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Advanced Photonix (NYSEMKT:API)

Q3 2013 Earnings Call

February 11, 2013 4:30 pm ET

Executives

Jim McDonald

Richard D. Kurtz - Chief Executive Officer and Director

Jeffrey Anderson - Chief Financial Officer and Principal Accounting Officer

Robin F. Risser - Chief Operating Officer, Secretary and Director

Analysts

Dave Kang - B. Riley & Co., LLC, Research Division

Richard Birrell

Operator

Good day, everyone, and welcome to Advanced Photonix's 2013 Third Quarter Earnings Conference Call. Today's conference call is being recorded. At this time, for opening remarks and introductions, I would like to turn the call over to Mr. Jim Mcdonald from Torrey Hills Capital. Please go ahead sir.

Jim McDonald

Thank you. Before we get started, I want to remind listeners that this conference call will contain forward-looking statements, which involve known and unknown risks and uncertainties about the company's business, the economy, and other factors that may cause actual results to differ materially from our expected achievements and anticipated results, including unforeseen technological obstacles, which may prevent or slow the development and/or manufacture of new products; problems with the integration of acquired companies and technology and possible inability to achieve expected synergies; and limited or slower-than-anticipated customer acceptance of new products, which has been and are being developed by the company. Please see our press release of today and our periodic reports filed with the SEC for a fuller statement of such risks factors. Given these uncertainties, listeners are cautioned not to place undue reliance on any forward-looking statements contained in this conference call.

The forward-looking information given during this teleconference represents management's expectations and beliefs as of the date hereof. The continued availability of this teleconference on the Internet or through other media does not mean that the company is reaffirming or confirming its continued validity, except as may otherwise be required by law. The company expressly disclaims any obligation to update or alter any of the forward-looking statements made herein as a result of any event, or occurrence after the date hereof.

This conference call also contains a presentation of non-GAAP financial measures as defined in the SEC's Regulation G. Reconciliations of non-GAAP financial measures to the company's GAAP-based financial statements are included in the company's third quarter earnings press release dated February 11, 2011, and are available on the website at www.advancedphotonix.com.

On today's call, we'll hear first from Richard Kurtz, the company's CEO, with some opening remarks; and then Jeff Anderson, the company CFO, with the financial results; and Robin Risser, the company's COO, who will discuss the state of the business and then back to Richard Kurtz for closing remarks. I'd like to turn it first over to Rick.

Richard D. Kurtz

Thank you, Jim, and thank you for joining us this afternoon. Our third quarter came in lower than we expected, with supply chain issues continuing for our HSOR product platform and continued softness in our Optosolutions product platform.

We are expecting Optosolutions and HSOR product revenues to resume growth as the industrial market grows and HSOR supply chain constraints are resolved.

The macroeconomic environment is still challenging, but we are seeing an increased interest in product development activities for Optosolution product platform and more 100-gig design wins come online. We've seen a building of our backlog in T-Gauge products and shipped a record number of systems in our third quarter. I will now turn the call over to Jeff Anderson to discuss the financial highlights. Go ahead, Jeff.

Jeffrey Anderson

Thank you, Rick, and thanks to all of you for joining us this afternoon. I'd like to briefly review a few financial highlights from our third quarter ending December 28, 2012. And then, I will turn the call over to Rob for an update on business activities.

Our revenues for the quarter were $5.8 million, a decrease of 10% or $0.7 million from revenues of $6.5 million for the prior-year quarter. For the 9 months, our revenues were $17.6 million, a decrease of $5.4 million or 23% from revenues of $23 million from the prior-year 9-month period.

We experienced revenue decreases in 4 of 5 markets for the quarter and 9 months ended compared to the prior-year periods.

However, sequentially, revenues increased 4% or $248,000 from last quarter, up in our 3 largest markets, led by telecom.

Telecommunication revenue in the third quarter increased by $48,000 or 3% and for the 9 months, decreased by $3.8 million or 40%. The quarterly increase year-over-year was constrained by supply chain issues. The lower revenue for the 9 months of this year compared to the 9 months last year was explained by lower 100-gigabyte line site sales given continued supply chain delivery issues, the transition of a large customer to our next-generation product and downward pressure on pricing.

Telecommunications revenue, on a consecutive quarterly basis, increased 9% or $160,000 from the second quarter of fiscal 2013. The higher sales experienced in the third quarter of fiscal 2013 resulted from the timing of revenues on the military communication program.

Revenues of 100G units remained constrained, given key component shortages.

Industrial sensing and nondestructive test market revenues for the third quarter and 9 months of fiscal 2013 were $2.6 million and $7.8 million, respectively, a decrease of 10% or $276,000 over the prior-year quarter and a decrease of 6% or $527,000 over the prior-year 9-month results.

All declines were due to the slowdown seen in this market for Optosolutions product platform, partially offset by increased revenues in the Terahertz product platform.

Sequentially, revenues increased 3% or $70,000 from the second quarter of fiscal 2013 on the increased Terahertz product sales.

Military, aerospace market revenues in the third quarter were $1.1 million, a decrease of 20% or $271,000 compared to the prior-year quarter due to the timing of orders on certain Optosolutions missile platforms. On a 9-month basis, revenues were $3.5 million, a 5% increase or $156,000 over the prior year on the strength of the Terahertz F-35 contract revenues.

Sequentially, revenue increased $34,000 or 3% from the second quarter of fiscal 2013 due to the timing of orders for certain Optosolutions missile platforms.

Medical market revenues in the third quarter and 9 months ended December 28, 2012, were $240,000 and $691,000, respectively, a quarterly decrease of $68,000 or 22% and a 9-month decrease of $137,000 or 17%. These fluctuations are the result the 1 customer introducing a new product that does not require our product.

Homeland Security revenues were 0 for the third quarter and 9 months ended December 28, 2012, compared to $117,000 in the third quarter of fiscal 2012 and $1 million for the 9 months of fiscal 2012.

The decrease was the result of the completion of the In-Q-Tel anomaly detection system development contract in fiscal 2012. Any further near-term revenues will be dependent on placement by the Transportation Security Administration of our Terahertz-based anomaly detectors on the qualified products list.

Gross profit for the third quarter of fiscal 2013 was $2.5 million compared to $2.7 million for the third quarter of 2012, a decrease of $237,000 on a revenue decrease of $684,000.

Year-to-date gross profit was $6.7 million, down from $9.6 million in the 9 months of fiscal 2012. The lower gross profit in the third quarter of fiscal 2013 relative to the fiscal 2012 was attributable to weakness in our Optosolutions products. The lower gross profit for the 9 months of fiscal 2013 relative to fiscal 2012 was primarily due to decreased volume and prices on our HSOR products.

