a50892514.htm
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
 
FORM 10-K
(Mark One)
 
þ
 
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended March 31, 2014
OR
 
o
 
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from                      to                      .

1-11056
(Commission file number)

ADVANCED PHOTONIX, INC. ®
(Exact name of registrant as specified in its charter)
 
 
 Delaware      33-0325826
 (State or other jurisdiction of incorporation or organization)       (I.R.S. Employer Identification No.)
 
2925 Boardwalk, Ann Arbor, Michigan  48104
(Address of principal executive offices)

(734) 864-5600
(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:
Title of each class
 
Name of each exchange on which registered
Common Stock, $0.001 par value
 
NYSE MKT:  API

Securities registered pursuant to Section 12(g) of the Exchange Act:
None
     
 
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    YES   NO þ
 
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.      YES   o  NO þ
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.     YES þ             NO o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 229.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).      YES þ  NO o
 
 
1

 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
 
  Large accelerated filer o   Accelerated filer o
       
  Non-accelerated filer o (Do not check if a smaller reporting company) Smaller reporting company þ
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).     YES o          NO þ

The aggregate market value of the voting stock held by non-affiliates of the registrant as of September 30, 2013 was approximately $14,991,000.

Number of shares outstanding of the registrant's Common Stock as of June 23, 2014 37,381,413 shares of Class A Common Stock.
 
 
DOCUMENTS INCORPORATED BY REFERENCE
 
Portions of the registrant’s definitive Proxy Statement to be filed pursuant to Regulation 14A promulgated under the Securities Exchange Act of 1934 in connection with the 2014 Annual Meeting of Stockholders of registrant have been incorporated by reference into Part III of this Form 10-K.
 

 
 
2

 
 
 
ADVANCED PHOTONIX, INC.
FORM 10-K
FISCAL YEAR ENDED MARCH 31, 2014
TABLE OF CONTENTS

 
 
Page
Part I
 
4
 
12
 
31
 
31
 
31
 
 
Part II
 
32
 
32
 
32
 
44
 
44
 
71
 
71
 
71
 
 
Part III
 
72
 
72
 
72
 
72
 
72
 
 
Part IV
 
73
       
  Signatures  80
 
 
 
3

 
 
 
PART I

Except for the historical information contained herein, this report contains forward looking statements that involve a number of risks and uncertainties, including the difficulty of predicting demand for new optoelectronic products, the impact of competitive products and pricing, challenges to our intellectual property, our expectations about the impact of our acquisition of the non-automotive assets of Silonex, Inc. (Silonex) on our results and business and our ability to realize the expected benefits from the acquisition and successfully implement our plans and expectations for the Silonex business, the sufficiency of our sources of funding, the uncertainty and timing of the development and launch of new optoelectronic products, as well as other statements regarding our future operations, financial condition and prospects, and business strategies. Forward-looking statements may appear throughout this report, including without limitation, the following sections: Item 1 “Business,” Item 1A “Risk Factors,” and Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”  Forward-looking statements generally can be identified by words such as “anticipates,” “believes,” “estimates,” “expects,” “intends,” “plans,” “predicts,” “projects,” “will be,” “will continue,” “will likely result,” and similar expressions. These forward-looking statements are based on current expectations and assumptions that are subject to risks and uncertainties, which could cause our actual results to differ materially from those reflected in the forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those discussed in this Annual Report on Form 10-K, and in particular, the risks discussed under the caption “Risk Factors” in Item 1A and those discussed in other documents we file with the Securities and Exchange Commission (SEC). We undertake no obligation to revise or publicly release the results of any revision to these forward-looking statements, except as required by law. Given these risks and uncertainties, readers are cautioned not to place undue reliance on such forward-looking statements

Item 1.  Business

General

Advanced Photonix, Inc. ® (the Company, we, us, our or API) was incorporated under the laws of the State of Delaware in June 1988.  We are engaged in the development and manufacture of optoelectronic devices and value-added sub-systems and systems. We serve a variety of global Original Equipment Manufacturers (OEMs) in four primary markets.  We support our customers from the initial concept and design phase of the product, through testing to full-scale production.  We have two manufacturing facilities located in Camarillo, California and Ann Arbor, Michigan.

Products and Technology

Our Business

We are a leading test and measurement company that packages optoelectronic semiconductors into high-speed optical receivers (“HSOR” products), custom optoelectronic subsystems (“Optosolutions” products) and Terahertz instrumentation (“THz” products), serving a variety of global markets.  Our HSOR transmission products are deployed in the internet infrastructure to enable the high-speed bandwidth necessary to support video and data for your TV, computer, tablet or smart phone anytime and anywhere. Our communication test and measurement products (“Comtest”) are used to develop, manufacture and test optical communication equipment used in the telecom infrastructure. Our Optosolutions products are sold to a number of scientific instrumentation manufacturers for various applications such as metrology, currency validation, flame monitoring, solar panel quality, temperature sensing, particle detection, color sensing, infrared detection and many other applications that can only be done through optical sensing.  Our T-Gauge® systems are used to measure and verify physical properties on-line and in real-time to reduce raw materials  and rework costs in manufacturing processes as well as conduct quality control monitoring.  Our established and growing patented Terahertz technology has allowed us to expand from the laboratory market into the 24/7 industrial process and quality control manufacturing, military/aerospace, and security markets.

We support the customer from the initial concept and design of the semiconductor, hybridization of support electronics, packaging and signal conditioning or processing from prototype through full-scale production and validation testing.  The target markets served by us are Test and Measurement, Military/Aerospace, Telecom Transmission, and Medical.
 
 
 
4

 
 
Technology & Manufacturing Capabilities

Our basic technologies and manufacturing capabilities include the following:
 
  Optoelectronic semiconductor design and micro fabrication of III-V compound semiconductor (Indium Phosphide or InP and Gallium Arsenide or GaAs) and Silicon (Si) devices including photodetectors and terahertz transmitters/receiver antenna,
 ● Molecular Beam Epitaxy (MBE) growth of high-speed III-V compound semiconductor material including GaAs, InAlAs(Indium Aluminum Arsenide)and InP,
 ● High speed semiconductor analog amplifier specification, evaluation and design for outside fabrication,
  Photonic integrated circuit (PIC) coherent mixers and delay line interferometer (DLI) specification, evaluation, post processing, and design for outside fabrication for use in 40Gb/s and 100 Gb/s line side optical receivers,
 ● Opto-electronic hybrid packaging of semiconductor devices combining opto-electronic devices with high-speed electronicsand fiber optics,
  Vapor deposition and/or ion implantation for Silicon based Positive Intrinsic Negative (PIN) photo-detectors, Avalanche Photonic Detectors (APD’s) and Large Area Avalanche Photo Detectors (LAAPD),
   ●   Terahertz systems, subsystems, transmitters and receivers, transceivers and motion control hardware and software,
 ● Femtosecond laser specification, valuation, design and manufacture and
 ● Chromatic dispersion, polarization dispersion and optical delay management in complex optical systems.

Core Products
 
The core product technologies used in the majority of our products are opto-electronic semiconductor devices, including photodiodes and antennae made of Si or III-V compound semiconductor material and high speed semiconductor analog amplifiers.   Photodiodes and antennae sense light of varying wavelengths and intensity and convert that light and/or Terahertz wave into electrical signals. Analog amplifiers increase the converted electrical signals output power to a level required to communicate with follow on electrical components. We manufacture photodiodes of varying complexity, from basic PIN photodiode to the more sophisticated APD and antennae that transmit and receive Terahertz signals.  The APD is a specialized photodiode capable of detecting very low light levels due to an internal gain phenomenon known as avalanching.  All photodiode and THz devices are designed by our experienced engineering staff, and most are fabricated in our state-of-the-art clean rooms.  Some of our analog amplifiers are specified and tested by our engineering staff, designed by subcontractors and fabricated by outside suppliers.  Our products include the following:
 
  High Speed Optical Receivers (2.5 Gigabytes per second or Gb/s, 10Gb/s, 40Gb/s & 100Gb/s)packaged with InP, InAlAs, or GaAs PIN and/or APD photodiodes, electrical amplifiers and PIC’s.
 ● PIN and APD photodiodes and arrays in Si and III-V materials (InP, InAlAs, GaAs).
 ● Packaged PIN and APD photodiodes in Si and III-V materials (InP, InAlAs, GaAs).
 ● Packaged Si APD components, with and without thermo-electric coolers.
 ● Packaged Si LAAPD components.
  ●  Packaged Si photodiodes with patented FILTRODE® technology integrating optical filters directly on photodiode chips.
  ●  Terahertz Systems & subsystems utilizing III-V materials for Terahertz transmitters &/or receivers.
 
 
 
5

 
 
Terahertz Technology

One of the high growth technologies we are pursuing is Terahertz based on our T-Ray® product platforms.  THz is a region of the electromagnetic spectrum that lies between microwave and infrared waves and is in the early stages of adoption.  While microwaves and infrared waves have been explored and commercialized for decades, THz waves are in the early stages of being explored and commercialized due to the fact that they have historically been very difficult to generate and detect.  Recent advances in femtosecond lasers and ultra-fast semiconductor and electro-optic devices combined with fiber-optic packaging technologies have enabled the development of practical T-Ray® instrumentation for the research market with increasing adoption in the industrial, military and aerospace markets as a result of our growing group of value added resellers’ application and market development efforts.  THz can be used to “look” through and beneath materials with high 2-dimensional (2-D) and 3-dimensional (3-D) spatial resolution roughly equivalent to the resolution of the human eye or better.  It can also uniquely identify the chemical composition of many hidden or subsurface objects using non-ionizing radiation, which is not harmful to humans at the power levels commonly used today.  THz imaging and spectroscopy market applications include industrial quality control through non-destructive testing (including aerospace and pharmaceutical markets); homeland security and defense screening of people, packages and bags for weapons and weapons of mass destruction; medical imaging and other scientific applications.

We have had significant Terahertz technology and product development since 1997, resulting in 122 patents or patents pending to date.  In 2001, we sold the first commercial THz product, the T-Ray2000®, as a laboratory bench top instrument for application development with spectroscopy and imaging capabilities targeted at the research and development and off-line diagnostic markets.  In 2004, we sold the first T-Ray® Manufacturing Inspection System (QA1000) for on-line, real-time inspection to NASA for the space shuttle fuel tank inspection in the Return to Flight Program.  In March 2008, we shipped our next generation THz imaging and spectroscopy system (T-Ray 4000®).  The T-Ray 4000® is significantly smaller, lighter, and more powerful than previous THz generations and incorporates significant technological advancements.  The system weighs 55 pounds and is the size of a briefcase, which is a significant reduction from the 800 pound refrigerator size QA1000. In 2012, we introduced our fifth generation product called T-Gauge®, which weighs 35 pounds. This product  is targeted at the industrial, NDT and process quality control market.  We have established and continue to develop a value added reseller (VAR) network to accelerate adoption in vertical industrial markets, initially targeting the nuclear gauge replacement market.  To date, we have entered into VAR agreements with three established industrial process and quality control companies and a purchase agreement with an OEM in a vertical market.

Markets

Our products serve customers in a variety of global markets, typically North America, Asia, Europe and Australia.  The target markets and applications served by us are as follows:
 
 
Test and Measurement:
     
   Manufacturing, process and quality control
     
   Instrumentation
     
   Currency Validation
     
   Comtest
     
   Industrial
 
 
Telecommunications:
     
   Long Haul/Metro Transmission
     
   Enterprise/Access and Fiber to the premises Transmission
     
   Government

 
Military:
     
   Space
     
   Defense
 
 
Medical:
     
   Diagnostic & Monitoring
     
   Ophthalmic Equipment
     
   Medical Imaging
 
 
6

 
 
Raw Materials

Our principal raw materials used in the manufacture of our products are silicon and III-V material (InP, GaAs) wafers, chemicals, gases and metals used in processing wafers, gold wire, solders, electronic components, high speed specialized semiconductor amplifiers, PIC’s, and a variety of packages and substrates, including metal, printed circuit board, flex circuits, ceramic and plastic packages.  All of these raw materials can be obtained from several suppliers.  However, we depend on suppliers whose components have been qualified into our products and who could disrupt our business if they stop, decrease or delay shipments or if the components they ship have quality or consistency issues.  From time to time, particularly during periods of increased industry-wide demand, silicon wafers, III-V wafers (InP, GaAs), certain metal packages and other materials have been in short supply.  During the early part of our fiscal 2013, we or our customers were adversely affected by the lingering effect of supply chain disruptions caused by the tsunami in Japan and flooding in Thailand.  In the second half of fiscal 2013, we were affected by limitations in supply of a critical component used in our 100G HSOR product which limited our revenues.  In the press release dated June 7, 2013, we announced that these supplier bottlenecks had been alleviated.  In the future, any significant increase in lead times or shortage in supply on critical components could reduce future growth.

Research and Development

Since our inception in June 1988, we have incurred material research and development (R&D) expenses, with the intent of commercializing these investments into profitable new standard and custom product offerings.  During the fiscal years ended in 2014 and 2013, research and development expenses were $5.0 million and $5.7 million, respectively, which we believe was adequate to maintain the necessary investment in our future growth platforms.  We will continue to pursue government funded, as well as internally funded, research and development projects when they are in support of the our development objectives.  During fiscal years 2014 and 2013, approximately $0.8 million and $2.2 million, respectively, of our R&D spending was government funded, respectively.

As we begin the new 2015 fiscal year, the following research and development projects are currently underway:
 
HSOR next generation photodiodes and high-speed optical receivers for the 10G, 40G and 100G telecommunications market:
  o
Next generation 100G DP-QPSK coherent receivers for long haul and metro markets.
  o
1st generation 28Gb/s APD’s for the 100G enterprise/access market.
  o
4th generation integrated 40G NRZ for the enterprise/access market.
  o
2nd generation 2.5G APD for the fiber to the premises (FTTx)
  o
2nd  generation 10G APD chip and ROSA package for the fiber to the premises (FTTx)
  o
2nd generation high speed multi mode receivers for testing 32Gb/s fiber channel and 100Gb/s Ethernet products.
     
Terahertz – applications and enhancements to support market penetration.
 
Application and software development utilizing the T-Gauge®, product platform for industrial quality and process control markets.
  T-Gauge®, platform cost reduction initiatives.
 
Next generation multi-channel systems to support various vertical market requirements.
     
Custom Optoelectronics – PIN and subassembly developments.
 
Medical monitoring subsystem product.
 
Productization of a tunable light source for medical and test and measurement applications.
 
 
7

 
 
Environmental Regulations

The photonics industry, as well as the semiconductor industry in general, is subject to governmental regulations for the protection of the environment, including those relating to air and water quality, solid and hazardous waste handling, and the promotion of occupational safety. Various federal, state and local laws and regulations require that we maintain certain environmental permits.  We believe we have obtained all necessary environmental permits required to conduct our manufacturing processes.  Changes in the aforementioned laws and regulations or the enactment of new laws, regulations or policies could require increases in operating costs and additional capital expenditures and could possibly entail delays or interruptions of operations.

Backlog and Customers

Our sales are made primarily pursuant to standard purchase orders for delivery of products.  A substantial portion of our revenues are derived from sales to OEMs pursuant to individual purchase orders with short lead times. However, by industry practice, orders may be canceled or modified at any time.  Accordingly, we do not believe that the backlog of undelivered product under these purchase orders is a meaningful indicator of our future financial performance. When customers cancel an order, they are responsible for all finished goods; all incurred costs, direct and indirect, as well as a reasonable allowance for anticipated profits.  No assurance can be given that we will receive these amounts after cancellation.

Customers normally purchase our products and incorporate them into products that they in turn sell in their own markets on an ongoing basis.  As a result, our sales are dependent upon the success of our customers’ products and our future performance is dependent upon our success in finding new customers and receiving new orders from existing customers.

Marketing

In the United States and Canada, we market our products through a mix of technical sales engineers, salesmen, value added resellers, and independent sales representatives.  International sales, including Europe, the Middle East, Far East and Asia, are conducted directly by the technical sales engineers and at times in conjunction with foreign distributors, value added resellers and representatives.  Our products are primarily sold as components or sub-assemblies to OEMs and we market our products and capabilities through industry specific channels, including the Internet, industry trade shows, and in print through trade journals.

Competition

In our target markets, we compete with different companies in each of our three major product platforms: custom optoelectronic, high-speed optical receiver and THz systems.  We believe that our principal competitors for sales of custom optoelectronic products are small and medium size private companies and medium size public companies such as First Sensor, Excelitas, a division of Illinois Tool Works (ITW), and a division of OSI Systems (OSIS).  In the high-speed optical receiver market, certain product lines compete against some mix of the following competitors; JDS Uniphase (JDSU), Neophotonix (NPTN), Finisar, Avago, a division of Fujitsu (FOC), a division of Nippon Electric (NEL) and several other smaller companies. Because the THz product offering includes developing technology applications and markets, we believe the competition is mainly from several early stage small private companies like Menlo Systems supported by research institutions like the Fraunhofer Institute in Germany, Teraview, Advantest  and the use of alternative technologies, mainly nuclear gauges that are bundled with other process control equipment within divisions of several larger public companies.

Because we specialize in devices requiring a high degree of engineering expertise to meet the requirements of specific applications, we generally do not compete with  other large United States, European or Asian manufacturers of standard “off the shelf” optoelectronic components or silicon photodetectors.
 
