million for the nine months ended September 30, 2007. This represents an increase of 51% from $5.0 million for the first nine months of 2006. During the nine months ended September 30, 2007, gross margin was 34% compared with 37% in the first nine months of 2006, due to the inclusion of Photonic Products Ltd.’s mix of distributed and manufactured products and associated overhead expense.
Operating Expenses
Operating expenses totaled $10.7 million for the nine months ended September 30, 2007, increasing 44% year-over-year. The increase was primarily due to expenses incurred to comply with Sarbanes Oxley compliance and other IT expenditures as well as additional operating expenses and non-cash amortization of intangible assets related to Photonic Products. Non-cash amortization of intangible assets increased $0.7 million. Research and development spending increased by 9.5% to $2.3 million, but declined as a percentage of revenue to 10% from 15%. Sales and marketing and general and administrative expense increased 46%, or $2.4 million, but declined as a percentage of revenue to 34% from 38%.
Operating loss for the first nine months of 2007 was $3.1 million compared with operating losses of $2.4 million for the first nine months of 2006.
Non-Operating Expenses
Other expenses, which are comprised primarily of non-cash debt discount amortization and financing costs and interest expense, increased by $1.1 million, or 103%, for the nine months ended September 30, 2007 mainly due to new borrowing in October 2006 for the acquisition of Photonic Products Ltd. and the costs associated with the Laurus Master Fund note amendment.
Net Income (Loss)
Net loss including discontinued operations was $5.1 million or $0.15 per share. This compares to net loss of $3.5 million or $0.12 per share for the first nine months of 2006.
Provision (Benefit) for Income Taxes
We have recorded a valuation allowance against our net deferred tax assets after concluding that it is more likely than not that we will not be able to use those deferred tax assets. The Company recorded an income tax benefit for the nine months ended September 30, 2007 related to one of its non-U.S. based subsidiaries.
LIQUIDITY AND CAPITAL RESOURCES
Our September 30, 2007 cash balance of $2.5 million was $1.1 million higher than our cash balance on December 31, 2006.
For the quarter ended September 30, 2007, cash increased $0.8 million as compared to the same period of 2006, during which cash decreased by $0.9 million. Cash used by operating activities was $1.0 million primarily resulting from an operating loss of $1.3 million offset partially by $1.2 million of non-cash charges for depreciation, amortization, and stock compensation. In addition, the Company contributed $1.0 million from financing activities mainly from net proceeds relating to the issuance of a stock from the exercise of warrants. The Company paid $0.5 million for capital investment activities, which were partially offset by $0.2 million in new capital leases. For the quarter ended September 30, 2006, cash used in operating activities was $1.0 million, financing activities decreased by $1.0 million, and cash used by investing activities was approximately $0.5 million.
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For the nine months ended September 30, 2007, cash increased $1.1 million compared to the same period of 2006. Cash used by operating activities for continuing operations was $4.1 million primarily resulting from an operating loss of $5.1 million offset partially by $3.8 million of non-cash charges for depreciation, amortization, and stock-based compensation. Total financing activities conducted during the first nine months of 2007 contributed $4.5 million in cash mainly from net proceeds from the sale of common stock ($3.5 million) and from net proceeds from the issuance of a note ($2.3 million) for the nine months ended September 30, 2007. We made principal payments of debt of $1.5 million. Investing activities for the first nine months of 2007 were $(0.7) million mainly for the acquisition of plant and equipment. In the nine months ended September 30, 2006, cash used in operating activities for continuing operations was $1.3 million, cash used by financing activities for continuing operations was $(1.1) million, and cash used by investing activities for continuing operations was $0.2 million.
The current ratio (the ratio of current assets to short term liabilities) as of September 30, 2007 was 1.52. As of December 31, 2006, the current ratio was 1.15. Significant items contributing to the increase in working capital included an increase in receivables balances consistent with the increase in revenues offset by the September 25, 2007 $1.2 million cash received related to the sale of stock upon the exercise of warrants as noted below.