Gross profit percentage was 42% for the third quarter of fiscal 2013 compared to 41.3% in the third quarter of fiscal 2012 and 35.3% in the second quarter of fiscal 2013. The fiscal 2013 third quarter gross margin rate improved year-over-year and sequentially given the favorable product mix and cost reduction efforts.

Total operating expenses for the quarter and 9 months ended December 28, 2012, were $3.5 million and $9.9 million, respectively, a decrease of $85,000 and $1.3 million over the comparable fiscal 2012 periods, mostly due to actions taken to lower R&D expenses.

On a year-to-date basis, decreases occurred in every category of spending due to the austerity measures put in place, pending the return of volume on our HSOR products.

Total operating expenses for the third quarter of fiscal 2013 were up $2,017,000 when compared to the second quarter of fiscal 2013, the result of higher engineering activity on Terahertz contracts.

The noncash expense and stock option and restricted stock grants included in operating expenses was $46,000 and $124,000 for the 3- and 9-month periods ended December 28, 2012, compared to $235,000 and $480,000 for the 3- and 9-month periods ended December 30, 2011, respectively, as stock awards have been dramatically curtailed and prior grants become fully expensed.

Our GAAP net loss for the quarter -- third quarter of fiscal 2013 was $1,026,000 or $0.03 per share as compared to our GAAP net loss of $812,000 or $0.03 per share in the third quarter of fiscal 2012, an increase in the loss of $214,000. This increase in the loss for the fiscal 2013 quarter is primarily attributable to lower gross margin dollars realized of $237,000 on $684,000 lower revenues.

Year-to-date, we realized a net loss of $3.3 million in fiscal 2013 relative to a net loss of $1 million in fiscal 2012. The increase in the net loss of $2.3 million is attributable to lower gross margin due to lower revenues, partially offset by operating expense reductions of $1.3 million and $0.7 million in less income from the change in warrant liability.

Adjusted EBITDA came in at negative $485,000 for the third quarter compared to a negative $1,000 in the prior-year quarter for the 9 months of fiscal 2013. Adjusted EBITDA was negative $1.7 million versus a positive $0.7 million in the prior year's 9-month period.

At December 28, 2012, we had cash and cash equivalents of $559,000, a decrease of $2.7 million from the March 31, 2012, balance. The lower balance for the 9-month period is attributable to cash used in operating activities of $1.1 million, cash invested in CapEx and patents of $414,000 and cash used to retire debt of $1.1 million.

In evaluating the financing for the future growth of the company, we selected a mezzanine debt structure that minimizes the impact of equity dilution to our existing shareholders. As of last Friday, we signed a $2.5 million debt offering with partners for growth, with the closing expected this week. The additional cash, our current forecast and forecasted future operating cash flows are expected to provide sufficient liquidity for the next 12 months.

I would now like to turn the call over to our COO, Rob Risser.

Robin F. Risser

Thank you, Jeff. Good afternoon, everyone, and thanks for joining us on the call today. During our last conference call, we expect that our revenue to resume growth in the second half of our fiscal year compared to our first half. We expected our Optosolutions product platform revenue to return to its historical levels, our high-speed optical receiver product platform to resume growth with the introduction of our second-generation cost-reduced 100G coherent receivers and our Terahertz product platform to add at the early growth stages as our value-added resellers gain traction with their industrial process control and quality control customers.

Unfortunately, we did not meet expectations this past quarter. Our Optosolutions product platform continued to show signs of weakness in the military and industrial markets, down $1.1 million for the quarter and $1.9 million year-to-date on a comparative basis.

The majority of the comparative revenue mix this quarter came in the military market, down $800,000 for the quarter and $900,000 year-to-date, mainly due to timing of received military orders and the military customer of ours, losing market share to our European competitor.

The industrial market for Optosolutions has been challenging, down $300,000 for the quarter and $1 million for the first 9 months, due primarily to softness in our customer's light emitting diode manufacturing equipment market, in addition to the generally cautious capital expenditure environment due to poor, but gradually improving macroeconomic conditions.

We are continuing to focus on strategic customer-driven new opportunities for our Optosolutions product platform.

We expect Optosolutions will remain soft for the balance of the year. However, we have recently seen an increase in order activity and positive momentum for the industrial market, but remain cautious on the military market outlook for this platform.

The good news on our high-speed optical receiver platform is that our second-generation 100-gig product development has been successful and our customers are adopting it. However, we continue to experience supply chain constraints, limiting our ability to ship product, which has significantly impacted our revenue growth this past quarter and will continue into the fourth quarter.

The team has been tirelessly working with our supplier to resolve this bottleneck, which we hope will be resolved during the next several months. Demand for 100-gig products is growing rapidly, and we are in a good position to share in that growth when we resolve our supply chain constraints.

Unlike 40-gig deployment, which was never widely adopted due to its technical challenges and inflexible and costly network architecture, every major service provider in the world plans to deploy 100-gig coherent in their long-haul and submarine routes. And every Tier 1 optical equipment manufacturer plans to introduce 100G long-haul products by early 2014.

The attractiveness of this rapidly growing market means that the 100-gig receiver landscape is competitive and requires continuous product feature improvement and cost reduction as 100-gig expands into the metro markets over the next several years.

Our comm test high-speed optical receiver products are also undergoing substantial new product development to meet our customers' manufacturing quality control testing requirements, as 100-gig moves into the enterprise, access, metro and long-haul markets.

We expect to introduce new products to this market during fiscal 2014.

The past quarter was strong from our comm test high-speed optical receiver products, which helped improved our gross profit margin this past quarter despite disappointing top line revenue from our 100-gig products. This March 18 through the 24 -- 21, we will once again be exhibiting at the Optical Fiber Conference in Anaheim, California, which is the world's largest conference dedicated to optical communication.

Our Terahertz product platform is continuing its market traction in the industrial sector. We had a record number of product shipments in the third quarter, and we are pleased with the traction in this product platform.

It was a bright spot in an otherwise disappointing quarter. Early adopters are deploying our systems, our value-added reseller channel is developing, and visibility is continuing to increase in our Terahertz product platform.

In addition, we completed our vertical integration of this product platform in the third quarter, significantly increasing our cost competitiveness in the price-competitive industrial process control market. We are currently targeting the most difficult problems that can -- that either cannot be accomplished with the traditional nuclear gauges or would require multiple gauges.

