Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

Advanced Photonix, Inc. (NYSEMKT:API)

F3Q 2014 Results Earnings Call

February 10, 2014, 04:30 PM ET

Executives

Jim Macdonald - Torrey Hills Capital, Investor Relations

Jeffrey Anderson - Chief Financial Officer

Rob Risser - Chief Operating Officer

Richard D. Kurtz - Chief Executive Officer

Analysts

Dave Kang - B. Riley & Co.

Operator

Good day, everyone, and welcome to Advanced Photonix's 2014 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 conference call over to Mr. Jim McDonald from Torrey Hills Capital. Please go ahead, sir.

Jim Macdonald

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 and 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 have been and are being developed by the company.

Please see our press release of today and our periodic reports filed with the Securities and Exchange Commission for a fuller statement of such risk 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 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 the 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 10, 2013, and are available on its website at www.advancedphotonix.com.

On today's call we'll hear first from Jeff Anderson, CFO; who will pass the call on to Robin Risser, COO; and then Richard Kurtz, CEO will make the closing statements regarding the business of the company.

I will now turn it over to Mr. Jeff Anderson.

Jeffrey Anderson

Thank you, Jim and thanks to all of you for joining us this afternoon. I'd like to review just briefly a few financial highlights from our third quarter ending December 27, 2013 and then I will turn the call over to Rob for an update on business activities.

Our revenues for the quarter ended December 27, 2013 were $7.5 million, an increase of 28% or $1.6 million from revenues of $5.8 million for the quarter ended December 28, 2012. On a year-to-date basis our revenues were $22.1 million, an increase of $4.4 million or 25% from revenues of $17.6 million for the nine months ended December 28, 2012. Sequentially revenues were essentially flat.

We experienced revenue increases in our test and measurement and telecom markets for the quarter and three of four markets for the nine months ending December 27, 2013 compared to prior year periods.

The test and measurement market revenue was approximately $5.2 million and $14.3 million in the third quarter and the first nine months of the fiscal 2014, an increase of $1.6 million and $3.8 million over the related prior year periods. The growth was attributable to the March 2013 acquisition of the Silonex net operating assets by our newly formed Canadian subsidiary, Advanced Photonix Canada, Inc. also known as APC, and improvements in our Comtest product sales.

Sequentially, revenue increased approximately 11% or $510,000 from the second quarter of fiscal 2014 on the strength of Comtest product sales. Several telecommunication original equipment manufacturers or OEMs have begun using our Comtest products to incorporate into their own manufacturing test equipment, causing a near-term rise in demand. This is in addition to the traditional test and measurement OEMs that have introduced or plan to introduce new products for high-speed applications.

Telecommunications revenue in the third quarter and nine months of fiscal 2014 were $1.7 million and $4.6 million respectively, an increase of 78% and 53% respectively from prior year periods. The higher revenue was primarily due to the ramp of our 100G line side products and timing of orders and revenue on 40G line side products.

Telecommunications revenue, on a consecutive quarterly basis was flat as higher 100G sales were offset by lower 40G sales. We have seen several carriers shift their capital spend to increase their bandwidth on their optical networks, which has improved the outlook for 100G sales. As we look forward we expect this trend to continue given the many advantages of coherent technology over prior long-haul transmission protocols.

Military/Aerospace market revenues in the third quarter and first nine months of fiscal 2014 were $439,000 and $2.2 million respectively, a decrease of 60% from the comparable prior year third quarter and a 36% decrease over the prior year nine month activity. Terahertz development programs for the F-35 program have wound down since last year and follow-on contracts have been delayed. This combined with Optosolutions orders scheduled to ship in the third quarter which were pushed out explains the decrease in revenue.

Revenues decreased by $273,000 or 38% from the second quarter of fiscal 2014. The sequential decline is due to the delay of orders and shipments for several military programs, which we believe stems from government sequestration affecting defense expenditures.

Medical market revenues in the third quarter and first nine months of fiscal 2014 were $128,000, a $912,000 respectively, a $112,000 decrease and a $221,000 increase from prior year periods. These fluctuations in revenue are mainly due to the timing of shipments related to one customer. Given the pause in government spending experienced in the quarter that delayed expected Terahertz contract awards of $2.25 million and push out of deliveries of previously scheduled orders which is expected to linger for most of another quarter we revise our expectations for fiscal year 2014 revenues to grow by 25% relative to the prior year.

