PROPHOTONIX LIMITED
2011 ANNUAL REPORT
Solutions for LEDs
Solutions for Lasers
Corporate
ProPhotonix Limited (IRE)
3020 Euro Business Park
Little Island
Cork, Ireland
+353-21-5001300
ProPhotonix Limited
Sparrow Lane,
Hatfield Broad Oak
Hertfordshire, CM22 7BA UK
+44-1279-717170
ProPhotonix Limited
32 Hampshire Road
Salem, NH 03079
+1-603-893-8778
(This page left intentionally blank)
Page 2
2011 Chairman’s Letter
Dear Fellow Shareholders:
ProPhotonix made considerable progress in 2011, building on the strong foundations laid in 2010. We have
invested significantly in our R&D and sales efforts, added to our product offering, increased production
capacity, and expanded our geographical reach. We enter 2012 in a stronger financial position having
strengthened our balance sheet through an equity placement with institutional investors last July.
ProPhotonix consists of two business units: an LED systems manufacturing business based in Ireland, and a
laser modules production and laser diode distribution division located in the United Kingdom. Corporate,
marketing and the North American sales activities are based in Salem, New Hampshire, USA. With
comparatively faster growth in the LED market in 2011, LED system revenue exceeded laser revenue for the
first time. The Company’s revenue growth in 2011 was driven by a 26.1% increase in the LED division.
Despite lower laser sales, the laser division remains profitable and is poised for improvement in 2012. Overall
revenues grew 12%, notwithstanding the fragile global economy which led to a slowdown in sales to several
customers, especially in the solar equipment industry in the second half of the year.
At the beginning of 2011, we reorganized the Company’s sales force from a product focused approach to a
geographic full-product line sales basis. We expect this shift to lead to more cross-selling initiatives creating
new opportunities for ProPhotonix. The Company sells its products into the industrial (73%), medical (18%)
and defense/security (9%) markets. All of these markets continue to offer growth potential for ProPhotonix and,
as a direct result of our new selling approach, have an increased number of opportunities in each of these
markets as we move into 2012. In addition, late in 2011 we significantly bolstered our sales force in North
America, partnered with an exclusive distributor in China and selectively increased our sales capacity in certain
European markets, most notably in Germany. The build out of the sales organization is not complete and we
plan to increase our direct sales presence and distribution network in 2012.
ProPhotonix’s products are, and always have been, targeted towards customers who have a requirement for
high-quality and often custom products. To ensure that both our laser and LED products remain best-in-class,
we have continued to make investments in R&D and applications engineering, and successfully introduced
several new LED and laser products to market in 2011.
Your Board remains confident in the future of the Company and I would like to take this opportunity to thank
you for your continued support and interest in ProPhotonix.
Respectfully submitted,
Mark W. Blodgett
Chairman & Chief Executive Officer
April 11, 2012
Page 3
Director Remuneration Report
For the year ended December 31, 2011
Executive Director Compensation - Executive Director Compensation is reviewed by the
Independent Non-Executive Directors.
Non-Executive Director compensation is established periodically.
Expensed in 2011 based on stock
compensation rules, without
consideration of forfeitures
Executive Director
Salary
Bonus
Pension
Other (1)
Total Cash
Compensation
Options
RSA's
Total
Total All
Compensation
2011
Total All
Compensation
2010
Mark Blodgett (2)
$371,500
$ -
$4,346
$9,050
$384,986
$24,572
$37,400
$61,972
$446,868
$626,108
Tim Losik
188,750
-
5,500
525
194,775
12,005
25,125
37,130
231,905
265,233
Total Executive
Compensation
$560,250
$ -
$9,846
$9,575
$579,671
$36,577
$62,525
$99,102
$678,773
$891,341
Non-Executive Director
Dieter Klenner
$ -
$ -
$ -
$15,000
$15,000
$12,826
$3,750
$16,576
$31,576
$50,860
Ray Oglethorpe
Timothy Steel
Vincent Thompson
Total Non-
Executive
Compensation
-
-
-
-
-
-
-
-
-
15,000
15,000
13,261
4,375
17,636
32,636
58,576
11,250
11,250
5,441
-
5,441
16,691
-
11,250
11,250
5,441
-
5,441
16,691
-
$ -
$ -
$ -
$52,500
$52,500
$39,969
$8,125
$45,094
$97,594
$109,436
Director Share Options:
Director
Options
@
12/31/10
Options
Granted
Options
Forfeited
Options
@
12/31/11
Mark Blodgett
2,364,050
1,000,000
(310,000)
3,054,050
Tim Losik
400,000
500,000
-
900,000
Dieter Klenner
489,852
166,666
-
656,518
Ray Oglethorpe
601,840
166,666
(11,500)
757,006
Timothy Steel
-
195,433
-
195,433
Vincent Thompson
-
195,433
-
195,433
Total All Directors
3,855,742
2,224,198
(321,500)
5,758,440
(1) Other compensation for Executive Directors is for paid life insurance for the benefit of the director. Other compensation for non-executive directors represents
cash payments expensed in the current year.
(2) Company paid housing expenses for Mr. Blodgett in the amount of $76,711 and moving expenses from the U.S. to the U.K. in the amount of $7,073.
Page 4
ProPhotonix Limited
Consolidated Financial Statements
Years Ended December 31, 2011 and 2010
Page 5
FINANCIAL STATEMENTS
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Item
Independent Auditor’s Report .......................................................................................................................
Consolidated Balance Sheets as of December 31, 2011 and 2010 ...............................................................
Page
7
8
Consolidated Statements of Operations for the Years Ended December 31, 2011 and 2010 .......................
9
Consolidated Statements of Stockholders’ Equity / (Deficit) and Comprehensive Loss for the Years
Ended December 31, 2011 and 2010 ........................................................................................................
10
Consolidated Statements of Cash Flows for the Years Ended December 31, 2011 and 2010 .....................
11
Notes to Consolidated Financial Statements………………………………………………………………. 12
Page 6
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors and Stockholders
ProPhotonix Limited
Salem, New Hampshire
We have audited the accompanying consolidated balance sheets of ProPhotonix Limited (formerly known as
StockerYale, Inc.) and subsidiaries (the Company) as of December 31, 2011 and 2010, and the related
consolidated statements of operations, stockholders’ equity (deficit) and comprehensive loss, and cash flows for
the years then ended. These consolidated financial statements are the responsibility of the Company’s
management. Our responsibility is to express an opinion on these consolidated financial statements based on our
audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States of
America. Those standards require that we plan and perform the audits to obtain reasonable assurance about
whether the consolidated financial statements are free of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit
also includes assessing the overall financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the
financial position of the Company as of December 31, 2011 and 2010, and the results of its operations and its
cash flows for the years then ended in conformity with accounting principles generally accepted in the United
States of America.
Boston, Massachusetts
April 11, 2012
Page 7
FINANCIAL STATEMENTS
PROPHOTONIX LIMITED
(formerly StockerYale, Inc.)
CONSOLIDATED BALANCE SHEETS
($ in thousands except share and per share data)
December 31
2011
2010
Assets
Current assets:
Cash and cash equivalents
Accounts receivable, less allowances of $13 in 2011 and $47 in 2010
Inventories
Prepaid expenses and other current assets
Total current assets
Net property, plant and equipment
Goodwill
Acquired intangible assets, net
Other long-term assets
Total assets
Liabilities and Stockholders’ Equity (Deficit)
Current liabilities:
Revolving credit facility
Current portion of long-term debt
Capital lease obligations
Accounts payable
Income taxes payable
Accrued expenses
Total current liabilities
Long-term debt, net of current portion
Other long-term liabilities
Total liabilities
Stockholders’ equity (deficit):
Common stock, par value $0.001; shares authorized 150,000,000 at December 31, 2011 and
100,000,000 at December 31, 2010; 76,059,456 shares issued and outstanding at December 31,
2011 and 52,510,174 shares issued and outstanding at December 31, 2010
Paid-in capital
Accumulated deficit
Accumulated other comprehensive income
Total stockholders’ equity (deficit)
Total liabilities and stockholders’ equity (deficit)
$
$
4,066
2,405
1,694
288
8,453
653
458
332
36
1,811
1,957
1,892
295
5,955
906
468
610
66
$ 9,932
$ 8,005
$
$
643
1,587
-
1,456
29
778
4,493
1,631
178
6,302
641
600
24
2,003
-
1,368
4,636
3,407
150
8,193
76
110,751
(107,618)
421
53
105,678
(106,175)
256
3,630
(188)
$
9,932
$
8,005
See the notes to consolidated financial statements.