As our volumes increase and our VAR channels become more extensive, our vertical integration will help us compete favorably with a more traditional nuclear gauge technology that has been deployed over the past 50 years on the factory floor.

Our Terahertz military market contract revenues were up substantially this past quarter, as we accelerated development of our manufacturing quality control applications for the F-35 Joint Strike Fighter. We expect to substantially complete the work on the F-35 development contracts over the next 2 quarters. Our goal is to commercialize this application as the F-35 is deployed internationally over the next several years.

Our Terahertz SAF-T-CHEK anomaly detection system is being evaluated by the TSA for inclusion on the intermodal Qualified Products List, or QPL for non-airport personnel screening. We hope to be included in the intermodal QPL in fiscal '14, which represents the next step towards Terahertz commercialization in the Homeland Security market.

Automatic anomaly detection software, accurate enough to meet false positive and false negative requirements, would be the next step beyond the intermodal QPL and is required in order to place our ADS on the QPL for airport personnel screening.

Inclusion in the intermodal QPL is a long process with the Department of Homeland Security that tends to be event driven. As a result, we do not anticipate any meaningful revenue over the next several quarters in Homeland Security, absent a significant customer-driven development commitment for automatic anomaly detection software.

In summary, the Terahertz product platform made good progress this past quarter, and we expect revenue the remainder of the year to be in line with guidance. Fiscal 2014 will represent the transition from development contract-driven revenue to product revenue in our Terahertz product platform.

And now I'd like to turn the call back over to Rick. Rick?

Richard D. Kurtz

Thank you, Rob. We stated in the last quarter's conference call, we expected to grow 15% to 25% during our second half of the year relative to the first half of the year.

Given our supply chain constraints in our HSOR 100-gig products and the softness in demand in our Optosolutions product platform, we're reducing our forecast and expect to finish flat for the second half of the year compared to the first half.

Our 100-gig cost reduction efforts have been successful, and we expect to realize the fruits of these efforts, as our supply chain constraints are eliminated.

On the Terahertz side, as we mentioned earlier, we shipped a record number of systems in the third quarter and expect to ship systems for the F-35 contracts and others through the fourth quarter.

Our goal is to commercialize the products developed specifically for the F-35 under those contracts for our domestic and international partners. On the Homeland Security front, we are continuing our dialogue with our partners and waiting for the completion of the evaluation that will get us on the qualified product list.

Our business for Optosolutions has started to experience firming of military orders and is developing optical sensors for a variety of test and measurement instrumentation products, expanding our sensors beyond our current industrial applications today.

We're continuing to focus this product platform on growth markets and new sensor opportunities.

With the addition of the $2.5 million in funding from partners for growth, we have realigned our capital structure and provided the necessary working capital for next year's growth. We will be reviewing our strategic investments and growth opportunities across all our product platforms for this coming year to generate the highest returns possible.

I would now like to open up this call for your questions.

Question-and-Answer Session

Operator

[Operator Instructions] And our first question will be coming from the line of Randy Metzger [ph].

Unknown Analyst

Well, disappointing quarter, and we're -- we continue to go down this path. And I guess -- when are we going to finally get to a point of profitability, I guess, is kind of the burning question that some of us long-time guys want to know where we can see some increase in the share price finally? Well, what are your thoughts on that?

Richard D. Kurtz

Well, I think that the first thought starts with the revenue, getting back to where we were, prior to what I'll call the great crash of last year -- or last fiscal year. Once we get above that run rate, $7.5 million, $8 million, then we start generating some real positive cash flow at that point. And that's going to -- the critical nature of that is really going to be dependent on when we get our HSOR revenue up, and that's again back to the supply chain constraints we've had in certain components. Rob, you've got anything else to add?

Robin F. Risser

No, I think that has hurt us -- that's hurt us this past quarter and is going to hurt us in the next quarter.

Unknown Analyst

Yes. And can you expand on that a little bit? I understood back in -- 1.5 years ago, we had the flooding that occurred in the summer and in Thailand or in Asia. And I understood the reasons why that was affecting HSOR. And I guess, I have more of a question about the supply chain constraints that we're having because I see all of these other companies. I noticed Lucent Alcatel, JDSU, everybody else seems to be getting stuff out the door. So how are we different?

Robin F. Risser

We have some components that are sole sourced, and we have 1 particular sole-source component where the supplier has had significant technical difficulties. We've been living with that supplier for the last several months, trying to correct those. So that is really, in this particular case, what's going on. And these are -- this is a component that is not easily or quickly -- or easily second-sourced. So second source takes a while to develop.

Unknown Analyst

I understand. Is this a company in the U.S. or once again, is this a foreign company, if you consider that?

Robin F. Risser

Foreign company, European based.

Unknown Analyst

And then just to clarify 1 thing. You said, there's 1 new product -- or 1 customer has developed their own product that doesn't require our product. What area was that?

Richard D. Kurtz

That was medical. That's in the Optosolutions in medical, the medical market.

Unknown Analyst

Okay. You mentioned that there's been a decrease in every category of spending. Did I understand that correctly that you're cutting the spending across the board?

Jeffrey Anderson

For the 9 months, Randy, that's correct. If you look at -- we had $11.3 million worth of OpEx for the 9 months ended December 30, 2011. We had $9.9 million for the 9 months of December 28, 2012.

Unknown Analyst

And then as I understand, you cut the warrants, I assume those are the warrants or the options to vote yourselves and the Board of Directors? Or did I misunderstand that?

Jeffrey Anderson

We were talking about not warrants, but stock compensation, and that is dramatically reduced year-over-year, yes. For the 9 months, it was $480,000 last year, and it's roughly $235,000, I think, for the first 9 months of this year.

Unknown Analyst

And so I guess, the tough questions are, do you, gentlemen, anticipate your salaries will be decreased in any way? Is that even on the table?

Richard D. Kurtz

Everything can be on the table, Randy, I guess. One of the difficulties, obviously, is the fact that we're managing the business with the expectation of this rebound occurring with our supply chain here in the coming months. So we are taking actions that are appropriate across the board for not only just us, but for all the employees.

Unknown Analyst

Understand. There's no doubt that your technology is outstanding. I don't think -- I think that's the reason why most of us are here, and I want to continue with congratulations [indiscernible] and David Zimdars and the engineers there, I just wonder why would this outstanding technology we can't ever quite seem to get over the hump. I understand there have been lots of issues, but is the Board of Directors an issue at all in this week in your mind?