 
8

 

Proprietary Technology

We utilize proprietary design rules and processing steps in the development and fabrication of our PIN and APD photodiodes, THz transmitters and receivers, fiber-coupled THz subsystems/systems, and THz applications.  We have a significant number of patents pending and own the following patents and registered trademarks:

Patents and Trademarks Issued in Fiscal 2014
Patent/Trademark #
Title
Issue Date
8,436,310
System and method reducing fiber stretch induced timing errors in fiber optic coupled time domain terahertz systems
May-13
8,457,915
System and method to measure the transit time position(s) of pulses in a time domain data
Jun-13
2509530
Precision Fiber Attachment
Jul-13
1332068
Terahertz imaging system for examining particles
Nov-13
 
Patents and Trademarks Issued in Prior Years
 
Patent/Trademark #
Title
Issue Date
8,390,910
Picosecond Optical Delay
Mar-13
5166024
Terahertz Imaging System for Examining Articles
Dec-12
4,218,098
Trademark for T-Gauge
Oct-12
5022032
Pin Photodetector
Jun-12
5021888
Enhanced Photodetector
Jun-12
4980238
High Speed Ingaas Photoconductive Device
Apr-12
2474560
Planar Avalance Photodiode
Mar-12
1131650
Pin Photodetector
Mar-12
200580041877.4
HIGH SPEED INGASS PHOTOCONDUCTIVE DEVICE (CHINA)
Apr-11
1,034,433
PRECISION FIBER ATTACHMENT (SOUTH KOREA)
May-11
HK1106330
HIGH SPEED INGAAS PHOTOCONDUCTIVE DEVICE (HONG KONG)
May-11
4,755,341
HIGHLY DOPED P-TYPE CONTACT FOR HIGH SPEED, FRONT-SIDE ILLUMINATED PHOTODIODE (JAPAN)
Jun-11
200580023058.7
TERAHERTZ IMAGING SYSTEM FOR EXAMINING ARTICLES (CHINA)
Jun-11
2,025,077
DISPERSION & NONLINEAR COMPENSATOR FOR OPTICAL DELIVERY FIBER (SOUTH KOREA)
Jul-11
2,025,077
DISPERSION & NONLINEAR COMPENSATOR FOR OPTICAL DELIVERY FIBER (AUSTRIA)
Jul-11
2,025,077
DISPERSION & NONLINEAR COMPENSATOR FOR OPTICAL DELIVERY FIBER (GR BRITAIN)
Jul-11
2,025,077
DISPERSION & NONLINEAR COMPENSATOR FOR OPTICAL DELIVERY FIBER (FRANCE)
Jul-11
2,025,077
DISPERSION & NONLINEAR COMPENSATOR FOR OPTICAL DELIVERY FIBER (ITALY)
Jul-11
2,025,077
DISPERSION & NONLINEAR COMPENSATOR FOR OPTICAL DELIVERY FIBER (NETHERLANDS)
Jul-11
2,025,077
DISPERSION & NONLINEAR COMPENSATOR FOR OPTICAL DELIVERY FIBER (SPAIN)
Jul-11
602007015950.4
DISPERSION & NONLINEAR COMPENSATOR FOR OPTICAL DELIVERY FIBER (GERMANY)
Jul-11
2,467,400
FOCUSING FIBER OPTIC (CANADA)
Sep-11
4,833,478
METHOD & APPARATUS TO MONITOR PHASE CHANGES IN MATTER WITH TERAHERTZ RADIATION (JAPAN)
Sep-11
4,938,221
PLANAR AVALANCHE PHOTODIODE
Mar-12
142,195
HIGHLY-DOPED P-TYPE CONTACT FOR HIGH-SPEED, FRONT-SIDE ILLUMINATED PHOTODIODE (US)
Apr-05
660,471
HIGHLY-DOPED P-TYPE CONTRACT FOR HIGH-SPEED, FRONT-SIDE ILLUMINATED PHOTODIODE (KOREA)
Apr-06
726,387
TRADEMARK APPLICATION FOR T-RAY (CANADA)
Oct-08
765,715
HIGHLY-DOPED P-TYPE CONTACT FOR HIGH-SPEED, FRONT-SIDE ILLUMINATED PHOTODIODE (AUSTRIA)
Jan-04
766,174
ENHANCED PHOTODETECTOR (KOREA)
Oct-07
809,655
METHOD AND APPARATUS TO MONITOR PHASE CHANGES IN MATTER WITH TERAHERTZ RADIATION (KOREA)
Feb-08
811,365
PLANAR AVALANCHE PHOTODIODE (KOREA)
Feb-08
817,638
FOCUSING FIBER OPTIC (KOREA)
Mar-08
 
 
9

 
 
Patent/Trademark #
Title  Issue Date
934,665
TRADEMARK APPLICATION FOR T-RAY TRADEMARK (MADRID PROTOCOL)
Aug-07
934,665
TRADEMARK APPLICATION FOR T-RAY TRADEMARK (AUSTRALIA)
Aug-07
1,090,282
A DISPERSIVE PRECOMPENSATOR FOR USE IN AN ELECTROMAGNETIC RADIATION GERNERATION AND DETECTION SYSTEM (EUROPE)
Oct-10
1,090,282
A DISPERSIVE PRECOMPENSATOR FOR USE IN AN ELECTROMAGNETIC RADIATION GERNERATION AND DETECTION SYSTEM (AUSTRIA)
Oct-10
1,090,282
A DISPERSIVE PRECOMPENSATOR FOR USE IN AN ELECTROMAGNETIC RADIATION GERNERATION AND DETECTION SYSTEM (FRANCE)
Oct-10
1,090,282
A DISPERSIVE PRECOMPENSATOR FOR USE IN AN ELECTROMAGNETIC RADIATION GERNERATION AND DETECTION SYSTEM (GERMANY)
Oct-10
1,090,282
A DISPERSIVE PRECOMPENSATOR FOR USE IN AN ELECTROMAGNETIC RADIATION GERNERATION AND DETECTION SYSTEM (ITALY)
Oct-10
1,090,282
A DISPERSIVE PRECOMPENSATOR FOR USE IN AN ELECTROMAGNETIC RADIATION GERNERATION AND DETECTION SYSTEM (NETHERLANDS)
Oct-10
1,090,282
A DISPERSIVE PRECOMPENSATOR FOR USE IN AN ELECTROMAGNETIC RADIATION GERNERATION AND DETECTION SYSTEM (SPAIN)
Oct-10
1,090,282
A DISPERSIVE PRECOMPENSATOR FOR USE IN AN ELECTROMAGNETIC RADIATION GERNERATION AND DETECTION SYSTEM (GREAT BRITAIN)
Oct-10
1,113,520
PLANAR AVALANCHE PHOTODIODE (HONG KONG)
Mar-10
1,113,604
OPTICAL DELAY (HONG KONG)
Jan-11
1,115,504
PICOSECOND OPTICAL DELAY (HONG KONG)
Nov-09
1,116,280
HIGHLY-DOPED P-TYPE CONTACT FOR HIGH-SPEED, FRONT-SIDE ILLUMINATED PHOTODIODE (EP)
Oct-07
1,116,280
HIGHLY-DOPED P-TYPE CONTACT FOR HIGH-SPEED, FRONT-SIDE ILLUMINATED PHOTODIODE (FRANCE)
Oct-07
1,116,280
HIGHLY-DOPED P-TYPE CONTACT FOR HIGH-SPEED, FRONT-SIDE ILLUMINATED PHOTODIODE (GREAT BRITAIN)
Oct-07
1,116,280
HIGHLY-DOPED P-TYPE CONTACT FOR HIGH-SPEED, FRONT-SIDE ILLUMINATED PHOTODIODE (ITALY)
Oct-07
1,116,280
HIGHLY-DOPED P-TYPE CONTACT FOR HIGH-SPEED, FRONT-SIDE ILLUMINATED PHOTODIODE (GERMANY)
Oct-07
1,230,578
COMPACT FIBER PIGTAIL TERAHERTZ IMAGING SYSTEM (EP)
Aug-06
1,230,578
COMPACT FIBER PIGTAIL TERAHERTZ IMAGING SYSTEM (AUSTRIA)
Aug-06
1,230,578
COMPACT FIBER PIGTAIL TERAHERTZ IMAGING SYSTEM (FRANCE)
Aug-06
1,230,578
COMPACT FIBER PIGTAIL TERAHERTZ IMAGING SYSTEM (ITALY)
Aug-06
1,230,578
COMPACT FIBER PIGTAIL TERAHERTZ IMAGING SYSTEM (GREAT BRITAIN)
Aug-06
1,454,173
FOCUSING FIBER OPTIC (EP)
May-09
1,454,173
FOCUSING FIBER OPTIC (FRANCE)
May-09
1,454,173
FOCUSING FIBER OPTIC (GERMANY)
 May-09
1,454,173
FOCUSING FIBER OPTIC (ITALY)
  May-09
1,454,173
FOCUSING FIBER OPTIC (NETHERLANDS)
  May-09
1,454,173
FOCUSING FIBER OPTIC (GREAT BRITAIN)
  May-09
1,570,306
PRECISION FIBER ATTACHMENT (EP)
Aug-08
1,570,306
PRECISION FIBER ATTACHMENT (ITALY)
Aug-08
1,570,306
PRECISION FIBER ATTACHMENT (FRANCE)
Aug-08
1,570,306
PRECISION FIBER ATTACHMENT (GREAT BRITAIN)
Aug-08
1,570,306
PRECISION FIBER ATTACHMENT (AUSTRIA)
Aug-08
1,570,306
PRECISION FIBER ATTACHMENT (GERMANY)
Aug-08
1,794,558
PICOSECOND OPTICAL DELAY (EP)
Sep-09
1,794,558
PICOSECOND OPTICAL DELAY (FRANCE)
Sep-09
1,794,558
PICOSECOND OPTICAL DELAY (GERMANY)
Sep-09
1,794,558
PICOSECOND OPTICAL DELAY (ITALY)
Sep-09
1,794,558
PICOSECOND OPTICAL DELAY (GREAT BRITAIN)
Sep-09
1,794,558
PICOSECOND OPTICAL DELAY (NETHERLANDS)
Sep-09
1,820,219
HIGH SPEED INGAAS PHOTOCONDUCTIVE DEVICE (AUSTRIA)
Jan-11
1,820,219
HIGH SPEED INGAAS PHOTOCONDUCTIVE DEVICE (FRANCE)
Jan-11
 
 
10

 
 
 Patent/Trademark #  Title   Issue Date
1,820,219
HIGH SPEED INGAAS PHOTOCONDUCTIVE DEVICE (GERMANY)
Jan-11
1,820,219
HIGH SPEED INGAAS PHOTOCONDUCTIVE DEVICE (ITALY)
Jan-11
1,820,219
HIGH SPEED INGAAS PHOTOCONDUCTIVE DEVICE (NETHERLANDS)
Jan-11
1,820,219
HIGH SPEED INGAAS PHOTOCONDUCTIVE DEVICE (SPAIN)
Jan-11
1,820,219
HIGH SPEED INGAAS PHOTOCONDUCTIVE DEVICE (GREAT BRITAIN)
Jan-11
1,820,219
HIGH SPEED INGAAS PHOTOCONDUCTIVE DEVICE (HONG KONG)
Jan-11
1,820,219
HIGH SPEED INGAAS PHOTOCONDUCTIVE DEVICE (EUROPE)
Jan-11
1,963,580
PICOMETRIX TRADEMARK
Mar-96
2,345,153
HIGHLY-DOPED P-TYPE CONTACT FOR HIGH-SPEED, FRONT-SIDE ILLUMINATED PHOTODIODE (CANADA)
Mar-04
2,350,065
A DISPERSIVE PRECOMPENSATOR FOR USE IN AN ELECTROMAGNETIC RADIATION GERNERATION AND DETECTION SYSTEM (CANADA)
Jan-11
2,396,695
METHOD AND APPARATUS TO MONITOR PHASE CHANGES IN MATTER WITH TERAHERTZ RADIATION (CANADA)
Apr-10
3,561,696
TRADEMARK – T-RAY
Jan-09
3,561,697
TRADEMARK – T-RAY 2000
Jan-09
3,561,698
TRADEMARK – T-RAY 4000
Jan-09
4,180,824
COMPACT FIBER PIGTAIL TERAHERTZ IMAGING SYSTEM (JAPAN)
Sept-08
4,436,915
PRECISION FIBER ATTACHMENT (JAPAN)
Jan-10
4,717,946
THIN LINE JUNCTION PHOTODIODE (by Predecessor Co.)
Jan-88
4,782,382
HIGH QUANTUM EFFICIENCY PHOTODIODE DEVICES (by Predecessor Co.)
Nov-88
5,021,854
SILICON AVALANCHE PHOTODIODE ARRAY
Jun-91
5,057,892
LIGHT RESPONSIVE AVALANCHE DIODE
Oct-91
5,146,296
DEVICES FOR DETECTING AND/OR IMAGING SINGLE PHOTOELECTRON
Sep-92
5,308,989
TRADEMARK APPLICATION FOR T-GAUGE (JAPAN)
Mar-10
5,311,044
AVALANCHE PHOTOMULTIPLIER TUBE
May-94
5,477,075
SOLID STATE PHOTODETECTOR WITH LIGHT RESPONSIVE REAR FACE
Dec-95
5,757,057
LARGE AREA AVALANCHE ARRAY
May-98
5,801,430
SOLID STATE PHOTODETECTOR WITH LIGHT RESPONSIVE REAR FACE
Sep-98
6,005,276
SOLID STATE PHOTODETECTOR WITH LIGHT RESPONSIVE REAR FACE
Dec-99
6,029,988
COMPACT FIBER PIGTAILED TERAHERTZ IMAGING SYSTEM (GREAT BRITAIN)
Aug-06
6,111,299
ACTIVE LARGE AREA AVLANCHE PHOTODIODE ARRAY
Aug-00
6,262,465
HIGHLY-DOPED P-TYPE CONTACT FOR HIGH-SPEED, FRONT-SIDE ILLUMINATED PHOTODIODE
Jul-01
6,320,191
A DISPERSIVE PRECOMPENSATOR FOR USE IN AN ELECTROMAGNETIC RADIATION GENERATION AND DETECTION SYSTEM
Nov-01
6,816,647
COMPACT FIBER PIGTAILED TERAHERTZ IMAGING SYSTEM
Nov-04
6,849,852
SYSTEM AND METHOD FOR MONITORING CHANGES IN STATE OF MATTER WITH TERAHERTZ RADIATION
Feb-05
6,936,821
AMPLIFIED PHOTOCONDUCTIVE GATE
Aug-05
7,039,275
FOCUSING FIBER OPTIC
May-06
7,078,741
HIGH-SPEED ENHANCED RESPONSIVITY PHOTO DETECTOR
Jul-06
7,263,266
PRECISION FIBER ATTACHMENT
Aug-07
7,348,607
PLANAR AVALANCHE PHOTODIODE
Mar-08
7,348,608
PLANAR AVALANCHE PHOTODIODE
Mar-08
7,449,695
TERAHERTZ IMAGING SYSTEM FOR EXAMINING ARTICLES
Nov-08
7,468,503
PIN PHOTODETECTOR
Dec-08
7,572,021
TRADEMARK APPLICATION FOR T-GAUGE (CHINA)
Feb-11
8,452,427
TRADEMARK APPLICATION FOR T-GAUGE
Mar-10
8,493,256
TRADEMARK APPLICATION FOR T-RAY 4000
Feb-10
602005016704.8
PICOSECOND OPTICAL DELAY (GERMANY)
Sep-09
602005026049.8
HIGH SPEED INGASS PHOTOCONDUCTIVE DEVICE (GERMANY)
Jan-11
 
 
11

 
 
  Patent/Trademark #  Title  Issue Date
ZL02825106.7
FOCUSING FIBER OPTIC (CHINA)
Apr-09
ZL03803039.X
ENHANCED PHOTODETECTOR (CHINA)
Apr-09
ZL2003801087.X
PRECISION FIBER ATTACHMENT (CHINA)
Mar-09
ZL200480015226
PIN PHOTODETECTOR (JAPAN)
Jun-09
ZL200480043236
PLANAR AVALANCHE PHOTODIODE (CHINA)
May-09
ZL200580033244
PICOSECOND OPTICAL DELAY (CHINA)
Jan-10
HK1085841
ENHANCED PHOTODETECTOR (HONG KONG)
Dec-09
HK1086340
FOCUSING FIBER OPTIC (HONG KONG)
Feb-10
HK1090282
PIN PHOTODETECTOR (HONG KONG)
Oct-10
HK1095637
PRECISION FIBER ATTACHMENT (HONG KONG)
Apr-10
HK1097957
PIN PHOTODETECTOR (HONG KONG)
Mar-10
 
There can be no assurance that any issued patents will provide us with significant competitive advantages, or that challenges will not be instituted against the validity or enforceability of any patent, or, if instituted, that such challenges will not be successful.  The cost of litigation to uphold the validity and to prevent the infringement of a patent could be substantial.  Furthermore, there can be no assurance that our technology will not infringe on patents or rights owned by others, the licenses to which might not be available to us at all or on reasonable terms.  Based on limited patent searches, contacts with others knowledgeable in the field of our technology, and a review of the published materials, we believe that our competitors hold no patents, licenses or other rights to technology which would preclude us from pursuing our intended operations.

In some cases, we may rely on trade secrets to protect our innovations.  There can be no assurance that trade secrets will be established, that secrecy obligations will be honored or that others will not independently develop similar or superior technology.  To the extent that consultants, key employees or other third parties apply technological information independently developed by them or by others to our projects, disputes might arise as to the proprietary rights to such information which may not be resolved in our favor.

Employees

As of May 31, 2014, we had approximately 122 full time employees including 4 officers.  Included are 29 engineering and development personnel, 10 sales and marketing personnel, 68 operations personnel, and 15 general and administrative personnel.  We may, from time to time, engage personnel to perform consulting services and to perform research and development under third party funding.  In certain cases, the cost of such personnel may be included in the direct cost of the contract rather than in payroll expense.  None of our employees are covered by a collective bargaining agreement.  We believe our relations with our employees are good.

Silonex Net Asset Purchase

On March 1, 2013, the Company, through its newly formed Advanced Photonix Canada, Inc. subsidiary, acquired substantially all the operating assets and assumed certain liabilities of Silonex’s business for $900,000 in cash.  Silonex designed, manufactured and marketed optoelectronic devices and sensor solutions for various vertical markets, including Industrial Controls, Banking, Vending, Medical and Telecommunications.  The products, customers and business operations are complimentary to and have minimal overlap with the Company’s Optosolutions product line and the acquisition of the Silonex business broadened the Company’s overall supply channel due to Silonex’s existing relationships with Chinese manufacturers.

Item 1A.   Risk Factors

Investing in our Class A Common Stock involves a high degree of risk and uncertainty. You should carefully consider the risks and uncertainties described below before investing in our Class A Common Stock. Our business, prospects, financial condition and results of operations could be adversely affected due to any of the following risks. In that case, the value of our Class A Common Stock could decline, and you could lose all or part of your investment.

 
12

 
 
Risks Relating to Our Financial Condition and Performance
 
Our substantial debt obligations could impair our financial flexibility and restrict our business significantly.
 
We now have, and will continue to have, significant debt obligations, which are summarized in the table below:
 
 
SVB Term Loan
Agreement
SVB Revolving
Loan Agreement
SVB Ex-Im
Revolving Loan
Agreement
PFG Loan
Agreement
MSF & MEDC
Loan Agreement
Interest Rate as of June 16, 2014
7.75%
7.25%
7.25%
11.75%
5.00%
Principal Outstanding at
June 16, 2014
$250,000
$--
$563,000
$1,548,000
$654,000
Maturity Date(based on
amendments through June 2014
March 2015
June 2016
June 2016
August 2016
November and
December 2014
 
On January 31, 2012, we entered into a Loan and Security Agreement dated January 31, 2012 with Silicon Valley Bank (“SVB” and such agreement as amended from time to time, the “SVB Loan Agreement”) and a related Loan and Security Agreement (Ex-IM Loan Facility) with SVB (as amended from time to time, the “SVB Ex-Im Loan Agreement”, and together with the SVB Loan Agreement, the “SVB Loan Agreements”) that provided for a three-year $1 million term loan that expires in March 2015, and a $5 million line of credit with a $3 million export-import facility sublimit that currently expires in June 2016.  Subsequent to the execution of the original SVB Loan Agreements, there have been eight amendments that have modified the financial covenants, allowed for the acquisition of substantially all of the operating assets of Silonex, Inc. (“Silonex”), allowed us to enter into the PFG Loan Agreement (as described below), and extended the maturity date of the line of credit from January 2014 to June 2016.
 
On February 8, 2013, we entered into a $2.5 million secured Loan and Security Agreement with Partners for Growth III, L.P. (“PFG” and such agreement, as amended, the “PFG Loan Agreement”) that is subordinated to the SVB Loan Agreements and expires in August 2016.  As part of the consideration for and as a closing condition to the PFG Loan Agreement, the Company agreed to grant PFG and certain of its affiliates warrants to purchase up to 1,195,000 shares of the Company’s Class A Stock (the “Warrants”) in a private placement pursuant to Section 4(a)(2) of the Securities Act. 995,000 of the shares issuable under the Warrants were granted at an initial strike price equal to $0.50 per share (the “Tier 1 Warrants”), and the remaining 200,000 shares issuable under the Warrants were granted at an initial strike price equal to $1.00 per share (“$1.00 Warrants”).  Included in the PFG Loan Agreement were certain revenue and adjusted EBITDA goals which if hit would have reduced the interest rate from 11.75% to 9.75% and cancelled 200,000 of the warrants.  The Company has not achieved those goals during the year and so the interest rate for the remaining life of the loan remains at 11.75% and 1,195,000 warrants remain outstanding as of March 31, 2014.
 
The Warrants contain full-ratchet anti-dilution provisions that will result in proportional adjustments to the exercise price and the number of shares issuable under the PFG Warrant Agreements in the event that the Company conducts a stock split, subdivision, stock dividend or combination, or similar transaction. The PFG Warrant Agreements also include a net exercise provision pursuant to which warrant holders will receive the number of shares equal to (x) the product of (A) the number of Warrants exercised multiplied by (B) the difference between (1) the fair market value of a share of Class A Stock (with fair value generally being equal to the highest closing price of the Company’s Class A Stock during the 45 consecutive trading days prior to the date of exercise) and (2) the strike price of the Warrant, (y) divided by the fair market value of a share of Class A Stock.  In addition, in the event the Company is acquired, liquidates, conducts a public offering, or the Warrants expire, each warrant holder will have the right to “put” its Warrants to the Company in exchange for a per share cash payment that varies with the number of shares issuable under each Warrant, but in the aggregate will not exceed $250,000.
 
 
13

 
 
 
In fiscal years 2005 and 2006, we entered into two unsecured loan agreements that are currently held by the Michigan Economic Development Corporation (“MEDC” and such agreement the “MEDC Loan Agreement”) and a MEDC affiliate, the Michigan Strategic Fund (“MSF” and such agreement the “MSF Loan Agreement”) pursuant to which we borrowed an aggregate of amount of $2.2 million. As amended, payments on the approximately $327,000 in principal outstanding under each of the MEDC Loan Agreement and MSF Loan Agreement are deferred until they mature on December 1, 2014 and November 1, 2014, respectively, at which time the entire remaining balance under each loan agreement become due and payable.
 
