PROPHOTONIX LIMITED
2012 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
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2012 Annual Report to Stockholders
Dear Fellow Stockholders:
ProPhotonix’s 2012 financial results were disappointing. Enough has been written of the
collapse in business associated with the solar industry, to which we were deeply tethered in
2011, and which created much of the negative effect on our business in 2012. Sales to the solar
industry in 2011 were 15% of revenue, however, this declined to only 2% of sales in 2012. The
effect of this shift resulted in the decline in revenue and gross profit, and coupled with the
investment in the expanded sales force contributed to an operating loss of $3.1 million in 2012.
Honestly speaking we made mistakes: first, we did not sufficiently diversify our customer and
market positions, a situation of which we are mindful, and second, we did not reap the rewards
from the expected uptake in revenue from our investments in the expanded sales force.
However, the benefits of the sales force investment are becoming visible in 2013 as discussed
below.
While the 2012 financial results were dissatisfying, the operations had many accomplishments.
Enhancements were made to most of the LED product lines and several new LED and laser
products introduced: (i) the Cobra Max line light delivering up to twice the intensity of the
COBRA Slim series for line scan applications, the highest intensity line light on the market, (ii)
the LOTUS range was extended, adding two new cooling options to boost intensity, (iii) InViso
Micro Laser providing the thinnest line to the machine vision market, and (iv) the introduction of
the newest structured light laser family, 3D Pro and 3D Pro Mini, extending our offering to
customers with exacting vision inspection laser applications. The Company also expanded its
world-wide sales distribution network as envisioned at the beginning of the year. Finally, the
year finished with an improving book-to-bill ratio of 1.08 along with signs of continuing
improvement.
An improvement of business activity is evident in 2013; order bookings through the first four
months totaled $6.2 million and the April 30, 2013 backlog of unshipped orders grew 25% since
December 31, 2012. The recent order activity is validation of the investment in the sales
organization that began in 2011, as a significant amount of these orders are from new customers
we initially engaged with in late 2011 and 2012.
Many positive changes are occurring within our Company. Early in 2013, ProPhotonix
expanded its distributed product portfolio. The portfolio now includes high powered laser
devices from Oclaro, augmenting a multi-year relationship between our companies. In addition,
the Company and Osram Opto Semiconductors embraced a mutual agreement for ProPhotonix to
distribute Osram’s ground breaking green and blue Direct Diode Lasers. Both of these
arrangements add to our product portfolio further supporting our customers.
Page 1
Most important, in June 2013 the Company secured new loan financing with net availability of
$2.5 million through an existing lender to the Company alongside a new lender. In connection
with the financing, the existing lender converted €144,324 ($193,132) of debt into equity. We
are confident that this infusion of capital puts ProPhotonix on solid footing to continue the
execution of its long term strategy. The loan financing will be used for improving operations,
capital investments, product development, and business development.
On May 24, 2013, with the financing substantially in place, Mark W. Blodgett announced his
retirement from the Company after 24 years of service. Mr. Dietmar Klenner also announced, in
June 2013, that he will not stand for re-election to the Board after 10 years of service. I would
like to thank Mr. Blodgett for his leadership and vision and to also thank Mr. Klenner for his
service as a Director. On June 25, 2013, Raymond Oglethorpe became Chairman of the Board (a
non-executive director) and Mr. Mark Weidman, President, Wheelabrator Technologies, Inc., a
subsidiary of Waste Management, Inc., was nominated by our Board for election by our
stockholders at our annual meeting of stockholders as non-executive Director to the Board of
Directors to fill the vacancy created by Mr. Klenner’s decision to not stand for re-election. Mr.
Philip Feeley has accepted the position as acting Chief Financial Officer having served as the
Corporate Controller since 2005. We continue to strengthen the excellent board governance
practices of the Company.
I sincerely thank you: employees, customers, suppliers, and stockholders for your continued
support and confidence in ProPhotonix.
Respectfully submitted,
Tim Losik
President and Chief Executive Officer
Page 2
Director Remuneration Report
For the year ended December 31, 2012
Executive Director Compensation - Executive Director Compensation is reviewed by the
Independent Non-Executive Directors.
Non-Executive Director compensation is established periodically.
Expensed in 2012 based on stock
compensation rules, without
consideration of forfeitures
Executive Director
($)
Bonus ($)
Salary
Pension
($)
Other (1)
($)
Total Cash
Compensation
($)
Options
($)
RSA's
($)
Total ($)
Total All
Compensation
2012 ($)
Total All
Compensation
2011 ($)
Mark Blodgett (2)
384,000
-
1,875
9,050
394,925
19,779
-
19,779
414,704
446,868
Tim Losik
215,000
-
5,625
750
221,375
9,889
1,047
10,936
232,311
231,905
Total Executive
Compensation
Non-Executive Director
599,000
-
7,500
9,800
616,300
29,668
1,047
30,715
647,015
678,773
Dieter Klenner
-
-
-
21,250
21,250
3,488
-
3,488
24,738
31,576
Ray Oglethorpe
Timothy Steel
Vincent Thompson
Total Non-
Executive
Compensation
Director Share Options:
-
-
-
-
-
-
-
-
-
21,250
21,250
3,488
-
3,488
24,738
32,636
21,250
21,250
3,488
-
3,448
24,738
16,691
21,250
21,250
3,488
-
3,448
24,738
16,691
-
-
-
85,000
85,000
13,954
-
13,954
98,954
97,594
Director
Options
@
12/31/11
Options
Granted
Options
Forfeited
Options
@
12/31/12
Mark Blodgett
3,054,050
1,000,000
(199,400)
3,854,650
Tim Losik
900,000
500,000
-
1,400,000
Dieter Klenner
656,518
250,000
-
906,518
Ray Oglethorpe
757,006
250,000
(11,500)
995,506
Timothy Steel
195,433
250,000
-
445,433
Vincent Thompson
195,433
250,000
-
445,433
Total All Directors
5,758,440
2,500,000
(210,900)
8,047,540
(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) Excludes company paid housing expenses for Mr. Blodgett in the amount of $108,885 and U.K. income taxes in the amount of $171,546, of which $62,164 related
to 2011. As of May 24, 2013, Mr. Blodgett retired from ProPhotonix Limited and as of the date of this report is no longer a director of the Company.