On September 25, 2007, Mark Hawtin exercised warrants for the purchase of 1,140,741 shares of the Company’s common stock and paid at an average per share exercise price of $1.08 per share, or approximately $1,226,667 to the Company.
On June 28, 2006, the Company entered into a Security and Purchase Agreement with Laurus Master Fund, Ltd. Under the Security Agreement, a three-year revolving line of credit was established as described below under “Borrowing Arrangements.” The Company may borrow a total amount at any given time up to $4,000,000, limited to qualifying receivables and inventories, as defined in the agreement, for our working capital needs.
On January 26, 2007, the Company entered into a Securities Purchase Agreement with Smithfield Fiduciary LLC, under which we sold and issued for an aggregate purchase price of $2,300,000 to Smithfield Fiduciary LLC 2,000,000 shares of our common stock at a per share purchase price of $1.15 (a discount to the 30 day trading average) and a 10-year warrant to purchase 1,000,000 shares of common stock at an exercise price of $1.72 per share. The Company is using the proceeds from the transaction with Smithfield Fiduciary LLC for general working capital, including investments in our information technology infrastructure and accelerated operational improvements.
On June 19, 2007, the Company and Laurus entered into a Note Amendment Agreement to the secured term note issued by the Company to Laurus on December 30, 2005. The amendment extended the maturity date of the December note from December 30, 2008 to June 30, 2010. The monthly principal payment on the revised combined note is presently $125,000. The interest rate is prime plus 2%. The interest rate was 9.75% as of September 30, 2007.
Our cash balance improved from $1.4 million at December 31, 2006 to $2.5 million at September 30, 2007 primarily as a result of the $2,300,000 we raised from Smithfield as described above, additional funds borrowed from Laurus under the term note and a warrant exercise for common stock by Mark Hawtin for approximately $1.2 million.
Despite higher revenues, inventory only increased by $0.2 million. Capital spending for the period was $0.7 million.
Headcount was 230 at September 30, 2007, up slightly from year-end due to the addition of manufacturing, R&D and sales personnel. We expect modest increases in headcount during the fourth quarter as a result of sales re-engineering program and research and development investments.
The Company’s current forecast calls for increased revenue, cash flow and asset turnover. It also calls for significant investments in sales and marketing, production and information technology that would impact near-term profitability. The Company intends to pursue various options to finance any acquisitions and also to fund operations, as necessary and believes that current cash, and its ability to raise additional funds will be adequate to finance operations over the next year even if it is unable to achieve all the goals in the business plan. Should the Company be unable to raise additional funds the Company would implement cost reduction strategies to conserve cash.
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OFF-BALANCE SHEET ARRANGEMENTS
We have no significant off-balance sheet arrangements, including derivative instruments that have or are reasonably likely to have a current or future material effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.
RISK FACTORS
We operate in a rapidly changing environment that involves a number of risks, some of which are beyond our control. Forward looking statements in this report and those made from time to time by us through our senior management are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward looking statements concerning the expected future revenues, earnings or financial results or concerning project plans, performance, or development of products and services, as well as other estimates related to future operations are necessarily only estimates of future results and there can be no assurance that actual results will not materially differ from expectations. Forward-looking statements represent management’s current expectations and are inherently uncertain. We do not undertake any obligation to update forward-looking statements. If any of the following risks actually occurs, our financial condition and operating results could be materially adversely affected.
In addition to the other information set forth in this report, you should carefully consider the factors discussed in “Risk Factors” in our annual report on Form 10-KSB for the year ended December 31, 2006, which could materially affect our business, financial condition or future results. The risks described in our annual report on Form 10-KSB are not the only risks facing our Company. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and/or operating results. The risk factors in this report were disclosed in our annual report on Form 10-KSB and have been updated to provide information as of the date of this filing unless a different date is referred to in the risk factor.
