Good day, everyone, and welcome to Advanced Photonix's 2013 Second Quarter Earnings Conference Call. Today's conference 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.

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 thereof. 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 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 second quarter earnings press release dated November 12, 2013, and are available on its website at www.advancedphotonix.com. On today's call, we'll hear first from Don Pastor, Chairman of the Board for Advanced Photonix; and then Jeff Anderson, CFO; who will pass the call on to Robin Risser, COO; and then Richard Kurtz, CEO, will make closing statements regarding the business of the company. So at this point, let's turn it over to Don.

Thank you, Jim, and thanks to all of you for joining us this afternoon. I'd like to review just briefly a few of the board's actions since the last shareholder meeting, and then I'll turn the call over to Jeff for a financial update. As you all know, the last fiscal year was a very difficult year for API. Our shareholders were upset, and I believe they had every right to be. That message was clearly conveyed to us at the last shareholders meeting by the comments we received regarding the financial results. I want to assure you that the board was equally disappointed and has initiated a number of actions in conjunction with management to improve results. The board is taking an active role of oversight that, I believe, is paying dividends. When Rick and his team review our second quarter results, I hope you will agree that we are heading in the right direction. I believe we will continue to see improved results over the next 2 quarters. I think it is important that I convey to you the actions the board has taken over the last year to address the issues we faced and to clear up some misconceptions about the role of the board in representing the shareholders of this company. First, I want to clarify the role and responsibilities of the board. I have had shareholders ask me how many customers I have brought to the company and what I have done to help develop new technology. That is not the role of the board. The board's first responsibility is to protect the financial interest of the shareholders by making sure all the proper financial controls are in place, that financial results are disclosed in accordance with generally excepted accounting practices, and SEC regulations are…

Thank you, Don, and thanks to all of you for joining us this afternoon. I'd like to review just briefly a few financial highlights from our second quarter ending September 27, 2013, and then I'll turn the call over to Rob for an update on business activities. Our revenue for the second quarter, which ended on September 27, 2013, was $7.5 million, an increase of 35% or $1.9 million from the revenue of $5.6 million from last year's comparable quarter. Sequentially, revenues increased 6% or $458,000 from the first quarter of fiscal 2014. We experienced revenue increase in 3 of our 5 markets for the quarter when compared to the prior-year period. The test and measurement market revenue was approximately $4.7 million, an increase of $1.4 million over the related prior-year period. Approximately $945,000 of 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., or APC, with additional revenue improvements coming from our Comtest products. Sequentially, revenue increased approximately 5% or $242,000 for the first quarter of -- from the first quarter of fiscal 2014 on the strength of Comtest product sales. Several telecommunication 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 a high -- testing high-speed photonic components. Telecommunication transmission revenues in the second quarter were $1.7 million, an increase of 73% from the same quarter of the last fiscal year. These encouraging results have been due to the resolution of our vendor supply constraints in our 100G line side products and timing of orders and revenues on 40G…

Thank you, Jeff, and good afternoon, everyone. Thank you for joining us on this call today. We continue our growth in the second quarter in line with guidance we gave last quarter. Revenue was up 35% compared to last year's second quarter, and up 6% compared to last quarter. Revenue from products less than 2 years old was approximately 19% of our revenue in the second quarter, and this percentage is expected to almost double for the second half of the year, with the introduction of the new 100-gig transmission and Comtest products accounting for most of this increase. In addition, our adjusted EBITDA improved to a positive $20,000 on revenue of $7.5 million in the second quarter, compared to a negative $718,000 in last year's second quarter, an increase of $738,000. Revenue in the quarter met plan, and adjusted EBITDA was substantially ahead of plan for the quarter. Revenue on our high-speed optical receiver product platform was up 61% compared to the second quarter of last year, with transmission products up 73% and Comtest products up 47%. Late in the quarter, we began shipping 2 new products: a 100-gig receiver with variable optical attenuator, or VOA; and a Comtest product targeted at testing 32-gigabit-per-second fiber channel enterprise and access products. Demand for our high-speed optical receiver products has been robust for the first half of the fiscal year, and we forecast continued robust demand for the remainder of the fiscal year. As we indicated in our last quarter conference call, our team has implemented a successful continuous cost improvement program in our HSOR product platform. We have significantly cost reduced the labor and material content in these products through supply chain second sourcing, manufacturing engineering and engineering for manufacturing ability, operating efficiencies, new technology deployment, learning curve, economies of…

