STOCKERYALE INC - 10-Q Quarterly Report

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

As of July 31, 2003 there were 14,314,659 shares of the issuer's common stock outstanding.

In thousands, except per share data





		Thee Months						Six Months
		Ended June 30,						Ended June 30,
		2003			2002			2003			2002
Net sales	$	3,586		$	3,523		$	7,170		$	6,431
Cost of sales		2,800			2,907			5,435			5,491
Gross profit		786			616			1,735			940
Operating expenses:
Selling expenses		773			869			1,549			1,903
General and administrative		1,106			1,445			2,334			3,300
Amortization expense		79			79			159			169
Research and development		926			1,987			1,816			3,751
Total operating expenses		2,884			4,380			5,858			9,123
Operating loss		(2,098	)		(3,764	)		(4,123	)		(8,183	)
Interest and other income/(expense)		(52	)		180			(130	)		189
Interest expense		253			85			437			170
Loss before income tax benefit		(2,403	)		(3,669	)		(4,690	)		(8,164	)
Income tax benefit		0			0			(150	)		0
Net loss	$	(2,403	)	$	(3,669	)	$	(4,540	)	$	(8,164	)
Basic and diluted loss per share:
Net loss per share	$	(0.18	)	$	(0.29	)	$	(0.35	)	$	(0.65	)
Weighted average shares outstanding:
Basic and diluted		13,319			12,721			13,050			12,598

The interim condensed consolidated financial statements presented have been prepared by StockerYale, Inc. (the "Company") are unaudited and, in the opinion of the management, reflect all adjustments of a normal recurring nature necessary for a fair statement of (a) the results of operations for the three and six months ended June 30, 2003 and 2002, (b) the financial position at June 30, 2003 and December 31, 2002, and (c) the cash flows for the six month periods ended June 30, 2003 and 2002. These interim results are not necessarily indicative of results for a full year or any other interim period.

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

The Company has prepared the unaudited condensed financial statements on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. The Company will be required to generate sufficient cash flow to meet its obligations on a timely basis through improved operations, refinancing of existing debt and/or additional financing.

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

In accordance with Statement of Financial Accounting Standards ("SFAS") No. 128, Earnings per Share, basic and diluted net loss per common share for the three and six months ended June 30, 2003 and 2002 is calculated by dividing the net loss applicable to common stockholders by the weighted average number of common shares outstanding. There were 3,223,886 and 2,929,319 options and 672,000 and 19,500 warrants outstanding as of June 30, 2003 and 2002, respectively, which were not included in the diluted per share calculation because their inclusion would be anti-dilutive.

4 / STKR

2003 Form 10-Q

Table of Contents

Part I

Item 1

(3) INVENTORIES

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

(in thousands)	June 30, 2003		December 31, 2002
Finished goods	$	834	$	1,028
Work-in-process	147		101
Raw materials	3,898		3,349
	$	4,879	$	4,478

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

(4) STOCK BASED COMPENSATION

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

(in thousands)		Three Months Ended

Six Months Ended

		June 30,

June 30,

			2003			2002


2003



2002

Net loss as reported		$	(2,403	)	$	(3,669	)

$
(4,540	)

$
(8,164	)
Additional compensation expense			(1,078	)		(1,232	)


(2,153	)


(2,090	)
Pro forma		$	(3,481	)		(4,901	)

$
(6,693	)


(10,254	)
Net loss per share (basic and diluted)






As reported		$	(0.18	)	$	(0.29	)

$
(0.35	)

$
(0.65	)
Pro forma			(0.26	)		(0.39	)


(0.51	)


(0.81	)

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


	For the Quarter Ended June 30,
	2003	2002
Volatility	114%	111%
Expected option life-years from vest	5	5
Interest rate (risk free)	2.27%	4.40%
Dividends	None	None

5 / STKR

2003 Form 10-Q

Table of Contents

Part I

Item 1

(5) 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 income (loss) is as follows:

(in thousands)		Three Months Ended						Six Months Ended
		June 30,						June 30,
		2003			2002			2003			2002
Net loss	$	(2,403	)	$	(3,669	)	$	(4,540	)	$	(8,164	)
Other comprehensive income (loss):
Cumulative translation adjustment		640			307			1,189			466
Comprehensive loss	$	(1,763	)	$	(3,362	)	$	(3,351	)		(7,698	)