We need to obtain additional financing, which may not be available on favorable terms or at all.
As of September 30, 2007, we had cash and cash equivalents of approximately $2.5 million. On June 28, 2006, we established a three-year, $4 million revolving line of credit with Laurus Master Fund, Ltd. and issued 642,857 shares of our common stock to Laurus for $643. We used approximately $1.41 million of the proceeds available from this transaction to repay in full the amount outstanding under our credit facility with the National Bank of Canada. We may borrow a total amount at any given time up to $4 million under the line of credit, limited to qualifying receivables and inventories as defined in the agreement. As of September 30, 2007, $2,592,377 was outstanding under the line of credit, which has been classified as long-term debt.
On January 26, 2007, we sold and issued to Smithfield Fiduciary LLC 2,000,000 shares of our common stock at a per share purchase price of $1.15 (a discount to the 30 day trading average), for an aggregate purchase price of $2,300,000, and a 10-year warrant to purchase 1,000,000 shares of our common stock at an exercise price of $1.72 per share.
On June 19, 2007, we entered into a Securities Purchase Agreement with Laurus Master Fund Ltd. under which we borrowed $2,318,180 from Laurus. The note is due on June 30, 2010. We agreed to make monthly payments of principal and interest on the note beginning on July 1, 2007. Under the Securities Purchase Agreement we also sold and issued to Laurus an aggregate of 300,000 shares of common stock for an aggregate purchase price of $3,000.
Notwithstanding the completion of these financings, we have to raise additional capital but may not be able to find it on favorable terms or at all. If we are unsuccessful in raising additional capital, our business may not continue as a going concern. Even if we do find outside funding sources, we may be required to issue securities with greater rights than those currently possessed by holders of our common stock. We may also be required to take other actions that may lessen the value of our common stock or dilute our common stockholders, including borrowing money on terms that are not favorable to us or issuing additional equity securities. If we experience difficulties raising money in the future, our business and liquidity will be materially adversely affected.
We face risks related to securities litigation that could have a material adverse effect on our business, financial condition and results of operations.
Beginning in May 2005, three putative securities class action complaints were filed in the United States District Court for the District of New Hampshire against the Company and Mark Blodgett, the Company’s President, Chief Executive Officer and Chairman of the Board, Lawrence Blodgett, a former director, Francis O’Brien, the Company’s former Chief Financial Officer, Richard Lindsay, the Company’s former Chief Financial Officer, and Ricardo Diaz, the Company’s former Chief Operating Officer, purportedly on behalf
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of some of the Company’s shareholders. The complaints, which assert claims under the Securities Exchange Act of 1934, allege that some disclosures made by the Company in press releases dated April 19, 2004 and April 21, 2004 were materially false or misleading. The complaints seek unspecified damages, as well as interest, costs, and attorney’s fees. The three complaints were consolidated into one action and assigned to a single federal judge. The Court also appointed a group of lead plaintiffs and plaintiffs’ counsel, who filed a consolidated amended complaint to supersede the previously filed complaints. Mr. Lindsay is not named as a defendant in the amended complaint; therefore, he is not a party to the currently pending proceeding. The consolidated amended complaint asserts claims under Sections 10(b), 20(a), and 20A of the Securities Exchange Act of 1934, and Rule 10b-5 promulgated thereunder. On January 31, 2006, the Company and the individual defendants moved to dismiss all claims asserted in the consolidated amended complaint. On September 29, 2006, the Court ruled against the defendants on the motions to dismiss. On October 12, 2006, the Company and the individual defendants answered the consolidated amended complaint, denying all allegations of liability and setting forth affirmative defenses to the claims. On November 17, 2006, the Court approved a plan for the conduct of discovery in this matter. On June 26, 2007, a settlement agreement between the Company and the lead plaintiffs’ was submitted to the Court for its approval. Under the terms of the proposed settlement, which resolve all claims asserted against the Company and the individual defendants, plaintiffs would receive $3.4 million, to be paid entirely by the Company’s insurance carrier. On August 21, 2007, the Court preliminarily approved the proposed settlement and directed plaintiffs’ counsel to provide notice of the proposed settlement to members of the class by mail and newspaper publication. The Court also scheduled a fairness hearing for December 18, 2007, at which the Court will hear from any objectors to the proposed settlement and decide whether to grant final approval. The settlement remains conditioned upon final Court approval and expiration of the time for appeal from any order of the Court approving the settlement.