Page 8
PROPHOTONIX LIMITED
(formerly StockerYale, Inc.)
Consolidated Statements of Operations
($ in thousands except share and per share data)
Net Revenue
Cost of Revenue
Gross Profit
Research & Development Expenses
Selling, General & Administrative Expenses
Amortization of Intangible Assets
Asset Impairment
Operating Loss
Other Income / (Expense), net
Amortization of Debt Discount and Financing Costs
Interest Expense
Loss Before Taxes from Continuing Operations
Tax Provision (Benefit)
Net Loss from Continuing Operations
Gain on Sale of Discontinued Operations, net of tax
Loss from Discontinued Operations, net of tax
Net Loss
Loss Per Share:
Basic and diluted:
Net loss from continuing operations
Gain on sale of discontinued operations, net
Loss from discontinued operations, net
Net loss per share
Years Ended
December 31,
2011
2010
$ 16,977
10,613
$ 15,194
9,384
6,364
899
6,030
275
-
(840)
(184)
-
(363)
(1,387)
37
(1,424)
-
(19)
5,810
750
7,215
390
226
(2,771)
688
(551)
(552)
(3,186)
(111)
(3,075)
542
(116)
$ ( 1,443)
$ ( 2,649)
($0.02)
$0.00
($0.00)
($0.02)
($0.07)
$0.01
($0.00)
($0.06)
Basic and diluted weighted average shares outstanding
63,485,600
44,950,980
See the notes to consolidated financial statements.
Page 9
PROPHOTONIX LIMITED
(formerly StockerYale, Inc.)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY / (DEFICIT) AND COMPREHENSIVE LOSS
(in thousands)
Common Stock
Shares
Par
$0.001
Paid in
Capital
Accumulated
Deficit
Accumulated
Other
Comprehensive
Income
Total
Stockholders’
Equity
(Deficit)
Comprehensive
Loss
Balance December 31,
2009 ............................. 44,616 $
45 $103,048 $
(103,526)
$
118 $
(315)
Sale of common stock,
net of expenses ............ 3,825
Share based
compensation, net of
forfeitures ....................
(13)
Issuance of common
stock to settle
liabilities / debt ............ 4,082
Cumulative translation
adjustment ....................
Net loss ..............................
Comprehensive loss for
the year ended Dec.
31, 2010 .......................
Balance December 31,
4
-
859
-
-
501
-
-
863
501
4
1,270
-
-
1,274
(2,649)
138
138
(2,649) $
138
(2,649)
$
(2,511)
2010 ............................. 52,510 $
53 $105,678 $
(106,175)
$
256 $
(188)
Sale of common stock,
net of expenses of
$350 ............................. 23,550
23
4,874
-
-
4,897
Share based
compensation, net of
forfeitures ....................
Cumulative translation
adjustment ....................
Net loss ..............................
Comprehensive loss for
the year ended Dec.
31, 2011 .......................
Balance December 31,
-
-
199
-
-
199
(1,443)
165
165
(1,443) $
165
(1,443)
$
(1,278)
2011 ............................. 76,060 $
76 $110,751 $
(107,618)
$
421 $
3,630
See the notes to consolidated financial statements.
Page 10
PROPHOTONIX LIMITED
(formerly StockerYale, Inc.)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Years Ended December 31
2011
2010
Operating
Net loss
Gain on sale of discontinued operations, net of tax
Loss from discontinued operations, net of tax
Net loss from continuing operations
Adjustments to reconcile net loss to net cash used in operating activities:
$ (1,443)
-
(19)
$ (2,649)
542
(116)
(1,424)
(3,075)
Stock-based compensation expense
Depreciation and amortization
Foreign exchange loss
Amortization of debt discount and financing costs
Non cash interest income
(Gain) loss on disposal of assets
Asset impairment
Provision for inventories
Provision for bad debts
Deferred taxes
Other changes in assets and liabilities:
Accounts receivable
Inventories
Prepaid expenses and other current assets
Accounts payable
Income taxes payable
Accrued expenses
Other assets and liabilities
Net cash used in continuing operations
Net cash used in discontinued operations
Net cash used in operating activities
Investing
Proceeds from disposal of assets
Financing obligation payments
Purchase of property, plant and equipment
Net cash used in continuing operations
Net cash provided by discontinued operations
Net cash provided by (used in) investing activities
Financing
Net proceeds from sale of common stock
Borrowings of revolving credit facilities, net
Principal repayment of long-term debt
Net cash provided by (used in) financing activities
Effect of exchange rate on cash
Net change in cash and equivalents
Cash and equivalents at beginning of period
Cash and equivalents at end of period
Supplemental cash flow information:
Cash paid for interest
Cash paid for income tax
Non cash investing and financing activities:
Issuance of common stock to settle liabilities / debt
Common stock issued in connection with financings
Warrants issued in connections with financings
Write-off of assets from sale-leaseback transaction
Write-off of finance lease from sale-leaseback transaction
See the notes to consolidated financial statements.
199
601
281
-
-
8
-
61
-
-
(567)
100
(1)
(529)
29
(584)
29
501
917
130
551
(7)
(632)
226
37
49
(113)
(669)
(698)
278
901
-
276
-
(1,797)
(19)
(1,328)
(116)
(1,816)
(1,444)
-
-
(95)
3
(136)
(464)
(95)
-
(597)
692
(95)
4,897
8
(753)
95
863
57
(2,248)
4,152
(1,328)
14
10
2,255
1,811
(2,667)
4,478
$
$
$
$
$
$
$
$
4,066
363
15
-
-
-
-
-
$
$
$
$
$
$
$
$
1,811
564
-
1,274
16
24
2,821
(3,450)
Page 11
PROPHOTONIX LIMITED
(formerly StockerYale, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) ORGANIZATION AND BASIS OF PRESENTATION
ProPhotonix Limited (also referred to in this document as “ProPhotonix”, “we”, or the “Company”)
operates in two segments: as an independent designer and manufacturer of LED systems; and as a distributor of
laser diodes and manufacturer of laser modules through its ProPhotonix Limited subsidiary. The Company’s
products serve a wide range of applications and industries including machine vision and industrial inspection,
biomedical, defense and security, and other commercial applications.
On May 27, 2010, the shareholders of the Company approved by a majority vote of all of the
outstanding shares of the Company’s common stock to change its name from StockerYale, Inc. to ProPhotonix
Limited.
ProPhotonix Limited was incorporated on March 27, 1951 in the Commonwealth of Massachusetts and
is currently incorporated in the state of Delaware. In December 1995, the Company completed the registration
of its common stock with the U.S. Securities and Exchange Commission. The common stock of the Company
now trades on the Pink OTC Market in the U.S. under the trading symbol “STKR.PK”. On December 23, 2010,
the Company gained admission to the London Stock Exchange, plc (AIM listing), under the trading symbols
“PPIR” and “PPIX”.
The accompanying consolidated financial statements have been prepared on a going concern basis, which
contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. As
shown in the consolidated financial statements, during the years ended December 31, 2011 and 2010, the
Company recorded net losses of $1,443,000 and $2,649,000, respectively. Net use of cash flow for operating
activities from continuing operations for the same time periods were $1,797,000 and $1,328,000, respectively.