The obligations and restrictions under the SVB Loan Agreements, the PFG Loan Agreement, the MEDC Loan Agreement, the MSF Loan Agreement, and our other debt obligations could have important consequences for us, including:
 
 ●  limiting our ability to obtain necessary financing in the future; and
   
 ●  requiring us to dedicate a substantial portion of our cash flow to payments on our debt obligations, thereby reducing the availability of our cash flow to fund working capital, capital expenditures and other corporate requirements or expansion of our business.
 
If we are unable to meet our debt obligations, we could be forced to restructure or refinance our obligations, to seek additional equity financing or to sell assets, which we may not be able to do on satisfactory terms or at all. As a result, we could default on those obligations and in the event of such default, our lenders could accelerate our debt or take other actions that could restrict our operations.  The foregoing risks would be intensified to the extent we borrow additional money or incur additional debt.
 
We have previously violated certain covenants under the SVB Loan Agreements and the PFG Loan Agreement.
 
The SVB Loan Agreements and PFG Loan Agreement, each as amended, contained financial covenants through December 2013 and January 2014 that required the Company to maintain a minimum liquidity ratio of 2.25 to 1.00 and a minimum trailing three month adjusted EBITDA, measured monthly of (1) a negative $300,000 for each fiscal month during the period July through October 2013; and (2) $1 for each fiscal month during the period November 2013 through February 2014.
 
As of December 27, 2013 and January 24, 2014, the Company was not in compliance with then existing minimum adjusted EBITDA covenant of $1 for the three months ended December 27, 2013 and January 24, 2014, respectively, and as of January 24, 2014, the Company was also not in compliance with the then existing minimum liquidity ratio of 2.25 to 1.00.  In addition, the foregoing defaults triggered the cross-default provisions under each of the SVB Loan Agreements and PFG Loan Agreement.  Consequently, under the terms of each agreement, SVB and PFG were both entitled to proceed against the collateral provided as security for the loans issued thereunder upon an event of default subject, in PFG’s case, to any rights that SVB may have in that same collateral.
 
On February 10, 2014, the Company entered into separate Forbearance Agreements with SVB and PFG pursuant to which and subject to certain exceptions, each of SVB and PFG agreed not to proceed against the collateral securing their respective loans until February 28, 2014.  On March 5, 2014, the Company entered into separate amendment agreements with SVB and PFG where, among other things, (i) SVB agreed to extend the maturity date of the Company’s $5 million line of credit to May 31, 2014; (ii) the minimum trailing three month adjusted EBITDA covenant was reset to a negative $1.2 million for the fiscal month ended February 28, 2014, a negative $800,000 for the fiscal month ended March 31, 2014, a negative $600,000 for the fiscal month ended April 30, 2014 and a positive $1 for the fiscal month ending May 31, 2014; (iii) the existing minimum liquidity ratio covenant was reset to 1.30 to 1.00 as of February 28, 2014, and 2.25 to 1.00 for each month thereafter through May 2014; and (iv) each of SVB and PFG waived the existing defaults.  In addition to the payment of an amendment fee, the Company agreed to pay each of SVB and PFG additional fees of up to $50,000 and $75,000, respectively, no later than May 31, 2014 (the “Tail Fees”).
 
 
14

 
 
On April 30, 2014, we entered into separate amendment agreements with SVB and PFG where, among other things, (i) SVB agreed to extend the maturity date of our $5 million line of credit to July 31, 2014; (ii) the minimum trailing three month adjusted EBITDA covenant was reset to a negative $800,000 for the fiscal month ended March 31, 2014, a negative $600,000 for the fiscal month ended April 30, 2014, a negative $250,000 for the fiscal months ending May 31, 2014 and June 30, 2014 and a positive $1 for the fiscal month ending July 31, 2014; and (iii) the existing  minimum liquidity ratio covenant was reset to 1.30 to 1.00 as of March 31, 2014 through May 31, 2014, and 2.00 to 1.00 for each month thereafter through July 2014.  In addition to the payment of an amendment fee, the Company agreed to pay each of SVB and PFG their respective Tail Fee and, commencing with the month ended May 31, 2014, an additional fee of $15,000 for SVB and $20,000 for PFG (the “Leverage Ratio Fees”), for each month that the liquidity ratio is less than 2.00 to 1.00 as of the last day of the month under measurement.
 
On June 20, 2014, we signed separate amendments with SVB and PFG where, among other things, (i) SVB agreed to extend the maturity date of our line of credit to June 2016, (ii) all parties agreed to a minimum six month trailing adjusted EBTIDA covenant, measured at each fiscal month end, of negative $850,000 through June 2014, negative $300,000 for July through September 2014, a positive $1 for October through December 2014 and $100,000 each month thereafter subject to reset upon the submission of the fiscal 2016 budget but no lower than $100,000 on a rolling six month basis, (iii) all parties agreed to adjust the  minimum liquidity ratio, as defined in the respective credit agreements, ranging from 1.30 to 1.00 for months ending prior to June 2014 and 2.00 to 1.00 for all months on or after June 2014 as measured at each month end; and (iv) SVB restored an interest rate matrix based on the covenant performance that results in an interest rate on the line of credit ranging from prime rate plus 50 basis points on up to prime rate plus 400 basis points and an interest rate on the term loan ranging from prime plus 75 basis points on up to prime plus 450 basis points.  The agreements confirmed the obligation to pay the previously agreed Tail fees of $50,000 and $75,000 to SVB and PFG respectively, associated attorney fees for the amendment, but waived any Leverage Ratio fees for May 2014 and thereafter.
 
As a result of the amendments described above, the Company is now required to maintain (i) a minimum liquidity ratio of 1.30 to 1.00 through May, 2014, and 2.00 to 1.00 for each month thereafter; and (ii) a minimum rolling six month adjusted EBITDA, measured monthly of (A) a negative $850,000 for the fiscal month ended June 30, 2014, (B) a negative $300,000 for the fiscal months ended July 31, 2014, August 30, 2014 and September 30, 2014; (C) a positive $1 for the fiscal months ending October 31, 2014, November 30, 2014 and December 31, 2014; and (D) $100,000 each month thereafter subject to reset upon the submission of the fiscal 2016 budget, but in no case lower than $100,000 on a rolling six month basis.
 
While we believe we have good relations with SVB and PFG, we can provide no assurance that we will be able to obtain waivers or amendments if future covenant violations occur under the SVB Loan Agreements and/or the PFG Loan Agreement. Failure to obtain such waivers or amendments, if necessary, could materially affect our business, financial condition and results of operations.
 
 
15

 
 
We have incurred significant losses in prior periods and may incur losses in the future.
 
We have incurred significant losses in prior periods. We recorded a net loss of $4.3 million for the year ended March 31, 2014 and ended the period with an accumulated deficit of $48.5 million. In addition, we recorded net losses of $4.4 million and $2.1 million for the years ended March 31, 2013 and 2012, respectively. There can be no assurance that we will have sufficient revenue growth to offset expenses or to achieve profitability in future periods.
 
We must continue to increase our revenues in order to become profitable.  We cannot reliably predict when, or if, we will become profitable.  Even if we achieve profitability, we may not be able to sustain it.  If we cannot generate operating income or positive cash flows in the future, we will be unable to meet our working capital requirements.
 
We may not be able to generate the amount of cash needed to fund our existing indebtedness and future operations.
 
Our ability either to make payments on or to refinance our indebtedness, or to fund planned capital expenditures and research and development efforts, will depend on our ability to generate cash in the future.  Our ability to generate cash is in part subject to general economic, financial, competitive, regulatory and other factors that are beyond our control, and as such has fluctuated significantly as indicted in the table below:
 
Net Cash Provided by (used in) Operating Activities
FY 2010
FY 2011
FY 2012
FY 2013
FY 2014
$152,000
($473,000)
$130,000
($2,221,000)
($845,000)
 
Based on our expected level of operations, we believe our cash flow from operations, subsequent borrowings, the proceeds from offerings conducted under a previously filed registration statement and loan and credit agreement terms will be adequate to meet our future liquidity needs through at least March 31, 2015.  Significant assumptions underlie this belief, including, among other things, that there will be growth of 20% in our revenues and no material adverse developments in our business, liquidity or capital requirements.  If any of these assumptions prove to be inaccurate or we are unable to service our indebtedness for any other reason, the trading price of our Class A Stock may be adversely affected and our ability to raise additional financing may be impaired.  In addition, we will be forced to adopt an alternative strategy that may include actions such as:
 
●   reducing capital expenditures;
   
●   further reducing research and development efforts;
   
●   selling assets such as existing product lines or technology developments;
   
●   restructuring or refinancing our remaining indebtedness; and
   
●   seeking additional funding.
 
In light of our historical performance, we cannot assure you that our business will generate sufficient cash flow from operations, or that we will be able to make future borrowings in amounts sufficient to enable us to pay the principal and interest on our current indebtedness or to fund our other liquidity needs.  We may need to refinance all or a portion of our indebtedness on or before maturity.
 
If we raise additional funds through the issuance of equity or convertible debt securities, the percentage ownership of our stockholders could be significantly diluted, and these newly-issued securities may have rights, preferences or privileges senior to those of existing stockholders. We cannot assure you that additional financing will be available on terms favorable to us, or at all. If, when required, adequate funds are unavailable, or are not available on acceptable terms, our ability to fund our operations, take advantage of unanticipated opportunities, develop or enhance our products, or otherwise respond to competitive pressures could be significantly limited.
 
 
16

 
 
We may dispose of or discontinue existing product lines and technology developments, which may adversely impact our future results.
 
On an ongoing basis, we evaluate our various product offerings and technology developments in order to determine whether any should be discontinued or, to the extent possible, divested. In addition, if we are unable to generate the amount of cash needed to fund our existing indebtedness and future operations, we may be forced to sell one or more of our product lines or technology developments.
 
We cannot guarantee that we have correctly forecasted, or will correctly forecast in the future, the right product lines and technology developments to dispose or discontinue or that our decision to dispose of or discontinue various investments, products lines and technology developments is prudent if market conditions change. In addition, there are no assurances that the discontinuance of various product lines will reduce our operating expenses or will not cause us to incur material charges associated with such decision. Furthermore, the discontinuance of existing product lines entails various risks, including the risk that we will not be able to find a purchaser for a product line or the purchase price obtained will not be equal to at least the book value of the net assets for the product line. Other risks include managing the expectations of, and maintaining good relations with, our customers who previously purchased products from our disposed or discontinued product lines, which could prevent us from selling other products to them in the future. We may also incur other significant liabilities and costs associated with our disposal or discontinuance of product lines, including employee severance costs and excess facilities costs.
 
The Company’s cost saving initiatives may not be effective, and the Company’s ability to develop products could be adversely affected by reduced research and development and capital expenditures.
 
To conserve cash and more closely align our spending towards our strategic objectives, we have implemented a number of cost reduction initiatives over the past several years, including a workforce reduction in our administrative, research and development and sales and marketing staffs and, a refocusing of our research and development plans, and a reduction in capital expenditures.  We cannot assure you that the assumptions underlying our decisions as to which reductions to make as part of these cost reduction initiatives will prove to be correct and, accordingly, we may determine that we have reduced or eliminated resources that are necessary to, or desirable for, our business.  In particular, the reductions that we have made to our research and development staff and, research and development expenses and capital expenditures could hinder the Company’s ability to update or introduce new products.
 
Any impairment of goodwill and other intangible assets, could negatively impact our results of operations.
 
As of March 31, 2014 and March 31, 2013, our consolidated balance sheet included $4.6 million in goodwill. Goodwill represents the excess purchase price over amounts assigned to tangible or identifiable intangible assets acquired and liabilities assumed from our business acquisitions.  Our goodwill is subject to an impairment test on an annual basis and is also tested whenever events and circumstances indicate that goodwill may be impaired. Any goodwill value in excess of fair value as determined in an impairment test must be written off in the period of determination.
 
Intangible assets (other than goodwill) are generally amortized over the useful life of such assets.  The carrying value of the intangible assets aggregated to $2.9 million as of March 31, 2014.   From time to time, we may acquire, or make an investment in, a business which may require us to record goodwill based on the purchase price and the value of the acquired tangible and intangible assets. We may subsequently experience unforeseen issues with such business which adversely affect the anticipated returns of the business or value of the intangible assets and trigger an evaluation of the recoverability of the recorded goodwill and intangible assets for such business. Future determinations of significant write-offs of goodwill or intangible assets as a result of an impairment test or any accelerated amortization of other intangible assets could have a negative impact on our results of operations.
 
 
17

 
 
Risks Relating to Our Business
 
We are subject to the cyclical nature of the markets in which we compete and any future downturn may reduce demand for our products and revenue.
 
Many factors beyond our control affect our industry, including consumer confidence in the economy, interest rates, fuel prices and the general availability of credit.  The overall economic climate and changes in Gross National Product growth has a direct impact on our customers and the demand for our products.  We cannot be sure that our business will not be adversely affected as a result of an industry or general economic downturn.
 
Our customers may reduce capital expenditures and have difficulty satisfying liquidity needs because of continued turbulence in the U.S. and global economies, resulting in reduced sales of our products and harm to our financial condition and results of operations.
 
In particular, our historical results of operations have been subject to substantial fluctuations, and we may experience substantial period-to-period fluctuations in future results of operations. Any future downturn in the markets in which we compete could significantly reduce the demand for our products and therefore may result in a significant reduction in revenue. It may also increase the volatility of the price of our common stock. Our revenue and results of operations may be materially and adversely affected in the future due to changes in demand from customers or cyclical changes in the markets utilizing our products.
 
In addition, the telecommunications industry, has, from time to time, experienced, and may again experience, a pronounced downturn. To respond to a downturn, many service providers may slow their capital expenditures, cancel or delay new developments, reduce their workforces and inventories and take a cautious approach to acquiring new equipment and technologies from original equipment manufacturers like us, which would have a negative impact on our business. Weakness in the global economy or a future downturn in the telecommunications industry may cause our results of operations to fluctuate from quarter-to-quarter and year-to-year, harm our business, and may increase the volatility of the price of our common stock.
 
Customer acceptance of our products is dependent on our ability to meet changing requirements, and any decrease in acceptance could adversely affect our revenue.
 
Customer acceptance of our products is significantly dependent on our ability to offer products that meet the changing requirements of our customers, including telecommunication, military, medical and industrial corporations, as well as government agencies.  Any decrease in the level of customer acceptance of our products could have a material adverse effect on our business.
 
Our products must meet exacting specifications, and defects and failures may occur, which may cause customers to return or stop buying our products.
 
Our customers generally establish demanding specifications for quality, performance and reliability that our products must meet. However, our products are highly complex and may contain defects and failures when they are first introduced or as new versions are released. Our products are also subject to rough environments as they are integrated into our customer products for use by the end customers. If defects and failures occur in our products, we could experience lost revenue, increased costs, including warranty expense and costs associated with customer support, delays in or cancellations or rescheduling of orders or shipments, product returns or discounts, diversion of management resources or damage to our reputation and brand equity, and in some cases consequential damages, any of which would harm our operating results. In addition, delays in our ability to fill product orders as a result of quality control issues may negatively impact our relationship with our customers. We cannot assure you that we will have sufficient resources, including any available insurance, to satisfy any asserted claims.
 
 
18

 
 
Rapidly changing standards and regulations could make our products obsolete, which would cause our revenue and results of operations to suffer.
 
We design our products to conform to our customer’s requirements and our customer’s systems may be subject to regulations established by governments or industry standards bodies worldwide.  Because certain of our products are designed to conform to current specific industry standards, if competing or new standards emerge that are preferred by our customers, we would have to make significant expenditures to develop new products. If our customers adopt new or competing industry standards with which our products are not compatible, or the industry groups adopt standards or governments issue regulations with which our products are not compatible, our existing products would become less desirable to our customers and our revenue and results of operations would suffer.
 
The markets for many of our products are characterized by changing technology which could cause obsolescence of our products, and we may incur substantial costs in delivering new products.
 
The markets for many of our products are characterized by changing technology, new product introductions and product enhancements, and evolving industry standards.  The introduction or enhancement of products embodying new technology or the emergence of new industry standards could render existing products obsolete, and result in a write down to the value of our inventory, or result in shortened product life cycles.  Accordingly, our ability to compete is in part dependent on our ability to continually offer enhanced and improved products.
 
The success of our new product offerings will depend upon several factors, including our ability to:
 
●   accurately anticipate customer needs;
   
●   innovate and develop new technologies and applications;
   
●   successfully commercialize new technologies in a timely manner;
   
●   price our products competitively and manufacture and deliver our products in sufficient volumes and on time; and
   
●   differentiate our offerings from our competitors' offerings.
 
Some of our products are used by our customers to develop, test and manufacture their products. We therefore must anticipate industry trends and develop products in advance of the commercialization of our customers’ products. In developing any new product, we may be required to make a substantial investment before we can determine the commercial viability of the new product. If we fail to accurately foresee our customers’ needs and future activities, we may invest heavily in research and development of products that do not lead to significant revenues.
 
If any of our products are found to have, or are suspected to have, security vulnerabilities, we could incur significant costs and irreparable damage to our reputation.
 
If any of our products are found to have significant security vulnerabilities, then we may need to dedicate engineering and other resources to eliminating such vulnerabilities and to repairing or replacing products already sold or licensed to our customers. In addition, our customers and potential customers could perceive our products as unreliable, making it more difficult for us to sell our products.
 
 
 
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Our inability to find new customers or retain existing customers could have a material adverse effect on our business.
 
Customers normally purchase our products and incorporate them into products that they, in turn, sell in their own markets on an ongoing basis. As a result, our sales are dependent upon the success of our customers' products and our future performance is dependent upon our success in finding new customers and receiving new orders from existing customers.
 
In several of our markets, quality and/or reliability of our products are a major concern for our customers, not only upon the initial manufacture of the product, but for the life of the product.  Many of our products are used in remote locations for higher value assembly, making servicing of our products unfeasible.  Any failure of the quality and/or reliability of our products could have an adverse effect on our business.
 
If our customers do not qualify our products or if their customers do not qualify their products, our results of operations may suffer.
 
Most of our customers do not purchase our products prior to qualification of our products and satisfactory completion of factory audits and vendor evaluation. Our existing products, as well as each new product, must pass through varying levels of qualification with our customers. In addition, because of the rapid technological changes in our market, a customer may cancel or modify a design project before we begin large-scale manufacturing and receive revenues from the customer. It is unlikely that we would be able to recover the expenses for cancelled or unutilized custom design projects. It is difficult to predict with any certainty whether our customers will delay or terminate product qualification or the frequency with which customers will cancel or modify their projects. Any such delay, cancellation or modification could have a negative effect on our results of operations.
 
In addition, once a customer qualifies a particular supplier’s product or component, these potential customers design the product into their system, which is known as a design-in win. Suppliers whose products or components are not designed in are unlikely to make sales to that customer until at least the adoption of a future redesigned system. Even then, many customers may be reluctant to incorporate entirely new products into their new systems, as doing so could involve significant additional redesign efforts and increased costs. If we fail to achieve design-in wins in our potential customers’ qualification processes, we will likely lose the opportunity for significant sales to those customers for a lengthy period of time.
 
If the end user customers that purchase systems from our customers fail to qualify or delay qualifications of any products sold by our customers that contain our products, our business could be harmed. The qualification and field testing of our customers’ systems by end user customers is long and unpredictable. This process is not under our control or that of our customers; and, as a result, the timing of our sales is unpredictable. Any unanticipated delay in qualification of one of our customers’ products could result in the delay or cancellation of orders from our customers for products included in their equipment, which could harm our results of operations.
 
Our sales to overseas markets expose us to additional, unpredictable risks which could have a material adverse effect on our businessand expose us to liability under the Foreign Corrupt Practices Act.
 