(6) INTANGIBLE ASSETS

Intangible assets consist primarily of acquired patented technology and trademarks. Intangible assets are amortized over their estimated useful lives which range from two to five years. The Company has no intangible assets with indefinite lives. The Company reviews intangible assets when indications of potential impairment exists, such as a significant reduction in cash flows associated with the assets. Intangible assets as of June 30, 2003 and 2002 are as follows:



	For the Quarter Ended
(in thousands)	June 30, 2003		December 31, 2002
Identified intangible assets	$	3,549	$	3,549
Less: accumulated amortization	$	1,920	$	1,764
	$	1,629	$	1,785

Amortization of intangible assets was $79,000 and $79,000 for the three months ended June 30, 2003 and 2002, respectively and $159,000 and $169,000 for the six months ended June 30, 2003 and 2002, respectively.

As of June 30, 2003, the estimated future amortization expense of intangible assets, in thousands, is as follows:

2003				2004				2005				2006				2007 and thereafter
$	162			$	318			$	318			$	318			$	513

(7) 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.

6 / STKR

2003 Form 10-Q

Table of Contents

Part I

Item 1

(8) REVENUE RECOGNITION

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. In certain limited situations, customers 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 provides a reserve.

(9) RECENT ACCOUNTING PRONOUNCEMENTS

In June, 2002, FASB issued SFAS No. 146, Accounting for Cost Associated with Exit or Disposal Activities. SFAS No. 146 nullifies previous guidance on accounting for costs associated with exit or disposal activities and requires a liability for these costs to be recognized and measured at its fair value in the period in which the liability is incurred. SFAS No. 146 is effective for exit or disposal activities initiated after December 31, 2002. The Company did not exit or dispose of any activities during the first or second quarters of 2003.

(10) SEGMENT INFORMATION

The Company has adopted the SFAS No. 131, Disclosures About Segments of an Enterprise and Related information. SFAS No. 131 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 illumination segment develops and manufactures specialized illumination products for the inspection, machine vision, medical and military markets. Illumination products are sold both through distributors as well as directly to original equipment manufacturers (OEM's). The optical components segment develops and manufactures specialty optical fibers and phase masks used primarily in sensor, gyroscope and telecommunication equipment. Optical component products are sold primarily to original equipment manufacturers (OEM's).

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. The Company's non-allocable 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.

7 / STKR

2003 Form 10-Q

Table of Contents

Part I

Item 1

The Corporate assets include cash and cash equivalents, buildings and furniture and fixtures.


	Quarter Ended June 30, 2003									Quarter Ended June 30, 2002
	Illumination			Optical Components			Total			Illumination(1)			Optical Components			Total
Net sales	$	3,373		$	213		$	3,586		$	3,177		$	346		$	3,523
Gross margin		1,070			(284	)		786			547			69			616
Operating loss		(599	)		(1,499	)		(2,098	)		(1,012	)		(2,752	)		(3,764	)


	Six Months Ended June 30, 2003									Six Months Ended June 30, 2002
	Illumination			Optical Components			Total			Illumination(1)			Optical Components			Total
Net sales	$	6,561		$	609		$	7,170		$	5,774		$	657		$	6,431
Gross margin		2,127			(392	)		1,735			811			129			940
Operating loss		(1,167	)		(2,956	)		(4,123	)		(2,870	)		(5,313	)		(8,183	)


	June 30, 2003								December 31, 2002
	Illumination		Optical Components		Corporate		Total		Illumination		Optical Components		Corporate		Total
Total current assets	$	6,711	$	536	$	3,402	$	10,879	$	6,301	$	404	$	5,790	$	12,495
Property, plant & equipment		781		11,213		11,345		23,339		777		9,699		13,174		23,650
Intangible assets		1,629		-		-		1,629		1,785		-		-		1,785
Goodwill		2,677		-		-		2,677		2,677		-		-		2,677
Other assets		991		60		194		1,015		405		59		249		713
	$	12,789	$	11,809	$	14,941	$	39,539	$	11,945	$	10,162	$	19,213	$	41,320

(1) Illumination revenue in 2002 includes printer and recorder revenues which were transferred to an outside distributor in 2003.