The consolidated financial statements do not include any adjustments relating to the recoverability and
classification of recorded asset amounts or the amounts and classification of liabilities that might be necessary
should the Company be unable to continue as a going concern. On July 13, 2011, the Company sold
approximately 23.25 million shares of common stock on the London Stock Exchange, AIM listing at a price of
£0.14 ($0.22) per share for a total of £3.0 million, net of expenses (approximately $4.9 million). As a result of
the Company's cash balance, reduced debt levels, refinanced debt agreements and its focus on two core business
segments, management believes that it has adequate capital to sustain current operations through March 31,
2013.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accompanying consolidated financial statements reflect the application of the Company’s most
significant accounting policies as described in this note and elsewhere in the accompanying consolidated
financial statements and notes.
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of the Company and its wholly
owned subsidiaries, ProPhotonix (IRL) Limited, StockerYale Waterloo Acquisition Inc., StockerYale (UK)
Ltd., which owns 100% of ProPhotonix Limited, and ProPhotonix Holdings, Inc., which holds all of the
outstanding shares of StockerYale Canada (see note 14 for more information on the sale of the assets of
StockerYale Canada). All intercompany balances and transactions have been eliminated.
Page 12
RECLASSIFICATIONS
Certain reclassifications have been made to the 2010 consolidated financial statements, with no effect on net
loss, to be consistent with the classifications presented in 2011.
CASH AND CASH EQUIVALENTS
The Company considers cash equivalents to consist of highly liquid investments with original maturities of
three months or less when purchased.
ACCOUNTS RECEIVABLE
The Company reviews the financial condition of new customers prior to granting credit. After completing
the credit review, the Company establishes a credit line for each customer. Periodically, the Company reviews
the credit line for major customers and adjusts the credit limit based upon an updated financial condition of the
customer, historical sales and payment information and expected future sales. The Company has a large number
of customers; therefore, material credit risk is limited.
The Company periodically reviews the collectability of its accounts receivable. Provisions are established
for accounts that are potentially uncollectible. Determining adequate reserves for accounts receivable requires
management’s judgment. Conditions impacting the collectability of the Company’s receivables could change
causing actual write-offs to be materially different than the reserved balances.
Changes in the allowance for doubtful accounts were as follows:
Years Ended December 31
Balance at beginning of period .................................................................
Charges to costs and expenses ..................................................................
Account write-offs and other deductions ..................................................
2010
2011
In thousands
47 $
-
$
5
49
(7)
(34)
Balance at end of period ...........................................................................
$
13 $
47
INVENTORY
The Company values inventories at the lower of cost or market using the first in, first-out (“FIFO”)
method. The Company periodically reviews the quantities of inventory on hand and compares these amounts to
the expected usage for each particular product or product line. The Company records as a charge to cost of sales
any amounts required to reduce the carrying value amount of the inventory to net realizable value. Actual
results could be different from management’s estimates and assumptions.
INTANGIBLE ASSETS
The Company’s intangible assets consist of goodwill, trademarks, acquired patents and patented
technologies, distributor and customer relationships and related contracts, technology design and programs,
non-compete agreements and other intangible assets which, except for goodwill, are being amortized over their
useful lives. Goodwill is tested for impairment on an annual basis, and between annual tests in certain
circumstances, and written down when and if impaired. The Company has elected the end of the fourth quarter
to complete its annual goodwill impairment test.
Page 13
LONG-LIVED ASSETS
The Company reviews the recoverability of its long-lived assets including property, plant and equipment
and amortizing intangible assets when events or changes in circumstances occur that indicate that the carrying
value of the assets may not be recoverable. This review is based on the Company’s ability to recover the
carrying value of the assets from expected undiscounted future cash flows. If impairment is indicated, the
Company measures the loss based on the difference between the carrying value and fair value of the asset using
various valuation techniques including discounted cash flows. If an impairment loss exists, the amount of the
loss will be recorded in the consolidated statements of operations. It is possible that future events or
circumstances could cause these estimates to change.
LOSS PER SHARE
The Company calculates basic and diluted net loss per common share by dividing the net loss applicable to
common stockholders by the weighted average number of common shares outstanding.
As of December 31, 2011, 6,567,940 shares underlying options and 7,828,188 shares underlying warrants
were excluded from the calculation of diluted shares, as their effects were anti-dilutive.
As of December 31, 2010, 4,638,408 shares underlying options and 7,963,188 shares underlying warrants
were excluded from the calculation of diluted shares, as their effects were anti-dilutive.
REVENUE RECOGNITION
The Company recognizes revenue from product sales at the time of shipment and when persuasive
evidence of an arrangement exists, performance of our obligation is complete, the price to the buyer is fixed or
determinable, and collectability is reasonably assured. Custom products are designed and supplied to original
equipment manufacturers and produced in accordance with a customer-approved design. Custom 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 are able to estimate a reserve for their cost.
Revenues from funded research and development and product development are 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 or under the proportional method. Over the course of a fixed-price contract, the
Company routinely evaluates whether revenue and profitability should be recognized in the current period. The
Company estimates the proportional performance on their fixed-price contracts on a monthly basis utilizing
hours incurred to date as a percentage of total estimated hours to complete the project. If the Company does not
have a sufficient basis to measure progress toward completion, revenue is recognized upon completion of
performance, subject to any project management assessments as to the status of work performed. This method is
used because reasonably dependable estimates of costs and revenue earned can be made based on historical
experience and milestones identified in any particular 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.
The FASB issued amended revenue recognition guidance for arrangements with multiple deliverables
under the FASB Accounting Standards Update (“ASU”) 2009-13, Multiple-Deliverable Revenue Arrangements
(“ASU 2009-13”). The new guidance eliminates the prior residual method of revenue recognition and
establishes a hierarchy of methods to determine the selling price. The highest level in the hierarchy is vendor-
Page 14
specific objective evidence (“VSOE”) of selling price and is limited to the price charged when the same
deliverable is sold separately, or for a deliverable that is not yet sold separately, the price established by
management if it is probable that the price, once established, will not change before the separate introduction of
the deliverable to the marketplace. When VSOE does not exist, the next level of the hierarchy is third-party
evidence of selling price, which would exist if any other vendor separately sells a generally interchangeable
product. When neither VSOE nor third-party evidence exists, the allocation is based on the vendor’s best
estimate of the price that the deliverable would be sold for if it was sold on a standalone basis. ASU 2009-13 is
effective in fiscal years beginning on or after June 15, 2010, with early adoption permitted. The Company
adopted the guidance effective January 1, 2011.
For those arrangements that include multiple deliverables, the Company first determines whether each
service or deliverable meets the separation criteria of FASB ASC 605-25, Revenue Recognition—Multiple-
Element Arrangements. In general, a deliverable (or a group of deliverables) meets the separation criteria if the
deliverable has stand-alone value to the customer and, if the arrangement includes a general right of return
related to the delivered item, that delivery or performance of the undelivered item(s) is considered probable and
is substantially in control of the Company. Each deliverable that meets the separation criteria is considered a
separate ‘‘unit of accounting”. The Company allocates the total arrangement consideration to each unit of
accounting using the relative selling price method. The amount of arrangement consideration that is allocated
to a delivered unit of accounting is limited to the amount that is not contingent upon the delivery of another unit
of accounting. When vendor-specific objective evidence or third-party evidence is not available, adopting the
relative selling price method of allocation permits the Company to recognize revenue on specific elements as
completed based on the estimated selling price. Changes in judgments made in estimating the selling price of
the various deliverables could significantly affect the timing or amount of revenue recognition. After the
arrangement consideration has been allocated to each unit of accounting, the Company applies the appropriate
revenue recognition method for each unit of accounting based on the nature of the arrangement and the services
included in each unit of accounting. All deliverables that do not meet the separation criteria of FASB ASC 605-
25 are combined into one unit of accounting, and the most appropriate revenue recognition method is applied.
WARRANTY
The Company provides standard warranties for most products for periods up to one year. 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 in relation to the reserve as a percent of sales. The
Company adjusts annually the warranty provision based on actual experience and for any particular known
instances.
Warranty Reserves:
Years Ended December 31,
2011
2010
Balance at beginning of period ....................................................
Charges to costs and expenses .....................................................
Account write-offs and other deductions .....................................
$
$
In thousands
155
39
(35)
Balance at end of period ......................................................
