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.

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.

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…

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…

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…

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

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?

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.

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?

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.

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.

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

Totally HSOR was approximately $3.3 million in the quarter.

And how do they breakout?

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

Yeah.

It's pretty close to 50-50 Dave.

So 40G, 100G even?

No, 100G is substantially more than 40G.

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

You mean on a consecutive basis?

Yeah.

Right, that's right.

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?

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…

So you are in the AT&T camps?

Yeah.

Okay.

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

So AT&T is bigger than the China exposure?

Correct, that's correct.

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?

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.

Right.

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

Okay.

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

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?

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.

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?

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.

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?

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

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

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.

Near term meaning this quarter, March quarter?

Yes.

Okay. All right. Thank you.

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

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?

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

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

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

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…?

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.

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?

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

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.

Okay.

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

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.

Thank Ed.

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

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

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?

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

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.

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

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.

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?

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.

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

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.

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

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.

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

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.

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

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.

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

We have about 65.

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?

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.

So they are learning?

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.

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

Okay.

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

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?

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.

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?

Absolutely.

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

Thanks, Rich.

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

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?

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.

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?

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

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

Ralph, I appreciate your comments.

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

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?

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.

Yeah I guess that makes sense.

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.

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

Yeah that would be disclosed in the 10-Q.

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

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

And how much did the cost again…?

No comment at this point in time.

When can we expect a comment on that?

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

And why would you say at this point in time?

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

Have we gotten any new nominees for the Board?

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.

Okay. Well it looks like another buying opportunity?

All right

Sounds good, bye.

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

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.

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