A portion of our sales are being derived from overseas markets. These international sales are primarily focused in Asia, Europe and the Middle East. These operations are subject to unpredictable risks that are inherent in operating in foreign countries and which could have a material adverse effect on our business, including the following:
 
 
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● 
foreign countries could change regulations or impose currency restrictions and other restraints;
 
 ● 
changes in foreign currency exchange rates and hyperinflation or deflation in the foreign countries in which we operate;
 
● 
exchange controls;
 
● 
some countries impose burdensome tariffs and quotas;
 
● 
political changes and economic crises may lead to changes in the business environment in which we operate;
 
● 
international conflict, including terrorist acts, could significantly impact our financial condition and results of operations; and
 
● 
economic downturns, political instability and war or civil disturbances may disrupt distribution logistics or limit sales in individual markets.
 
In addition, we utilize third-party distributors to act as our representative for the geographic region that they have been assigned as well as value added resellers that have territorial restrictions. Sales through these channels represent approximately 11% of total revenue for the year ended March 31, 2014.  Significant terms and conditions of distributor agreements include FOB source, net 30 days payment terms, with no return or exchange rights, and no price protection. Since the product title transfers to the distributor at the time of shipment, the products are not considered inventory on consignment. Our success is dependent on these distributors finding new customers and receiving new orders from existing customers.
 
We are subject to the Foreign Corrupt Practice Act (“FCPA”) and other laws that prohibit improper payments to foreign governments and their officials for the purpose of obtaining or retaining business. Our activities in our overseas markets create the risk of unauthorized payments or offers of payments by one of our employees, consultants, sales agents or distributors, because these parties are not always subject to our control. While it is our policy to implement safeguards to discourage these practices, our existing safeguards and any future improvements may prove to be less than effective, and our employees, consultants, sales agents or distributors may engage in conduct for which we might be held responsible. Violations of the FCPA may result in severe criminal or civil sanctions, and we may be subject to other liabilities, which could negatively affect our business, operating results and financial condition. In addition, certain governmental authorities may seek to hold us liable for successor liability FCPA violations committed by companies in which we invest or that we acquire.
 
Customer demand is difficult to accurately forecast and, as a result, we may be unable to optimally match production with customer demand, which could adversely affect our business and financial results.
 
We make planning and spending decisions, including determining the levels of business that we will seek and accept, production schedules, and inventory levels, component procurement commitments, personnel needs and other resource requirements, based on our estimates of customer requirements. The short-term nature of commitments by many of our customers and the possibility of unexpected changes in demand for their products reduce our ability to accurately estimate future customer requirements. On occasion, customers may require rapid increases in production, which can strain our resources, cause our manufacturing to be negatively impacted by materials shortages, necessitate higher or more restrictive procurement commitments, increase our manufacturing yield loss and scrapping of excess materials, and reduce our gross margin. We may not have sufficient capacity at any given time to meet the volume demands of our customers, or one or more of our suppliers may not have sufficient capacity at any given time to meet our volume demands. Conversely, a downturn in the markets in which our customers compete can cause, and in the past have caused, our customers to significantly reduce or delay the amount of products ordered from us or to cancel existing orders, leading to lower utilization of our facilities. Because many of our costs and operating expenses are relatively fixed, reduction in customer demand due to market downturns or other reasons would have a material adverse effect on our gross margin, operating income and cash flow.
 
 
 
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Customer orders and forecasts are subject to cancellation or modification at any time which could result in higher manufacturing costs.
 
Our sales are made primarily pursuant to standard purchase orders for delivery of products. However, by industry practice, orders may be canceled or modified at any time. When a customer cancels an order, they are responsible for all finished goods, all costs, direct and indirect, incurred by us, as well as a reasonable allowance for anticipated profits. No assurance can be given that we will receive these amounts after cancellation. Furthermore, uncertainty in customer forecasts of their demands and other factors may lead to delays and disruptions in manufacturing, which could result in delays in product shipments to customers and could adversely affect our business. 
 
Fluctuations and changes in our customers’ demand are common in our industry. Such fluctuations, as well as quality control problems experienced in our manufacturing operations may cause us to experience delays and disruptions in our manufacturing process and overall operations and reduce our output capacity. As a result, product shipments could be delayed beyond the shipment schedules requested by our customers or could be cancelled, which would negatively affect our sales, operating income, strategic position at customers, market share and reputation. In addition, disruptions, delays or cancellations could cause inefficient production which in turn could result in higher manufacturing costs, lower yields and potential excess and obsolete inventory or manufacturing equipment. In the past, we have experienced such delays, disruptions and cancellations.
 
We depend upon an outside contract manufacturer for a portion of the manufacturing process for some of our products. Our operations and revenue related to these products could be adversely affected if we encounter problems with this contract manufacturer.
 
Many of our products are manufactured internally.  However we also rely upon a contract manufacturer in China to produce the finished portion of some of our optoelectronic components. Our reliance on a contract manufacturer for these products makes us vulnerable to possible capacity constraints and reduced control over delivery schedules, manufacturing yields, manufacturing quality/controls and costs. If the contract manufacturer for our products were unable or unwilling to manufacture our products in required volumes and at high quality levels or to continue our existing supply arrangement, we would have to identify, qualify and select an acceptable alternative contract manufacturer or move these manufacturing operations to our internal manufacturing facilities. An alternative contract manufacturer may not be available to us when needed or may not be in a position to satisfy our quality or production requirements on commercially reasonable terms, including price. Any significant interruption in manufacturing our products would require us to reduce our supply products to our customers, which in turn would reduce our revenue, harm our relationships with the customers of these products and cause us to forego potential revenue opportunities.
 
We depend on key in-house manufacturing capabilities and a loss of these capabilities could have an adverse effect on our existing operations and new business growth.
 
We depend on key in-house manufacturing equipment and assembly processes.  We believe that these key manufacturing and assembly processes give us the flexibility and responsiveness to meet our customer delivery schedule and performance specification with a custom product.  This value proposition is an important component of our offering to our customers.  A loss of these capabilities could have an adverse effect on our existing operations and new business growth.
 
 
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Changes in the spending priorities of the federal government can materially adversely affect our business.
 
For our fiscal 2014, approximately 14% of our sales were related to products and services purchased by the federal government directly or indirectly. Our business relies upon continued federal government expenditures on defense, intelligence, homeland security, aerospace and other programs that we support.  For fiscal 2013, our sales to federal government contractors totaled 25% of sales. In addition, foreign military sales are affected by U.S. government regulations, regulations by purchasing foreign governments and political uncertainties in the U.S. and abroad.  There can be no assurance that the federal government budget (including defense and military) will continue to grow or that sales of defense related items to foreign governments will continue at present levels. The terms of defense contracts with the U.S. government generally permit the government to terminate such contracts, with or without cause, at any time. Any unexpected termination of a significant U.S. government contract with a military contractor to which we sell our products could have a material adverse effect on our business.
 
We face intense competition which could negatively impact our results of operations and market share.
 
We compete with a range of companies in our target markets, some of which have greater financial and marketing resources, and greater manufacturing capacity, as well as better-established relationships with customers, than we do. Because we specialize in custom high performance devices requiring a high degree of engineering expertise to meet the requirements of specific applications, we generally do not compete to any significant degree with other large United States, European or Pacific Rim high volume manufacturers of standard “off the shelf” optoelectronic components.  We cannot assure you that we will be able to compete successfully in our markets against these or any future competitors.
 
We also face competition from some of our customers who evaluate our capabilities against the merits of manufacturing products internally. Due to the fact that such customers are not seeking to make a profit directly from the manufacture of these products, they may have the ability to manufacture competitive products at a lower cost than we would charge such customers. As a result, these customers may purchase less of our products and there would be additional pressure to lower our selling prices which, accordingly, would negatively impact our revenue and gross margin.
 
Intense competition in our markets could result in aggressive business tactics by our competitors, including aggressively pricing their products or selling older inventory at a discount. If our current or future competitors utilize aggressive business tactics, including those described above, demand for our products could decline, we could experience delays or cancellations of customer orders, or we could be required to reduce our sales prices.
 
Acquisition and alliance activities by our competitors could disrupt our ongoing business.
 
From time to time, our competitors acquire or enter into exclusive arrangements with companies with whom we do business or may do business in the future. Reductions in the number of partners with whom we may do business in a particular context may reduce our ability to enter into critical alliances on attractive terms or at all, and the termination of an existing alliance by a business partner may disrupt our operations.
 
Decreases in average selling prices of our products may increase operating losses and net losses, particularly if we are not able to reduce our expenses commensurately.
 
The market for optical components and subsystems continues to be characterized by declining average selling prices resulting from factors such as increased price competition among optical component and subsystem manufacturers, excess capacity, the introduction of new products and increased unit volumes as manufacturers continue to deploy network and storage systems. In the last two years, we have observed a significant decline of average selling prices, primarily in the telecommunications market. We anticipate that average selling prices will continue to decrease in the future in response to product introductions by our competitors or us, or in response to other factors, including price pressures from significant customers. In order to sustain profitable operations, we must, therefore, reduce the cost of our current designs or continue to develop and introduce new products on a timely basis that incorporate features that can be sold at higher average selling prices. Failure to do so could cause our sales to decline and operating losses to increase.
 
 
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Our cost reduction efforts may not keep pace with competitive pricing pressures. To remain competitive, we must continually reduce the cost of manufacturing our products through design and engineering changes. We may not be successful in redesigning our products or delivering our products to market in a timely manner. We cannot assure you that any redesign will result in sufficient cost reductions enabling us to reduce the price of our products to remain competitive or positively contribute to operating results.
 
Shifts in our product mix may result in declines in gross profit.
 
Our gross profit margins vary among our product platforms, and are generally highest on our Terahertz products. Our overall gross profit has fluctuated from period to period as a result of shifts in product mix, the introduction of new products, decreases in average selling prices for older products and our ability to reduce product costs, and these fluctuations are expected to continue in the future. If our customers decide to buy more of our products with low gross profit margins and fewer of our products with high gross profit margins, our total gross profits could be adversely affected.
 
Environmental regulations could increase operating costs and additional capital expenditures and delay or interrupt operations.
 
The photonics industry, as well as the semiconductor industry in general, is subject to governmental regulations for the protection of the environment, including those relating to air and water quality, solid and hazardous waste handling, and the promotion of occupational safety. Various federal, state and local laws and regulations require that we maintain certain environmental permits. While we believe that we have obtained all necessary environmental permits required to conduct our manufacturing processes. If we were found to be in violation of these laws, we could be subject to governmental fines and liability for damages resulting from such violations.
 
Changes in the aforementioned laws and regulations or the enactment of new laws, regulations or policies could require increases in operating costs and additional capital expenditures and could possibly entail delays or interruptions of operations.
 
If we have insufficient proprietary rights or if we fail to protect those we have, our business would be materially harmed.
 
Our success and ability to compete is dependent in part on our proprietary technology. We rely on a combination of patent, copyright, trademark and trade secret laws, as well as confidentiality agreements and internal procedures, to establish and protect our proprietary rights. For example, we utilize proprietary design rules and processing steps in, among other things, the development and fabrication of our PIN photodiodes, APD photodiodes and our THz systems and sensors. In addition, our products rely upon over 197 patents or patents pending. There can be no assurance that any issued patents will provide us with significant competitive advantages, or that challenges will not be instituted against the validity or enforceability of any patent utilized by us, or, if instituted, that such challenges will not be successful. The cost of litigation to uphold the validity and to prevent the infringement of a patent could be substantial and could have a material adverse effect on our operating results. Furthermore, there can be no assurance that our technology, which we are constantly developing, will not infringe on patents or rights owned by others, licenses to which might not be available to us. While we have conducted limited due diligence and have conferred with experts with respect to, among other things, our proprietary materials which we incorporate into our PIN photodiodes, APD photodiodes and our THz systems and sensors, there can be no assurance that we have not overlooked or misinterpreted the status of the proprietary rights and intellectual property of others with respect to these products.
 
 
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The steps we have taken to protect our intellectual property may not adequately prevent misappropriation or ensure that others will not develop competitive technologies or products. Other companies may be investigating or developing other technologies that are similar to our own. It is possible that patents may not be issued from any of our pending applications or those we may file in the future and, if patents are issued, the claims allowed may not be sufficiently broad to deter or prohibit others from making, using or selling products that are similar to ours. We do not own patents in every country in which we sell or distribute our products, and thus others may be able to offer identical products in countries where we do not have intellectual property protection. In addition, the laws of some territories in which our products are or may be developed, manufactured or sold, including Europe, Asia-Pacific or Latin America, may not protect our products and intellectual property rights to the same extent as the laws of the United States.
 
In some cases, we may rely on trade secrets to protect our innovations. There can be no assurance that trade secrets will be established, that secrecy obligations will be honored or that others will not independently develop similar or superior technology. To the extent that consultants, key employees or other third parties apply technological information independently developed by them or by others to our projects, disputes might arise as to the proprietary rights to such information which may not be resolved in our favor.
 
Pursuing infringers of our intellectual property rights can be difficult and costly.
 
Policing unauthorized use of our technology is difficult and we cannot be certain that the steps we have taken will prevent the misappropriation, unauthorized use or other infringement of our intellectual property rights. Pursuing infringers of our proprietary rights could result in significant litigation costs, and any failure to pursue infringers could result in our competitors utilizing our technology and offering similar products, potentially resulting in loss of a competitive advantage and decreased sales.
 
Despite our efforts to protect our proprietary rights, existing patent, copyright, trademark and trade secret laws afford only limited protection. Further, we may not be able to effectively protect our intellectual property rights from misappropriation or other infringement in foreign countries where we have not applied for patent protections, and where effective patent, trademark, trade secret and other intellectual property laws may be unavailable, or may not protect our proprietary rights as fully as U.S. law.  We seek to secure, to the extent possible, comparable intellectual property protections in China and other areas in which we operate. Moreover, the level of protection afforded by patent and other laws in countries such as China may not be comparable to that afforded in the U.S.
 
Protecting our intellectual property is difficult especially after our employees or our third-party contractors end their employment or engagement. We may have employees leave us and go to work for competitors. Attempts may be made to copy or reverse-engineer aspects of our products or to obtain and use information that we regard as proprietary. Accordingly, we may not be able to prevent misappropriation of our technology or prevent others from developing similar technology.
 
We may be involved in intellectual property disputes in the future, which could divert management’s attention, cause us to incur significant costs and prevent us from selling or using the challenged technology.
 
Participants in the markets in which we sell our products have experienced litigation regarding patent and other intellectual property rights. Numerous patents in these industries are held by others, including our competitors. In addition, third parties may claim that we, or our products, operations or any products or technology we obtain from other parties are infringing their intellectual property rights; and we may be unaware of intellectual property rights of others that may cover some of our assets, technology and products.
 
 
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Regardless of their merit, responding to such claims can be time consuming, divert management’s attention and resources and may cause us to incur significant expenses. While we believe that our products do not infringe in any material respect upon the intellectual property rights of other parties and/or believe that a meritorious defense would exist with respect to any assertions to the contrary, we cannot be certain that our products would not be found to infringe upon the rights of others. Intellectual property claims against us could invalidate our proprietary rights and force us to do one or more of the following:
 
● 
obtain from a third party claiming infringement a license to sell or use the relevant technology, which may not be available on reasonable terms, or at all;
 
 ● 
stop manufacturing, selling, incorporating or using our products that use the challenged intellectual property;
 
● 
pay substantial monetary damages; or
 
● 
expend significant resources to redesign the products that use the technology and to develop non-infringing technology.
 
Any of these actions could result in a substantial reduction in our revenue and could result in losses over an extended period of time.
 
If we fail to obtain the right to use the intellectual property rights of others which are necessary to operate our business, and to protect their intellectual property, our business and results of operations will be adversely affected.
 
In the past, we have licensed certain Terahertz technology for use in our products.  In the future, we may choose, or be required, to license technology or intellectual property from third parties in connection with the development of our products. We cannot assure you that third-party licenses will be available to us on commercially reasonable terms, if at all. Our competitors may be able to obtain licenses, or cross-license their technology, on better terms than we can, which could put us at a competitive disadvantage. Also, we typically enter into confidentiality agreements with such third parties in which we agree to protect and maintain their proprietary and confidential information, including requiring our employees to enter into agreements protecting such information. There can be no assurance that the confidentiality agreements will not be breached by any of our employees or that such third parties will not make claims that their proprietary information has been disclosed.
 
We face strong competition for skilled workers which could result in our inability to attract and retain necessary personnel.
 
Our success depends in large part on our ability to attract and retain highly qualified scientific, technical, management, and marketing personnel.  Competition for such personnel is intense and there can be no assurance that we will be able to attract and retain the personnel necessary for the development and operation of our business.
 
We may not be able to successfully integrate future acquisitions, which could result in our not achieving the expected benefits of the acquisition, the disruption of our business and an increase in our costs.
 
Our ability to continue to grow may depend upon identifying and successfully acquiring attractive companies, effectively integrating these companies, achieving cost efficiencies and managing these businesses as part of our company.
 
 
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We may not be able to effectively integrate the acquired companies and successfully implement appropriate operational, financial and management systems and controls to achieve the benefits expected to result from these acquisitions. Our efforts to integrate these businesses could be affected by a number of factors beyond our control, such as regulatory developments, general economic conditions and increased competition. In addition, the process of integrating these businesses could cause the interruption of, or loss of momentum in, the activities of our existing business. The diversion of management’s attention and any delays or difficulties encountered in connection with the integration of these businesses could negatively impact our business and results of operations. Further, the benefits that we anticipate from these acquisitions may not develop.
 
Future acquisitions could require us to issue additional indebtedness or equity.
 
If we were to undertake a substantial acquisition for cash, the acquisition would likely need to be financed in part through bank borrowings or the issuance of public or private debt. This acquisition financing would likely increase our ratio of debt to equity and adversely affect other leverage criteria. Under our existing SVB Loan Agreement and PFG Loan Agreement, we are required to obtain consent prior to incurring additional indebtedness beyond a certain dollar amount.   We cannot assure you that the necessary acquisition financing would be available to us on acceptable terms if and when required. If we were to undertake an acquisition for equity, the acquisition may have a dilutive effect on the interests of the holders of our Common Stock.
 
We may be liable for damages based on product liability claims relating to defects in our products which might be brought against us directly, or against our customers in their end-use markets.  Such claims could result in a loss of customers in addition to substantial liability in damages.
 
Our products are complex and undergo quality testing as well as formal qualification, both by our customers and by us. However, defects may occur from time to time. Our customers’ testing procedures are limited to evaluating our products under likely and foreseeable failure scenarios and over varying amounts of time. For various reasons, such as the occurrence of performance problems that are unforeseeable in testing or that are detected only when products age or are operated under peak stress conditions, our products may fail to perform as expected long after customer acceptance. Failures could result from faulty components or design, problems in manufacturing or other unforeseen reasons. As a result, we could incur significant costs to repair or replace defective products under warranty, particularly when such failures occur in installed systems.  In addition, we may in certain circumstances honor warranty claims after the warranty has expired or for problems not covered by warranty in order to maintain customer relationships. Any significant product failure could result in lost future sales of the affected product and other products, as well as customer relations problems, litigation and damage to our reputation.
 
In addition, our products are typically embedded in, or deployed in conjunction with, our customers’ products, which incorporate a variety of components, modules and subsystems and may be expected to interoperate with modules produced by third parties. As a result, not all defects are immediately detectable, and, when problems occur, it may be difficult to identify the source of the problem. These problems may cause us to incur significant damages or warranty and repair costs, divert the attention of our engineering personnel from our product development efforts and cause significant customer relations problems or loss of customers, all of which would harm our business.
 
Furthermore, many of our products may provide critical performance attributes to our customers’ products that will be sold to end users who could potentially bring product liability suits in which we could be named as a defendant. The sale of these products involves the risk of product liability claims. If a person were to bring a product liability suit against one of our customers, this customer may attempt to seek contribution from us. A person may also bring a product liability claim directly against us. A successful product liability claim or series of claims against us in excess of our insurance coverage for payments, for which we are not otherwise indemnified, could have a material adverse effect on our financial condition or results of operations. We have acquired product liability coverage of up to $2 million.
 
 
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Our current and planned systems, procedures and controls may not be adequate to support our future operations.
 