The lower top line growth will cause to miss our adjusted EBITDA covenant in the quarter and we now expect that we will need to seek some additional capital to fund the expected future operations of the business. We can bring in financing in many different ways and that is the reason we have stated in our filings that we are pursuing both strategic alternatives and financing options. In the near-term Silicon Valley Bank has a long history of working with technology companies operating with limited liquidity. We have a good working relationship with them and have no reason to believe we won't be able to reach an agreement to move ahead.

Gross profit for the third quarter of fiscal 2014 was $1.9 million, compared to $2.5 million for the third quarter of fiscal 2013, a decrease of $565,000 on a revenue improvement of $1.6 million. Year-to-date gross profit was $7.6 million, up from $6.7 million in the first nine months of fiscal 2013. The results reflect a non-cash $608,000 accelerated depreciation charge taken due to the shutdown of the fab production on our silicon photodiodes used in the Optosolutions products and a shift away from Terahertz contract revenue given the completion of the F-35 program deliverables.

Total operating expenses for the quarter and first nine months of fiscal 2014 were $3.2 million and $10 million, a decrease of $266,000 and an increase of $53,000 over the comparable fiscal 2013 periods. With the acquisition of the net assets of Silonex we brought on certain overheads that have increased our spend rate relative to last year. This has been more than offset in the current quarter and almost offset for the first nine months of the year given headcount and expense reductions taken in other areas.

Total operating expenses for the third quarter of fiscal 2014 decreased by $136,000 when compared with the second quarter of fiscal 2014, given the reduction in contract and headcount engineering spend. Non-cash expensing of stock option and restricted stock grants included in operating expenses was $39,000 and $105,000 for the three and nine period ended December 27, 2013 compared to $43,000 and a $114,000 for the three and nine period ended December 20, 2013 as stock awards have been limited over the past year.

Interest expense in the third quarter and first nine months of fiscal 2014 was $154,000 and $479,000 respectively. This increase of a $120,000 and $382,000 in expense relative to prior year periods is due to the increase in total debt associated with the PFG funding and the noncash amortization of the debt discount related to the initial value of the warrants granted as part of the PFG funding. The fair value of the warrant liability is affected by changes and inputs to the model including our stock price, expected stock price volatility and contractual term. To the extent that the fair value of the warrant liability increases or decreases record we an expense or income in our consolidated statement of operations.

The expense of a $124,000 for the current quarter and expense of $213,000 for the nine months ended December 27, 2013 are attributive to the change in the warrant liability driven primarily by the change in the stock price at quarter end. This is in contrast to a small amount of income in prior year periods.

We realized a GAAP net loss for the third quarter of fiscal 2014 of $1.6 million or $0.05 per share as compared to a net loss of $1,26,000 or $0.03 per share in the third quarter of fiscal 2013, an increase in the net loss due to the non-cash accelerated depreciation taken in the quarter. Year-to-date we realized a net loss of $3,121,000 in fiscal 2014 relative to a loss of $3,305,000 in fiscal 2013. The improvement is the result from improving sales and our related gross margin net to non-cash accelerated depreciation taken in the quarter.

On a non-GAAP basis the net loss for the quarter was $517,000, an improvement over the $700,000 loss in the third quarter of fiscal 2013. For the first nine months of fiscal 2014 the non-GAAP loss was $1.2 million, a $1.1 million improvement over last year's comparable period.

At December 27, 2013, we had cash and cash equivalents of $116,000, a decrease of $503,000 from the March 31, 2013, balance. The lower balance in the nine months period is attributable to cash used in operating activities of 260,000, cash used in investing activities of 285,000 and cash provided by financing activities of 42,000. Given the slower than expected sales in the quarter, we breached our adjusted EBITDA covenant with SEB and PFG as we achieved a negative adjusted EBITDA of 206,000 which was below the $1 requirement for that period.

In the interim, we have entered into separate variance agreements with each of SEB and PFG that are effective through the end of February 2014 to allow for the time for the parties to agree upon new covenants and to negotiate an extension of the SEB line of credit. Again our lending partners have worked through situations like this with many other parties successfully and we believe we can achieve the same outcome.

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

Rob Risser

Thank you, Jeff, and good afternoon everyone and thank you for joining us on this call today. Revenue grew 28% compared to last year's third quarter, but was relatively flat compared to last quarter and came in below guidance of last quarter. We have mixed results in the quarter with our high-speed optical receiver product platform continuing its growth of 71% compared to the same quarter last year offset by weaker revenue than expected from our Terahertz and Optosolutions product platforms.