Page 3
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ProPhotonix Limited
Consolidated Financial Statements
Years Ended December 31, 2012 and 2011
FINANCIAL STATEMENTS
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Item
Independent Auditor’s Reports .....................................................................................................................
Consolidated Balance Sheets as of December 31, 2012 and 2011 ...............................................................
Page
7
10
Consolidated Statements of Operations and Comprehensive Loss for the Years Ended December 31,
2012 and 2011 ...........................................................................................................................................
11
Consolidated Statements of Stockholders’ Equity / (Deficit) for the Years Ended December 31, 2012 and
2011...........................................................................................................................................................
12
Consolidated Statements of Cash Flows for the Years Ended December 31, 2012 and 2011 .....................
13
Notes to Consolidated Financial Statements………………………………………………………………. 14
Page 6
Independent Auditors’ Report
The Board of Directors
ProPhotonix Limited
32 Hampshire Road
Salem
New Hampshire
United States of America
Report on the Financial Statements
We have audited the accompanying consolidated financial statements of ProPhotonix Limited and its
subsidiaries, which comprise the consolidated balance sheet as of December 31, 2012, and the related
consolidated statements of operations and comprehensive loss, stockholders’ equity / (deficit), and cash
flows for the year then ended, and the related notes to the consolidated financial statements.
Management’s Responsibility for the Financial Statements
Management is responsible for the preparation and fair presentation of these consolidated financial
statements in accordance with U.S. generally accepted accounting principles; this includes the design,
implementation, and maintenance of internal control relevant to the preparation and fair presentation of
consolidated financial statements that are free from material misstatement, whether due to fraud or error.
Auditors’ Responsibility
Our responsibility is to express an opinion on these consolidated financial statements based on our audit.
We conducted our audit in accordance with auditing standards generally accepted in the United States of
America. Those standards require that we plan and perform the audit to obtain reasonable assurance about
whether the consolidated financial statements are free from material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the
consolidated financial statements. The procedures selected depend on the auditors’ judgment, including the
assessment of the risks of material misstatement of the consolidated financial statements, whether due to
fraud or error. In making those risk assessments, the auditor considers internal control relevant to the
entity’s preparation and fair presentation of the consolidated financial statements in order to design audit
procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on
the effectiveness of the entity’s internal control. Accordingly, we express no such opinion. An audit also
includes evaluating the appropriateness of accounting policies used and the reasonableness of significant
accounting estimates made by management, as well as evaluating the overall presentation of the
consolidated financial statements.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our
audit opinion.
Page 7
ABCD Opinion
In our opinion, the consolidated financial statements referred to above present fairly in all material respects,
the financial position of ProPhotonix Limited. and its subsidiaries as of December 31, 2012, and the results
of their operations and their cash flows for the year then ended in accordance with U.S. generally accepted
accounting principles.
Other matters
The consolidated financial statements of ProPhotonix Limited and its subsidiaries as of and for the year
ended December 31, 2011 were audited by other auditors. Those auditors expressed an unqualified opinion
on those financial statements in their report dated 11 April 2012.
KPMG LLP
Cambridge
United Kingdom
20 June 2013
Page 8
Page 9
FINANCIAL STATEMENTS
PROPHOTONIX LIMITED
CONSOLIDATED BALANCE SHEETS
($ in thousands except share and per share data)
December 31
2012
2011
Assets
Current assets:
Cash and cash equivalents
Accounts receivable, less allowances of $31 in 2012 and $13 in 2011
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
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
Long-term portion of capital lease obligations
Other long-term liabilities
Total liabilities
Stockholders’ equity:
Common stock, par value $0.001; shares authorized 150,000,000 at December 31, 2012 and
December 31, 2011; 76,059,457 shares issued and outstanding at December 31, 2012 and
December 31, 2011 .............................................................................................................
Paid-in capital
Accumulated deficit
Accumulated other comprehensive income
Total stockholders’ equity
Total liabilities and stockholders’ equity
$
$
1,278
2,225
2,033
234
5,770
523
467
218
23
4,066
2,405
1,694
288
8,453
653
458
332
36
$ 7,001
$ 9,932
$
$
662
2,387
10
2,000
-
1,084
6,143
-
10
178
6,331
643
1,587
-
1,456
29
778
4,493
1,631
-
178
6,302
76
110,893
(110,521)
222
76
110,751
(107,618)
421
670
3,630
$
7,001
$
9,932
See the notes to consolidated financial statements.