The laws and regulations affecting public companies, including the provisions of the Sarbanes-Oxley Act of 2002, the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (the “Dodd-Frank Act”) and the rules adopted or proposed by the SEC, will result in increased costs to us as we evaluate the implications of any new rules and respond to their requirements. New rules could make it more difficult or more costly for us to comply with regulatory requirements, including our reporting obligations under the Securities Exchange Act of 1934 (the “Exchange Act”), and obtain certain types of insurance, including director and officer liability insurance, and we may be forced to accept reduced policy limits and coverage or incur substantially higher costs to obtain the same or similar coverage.  We cannot predict or estimate the amount of the additional costs we may incur or the timing of such costs to comply with any new rules and regulations, or if compliance can be achieved.
 
Additionally, in August 2012 the SEC adopted the conflict mineral rules under Section 1502 of the Dodd-Frank Act. The conflict mineral rules require issuers that manufacture products that contain certain minerals and metals (tantalum, tin, gold or tungsten), known as conflict minerals, to perform due diligence and to report annually to the SEC whether such minerals originated in the Democratic Republic of Congo or an adjoining country. The implementation of these new requirements could adversely affect the sourcing, availability and pricing of minerals we use in the manufacture of our products. In addition, we have incurred and will incur additional costs to comply with the disclosure requirements, including costs related to determining the source of any of the relevant minerals used in our products. On June 2, 2014, we filed our conflict minerals report with the SEC indicating we were “conflict free undetermined” because we did not receive 100% of the surveys back from our suppliers to confirm that they used conflict free materials in the production of our parts.  We intend to continue to develop more transparency into our supply chain as required by the SEC pursuant to the Dodd-Frank Act but significant efforts remain in order to achieve 100% certainty.
 
We are increasingly dependent on information technology systems and infrastructure.
 
We rely to a large extent on sophisticated information technology systems and infrastructure. The size and complexity of these systems make them potentially vulnerable to breakdown, malicious intrusion, and random attack. Likewise, confidentiality or data privacy breaches by employees or others with permitted access to our systems may pose a risk that trade secrets, personal information, or other sensitive data may be exposed to unauthorized persons or to the public. While we have invested in the protection of data and information technology, there can be no assurance that our efforts will prevent breakdowns or breaches in our systems that could adversely affect our business.
 
We may be unable to utilize our net operating loss carryforwards to reduce our income taxes, which could adversely affect our future financial results.
 
As of March 31, 2014, we had net operating loss, or NOL, carryforwards for U.S. federal and state tax purposes of $25.4 million and $6.5 million, respectively. As these net operating losses have not been utilized, a portion has begun to expire in the current year. The utilization of the NOL and tax credit carryforwards are subject to a substantial limitation imposed by Section 382 of the Internal Revenue Code of 1986, as amended, or the Code, and similar state provisions. We recorded deferred tax assets, net of valuation allowance, for the NOL carryforwards currently available after considering any existing Section 382 limitation. If we incur an additional limitation under Section 382, then the NOL carryforwards, as disclosed, could be reduced by the impact of any future limitation that would result in existing NOL carryforwards and tax credit carryforwards expiring unutilized.
 
 
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Risks Relating to Our Class A Common Stock
 
Our share price has been volatile in the past and may decline in the future.
 
Our Class A Stock has experienced significant market price and volume fluctuations in the past and may experience significant market price and volume fluctuations in the future in response to factors such as the following, some of which are beyond our control:
 
 ●   quarterly variations in our operating results;
   
 ●   operating results that vary from the expectations of securities analysts and investors;
   
 ●   changes in expectations as to our future financial performance, including financial estimates by securities analysts and investors;
   
 ●   announcements of technological innovations or new products by us or our competitors;
   
 ●   announcements by us or our competitors of significant contracts, acquisitions, strategic partnerships, joint ventures or capital commitments;
   
 ●   changes in the status of our intellectual property rights;
   
 ●   announcements by third parties of significant claims or proceedings against us
   
 ●   additions or departures of key personnel
   
 ●   future sales of our Class A  Stock  or securities exercisable or convertible into shares of Class A  Stock;
   
 ●   stock market price and volume fluctuations; and
   
 ●   general economic conditions.
 
Stock markets often experience extreme price and volume fluctuations. Market fluctuations, as well as general political and economic conditions, such as a recession or interest rate or currency rate fluctuations or political events or hostilities in or surrounding the United States, could adversely affect the market price of our Class A  Stock.
 
In the past, securities class action litigation has often been brought against companies following periods of volatility in the market price of its securities. We may in the future be the target of similar litigation. Securities litigation could result in substantial costs and divert management's attention and resources both of which could have a material adverse effect on our business and results of operations.
 
A limited public trading market may cause volatility in the price of our Class A Stock.
 
The quotation of our Class A Stock  on the NYSE MKT does not assure that a meaningful, consistent and liquid trading market currently exists, and in recent years such market has experienced extreme price and volume fluctuations that have particularly affected the market prices of many smaller companies like us. Our Class A Stock is thus subject to this volatility. In particular, although over 31 million shares of the Company’s Class A Stock were outstanding through the end of fiscal year 2014, the average daily trading volume over the 12 month period ended March 31, 2014 was approximately 78,000, or less than 0.3% of the number of shares outstanding.  Consequently, sales of substantial amounts of Class A Stock , or the perception that such sales might occur, could adversely affect prevailing market prices of our Class A Stock  and our stock price may decline substantially in a short time and our stockholders could suffer losses or be unable to liquidate their holdings.
 
 
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Future sales of our Class A Stock in the public market could lower our stock price, and conversion of our warrants or stock options and any additional capital raised by us may dilute your ownership.
 
We may sell additional shares of Class A Stock in the future. In addition, holders of warrants or stock options may exercise their warrants or stock options to purchase shares of our Class A Stock. We cannot predict the size of future issuances of our Class A Stock or the effect, if any, that future issuances and sales of shares of our Class A Stock will have on the market price of our Class A Stock. Sales of substantial amounts of our Class A Stock, including shares issued in connection with the exercise of the warrants or stock options, or the perception that such sales could occur, may adversely affect prevailing market prices for our Class A Stock.
 
Shares eligible for public sale in the future could decrease the price of our Class A Stock and reduce our future ability to raise capital.
 
Future sales of substantial amounts of our Class A Stock in the public market could decrease the prevailing market price of our Class A Stock, which would have an adverse effect on our ability to raise equity capital in the future.
 
Our issuance of Preferred Stock could adversely affect holders of Class A Stock.
 
Our board of directors (the “Board”) is authorized to issue series of Preferred Stock without any action on the part of our holders of Class A Stock. Our Board also has the power, without stockholder approval, to set the terms of any such series of Preferred Stock that may be issued, including voting rights, dividend rights, and preferences over the Class A Stock with respect to dividends or if we liquidate, dissolve or wind up our business and other terms. If we issue Preferred Stock in the future that has preference over the Class A Stock with respect to the payment of dividends or upon our liquidation, dissolution or winding up, or if we issue Preferred Stock with voting rights that dilute the voting power of the Class A Stock, the rights of holders of the Class A Stock or the price of the Class A Stock could be adversely affected.
 
We do not intend to pay dividends and are precluded from doing so while our SVB and PFG Loan Agreements are outstanding.
 
We have never declared or paid any cash dividends on our Common Stock and we are currently precluded from doing so while the SVB and PFG Loan Agreements are outstanding. Even in the event the SVB and PFG Loan Agreements are terminated, we currently intend to retain future earnings, if any, to finance operations and expand our business and, therefore, do not expect to pay any dividends in the foreseeable future.
 
Provisions in our organizational documents and Delaware law may delay or prevent a third party from acquiring us, which could decrease the value of our stock.
 
Our Board has the authority to issue preferred stock and to determine the price, rights, preferences, privileges and restrictions, including voting and conversion rights, of those shares without any further vote or action by the stockholders. The issuance of our preferred stock could have the effect of making it more difficult for a third party to acquire us. In addition, we are subject to the anti-takeover provisions of Section 203 of the Delaware General Corporation Law (the “DGCL”), which could also have the effect of delaying or preventing our acquisition by a third party. Further, certain provisions of our Certificate of Incorporation and bylaws could delay or make more difficult a merger, tender offer or proxy contest, which could adversely affect the market price of our common stock, including:
 
not providing for cumulative voting in the election of directors;
 
limiting the persons who may call special meetings of stockholders; and
 
requiring advance notification of stockholder nominations and proposals.
 
 
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These and other provisions in our amended and restated certificate of incorporation, our amended and restated bylaws and under Delaware law could discourage potential takeover attempts, reduce the price that investors might be willing to pay for shares of our common stock in the future and result in the market price being lower than it would be without these provisions.
 
Compliance with Regulation M may affect the marketability of our shares of Class A Stock.
 
During such time as we may be engaged in a distribution of the securities covered by the S-3 prospectus filed on May 5, 2014 and declared effective on May 12, 2014, we are required to comply with Regulation M promulgated under the Exchange Act. With certain exceptions, Regulation M precludes us, any affiliated purchasers, and any broker-dealer or other person who participates in such distribution from bidding for or purchasing, or attempting to induce any person to bid for or purchase, any security which is the subject of the distribution until the entire distribution is complete. Regulation M also restricts bids or purchases made in order to stabilize the price of a security in connection with the distribution of that security. All of the foregoing may affect the marketability of our shares of Class A Stock.

 
Item 2.    Properties

We lease all of our executive offices, research, marketing and manufacturing facilities under non-cancellable operating leases.  At March 31, 2014, those leases consisted of approximately 83,000 square feet in three facilities, a reduction of 14% from the previous year. The lease for our facility located in Camarillo, California was reduced from approximately 40,000 to 29,000 square feet in February 2014 and is now leased through March 2019.   In January 2010, our wholly owned subsidiary, Picometrix LLC, entered into a "Fourth Addendum & Extension Agreement" for our lease of the Ann Arbor, MI facility, which extended the lease to May 31, 2021. The 50,000 sq. ft. facility houses our research, development and manufacturing operations for the terahertz and high-speed optical receiver product platforms, corporate headquarters, and the semiconductor micro-fabrication facility for all three of our product platforms. The state-of-the-art facility was completed in 2001 and was designed to meet our unique requirements, including InP and GaAs material growth, semiconductor micro-fabrication, and precision hybrid assembly and high-speed testing. In addition, the facility includes an industry leading HSOR laboratory and three secure user laboratories for collaborative terahertz application development.   We also assumed the current lease of Silonex in Montreal, Canada which expires in May 2015, in connection with the acquisition of substantially all of its net operating assets.  The approximate 4,000 square feet of space includes research and administrative space.

 
Item 3.     Legal Proceedings
 
None

 
Item 4.     Mine Safety Disclosures

Not Applicable
 
 
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PART II

Item 5.    Market for Registrant’s Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities
 
Stock Performance Graph
 As a smaller reporting company, we are not required to prepare a stock performance graph and have elected not to do so this year.

Stockholder Information
Our Class A Common Stock is traded on the NYSE MKT exchange under the symbol "API".As of June 20, 2014, we had 102 holders of record for the Class A Common Stock (including shares held in street name).
 
Quarterly Stock Market Data
The following table sets forth the high and low closing prices of our Class A Common Stock by quarter for fiscal years 2014 and 2013.
 
Common Stock Price
   
1st Quarter
   
2nd Quarter
   
3rd Quarter
   
4th Quarter
 
   
2013
   
2014
   
2013
   
2014
   
2013
   
2014
   
2013
   
2014
 
Common Stock1
                                               
High
  $ 0.77     $ 0.72     $ 0.76     $ 0.68     $ 0.67     $ 0.85     $ 0.80     $ 0.81  
Low
  $ 0.51     $ 0.42     $ 0.52     $ 0.47     $ 0.40     $ 0.55     $ 0.41     $ 0.58  
1 Price ranges on the NYSE MKT.
 
 
 
We have never paid any cash dividends on our capital stock and are currently precluded from doing so while the SVB and PFG loan agreements are outstanding.  Even in the event the SVB and PFG Loan Agreements are terminated, we intend to retain earnings, if any, for use in our business and do not anticipate that any funds will be available for the payment of cash dividends on our outstanding shares in the foreseeable future.
 
Repurchases of Equity
We have made no repurchases of our common stock during our fourth fiscal quarter ended March 31, 2014.

 
Item 6.   Selected Financial Data

Advanced Photonix, Inc.  is a smaller reporting company as defined by Rule 12b-2 of the Exchange Act and is not required to provide the information required under this item.

 
Item 7.    Management’s Discussion and Analysis of Financial Condition and Results of Operations

Forward-Looking Statements
Certain statements contained in this Management’s Discussion and Analysis (MD&A), including, without limitation, statements containing the words “may,” “will,” “can,” “anticipate,” “believe,” “plan,” “estimate,” “continue,” and similar expressions constitute “forward-looking statements.” These forward-looking statements reflect our current views with respect to future events and are based on assumptions and subject to risks and uncertainties. You should not place undue reliance on these forward-looking statements. Our actual results could differ materially from those anticipated in these forward-looking statements for many reasons, including risks described in the Risk Factors sections and elsewhere in this filing. Except for our ongoing obligation to disclose material information as required by federal securities laws, we do not intend to update you concerning any future revisions to any forward-looking statements to reflect events or circumstances occurring after the date of this report. The following discussion should be read in conjunction with the Risk Factors as well as our financial statements and the related notes.
 
 
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Our Business
We are a leading test and measurement company that packages optoelectronic semiconductors into high-speed optical receivers (“HSOR” products), custom optoelectronic subsystems (“Optosolutions” products) and Terahertz instrumentation (“THz” products), serving a variety of global markets.  Our HSOR transmission products are deployed in the internet infrastructure to enable the high-speed bandwidth necessary to support video and data for your TV, computer, tablet or smart phone anytime and anywhere. Our communication test and measurement products (“Comtest”) are used to develop, manufacture and test optical communication equipment used in the telecom infrastructure. Our Optosolutions products are sold to a number of scientific instrumentation manufacturers for various applications such as metrology, currency validation, flame monitoring, solar panel quality, temperature sensing, particle detection, color sensing, infrared detection and many other applications that can only be done through optical sensing.  Our T-Gauge® systems are used to measure and verify physical properties on-line and in real-time to reduce raw materials  and rework costs in manufacturing processes as well as conduct quality control monitoring.  Our established and growing patented Terahertz technology has allowed us to expand from the laboratory market into the 24/7 industrial process and quality control manufacturing, military/aerospace, and security markets.
 
We support the customer from the initial concept and design of the semiconductor, hybridization of support electronics, packaging and signal conditioning or processing from prototype through full-scale production and validation testing.  The target markets served by us are Test and Measurement, Military/Aerospace, Telecom Transmission, and Medical.
 
Critical Accounting Policies and Estimates
The discussion and analysis of our financial condition and results of operations is based on the condensed consolidated financial statements, which have been prepared in conformity with accounting principles generally accepted in the United States of America. The preparation of these condensed consolidated financial statements requires us to make judgments and estimates that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statement and the reported amount of revenues and expenses during the reporting period. We base our estimates on historical experience and on various other assumptions that we believe are reasonable under the circumstances. Actual results may differ from such estimates under different assumptions or conditions.

Application of Critical Accounting Policies
Application of our accounting policies requires management to make certain judgments and estimates about the amounts reflected in the financial statements. We use historical experience and all available information to make these estimates and judgments, although differing amounts could be reported if there are changes in the assumptions and estimates. Estimates are used for, but not limited to, the accounting for the allowance for doubtful accounts, inventory cost adjustments, impairment costs, depreciation and amortization, warranty costs, taxes and contingencies. We have identified the following accounting policies as critical to an understanding of our financial statements and/or as areas most dependent on management's judgments and estimates.

Revenue Recognition
Revenue is derived principally from the sales of our products.  We recognize revenue when persuasive evidence of an arrangement exists, usually in the form of a purchase order, when shipment has occurred since title and risk of loss passes at that time, or when services have been rendered, the price is fixed or determinable and collection is reasonably assured in terms of both credit worthiness of the customer and there are no post shipment obligations or uncertainties with respect to customer acceptance.
 
We sell certain of our products to customers with a product warranty that provides warranty repairs at no cost. The length of the warranty term is one year from date of shipment.  We accrue the estimated exposure to warranty claims based upon historical claim costs.  We review these estimates on a regular basis and adjust the warranty provisions as actual experience differs from historical estimates or as other information becomes available.
 
 
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We do not provide price protection or a general right of return.  Our return policy only permits product returns for warranty and non-warranty repair or replacement and requires pre-authorization by us prior to the return. Credit or discounts, which have been historically insignificant, may be given at our discretion and are recorded when and if determined.

We predominantly sell directly to original equipment manufacturers with a direct sales force with limited sales through representatives, VAR’s and distributors. Distributor and VAR sales represented approximately 11% of total revenue for the year ended March 31, 2014.  Significant terms and conditions of distributor agreements include FOB source, net 30 days payment terms, with no return and limited exchange rights, and no price protection.  Since the product transfers title to the distributor at the time of shipment by us, the products are not considered inventory on consignment.
 
Revenue is also derived from technology research and development contracts. We recognize revenue from these contracts as services and/or materials are provided.

Impairment of Goodwill and Long-Lived Assets
As of March 31, 2014 and March 31, 2013, the consolidated balance sheet included $4.6 million of goodwill. Goodwill represents the excess purchase price over amounts assigned to tangible or identifiable intangible assets acquired and liabilities assumed from our business acquisitions.

Goodwill and intangible assets that are not subject to amortization are tested for impairment annually or more frequently if events or changes in circumstances indicate that the asset might be impaired.  During the year ended March 31, 2013, we adopted new FASB guidance relative to goodwill impairment whereby in its annual assessment of goodwill impairment, we have the option to first assess qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not that the fair value of a reporting unit is less than its carrying value before performing the two step quantitative impairment test.  If after assessing the totality of events or circumstances, we determine it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, then performing the two step impairment test is not necessary.  Step one of the two step impairment test is to compare the fair value of the reporting unit with the unit’s carrying amount, including goodwill. Fair value of each reporting unit is determined by weighting fair values using a combination of a discounted cash flow approach, and observed enterprise values to revenue multiples and precedent sales transaction multiples for companies in the reporting unit’s peer group.  If this test indicates that the fair value is less than the carrying value, then step two is required to compare the implied fair value of the reporting unit’s goodwill with the carrying amount of the reporting unit’s goodwill. If the carrying amount of the goodwill exceeds its implied fair value, an impairment loss shall be recognized in an amount equal to that excess.  We have selected March 31 as the date for its annual impairment test.

We continue to meet the criteria to report as a single reportable segment.  In fiscal 2013 and prior years, we had one reporting unit.  The nature of the production process was similar for our three product lines, manufacturing for the different product lines occurred in common facilities and the types and class of customers were in some cases similar across the three product lines.  However, as disclosed in Note 11, in the third quarter of fiscal 2014, we made the decision to begin outsourcing the silicon photodiode production that is used in the Optosolutions product line given sources in Asia became more cost effective.  In addition, the decision was made to provide access to the Asia market which we believe will benefit the Company as a whole.  Prior to that decision, the production of silicon photodiodes had been done in the Ann Arbor, Michigan facility using shared equipment with the HSOR and THz product lines.  As a result of the change from a shared manufacturing process for the three product lines and certain restructuring changes internally, we have concluded we can no longer aggregate our three product lines into one reporting unit for goodwill impairment purposes as of March 31, 2014 but instead consider there to be two reporting units as photodiode production remains common for the HSOR and THZ products and the types and classes of customers are similar as well.  We determined the fair value of the two reporting units by weighting fair values using a combination of a discounted cash flow approach, observed enterprise values to revenue multiples, and precedent sales transaction multiples for companies in the reporting units’ peer group.  Key assumptions used to determine the fair value of each reporting unit were (a) future expected cash flows; (b) estimated residual growth rates; (c) discount rates which were based on our estimates of the after tax weighted average cost of capital, (d) observed enterprise values to sales multiples  for our peer group; and (e) enterprise to revenue multiples observed in precedent merger and acquisition transactions for our peer group.  Additionally, we consider our market capitalization in comparison to the aggregate fair value of the reporting units.
 
As a result of the changes in reporting units during the year, we allocated the $4.6 million of Goodwill to our two reporting units based on the reporting units’ relative fair values.  We then compared the fair value of each reporting unit to the respective carrying value.  Our valuation as of March 31, 2014 indicated there were no impairments of Goodwill for the two reporting units when computed as described above, with the fair value exceeding carrying value by at least 109% for both.
 