There is no assurance that final approval of the settlement will be obtained. If the settlement is not approved, though we intend to vigorously contest the allegations in the securities complaint, we are not able to predict the outcome of this litigation or the application of, or coverage provided by, our insurance carriers. If the settlement is not approved, there is no assurance our current and former directors and officers and we will prevail in defending this action or that our insurance policies will cover all or any expenses or financial obligations arising from the lawsuit. If our defenses are ultimately unsuccessful, or if we are unable to achieve a favorable settlement or coverage from our insurance carriers, we could be liable for large damage awards that could have a material adverse effect on our business, results of operations and financial condition results may be adversely affected.
Quantitative and Qualitative Disclosure about Market Risk
Foreign Currency Exchange Rate Risk
We have entered into forward foreign currency exchange rate contracts and option contracts with financial institutions to reduce the risk that our cash flows and earnings will be adversely affected by foreign currency exchange rate fluctuations between the U.S. dollar and the Canadian dollar. These programs are not designed for trading or speculative purposes. We do not believe that our Cork, Ireland subsidiary has material foreign currency exchange rate exposure. In accordance with SFAS No. 133, we recognize derivative instruments as either assets or liabilities on the balance sheet at fair value. These forward contracts are not accounted for as hedges and, therefore, changes in the fair value of these instruments are recorded as interest income and other, net. Neither the cost nor the fair value of the contracts was material at December 31, 2006. The notional principal of our forward contracts to purchase Canadian dollars with foreign currencies as of December 31, 2006 was $1,250,000 U.S. The fair value of our open forward contracts was $31,900 U.S. as of December 31, 2006 and is recorded in the accompanying condensed consolidated balance sheet. The net impact of these forward contracts during 2006 was a net loss of $14,500 U.S. and it was recorded in the accompanying condensed consolidated statement of operations. The net gain recorded in the quarter ended March 31, 2007 on these remaining forward contracts was $8,559 U.S.
The objective of this option contract is to limit the fluctuations in prices paid materials and labor and the potential volatility in cash flows from future foreign exchange rate movements in the Canadian dollar versus the U.S. dollar. The Company continually evaluates those foreign currency exchange rates with respect to its future usage requirements.
On December 6, 2006 we entered into a forward foreign currency exchange rate contract with Anglo-Irish bank to convert $500,000 U.S. per month into Canadian dollars at a strike rate with a bottom end range of $1.09 Canadian dollar to the U.S. dollar, and 100% upside flexibility to market rates in excess of the $1.09 strike rate. This arrangement began on March 1, 2007 and continues until December 31, 2007. We paid a premium of $61,500 U.S. to the bank on this date. At September 30, 2007, the value of this contract was approximately $148,000 U.S. and has been recorded in the accompanying financial statements and balance sheet.
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Management has determined that all of our foreign subsidiaries operate primarily in local currencies that represent the functional currencies of the subsidiaries. All assets and liabilities of foreign subsidiaries are translated into U.S. dollars using the foreign currency exchange rate prevailing at the balance sheet date, while income and expense accounts are translated at average exchange rates during the year. Our operating results are affected by fluctuations in the value of the U.S. dollar as compared to currencies in foreign countries, as a result of our transactions in these foreign markets.