The Company's export sales are denominated in U.S. dollars. These sales are as follows:

	Three Months Ended June 30,				Six Months Ended June 30,
Export sales by region (in thousands)		2003		2002			2003		2002
United States	$	2,152	$	2,114	$	4,302		$	3,859
Canada		322		317		645			579
Europe		789		775		1,577			1,415
Asia		323		317		646			578
Total sales	$	3,586	$	3,523	$	7,170		$	6,431

8 / STKR

2003 Form 10-Q

Table of Contents

Part I

Items 1, 2

(11) DEBT

National Bank of Canada

On May 26, 2003, the Company entered into a credit agreement with the National Bank of Canada replacing the facility with Toronto Dominion Bank. The new agreement provides total borrowing availability up to $4,800,000 CDN. Initial proceeds were used to pay off the credit agreement with Toronto Dominion Bank.

The credit facility consists of a $2,500,000 CDN line of credit secured by accounts receivable and inventory bearing a variable interest rate of Canadian prime rate plus 1.5% and a $2,300,000 CDN ten year term note bearing a variable interest rate of Canadian prime rate plus 2.25%. The term note availability is $1,300,000 CDN net of a $1,000,000 CDN term deposit. The term deposit will become available to the Company at a rate of $125,000 CDN per quarter based upon the Company (StockerYale Canada) achieving 90% of its forecasted earnings before interest, depreciation, taxes and amortization (EBIDTA).

As of June 30, 2003, $1,654,000 CDN was outstanding under the line of credit and $2,300,000 CDN was outstanding under the term note. As of June 30, 2003 the interest rate on the line of credit and the term note were 6.50% and 7.25%, respectively.

The National Bank of Canada credit facility requires the following financial covenants including: working capital, net worth, capital expenditures, a financial coverage ratio and maximum inventory levels. The Company's Canadian subsidiary was in compliance with all provisions of the credit agreement as of June 30, 2003.

TJJ Corporation

The amended TJJ Corporation term note requires the Company to maintain a stockholders' equity balance of at least $22.0 million. As of June 30, 2003, the Company's stockholders' equity balance was $22.5 million.

(12) PRIVATE PLACEMENT

In June, the Company raised $1,200,000 through a private placement of equity composed of 1,610,000 shares of common stock at $0.60 per share plus $270,000 convertible at $0.60 per share less issuance costs.

Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND OPERATING RESULTS

This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and section 21E of the Securities Exchange Act of 1934. The company's actual results could differ materially from those set forth in the forward-looking statements. When the Company uses words such as "anticipate," "believe," "estimate," "expect," "intend," and other similar expressions, they generally identify forward-looking statements. Forward-looking statements include, for example, statements relating to acquisitions and related financial information, development activities, business strategy and prospects, future capital expenditures, sources and availability of capital, environmental and other regulations and competition. Investors should exercise caution in interpreting and relying on forward-looking statements since they involve known risks, uncertainties and other factors which are, in some cases, beyond the company's control and could materially affect the Company's actual results, performance or achievements. Such factors include, without limitation: market conditions that could make it more difficult or expensive for the Company to obtain the necessary capital to finance its research and development projects, operations, as well as its ability to refinance existing debt; the existence of other independent suppliers of optical fiber, who may have greater resources than the Company; and the uncertainty that the company's significant investments in research and development will not result in products that achieve market acceptance. Additional such factors are discussed in the section entitled "certain factors affecting future operating results" on page 20 of the Company's annual report on form 10-K for the fiscal year ended December 31, 2002.

9 / STKR

2003 Form 10-Q

Table of Contents

Part I

Item 2

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-K for the year ended December 31, 2002.

THREE MONTHS ENDED JUNE 30, 2003 AND 2002

Net Sales

For the quarter ended June 30, net sales increased $0.1 million or 2% from $3.5 million in 2002 to $3.6 million in 2003. Illumination revenues increased $0.4 million or 14% over the comparable period in 2002 which more than offest a modest decline in phase mask sales and the elimination of printer and recorder revenue resulting from the transfer of this product line to an outside distributor in the fourth quarter of 2002. Fiber optic lighting from the Company's Salem facility, structured light laser sales from the Company's Canadian subsidiary and initial shipments of recently announced major orders from the Company's operations in Ireland (LEDs) and Singapore (advanced imaging systems) were the principal factors driving the illumination gain.

Gross Profit

Gross margins improved from $0.6 million or 17% of sales in 2002 to $0.8 million or 22% of sales in 2003 as increased sales and lower manufacturing overhead contributed incremental profits of $0.1 million and $0.1 million, respectively.