$
159
$
98
90
(33)
155
Page 15
The Company expenses advertising costs as incurred. Advertising expenses for the years ended 2011 and
2010 were approximately $330,000 and $278,000, respectively.
ADVERTISING EXPENSE
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are valued at the lower of cost or estimated carrying values. The Company
provides for depreciation on a straight-line basis over the assets estimated useful lives or lease terms, if shorter.
The following table summarizes the estimated useful lives by asset classification:
Asset Classification
Building and building improvements ................................... Term of the lease or 10-40 years
Computer equipment ............................................................
Machinery and equipment ....................................................
Furniture and fixtures ...........................................................
3 to 5 years
5 to 10 years
3 to 10 years
Estimated Useful Life
Maintenance and repairs are expensed as incurred.
INCOME TAXES
The Company accounts for income taxes under the liability method. Under this method the Company
recognizes deferred tax assets and liabilities for the expected future tax consequences of events that have been
recognized in the financial statements or tax returns. Deferred tax assets and liabilities are determined based on
the difference between the financial reporting and tax basis of the assets and liabilities using tax rates expected
to be in place when the differences reverse. Valuation allowances are established when necessary to reduce
deferred tax assets to the amount that is more likely than not to be realized. The Company recognizes the tax
benefit of tax positions to the extent that the benefit will more likely than not be realized. The determination as
to whether the tax benefit will more likely than not be realized is based upon the technical merits of the tax
position as well as consideration of the available facts and circumstances. With respect to any uncertain tax
positions, the Company records interest and penalties, if any, as a component of income tax expense. It did not
have any interest and penalties related to uncertain tax positions during the years ended December 31, 2011 or
2010. Additional information on the Company’s income tax provision and deferred tax assets and liabilities
may be found at Note 9.
STOCK-BASED COMPENSATION
the grant of a variety of awards with various
The Company has stock-based compensation plans for its employees, officers, and directors. The plans
the
permit
Remuneration Committee of the Company’s Board of Directors (“GNRC”). Generally the grants vest over
terms of two to 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.
terms and prices as determined by
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, except 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
Page 16
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.
During 2011, the Company recognized approximately $199,000 of stock-based compensation related to
restricted stock and options, all of which was charged to selling, general and administrative expense. During
2010, the Company recognized approximately $501,000 of stock-based compensation related to restricted stock
and options, all of which was charged to selling, general and administrative expense.
Stock Option Awards—The fair value of each option grant is estimated using the Black-Scholes option
pricing model. The fair value is then expensed 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 is calculated based on the historical
volatility of the Company’s stock at the time of the award. The average expected option term is based on
historical trends. The risk-free interest rate is based on U.S. Treasury zero-coupon issues assumed at the date of
grant and generally no dividends are assumed in the calculation. The compensation expense recognized for all
equity-based awards is net of estimated forfeitures. Forfeitures are estimated based on the historical trends.
Restricted Share Awards— The Company periodically awards restricted shares of common stock to
employees. The awards vest in equal annual installments over a period of four years, assuming continued
employment, 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 the awards is based on the fair market value of the Company’s
common stock on the date of issue, which is the closing market price on the date of the award. During 2010 and
2009, the Company did not grant any shares of restricted stock.
TRANSLATION OF FOREIGN CURRENCIES
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. For foreign subsidiaries,
whose functional currency is not the U.S. dollar, assets and liabilities are translated using the foreign exchange
rates prevailing at the balance sheet date, and income and expense accounts using average exchange rates for
the period. Cumulative transaction gains or losses from the translation into the Company’s reporting currency
are included as a separate component of stockholder’s equity (accumulated other comprehensive loss) in the
accompanying consolidated balance sheets.
As of October 1, 2011, management determined the functional currency of StockerYale (UK) Ltd, and
ProPhotonix Limited is the Euro. As of this date the balance sheet was remeasured in Euros and all historical
foreign currency translation adjustments reported within accumulated other comprehensive loss remain as a
component of accumulated other comprehensive loss.
Foreign currency transaction losses from continuing operations recorded in the statements of operations as
other income (expense), net were approximately $327,000 and $80,000 for 2011 and 2010, respectively.
FAIR VALUES OF FINANCIAL INSTRUMENTS
The Company’s financial instruments consist mainly of cash and cash equivalents, accounts receivable,
revolving credit facility, accounts payable and long-term debt. The estimated fair value of these financial
instruments, with the exception of fixed rate long-term debt, approximates their carrying value due to the short-
term maturity of certain instruments and the variable interest rates associated with certain instruments, which
have the effect of re-pricing such instruments regularly. The carrying value of fixed rate long-term debt
approximates fair value.
Page 17
CONCENTRATION OF CREDIT RISK
Financial instruments that potentially subject the Company to concentrations of credit risk consist
principally of trade receivables. The risk is limited due to the relatively large number of customers composing
the Company’s customer base and their dispersion across many industries and geographic areas within the
United States, Canada, United Kingdom, Europe and Asia. The Company performs ongoing credit evaluations
of existing customers’ financial condition. The Company has a large number of customers; therefore,
concentrated credit risk is limited to only a small number of customers. The Company had no customer
accounting for 10% or more of consolidated revenues in either 2011 or 2010. The Company had one customer
that accounted for 10% of the outstanding accounts receivable balance at December 31, 2011 and 2010. The
Company maintains its cash and cash equivalents in bank deposit accounts, which at times may exceed insured
limits. At December 31, 2011, the amount in excess of governmental insurance protection was approximately
$3.7 million. The Company believes it is not exposed to any significant credit risk on cash and cash
equivalents.
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.
(3) RECENT ACCOUNTING PRONOUNCEMENTS
Goodwill Impairment Test
In December 2010, the Financial Accounting Standards Board (the “FASB”) issued authoritative
guidance which modifies the requirements of Step 1 of the goodwill impairment test for reporting units with
zero or negative carrying amounts. This guidance was effective for fiscal years beginning after December 15,
2010. The adoption of this guidance did not impact our consolidated balance sheets or statements of operations.
In September, 2011, the FASB issued updated guidance concerning the testing of goodwill impairment.
This guidance modifies goodwill impairment testing by allowing the inclusion of qualitative factors in the
assessment of whether a two-step goodwill impairment test is necessary. Thus, entities are no longer required to
calculate the fair value of a reporting unit unless they conclude through an assessment of qualitative factors that
it is more likely than not that the unit’s carrying value is greater than its fair value. When an entity’s qualitative
assessment reveals that goodwill impairment is more likely than not, the entity must perform the two-step
goodwill impairment test. The adoption of this guidance is not expected to have a material impact on our
consolidated balance sheets or statements of operation.
Fair Value Measurements and Disclosures
In May 2011, the FASB issued additional guidance on fair value disclosures. This guidance is intended
to establish common requirements for measuring fair value and for disclosing information about fair value
measurements in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”) and
International Financial Reporting Standards (“IFRS”). This guidance is effective for the first interim or annual
Page 18
reporting period beginning after December 15, 2011. The adoption of this guidance is not expected to have a
material impact on our consolidated balance sheets or statements of operations.
Other Comprehensive Income
In June 2011, the FASB issued a new accounting standard for the presentation of comprehensive income.
The new standard requires the presentation of comprehensive income, the components of net income and the
components of other comprehensive income either in a single continuous statement of comprehensive income or
in two separate but consecutive statements. The new standard also requires presentation of adjustments for
items that are reclassified from other comprehensive income to net income in the statement, or statements, when
the components of net income and the components of other comprehensive income are presented. This guidance
is effective for fiscal years, and interim periods within those years, beginning after December 15, 2011. As this
standard relates only to the presentation of other comprehensive income, the adoption of this accounting
standard will not have an impact on our consolidated financial position, results of operations and cash flows.
Inventories are stated at the lower of cost (first-in, first-out basis) or market when applicable and include
materials, labor and overhead. Inventories are as follows:
(4) INVENTORIES
Years Ended December 31
Finished goods .....................................................................................
Work in-process ...................................................................................
Raw materials ......................................................................................
2011
2010
In thousands
$ 362
141
1,191
$ 413
164
1,315
Net inventories .............................................................................