Interest Rate Risk
We are exposed to market risk from changes in interest rates, which may adversely affect our financial position, results of operations and cash flows. In seeking to minimize the risks from interest rate fluctuations, we manage exposures through our regular operating and financing activities. We are exposed to interest rate risk primarily through our borrowings under the Laurus Master Fund Ltd. line of credit of $2.592 million with an interest rate of prime plus 1% and the Laurus Master Fund, Ltd. term note of $4.5 million with an interest rate of prime plus 2%. As of September 30, 2007, the fair market value of our outstanding debt approximates the carrying value due to short-term maturities, variable interest rates and comparisons to current market fixed rate instruments.
Item 3. | Controls and procedures |
Evaluation of disclosure controls and procedures.
We conducted an evaluation, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of the end of the period covered by this report. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures are effective, as of the end of the period covered by this report, to ensure that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission rules and forms, and that the information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.
Changes in internal control over financial reporting.
There was no change in our internal control over financial reporting during the quarter to which this report relates that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
Item 1. | Legal Proceedings |
Beginning in May 2005, three putative securities class action complaints were filed in the United States District Court for the District of New Hampshire against the Company and Mark Blodgett, the Company’s President, Chief Executive Officer and Chairman of the Board, Lawrence Blodgett, a former director, Francis O’Brien, the Company’s former Chief Financial Officer, Richard Lindsay, the Company’s former Chief Financial Officer, and Ricardo Diaz, the Company’s former Chief Operating Officer, purportedly on behalf of some of the Company’s shareholders. The complaints, which assert claims under the Securities Exchange Act of 1934, allege that some disclosures made by the Company in press releases dated April 19, 2004 and April 21, 2004 were materially false or misleading. The complaints seek unspecified damages, as well as interest, costs, and attorney’s fees. The three complaints were consolidated into one action and assigned to a single federal judge. The Court also appointed a group of lead plaintiffs and plaintiffs’ counsel, who filed a consolidated amended complaint to supersede the previously filed complaints. Mr. Lindsay is not named as a defendant in the amended complaint; therefore, he is not a party to the currently pending proceeding. The consolidated amended complaint asserts claims under Sections 10(b), 20(a), and 20A of the Securities Exchange Act of 1934, and Rule 10b-5 promulgated thereunder. On January 31, 2006, the Company and the individual defendants moved to dismiss all claims asserted in the consolidated amended complaint. On September 29, 2006, the Court ruled against the defendants on the motions to dismiss. On October 12, 2006, the Company and the individual defendants answered the consolidated amended complaint, denying all allegations of liability and setting forth affirmative defenses to the claims. On November 17, 2006, the Court approved a plan for the conduct of discovery in this matter.
On June 26, 2007, a settlement agreement between the Company and the lead plaintiffs in the class action lawsuit was submitted to the United States District Court for the District of New Hampshire for its approval. Under the terms of the proposed settlement, which would resolve all claims asserted against the Company and the individual defendants, plaintiffs would receive $3.4 million, to be paid entirely by the Company’s insurance carrier. On August 21, 2007, the Court preliminarily approved the proposed settlement and directed plaintiffs’ counsel to provide notice of the proposed settlement to members of the class by mail and newspaper publication.
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The Court also scheduled a fairness hearing for December 18, 2007, at which the Court will hear from any objectors to the proposed settlement and decide whether to grant final approval. The settlement remains conditioned upon final court approval and expiration of the time for appeal from any order of the Court approving the settlement. There can be no assurance that final approval of the settlement will be obtained.
Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds |
On September 25, 2007, the Company issued and sold an aggregate of 1,140,741 shares of common stock to Mark Hawtin upon the exercise of outstanding warrants. The aggregate purchase price received by the Company upon the exercise of the warrants and the issuance of the shares of common stock was $1,226,666.97. The issuance and sale of the shares was effected without registration in reliance on Section 4(2) of the Securities Act of 1933, as amended, and Rule 506 of Regulation D promulgated thereunder, as a sale by the Company not involving a public offering. No underwriters were involved with the issuance and sale of the shares.