Operating Expenses

Operating expenses decreased $1.5 million or 34% from $4.4 million in the second quarter of 2002 to $2.9 million in the second quarter of 2003. Research and development expenses declined $1.1 million or 53% due to reduced salaries and benefits, lower development costs and the elimination of joint venture expenditures. Lower salaries and commissions combined with tighter marketing expenditures resulted in a $0.1 million or 11% decline in selling expenditures. General and administrative expenses were reduced $0.3 million or 23% due to lower salaries, travel and professional fees.

Interest Expense

Interest expense was $253,000 in the second quarter of fiscal 2003 compared to $85,000 in 2002 due to both higher interest rates and a higher level of borrowing.

Provision (Benefit) for Income Taxes

The Company's historical operating losses raise doubt as to the realizability of the deferred tax assets. As a result, management has provided a valuation allowance for the net deferred tax assets that may not be realized.

10 / STKR

2003 Form 10-Q

Table of Contents

Part I

Item 2

SIX MONTHS ENDED JUNE 30, 2003 AND 2002

Net Sales

For the six months ended June 30, net sales increased $0.8 million or 11% from $6.4 million in 2002 to $7.2 million in 2003. Illumination revenues increased $1.4 million or 25% over the comparable period in 2002 which more than offset a decline in phase mask sales and a $0.4 million decline from the elimination of printer and recorder revenue resulting from the transfer of this product line to an outside distributor in the fourth quarter of 2002. Specialty fiber sales increased $0.1 million over 2002. Structured light laser sales from the Company's Canadian subsidiary and initial shipments of recently announced major orders from the Company's operation in Ireland (LEDs) and Singapore (advanced imaging systems) were the principal factors driving the illumination gain.

Gross Profit

Gross margins improved from $0.8 million or 85% in 2003 to $1.7 million or 24% of sales as increased sales and lower manufacturing overhead contributed incremental profits of $0.6 million and $0.2 million, respectively.

Operating Expenses

Operating expenses decreased $3.3 million or 36% from $9.1 million for the first six months of 2002 to $5.9 million in the first six months of 2003. Research and development expenses declined $1.9 million or 52% due to reduced salaries, lower development costs and the elimination of joint venture expenditures. The Company's focus on only those product development projects, which would positively impact near-term revenue, resulted in a 35% reduction in research and development headcount. Lower salaries and commissions combined with tighter marketing expenditures resulted in a $0.4 million or 19% decline in selling expenditures. General and administrative expenses were reduced $1.0 million or 29% due to lower salaries, travel and professional fees. Overall, the cost realignment programs implemented in the second half of 2002 eliminated 62 positions, reducing total headcount from 223 to 161, as of the six months ended June 30, 2002 and 2003, respectively.

Interest Expense

Interest expense was $437,000 for the six months ended June 30, 2003 compared to $170,000 in 2002 due to both higher interest rates and a higher level of borrowing.

Net Income (Loss)

Net loss for the six months ended June 30, 2003 decreased $3.7 million or 43% to $4.5 million compared to a net loss of $8.2 million for the same period in 2002.

Provision (Benefit) for Income Taxes

11 / STKR

2003 Form 10-Q

Table of Contents

Part I

Item 2

LIQUIDITY AND CAPITAL RESOURCES

As discussed in both the previously filed Form 10-K for the year ended December 31, 2002 and Form 10-Q for the quarter ended March 31, 2003, the Company is pursuing various options to raise additional capital to finance operations.

Two of these options were consummated in the second quarter of 2003, including the completion of refinancing the Company's Canadian subsidiary's credit facility with the National Bank of Canada and closing a $1.2 million equity placement with several of the Company's institutional investors. The new National Bank of Canada credit facility did not raise any additional capital. The new facility principally retired the Toronto Dominion (TD) Bank facility upon closing, however, the new facility provides the Company incremental future financing beyond the levels available under the TD Bank loan agreement. The private placement of $1,200,000 was composed of 1,610,000 shares of common stock at $0.60 per share plus $270,000 convertible at $0.60 per share less issuance expenses.

The Company is also evaluating several short-term options to raise additional funds through the sale of real estate and/or a private placement of equity/debt securities. The Company expects to make a final decision on these options by the end of the third quarter. The Company also expects to submit a proposal in the third quarter for a Canadian government development loan. The Company anticipates a decision by the Canadian government in the fourth quarter with funding commencing in the first quarter of 2004.