Thank you, Rob, and good afternoon, everyone. And thank you for joining us on the call today. Our second quarter came in as expected, but we did see some headwind with the military and contract revenues from both the sequester and the government shutdown. As both Jeff and Rob outlined, revenues have started getting back to where they were 2 years ago with the telecom transmission revenue and the growth of the test and measurement revenues with the acquisition of Advanced Photonix Canada. We have a press release today announcing the approval to use the Underwriters Laboratory Mark on our Terahertz products. This is the first Terahertz system in the world to receive the UL Mark. API's Terahertz product line will be featured on the 21st Century business network. Our 10-minute segment will air in the coming weeks and be released over the Fox Business Network, CNBC, Bloomberg U.S. and Bloomberg international networks. We'll be getting a press release out once the dates have been finalized. The segments will have a field shot of our deployment or installation at our partner Appvion, formally called Appleton Paper. We believe that this exposure will help us communicate the features and benefits to industry of using our T-Gauge system, replacing current ionizing or potentially harmful technology for process control that can lead to greater cost savings. As mentioned by Rob, we had a very successful exhibition at the K show. We gave 4 plenary sessions on Terahertz and our T-Gauge system during the show. We met with numerous potential customers, value-added resellers or VARs, and uncovered new vertical market opportunities. We are encouraged with the growth of the opportunity funnel. Given this success, we decided that we would not attend the Transportation Security show, as mentioned in the prior earnings call, mainly due…

[Operator Instructions] Our first question comes from David Kang at B. Riley.

First of all, what was HSOR revenue during the quarter?

It comprises the telecom space and it's part of the test and measurement relative to the Comtest products. So it was roughly $2.9 million in total there.

Okay. Now for apples-to-apples, was it $2 million first quarter going to $2.9 million? Or it was $2 million last quarter so...

[indiscernible] to $2.9 million, David.

You broke up. Can you repeat that?

$1.9 million to $2.9 million.

Okay. And I assume most of that delta was, what, 100G-related products?

Large part. I think we had talked before that 73% growth occurred in the 100G, and 45% [ph] in the Comtest quarter-to-quarter.

Right, right, right. And then besides Alcatel, were there any other major telecom OEM customers?

There are other telecom OEM customers, but their contribution this past quarter was negligible compared to our largest customer.

So largest customer, can you disclose what the percentage was like? Was it 10%, 20%?

Well, the 100-gig, the largest customer is the dominant share of the 100-gig. The 40-gig, they're not the dominant share.

Got it, got it. And then that announcement that you've made about the 100G commitment from that customer, are you the primary customer? And can you disclose what kind of pricing you had to -- was it like a 10% to 15%? I guess, typically, 10% to 15%; Was it closer to 10% or 15%?

I'd say closer to the 15%. It depends on which products you've got. And with that particular customer, we have 3, 4 actual design wins, separate design wins with that customer. So each one has something slightly different. But let's just say, on average, it was closer to 15% than 10%.

Okay. And as you know, Rob, I mean, there aren't that many major OEMs doing 100G. So you got that European customer and your competitors have the other one. I mean, how sticky is it, I mean, for you to get into other major houses?

Dave, some of it is -- everybody's got different timing. The design windows have different timings, and some have different features that they want. So you have to time it up correctly and you have to have the particular nuance that they may need. So we have other customers. Of course, this particular customer is -- represents a leader in the 100-gig side.

Got it, got it. And then Jeff, what was your CapEx for the quarter? And what to expect going forward?