Page 10
PROPHOTONIX LIMITED
Consolidated Statements of Operations and Comprehensive Loss
($ in thousands except share and per share data)
Revenue
Cost of Revenue
Gross Profit
Research & Development Expenses
Selling, General & Administrative Expenses
Amortization of Intangible Assets
Operating Loss
Other Income / (Expense), net
Interest Expense
Loss Before Taxes from Continuing Operations
Tax Provision
Net Loss from Continuing Operations
Loss from Discontinued Operations, net of tax
Net Loss
Other Comprehensive Income (Loss):
Foreign currency translation
Total Comprehensive Loss
Loss Per Share:
Basic and diluted:
Net loss from continuing operations
Loss from discontinued operations, net
Net loss per share
Years Ended
December 31,
2012
2011
$ 13,904
(9,597)
$ 16,977
(10,613)
4,307
(922)
(6,403)
(118)
(3,136)
490
(257)
(2,903)
-
(2,903)
-
6,364
(899)
(6,030)
(275)
(840)
(184)
(363)
(1,387)
37
(1,424)
(19)
$ (2,903)
$ (1,443)
(199)
165
$ ( 3,102)
$ ( 1,278)
($0.04)
($0.00)
($0.04)
($0.02)
($0.00)
($0.02)
Basic and diluted weighted average shares outstanding
76,059,457
63,485,600
See the notes to consolidated financial statements.
Page 11
PROPHOTONIX LIMITED
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY / (DEFICIT)
(in thousands)
Common Stock
Shares
Par
$0.001
Paid in
Capital
Accumulated
Deficit
Accumulated
Other
Comprehensive
Income
Total
Stockholders’
Equity (Deficit)
52,510
$
53
$105,678
$
(106,175)
$
256
$
(188)
23,550
-
23
-
4,874
-
-
199
-
-
165
(1,443)
4,897
199
165
(1,443)
Balance December 31, 2010
Sale of common stock, net of
expenses of $350 .........
Share based compensation, net
of forfeitures ................
Translation adjustment ......
Net loss ..............................
Balance December 31, 2011
76,060
$
76
$110,751
$
(107,618)
$
421
$
3,630
Share based compensation, net
of forfeitures ................
Translation adjustment ......
Net loss ..............................
-
-
143
-
(2,903)
-
(199)
143
(199)
(2,903)
Balance December 31, 2012
76,060
$
76
$110,893
$
(110,521)
$
222
$
670
See the notes to consolidated financial statements.
Page 12
PROPHOTONIX LIMITED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Years Ended December 31
2012
2011
Operating
Net loss
Loss from discontinued operations, net of tax
Net loss from continuing operations
Adjustments to reconcile net loss to net cash used in operating activities:
$ (2,903) $ (1,443)
(19)
-
(2,903)
(1,424)
Stock-based compensation expense
Depreciation and amortization
Foreign exchange (gain) loss
Loss on disposal of assets
Provision for inventories
Provision for bad debts
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
Purchase of property, plant and equipment
Net cash 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
See the notes to consolidated financial statements.
143
396
(188)
-
75
25
199
(372)
57
505
-
261
21
(1,782)
-
(1,782)
(67)
(67)
-
-
(889)
(889)
(50)
(2,788)
4,066
$
$
$
1,278
228
-
199
601
281
8
61
-
(567)
100
(1)
(529)
29
(584)
29
(1,797)
(19)
(1,816)
(95)
(95)
4,897
8
(753)
4,152
14
2,255
1,811
$
$
$
4,066
363
15
Page 13
PROPHOTONIX LIMITED
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 through ProPhotonix
(IRL) Limited; and as a distributor of laser diodes and manufacturer of laser modules through ProPhotonix
Limited, a U.K. subsidiary. The operating units are ProPhotonix (IRL) Limited based in Cork, Ireland,
ProPhotonix Limited, a U.K. subsidiary based near Stansted, United Kingdom and ProPhotonix Limited, based
in Salem, New Hampshire, U.S.A. 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.
ProPhotonix Limited was incorporated on March 27, 1951 in the Commonwealth of Massachusetts and
currently incorporated in the state of Delaware. The common stock of the Company now trades on the Pink
OTC Market in the U.S. under the trading symbol “STKR”. 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, 2012 and 2011, the
Company recorded net losses of $2,903,000 and $1,443,000, respectively. Net use of cash flow for operating
activities from continuing operations for the same time periods were $1,782,000 and $1,797,000, 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 June 20, 2013, the Company entered into
an amendment with the PPI Bond bondholder who waived any and all events of default and to amend the terms
of the PPI Bond. The amendment restructures the existing Bond as described in Note 8. Also on June 20, 2013,
the Company entered into a term note agreement with the holder of the PPI Bond allowing for an additional
$1,000,000 of available funds as described in Note 17. Under the terms of this note, the Company must use 50%
of any amounts advanced to make additional principal payments under the PPI Bond. Finally, on June 20,
2013, The Company entered into a term note agreement with a Lender, affiliated with the Company CEO, for
$2.0 million of available funds as described in Note 17. The Company believes with this loan capacity that it
has adequate working capital to continue to trade for at least the next twelve months from the approval of these
financial statements.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accompanying consolidated financial statements are prepared in conformity with Generally Accepted
Accounting Principles (“U.S. GAAP”) and 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, a U.K. subsidiary, and ProPhotonix Holdings, Inc., which
Page 14
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.