Revenue from products less than two years old was greater than 30% of our revenue in the third quarter compared to 19% in the second quarter and revenue from products less than two years old in the high-speed optical receiver and the Terahertz product platforms was greater than 50%. This reflects the investment in product development, targeted on our high-speed growth markets over the past years resulting in a successful introduction of new products, including the T-Ray 5000 Terahertz products and high-speed optical receiver products for 100-gig, CR-100D with variable optical attenuator for the transmission markets and the DGM32 for 100-gig Comtest markets.

Our adjusted EBITDA improved by 58% compared to the third quarter last year. However it was negative $205,000 on $87,000 lower revenue compared to last quarter's $20,000 positive adjusted EBITDA. Revenue and adjusted EBITDA in the quarter were substantially below plan due to the lower revenue and adjusted EBITDA in our Terahertz and Optosolutions product platforms offset partially by higher revenue and adjusted EBITDA in our high-speed optical receiver product platform. The high-speed optical receiver product platform revenue increased 71% compared to the third quarter of last year was broad-based, was transmission products of 78% and Comtest products of 63%.

Two new products of 100-gig receiver with variable optical attenuator targeted at the long haul transmission market and the 100-gig Comtest product targeted at testing next generation 100-gig, Ethernet and fiber channel and the price access products drove this growth.

Demand for our high-speed optical receiver product has been robust for the first three quarters of the fiscal year and we forecast continued robust demand for the remainder of the fiscal year and beyond. Our previously announced 100-gig design wins combined with our recently announced CR-100D coherent optical receiver design win at a Chinese OEM positions us well on this high growth 100-gig market. Our China OEM customer won a share of the massive China Mobile 100-gig network build-out recently announced.

High-speed optical receiver product platform revenue on our fourth quarter historically gets off to a slow start, due to holidays in North America, Europe and China. Lower selling prices that became effective on our fourth quarter, but we estimate that fourth quarter revenues will meet or exceed plan in this product platform.

As we indicated in our second quarter conference call, our team has implemented a successful continuous cost improvement culture in our high speed optical receiver product platform and continues to significantly cost reduce the labor and material content in these products through supply chain second sourcing, manufacturing engineering, improving operating efficiencies, new technology deployment, learning curve economies of scale, selective manufacturing automation and right-sizing operating expenses while still being able to invest in next generation product development for our high growth markets.

We received the first 10-gigabit per second APD ROSA receiver samples from our low cost Asian contract manufacturer in January. Our patented industry leading high performance and high yield APD technology is ideally suited for the high volume fiber to the home and fiber to the curb markets which are just beginning to transition to higher speeds. Our 10-gig APD revenue has historically been moderate since the products were primarily deployed in niche optical transmission, 310 MSA transponders and line cards that required the highest performance for long haul and submarine markets.

We will be sampling customers for the new APD products over the next two quarters with hopes of winning several design sockets during the next fiscal year. We will exhibit at the Optical Fiber Conference Trade Show March 10 through the 13 in San Francisco and we’ll once again sponsor the Executive Forum held on Monday before the exhibitions open.

OSC is a largest global conference and trade show for optical communication and networking infrastructure professionals with more than 12,000 attendees from over 65 countries. Deployment of 100-gig coherent technology in the long-haul, metro, access and enterprise markets over the next five years is expected to be the growth driver for the optical market. Our products and planned future product developments are targeting these areas of network infrastructure growth.

Our Optosolutions product platform revenue was up 47% compared to the third quarter of last year, primarily based on the APC recurring revenues and test and measurement of the $840,000 compared to the third quarter of fiscal year 2013 which had no APC revenues offset by weaknesses in the military and medical market.

The combined Optosolutions product platform revenue was down 14% compared to the second quarter of this year. Revenue and adjusted EBITDA did not meet plan for the quarter and thus year to date. This miss was primarily attributable to the revenue from the APC acquisition coming in lower than planned due to slower customer acceptance from an APC second source product.

We closed the Optosolutions silicon fab in Ann Arbor in the third quarter as part of our cost reduction and improved competitiveness efforts in this product platform. We anticipate this will save approximately $500,000 annually beginning in FY ’15 and will improve our product competitiveness by outsourcing to an agent based manufacturer that uses larger diameter wafers.

We have reduced our space requirement for our Camarillo operations and are currently negotiating a smaller footprint starting in fiscal 2015. We estimate this could save us another $200,000 annually beginning at the start of FY ’15.