Our patent and CapEx spend was about $100,000 in the quarter, and we expect that to kind of continue. So we did $220,000 in the first half, with both of those expending kind of a similar pattern in the second half.

Got it, got it. And then Rick, you kind of telegraphed the decline in Terahertz second quarter and maybe even third quarter, but do you expect that to rebound in fourth quarter?

Yes. Again, it's a transition from the contract sales to the product sales. And again, we've made the transition from having, oh, god, I'll say high-value engineers doing a lot of the assembly to manufacturing people doing the assembly. And so one of the things that we're able to do, obviously, is we are able to be more competitive on our pricing but yet hold our margins. So some of that is also in the ASP being reduced to meet competitive requirements by holding our margin.

Got it. And then you talked about strategic alternatives. Obviously, you're not going to talk about that. But you also talked about refocusing on R&D. Can you just give us an example or your thinking -- what you're thinking there?

Well, there's a lot of vertical niches that require adoption of different sensor heads, we'll call them, and different ways to handle the signal from multiple sensor heads. So there's things that we're evaluating with potential VARs out there that would open up other niches, which would require some investment. Not so much in R, but in development.

Got it, got it. And then lastly, so you're still sticking with 35% growth in sales fiscal '14 over '13. Can you just go over some of the assumptions? Obviously, it's not going to come from Mil/Aero but, I guess, Comtest and HSOR. Just give us a little bit more granularity or assumptions behind that?

Yes. I think Rob addressed that, saying that the growth in HSOR is going to be strong in the second half with the 100G VOAs and the other Comtest products that we've got there. I think that we'll see -- we've got potential to see even more growth in the test and measurement area, specifically from the, we'll call it, the APC group, and the customers located out in China. And then, of course, there's always the opportunity for more industrial product sales with the Terahertz to the process control market.

Sure. And Rob, just lastly, just wanted to get some information on that, going back to that announcement from yesterday on the 100G commitment. So it says $4.6 million to $6 million. What was it in FY -- or no, that's not -- is that calendar '14, first of all? And if it's so -- calendar '14.

Dave, they always do things on calendar, yes.

Okay, so calendar '14 of like $5-million-plus. What was it this year, calendar '13? So just wanted to get...

Well, if you recall, they gave us a commitment similar to that. But with our supply chain disruptions, we were like at even, just slightly more than half of the commitment.

So it was about $3 million-ish?

Yes.

Okay. So we put $3 million to $6 million, so almost double there? Got it.

The next question comes from Edward Perry [ph], private investor.

First, I'm very glad to hear Don Pastor speak. We're all very lucky to have someone of his background and caliber functioning there at API, that's quite an accomplishment. He's performing almost a thankless task, but he's needed. So...

Thank you very much.

Okay, some questions. Last conference call, you mentioned that only -- there was one other competitor with VOA capability. Is that still holding? Or is more on, jumping on?

Well, there are those that have announced. But as far as in the customers that count, there still is only one other competitor.

That's very good advantage for you people. Now the other thing. I see that you actually are ahead of EBITDA schedule for what you expected?

We are, yes.

Now you're institutional participation has really cratered. It went from about 27% in steel [ph] to, oh, god, it's less. It's only about 9% or 8% now. Do you foresee where your EBITDA will get to that point, where you could actually start promoting API again for the institutional purchases?

Ed, I think that's more of -- related to the volume of the stock. We were trading -- when it got quiet in the telecom space, we drifted down to only 30,000 shares a day on average. And it's just not enough liquidity for an institutional investor to come in on the stock. And so what we're focused on right now, with Torrey Hills Capital, was going out to the high net worth individuals, meeting with them, showing them what the company can do and getting -- trying to get the volume back up to the point where the institutionals would feel comfortable enough with liquidity in the stock to be able to take position. Because when they take a position, they want to be able to liquidate out without moving the stock too much. So it's really a process of getting more volume and then, later on, getting those. We do expect to see improvements in the adjusted EBITDA as we go forward here as the revenue grows. I think we've kind of crossed the threshold here. We're finally generating some cash flow on an adjusted EBITDA basis. And so I think that will also help some of the bigger guys who are looking for, maybe, more positive cash flow. But all in all, I think it's more so the volume of our stock that the keeps the entities out of our stock at this point in time.