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. The Company also has receivables insurance at ProPhotonix
Limited, a U.K. subsidiary, which allows the Company to submit a claim on overdue receivables in excess of 60
days past invoice date. 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 ..................................................
2011
2012
In thousands
13 $
25
(7)
47
-
(34)
$
Balance at end of period ............................................................................
$
31 $
13
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 15
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, 2012, 9,355,890 shares underlying options and 7,809,567 shares underlying warrants
were excluded from the calculation of diluted shares, as their effects were anti-dilutive.
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.
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 freight on board (FOB) at shipping point. In certain limited
situations, distributors may have the right to return products. Such rights of return may preclude the Company
from recognizing revenue until the return period has ended.
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”). 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.
Page 16
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”. 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:
Balance at beginning of period ....................................................
Charges to costs and expenses .....................................................
Account write-offs and other deductions .....................................
$
$
In thousands
159
18
(13)
Balance at end of period ......................................................
$
164
$
155
39
(35)
159
Years Ended December 31,
2012
2011
The Company expenses advertising costs as incurred. Advertising expenses for the years ended 2012 and
2011 were approximately $250,000 and $330,000, 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 capital 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.
Page 17
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, 2012 or
2011. As of December 31, 2012 and 2011, the Company has cumulatively recorded long-term liabilities of
$178,000 and $178,000 respectively, relative to the sale of its North American operations to Coherent, Inc.
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
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 2012, the Company recognized approximately $143,000 of stock-based compensation related to
restricted stock and options, all of which was charged to administrative expense. 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.
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 ratably 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.
Page 18
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 2012 and
2011, 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.
Management has determined the functional currency of StockerYale (UK) Ltd, and ProPhotonix Limited, a
U.K. subsidiary, is the euro. The functional currency of ProPhotonix (IRL) Limited is the euro, while the
functional currency of ProPhotonix Limited U.S.A. is the U.S. dollar.
Foreign currency transaction losses from continuing operations recorded in the statements of operations as
other income (expense), net were approximately $(471,000) and $327,000 for 2012 and 2011, 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.
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 believes that its 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 2012 or 2011. The Company had one customer that accounted for 10% of the outstanding
accounts receivable balance at December 31, 2012 and 2011. The Company maintains its cash and cash
equivalents in bank deposit accounts, which at times may exceed insured limits. At December 31, 2012, the
amount in excess of governmental insurance protection was approximately $1.0 million. 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.
Page 19
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
In May 2011, the FASB issued Accounting Standards Update (ASU) 2011-04, "Fair Value Measurement
(Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S.
GAAP and International Financial Reporting Standards (IFRS)." ASU 2011-04 represents converged guidance
between GAAP and IFRS resulting in common requirements for measuring fair value and for disclosing
information about fair value measurements. This new guidance is effective for fiscal years beginning after
December 15, 2011 and subsequent interim periods. The requirements of ASU 2011-04 did not have a material
impact on the Company's Consolidated Financial Statements.
In June 2011, the FASB issued ASU 2011-05, "Presentation of Comprehensive Income." ASU 2011-05
requires the Company to present components of other comprehensive income and of net income in one
continuous statement of comprehensive income, or in two separate, but consecutive statements. The option to
report other comprehensive income within the statement of equity has been removed. This new presentation of
comprehensive income is effective for fiscal years beginning after December 15, 2011 and subsequent interim
periods. As this standard relates only to the presentation of other comprehensive income, the adoption of the
accounting standard did not have an impact on our consolidated financial position, results of operations and
cash flows. The revised presentation requirements are reflected in the Consolidated Statements of
Comprehensive Income.
In September 2011, the FASB issued ASU 2011-08, "Testing Goodwill for Impairment." This revised
standard provides entities with the option to first use an assessment of qualitative factors to determine whether
the existence of events or circumstances leads to a determination that it is more likely than not that the fair value
of a reporting unit is less than its carrying amount. If a conclusion is reached that reporting unit fair value is not
more likely than not below carrying value, no further impairment testing is necessary. This revised guidance
applies to fiscal years beginning after December 15, 2011, and the related interim and annual goodwill
impairment tests. The requirements of ASU 2011-08 did not have an impact on the Company's Consolidated
Financial Statements.
In December 2011, the FASB issued ASU 2011-11, "Disclosures about Offsetting Assets and
Liabilities." ASU 2011-11 requires enhanced disclosures including both gross and net information about
financial and derivative instruments eligible for offset or subject to an enforceable master netting arrangement
or similar agreement. This new guidance is effective for annual reporting periods beginning on or after January
1, 2013 and subsequent interim periods. The requirements of ASU 2011-11 will not have an impact on the
Consolidated Financial Statements.
Page 20
(4) INVENTORIES
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:
Years Ended December 31
Finished goods .....................................................................................
Work in-process ...................................................................................
Raw materials .......................................................................................
2012
2011
In thousands
$ 460
176
1,397
$ 362
141
1,191
Net inventories .............................................................................
$ 2,033
$ 1,694
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
2012
2011
Buildings and building improvements ...........................................