We continued our investment in Optosolutions sales, marketing and new product development in the third quarter and are currently identifying and evaluating new product development opportunities for this product platform. Our Optosolutions product platform sales and marketing team exhibited their photonics west last week, which is the largest trade show they attend, to prospect for new business and product development ideas.

As you can see the Optosolutions team has been busy and we anticipate seeing an increased profitability over the next year as these initiatives are completed.

In our Terahertz product platform this quarter we continued our transition from product and application development, funded substantially by government contracts to product sales of T-Ray 5000 products directly to the established scientific market and through the value-added resellers to the emerging process and quality control markets. We expect fiscal ' 14 revenue to be down approximately 40% from last year as we cross the chasm from research markets to industrial adoption and rely less on contract revenue.

Third quarter revenue in our Terahertz product platform was up 5% compared to the second quarter but down 56% compared to the third quarter of last year, due primarily to slower than anticipated and slow adoption of the T-Ray 5000 due impart to higher than anticipated value-added resellers sales force training needs and unanticipated field service issues. This combined with the delay of a large military contract related to the F-35 Joint Strike Fighter due to the government sequestration have delayed our Terahertz sales ramp in fiscal 2014. Terahertz adjusted EBITDA was substantially worse than plan for the quarter as a result of lower revenue.

In the third quarter we continued to focus on developing, training and expanding our Terahertz value-added reseller channel and visibility and industrial adoption is continuing to improve as our VAR network has become more experienced in selling our Terahertz solutions. In addition, the engineering and manufacturing team continued its focus on hardening the T-Ray 5000, receiving UL certification, supporting end users and value-added resellers on initial installations, significantly cost reducing the product in order to meet industry required price points and transferring the T-Ray 5000 from engineering's preproduction line to manufacturing's production lines.

This past quarter, as we have done the past several quarters, our Terahertz team worked closely with our VARs in the process and quality control markets, targeting the most difficult problems that either cannot be accomplished with traditional nuclear gauges or would require multiple gauges. Our VARs customers are typically updating their production line or installing a new production line, including the installation of process and quality-control sensors. These projects have a long sales cycle, an extensive capital appropriations approval process and exhibit some price sensitivity.

We are focusing on continuous cost reductions in the Terahertz product platform in order to meet customer expectations and have been successful in achieving industry leading cost reductions to date.

In the case of a new sensor technology, the proof-of-concept stage typically precedes the capital appropriation approval process. Once our VARs have won the bid they typically receive the purchase orders four months in advance of installation. They in turn, issue purchase orders to us and expect delivery two months later.

Our Terahertz team also exhibited at Photonics West last week and gave a live demonstration that was well received by several prospective customers at the show. Photonics West is primarily targeted at the research market but also has substantial industrial customers that attend. In summary our third quarter came in below guidance and plan, but substantial improvement compared to the third quarter of last year.

Our high-speed optical receiver product platform exceeded plan but was offset by below plan performance of our Optosolutions product platform and our emerging market Terahertz product platform. Despite all this all three product platforms have positive momentum and are making significant improvements in market growth, market adoption and cost reduction that position us well for next fiscal year.

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

Richard D. Kurtz

Thank you, Rob, and good afternoon, everyone. And thank you for joining us on the call today. As I mentioned during our mid-quarter update, the delays in Terahertz development combined with the push off in military/aerospace orders impacted our third quarter numbers. These impacts have affected our ability to meet the existing bank covenants and we are working with them to restructure the covenants.

Silicon Valley Bank has significant experience with high tech companies and has worked with many during tight times. We feel confident that they’ll work with us given our near term opportunities. These opportunities are in all of our product platforms and we’ll need to find a way to capitalize on those opportunities that can provide the greatest impact now and in the future.

We have a strong backlog in HSOR and 100-gig products in particular as outlined in our press release last week. The news out of the telecom market is one of growth and opportunity. A major optical customer’s demand grew substantially in this quarter and we have added the second shift now working weekends to keep up with this demand. Our supply chain has responded to this increase in demand and we are looking to continue HSOR growth throughout the calendar year.

We are now seeing a strong build up in potential T-Gauge orders in both the industrial and research markets. During the Photonics West show we held a demonstration for our new T-Image product. This new product combines the T-Gauge control unit with a motion control system that can perform sub-service imaging looking for defects or anomalies. As a result of this and other work at the K show we are now in discussion with several new VARs in different vertical market niches and have received the preliminary commitment and a purchase order for a development system from one of those potential VARs.

Development contracts for Terahertz are still pending and we are hopeful that these will be resolved in next 60 days, positioning our FY’15 revenues in Terahertz for strong growth.