 
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As noted above, our stock price is a significant factor in assessing fair value for purposes of the goodwill impairment test. As of March 31, 2014, our market capitalization exceeded shareholders' equity balance by 91%.  The aggregate fair value of our reporting units exceeded our market capitalization by 34%.  If our market capitalization falls below the current carrying value for a sustained period, or our reporting units do not perform as expected, it is reasonably likely that an impairment assessment would be necessary and a non-cash charge to operating income may be recorded.

The carrying value of other long-lived assets, including amortizable intangibles, leasehold improvements, and equipment, are evaluated whenever events or changes in circumstances indicate that a potential impairment has occurred relative to a given asset or assets. Impairment is deemed to have occurred if projected undiscounted cash flows associated with an asset (asset group) are less than the carrying value of the asset (asset group). The estimated cash flows include our assumptions of cash inflows and outflows directly resulting from the use of that asset, or group of assets used in conjunction with the specific asset or assets, in operations. The amount of the impairment loss recognized is equal to the excess of the carrying value of the asset, or asset group, over its then estimated fair value. As a result of the current year operating loss, we performed an impairment evaluation.  The vast majority of the amortizing intangibles, leasehold improvements and equipment subject to the impairment test are in the combined HSOR and THz reporting unit.  Given the shared nature of the manufacturing process for photodiodes, we have determined the lowest level of cash flows to be the reporting unit.  The impairment analysis involved forecasting future undiscounted cash flows of the reporting unit over the estimated useful life of the primary asset of the group.  After performing this first step analysis, we concluded that as of March 31, 2014 there were no impairments indicated based upon the expected overall growth in the 100G telecommunications market and our restored ability to service this growth given the resolution of supply chain constraints that occurred in fiscal 2013.  Further, our Terahertz products have been cost reduced to a point where they have become a competitive green alternative to the nuclear gauges used to control certain continuous manufacturing processes.  We believe that the product is nearing a point of significant growth in the adoption of this disruptive technology which further increases the expected future cash flows of the group.
 
Accounting for Income Taxes
Income tax provisions and benefits are made for taxes currently payable or refundable, and for deferred income taxes arising from future tax consequences of events that were recognized in the our financial statements or tax returns and tax credit carryforwards. The effects of income taxes are measured based on enacted tax laws and rates applicable to periods in which the differences are expected to reverse. If necessary, a valuation allowance is established to reduce deferred income tax assets to an amount that will more likely than not be realized in accordance with FASB guidance pertaining to accounting for income taxes.

As part our assessment of the need for a valuation allowance, we consider all available evidence, both positive and negative, including our recent operating results and our forecasting process.  We forecast taxable income through our budgeting and planning process each year. The process takes into account existing contracts, firm sales backlog, and projected sales based upon customer supplied forecasts of product purchases, resources needed to fulfill these customers’ requirements, and extraordinary expenses that may be part of long-term initiatives to increase shareholder value through revenue growth and efficiency improvements leading to profit improvement. We have substantial history, more than 10 years in most cases, with our customers and markets on which our forecasts are based.

At March 31, 2014, we had net operating loss carry forwards (NOL’s) of approximately $25.4 million for Federal income tax purposes and $6.5 million for state income tax purposes that expire at various dates between 2017 and 2034.  The tax laws related to the utilization of loss carry forwards are complex and the amount of the our loss carry forward that will ultimately be available to offset future taxable income may be subject to annual limitations under Internal Revenue Code Section 382 resulting from changes in the ownership in our common stock.
 
We performed an analysis to determine whether an ownership change under Section 382 of the Internal Revenue Code had occurred. The effect of an ownership change would be the imposition of an annual limitation on the use of the net operating loss carry forwards attributable to periods before the change.  As of March 31, 2014, we believe there are no limitations on the use of these Federal NOLs.
 
 
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At March 31, 2014, our net deferred tax asset before consideration of a valuation allowance was approximately $12.6 million, mainly consisting of net operating loss carry-forwards which expire at various amounts over an approximate 20 year period. In assessing the realizability of deferred tax assets, we have determined that at this time it is “more likely than not” that deferred tax assets will not be realized, primarily due to uncertainties related to our ability to utilize the net operating loss carry-forwards before they expire based on the negative evidence of our recent years’ history of losses over the past three years, outweighing the positive evidence of income projections in future years. The ultimate realization of these deferred tax assets is dependent upon the generation of future taxable income during those periods in which those temporary differences become deductible or within the periods before NOL carry forwards expire. As of both March 31, 2014 and 2013, we recorded a full valuation allowance on our net deferred tax assets.

The calculation of federal income taxes involves dealing with uncertainties in the application of complex tax regulations.  We recognize liabilities for uncertain tax positions based on a two-step process. The first step involves evaluating the tax position for recognition by determining if the weight of available evidence indicates that it is more likely than not that the position will be sustained on audit, including resolution of related appeals or litigation processes, if any. The second step involves estimating and measuring the tax benefit as the largest amount that is more than 50% likely to be realized upon ultimate settlement. It is inherently difficult and subjective to estimate such amounts, as we have to determine the probability of various possible outcomes. Our evaluation of uncertain tax positions is based on factors including, but not limited to, changes in facts or circumstances, changes in tax law, effectively settled issues under audit, and new audit activity. Such a change in recognition or measurement would result in the recognition of a tax benefit or an additional charge to the tax provision.  We have taken no tax positions which would require disclosure.

Inventories
Inventories, which include material, labor and manufacturing overhead, are stated at the lower of cost (on a first in–first out basis) or market. Slow moving and obsolete inventories are reviewed throughout the year to assess whether a cost adjustment is required. Our review of slow moving and obsolete inventory begins with a listing of all inventory items which have not moved regularly within the past 12 months.  In addition, any residual inventory, which is customer specific and remaining on hand at the time of contract completion, is included in the list. The complete list of slow moving and obsolete inventory is then reviewed by the production, engineering and/or purchasing departments to identify items that can be utilized in the near future. These items are then excluded from the analysis and the remaining amount of slow-moving and obsolete inventory is then further assessed and a write down is recorded when warranted. Additionally, non-cancelable open purchase orders for parts we are obligated to purchase where demand has been reduced may also be written down. Impairments for open purchase orders where the market price is lower than the purchase order price are also recorded. The impairments established for excess, slow moving, and obsolete inventory create a new cost basis for those items.  The cost basis of these parts is not subsequently increased if the circumstances which led to the impairment change in the future.  If a product that had previously been impaired is subsequently sold, the amount of reduced cost basis is reflected as cost of goods sold.

Warrant Valuations
We have warrants outstanding exercisable into 1,462,196 shares of Series A Common Stock with an estimated value of $409,000 as of March 31, 2014.  We compute the value of the warrants using the Monte Carlo model, which is generally a preferred model when instruments contain non-standard features.  When a warrant may have different share exercise assumptions such as those issued in February 2013 to Partners for Growth III, L.P. and affiliates, we weigh various values based on the estimated probability of each outcome as of the valuation date.  The value derived from the model is therefore sensitive to changes in our weighting and also changes in the inputs regarding the current stock price, the contractual term, volatility, risk free interest rates and expected dividend rate.
 
 
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Results of Operations

Fiscal Year Ended March 31, 2014 Compared to Fiscal Year Ended March 31, 2013

Revenues
We predominantly operate in one industry segment, light and radiation detection devices, and sell to four major markets including test and measurement, telecommunications, military and aerospace, and medical.  Revenues by market consisted of the following:
                                                                                                                                     
    Year ended
   
March 31, 2014
   
March 31, 2013
 
Test and Measurement
  $ 18,640,000       64 %   $ 15,121,000       64 %
Telecommunications  
    6,517,000       23 %     3,413,000       14 %
Military/Aerospace
    2,738,000       9 %     4,176,000       18 %
Medical
    1,146,000       4 %      939,000       4 %
    Total Revenues
  $ 29,041,000       100 %   $ 23,649,000       100 %          

Our total revenues for fiscal 2014 were $29.0 million, an increase of approximately $5.4 million, or 23%, from revenues of $23.6 million for fiscal 2013. Three of our four market segments showed growth in fiscal 2014 relative to fiscal 2013.

Test and Measurement market revenues were $18.6 million in fiscal 2014, an increase of 23% ($3.5 million) from fiscal 2013 revenues of $15.1 million due to the full year of activity from the newly acquired net operating assets of Silonex (now known as Advanced Photonix Canada or APC).  Our Test and Measurement revenue in the fourth quarter of the current year decreased 7% ($327,000) from the comparable prior year quarter primarily due to completion of Terahertz contract on the F-35 program.  Revenues in this market during the fourth quarter of the current year decreased approximately 17%, or $862,000, from the third quarter of the current year given completion of the Terahertz contracts and a pause in Comtest activity.

Telecommunications sales were $6.5 million, an increase of $3.1 million, or 90%, from fiscal 2013. The increase in our telecommunications revenues for fiscal 2014 was the result of resolution of supply chain disruptions that allowed us to regain market share at major 100G customers.  Our Telecommunications revenue in the fourth quarter increased approximately 388% ($1.5 million) from the prior year fourth quarter and increased approximately 11% ($180,000) from the third quarter of the current year although this was muted by the annual contract price reductions with a major customer.  Market share improvements, market growth, and new awards in China to improve their internet infrastructure explain the improved business conditions.

Military/Aerospace market revenues were $2.7 million in fiscal 2014, a decrease of 34% ($1.4 million) from the comparable prior year revenues of $4.2 million.  Our military/aerospace market revenue in the fourth quarter of the current year decreased 25% ($182,000) from the prior year fourth quarter.  Both decreases occurred due to completion of the F-35 development contract in these respective periods.    Our military/aerospace market revenues increased 24% ($103,000) from the third quarter of the current year with the start of shipments under an Optosolutions missile program award given 9 months ago and delayed by the prime contractor.

Medical market revenues increased $207,000, or 22%, to $1.1 million from the prior year revenue of $939,000.  Our medical market revenue in the fourth quarter of the current year was similar to the prior year fourth quarter and were up by $105,000 from the third quarter of the current year.  These fluctuations are the primary result of the shipment pattern from one customer.

In looking out to next year, we believe Test and Measurement revenues will grow more modestly given there has been a full year of the Silonex revenues in the base.  Most of the growth is expected from forecasted THz system sales.  Telecom revenues in fiscal year 2015 are expected to be up significantly as we supply HSOR products to satisfy the rapidly growing 100 Gigabytes per second (Gb/s) infrastructure build out and market share increase coming from China.  The military/aerospace market retrenched significantly in fiscal year 2014 and we plan on slightly higher revenues in fiscal year 2015 given anticipated orders on the F-35, naval hull coating and certain missile programs.  We expect medical market revenues to be flat to slightly down in fiscal year 2015 due to product transitions at a major customer.  Overall, we expect fiscal year 2015 to exceed 20% growth on the strength of our HSOR and THz product offerings.
 
 
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Gross Profit
Gross Profit was $9.6 million (or 33% of revenue), compared to the prior year of $8.8 million (37% of revenue), an increase of $782,000.  Gross profit dollars increased given the higher volumes from the telecom market and the Silonex acquisition and was muted since we shutdown our silicon fabrication activities in the third quarter of fiscal year 2014 incurring special charges of $667,000.  The lower gross profit rate was due primarily to the lower volume of THz contracts during the year.   Gross profit in the fourth quarter of fiscal 2014 was $2.0 million (29% of revenue) versus $2.2 million (36% of revenue) during the prior year fourth quarter given the mix shift out of Terahertz contracts.  Gross profit was $1.9 million (25% of revenue) in the third quarter of fiscal 2014 and improved by approximately $116,000 in the fourth quarter of fiscal 2014 to $2.0 million despite the 6% lower sales volume.   The third quarter gross margin was adversely affected by the silicon fabrication shutdown costs.

Operating Expenses
Research and Development expenses (R&D) -- Our R&D expenses decreased approximately 12%, or $708,000, over the prior year. R&D expenses of $5.0 million for fiscal 2014 compared to $5.7 million in fiscal 2013 were 17% and 24% of sales, respectively. In fiscal 2013, we continued spending to develop and qualify certain HSOR products, and fulfill certain THz development contracts.  Early in fiscal 2014 we reduced our engineering headcount to bring our spending more in line with our revenue profile as these projects were completed.
 
 
Sales and Marketing expenses (S&M) – S&M expenses increased $469,000 (or 22%) to $2.6 million (9% of sales) in fiscal 2014 compared to $2.1 million (9% of sales) in fiscal 2013.  The increase was attributable to the acquisition of the Silonex business which brought certain ongoing sales and marketing costs and an increase in HSOR product line sales which drove higher commissions for the year.

General and Administrative expenses (G&A) -- G&A expenses increased $228,000 to approximately $4.5 million (15% of sales) for fiscal 2014, as compared to $4.3 million (18% of sales) for fiscal 2013. The increase was due to reduced tax credits obtained in FY14 when compared to the prior year and higher bank fees.

Amortization expense decreased approximately $152,000 to $1.0 million compared to the prior year of approximately $1.2 million.  We use the cash flow amortization method on the majority of our intangible assets which results in a declining expense profile over the life of the assets.

Financing and Other Income (Expense), net
Interest income for fiscal 2014 was approximately $8,000, compared to $10,000 for fiscal 2013.

Interest expense for fiscal 2014 was $652,000 as compared to $202,000 in fiscal 2013, an increase of $450,000, due to higher rates on our loans with SVB, a $2.1 million increase in borrowings under our line of credit with SVB, non-cash amortization of $254,000, and issuance of the Partners for Growth (PFG) loan for $2.5 million in February 2013 to assist in financing the Silonex business net operating asset purchase as well as provide additional liquidity.  

For the year ended March 31, 2014, there was an increase in the fair value of the warrant liability that triggered expense of $117,000 which compared to other income of $168,000 for the year ended March 31, 2013.  FASB guidance requires our outstanding warrants to be recorded as a liability at fair value with subsequent changes in fair value recorded in earnings. The fair value of the warrant is determined using a Monte Carlo option pricing model, and is affected by changes in inputs to that model including our stock price, expected stock price volatility and contractual term.  When a warrant may have different share exercise assumptions such as those issued in February 2013 to PFG and affiliates, we weigh various values based on the estimated probability of each outcome as of the valuation date.  The expense of $117,000 related to the change in fair value of the warrant liability for fiscal 2014 is primarily due to the increase in our stock price.

Net loss for fiscal 2014 was $4.3 million ($0.14 per share), as compared to net loss of $4.4 million ($0.14 per share) in fiscal 2013, a decrease in the loss of approximately $123,000.  The decrease in losses for the year were primarily attributable to the higher gross margin realized of $782,000 and lower operating expense spend of $163,000 partially offset by higher interest and warrant related expense.
 
 
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Liquidity and Capital Resources
At March 31, 2014, we had cash and cash equivalents of $120,000, a decrease of $499,000 from $619,000 as of March 31, 2013 as cash and our line of credit have been used to fund losses and pay down certain debt obligations. Cash used in operating activities in fiscal 2014 was $845,000, cash used in investing activities was $421,000 and cash provided from financing activities netted $767,000.

Operating Activities
Net cash used in operations for the year ended March 31, 2014 was $845,000, the result of  a net loss of $4.3 million net of non-cash expenses of $3.0 million and  net cash provided by changes in operating assets and liabilities of $459,000.  During the year, we matched our vendor’s payment cycle with our customer’s payment cycle thereby allowing for the liquidation of a small amount of working capital into cash.

Net cash used in operating activities of $2.2 million for the year ended March 31, 2013 was the result of net cash used by operations of $2.4 million and by net cash provided by changes in operating assets and liabilities of $172,000.  The net cash used by operations included a net loss of $4.4 million and non cash items of $2.0 million from depreciation, amortization, debt discount amortization and stock based compensation expense and cash provided from operating assets and liabilities.  Revenue levels at the end of the year were slightly down from the prior year end thereby allowing for a slight working capital liquidation.

Investing Activities
Net cash used in investing activities was $421,000 for the year ended March 31, 2014, consisting of capital expenditures of $136,000 and patent expenditures of $285,000.

Net cash used by investing activities was $1.5 million for the year ended March 31, 2013, consisting of capital expenditures of $408,000, patent expenditures of $181,000, and $900,000 spent by our newly formed Canadian subsidiary, Advanced Photonix Canada, Inc. to acquire the net operating assets of Silonex in March 2013.

Financing Activities
Net cash provided by financing activities was approximately $767,000 for the year ended March 31, 2014.  We made line of credit draws of $2.1 million to pay principal of $1.4 million in term debt.  During fiscal 2014, we made scheduled principal payments of $361,000 on our debt with SVB, $714,000 on our debt with PFG and $276,000 on our debt with MEDC/MSF.

Net cash used in financing activities was approximately $1.1 million for the year ended March 31, 2013.  In February 2013, we entered into a 42 month amortizing note with PFG in exchange for $2.5 million.  During fiscal 2013, we made scheduled principal payments of $923,000 on our debt with SVB, PFG and MEDC/MSF and paid down $500,000 on our line of credit with SVB.

Debt
 
Bank Debt
On January 31, 2012, we entered into a Loan and Security Agreement with Silicon Valley Bank (“SVB” and such agreement as amended from time to time, the “SVB Loan Agreement”) and a related Loan and Security Agreement (Ex-IM Loan Facility) with SVB (as amended from time to time, the “SVB Ex-Im Loan Agreement”, and together with the SVB Loan Agreement, the “SVB Loan Agreements”) that provided for a three-year $1 million term loan that, as amended through June 2014, expires in March 2015, and a $5 million line of credit with a $3 million export-import facility sublimit that, as amended through June 2014, expires in June 2016. Subsequent to the execution of the original SVB Loan Agreements, there have been eight amendments that have modified the financial covenants, allowed for the acquisition of substantially all of the operating assets of Silonex, Inc. (“Silonex”), allowed us to enter into the loan agreement with Partners for Growth III, L.P. (“PFG” and such agreement as amended from time to time as the “PFG Loan Agreement) as described below and extended the maturity date of the line of credit from January 2014 to June 2016.
 
 
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The SVB Loan Agreements as amended contained December 2013 and January 2014 financial covenants that required us to maintain a minimum liquidity ratio of 2.25 to 1.00 and a minimum trailing three month adjusted EBITDA, measured monthly of (1) a negative $300,000 for each fiscal month during the period July through October 2013; and (2) $1 for each fiscal month during the period November 2013 through February 2014.
 
As of December 27, 2013 and January 24, 2014, we were not in compliance with the then existing minimum adjusted EBITDA covenant of $1 for the three months ended December 27, 2013 and January 31, 2014, respectively, and as of January 31, 2014, the we were also not in compliance with the then existing minimum liquidity ratio of 2.25 to 1.00.  In addition, the foregoing defaults triggered the cross-default provisions under each of the SVB Loan Agreements and the loan with PFG under the PFG Loan Agreement.  Consequently, under the terms of each agreement, SVB and PFG were both entitled to proceed against the collateral provided as security for the loans issued thereunder upon an event of default subject, in PFG’s case, to any rights that SVB may have in that same collateral.
 
On February 10, 2014, we entered into separate Forbearance Agreements with SVB and PFG pursuant to which and subject to certain exceptions, each of SVB and PFG agreed not to proceed against the collateral securing their respective loans until February 28, 2014.  On March 5, 2014, we entered into separate amendment agreements with SVB and PFG where, among other things, (i) SVB agreed to extend the maturity date of the Company’s $5 million line of credit to May 31, 2014; (ii) the minimum trailing three month adjusted EBITDA covenant was reset to a negative $1.2 million for the fiscal month ended February 28, 2014, a negative $800,000 for the fiscal month ended March 31, 2014, a negative $600,000 for the fiscal month ended April 30, 2014 and a positive $1 for the fiscal month ending May 31, 2014; (iii) the existing minimum liquidity ratio covenant was reset to 1.30 to 1.00 as of February 28, 2014, and 2.25 to 1.00 for each month thereafter through May 2014; and (iv) each of SVB and PFG waived the existing defaults.  In addition to the payment of an amendment fee, the Company agreed to pay each of SVB and PFG additional fees of up to $50,000 and $75,000, respectively, no later than May 31, 2014 (the “Tail Fees”).
 