Richard D. Kurtz

No, I think it comes down to, look -- and again, when we talk about the difference between the outsourcing of a key component like we do for the HSOR and being vertically integrated, that's something that we never had the capability of doing in-house, so we had to find an external source. Some of our competitors have that capability, but at the same time, they don't have the same capability that we do in manufacturing the photodiode, we'll call it. The other key component. So our path was fixed early on, and we alluded to it last year when we talked about the supply chain constraint we faced when we used the Japanese supplier. Well, we knew that the Japanese supplier was never going to be as competitive, and so that's why Rob and his team went out and started looking at another source. And unfortunately, there was no other U.S. source that was available to make this product. And so we had to end up with a European supplier that we had to work very, very closely with.

Unknown Analyst

And then I assume you're like us, because I know you have a number of shares in the company and you're disappointed in the share price. And so my question to you is, one of the burning questions that goes on in the retail community and across the message boards, is why don't we ever see any insider buying at these low rates? So we understand that your skin, so to speak, is also in the game like ours.

Richard D. Kurtz

Well, again, you're right, we do have a lot of -- management does own a lot of stock today. And there are a number of different reasons that we are typically precluded from buying stock, and those are the quiet periods where we know something that the retail market does not, okay? An example of that would be the work we've done with our partners from growth[ph], okay? So we knew about that event, we've been working with them for quite a long time. So that precludes us during any open period that we typically would have from acting. So it's a very fine line that we continually have to walk, whether or not we know something that the general populace or general market does not know, so that we can protect ourselves and not get in trouble with our friends at the SEC. So again, it may seem that we never buy, but at the same time, we are precluded because some of the inside knowledge we do have.

Operator

Next question is from the line of Dave Kang, B. Riley.

Dave Kang - B. Riley & Co., LLC, Research Division

The first question is -- so going back to the supply-chain issues. Just -- can you quantify that, how much of that issue impacted your business?

Robin F. Risser

I would say that we would have been able to meet our guidance, Dave, if-- without the supply-chain issues.

Dave Kang - B. Riley & Co., LLC, Research Division

So about $1 million then?

Robin F. Risser

I'd say at least, yes.

Dave Kang - B. Riley & Co., LLC, Research Division

And so -- that's my second follow-up question is regarding your revised guidance of flat. So I'm assuming a lot of that, call it, 20%. Now, it's flat, a lot of that has to do with this supply-chain issue then?

Robin F. Risser

Yes, the supply-chain issue would be a big issue and softness in the Optosolutions product platform is another contributor. But either one of those could -- either one of those individually could get us to where we had hoped to be.

Dave Kang - B. Riley & Co., LLC, Research Division

So it's not really a market dynamics, it's not really the weak macro or just optical market being kind of soft, it's not that, but it's more of a company specific issue that you're revising down your expectation for this fiscal year?

Robin F. Risser

It's a company specific for the high-speed optical receivers. It's more of a market condition for the Optosolutions.

Dave Kang - B. Riley & Co., LLC, Research Division

For the custom optical business. Got it, got it, okay. And then I'm assuming, based on your commentaries in the press release, it sounds like June quarter, we should see some kind of uptick, sequential uptick from March quarter?

Robin F. Risser

That's what we're -- that is all dependent upon the supply-chain issues, which we believe will be solved.

Dave Kang - B. Riley & Co., LLC, Research Division

Yes, because you got about 4 months until June. So hopefully -- but how -- can you -- how long does the thing has been going? It sounds like it's been going on for a while, isn't it? At least a couple of quarters, right?

Robin F. Risser

That's right. Primarily this quarter is where you see the greatest hit, but early last quarter is when it started impacting.

Richard D. Kurtz

It gets back to the timeline of qualification, while we qualified the part, it's the ramp-up of the volume that we wanted from this particular supplier that they've not been able to match. And basically, I'm going to say it really reared its ugly head in late October, early November. That's when we start sending people to help them with their root cause analysis and find out exactly what services we can provide to get that ramp-up going.

Robin F. Risser

Yes, we have part of our team triage this.

Dave Kang - B. Riley & Co., LLC, Research Division

So you feel pretty confident it's going to be solved in the next few months because the current supplier will get their act together or are you going to qualify a second vendor?

Robin F. Risser

No, I think the former, Dave, qualifying a second vendor is a longer process. We're in the process of doing those things, but that's not a 1 or 2 quarter...

Dave Kang - B. Riley & Co., LLC, Research Division

Okay. Then what gives you the confidence that the current vendor will eventually resolve this problem that they're having?

Robin F. Risser

Well, we believe that we finally, got the root cause, and that there's corrective action, and we know there's a pile of products at a certain stage of process and with that, assuming that our belief is correct and we'd unleash the supply to us. And of course, there's a little lag from the time we receive it to the time it gets incorporated and shipped. So we have people living there at that facility.

Dave Kang - B. Riley & Co., LLC, Research Division

And then also, another issue is -- that you guys talked about in the past is the additional competitors. I mean, before, it was just -- there were 2. Now it sounds -- how many are there now, like 4 or 5?

Robin F. Risser

Well, in our primary customer on 1 design win for the 100-gig, there are 3 that shared that business. And on the other, there are 2 -- there are 3 design wins in that customer. On another 1 of the design wins were sole sourced, which is a problem for a customer right now. And on the third design win there, we are 1 of 2 sources. And on the third design win, the 2 sources are -- we're the only source common to all 3 design wins.

Dave Kang - B. Riley & Co., LLC, Research Division

So what kind of a pricing are you expecting -- you talked about pricing in your prepared statement, say 10% to 15% is a normal, I mean, are we expecting -- should we expect 15% or 10%?

Robin F. Risser

No, I think 10% is -- on the go forward, but the pricing pressure was severe transitioning this last year when you got into the pricing that occurred in calendar year 2012, when the product went kind from early product introduction, our customers' products to at least 1 customer full rate production while all their competitors were scrambling to try to develop a product. So there was a significant price compression. It looks -- that looked a little bit like what happens when people are buying prototypes in early field trial products. This is production release products. So this starts moving down into kind of the normal pricing regime, that pricing pressure that you have in that business, which takes away if you have a 30% growth rate, it takes away 10% of that growth rate on pricing pressures.

Dave Kang - B. Riley & Co., LLC, Research Division

Right, right. But this just sounds like it's going to be more closer to 10% than 15%?

Robin F. Risser

The pricing for calendar 2013? That is correct.

Dave Kang - B. Riley & Co., LLC, Research Division

New year. Okay. And my last question is, of that $5.9 million contract you received. I believe that was for 12 months shipment, correct?