In the Optosolutions product platform we are continuing our operational focus with a fab less and offshore business model. As Jeff and Rob have mentioned we had non-cash write off within the third quarter for the fab shutdown. This will ultimately have a positive effect on the bottom line for Optosolutions.

Last week at the Photonics West show, the Optosolutions group demonstrated our new technology called a Tunable Light Source or TLS using LED technology. This technology has applications in the test and measurement industries and also potential in the lighting industry.

We launched a new website to improve the marketing of our products and the branding of our company as a test and measurement leader using photonics. The new website highlights all three product platforms including a completely revamped Terahertz section featuring our entire suite of products and markets served. We’re very excited about the coming year for both our telecommunication and Terahertz product platforms. We’re working on new product developments to further lower the cost of a Terahertz solution thereby allowing us to accelerate market adoption, compete more effectively against older technologies and expand our addressable markets and encourage additions to our value added resale account.

On behalf of the team we appreciate your continued support and I would now like to open up this call for your questions.

Question-and-Answer Session

Operator

Thank you, sir. (Operator Instructions). And our first question comes from Dave Kang from B. Riley. Please go ahead with your question.

Dave Kang - B. Riley & Co.

Thank you. Good afternoon. First, on gross margin, Jeff, so gross margin was 25 points -- what was it without accelerated depreciation and what do you think outlook will be for the current quarter, March quarter?

Jeffrey Anderson

I don't give specific guidance by quarter on the gross margin side but if you do the math it’s 34% when adjusting for the restructuring cost related to the fab shutdown.

Dave Kang - B. Riley & Co.

Got it, and then with you guys going fab less for custom opto, can you provide us some color as far as the impact on your margin lines, gross and operating?

Jeffrey Anderson

Well Rob spoke to the point about the savings for us on that was going to be approximately $500,000 annually. So it just depends on the volume of the business.

Rob Risser

You will find in our filings what we said Dave, it’s a range of 400 to 600 and that’s kind of dependent upon the specific mix.

Dave Kang - B. Riley & Co.

And just wonder if you can provide what the actual HSOR number was?

Jeffrey Anderson

Totally HSOR was approximately $3.3 million in the quarter.

Dave Kang - B. Riley & Co.

And how do they breakout?

Jeffrey Anderson

Well between the different product lines or [hardware] and..?

Dave Kang - B. Riley & Co.

Yeah.

Jeffrey Anderson

It's pretty close to 50-50 Dave.

Dave Kang - B. Riley & Co.

So 40G, 100G even?

Rob Risser

No, 100G is substantially more than 40G.

Dave Kang - B. Riley & Co.

Okay. And yet 40G did have an impact as far I guess it was flat?

Rob Risser

You mean on a consecutive basis?

Dave Kang - B. Riley & Co.

Yeah.

Rob Risser

Right, that's right.

Dave Kang - B. Riley & Co.

And then how do we see this all playing out. I mean I am assuming 100G is still ramping but what about 40G, is it still declining or has it stabilized?

Rob Risser

Well 40G is declining. It is primarily associated with some niche markets as-well-as servicing the continued population of some of the OEM equipment in the North American build out primarily by AT&T. So there are…

Dave Kang - B. Riley & Co.

So you are in the AT&T camps?

Rob Risser

Yeah.

Dave Kang - B. Riley & Co.

Okay.

Rob Risser

And then we also have some in the Asian camp on the DCPSK but that is that's a fairly low volume for us.

Dave Kang - B. Riley & Co.

So AT&T is bigger than the China exposure?

Rob Risser

Correct, that's correct.

Dave Kang - B. Riley & Co.

Okay, and then so just going back to 25% year-over-year growth now that implies that the current quarter will be kind of flat. Just wondering if you could provide little bit more color, so is it safe to assume HSOR will be up and on a sequential basis Terahertz and Opto will be down, is that fair?

Jeffrey Anderson

I would say Dave at least on the HSOR side that traditionally our fourth quarter does not show a lot of growth because we have the impact of the annual price negotiations, price reductions that occur and those show up beginning the shipments in the fourth quarter. Again the fourth quarter tends to be a little bit of short quarter because of the holidays that occur. This year in particular if you saw our cut off was 27th of December.

Dave Kang - B. Riley & Co.

Right.

Jeffrey Anderson

So really we had most kind of tail end of Christmas and New Year and then you've got the Chinese New Year.

Dave Kang - B. Riley & Co.

Okay.