$ 1,694
$ 1,892
Management performs quarterly 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.
(5) PROPERTY, PLANT AND EQUIPMENT
Major classes of property, plant and equipment were as follows:
Years Ended December 31
2011
2010
Buildings and building improvements............................................
Computer equipment ......................................................................
Machinery and equipment ..............................................................
Furniture and fixtures .....................................................................
$
284
414
1,738
622
283
934
1,801
690
In thousands
$
Property, plant and equipment ................................................
Less accumulated depreciation .......................................................
$ 3,058
$ 3,708
(2,405 )
(2,802)
Net property, plant and equipment .........................................
$ 653
$ 906
Depreciation expense from continuing operations was approximately $326,000 and $527,000 in the years
ended December 31, 2011 and 2010, respectively. In 2005, the Company entered into a sale-leaseback
transaction on the Company’s headquarters which was recorded as a finance lease in accordance with
Page 19
accounting standards. See Note 15 for a description of the transaction and write-off of the assets ($2,821,000
net book value) related to the finance lease upon completion of the sale in 2010.
(6) GOODWILL
The Company uses a two-part impairment test in which it first estimates the fair value of its reporting
units by using forecasts of discounted cash flows and then compares that value to the carrying value which
requires that certain assumptions and estimates be made regarding industry economic factors and future
profitability of reporting units to assess the need for an impairment charge. The methodology the Company
uses to allocate certain corporate expenses is based on each segments use of services and/or direct benefit to its
employees. While the Company believes it has made reasonable estimates and assumptions to calculate the fair
value of the reporting segments and implied fair value of goodwill, the impairment analysis is highly sensitive
to actual versus forecast results. If the estimated value is less than the carrying value the Company moves to the
second step of the impairment test to determine if goodwill is impaired.
In connection with the annual fair value test of goodwill, performed at the end of the fourth quarter 2011,
and at the end of the fourth quarter 2010, the Company concluded that no impairment existed.
The changes in the carrying amount of goodwill for the years ended December 31, 2011 and 2010 was as
follows:
Beginning of the year ..................................................
Effect of exchange rate ...............................................
Impairment charge ......................................................
$ 468
(10)
-
$ 508
(40)
-
End of year ..................................................................
$ 458
$ 468
December 31, 2011
December 31, 2010
( In thousands)
Goodwill as of December 31, 2011 and 2010 relates to the LED reporting unit.
(7) INTANGIBLE ASSETS
Intangible assets consist of trademarks, acquired patents and patented technologies, distributor and
customer relationships and related contracts, technology design and programs, non-compete agreements and
other intangible assets. There are no intangible assets with indefinite lives. There were no intangible assets
acquired in 2011. During 2010, the Company, including its subsidiaries, changed its name from StockerYale,
Inc. to ProPhotonix Limited. As a result of this name change, the Company recorded an impairment charge of
approximately $226,000 related to a previously acquired trade name. Intangible assets and their respective
useful lives are as follows:
Acquired patents, patented technology and purchased technology
Acquired customer contracts and relationships
Acquired non compete agreements
Acquired technology design and programs
Other
Useful Life
5 – 8 Years
5 – 8 Years
3 Years
8 Years
3 – 7 Years
Page 20
Gross carrying amounts and accumulated amortization of intangible assets were as follows as of
December 31, 2011 for each intangible asset class.
Acquired patents, patented technology and purchased technology
Acquired customer contracts and relationships .........................
Acquired non compete agreement .............................................
Acquired technology design and programs................................
Other ..........................................................................................
Total ...................................................................................
$
291 $
1,900
615
322
105
$ 3,233 $
Gross carrying amounts and accumulated amortization of intangible assets were as follows as of
December 31, 2010 for each intangible asset class.
Gross
Carrying
Amount
Net Balances
Accumulated
Amortization
(in thousands)
(291)
$
(1,682)
(615)
(212)
(101)
(2,901)
$
Accumulated
Amortization
(in thousands)
(284)
$
(1,460)
(616)
(168)
(96)
(2,624)
$
-
218
-
110
4
332
7
441
-
153
9
610
Gross
Carrying
Amount
Net Balances
Acquired patents, patented technology and purchased technology
Acquired customer contracts and relationships .........................
Acquired non compete agreement .............................................
Acquired technology design and programs................................
Other ..........................................................................................
Total ...................................................................................
$
291 $
1,901
616
321
105
$ 3,234 $
Actual Expense
2010
2011
Estimated Future Expense
2013
2015
2014
Thereafter
2012
In thousands
Amortization expense of
intangible assets............................... $ 390 $ 275 $ 122 $ 122 $ 88 $
- $
-
Page 21
(8) DEBT
Years Ended December 31
Bonds payable to the former stockholders of Photonic Products Ltd.
maturing on December 31, 2012, with an interest rate of 11%, at
December 31, 2011 and at December 31, 2010................................................
Senior Fixed Rate Secured Bond to a private investor, maturing on June
30, 2015, with an interest rate of 8% at December 31, 2011 and at
December 31, 2010. .........................................................................................
2011
2010
In thousands
$
793
$
1,393
$
2,425
$
2,614
Borrowings under Revolving Credit facility with Barclay’s Bank Sales Financing with an
interest rate of 2.65% above Barclay’s base rate (3.15% as of December 31, 2011 and
2010). ................................................................................................................................................................
643
Sub-total debt ........................................................................................................
Less – revolving credit facility ………………………………………..
Less—Current portion of long-term debt ....................................................
Total long-term debt .............................................................................................
3,861
(643)
(1,587)
$
1,631
641
4,648
(641)
(600)
$
3,407
Photonic Products Ltd.
BORROWING AGREEMENTS
StockerYale (UK) Ltd., a wholly owned subsidiary of the Company, issued bonds to each of the former
stockholders of Photonic Products Ltd. with an aggregate initial principal amount equal to $2,400,000 (Photonic
Bonds).
On October 30, 2010 and December 10, 2010, the Company and the holders of the Photonic Bonds entered
into Deeds of Variation of the Photonic Bonds. The amendments required a payment on October 30, 2010
against the principal balance in the amount of $150,000. The Photonic Bonds were amended to pay the
outstanding balance as of October 31, 2010 monthly over the period from November 30, 2010 through
November 30, 2012 at the rate of $50,000 principal plus simple interest (at 11% per annum). On December 31,
2012, the remaining balance (approximately $243,000) of the Photonic Bonds shall be payable in full. The key
repayment terms of the Photonic Bonds, under this amendment, are as follows:
(a) Principal as of December 10, 2010:
(b) Interest Rate:
(c) Repayment term:
(d) Monthly principal:
(e) Balloon payment:
$1,443,000
11% per annum, payable monthly
October 31, 2010 to November 30, 2012
$50,000
$243,000 due December 31, 2012
StockerYale (UK) Ltd. may elect to prepay the bonds at any time, in whole or in part, without penalty or
premium. If StockerYale (UK) Ltd. fails to make any payments under the bonds, the former stockholders of
Photonic Products Ltd. may have the right to require payment from the Company in the form of newly issued
shares of the Company’s common stock.
Page 22
As of December 31, 2011, $793,000 was outstanding under the bonds issued to the stockholders of
Photonic Products Ltd., which was classified as current portion of long-term debt.
As of December 31, 2010, $1,393,000 was outstanding under the bonds issued to the stockholders of
Photonic Products Ltd., which was classified as $600,000 current portion of long-term debt, and $793,000 as
long-term debt.
Private Investor Notes and Bond
ProPhotonix Limited Financing
On October 31, 2006, StockerYale (UK) Ltd. issued a 10% Senior Fixed Rate Secured Bond (“SYUK
Bond”), as amended at various times, in the original principal amount of $4,750,000 StockerYale (UK) Ltd.
may prepay the bond at any time, in whole or in part, without penalty or premium. The bond was secured by all
of the equity interests of Photonic Products Ltd. owned by StockerYale (UK) Ltd. The Company used the net
proceeds to make the cash payment for the acquisition of Photonic Products Ltd. The remaining proceeds were
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 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. The aggregate proceeds of the bond and
warrants of $4,750,000 were allocated between the bond and the common stock warrants based upon their
relative fair market value. The proceeds price allocated to the bond was $3,255,349 and the proceeds allocated
to the common stock warrants were $1,494,651. The difference between the aggregate face amount of the bond
of $4,750,000 and the initial carrying value of the bond was recorded as a debt discount of $1,494,651 and was
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.