Robin F. Risser

That's correct. Calendar year 2013.

Dave Kang - B. Riley & Co., LLC, Research Division

So that was calendar '13? So I'm assuming so far, it's been pretty minimal then?

Richard D. Kurtz

Yes, so far -- well, it wouldn't have been anything in what we reported for this last quarter.

Dave Kang - B. Riley & Co., LLC, Research Division

Right so it's going to be starting March quarter?

Richard D. Kurtz

But it will be minimal in our fourth quarter.

Dave Kang - B. Riley & Co., LLC, Research Division

So it's going to be more like starting next quarter, like June quarter, then?

Richard D. Kurtz

Right. Totally tied to the supply chain.

Operator

The next question is from the line of Edward Perry [ph].

Unknown Analyst

Supply-chain issues, all right. I happened to listen in on the Akilaro conference call. And they're also having supply-chain issues, so I think they were calling them amplifiers. If they had them, they'd sell many more HSOR devices. Are your competitors also experiencing supply-chain for various reasons like you are?

Richard D. Kurtz

Well, it is -- there's not a universal on this, at their -- everyone does rely on a third-party supplier -- sole source third-party supplier on the 100-gig space for amplifiers. But everyone doesn't -- everyone has a different supply-chain constraint on other parts that they may have needed to sell the system. And each one may have a different sole-source supplier. So the ones that -- there are some that don't have a supply-chain constraint at the moment, there are some that have had a supply chain constraint. But for different reasons than what we have had, on the amplifiers side, we locked up enough of the supply that, that wasn't a constraint for us.

Unknown Analyst

Okay. Are you losing market share...

Robin F. Risser

Well, we what we certainly lost market share in this last quarter because our customer all, but in the design win where we're the sole-source, that customer needed to shift their allocation. If you recall, on these -- one of the design wins, there are 3 suppliers that are expected to get about equal business. And so obviously, we did not get that business because we couldn't deliver. And so another one of the suppliers would've gotten more business. That supplier tended to be NeoPhotonics in that particular example.

Unknown Analyst

Okay. So it sounds like that were you not with supply-chain issues, you probably would've come up like a flat quarter, roughly speaking?

Robin F. Risser

Flat? No, we would've been up, substantially.

Jeffrey Anderson

And are you talking sequentially? This is Jeff Anderson.

Unknown Analyst

Just sequentially.

Jeffrey Anderson

Sequentially, we were $5.6 million last quarter and so we were up roughly $240,000. So yes, we would have been up substantially more than that if we were to had supply chain issues resolved.

Unknown Analyst

That's interesting, okay. Next question, TSA issues on the SAF-T-CHEK. Do you know the false-positive rate that they're getting on that device?

Richard D. Kurtz

We cannot disclose that.

Unknown Analyst

Okay, great. Now about T-Gauge, I saw on the Torrey Hills rework of your presentation, which I thought it was an excellent job, they indicate that nuclear has install base of 2,000 units and that they replaced 500 a year. That's what they...

Richard D. Kurtz

2,000 units, 500 a year replacement.

Unknown Analyst

Exactly. Now that's a very rapid replacement for a nuclear gauge.

Richard D. Kurtz

You have to understand that if they have an install base, that's quite high because again, it's been around for 50 years. So when we talk about it, you've got to take it in different increments and how you want to look at it. So the best way for us to look at it was to say that we -- the opportunity for us is about 500 units a year replacement.

Unknown Analyst

Okay. What do you project in terms of the shipping out the door T-Gauge units in this area, as well as the VAR? I mean, rate of like 1 a month or something like that? Or...

Richard D. Kurtz

Well, we're hoping to -- last -- this quarter that we reported on, we were ahead of the 1-a-month rate. And we're hoping that we're north of 1 a month, probably less than 3 or 4 a month next fiscal year.

Unknown Analyst

That's very good because I believe they're higher-margin sales, if I'm not mistaken.

Robin F. Risser

They have a good gross margin.

Richard D. Kurtz

Yes, they have good gross margin, but increased support costs below the line.

Unknown Analyst

I got it. Okay. Now from that same presentation, there was a mention of fiber to the home is a potential home win -- home run win. Where -- how does that play out?

Richard D. Kurtz

If you take a look at the Q, I think we mentioned in the Q when we talked about the 10-gig opportunity. If you'd been reading up on a lot of the lightwave magazines or the telecommunications magazines, they talk about how China has a real strong emphasis on delivering 10-gig to the home. Well, the infrastructure isn't built out now. We're working on the development program that hopefully will be rolled out in the first half of next fiscal year for a new product. And we mentioned that I think last quarter a little bit for a 10-gig APD or avalanche photodiode. And, along with that, so you'd have a combination of being able to sell a finished product and we're talking to a number of offshore manufacturers to help us with the assembly of that. But then at the same time, just looking at possibly selling APD chips that would be pretty high volume on that end. Because again, when you talk about the Chinese market, they've given us projections of $1 million a month type of thing, which would be fabulous from a chip production point of view.

Robin F. Risser

It sounds good. So fiber to the home or Fiber-to-the-Curb, FTTX was basically how it's referred to, is domestically in North America, it's been dominated by Verizon's FiOS. And that has tended to be 2.5-gig downstream speeds. But the Fiber-to-the-Curb and Fiber to the Home market, as Richard indicated, really materialized dramatically in China. And recently, Chinese leaders, I think, announced that they were going to get another 40 million homes with Fiber to the Home board or to the curb as a new initiative. So those require all Fiber to the Home or Fiber-to-the-Curb architectures require avalanche photodiode's is the photodiode. And that's a photodiode that we had developed, our 10-gig avalanche for the photodiode that we had developed years ago. But the market really had not materialized enough for that. So while we sell some of those into the metro market space, they'd never been repackaged to take advantage of the Fiber-to-the-Curb or Fiber to the Home market, simply because there was no Fiber-to-the-Curb or Fiber to the Home market at 10-gig. So this is an emerging market that's occurring and this product development that Rick mentioned is really a new package development, a lower cost package development that would then be manufactured in Asia rather than domestically here. Although the semiconductor would come out of our fab here in Ann Arbor.

Unknown Analyst

Amazing. I had no knowledge of this, and it's very illuminating if you'll pardon upon. Okay. Now speaking of the Chinese. In looking at some of the telecom commentary, I noticed -- seen that Chinese seem to be bypassing the 40-gig going right to 100-gig, that's a surprise. Are you experiencing this also? Or...