Jeffrey Anderson

So we typically have those things combined and we typically tend to be more flattish.

Dave Kang - B. Riley & Co.

Okay. But what about the Chinese OEM win you guys announced last week that's about $500,000 does it get filled in this quarter or next quarter?

Richard D. Kurtz

No, we are trying to fill as much as we can this quarter. But those tend to be pretty short lead times with customers in that part of the world and it may be difficult to be satisfied all that in that first quarter.

Dave Kang - B. Riley & Co.

Got it. What about the capacity I mean some of your peers are talking about being capacity constrained and you guys talked about running weekends and all that. Can you just quantify the situation?

Jeffrey Anderson

Well. We believe that we will be supply side -- supply chain or capacity constrained but we are adding shifts. We've been running as Rick had mentioned partial second shift building that to full second shift and both for the optical sub-systems as-well-as the electrical sub-systems and now tests. And so we believe that we will be able to ramp up to the demand there. In the meantime we've been preparing beginning in last quarter the supply chain to make sure that they are stepping up to the increased volume that's going on, which all takes little bit of time to ramp up.

Dave Kang - B. Riley & Co.

Got it. And lastly on your cash situation, so did your balance sheet affect your business I mean your customers I mean what are they telling you? Have you lost any customers because of this?

Rob Risser

No, we have not. We haven't seen any of the issue.

Dave Kang - B. Riley & Co.

Especially like your telecom customers I mean they certainly have balance sheet as a criteria and how are you addressing that?

Rob Risser

We have not really -- that has not been a topic of conversation, Dave with our telecom customers. So I am sure we have quite a relation, deep and long-term relationships with those customers. So I am not anticipating a significant impact on that. Assuming we get this addressed which we are in the near team.

Dave Kang - B. Riley & Co.

Near term meaning this quarter, March quarter?

Rob Risser

Yes.

Dave Kang - B. Riley & Co.

Okay. All right. Thank you.

Operator

And our next question comes from Randy Knutson, who is a private investor. Please go ahead with your question.

Unidentified Analyst

Good afternoon. Let me first ask on the -- is there any way you are going to be able to facilitate the growth that you need without significantly diluting the existing shareholders' interest?

Richard D. Kurtz

Well Randy as I mentioned during the mid-quarter call, we're going to explore all financial and strategic alternatives out there.

Unidentified Analyst

Okay. And so you really had no sense one way or the other whether that…?

Richard D. Kurtz

I just don't want to comment at this point in time.

Unidentified Analyst

Well should we be able to then slip a $116,000 in your cash or somewhere in that neighborhood is it -- do we remain viable and able to keep a [watch] in the…?

Richard D. Kurtz

Again SVB has vast experience with high-tech companies and they can see what we have got planned for our future growth and how our cash position will change in the short term or the near term I will say and they are willing to work with us so that's why we plan doing and keeping moving the company forward.

Unidentified Analyst

How has that affected, if at all how is the lending affected if at all by the share price? Is that a factor that they take into consideration?

Richard D. Kurtz

No, I don't think it's a factor that they take into consideration Randy.

Unidentified Analyst

Because I am -- it seems like we're always -- we instead -- to shareholders in terms of are we getting any traction and really hopeful this quarter was going to be one where we would turn the corner so it's an disappointing sort of news but always encouraged to hear there's new products so just I guess I am concerned about how we do the planning to accomplish anything without -- anyway that's all I have to say. Thank you.

Richard D. Kurtz

Okay.

Operator

Our next question comes from Edward Perry. Please go ahead with your question.

Unidentified Analyst

Yes I want to thank Rob for his very detailed granular description of the operational accomplishments and challenges of this past quarter it was very comforting to hear.

Rob Risser

Thank Ed.

Unidentified Analyst

Okay. So it sounds like the strategic options to shore up liquidity are really primarily SVB and PFG looks like is that fair statement?

Richard D. Kurtz

Yeah. Financing options we'd have to go through them, now we have to go to them, yes.

Unidentified Analyst

Yeah. So that's the first line of defense. All right, that's clear. You are fortunate to have SVB in your portfolio of lenders actually. U2T has basically exited the competitive market, has this affected demand for your product lines from other customers?

Richard D. Kurtz

Yes I guess Rob can address that a little better than us. We have seen some changes in the landscape right. Rob?