On June 9, 2009, the bondholder and the Company entered into a Transfer Agreement under which they
agreed to transfer $1,000,000 of debt (the “Transfer Amount”) from the SYUK Bond to the ProPhotonix (IRL)
Limited (“PPI” Bond) described below.
On December 10, 2010, with an effective date of December 23, 2010, the Company and the bondholder
entered into a binding term sheet to amend the terms of all debt owed by the Company to the bondholder. The
amendment converted approximately $1,275,000 of the SYUK bond into shares of common stock, at a
conversion price of £0.20 ($0.31) per share and the remaining balance was assigned to and assumed by
ProPhotonix (IRL) Limited as part of the PPI Bond.
As of December 31, 2010 the entire balance was transferred or converted and the bond was cancelled.
All related debt discount was expensed as a result of the extinguishment.
ProPhotonix (IRL) Limited Senior Fixed Rate Secured Bond
On July 24, 2008, ProPhotonix (IRL) Limited issued a three-year 12% Senior Fixed Rate Secured
Bond(“PPI Bond”), as amended at various times, to a bondholder in the original principal amount of €935,000
($1,472,905 at July 24, 2008) secured by all of the assets of ProPhotonix (IRL) Limited. The bond was to
originally mature on July 30, 2011. ProPhotonix (IRL) Limited agreed to make payments of principal and
interest of approximately €31,000 over the term beginning August 30, 2008. The outstanding principal on the
bond accrued interest at an original annual rate of 12%. ProPhotonix (IRL) Limited may prepay the bond at any
time, in whole or in part, without penalty or premium. The Company used the net proceeds for working capital.
Page 23
In connection with the issuance of the bond, the Company issued warrants to the bondholder to purchase
636,404 shares of its common stock for a purchase price of $0.45 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. The underlying assumptions included in the Black-Scholes Model were: a risk-free interest rate of
4.03%; an expected life of ten years; and an expected volatility of 98% with no dividend yield. The total value
of the warrants was recorded as a debt discount of approximately $220,000 and was amortized over the life of
the bond, using the effective interest method.
On June 9, 2009, the bondholder loaned the company an additional $500,000 payable over the remaining
term of the original loan, at the same fixed 12% interest rate. As a part of the agreement, the Company issued
to the bondholder additional ten-year common stock warrants to purchase 500,000 shares of common stock at
an exercise price per share of $0.10. An additional debt discount was recorded in the amount of $38,086 and
was amortized over the remaining 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 3.86%, an expected life of seven years, an expected volatility of 105.04% and no dividend yield.
Also on June 9, 2009, the Company and bondholder entered into a Transfer Agreement under which
they agreed to transfer $1,000,000 of debt (the “Transfer Amount”) from the SYUK Bond described above to
the PPI Bond. Interest accrues and is payable monthly and the amount was originally payable on July 30, 2011.
On December 10, 2010, the Company and the bondholder entered into a binding restructuring of the PPI
Bond. The amendment provided that ProPhotonix (IRL) Limited assume €692,128 ($942,124) of the balance of
the SYUK Bond, which was then combined with the existing PPI Bond. This bond is secured by the assets of
ProPhotonix (IRL) Limited. The PPI Bond was amended such that interest only is paid monthly on the
outstanding balance through June 30, 2012 and thereafter equal monthly payments of principal and interest over
the three year period July 1, 2012 through June 30, 2015. The Company also paid a restructuring fee of $50,000
to the bondholder. The key repayment terms of the PPI Bond, under the most recent amendment, are as follows:
(a) Principal as of December 10, 2010:
(b) Interest Rate:
(c) Interest payments only:
(d) Principal Repayment term:
(e) Monthly principal and interest:
€1,972,523 ($2,614,000)
8% per annum
through June 30, 2012
36 months (July 31, 2012 through June 30, 2015)
€61,812 ($82,000)
At December 31, 2011, $2,424,917 remained outstanding under the note, which was classified as
$794,027 current portion of long-term debt and $1,630,890 as long term debt.
At December 31, 2010, $2,614,184 remained outstanding under the note, which was classified as long-
term debt.
Barclays Bank, PLC
On February 6, 2008, the Company’s ProPhotonix Limited subsidiary in the U.K. entered into a
Confidential Invoice Discounting Agreement with Barclays Bank Sales Financing (“Barclays”). Under the
Discounting Agreement, a three-year revolving line of credit was established. The Discounting Agreement
originally provided for a revolving line of credit not to exceed an aggregate principal amount of £700,000
($1,083,000) and grants a security interest in and lien upon all of ProPhotonix Limited’s trade receivables in
favor of Barclays. The Company originally could borrow a total amount at any given time up to ₤700,000,
limited to qualifying receivables as defined. The proceeds from this line of credit were used to pay in full the
outstanding amount under the overdraft facility between ProPhotonix Limited and Barclays Bank, PLC.
Page 24
The facility requires the maintenance of certain financial covenants including a minimum tangible net
worth. On March 8, 2010, the Company entered into an amendment to the revolving credit facility agreement,
which temporarily removed the minimum tangible net worth requirement of £350,000 ($541,000 USD as of
December 31, 2011) as of March 31, 2010 and June 30, 2010. Barclays also reserves the right to review the
facility in the event of losses at the ProPhotonix Limited subsidiary in any 3-month rolling period. The
maximum amount allowed outstanding under the line of credit is £650,000 ($1,006,000 USD as of December
31, 2011). The outstanding principal under the note accrues interest at an annual rate of 2.65% above the
Barclays base rate. The interest rate was 3.15% as of December 31, 2011.
On November 25, 2010, the Company entered into an amendment to the revolving credit facility
agreement to extend the minimum period to May 25, 2012 from the original termination date of February 6,
2011.
The amount outstanding under the facility was $643,000 as of December 31, 2011 and $641,000 as of
December 31, 2010, all of which was classified as a short term debt under revolving credit facility. As of
December 31, 2011, the Company had approximately $25,000 available under this facility.
(9) TAXES
The Company had net deferred tax assets, before considering the full valuation allowance, totaling $30.0
million as of December 31, 2011 and $29.0 million as of December 31, 2010. 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 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. Because of its historical operating losses, the Company has not been subject to income taxes since 1996.
The Company has recorded a deferred tax asset for one of its non-U.S. subsidiaries related to net operating
losses.
The Company is subject to taxation in the U.S., Canada, the United Kingdom, Ireland and various states
and local jurisdictions. As a result of the Company’s tax loss position, the tax years 2000 through 2011 remain
open to examination by the federal and most state tax authorities. In addition, the tax years 2007 through 2011
are open to examination in foreign jurisdictions. As of December 31, 2011, the Company did not have any tax
examinations in process.
Page 25
The components of the provision (benefit) for income taxes of continuing operations are as follows:
Years Ended December 31,
2011
2010
In thousands
Current
Federal........................................................................................... $ —
State...............................................................................................
—
Foreign ..........................................................................................
37
Sub-total ........................................................................................
37
Deferred
Federal...........................................................................................
State...............................................................................................
Foreign ..........................................................................................
—
—
—
Sub-total ........................................................................................
—
Total provision (benefit)
$ 37
$ —
—
(46)
(46)
—
—
(65)
(65)
$ (111)
The income tax (benefit) / provision included in the accompanying statement of operations is as follows:
Years Ended December 31,
2011
2010
In thousands
Continuing Operations ..................................................................... $ 37
Discontinued Operations ................................................................. 28
$ (111)
150
Total ......................................................................................................... $ 65
$ 39
The significant items comprising the deferred tax asset and liability at December 31, 2011 and 2010 are as
follows:
Years Ended December 31,
2011
2010
In thousands
Net operating loss carry forwards ...............................................