The Company can give no assurances to the timing or terms of such arrangements, assuming it is able to consummate one or more of these options. If the Company is unable to raise sufficient funds through these options by the end of the third quarter of 2003, it will need to implement further cost reduction strategies, and the Company will not have adequate capital to sustain its current operations.

For the six months ended June 30, 2003, unrestricted cash and cash equivalents decreased $2.5 million. Cash used in operating activities was $3.5 million for the period ended June 30, 2003 which primarily resulted from an operating loss of $4.5 million excluding cash and debt, partially offset by a $1.5 million in depreciation and amortization.

Cash from financing activities was $0.7 million principally due to in proceeds from the sale of common stock as the refinancing of the Canadian credit facility was cash neutral.

Investing activities provided $0.2 million as proceeds from a land sale in Montreal offset nominal capital expenditures.

TJJ Corporation

On December 27, 2002, the Company entered into a Term Note agreement with TJJ Corporation. The Term Note is a $5 million, three-year note due December 26, 2005, secured by the Company's Salem headquarters and bears an interest rate of 8.5%. The note allows the Company to initially draw down $4,000,000 subject to a 2% commitment fee. The Company had the option to draw down the additional $1,000,000 subject to a 1.25% commitment fee in increments of $250,000 which was exercised in full in March 2003. In addition, the Company issued warrants to purchase 250,000 shares of the Company's common stock. The warrants can be exercised over a five-year period and each warrant can be exchanged for one share of common stock at a purchase price of $1.35 per share. As of June 30, 2003, $5,000,000 was outstanding under the Term Note Agreement. The Term Note was issued together with the warrants. The aggregate purchase price of the Term Note and the warrants ($5,000,000) was allocated between the Term Note and the warrants based upon their relative fair market values. The purchase price assigned to the Term Note and warrants was $4,753,256 and $246,744 respectively. The difference between the face amount of the Term Note, and the aggregate purchase price allocated to the Term Note $4,753,256 was recorded as debt discount, and is being amortized over the life of the Term Note. As of June 30, 2003, $5,000,000 was outstanding under the Term Note and the Company was in compliance with the covenants of the Term Note. The Term Note requires the Company to maintain stockholders' equity of $22.0 million. The Company's stockholders' equity was $22.5 million at June 30, 2003. The Company was in compliance with all provisions of the agreement as of June 30, 2003.

12 / STKR

2003 Form 10-Q

Table of Contents

Part I

Item 2

Merrill Lynch Financial Services

On May 19, 2001, the Company entered into a credit agreement with Merrill Lynch Financial Services, Inc. providing total borrowing availability up to $6,000,000. Initial proceeds were used to pay off the credit agreement between the Company and Wells Fargo Business Credit, Inc. The initial credit facility with Merrill Lynch consisted of a line of credit of up to $2,500,000 and a reducing revolver in the amount of $3,500,000. On April 24, 2002, the Company entered into an amendment of the credit agreement, which increased the borrowing availability up to $7,000,000 by increasing the line of credit to $3,500,000 and maintaining the reducing revolver at $3,500,000.

On December 27, 2002, the Company entered into a second amendment of the credit agreement, which decreased the borrowing availability to $6,000,000 by decreasing the line of credit to $2,500,000 as of July 31, 2003 and maintaining the reducing revolver at $3,500,000. The line of credit is subject to review and renewal as of July 31, 2003. As of June 30, 2003, $2,624,993 was outstanding under the reducing revolver and $2,541,667 was outstanding under the line of credit. The outstanding principal balance of all advances under this credit facility bears interest at 2.5% over the one month LIBOR rate. As of June 30, 2003 the interest rate was approximately 3.5%.

The Company's obligations under this credit facility are secured by substantially all the Company's Salem assets, excluding real property, plus a pledge of restricted cash in the amount of $2,000,000. In addition, the Company is required to maintain a $7.8 million tangible net worth. The Company was in compliance with all provisions of the credit agreement as of June 30, 2003. The reducing revolver is a seven-year loan with monthly principal and interest payments.

National Bank of Canada

CRITICAL ACCOUNTING POLICIES, COMMITMENTS AND CERTAIN OTHER MATTERS

The Company considered the disclosure requirements of FR-60 regarding critical accounting policies and FR-61 regarding liquidity and capital resources, certain trading activities and related party/certain other disclosures, and concluded that nothing materially changed during the quarter that would warrant further disclosure under these releases.