Right, that does make sense. A question also on -- it sounds like the VAR process will be really a long-term evolution going forward. But what about the TSA? Where does that stand for the QPL?

Yes, it's a typical government response, a black hole right now. We've not heard anything. We've not gotten any updates even though we reach out and tried to contact them. Some of the players, obviously, have changed position, so the people that were originally on the programs are not on this particular aspect of the program today. So that's the reason that we really have to focus on the industrial market segment and continue there. Now there might be opportunities for more strategic relationships with other people out there that could help carry the ball a little bit farther. But right now, our focus needs to be what we can do, and we can apply the technology to our next industrial process control.

Okay, great. And one last question. It was -- it had been said that Huawei and China Telecom were both in the position of firming up at the end of this year for their prospects for next year. Have you seen anything coming from that?

Huawei and -- yes, ZTE and Huawei are the primary OEMs that supply the Chinese market. And China Mobile and China Telecom and China Unicom are the ones that deploy it. And we have seen some activity coming out of that area, but not substantial. Yes, there's been more murmurs than there has been action. But there is some action.

Our next question comes from Randy Knutson [ph], private investor.

Let me first start off with your press release today. It mentions this is the UL approval release. There's a mention in there that you're also close to receiving CE approval. What does CE stand for?

That's the European approval counterpart to Underwriter Laboratories.

Okay. So that...

So that gives you the same approval status in the European community.

And what does the C and E stand for, if you know?

Not off top of my head, Randy. Again, it's an approval that you've passed the certifications and testing, that it's a safe product. When you talk to U.S. companies, they typically are wanting you to have that type of mark from the Underwriter Laboratories, so that the insurance companies know that, that product won't pull up in their factories. So that's one of the reasons that it's very important for us to get that type of certification or approval.

No, I think that's a huge thing, and I commend you for doing that. That's great news. We've been talking about that for a while. And I guess, you've addressed the issue of this, the QPL list with Ed. But let me -- or Mr. Perry. But let me just ask, I'm unclear why we can't market the SAF-T-CHEK device to any number of other -- is there some reason why it's got to first go to get approved on the QPL list before we could start selling it to other governments or other people?

We went to the Transportation Security show a couple of years ago in the U.K. And it was education for us, because every single potential government entity or department, the first question they ask is, "Is this approved by the TSA?" And they're using that as kind of like the Good Housekeeping Standard Approval. And so as a result, until you really pass that, that threshold, nobody's really going to really step out on a limb and buy equipment. That being said, Randy, I think that we continue to look for people that have -- would be a good strategic partner out there for us that we could possibly work with in getting and pushing that approval process through.

Okay. And I think there was a lot of speculation, at least on my part, that the recent patent application that we saw relating to the -- your anomaly detection, or SAF-T-CHEK device, was an indication that maybe there is some movement underway but you're saying, really, we're still kind of in the same black hole with the TSA that we were before?

Yes. I mean, that was a trademark approval, basically, for the name SAF-T-CHEK, and not so much a patent. So from that aspect, we wanted to protect the branding identity for future use.

And then tell me a little bit about the interface between Camarillo and API Canada? It sounds like they're essentially now trying to perform the same function, to some degree. Is there any move underway that there's going to be some consolidation between those 2? I know you mentioned China as the place where the products are going to being built, if I understood correctly.

Yes. Again, the contract assembly partners that we have in China are one aspect. But the Canadian operation is just an engineering design office, okay? So there's really no production being done there. So again, they've got a particular skill set and familiarity with regards to product development and design that we are leveraging through our California operations for that new product and market development that Rob mentioned earlier relative to the new sales, Director of Sales and the new East Coast sales person, everything we're doing out there to help them grow their operation.