Computer equipment......................................................................
Machinery and equipment .............................................................
Furniture and fixtures.....................................................................
$
290
427
1,785
703
284
414
1,738
622
In thousands
$
Property, plant and equipment ...............................................
Less accumulated depreciation ......................................................
$ 3,205
$ 3,058
(2,682 )
(2,405 )
Net property, plant and equipment ........................................
$ 523
$ 653
Depreciation expense from continuing operations was approximately $278,000 and $326,000 in the years
ended December 31, 2012 and 2011, respectively.
(6) GOODWILL
The Company uses a three-step approach to a goodwill impairment test. First, ASU 2011-08 allows
entities with the option to first use an assessment of qualitative factors to determine whether the existence of
events or circumstances leads to a determination that it is more likely than not that the fair value of a reporting
unit is less than its carrying amount. If a conclusion is reached that reporting unit fair value is not more likely
than not below carrying value, no further impairment testing is necessary. If further testing is necessary, the
second step is to estimate the fair value of its reporting units by using forecasts of discounted cash flows and
compare 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 third step of the impairment test to determine if
goodwill is impaired.
Page 21
In connection with the annual fair value test of goodwill, performed at the end of the fourth quarter 2012,
and at the end of the fourth quarter 2011, the Company concluded that no impairment existed.
The changes in the carrying amount of goodwill for the years ended December 31, 2012 and 2011 was as
follows:
Beginning of the year ..................................................
Effect of exchange rate ...............................................
$ 458
9
$ 468
(10)
End of year ..................................................................
$ 467
$ 458
December 31, 2012
December 31, 2011
( In thousands)
Goodwill as of December 31, 2012 and 2011 relates to the LED reporting unit.
(7) INTANGIBLE ASSETS
Intangible assets consist of distributor and customer relationships and related contracts, technology design
and programs, and other intangible assets. There are no intangible assets with indefinite lives. There were no
intangible assets acquired in 2012. Intangible assets and their respective useful lives are as follows:
Acquired customer contracts and relationships
Acquired technology design and programs
Other
Useful Life
5 – 8 Years
8 Years
3 – 7 Years
Gross carrying amounts and accumulated amortization of intangible assets were as follows as of
December 31, 2012 for each intangible asset class.
Gross
Carrying
Amount
Accumulated
Amortization
(in thousands)
Net Balances
Acquired customer contracts and relationships .........................
Acquired technology design and programs................................
Other ..........................................................................................
Total ...................................................................................
2,061
349
114
$ 2,524 $
(1,935)
(257)
(114)
(2,306)
$
126
92
-
218
Gross carrying amounts and accumulated amortization of intangible assets were as follows as of
December 31, 2011 for each intangible asset class.
Page 22
Gross
Carrying
Amount
Accumulated
Amortization
(in thousands)
Net Balances
Acquired customer contracts and relationships .........................
Acquired technology design and programs................................
Other ..........................................................................................
Total ...................................................................................
1,900
322
105
$ 2,327 $
(1,682)
(212)
(101)
(1,995)
$
218
110
4
332
Actual Expense
Estimated Future Expense
2011
2012
2013
2014
In thousands
Amortization expense of
intangible assets...............................
$ 275 $ 118 $ 128 $ 90
(8) DEBT
Years Ended December 31
Bonds payable to the former stockholders of Photonic
Products Ltd. maturing on December 31, 2012 (see notes
below relative to a default), with an interest rate of 11%, at
December 31, 2012 and at December 31, 2011. ...........................
Senior Fixed Rate Secured Bond to a private investor,
maturing on June 30, 2015 (see notes below relative to a
default), with an interest rate of 8% at December 31, 2012
and at December 31, 2011. ...........................................................
2012
2011
In thousands
$
243
$
793
$ 2,144
$ 2,425
Borrowings under Revolving Credit facility with Barclays Bank Sales
Financing with an interest rate of 2.65% above Barclay’s base rate (3.15%
as of December 31, 2012 and 2011). .....................................................................................
662
643
Sub-total debt ....................................................................................
Less – revolving credit facility ………………………………………..
Less—Current portion of long-term debt .................................
3,049
(662)
(2,387)
3,861
(643)
(1,587)
Total long-term debt .........................................................................
$
-
$ 1,631
Page 23
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 was to have been paid in full.
However, the Company was in default of payment of the bond at December 31, 2012. The Bond was
subsequently paid in full on April 30, 2013.
The original key repayment terms of the Photonic Bonds, under this amendment, were 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. could have elected to prepay the bonds at any time, in whole or in part, without
penalty or premium. If StockerYale (UK) Ltd. failed to make any payments under the bonds, the former
stockholders of Photonic Products Ltd. may have had the right to require payment from the Company in the
form of newly issued shares of the Company’s common stock.
As of December 31, 2012, $243,000 was outstanding under the bonds issued to the stockholders of
Photonic Products Ltd., which was classified as current portion of long-term debt. The bonds were not paid in
full on December 31, 2012 as required by the Bond agreement. However, on April 30, 2013, the bonds were
paid in full satisfaction of the outstanding amount.
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
Private Investor Notes and Bond
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. 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. Also on June 9, 2009, the Company and bondholder consolidated $1.0 million
of other bonds between the Company and bondholder to the PPI Bond.