13 / STKR

2003 Form 10-Q

Table of Contents

Part I

Item 3

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

FOREIGN CURRENCY EXCHANGE RISK

Management has determined that all of the Company's 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 exchange rate prevailing at the balance sheet date, while income and expense accounts are translated at average exchange rates during the year. As such, 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 the Company's transactions in these foreign markets. The Company does not operate a hedging program to mitigate the effect of a significant rapid change in the value of the Canadian Dollar or Euro as compared to the U.S. dollar. If such a change did occur, the Company would have to take into account a currency exchange gain or loss in the amount of the change in the U.S. dollar denominated balance of the amounts outstanding at the time of such change. While the Company does not believe such a gain or loss is likely, and would not likely be material, there can be no assurance that such a loss would not have an adverse material effect on the Company's results of operations or financial condition.

INTEREST RATE RISK

The Company is exposed to market risk from changes in interest rates, which may adversely affect its financial position, results of operations and cash flows. In seeking to minimize the risks from interest rate fluctuations, the Company manages exposures through its regular operating and financing activities. The Company is exposed to interest rate risk primarily through its borrowings under its $2.5 million credit line and $3.5 million Reducing Revolver with Merrill Lynch with an interest rate at 2.5% over the one month LIBOR and its $4.8 million CDN credit facility with the National Bank of Canada with interest rates of 1.5% and 2.5% over the Canadian prime rate. As of June 30, 2003 the fair market value of the Company's outstanding debt approximates its carrying value due to the short-term maturities and variable interest rates. A 1% change in interest rates could increase or decrease interest expense by approximately $120,000 on an annual basis.

ITEM 4. CONTROLS AND PROCEDURES

(a) Evaluation of disclosure controls and procedures.

As required by new Rule 13a-15 under the Securities Exchange Act of 1934, within the 90 days prior to the date of this report, the Company carried out an evaluation under the supervision and with the participation of the Company's management, including the Company's Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company's disclosure controls and procedures. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company's disclosure controls and procedures are effective to ensure that information required to be disclosed by the Company in the reports it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission's rules and forms. In connection with the new rules, we currently are in the process of further reviewing and documenting our disclosure controls and procedures, including our internal controls and procedures for financial reporting, and may from time to time make changes aimed at enhancing their effectiveness and to ensure that our systems evolve with our business.

(b) Changes in internal controls

None

14 / STKR

2003 Form 10-Q

Table of Contents

Part II

Items 1 - 4

Item 1. LEGAL PROCEEDINGS

At times the company may be involved in disputes and/or litigation with respect to its products and operations in its normal course of business. The company does not believe that the ultimate impact of the resolution of such matters would have a material adverse effect on the company's financial condition or results of operations. The company is not currently involved in any legal proceedings.

Item 2. CHANGES IN SECURITIES AND USE OF PROCEEDS

Not applicable.

Item 3. DEFAULTS UPON SENIOR SECURITIES

Not applicable.

Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY

a) A special meeting of stockholders of the Company in lieu of the annual meeting was held on May 22, 2003.

b) The following matters were presented and voting results were as follows:

PROPOSAL I - Election of Directors


	Number of Shares/Votes
Nominees	For	Withheld
Mark W. Blodgett	9,493,598	110,005
Clifford L. Abbey	9,597,328	6,275
Lawrence W. Blodgett	9,494,793	108,810
Steven E. Karol	9,598,328	5,275
Dr. Herbert Cordt*	9,594,828	8,775
Raymond J. Oglethorpe	9,598,528	5,075

Dr. Herbert Cordt has resigned from the Board of Directors.

15 / STKR

2003 Form 10-Q

Table of Contents

Part II

Items 5, 6

Item 5. OTHER INFORMATION

Not applicable.

Item 6. EXHIBITS, LISTS AND REPORTS ON FORM 8-K

(a) The following is a complete list of exhibits filed as part of this Form 10-Q:

Exhibit Number Description

31.1 CEO Certification

31.2 CFO Certification

32.1 CEO Certification

32.2 CFO Certification

(b) Reports on Form 8-K: None

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereto duly authorized.

StockerYale, Inc.