On April 30, 2014, API entered into separate amendment agreements with SVB and PFG where, among other things, (i) SVB agreed to extend the maturity date of the $5 million line of credit to July 31, 2014; (ii) the trailing three month adjusted EBITDA covenant was reset to a negative $800,000 for the fiscal month ended March 31, 2014, a negative $600,000 for the fiscal month ended April 30, 2014, a negative $250,000 for the fiscal months ending May 31, 2014 and June 30, 2014 and a positive $1 for the fiscal month ending July 31, 2014; and (iii) the existing minimum liquidity ratio covenant was reset to 1.30 to 1.00 as of March 31, 2014 through May 31, 2014, and 2.00 to 1.00 for each month thereafter through July 2014.  In addition to the payment of an amendment fee, we agreed to pay each of SVB and PFG their respective Tail Fee and, commencing with the month ended May 31, 2014, an additional fee of $15,000 and $20,000, respectively, for each month that the liquidity ratio is less than 2.00 to 1.00 as of the last day of the month under measurement.
 
On June 6, 2014 we received approximately $2,657,000 in proceeds before expenses from a secondary placement of 5,391,304 shares of Class A Common Stock through a firm underwriting by B Riley & Co., LLC.  On June 10, 2014, the underwriter exercised the option on an additional 808,696 shares of Class A Common Stock for proceeds before expenses of $398,606.  The net proceeds were used to pay down the existing line of credit with SVB and certain related fees.  On June 20, 2014, we signed separate amendments with SVB and PFG where, among other things, (i) SVB agreed to extend the maturity date of the Company’s  line of credit to June 2016, (ii) all parties agreed to a six month trailing adjusted EBTIDA covenant, measured at each fiscal month end, of negative $850,000 through June 2014, negative $300,000 for July through September 2014, a positive $1 for October through December 2014 and $100,000 each month thereafter subject to reset upon the submission of the fiscal 2016 budget but no lower than $100,000 on a rolling six month basis, (iii) all parties agreed to adjust the  minimum liquidity ratio, as defined, to be 1.30 to 1.00 for months ending prior to June 2014 and 2.00 to 1.00 for all months on or after June 2014 as measured at each month end, and (iv) SVB restored an interest rate matrix based on the covenant performance that results in an interest rate on the line of credit to range from prime rate plus 50 basis points up to prime rate plus 400 basis points and an interest rate on the term loan to range from prime plus 75 basis points up to prime plus 450 basis points.  The agreements confirmed the obligation to pay the previously agreed Tail fees of $50,000 and $75,000 to SVB and PFG respectively, associated attorney fees for the amendment, but waived the added tail fees for May 2014 of $15,000 and $20,000 respectively.
 
The interest rates on the SVB term loan and line of credit as of March 31, 2014 were 7.75% and 7.25%, respectively.  We had approximately $2.1 million outstanding on the SVB line of credit with approximately $2.0 million in borrowing capacity as of March 31, 2014.  As of June 24, 2014, we have paid off the entire outstanding balance of the line of credit.
 
 
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The EX-IM loan facility, is guaranteed by API’s subsidiaries and all borrowings under the SVB Loan Agreements are secured by a first priority security interest granted to SVB over substantially all of our respective assets.  As of March 31, 2014, we were in compliance with the related liquidity and adjusted EBITDA covenant with SVB based on the agreement as of that date.  Based on the current projections, we expect to remain in compliance with the SVB loan covenants through at least March 2015 using the covenants agreed with SVB in June 2014.

Total interest payments made to the bank during the years ended March 31, 2014 and March 31, 2013 were approximately $107,000 and $54,000, respectively.

Partners for Growth Secured Debt
On February 8, 2013, we entered into a $2.5 million secured Loan and Security Agreement with PFG that is subordinated to the SVB Loan Agreements.  Pursuant to the terms of the agreement, we are obligated to make monthly principal payments of $59,524, plus accrued interest at 11.75% through maturity in August 2016.  As part of the consideration for and as a closing condition to the PFG Loan Agreement, we agreed to grant PFG and certain of its affiliates warrants to purchase up to 1,195,000 shares of the Company’s Class A Stock (the “Warrants”) in a private placement pursuant to Section 4(a)(2) of the Securities Act. 995,000 of the shares issuable under the Warrants were granted at an initial strike price equal to $0.50 per share (the “Tier 1 Warrants”), and the remaining 200,000 shares issuable under the Warrants were granted at an initial strike price equal to $1.00 per share (“$1.00 Warrants”).  Included in the PFG Loan Agreement were certain revenue and adjusted EBITDA goals which if hit would have reduced the interest rate from 11.75% to 9.75% and cancelled 200,000 of the warrants.  We did not achieve those goals during the year and so the interest rate for the remaining life of the loan remains at 11.75% and 1,195,000 warrants remain outstanding as of March 31, 2014.
 
The Warrants contain full-ratchet anti-dilution provisions that will result in proportional adjustments to the exercise price and the number of shares issuable under the PFG Warrant Agreements in the event that we conduct a stock split, subdivision, stock dividend or combination, or similar transaction. The PFG Warrant Agreements also include a net exercise provision pursuant to which warrant holders will receive the number of shares equal to (x) the product of (A) the number of Warrants exercised multiplied by (B) the difference between (1) the fair market value of a share of Class A Stock (with fair value generally being equal to the highest closing price of our Class A Stock during the 45 consecutive trading days prior to the date of exercise) and (2) the strike price of the Warrant, (y) divided by the fair market value of a share of Class A Stock.  In addition, in the event we are acquired, liquidate, conduct a public offering, or the Warrants expire, each warrant holder will have the right to “put” its Warrants to us in exchange for a per share cash payment that varies with the number of shares issuable under each Warrant, but in the aggregate will not exceed $250,000.
The PFG Loan Agreements as amended through December 2013 and January 2014, contained financial covenants that required us to maintain a minimum liquidity ratio of 2.25 to 1.00 and a minimum trailing three month adjusted EBITDA, measured monthly of (1) a negative $300,000 for each fiscal month during the period July through October 2013; and (2) $1 for each fiscal month during the period November 2013 through February 2014.
 
As of December 27, 2013 and January 24, 2014, we were not in compliance with then existing adjusted minimum EBITDA covenant of $1 for the three months ended December 27, 2013 and January 24, 2014, respectively, and as of January 24, 2014, API was also not in compliance with the then existing minimum liquidity ratio of 2.25 to 1.00.  In addition, the foregoing defaults triggered the cross-default provisions under each of the SVB Loan Agreements and the loan with PFG.  Consequently, under the terms of each agreement, SVB and PFG were both entitled to proceed against the collateral provided as security for the loans issued thereunder upon an event of default subject, in PFG’s case, to any rights that SVB may have in that same collateral.
 
 
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On February 10, 2014, we entered into separate Forbearance Agreements with SVB and PFG pursuant to which and subject to certain exceptions, each of SVB and PFG agreed not to proceed against the collateral securing their respective loans until February 28, 2014.  On March 5, 2014, we entered into separate amendment agreements with SVB and PFG where, among other things, the minimum trailing three month adjusted EBITDA covenant was reset to a negative $1.2 million for the fiscal month ended February 28, 2014, a negative $800,000 for the fiscal month ended March 31, 2014, a negative $600,000 for the fiscal month ended April 30, 2014 and a positive $1 for the fiscal month ending May 31, 2014; the existing minimum liquidity ratio covenant was reset to 1.30 to 1.00 as of February 28, 2014, and 2.25 to 1.00 for each month thereafter through May 2014; and each of SVB and PFG waived the existing defaults.  In addition to the payment of an amendment fee, we agreed to pay each of SVB and PFG additional fees of up to $50,000 and $75,000, respectively, no later than May 31, 2014 (the “Tail Fees”).
 
On April 30, 2014, we entered into separate amendment agreements with SVB and PFG where, among other things the trailing minimum three month adjusted EBITDA covenant was reset to a negative $800,000 for the fiscal month ended March 31, 2014, a negative $600,000 for the fiscal month ended April 30, 2014, a negative $250,000 for the fiscal months ending May 31, 2014 and June 30, 2014 and a positive $1 for the fiscal month ending July 31, 2014; and the existing minimum liquidity ratio covenant was reset to 1.30 to 1.00 as of March 31, 2014 through May 31, 2014, and 2.00 to 1.00 for each month thereafter through July 2014.  In addition to the payment of an amendment fee, we agreed to pay each of SVB and PFG their respective Tail Fee and, commencing with the month ended May 31, 2014, an additional fee of $15,000 and $20,000, respectively, for each month that the liquidity ratio is less than 2.00 to 1.00 as of the last day of the month under measurement.

On June 20, 2014, we signed separate amendments with SVB and PFG where, among other things, both parties agreed to a minimum six month trailing adjusted EBTIDA covenant, measured at each fiscal month end, of negative $850,000 through June 2014, negative $300,000 for July through September 2014, a positive $1 for October through December 2014 and $100,000 each month thereafter subject to reset upon the submission of the fiscal 2016 budget but no lower than $100,000 on a rolling six month basis, both parties agreed to adjust the  minimum liquidity ratio, as defined, to be 1.30 to 1.00 for months ending prior to June 2014 and 2.00 to 1.00 for all months on or after June 2014 as measured at each month end.  The agreements confirmed the obligation to pay the previously agreed Tail fees of $50,000 and $75,000 to SVB and PFG respectively, associated attorney fees for the amendment, but waived the added tail fees for May of $15,000 for SVB and $20,000 for PFG.

We were in compliance with its loan covenants with PFG as of March 31, 2014 which were substantially the same as with SVB as of that date.  Based on current projections, we expect to be in compliance with the revised PFG loan covenants through at least March 2015 using the covenants agreed with PFG in June 2014.

We determined the fair value of the warrant as of the issuance date to be $434,000.  Pursuant to the accounting literature, a debt discount and a warrant liability were established as of the issuance date with the debt discount amortized over the life of the loan on an effective interest method.  As of March 31, 2014, there was $218,000 in remaining unamortized debt discount offset against the PFG long term debt principal.  See Note 9 to the Consolidated Financial Statements for additional information on the PFG warrants.

Total interest payments made to PFG during the years ended March 31, 2014 and March 31, 2013 were approximately $253,000 and $12,000, respectively.
 
MEDC/MSF Loans
In fiscal years 2005 and 2006, we entered into two unsecured loan agreements that are currently held by the Michigan Economic Development Corporation (“MEDC” and such agreement the “MEDC Loan Agreement”) and a MEDC affiliate, the Michigan Strategic Fund (“MSF” and such agreement the “MSF Loan Agreement”) pursuant to which we borrowed an aggregate of amount of $2.2 million. As amended, payments on the approximately $327,000 in principal outstanding as of March 31, 2014, under each of the MEDC Loan Agreement and MSF Loan Agreement are deferred until they mature on December 1, 2014 and November 1, 2014, respectively, at which time the entire remaining balance under each loan agreement becomes due and payable. The interest rate under both of the loans was 5.00% as of March 31, 2014.

Interest payments made to the MEDC/MSF were approximately $33,000 and $49,000 during the years ended March 31, 2014 and March 31, 2013, respectively.
 
 
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Capital Leases
During fiscal 2014, we purchased certain equipment through several capital leases with monthly principal payments of $1,700 plus interest with some maturities extending to 2019.  The leases are collateralized by the associated equipment.

Interest payments made to the lessors for the year ended March 31, 2014 totaled $4,000.

The current debt principal and maturities of all outstanding debt are included in the table below.  The PFG loan balance below reflects the remaining principal on the amortizing term loan but is shown net of a debt discount of $218,000 on our balance sheet.

Debt Maturity Table (in 000’s)
     
Debt Maturities
   
Balance 3/31/13
   
Balance 3/31/14
   
FY2015
   
FY2016
   
FY2017
   
FY2018
   
FY2019
   
FY2020 & Beyond
 
Credit Line –
Silicon Valley Bank
  $ --     $ 2,147     $ 2,147     $ --     $ --     $ --     $ --     $ --  
Term Loan –
Silicon Valley Bank
    667       306       306       --       --       --       --       --  
Partners for Growth Loan
    2,441       1,726       714       714       298       --       --        --  
MEDC/MSF  loans
    930       654       654       --       --       --       --       --  
Capital Leases
            56       20       11       11       12       2          
TOTAL
  $ 4,038     $ 4,889     $ 3,841     $ 725     $ 309     $ 12     $ 2     $ --  

Liquidity Outlook
During the past two years, we have been consuming cash because we have been operating at revenue levels below our cash breakeven point (as measured on an EBITDA basis calculated based on our lending agreements), we had business needs to purchase certain equipment and continue patent activities, and have had to pay principal on amortizing term debt.  To fund this activity, we have steadily drawn down our cash balance, liquidated working capital into cash and used our available line of credit with SVB.  As mentioned in the Debt section, the lack of positive EBTIDA pursuant to our lending agreement in December 2013 and the line of credit levels in January 2014 caused us to violate our loan covenants.  To improve our liquidity position, we evaluated many alternatives for the lowest cost of capital and eventually settled on a secondary offering which was done on a firm underwritten basis by B. Riley in June 2014.  The net proceeds after expenses of approximately $2.9 million were received in June 2014 and were used to pay down our existing line of credit with SVB.  With this cash infusion, our lenders were comfortable extending our line of credit out two years until June 2016.  Headwinds that slowed our growth in 2014 are expected to become tailwinds such that we expect revenue levels to increase in fiscal 2015 to a point that we begin generating positive EBITDA.  We believe that with this positive EBITDA, our existing cash and cash equivalents plus availability on our line of credit will provide sufficient liquidity for us for the next twelve months. Positive cash flow from operations is highly dependent on increasing revenue levels.  We have had and may continue to experience supply limitations that could hamper our ability to achieve the levels of HSOR revenue and the related gross margin previously enjoyed.  We may therefore need additional financing to fund our operations in the future and there can be no assurance that additional funds will be available, especially if we experience operating results below expectations, or, if financing is available, there can be no assurance as to the terms on which funds might be available. If adequate financing is not available as required, or is not available on favorable terms, our business, financial position and results of operations will be adversely affected.
 
 
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Summary of Contractual Obligations
The following table sets forth our contractual obligations at March 31, 2014.
 
Contractual Obligations
   
Payments due by period
 
   
Total
   
FY 2015
   
FY 2016-2018
   
FY 2019-2021
   
FY 2022 & later
 
Bank line of credit
  $ 2,147,000     $ 2,147,000     $ -     $ -     $ -  
Bank term loan
    306,000       306,000       -       -       -  
Partners for Growth loan
    1,726,000       714,000       1,012,000       -       -  
MEDC/MSF loans
    654,000       654,000       -       -       -  
Capital leases
    56,000       20,000       34,000       2,000       -  
Subtotal–Balance Sheet
  $ 4,889,000     $ 3,841,000     $ 1,046,000     $ 2,000     $ -  
Expected interest expense on current debt obligations
    313,000       232,000       81,000       -       -  
Operating lease obligations
    5,055,000       892,000       2,583,000       1,580,000       -  
Purchase obligations
    2,602,000       2,602,000       -       -       -  
Total
  $ 12,859,000     $ 7,567,000     $ 3,710,000     $ 1,582,000     $ -  

The Bank line of credit has been shown as due in fiscal year 2015 since this balance was paid with the proceeds of the equity offering completed in June 2014.  SVB has extended our line of credit through June of 2016 and we expect to begin using the line of credit again in fiscal year 2015.  Partners for Growth debt is shown at face value in the above table while the balance sheet reflects a debt discount related to the warrants issued of $218,000 as of March 31, 2014.  Purchase obligations represent an estimate of all open purchase orders and contractual obligations in the ordinary course of business for which we have not yet received the goods or services. We enter into agreements with suppliers that allow them to procure inventory based upon agreements defining our material and services requirements. Although open purchase orders are considered enforceable and legally binding, the terms generally allow us the option to cancel, reschedule and adjust our requirements based on our business needs prior to the delivery of goods or the performance of services.

Off-Balance-Sheet Arrangements
At March 31, 2014 and March 31, 2013, we did not have any off-balance sheet arrangements or relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, which are typically established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes.

Recent Accounting Pronouncements
In May 2014, the FASB issued Accounting Standards Update (“ASU”) No. 2014-09 – Revenue from Contracts with Customers (Topic 606). The amendments in this ASU create Topic 606, Revenue from Contracts with Customers, and supersede the revenue recognition requirements in Topic 605, Revenue Recognition, including most industry-specific revenue recognition guidance throughout the Industry Topics of the Codification. In addition, the amendments supersede the cost guidance in Subtopic 605-35, Revenue Recognition—Construction-Type and Production-Type Contracts, and create a new Subtopic 340-40, Other Assets and Deferred Costs—Contracts with Customers. In summary, the core principle of Topic 606 is that an entity recognizes revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.  The amendments in this ASU are effective for annual periods beginning after December 15, 2016, including interim periods within that reporting period.  Early adoption is not permitted.  We are currently assessing the impact this ASU will have on our future financial statements.

 
Item 7A.   Quantitative and Qualitative Disclosures About Market Risk
At March 31, 2014, most of our interest rate exposure is linked to the prime rate on our SVB loans, subject to certain limitations, offset by interest that may be earned on our cash balances.  As our cash balances have been minimal, we are at risk to the extent of changes in the prime rate.  A 1% increase in prime rate will add approximately $25,000 in annual interest expense.  We do not believe that moderate changes in the prime rate will materially affect our operating results or financial condition.

Over 99% of our sales and purchases are denominated in U.S. dollars for fiscal 2014.  At March 31, 2014, we were subject to less than $1 million of foreign currency exchange fluctuations primarily with the Canadian dollar.

 
Item 8.     Financial Statements and Supplementary Data
The following consolidated financial statements of Advanced Photonix, Inc., prepared in accordance with Regulation S-X and the Report of the Independent Registered Public Accounting Firm are included in Item 8:
 
 
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   Page
Report of Independent Registered Public Accounting Firm      46
   
Financial Statements:  
Consolidated Balance Sheets as of March 31, 2014 and March 31, 2013     47
   
Consolidated Statements of Operations for the years ended March 31, 2014
 and March 31, 2013    
48
   
Consolidated Statements of Shareholders' Equity for the years ended March 31, 2014
 and March 31, 2013  
49
   
Consolidated Statements of Cash Flows for the years ended March 31, 2014
and March 31, 2013    
 50
   
Notes to Consolidated Financial Statements    51
 
 
 
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Shareholders
of Advanced Photonix, Inc.
Ann Arbor, Michigan

We have audited the accompanying consolidated balance sheets of Advanced Photonix, Inc. as of March 31, 2014 and 2013 and the related consolidated statements of operations, shareholders’ equity and cash flows for the years then ended.  In connection with our audits of the financial statements, we have also audited the financial statement schedule included at Item 15.  These financial statements and schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States).  Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement.  The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.  An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements and schedule.  We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Advanced Photonix, Inc. at March 31, 2014 and 2013, and the results of its operations and its cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.

Also, in our opinion, the financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.