Robin F. Risser

Yes. Well, China really, for the long haul, adopted 40-gig DQPSK, it's a particular modulation scheme driven by the government-funded CapEx expenditures and the only real OEM that participated in that was Huawei. But that now -- and we participated a little bit with Huawei on that, but not very much as they morphed and they are rapidly transitioning away from that into 100-gig. It's kind of the second end behind Alcatel-Lucent.

Unknown Analyst

Interesting. The last question I have is, I noticed, Camarillo [ph] you had a non-cancelable lease, which is due to expire in February '15 -- or sorry, '14. I don't know what the implications are, but if your Optosolutions business is softening, would it make any sense at all to capture those equipments, personnel, processes and ship them to Ann Arbor?

Robin F. Risser

That's a strategic decision that we will review during the year.

Unknown Analyst

Okay. So I mean, it is under consideration?

Robin F. Risser

Absolutely. There's a lot of things that are under consideration.

Unknown Analyst

And Test & Measurement, I noticed JDSU was experiencing almost a bonanza in their test measurement with respect to the new schema on the 100-gig coherent. Are you getting that also?

Robin F. Risser

We -- in the market that we serve, we are not yet seeing that Test & Measurement ramp-up in those systems. JDSU -- there are a lot of different pieces of equipment used, some of them requiring higher speed, some of it just diagnostics tools and installation tools. And we don't tend to service the installation tool segment or the optical diagnostics segment. We tend to service the transponder, quality control, if you want to test to make sure your transponder or lan card is good or you want to test to make sure the laser is good that you manufactured. But JDSU has got a very broad product offering, some of which apply to all different speeds without a change in product, especially if it's in the passive optical space. So that's where a lot of their volume has occurred.

Unknown Analyst

Got it. So in summary, then it just sounds like the supply chain issue is really where you guys took it on the chin this past few?

Robin F. Risser

Yes, that and softness on the Optosolutions.

Operator

Next question is from the line of Mike Haymaker [ph].

Unknown Analyst

My question to start, you guys talked about a $5.9 million commitment for calendar year 2013. Has that gone away as a result of this supply chain issue? Or is it being delayed? Or is it not related?

Robin F. Risser

We haven't gotten any notice that, that is being reduced at all. But remember, that would really start -- those commitments tend to ramp up during the calendar year. So in January, and January tends to be a slow time anyway in that space, so we'll -- we don't believe that we'll lose market share out of it. But we have to solve this as quickly as possible. If not, then we will lose some of that. And then that commitment, $5.9 million wasn't all 100-gig. There is, let's say, 20% of it was 40-gig, and that's -- we're okay with that. So we have to solve this problem or we do risk losing some of that commitment.

Unknown Analyst

But you're saying you don't need to deliver that until January to start delivering on that until...

Robin F. Risser

That's right, although we're trying to give you some sense that we still will have this supply chain problem, again in our fourth quarter, which began last month.

Unknown Analyst

So your fourth quarter beginning in February, and it goes February, March...

Richard D. Kurtz

No, January, February, March.

Robin F. Risser

So our fourth quarter is -- ends March 31, 2013.

Unknown Analyst

The January you just mentioned, that's January 2014?

Robin F. Risser

That's January 2013. So we got -- the commitment to customers tend to give are calendar year commitments.

Unknown Analyst

So that's potentially -- could have some problems unless you get the supply chain thing?

Richard D. Kurtz

That's correct.

Robin F. Risser

That's right.

Unknown Analyst

Okay. The orders that you were working on for the 100-gig, have they gotten -- have any gotten canceled yet or they're just waiting or...

Robin F. Risser

No, there are no cancellations.

Unknown Analyst

Cancellations. How about the outstanding warrants, are the rest of them expiring pretty soon? I don't remember the dates.

Jeffrey Anderson

We have 1 tranche, Mike, that's still outstanding. I think that runs through 2015. And that's in our Q, it's $795,000. Now we do have an additional warrant tranche associated with this financing that we've signed, but not yet closed, and we'll issue those warrants when we do close the $2.5 million facility.

Unknown Analyst

So there's going to be more warrants coming out then?

Jeffrey Anderson

Yes, there are $1,195,000 warrants associated with the $2.5 million partners for growth financing.

Robin F. Risser

That are in the money at the moment.

Unknown Analyst

Can you say what price they're at or you can't?

Jeffrey Anderson

$2,000,000.

Richard D. Kurtz

They are, yes, disclosed in the Q, there are some warrants at $1 and some warrants at $0.50. And it's the lower of that price on -- are $0.50 or it's a 10-day volume weighted average price, so there'll be a calculation to determine exactly what the final price is.

Unknown Analyst

Okay. A question about guidance. With all due respect, I don't think you've gotten the guidance right yet. So maybe we should stop offering guidance, do you think? People get excited when we hear 15% to 20%. And it comes and goes, we don't get it or something.

Richard D. Kurtz

I'd have to talk to the Chairman about that. Other austerity measures that we're looking at in the near term, depending on how quickly our supply chain can get corrected because again, you don't like to start and stop things. But salary reductions, other discretionary spending, I'll call it, like matching the 401(k), all these things are on the table and being evaluated by management and the board.

Unknown Analyst

Okay. One thing that would concern us as a shareholder like myself is that you have some pretty talented engineers, I think Randy mentioned Ira is one. How do you make sure year retained the people who are really the brains and the guts of your company?

Richard D. Kurtz

Well, that's the reason that you don't want to pull the trigger too fast. We've had a team, as Rob keeps saying, living in Europe for a while, trying to help out our supplier. And we get close and then Murphy pops his head, I'll say, and then we have to look at and reevaluate it and say, okay, when is the next snapping of the chalk line? And unfortunately, this truck line has moved a couple of times on this -- chalk -- due to no reasons that we could find. Just like I said, it's Murphy's Law. But again, we're trying to keep all the talent that we possibly can on board, and that's the reason that we don't want to take any severe actions relative to 401(k), mass salary reduction and things like that. We really have to, given what we think is going to be coming back on the supply chain constraint.

Unknown Analyst

Great. I think there is really an analysis around the value of what you're getting for your money and many of us have expressed concern over the years about the value of the board, and it seems like that would be a relatively easy cut to make rather than people's 401(k)s, just one investor's opinion. My final question, and it's probably rhetorical, but what have we learned based on what's happened so far? Have we learned that the sole source is not a good way to do this? Or is there the other way around it and we learned that -- how, as a 10-year, 12-year investor here, I'd at least like to think that we're learning our lessons and not commit -- make the same mistake more than 2 or 3x?