A question regarding Terahertz. You mentioned that your military expenditures are down, and I'm kind of curious why. I understand that the F-35, what's going on with the sequester. But I read about NATO deploying the F-35 to any number of other countries, and you mentioned this before. I just saw, for example, Norway has bought a bunch of F-35s. Are we going to be doing the same kind of inspection or paint deployment inspection that we were doing in the U.S.?

Well, that was the original process that we were doing. Now this is a pretty complicated process relative to the development program that we've worked with for the coding measurements. And so we've gone through what is referred to as a Phase 2E process. And right now, the next step would be for us to take the product that we've developed to date, and move it into what's referred to as NPI, or new product introduction, which is basically the commercialization phase. And that's one of the things that we're in dialogue with the government on, is how to get that product from a prototype platform to a commercialized platform. And that would include getting the UL Mark for the new sensor attachment, not just the PCU or the control unit.

And Randy, one other thing to piggyback on what Rick said. The manufacturing will occur domestically. So any of the allies that are going to order planes, those planes will go through the domestic manufacturing operations. So we'd use whatever product we had during the manufacturing process. And then ultimately, as they're deployed, which is pretty long cycle for deployment, there will be various different maintenance depots around the world, and we're anticipating that they would also need some instrumentation for those maintenance depot stations around the world.

That was one of the reasons that we signed up Shimadzu as the distributor for Japan, because Japan is one of those partners that is acquiring F-35s, and they have a very good relationship with the Japanese Department of Defense. And so they were doing that in anticipation that, ultimately, they would be handling that distribution for us in Japan.

It was a refreshing -- and I agree with Ed -- to hear Don Pastor's comments, and I appreciate those. But it seems to me that the proof is going to be in the pudding. I noticed in the general and administrative expenses that we had significantly greater legal expenses because of the proxy. And I'm assuming that's because the shareholders were up in arms, and I would tell you we still are up in arms until the board demonstrates to us that they're going to take a more shareholder-friendly view of the company. And I think that's the one thing. The technology there, no doubt, you guys are working countless hours, got great engineering staff, but the board's really been the problem from a number of our perspectives. And so I appreciated those comments. And so now the question, let's talk just for a moment about the Chuck Knoles lawsuit that's been filed. What's going to be the response of the company? Are we going to spend more money opposing that, or are we going to try to work out some solution?

It's in litigation. We can't comment on that.

Well, I just hope that in the scheme of this, you had a, 12 million votes cast in favor of Proxy Vote 6. And it seemed to me, the only people that voted against it were the directors, and that should tell you something right there. I mean, who is -- who would be battling this issue? Whose interests are being looked out for, I guess, is the way to phrase this. And so that's one just comment I'd like to make in light of Don Pastor's statements, which I do take as being refreshing, and I do appreciate him saying it. And then my last question is, is the board receiving additional compensation in some fashion that we don't know about? Are they getting something because the equity revenue package was soundly rejected by the shareholders? Is there something coming in through the back door that we need to know about?

No.

Nothing at all?

No.

Okay. So no incentives, no additional stock awards, no allowances that are -- we're -- that's good. I applaud you there, because the other thing I would say about the board to you, Don, is that we never see anybody making retail purchases or purchases on the open market. And clearly, if you have confidence in the company and where it's going, you demonstrate that by making purchases. So I hope we see that in the future from whoever's on the board.

This concludes our question-and-answer session. I'd like to turn the conference back over to Richard Kurtz for any closing remarks.

I don't have anything other to add, other than thank everybody for taking the time for listening to our report today, I appreciate it. And for our entire team, we appreciate your continued support of our company. We are very focused on growing our revenues, increasing both non-GAAP and EBITDA and translating that into GAAP profits. So have a great week, and thank you again.

Thank you again. That does conclude today's conference call. We appreciate your participation, and you may now disconnect.