Page 24
On December 10, 2010, the Company and the bondholder entered into the most recent amendment of the
PPI Bond. 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 December, 2010 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, 2012, $2,143,803 was outstanding under the bond all of which was classified as
current portion of long-term debt. The Company was in default in respect of its repayment obligations under the
bond at December 31, 2012. On June 20, 2013 the bondholder entered into an amendment and waiver
agreement with the Company waiving all events of default from inception of the bond through the date of the
amendment. In addition, the bondholder also agreed to a restructuring of the bond as follows:
(a) Convert € 144,324 ($193,132) of the balance of the bond into common stock of the Company with a
subsequent transfer of such common stock to the Term Loan holder described in Note 17 as part of the
Term Loan provided to the Company
(b) Principal as of June 20, 2013:
€ 1,426,540 ($1,909,281)
(c) Interest Rate:
8% per annum
(d) Interest payments only:
June 30, 2013 through June 30, 2014
(e) Principal Repayment:
€15,000 per month plus interest July 1, 2014 through June 30,
2015, thereafter principal and interest monthly €56,378 ($75,456) from July 1, 2015 through June 30,
2017*
(f) One-time fee of €31,413 ($42,043) payable on June 30, 2017.
In addition to the terms above, the bondholder will be entitled to a principal reduction, at the backend of
the Bond, equal to 30% of Free Cash Flow defined as (earnings before interest, taxes, depreciation, and
amortization (EBITDA) minus debt repaid and interest paid, minus capital expenditures not financed,
and minus taxes paid, each during such calendar quarter).
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.
Barclays Bank, PLC
On February 6, 2008, ProPhotonix Limited, a U.K. subsidiary, 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 ($1,132,000) and grants a
security interest in and lien upon all of ProPhotonix Limited, a U.K. subsidiary, 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, a U.K. subsidiary, and Barclays Bank, PLC.
Page 25
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 ($566,000 USD as of
December 31, 2012) as of March 31, 2010 and June 30, 2010. Barclays also reserves the right to review the
facility in the event of losses in any 3-month rolling period at ProPhotonix Limited, a U.K. subsidiary. The
maximum amount allowed outstanding under the line of credit is £650,000 ($1,051,000 USD as of December
31, 2012). 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, 2012.
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.
On November 14, 2012, the Company entered into an amendment to the revolving credit facility
agreement to extend the minimum period to November 14, 2013.
The amount outstanding under the facility was $662,000 as of December 31, 2012 and $643,000 as of
December 31, 2011, all of which was classified as a short term debt under revolving credit facility. As of
December 31, 2012, the Company had approximately $37,000 available under this facility.
(9) TAXES
The Company had deferred tax assets, before considering the full valuation allowance, totaling
approximately $27.7 million as of December 31, 2012 and approximately $30.0 million as of December 31,
2011. 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 2012 remain
open to examination by the federal and most state tax authorities. In addition, the tax years 2007 through 2012
are open to examination in foreign jurisdictions. As of December 31, 2012, the Company did not have any tax
examinations in process.
Page 26
The components of the provision (benefit) for income taxes of continuing operations are as follows:
Years Ended December 31,
2012
2011
In thousands
Current
Federal........................................................................................... $ —
State...............................................................................................
—
Foreign ..........................................................................................
—
Sub-total ........................................................................................
—
Deferred
Federal...........................................................................................
State...............................................................................................
Foreign ..........................................................................................
—
—
—
Sub-total ........................................................................................
—
Total provision (benefit)
$ —
$ —
—
37
37
—
—
—
—
$ 37
The income tax (benefit) / provision included in the accompanying statement of operations are as follows:
Years Ended December 31,
2012
2011
In thousands
Continuing Operations ..................................................................... $ -
Discontinued Operations ................................................................. -
$ 37
28
Total ......................................................................................................... $ -
$ 65
The significant items comprising the deferred tax asset and liability at December 31, 2012 and 2011 are as
follows:
Years Ended December 31,
Net operating loss carry forwards ...............................................
Foreign net operating loss carry forwards ...................................
R&D tax credit ............................................................................
Deferred compensation ...............................................................
Other ............................................................................................
Valuation allowance ....................................................................
Total .......................................................................................
Intangible asset-basis differences ................................................
Deferred tax liability, net .......................................................
2012
2011
In Thousands
$ 25,080
1,693
525
222
184
(27,704)
$ -
-
$ -
$ 25,397
3,548
525
174
160
(29,671)
$ 133
(133)
$ -
Page 27
The Company’s deferred tax liability, at December 31, 2011 related to the difference in the basis of its
intangible assets acquired in a foreign jurisdiction.
As of December 31, 2012, the Company had United States federal net operating loss carry forwards
(NOLs) of approximately $62.7 million (2011: $64.1 million) available to offset future taxable income, if any.
These carry forwards expire through 2032 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, 2012, the Company also has Canadian
federal NOLs of approximately $1.5 million (2011: $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, 2012, the Company also has a United Kingdom
NOL of approximately $4.5 million (2011: $3.7m) for which management has provided a full valuation
allowance against. The total valuation allowance against deferred tax assets has decreased by $2.0m (2011:
increased by $0.5m).
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, 2012 and 2011, the Company
has cumulatively recorded long-term liabilities of $178,000 and $178,000 respectively, relative to the sale of its
North American operations to Coherent, Inc. This represents the only significant uncertain tax position of the
Company.