Richard D. Kurtz

I think that's a true statement. I think that when we first did this, as Rob mentioned, that some of our competitors are vertically integrated on some components, but they all have a supply chain constraints. The issues you always face is that, it's not like -- this is a high-volume production business where you can have 5, 6 different sources out there and it's highly technical. So it makes it very difficult now. We switched from a company supplier to a European supplier, and the driving force there basically was cost savings. The Japanese would not match our targeted prices and as a result, we had to find somebody that would be willing to work with us and develop the process, because again, it's not like it's a common manufacturing process that's available to a lot of people or a lot of suppliers out there. So the first thing, I think, we learned is that, you do want to have multiple suppliers, we'd like to find another one if we could in a number of different areas for different components. But at the same time, it's very tough to find those that-- you end up not -- you'd not wanting to buy from your competitor, right? So...

Robin F. Risser

I'd say that we -- lesson learned with this kind of leading-edge product, usually when a product is first introduced, as much as you'd like to have 2 sources, it probably is unrealistic. But we definitely have had a, aggressive second-source program on a lot of the parts. So there are parts that you haven't heard about supply chain constraints, but we have developed second sources on them, aggressively and from low-cost economies in Asia. So that has happened, but that hasn't been implemented on all of the products. But we do have a program aggressively trying to do that. I would say, though, it's probably unrealistic to believe that as -- given the more advanced products get first introduced that right off the bat we'll be able to have a second source because you do have to -- you're not buying existing products, you're having to develop the supply chain and it developed -- they develop -- they don't develop all at once on the more complicated pieces.

Unknown Analyst

The personnel that API has in Europe working with the supplier, are you paying for their travel and their expenses, or it's supplier paying?

Richard D. Kurtz

No, we aren't.

Robin F. Risser

No, the supplier is paying because they're scrapping hundreds of thousands of dollars worth of material.

Unknown Analyst

So it sounds like you discovered a quality issue with some of the components and then you had to go back and tried to track it down? Is that it?

Robin F. Risser

Yes.

Richard D. Kurtz

That's correct.

Jeffrey Anderson

That's exactly right.

Operator

Your next question is coming from the line of Richard Birrell.

Richard Birrell

Most of these guys have asked a lot of questions that I had on my sheet. I guess, I'll go back to a couple of CCs ago. And the question came up about stock price and I think, Rick, you kind of mentioned that it really wasn't that important. Are you reconsidering any of that statement?

Richard D. Kurtz

I didn't say that. I said the fact that there was a lot of knowledge that we have that it's not disclosed, so I can't act in that open period or non-quiet period. I didn't say that we wouldn't act, I said, I couldn't act. So I'm sorry if you misunderstood me, Rich.

Richard Birrell

No, no, I'm talking about the stock price, how the stock price is affected in the stock market that's $0.01 stock at this point, going in...

Jeffrey Anderson

It kind of came across that way in the CC that other things were a lot more important like what was going on behind-the-scenes, but what was coming out on a day-to-day stock market as far as the price of our shares was not that important because -- I just can't kind of took it that way.

Richard D. Kurtz

When did I say that? I don't remember saying anything like that, I guess.

Richard Birrell

I have to go back, it's been talked about on the board quite a bit as far as -- I think it was a couple of...

Richard D. Kurtz

Okay, it's in the board, not in the conference call. That's fine, I understand.

Richard Birrell

No, it was in the conference call and it came up right after the conference call that I think I was the one who came up with probably the third or fourth question in the CC that was talking about the share price. And -- I'd have to go back and actually look at those CCs.

Richard D. Kurtz

The only comment that I would make on that is I don't control the share price, right? So I don't mind getting beat up by you guys with regards to earnings or meeting revenue projections that we've given because we should be better at that than we are. I can understand that disappointment. And we are very disappointed in the revenue projections, not meeting those because a lot of things has happened again. A lot of them we feel were out of our control at the same time. But I can't control the stock price. If I could control the stock price, I'd going to be going to jail.

Richard Birrell

No, I understand. I guess what I get at is that, the things that you do control, you have a high profit margin type of industry that you're in, the technology and you've got like 42% profit margins. And you can't always look forward that you're going to have 42% profit margins on your technology that, that might reduce down to 25% to 30%. As these things become adopted over the long haul, just like it's occurred on your 40-gig HSOR. So when you start to look forward on your structuring of your cost, is that something you're considering, so that your...

Richard D. Kurtz

Yes. Again, like I said before, when we get to that $8 million run rate, we have enough leverage within our business model that we start dropping a lot of money down. Now again, we spent a lot of money in R&D, okay, to develop the product, to get the revenues and the high growth and the good margins that we want. So as a result, we need the revenue. Now I remember, maybe a year or 2 ago, somebody said, why don't we cut our R&D? Yes, that would be an option, and we would not have any new product development going on and we'd be very short lived as a business. So it's something that we have to manage as a company thing. Yes, we know what level of investments we need to develop the new products, and we have to be sustainable in that long run. Now unfortunately, we've had this a little bit of a supply chain constraint that's caused us some issues. And we try to manage through that in this last couple of quarters by cutting our OpEx.

Jeffrey Anderson

The other thing that's important just to keep in mind is in this state that we're currently in, you can figure somewhere around 50% of the revenue comes from products that are less than 2 years old. So those are always -- have to be developed and they're subject to a lot more uncertainty than products that you've been routinely shipping to customers that have been routinely purchasing those. It's not an excuse, it's just a fact, right? So that is the environment we're operating in. We're hoping that over time, as that changes, as there is a greater and greater percentage of revenue that are coming from products that have been established with customers for a longer period of time, that's usually when the volume of the product is going up and the market is adopting it more rapidly. That's usually when you get more margin pressure. But you've got a lot more gross profit margin dollars to cover those operating expenses that don't go up at the same rate the revenue should go up. So that's where we're headed. We haven't gotten there yet. But that's what we're headed.

Richard Birrell

Okay. We spent a lot of time talking about the HSOR and some of the supply constraints and so forth. We kind of not talk much about the Terahertz and what's coming up with that? I know back -- probably go back about 4 years ago when we were looking at the pharmaceuticals and look like there was some interest from the pharmaceuticals and good opportunity to get adopted in that market and we haven't see that occur. Do you see that as a lack of salesmanship or product capability?