August 13, 2003	/s/ Mark W. Blodgett
	Mark W. Blodgett,
	Chairman and Chief Executive Officer

August 13, 2003	/s/ Francis J. O'Brien
	Francis J. O'Brien,
	Chief Financial Officer and Treasurer

16 / STKR

End

2003 Form 10-Q

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

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

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

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

In thousands
	June 30, 2003		December 31, 2002
Assets
Current assets:
Cash and cash equivalents	$	563	$	3,070
Restricted cash		2,277		2,000
Accounts receivable, less reserves of approximately $90 at June 30, 2003 and $155 at December 31, 2002		2,515		2,200
Inventories		4,879		4,478
Prepaid expenses and other current assets		645		747
Total current assets		10,879		12,495
Property, plant and equipment, net		23,339		23,650
Goodwill		2,677		2,677
Identified intangible assets, net		1,629		1,785
Officer note receivable		249		249
Other long-term assets		766		464
Total assets	$	39,539	$	41,320
Liabilities and stockholders' equity
Current liabilities:
Current portion of long-term debt	$	170	$	5,306
Short-term debt ,net of unamortized discount of $224 at June 30, 2003 and $269 at December 31, 2002		6,557		7,446
Accounts payable		2,188		2,050
Accrued expenses		1,380		1,399
Short-term portion of capital lease obligation		67		61
Total current liabilities		10,362		16,262
Long-term debt and capital lease obligations - less current portion		6,369		96
Other long-term liabilities		270		-
Commitments and contingencies
Stockholders' equity:
Common stock, par value $0.001-shares authorized 100,000,000; Shares issued and outstanding 14,392,070 and 12,771,524 at June 30, 2003 and December 31, 2002, respectively		14		13
Paid-in capital		69,563		68,637
Accumulated other comprehensive income (loss)		923		(266)
Accumulated deficit		(47,962)		(43,422)
Total stockholders' equity		22,538		24,962
Total liabilities and stockholders' equity	$	39,539	$	41,320

In thousands
	Six Months Ended June 30,
	2003			2002
Operations
Net loss	$	(4,540	)	$	(8,164	)

Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization		1,496			1,390
Deferred income taxes and other charges		-			(91	)
Loss on investment in joint venture		-			287
Other changes in assets and liabilities:
Accounts receivable, net		(315	)		(721	)
Inventories		(401	)		162
Prepaid expenses and other current assets		102			126
Accounts payable		138			(1,902	)
Accrued expenses		(20)			93
Officer note receivable		-			(250	)
Other assets and liabilities		53			-
Net cash used in operating activities		(3,487	)		(9,070	)
Financing
Proceeds from sale of common stock		1,197			9,819
Proceeds of term note		985			-
Repayments of bank debt		(1,481)			2,164
Repayment of bank debt to Toronto Dominion Bank		(2,210)			-
Proceeds from the National Bank of Canada		2,918			-
Restricted cash related to term deposit with National Bank of Canada		(738)			-
Decrease in note receivable		63			42
Net cash provided by financing activities		734			12,025
Investing
Proceeds from land sale		306			-
Purchases of property, plant and equipment		(64	)		(1,460	)
Net investment in joint venture		-			(260	)
Net cash used in investing		242			(1,720	)
Effect of exchange rates		4			466
Net change in cash and equivalents		(2,507	)		1,701
Cash and equivalents, beginning of year		3,070			1,576
Cash and equivalents, end of year	$	563		$	3,277
Supplemental disclosure of cash flow information:
Interest paid		437			170
Stock issued in Ciena acquisition		-			200

PART I - FINANCIAL INFORMATION

Item 1	Financial Statements (Unaudited)

	Unaudited Condensed Consolidated Balance Sheets at June 30, 2003 and December 31, 2002	1

	Unaudited Condensed Consolidated Statement of Operations for the three and six months ended June 30, 2003 and 2002	2

	Unaudited Condensed Consolidated Statement of Cash Flows for the six months ended June 30, 2003 and 2002	3

	Notes to Unaudited Condensed Consolidated Financial Statements	4

Item 2	Management's Discussion and Analysis of Financial Condition and Results of Operations	9

Item 3	Quantitative and Qualitative Disclosure About Market Risk	14

Item 4	Controls & Procedures	14


PART II - OTHER INFORMATION

Item 1	Legal Proceedings	15

Item 2	Changes in Securities	15

Item 3	Defaults Upon Senior Securities	15

Item 4	Submission of Matters to a Vote of Security Holders	15

Item 5	Other Information	16

Item 6	Exhibits and Reports on Form 8-K	16

	Signature (s)	16