(10) UNREGISTERED SALES OF EQUITY SECURITIES AND WARRANTS
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).
On June 20, 2013, €144,324 ($193,132) of the PPI Bond (Note 8) was converted in exchange for
7,605,946 shares of common stock of the Company; such shares were issued to the Term Loan holder in partial
consideration relating to securing the Term Loan (Note 17). Also on June 20, 2013, the Company issued a
Warrant in partial consideration for the Term Loan issued by the PPI Bond holder, described in Note 17. The
Warrant for 1,900,000 shares of common stock of the Company is exercisable at a price of $0.03 per share
through June 20, 2023.
Page 28
Warrants
As of December 31, 2012, there were 7,809,567 common shares outstanding warrants with the following
exercise prices and expiration dates:
Number of Common Shares
Warrants
1,127,000
5,000
551,500
3,570,000
1,150,000
906,067
500,000
7,809,567
Exercise Price
Expiration Date
$0.50
$0.50
$0.32 –$1.44
$1.15 –$3.12
$0.80 –$1.72
$0.45 –$0.60
$0.10 –$0.10
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. On April 17, 2012, the Board of Directors approved amendments No. 2 and No. 3 to
the 2007 Stock Incentive Plan. Amendment No. 2 provided for various administrative and updated the
definition of “exercise price”. Amendment No. 3 increased the stock available for Awards to 11,300,000
shares of common stock; plus an annual increase to be added on the first day of each of the Company’s fiscal
years during the period beginning in fiscal year 2013 and ending on the second day of fiscal year 2017 equal to
the lesser of (i) 2,000,000 shares of common stock, (ii) 5% of the outstanding shares on such date, or (iii) an
amount determined by the Board. Also, this amendment provides that the per participant limit increased to 2
million shares per calendar year. As of December 31, 2012, there were 11,300,000 shares reserved for
issuance and there were 7,300,000 shares reserved at December 31, 2011. The Company had 1,554,544 shares
available under the plan for future grants of options and restricted shares December 31, 2012.
In May, 2012, the Board of Directors approved the Third Amended and Restated Policy Regarding
Compensation of Independent Directors, (i) cash compensation is increased from $15,000 to $25,000 per annum
paid in arrears each quarter; (ii) the number of shares for the option grant for 2012 only shall be calculated as
follows: the lesser of 250,000 option shares or the non-cash component of compensation ($25,000) divided by
the mid market price as quoted on LSE – AIM on the date of grant as converted into USD at the closing foreign
currency exchange rate. Also, in accordance with the foregoing calculation the 2012 annual stock option grants
to non-employee Directors of the Company (the “Annual Grants”) to be issued as of the date of this meeting
(the “Option Date”) shall each be for an option to purchase up to 250,000 shares at a per share exercise price of
$0.0924, and that such options shall vest and become exercisable as to 25% of the original number of shares
subject to each option on each of the first, second, third and fourth anniversaries of the Option Date, until fully
vested on the fourth anniversary of the Option Date.
Page 29
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. No further grants are allowed under this plan.
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. No
further grants are allowed under this plan.
The following table summarizes information about the stock options outstanding as of December 31, 2012.
There is no intrinsic value on the options outstanding at December 31, 2012. The intrinsic value of the options
exercisable at December 31, 2011 is approximately $3,000.
During 2012 and 2011, the Remuneration Committee 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 3,085,000 options granted during the year ended December 31, 2012 and 2,549,198 options were
granted during the year ended December 31, 2011. 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. The
exercise price for these options range from $0.09 to $0.11 per share in 2012, and from $0.09 to $0.21 per share
in 2011.
Page 30
The weighted average assumptions for grants during the years ended December 31, 2012 and December 31,
2011 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,
2012
188.7%-189.6%
4.3 years
0.62%-0.93%
$0
$0.10
Twelve months Ended
December 31,
2011
162.1%-167.2%
5.3 years
1.81%-2.54%
$0
$0.12
Balance at December 31, 2010............................
Granted ........................................................
Exercised .....................................................
Cancelled .....................................................
Options
Outstanding
4,638,408
2,549,198
-
( 619,666)
Balance at December 31, 2011............................
6,567,940
Vested and Exercisable at December 31,
2011 .................................................................
3,383,786
Balance at December 31, 2011............................
Granted ........................................................
Exercised .....................................................
Cancelled .....................................................
6,567,940
3,085,000
-
( 297,050)
Balance at December 31, 2012............................
9,355,890
Vested and Exercisable at December 31,
2012 .................................................................
4,057,031
Vested and Expected to Vest at December
Weighted
Average
Exercise Price
per Share ($)
1.23
0.12
-
6.23
0.33
0.52
0.33
0.10
-
2.55
0.19
0.28
Weighted
Average
Remaining
Contractual
Term
(in Years)
7.25
7.70
6.57
7.70
7.70
6.36
31, 2012 ....................................................... 9,135,139
0.19
7.67
Range of
Exercise Prices
$ 0.08 – 0.99
1.00 – 1.99
2.00 – 3.99
$ 0.08 – 3.99
Options
Outstanding
8,972,990
317,900
65,000
9,355,890
Weighted
Average
Contractual
Life (years)
8.0
1.1
1.4
7.7
Weighted
Average
Exercise
Price
$
$
0.13
1.25
2.06
0.19
Options
Exercisable
3,674,131
317,900
65,000
4,057,031
Weighted
Average
Exercise
Price
$
$
0.17
1.25
2.06
0.28
Page 31
At December 31, 2012, there was approximately $414,000 of total unrecognized compensation cost related to
stock options granted. The cost is expected to be recognized over the next 1.78 years. Total stock option
expense recorded in 2012 and 2011 was approximately $142,000 and $83,000, respectively. There were no
options exercised during 2012 and 2011.