Richard D. Kurtz

Neither, I think it's a matter of how the pharmaceuticals would have to go about the implementation. If you think about it, any change to their manufacturing process requires FDA approval, okay? They are -- they manufacture product under cGMP and that's approved, okay. Once they make a change to that manufacturing process, they have to go back to the Feds, get it approved, show them the documentation that's been done. Now when we first started talking with them, it was during the period that there was all of a sudden massive consolidation amongst all the pharmaceutical industries. That, coupled with the fact that they have a long period to accept, approve and qualify product, we made the conscious decision that says, you know what, we need to have something that has a higher ROI associated with it. Now pharmaceuticals always run into this problem, we'll call it, and it happens a little bit more offshore, I'll say, than onshore where they have contaminants. Metal contaminants, other anomalies within -- in the capsules or in the drugs, and they get the massive recall. Well, okay, that's being very reactive just like CFA is reactive, we'll say. And so people will make a phone call to us and were saying, "You know what that's good, but somebody has got to show me how you're going to fund it, how are you going to do all this because we don't want to do that development cost without having a customer per se that's going to give us a purchase order based on criteria that we can adopt and, we can understand." With the industrial applications that we're doing today and our VARs, we know exactly what they're expecting. We know what the ROI is, and you can very quickly, I think, convince them. Now it wasn't overnight that we did this. This is over a period of a couple of years. But now we're starting to gain that ramping momentum with the industrial applications. I think it's going to take some effort to get back into the pharmaceutical area to really get them exposed to what we can do. Now if somebody came to us tomorrow, so have a brand-new line, we're putting in that we're looking at. Okay, that's a different subject that would get our feet wet again, as long as we understood and there was a commitment by them to buy the product and not just going to application development endlessly like they did 3 or 4 years ago, I'll call it.

Robin F. Risser

And we do have some neutroceutical design wins.

Richard Birrell

We're hard on you guys but we're here as stock investors for quite a few years and like I say, we're watching a high-margin items again when things -- with the cuts for R&D and so forth. We just wanting to make sure that we got the right team on the field. I think some of the people have mentioned about Board of Directors and so forth because at the end of the day, these reports come out, it's -- can you guys remember when the last time you reported a profit?

Richard D. Kurtz

3 years ago, I believe it was.

Richard Birrell

Okay. And that's everybody, a lot of industry out here is going through the same macroeconomic conditions, and I think that you heard it from the investors we're out here with our hard-earned dollars investing in the company, we're here looking for results.

Richard D. Kurtz

We understand.

Richard Birrell

Today is not a good day for us, so we're just kind of voicing our opinion. I appreciate your ears -- don't hold this against this, we're just voicing our opinions.

Robin F. Risser

Yes, we know. We're frustrated, too. But we're trying to make it happen.

Operator

We do have a follow-up question from the line of Randy Madison.

Unknown Analyst

Gentlemen, let me just follow-up on a couple of other things if I could very quickly because I really didn't ask you much about Terahertz. Did I understand you telling Ed Perry that we're shipping about -- we're hoping to ship about 3 or 4 a month, is that a hope or did I misunderstand?

Richard D. Kurtz

There's a difference. What we're trying to plan for, okay, so obviously, we're currently in the process of putting our strategic plan together and getting board approval on that plan. And that kind of sets the revenue expectation, the expenditure expectation, the investment expectation and the like for all 3 of our product platforms. So by saying that, we've proven to ourselves at least that we had the manufacturing capacity to build 4 systems in a quarter, okay? So that's a little bit more than 1 a month. And our goal would be to beat that, to have more than 1 a month, this coming year.

Unknown Analyst

Very good. And in terms of the VARs that are on board, it seems to me that we have 3, is that correct? Or did the paper -- can we count the paper company as an additional VAR?

Richard D. Kurtz

It's really kind of weird because we count them as a VAR. But they're not going to be a real true reseller. What we're partnering with them is the application development within the paper industry, okay? So we've got the Appleton guys, we've got thermal, and we've got ACT as our 3 main VARs. And then of course, we have the Japanese that really didn't sign the agreement per se to us -- with us today. And so we're hopeful that we will have a Japanese VAR out there eventually in this coming year. And then of course, looking at the other vertical market segments where we can sign additional VARs into.

Richard Birrell

And then in terms of the Terahertz that we deployed to the factory floor, have there been any problems -- major problems that we should be concerned about?

Richard D. Kurtz

Well, I think that anytime you take a new technology to the factory floor that's never been deployed, you're going to run into problems. So from that aspect, it's how you respond to those problems and how you support the end customer and the VAR in overcoming those issues. Now if I said that we had absolutely no problems, I'd probably be misleading everybody. At the same time, do we have insurmountable problems that we've run into? Not at all. Do we have customers that have walked away from us? No we haven't.

Richard Birrell

And I know one of the early applications, even before you made a commercial sale was in the wood market up in Canada. And it's my recollection, I used to have video on my blog showing that -- what appears to be 1 of your key unit and some kind of an machine moving back and forth over the wood.

Richard D. Kurtz

Yes. Ordinate strand board.

Richard Birrell

Is there anything -- have you gone back to any of those people now that you have this further development to see if there's any interest there?

Richard D. Kurtz

It's kind of strange because that was a professor out of the university that was developing a software that was going to take our signal to help them with their manufacturing process. Unfortunately, he did not get the funding that he was seeking to start his start-up. So he's still a professor as far as I know. Now we've reached out, and we've contacted him several times and just trying to keep him appraised. But other than that, it's again, early technology, long-term development with regards to application and it really has to have a quantifiable ROI and a real VAR. No we haven't done anything more in the forest industry, but that's like saying are we going to do anything more with the Lourve to look at artwork. I mean those are kind of like one-off type of things, and you see if they have any -- they can grow any seeds off of that, but typically, you really want to look at an industrial application like we are today.

Richard Birrell

And is there anything at all you can tell us about the reception by TSA of the SAF-T-CHEK?

Richard D. Kurtz

I guess, my comment would that they love the hardware, they are looking at it and would love to have it on the QPL [ph] and that's what they're working on.

Richard Birrell

And is the algorithm deconvolution, is that what that's based on or is it based on...

Richard D. Kurtz

It's -- I don't want to talk too much about it, obviously. But it is an algorithm.

Richard Birrell

And you can't say if it's compressive, sensing or...

Richard D. Kurtz

No I'd have somebody knocking on my door.

Operator

At this time, I'm showing no further questions in queue.

Richard D. Kurtz

Well, I don't have anything more to add other than thank everybody for taking the time to listen and to our report today. And I appreciate -- for our entire team, we appreciate your continued support and your comments. And we take them to heart. Thank you very much.

Operator

Ladies and gentlemen, that concludes today's conference. We appreciate your participation. You may now disconnect. Have a great day.

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