Foreign net operating loss carry forwards ...................................
Financial reporting reserves not yet deductible for tax purpose .
Accelerated depreciation and property-basis differences ............
Other ............................................................................................
Valuation allowance ....................................................................
$ 25,397
3,548
10
68
860
(29,750)
$ 24,289
4,235
16
57
911
(29,276)
Total .......................................................................................
Intangible asset-basis differences ................................................
$ 133
(133)
$ 232
(232)
Deferred tax liability, net .......................................................
$ -
$ -
The Company’s deferred tax liability, at December 31, 2011 and 2010 relates to the difference in the basis
of its intangible assets acquired in a foreign jurisdiction.
Page 26
As of December 31, 2011, the Company had United States federal net operating loss carry forwards
(NOLs) of approximately $64.1 million available to offset future taxable income, if any. These carry forwards
expire through 2031 and are subject to review and possible adjustment by the Internal Revenue Service. The
Company may be subject to limitations under Section 382 of the Internal Revenue Service Code as a result of
changes in ownership. 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. At December 31, 2011, the Company also has Canadian federal NOLs of
approximately $2.0 million available to offset future taxable income, if any. These carry forwards expire
through 2031 and are subject to review and possible adjustment by the Canadian Revenue Agency. The
Company may be subject to limitations of the use of the Canadian NOLs as a result of changes in ownership.
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. At December 31, 2011, the Company also has a United Kingdom NOL of approximately $6.5 million,
for which management has provided a full valuation allowance against. The valuation allowance increased by
approximately $474,000 and $575,000 for the years ended December 31, 2011 and 2010.
The Company 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. As of December 31, 2011 and 2010, the Company
has cumulatively recorded long-term liabilities of $178,000 and $150,000 respectively, relative to the sale of its
North American operations to Coherent, Inc.
(10) UNREGISTERED SALES OF EQUITY SECURITIES AND WARRANTS
On December 23, 2010, the Company listed on the London Stock Exchange-AIM. In the course of this
listing, the Company sold 3,825,000 shares of common stock at £0.20 ($0.31 as of December 23, 2010) per
share. Also, the Company issued an additional 50,000 shares of common stock for fees associated with the
listing in lieu of cash (fair value of approximately $16,000 at grant date).
On December 23, 2010, pursuant to the terms of the Company’s listing on the London Stock Exchange-
AIM, the Company issued a warrant to purchase up to an aggregate of 76,500 shares of the Company’s common
stock to Libertas Capital Corporate Finance Limited. The warrant is exercisable at any time at a per share price
of £0.20 and expires on the fifth anniversary of the grant date. 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 2.09%, an expected life of five years and an expected volatility of 156% with no
dividend yield. The fair value of the warrant issue was approximately $22,000 at grant date.
On July 13, 2011, the Company sold approximately 23,250,000 shares of common stock on the London
Stock Exchange, AIM listing at a price of £0.14 ($0.22) per share for a total of £3.0 million, net of expenses
(approximately $4.9 million).
Page 27
Warrants
As of December 31, 2011, there were 7,828,188 common shares underlying outstanding warrants with the
following exercise prices and expiration dates:
Number of Common Shares
Underlying Warrants
18,621
1,127,000
5,000
551,500
3,570,000
1,150,000
906,067
500,000
7,828,188
Exercise Price
Expiration Date
$0.80 –$0.80
$0.50 –$0.50
$0.50 –$0.50
$0.32 –$1.44
$1.15 –$3.12
$0.80 –$1.72
$0.45 –$0.60
$0.10 –$0.10
2012
2013
2014
2015
2016
2017
2018
2019
(11) STOCK OPTION PLANS
Under the Company’s 2007 Stock Incentive Plan (the 2007 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 were initially
reserved for issuance under the 2007 Plan. In addition, there is an annual increase to the number of shares
reserved for issuance under the 2007 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. As of December 31, 2011, there were 8,300,000 shares reserved for issuance and
there were 7,300,000 shares reserved at December 31, 2010.
In May 2010, the Board of Directors approved the Second Amended and Restated Policy Regarding
Compensation of Independent Directors, which provided that the $50,000 annual compensation of independent
directors be divided into a $15,000 cash payment and an option to purchase shares of common stock that have
an aggregate market value of $35,000 as of the date of the grant and that the prior $5,000 additional annual
compensation given to chairs of committees be revoked. In August 2010, the Board of Directors approved the
Third Amended and Restated Policy Regarding Compensation of Independent Directors, which added a
provision for an initial grant to new directors of an option to purchase 75,000 shares of common stock. There
were no options issued as a part of or after the August 2010 amendment. In March 2011, the Board of Directors
approved the Fourth Amended and Restated Policy Regarding Compensation of Independent Directors, which
revoked the provision that provides the initial 75,000 option grant to new directors.
In May 2004, the Company adopted the 2004 Stock Option and Incentive Plan (the 2004 Option Plan) for
the purpose of issuing both Incentive Options and Nonqualified Options to officers, employees and directors of
the company. A total of 2,500,000 shares of common stock were reserved for issuance under this plan. Options
were granted under the 2004 Option Plan on terms and prices as determined by the Board of Directors. Each
option will be exercisable after the period or periods specified in the option agreement, but no option may be
exercised after the expiration of 10 years from the date of grant. No further grants are allowed under this plan.
Page 28
In May 2000, the Company adopted the 2000 Stock Option and Incentive Plan for the purpose of issuing
both Incentive Options and Nonqualified Options to officers, employees and directors of the Company. A total
of 2,800,000 shares of common stock were reserved for issuance under this plan. Options were granted under
the 2000 Option Plan on terms and at prices as determined by the Board of Directors. Each option will be
exercisable after the period or periods specified in the option agreement, but no option may be exercised after
the expiration of 10 years from the date of grant. No further grants are allowed under this plan.
The Company had 1,564,244 shares available for future grants of options and restricted shares
December 31, 2011. The following table summarizes information about the stock options outstanding as of
December 31, 2011. The intrinsic value on the options outstanding at December 31, 2011 is approximately
$23,000. The intrinsic value of the options exercisable at December 31, 2011 is approximately $3,000.
During 2011 and 2010, the GNRC approved various qualified and non-qualified stock option awards to
purchase shares of the Company’s common stock to various officers, directors and employees. There were
2,549,198 options granted during the year ended December 31, 2011 and 2,410,562 options were granted during
the year ended December 31, 2010. These options vest between the six-month and four year anniversary of the
grant date, provided that the recipient continues to serve the Company in that capacity until each such vesting.
The exercise price for these options range from $0.09 to $0.21 per share in 2011, to $0.08 to $0.12 per share in
2010.
The weighted average assumptions for grants during the years ended December 31, 2011 and December
31, 2010 used in the Black-Scholes option pricing model were as follows:
Volatility………………………………………..
Expected option life……………………………
Interest rate (risk free)………………………….
Dividends……………………………………….
Weighted average grant date fair value………...
Twelve months Ended
December 31,
2011
162.1%-167.2%
5.3 years
1.81%-2.54%
$0
$0.12
Twelve months Ended
December 31,
2010
111.6%-112.2%
5.5 – 6.08 years
3.05%-3.83%
$0
$0.08
Page 29
Balance at December 31, 2009 ............................
Granted ........................................................
Exercised .....................................................
Cancelled .....................................................
Options
Outstanding
3,005,098
2,410,562
-
( 777,252)
Weighted
Average
Exercise Price
per Share ($)
2.87
0.11
-
4.05
Balance at December 31, 2010 ............................
4,638,408
Vested and Exercisable at December 31,
2010 .................................................................
3,349,286
1.23
1.65
Balance at December 31, 2010 ............................
Granted ........................................................
Exercised .....................................................
Cancelled .....................................................
4,638,408
2,549,198
-
( 619,666)
1.23
0.12
-
6.23
Balance at December 31, 2011 ............................
6,567,940
Vested and Exercisable at December 31,
2011 .................................................................