Rob Risser

Yeah, so Ed, that's a good question. They did exit Finisar announced the acquisition of U2T and U2T that acquisition was based upon a few things, a little more complicated than what appears on the surface. But we have seen customers indicate -- if you recall the high end of the Comtest business for 100-gig Comtest U2T has tended to have the largest package there of that and we have seen existing customers from on the Comtest side as far initiating conversations with us and it is little too early to tell on the transmission side yet if will be favorable as competitor if in fact the competitor is effectively been eliminated from that supply chain.

I do know that Finisar has not had a history of selling components into the into the optical communication market, they are really a sub-system supplier. So it would be illogical to assume in the long term that there are not going to be a component supplier but too early to tell yet on that.

Unidentified Analyst

Great and quickly is your 100D device still basically the industry’s leader or have more competitors come in on that?

Richard D. Kurtz

No, it’s the same set of competitors that we have had. There are two that offer the functionality of 100G with VOA, variable optical attenuator, we are one of two that are offering that and the design wins. I am sure there are more that are going to try to do that but we are in a pretty good position with that.

Unidentified Analyst

Well your second shift certainly attributes that factor I am sure of that. Another question I have in the interim conference call you mentioned moving to a medium to high value photonics manufacturing product profile and you also today spoke about formal Terahertz opportunities. What does that mean? What Terahertz opportunities you are talking about?

Richard D. Kurtz

Well again, when we talk about Terahertz we had pretty good response at K show and the photonics west show so we have lot of interest both from the research area and some various industrial niches and we’re talking to a number of potential value added resellers that would give us market entrance shall we say in some very specific vertical niches. So I don't want to go into a lot of details what those niches are just that we will be expanding where we can apply Terahertz from where we are today.

Unidentified Analyst

Okay but now when you speak of niches that doesn’t really encompass medium to high volume photonics.

Richard D. Kurtz

That’s for Terahertz portion. We are talking about HSOR, it was really what Rob was referring to when we were talking about our APD product for the 10-gig and the 2.5-gig. So those are that we would be potentially selling into the market and those are the higher volume guys because they address different market segments that we play in today, typically on the telecommunication long haul area. So those are you know fiber to the home that the access enterprise market which has a lot higher volume today than the long haul market does.

Unidentified Analyst

Now is this is a China market primarily or is it domestic, new domestic opportunity?

Richard D. Kurtz

Well the fiber to the home is driven by the China market. Although there are domestic and European application but still the volume market is in china. The access and enterprise markets tend to be pretty universal and that being within the building or within a you know campus to the access market spend really refer to connecting you know the buildings to the metro. So those being little closer you get to the end user in volume, the volume goes up quite dramatically actually.

Unidentified Analyst

Thanks. Now you also mentioned in the interim that you were retooling Ann Arbor for additional Terahertz manufacturing.

Richard D. Kurtz

Yeah that was just Daniel once we had outsourced the silicon fab portion of it. We have got floor space now where we can repurpose cleaning room for Terahertz. I don't think you have been here but some of the shareholders have been here and they can remember how Terahertz was in individual laboratory rooms column and it was broken up into three or four different areas. This gives us the ability to centrally locate manufacturing in one area making it little bit more efficient for production.

Unidentified Analyst

In Camarillo are you staying in the same building for rest of the smaller footprint?

Richard D. Kurtz

That’s correct. You know we looked around at various buildings. We found one and then we are thinking about – but the landlord came back and said well if you only need half the space then I would be willing to work with you on that. So it was really great because it saves us they any moving cost shall we say.

Unidentified Analyst

Absolutely But how many people are if you can are in Camarillo?

Richard D. Kurtz

We have about 65.

Unidentified Analyst

Okay. That's a substantial number. Okay. And I think I am running out of questions. Yeah the VARs, all right you have been with the bars now the prior group of VARs if you for, some maybe two years now I think are they selling units?

Richard D. Kurtz

Yeah. One of the things that big companies like Thermo Fischer, they have a process called their phase gate process, and which -- when they introduce a new product it has to go through this phase gate process that will pass all their hurdles and things like that. Now we are fortunate in fact that yes they did sell units but they did go through the phase gate process, so they are trying to play catch up and we expect them to actively launch the marketing of the Terahertz systems. I would say by April 1, they will have completed all their phase gate internal documentation and work and things like that.

Unidentified Analyst

So they are learning?

Richard D. Kurtz

Yeah, they are still coming up the learning curve a little bit. So and Rod mentioned a fact that we still have to hold their hands quite a bit to support their trials and their developments out there.

Unidentified Analyst

Okay. It makes sense. And I think I've run out of questions. Again thank you very much.

Richard D. Kurtz

Okay.