A summary of the status of the Company’s non-vested shares of restricted stock for 2012 and 2011 and
changes during 2012 and 2011 are presented below:
Shares
Weighted
Average
Grant-Date Fair Value
Non-vested at December 31, 2010 ................................. 196,024
Granted ................................................................... -
Vested .................................................................... (158,524)
Cancelled................................................................ -
Non-Vested at December 31, 2011 ................................ 37,500
Granted ................................................................... -
Vested .................................................................... (37,500)
Cancelled................................................................ -
$ 1.10
-
$ 1.20
-
$ 0.67
-
$ 0.67
-
Non-Vested at December 31, 2012 ................................ -
$ -
As of December 31, 2012, there was no unrecognized compensation cost related to restricted stock awards.
As of December 31, 2012, 2,104,202 shares were vested. As of December 31, 2011, 2,066,702 shares were
vested. The total fair value of shares vested during 2012 and 2011 was approximately $25,000 and $190,000.
Total compensation from continuing operations recorded in 2012 and 2011 was approximately $1,000 and
$116,000, 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, 2012 and
2011, there were no shares issued under the Stock Purchase Plan.
(13) EMPLOYEE DEFINED CONTRIBUTION 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 $31,000 in the year ended December 31, 2012 and
$27,000 in the year ended December 31, 2011. The Company incurred costs of approximately $1,700 in 2012
and approximately $2,300 in 2011 to administer the Plan.
Page 32
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 $41,000 and $38,000 in the
years ended December 31, 2012 and 2011, 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 $22,000 and $28,000 in the years ended December 31, 2012 and 2011, respectively. Plan
administration costs come out of the plan itself.
(14) DISCONTINUED OPERATIONS
StockerYale Canada 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, 2012 and
2011 represent the professional fees and other expenses associated with the sold business. The loss from
discontinued operations for the years ended December 31, 2012 and 2011 was $0 and $19,000, respectively.
Other obligations and contingent liabilities
(15) COMMITMENTS AND CONTINGENCIES
The Company leases approximately 3,600 square feet for its corporate headquarters and sales office in
Salem, New Hampshire. The term of the lease requires monthly tenant at-will payments with a 90 day
termination notice. Base rent is $2,550 per month plus the tenant’s share of expenses.
ProPhotonix (IRL) Limited 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, a U.K. subsidiary, leases approximately 13,000 square feet of space in Hatfield
Broad Oak, Hertfordshire, U.K. The lease has a term of nine years ending September 29, 2013. Rent charges
are £87,000 per year.
The Company utilizes, or has assumed, capital leases to finance purchases of equipment or vehicles. There
was approximately $22,000 and $0 payable in principal and interest under these leases at December 31, 2012
and December 31, 2011, 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, 2012 and December 31, 2011,
is as follows:
Assets under capital lease ...........................................................
Less—accumulated depreciation ................................................
2012
$ 621,000
(574,000)
2011
$ 571,000
(497,000)
Assets under capital lease, net ....................................................
$ 47,000
$ 74,000
Page 33
Scheduled future maturities of debt, and operating lease obligations for the next five years:
Due by period
2013
2014
2015
2016 +
Total
in thousands
Debt obligations ......................................
Operating lease obligations .....................
165
$ 1,744 $ 909 $ 396 $ — $3,049
165
—
—
—
$ 1,909 $ 909 $ 396 $ — $3,214
The Company expensed approximately $293,000 and $313,000 in rent for the years ended December 31, 2012
and 2011, respectively.
(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
On June 20, 2013, the Company entered into a Term Loan agreement with a Lender related to the Company
CEO, Tim Losik. The Term Loan provides availability to the Company of up to $2.0 million during the term of
the Loan, as follows, subject to certain restrictions:
(a) Available Loan:
(b) Interest Rate:
$2.0 million; minimum draw $250,000
12.25% per annum
(c) Interest payments only:
(d) Principal Repayment term:
June 30, 2013 through May 31, 2014
36 months (June 30, 2014 through May 31, 2017)
On June 20, 2013, the Company entered into a Term Loan agreement with the PPI Bond holder to provide up to
$1.0 million of loan availability subject to certain terms as follows:
(a) Available Loan (subject to (b) below):
(b) 50% of each advance shall be used to repay amounts owed under the PPI Bond (Note 8)
$1.0 million; minimum draw $125,000
(c) Interest Rate:
(d) Interest payments only:
(e) Principal Repayment term:
12.25% per annum
June 30, 2013 through May 31, 2014
36 months (June 30, 2014 through May 31, 2017)
The Company has evaluated subsequent events through June 20, 2013, the date which the financial statements
were available to be issued, and there were no additional events that impacted these financial statements or
required additional disclosure to the financial statements.
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