3,383,786
0.33
0.52
Weighted
Average
Remaining
Contractual
Term
(in Years)
5.56
7.25
6.77
7.25
7.70
6.57
Vested and Expected to Vest at December
31, 2011 ...................................................... 6,224,834
0.34
7.57
Range of
Exercise Prices
$ 0.08 – 0.99
1.00 – 1.99
2.00 – 3.99
4.00 – 6.99
7.00 – 11.99
$ 0.08 – 11.99
Options
Outstanding
6,040,540
320,900
76,500
125,400
4,600
6,567,940
Weighted
Average
Contractual
Life (years)
Weighted
Average
Exercise
Price
8.2
2.1
2.1
0.4
0.2
7.7
$
$
0.16
1.25
2.35
4.85
7.20
0.33
Options
Exercisable
2,856,386 $
320,900
76,500
125,400
4,600
3,383,786 $
Weighted
Average
Exercise
Price
0.19
1.25
2.35
4.85
7.20
0.52
At December 31, 2011, there was approximately $258,000 of total unrecognized compensation cost related to
stock options granted. The cost is expected to be recognized over the next 2.08 years. Total stock option
expense recorded in 2011 and 2010 was approximately $83,000 and $198,000, respectively. There were no
options exercised during 2011 and 2010.
On March 14, 2012, and on March 22, 2012, the GNRC approved qualified stock option awards to purchase
shares of the Company’s common stock to officers, and employees. A total of 2,085,000 options were granted
Page 30
on these two dates. These options vest over a four year anniversary of the grant date, provided that the recipient
continues to serve the Company in that capacity until each such vesting.
A summary of the status of the Company’s non-vested shares of restricted stock for 2011 and 2010 and
changes during 2011 and 2010 are presented below:
Shares
Weighted
Average
Grant-Date Fair Value
Non-vested at December 31, 2009 ................................. 490,689
Granted ................................................................... -
Vested .................................................................... (281,735)
Cancelled................................................................ (12,930)
Non-Vested at December 31, 2010 ................................ 196,024
Granted ................................................................... -
Vested .................................................................... (158,524)
Cancelled................................................................ -
Non-Vested at December 31, 2011 ................................ 37,500
$ 1.15
-
1.18
1.26
$ 1.10
-
$ 1.20
-
$ 0.67
As of December 31, 2011, there was approximately $1,000 of total unrecognized compensation cost
related to restricted stock awards. The cost is expected to be recognized in January 2012. As of December 31,
2011, 2,066,702 shares were vested. As of December 31, 2010, 1,908,178 shares were vested. The total fair
value of shares vested during 2011 and 2010 was approximately $190,000 and $332,000. Total compensation
from continuing operations recorded in 2011 and 2010 was approximately $116,000 and $303,000, respectively.
(12) EMPLOYEE STOCK PURCHASE PLAN
In May 2000, the Company adopted the 2000 Employee Stock Purchase Plan (the Stock Purchase Plan),
which permits the eligible employees of the Company and its subsidiaries to purchase shares of the Company’s
common stock, at a discount, through regular monthly payroll deductions of up to 10% of their pre-tax gross
salary. Subject to adjustment for stock splits, stock dividends and similar events, a maximum of 300,000 shares
of common stock may be issued under the Stock Purchase Plan. During the years ended December 31, 2011 and
2010, there were no shares issued under the Stock Purchase Plan.
(13) EMPLOYEE BENEFIT PLANS
On January 17, 1994, the Company established the StockerYale, Inc. 401(k) Plan (the Plan). Under the
Plan, employees are allowed to make pre-tax retirement contributions. In addition, the Company may make
matching contributions, not to exceed 100% of the employee contributions, and profit sharing contributions at
its discretion. The Company made matching contributions of $27,000 in the year ended December 31, 2011 and
$30,000 in the year ended December 31, 2010. The Company incurred costs of approximately $2,300 in 2011
and approximately $3,000 in 2010 to administer the Plan.
The Company also has voluntary contribution pension schemes in Ireland and in the United Kingdom. In
the United Kingdom, the Company contributes a maximum of 3% of the participating employee salaries, with
one exception, where the maximum contribution is 10%. The plan is voluntary, with plan administration costs
coming out of the plan itself. The Company made contributions of approximately $38,000 and $35,000 in the
Page 31
years ended December 31, 2011 and 2010, respectively. In Ireland, the Company also has a voluntary plan that
matches contributions for those participating employees with minimum of 6 months of service. After two years
of service, the Company will match up to a maximum of 5% of salary. The Company made contributions of
approximately $28,000 and $24,000 in the years ended December 31, 2011 and 2010, respectively. Plan
administration costs come out of the plan itself.
(14) DISCONTINUED OPERATIONS
SYC was sold to Coherent on October 13, 2009, and has been reported as discontinued operations.
Amounts recorded in loss from discontinued operations for the years ended December 31, 2011 and 2010
represent the professional fees and other expenses associated with the sold business. The loss from
discontinued operations for the years ended December 31, 2011 and 2010 was $19,000 and $116,000,
respectively. The Company recorded a gain of approximately $0.5 million on the sale of discontinued
operations in 2010 related to the working capital adjustment.
Lease obligation treated as financing
(15) COMMITMENTS AND CONTINGENCIES
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 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. Because the transaction did not qualify as a
sale for accounting purposes, the net proceeds were classified as a financing lease obligation. Accordingly, the
Company carried the value of the building on its balance sheet and recorded depreciation expense until the
criteria to record a sale were met on December 31, 2010; the expiration date of the lease. The Company
recognized a gain of approximately $660,000 upon completion of the sale at December 31, 2010.
On December 31, 2010, the Company amended the lease to reduce the rentable space to 3,600 square feet.
The term of the lease was amended to require monthly tenant at-will payments with a 90 day termination notice.
Base rent was amended from $16,949 per month to $2,550 per month and the tenant’s share of expense was
reduced.
Other obligations and contingent liabilities
StockerYale (IRL) Ltd. leases approximately 10,000 square feet for its operations in Cork, Ireland. The
lease term began on August 22, 2008 for a term of five years with rent and service charges of €102,000 per
year.
ProPhotonix Limited (UK) leases approximately 13,000 square feet of space in Hatfield Broad Oak,
Hertfordshire, UK. The lease has a term of nine years ending September 29, 2013.
The Company’s Canadian subsidiary, StockerYale Canada Inc., was the prime tenant of the property
located at 275 Kesmark Street, Montreal, Quebec, Canada. The lease ended in mid January, 2011.
The Company utilizes, or has assumed, capital leases to finance purchases of equipment or vehicles. There
was approximately $0 and $29,000 payable in principal and interest under these leases at December 31, 2011
Page 32
and December 31, 2010, respectively. The Company records depreciation expense on assets acquired under a
capital lease in the consolidated statement of operations.
The net book value of assets acquired under capital leases at December 31, 2011 and December 31, 2010,
is as follows:
Assets under capital lease ...........................................................
Less—accumulated depreciation ................................................
2011
$ 571,000
(497,000)
2010
$ 573,000
(430,000)
Assets under capital lease, net ....................................................
$ 74,000
$ 143,000
Scheduled future maturities of debt, and operating lease obligations for the next five years:
Due by period
2012
2013
2014
2015 +
Total
in thousands
Debt obligations ......................................
Operating lease obligations .....................
274
$ 2,230 $ 861 $ 770 $ — $3,861
426
—
152
—
$ 2,504 $ 1,013 $ 770 $ — $4,287
The Company expensed approximately $313,000 and $369,000 in rent for the years ended December 31, 2011
and 2010, respectively.
Page 33
(16) LEGAL PROCEEDINGS
The Company is party to various legal proceedings generally incidental to its business. Although the
disposition of any legal proceedings cannot be determined with certainty, it is the Company’s opinion that any
pending or threatened litigation will not have a material adverse effect on the Company’s results of operations,
cash flow or financial condition.
(17) SUBSEQUENT EVENTS
The Company has evaluated subsequent events through April 11, 2012, the date which the financial statements
were available to be issued, and there were no events that impacted these financial statements or required
additional disclosure to the financial statements.
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