Operator

Our next question comes from Rich Farrell. Please go ahead with your question.

Unidentified Analyst

Yeah. One of the questions I was looking at was asked earlier and that was probably some of your question marks we are looking at, your financial situation going forward, some of the business deals that you guys are working with. But I guess one of the other indicators I looked for is are you guys seeing a higher turnover rate in your personnel because people are worried they are not going to get raises, people aren't going to get or looking at a obviously a long-term future?

Richard D. Kurtz

No, I think we have a pretty dedicated work force here. We did give everybody, I'll say above the sea level raises this year. So we've made a commitment that if we hit the operational performance that we will do other things for them. So they are pretty committed, they understand that we have to work through this issue but we have a lot of great opportunities.

Unidentified Analyst

Okay. That was the one question I had because a company is built on the people that are doing the work at the lowest levels and then it's -- you don't get the ship going any direction once you get people leaving?

Richard D. Kurtz

Absolutely.

Unidentified Analyst

Okay. That's good to hear. Thank you.

Richard D. Kurtz

Thanks, Rich.

Operator

Our next question comes from Jeremy Fair. Please go ahead with your question.

Unidentified Analyst

Yeah. Just want to kind of appreciate the cost reduction efforts you guys have made and I guess I am trying to figure out when those permanently trickle down to your salary, for the terrible, terrible performance you have turned in with the company, any discussion to cut your salary permanently?

Richard D. Kurtz

Well I don't think that, that's a topic for this earnings call, quite honestly. And it's one of the things that we will talk about at the Board level when we get together in next week.

Unidentified Analyst

Okay. Another question. What is the take -- so maybe we are still in discussion either on the tech deal with someone– new position somewhere outside of this company doesn't seem to know how to lead a company?

Richard D. Kurtz

I don't think that's an appropriate question either.

Unidentified Analyst

Okay. Well. I don't think the performance is appropriate either for ten years? But appreciate it.

Richard D. Kurtz

Ralph, I appreciate your comments.

Operator

And our next question comes from Charles Laws. Please go ahead with your question.

Unidentified Analyst

Okay. Thank you. Definitely appropriate for those questions now, but not to talk -- dwell on that, on the Chinese order what type of profit margins is going to be on that?

Richard D. Kurtz

I don't think we want to discuss profit margins relative to an open conversation where our competitors know where our profit margins are and give away that portion of our profit to somebody else so they can undercut our pricing. Does that make sense.

Unidentified Analyst

Yeah I guess that makes sense.

Rob Risser

And I would say just to add some color to that, they have been held up pretty well relative to the rest of -- the prices with the rest of the customers. So there wasn't any unusual pricing relative to the Chinese orders in the transmission -- telecom transmission space.

Unidentified Analyst

Okay. I think that was the last meeting a question one really quite as pointed as I like to hear. You said there was no compensation -- new compensation for the Board since the meeting there has been no increased compensation, where they are not getting money because they didn't get the -- that employee compensation act failed? Just want to know

Richard D. Kurtz

Yeah that would be disclosed in the 10-Q.

Unidentified Analyst

And why wasn't the lawsuit disclosed in the 10-Q?

Richard D. Kurtz

I am not going to make a comment on the lawsuit because it was summary dismissed.

Unidentified Analyst

And how much did the cost again…?

Richard D. Kurtz

No comment at this point in time.

Unidentified Analyst

When can we expect a comment on that?

Richard D. Kurtz

You won't get a comment on the lawsuit because it's immaterial.

Unidentified Analyst

And why would you say at this point in time?

Richard D. Kurtz

Because there is -- I don't want to make a comment on it. It's not material to the earnings call.

Unidentified Analyst

Have we gotten any new nominees for the Board?

Richard D. Kurtz

That's for the Board to nominate, they need to talk about. We are going out and looking at people, yes, as we always do.

Unidentified Analyst

Okay. Well it looks like another buying opportunity?

Richard D. Kurtz

All right

Unidentified Analyst

Sounds good, bye.

Operator

And at this time I am showing no additional questions, I'd like to turn the conference call back over for any closing remarks.

Richard D. Kurtz

Well I don't have anything other to add than to thank everybody taking the time to listen to our report today, I appreciate it. And for our entire team, we appreciate your continued support of our company. So have a great week and thank you again.

Operator

Ladies and gentlemen that does conclude today's conference call. We do thank you for attending. You may now disconnect your telephone lines.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Advanced Photonix's CEO Discusses F3Q 2014 Results - Earnings Call Transcript
This Transcript
All Transcripts