On October 18, 2007, the Company issued an aggregate of 214,174 shares of its common stock, as partial consideration for the purchase of substantially all of the assets of Spectrode LLC. The fair market value of the shares was calculated based on the average closing price per share of the Company’s common stock on the Nasdaq Global Market for the 10 trading day period ending on October 17, 2007, the trading day prior to the closing of the acquisition. The issuance of the shares was effected without registration in reliance on Section 4(2) of the Securities Act of 1933, as amended, and Rule 506 of Regulation D promulgated thereunder, as a sale by the Company not involving a public offering. No underwriters were involved with the issuance and sale of the shares.
Item 5. | Other Information |
Subsequent Events
Change in Directors and Acquisition of Spectrode, LLC
On October 29, 2007, the Board of Directors of the Company, following a recommendation of the Governance, Nominating and Compensation Committee of the Board (the “GNC Committee”), elected Parviz Tayebati to the Board of Directors.
In accordance with the Company’s Policy Regarding Compensation of Independent Directors, on November 5, 2007, the Company granted to Mr. Tayebati an aggregate of 14,723 shares of common stock of the Company having an aggregate market value of $16,931.51, based upon the closing price per share of the common stock as reported on the Nasdaq Global Market on the date of grant. The shares of common stock shall be restricted, and the restrictions lapse as to 25% of the shares per annum on each of the first, second, third and fourth anniversaries of the date of grant. Restrictions lapse as to 100% of the shares upon the Company achieving positive cash flow from operations for two consecutive fiscal years.
On October 18, 2007, the Company acquired substantially all of the assets of Spectrode LLC (“Spectrode”) for an aggregate purchase price of $375,000, consisting of $100,000 in cash and 214,174 unregistered shares of the Company’s common stock. In addition, the Company is required to pay to Spectrode a continuing royalty payment equal to 1% of sales revenue for lasers sold by the Company or any third party at any time after the closing using technology covered by a certain patent application of Spectrode. The obligation of the Company to make these royalty payments terminates (i) if one or more U.S. or other patents are issued with respect to the technology, then upon the expiration of the last such patent to expire, or (ii) if no U.S. or other patents are issued with respect to the technology, then upon the twentieth anniversary of the closing of the acquisition.
The Asset Purchase Agreement relating to the acquisition of the Spectrode assets by the Company provided that following the closing of the acquisition, Mr. Tayebati would be elected to the Board of Directors of the Company, subject to the approval of the GNC Committee and the Board of Directors.
Other Information
During the quarter ended September 30, 2007, we made no material changes to the procedures by which shareholders may recommend nominees to our Board of Directors, as described in our most recent proxy statement.
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Item 6. | Exhibits |
(a) The following is a complete list of exhibits filed as part of this Form 10-QSB.
3.1 Amended and Restated Bylaws of the Registrant are incorporated herein by reference to Exhibit 3.2 of the Registrant’s Annual Report on Form 10-KSB filed on March 31, 2005 (File No. 000-27372).
3.2 Amendment No. 1 to Amended and Restated ByLaws of the Registrant, dated August 28, 2007, is incorporated herein by reference to Exhibit 3.1 of the Registrant’s Current Report on Form 8-K filed on August 30, 2007 (File No. 000-27372).
31.1 Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2 Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1 Certification of the Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2 Certification of the Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
In accordance with the requirements of the Securities Exchange Act of 1934, the Registrant caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
STOCKERYALE, INC. | ||||
Date: November 14, 2007 | By: | /s/ MARK W. BLODGETT | ||
Mark W. Blodgett | ||||
President, Chief Executive Officer and Chairman of the Board | ||||
Date: November 14, 2007 | By: | /s/ MARIANNE MOLLEUR | ||
Marianne Molleur | ||||
Senior Vice President and Chief Financial Officer |
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