/s/ BDO USA, LLP
Troy, Michigan
June 30, 2014
 
 
 
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ADVANCED PHOTONIX, INC.
CONSOLIDATED BALANCE SHEETS

 
 
   
March 31, 2014
 
March 31, 2013
ASSETS
           
Current assets:
           
Cash and cash equivalents
  $ 120,000     $ 619,000  
Receivables, net of allowance for doubtful accounts of $20,000 and $56,000, respectively
    5,085,000       4,988,000  
Inventories
    4,749,000       3,905,000  
Prepaid expenses and other current assets
    444,000       795,000  
Total current assets
    10,398,000       10,307,000  
Equipment and leasehold improvements, net
    2,144,000       3,415,000  
Goodwill
    4,579,000       4,579,000  
Intangible assets, net
    2,942,000       3,686,000  
Security deposits and other assets
    138,000       229,000  
          Total Assets
  $ 20,201,000     $ 22,216,000  
LIABILITIES AND SHAREHOLDERS’ EQUITY
               
Current liabilities:
               
Accounts payable
  $ 2,661,000     $ 1,829,000  
Accrued compensation
    701,000       729,000  
Accrued subcontracting costs
    344,000       427,000  
Other accrued expenses
    1,108,000       871,000  
Current portion of long-term debt, PFG
    714,000       714,000  
Current portion of long-term debt, MEDC/MSF
    654,000       553,000  
Current portion of capital lease
    20,000       --  
Current portion of long-term debt, bank line of credit
    2,147,000       --  
Current portion of long-term debt, bank term loan
    306,000       333,000  
Total current liabilities
    8,655,000       5,456,000  
Long-term debt, less current portion – PFG, net of debt discount
    794,000       1,322,000  
Long-term debt, less current portion – MEDC/MSF
    --       377,000  
Long-term debt, less current portion – bank term loan
    --       334,000  
Long-term debt, capital lease
    36,000       --  
         Warrant liability
    409,000       292,000  
           Total liabilities
    9,894,000       7,781,000  
Commitments and contingencies
               
Shareholders' equity:
               
Class A Common Stock, $.001 par value, 100,000,000 authorized; 31,203,213 shares issued
and outstanding as of March 31, 2014 and 31,158,347 shares issued and outstanding as of March 31, 2013
    31,000       31,000  
Additional paid-in capital
    58,752,000       58,616,000  
Accumulated deficit
    (48,476,000 )     (44,212,000 )
 Total shareholders' equity     10,307,000       14,435,000  
 Total Liabilities and Shareholders’ Equity   $ 20,201,000     $ 22,216,000  

 
See Notes to Consolidated Financial Statements.
 
 
47

 
 
 
ADVANCED PHOTONIX, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Fiscal Years Ended March 31, 2014 and March 31, 2013

 
 
   
2014
 
2013
             
Sales, net
  $ 29,041,000     $ 23,649,000  
Cost of products sold
    19,433,000       14,823,000  
Gross profit
    9,608,000       8,826,000  
                 
Operating expenses:
               
    Research, development and engineering expenses
    4,975,000       5,683,000  
    Sales and marketing expenses
    2,562,000       2,093,000  
    General and administrative expenses
    4,482,000       4,254,000  
    Amortization expense – intangible assets
    1,029,000       1,181,000  
    Total operating expenses
    13,048,000       13,211,000  
Loss from operations
    (3,440,000 )     (4,385,000 )
                 
Other income (expense):
               
    Interest income
    8,000       10,000  
    Interest expense
    (652,000 )     (202,000 )
    Change in fair value of warrant liability
    (117,000 )     168,000  
    Other income (expense)
    (63,000 )     22,000  
           Total other expense
    (824,000 )     (2,000 )
Loss before benefit for income taxes
    (4,264,000 )     (4,387,000 )
                 
Benefit for income taxes
    --       --  
Net loss and comprehensive loss
  $ (4,264,000 )   $ (4,387,000 )
                 
Basic and diluted loss per share
  $ (0.14 )   $ (0.14 )
                 
Weighted average common shares outstanding
    31,227,000       31,161,000  

 
See Notes to Consolidated Financial Statements.
 
 
48

 
 
 
ADVANCED PHOTONIX, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
For the Fiscal Years Ended March 31, 2014 and March 31, 2013
(In thousands, except share data)
 
 

     
Class A
Common
Shares
   
Class A
Common
Amount
   
Additional
Paid-in
Capital
   
Accumulated
Deficit
   
Total
 
 
BALANCE,
     MARCH 31, 2012
    31,159,431     $ 31     58,446     (39,825)     18,652  
 
Exercise of stock options
    1,716       --       3       --       3  
 
Forfeiture of restricted shares
    (2,800 )     --       --       --       --  
 
Stock based compensation
    --       --       167       --       167  
 
Net loss
    --       --       --       (4,387 )     (4,387 )
 
BALANCE,
     MARCH 31, 2013
    31,158,347       31       58,616       (44,212)       14,435  
 
Exercise of stock options
    5,193       --       5       --       5  
 
Issuance of restricted shares
    90,000       --       --       --       --  
 
Forfeiture of restricted shares
    (18,636 )     --       --       --       --  
 
Correction to outstanding shares
    (31,691 )     --       --       --       --  
 
Income taxes paid on stock grant
    --       --       (8 )     --       (8 )
 
Stock based compensation
    --       --       139       --       139  
 
Net loss
    --       --       --       (4,264 )     (4,264 )
 
BALANCE,
     MARCH 31, 2014
    31,203,213     $ 31     $ 58,752     $ (48,476)     $ 10,307  

See Notes to Consolidated Financial Statements.
 
 
49

 
 
 
ADVANCED PHOTONIX, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the fiscal years ended March 31, 2014 and March 31, 2013
 
   
2014
   
2013
 
Cash flows from operating activities:
       
 
 
Net loss   $ (4,264,000 )   $ (4,387,000 )
Adjustments to reconcile net loss to net cash used in operating activities
               
    Depreciation     1,489,000       785,000  
Amortization of intangible assets
    1,029,000       1,181,000  
Amortization of debt discount
    186,000       29,000  
Stock based compensation expense
    139,000       167,000  
Change in fair value of warrant liability
    117,000       (168,000 )
Changes in operating assets and liabilities:
               
Accounts receivable     (97,000 )     (150,000 )
Inventories
    (844,000 )     71,000  
Prepaid expenses and other assets
    442,000       (429,000 )
Accounts payable
    832,000       596,000  
Accrued expenses
    126,000       84,000  
Net cash used in operating activities
    (845,000 )     (2,221,000 )
                 
Cash flows from investing activities:
               
Capital expenditures     (136,000 )     (408,000 )
Patent expenditures
    (285,000 )     (181,000 )
Cash paid for Silonex net assets
    --       (900,000 )
Net cash used in investing activities
    (421,000 )     (1,489,000 )
                 
Cash flows from financing activities:
               
Payments on bank term loan     (361,000     (333,000 )
Payments on bank line of credit
    --       (500,000 )
Proceeds from bank line of credit
    2,147,000       --  
Payments on MEDC/MSF term loans
    (276,000 )     (531,000 )
Proceeds from PFG Loan
    --       2,500,000  
Payments on PFG Loan
    (714,000 )     (59,000 )
Payments on capital leases
    (26,000 )        
Income taxes paid on stock grant
    (8,000 )        
Proceeds from exercise of stock options
    5,000       3,000  
Net cash provided by financing activities
    767,000       1,080,000  
Net decrease in cash and cash equivalents
    (499,000 )     (2,630,000 )
Cash and cash equivalents, beginning of year
    619,000       3,249,000  
Cash and cash equivalents, end of year
  $ 120,000     $ 619,000  
                 
                 
Supplemental cash flow information:
               
Cash paid for interest
  $ 398,000     $ 115,000  
Cash paid for income taxes
  $ --     $ --  
Supplemental disclosure of non-cash investing and financing activities:
               
Acquisition of equipment through capital lease   $ 82,000       --  
 

See Notes to Consolidated Financial Statements.
 
 
50

 

ADVANCED PHOTONIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2014 and March 31, 2013

1. The Company

Advanced Photonix, Inc. ® (API) was incorporated under the laws of the State of Delaware in June 1988.  API and its subsidiaries (the Company, we, us or API) are a leading supplier of optoelectronic semiconductors which are packaged into components, sub-systems and full systems for high-speed optical receivers (HSOR), custom optoelectronic products and Terahertz (THz) instrumentation, serving a variety of global markets.  The Company supports its customers from the initial concept and design phase of the product, through testing to full-scale production.  The Company has two manufacturing facilities located in Camarillo, California and Ann Arbor, Michigan.

2. Basis of Presentation and Summary of Significant Accounting Policies

Principles of Consolidation
The consolidated financial statements include the financial statements of the API and its wholly-owned subsidiaries (Silicon Sensors, Inc., Picometrix, LLC and Advanced Photonix Canada, Inc.).  The functional currency of all locations is the US dollar.  All significant inter-company balances and transactions have been eliminated in consolidation.
 
Recent Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2014-09 – Revenue from Contracts with Customers (Topic 606). The amendments in this ASU create Topic 606, Revenue from Contracts with Customers, and supersede the revenue recognition requirements in Topic 605, Revenue Recognition, including most industry-specific revenue recognition guidance throughout the Industry Topics of the Codification. In addition, the amendments supersede the cost guidance in Subtopic 605-35, Revenue Recognition—Construction-Type and Production-Type Contracts, and create a new Subtopic 340-40, Other Assets and Deferred Costs—Contracts with Customers. In summary, the core principle of Topic 606 is that an entity recognizes revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.  The amendments in this ASU are effective for annual periods beginning after December 15, 2016, including interim periods within that reporting period.  Early adoption is not permitted.  The Company is currently assessing the impact this ASU will have on its future financial statements.

Reclassifications
Certain prior year balances have been reclassified in the consolidated financial statements to conform to the current year presentation.

Operating Segment Information
FASB guidance establishes annual and interim reporting standards for operating segments and requires certain disclosures about the products and services an entity provides, the material countries in which it holds assets and reports revenue, and its major customers. Operating segments are defined as components of an enterprise that engage in business activities for which separate financial information is available that is evaluated regularly by the chief operating decision maker, or decision making group, in deciding how to allocate resources and in assessing performance. API’s chief operating decision makers are its chief executive officer and chief operating officer, who review financial information presented on a consolidated basis for purposes of allocating resources and evaluating financial performance. API has one business activity: light and radiation detection devices also known as photodiodes.
 
Pervasiveness of Estimates
The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.  Actual results could differ from those estimates.

Fair Value of Financial Instruments
The carrying value of all short term financial instruments potentially subject to valuation risk (principally consisting of cash equivalents, accounts receivable, and accounts payable) approximates fair value based upon the short term nature of these instruments.  In the case of MEDC/MSF term debt, the bank line of credit, the PFG debt and the bank term debt, the carrying value approximates fair value based upon prevailing interest rates available to the Company.  In the case of new capital lease debt, the carrying value approximates fair value as this debt was entered into in during the current year and interest rates have not changed significantly during the year for this type of debt.
 
Cash Equivalents
The Company considers all highly liquid investments, with an original maturity of three months or less when purchased, to be cash equivalents.
 
 
51

 
 
Accounts Receivable
Receivables are stated at amounts estimated by management to be the net realizable value. The allowance for doubtful accounts is based on specific identification. Accounts receivable are charged off when it becomes apparent, based upon age or customer circumstances, that such amounts will not be collected.
 
Accounts receivable are unsecured and the Company is at risk to the extent such amounts become uncollectible.  The Company performs periodic credit evaluations of its customers’ financial condition and generally does not require collateral. Any unanticipated change in the customers’ credit worthiness or other matters affecting the collectability of amounts due from such customers could have a material effect on the results of operations in the period in which such changes or events occur. As of March 31, 2014, one customer individually comprised 19% of accounts receivable.  As of March 31, 2013, one customer individually comprised 12% of accounts receivable.  The allowance for doubtful accounts was $20,000 and $56,000 on March 31, 2014 and March 31, 2013, respectively.

Concentration of Credit Risk
Cash and cash equivalents are maintained at financial institutions and, at times, balances may exceed federally insured limits.  We have never experienced any losses related to these balances.  As of March 31, 2013, approximately $190,000 was held at Silicon Valley Bank in excess of federally insured limits.  As of March 31, 2014, the $120,000 in cash held at banks was within federally insured limits.
 
Inventories
Inventories, which include material, labor and manufacturing overhead, are stated at the lower of cost (on a first in–first out basis) or market. Slow moving and obsolete inventories are reviewed throughout the year to assess whether a cost adjustment is required. Our review of slow moving and obsolete inventory begins with a listing of all inventory items which have not moved regularly within the past 12 months.  In addition, any residual inventory, which is customer specific and remaining on hand at the time of contract completion, is included in the list. The complete list of slow moving and obsolete inventory is then reviewed by the production, engineering and/or purchasing departments to identify items that can be utilized in the near future. These items are then excluded from the analysis and the remaining amount of slow-moving and obsolete inventory is then further assessed and a write down is recorded when warranted. Additionally, non-cancelable open purchase orders for parts we are obligated to purchase where demand has been reduced may also be written down. Impairments for open purchase orders where the market price is lower than the purchase order price are also recorded. The impairments established for excess, slow moving, and obsolete inventory create a new cost basis for those items.  The cost basis of these parts is not subsequently increased if the circumstances which led to the impairment change in the future.  If a product that had previously been impaired is subsequently sold, the amount of reduced cost basis is reflected as cost of goods sold.

Equipment and Leasehold Improvements
Equipment and leasehold improvements are stated at cost.  Depreciation and amortization are computed using the straight-line method over the estimated useful lives of the assets, as follows:

Leasehold improvements
Term of lease or useful life,
whichever is less
Machinery and equipment
5 – 7 years
Furniture and fixtures
3 – 7 years
Computer hardware
3 – 7 years
Computer software
3 – 5 years
Equipment under capital lease
Term of lease or useful life,
whichever is less

Patents
Patents represent costs incurred in connection with patent applications.  Such costs are amortized using the straight-line method over the useful life of the patent once issued, or expensed immediately if any specific application is unsuccessful.
 
 
52

 

Impairment of Goodwill and Long-Lived Assets
As of March 31, 2014 and March 31, 2013, the consolidated balance sheet included $4.6 million of goodwill. Goodwill represents the excess purchase price over amounts assigned to tangible or identifiable intangible assets acquired and liabilities assumed from our business acquisitions.

Goodwill and intangible assets that are not subject to amortization are tested for impairment annually or more frequently if events or changes in circumstances indicate that the asset might be impaired.  During the year ended March 31, 2013, the Company adopted new FASB guidance relative to goodwill impairment whereby in its annual assessment of goodwill impairment, the Company has the option to first assess qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not that the fair value of a reporting unit is less than its carrying value before performing the two step quantitative impairment test.  If after assessing the totality of events or circumstances, the Company determines it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, then performing the two step impairment test is not necessary.  Step one of the two step impairment test is to compare the fair value of the reporting unit with the unit’s carrying amount, including goodwill.  Fair value of each reporting unit is determined by weighting fair values determined using a combination of a discounted cash flow approach, and observed enterprise to revenue multiples and precedent sales transactions multiples for companies in the reporting units’ peer group.  If this test indicates that the fair value is less than the carrying value, then step two is required to compare the implied fair value of the reporting unit’s goodwill with the carrying amount of the reporting unit’s goodwill. If the carrying amount of the goodwill exceeds its implied fair value, an impairment loss shall be recognized in an amount equal to that excess.  The Company has selected March 31 as the date for its annual impairment test.

The Company continues to meet the criteria to report as a single reportable segment.  In fiscal 2013 and prior years, the Company had one reporting unit.  The nature of the production process was similar for the Company’s three product lines, manufacturing for the different product lines occurred in common facilities and the types and class of customers were in some cases similar across the three product lines.  However, as disclosed in Note 11, in the third quarter of fiscal 2014, the Company made the decision to begin outsourcing the silicon photodiode production that is used in the Optosolutions product line given sources in Asia became more cost effective.  In addition, the decision was made to provide access to the Asia market which management believes will benefit the Company as a whole.  Prior to that decision, the production of silicon photodiodes had been done in the Ann Arbor, Michigan facility using shared equipment with the HSOR and THz product lines.   As a result of the change from a shared manufacturing process for the three product lines and certain restructuring changes internally, the Company has concluded it can no longer aggregate its three product lines into one reporting unit for goodwill impairment purposes as of March 31, 2014 but instead considers there to be two reporting units as photodiode production remains common for the HSOR and THZ products and the types and classes of customers are similar as well.  The Company determined the fair value of the two reporting units by weighting fair values determined using a combination of a discounted cash flow approach, and observed enterprise values to revenues multiples and precedent sales transaction multiples for companies in the reporting units’ peer group.  using a combination of discounted cash flow, market multiples and precedent transactions for a product line or group of product lines.  Key assumptions used to determine the fair value of each reporting unit were (a) future expected cash flows; (b) estimated residual growth rates; (c) discount rates which were based on our estimates of the after tax weighted average cost of capital; (d) observed enterprise value to sales multiples for our peer group; and (e) enterprise to revenue multiples observed in precedent merger and acquisition transactions for our peer group.  Additionally, we consider our market capitalization in comparison to the aggregate fair value of the reporting units.

As a result of the changes in reporting units during the year, the Company allocated the $4.6 million of Goodwill to its two reporting units based on the reporting units’ relative fair value.  The Company then compared the fair value of the reporting units to their respective carrying value.  The Company’s valuation as of March 31, 2014 indicated there were no impairments of Goodwill for the two reporting units when computed as described above, with the fair value exceeding carrying value by at least 109% for both.

As noted above, API’s stock price is a significant factor in assessing fair value for purposes of the goodwill impairment test.  As of March 31, 2014, API’s market capitalization exceeded the shareholders’ equity balance of the Company by 91%.  If the Company’s market capitalization falls below the current carrying value for a sustained period, or the Company’s reporting units do not perform as expected, it is reasonably likely that an impairment assessment would be necessary and a non-cash charge to operating income may be recorded.
 
 
53

 
 
The carrying value of other long-lived assets, including amortizable intangibles, leasehold improvements, and equipment, are evaluated whenever events or changes in circumstances indicate that a potential impairment has occurred relative to a given asset or assets. Impairment is deemed to have occurred if projected undiscounted cash flows associated with an asset (asset group) are less than the carrying value of the asset (asset group). The estimated cash flows include management’s assumptions of cash inflows and outflows directly resulting from the use of that asset, or group of assets used in conjunction with the specific asset or assets, in operations. The amount of the impairment loss recognized is equal to the excess of the carrying value of the asset, or asset group, over its then estimated fair value. As a result of the current year operating loss, the Company performed an impairment evaluation.  The vast majority of the amortizing intangibles, leasehold improvements and equipment subject to the impairment test are in the combined HSOR and THz reporting unit.  Given the shared nature of the manufacturing process for photodiodes, the Company has determined the lowest level of cash flows to be the reporting unit.  The impairment analysis involved forecasting future undiscounted cash flows of the reporting unit over the estimated useful life of the primary asset of the group.  After performing this first step analysis, the Company concluded that as of March 31, 2014 there were no impairments indicated.

Revenue Recognition
Revenue is derived principally from the sales of the Company’s products when, persuasive evidence of an arrangement exists, usually in the form of a purchase order, when shipment has occurred or when services have been rendered since title and risk of loss typically transfer at shipment, the price is fixed or determinable and collection is reasonably assured in terms of both credit worthiness of the customer and there are no post shipment obligations or uncertainties with respect to customer acceptance.
 
The Company sells certain of its products to customers with a product warranty that provides warranty repairs at no cost. The length of the warranty term is one year from date of shipment.  The estimated exposure is accrued to warranty claims based upon historical claim costs.  These estimates are reviewed on a regular basis with adjustments to the warranty provisions as other information becomes available.

The Company does not provide price protection or a general right of return.  The return policy only permits product returns for warranty and non-warranty repair or replacement and requires pre-authorization by the Company prior to the return. Credit or discounts, which have been historically insignificant, may be given at the Company’s discretion and are recorded when and if determined.

The Company predominantly sells directly to original equipment manufacturers with a direct sales force with limited sales through representatives, value added resellers (VAR) and distributors. Distributor and VAR sales represented approximately 11% of total revenue for the year ended March 31, 2014.  Significant terms and conditions of distributor agreements include FOB source, net 30 days payment terms, with no return and limited exchange rights, and no price protection.  Since the product transfers title to the distributor at the time of shipment, the products are not considered inventory on consignment.
 
Revenue is also derived from technology research and development contracts. API recognizes revenue from these contracts as services and/or materials are provided.  Government contract revenues represent approximately 5% and 15% of annual sales for the years ended March 31, 2014 and 2013, respectively.

Significant Customers
During the fiscal year ended March 31, 2014, there were two customers that accounted for 10% and 12% or more of the Company’s net sales, respectively.  During the fiscal year ended March 31, 2013, one customer accounted for 15% of the Company’s net sales.
 
 
54

 
 
Product Warranty
The Company generally sells products with a limited warranty of product quality. The Company accrues for known warranty issues if a loss is probable and can be reasonably estimated, and accrues for estimated incurred but unidentified issues based on historical activity.  Accrued product warranty liability is included in Other Accrued expenses in the Consolidated Balance Sheets.

The following table presents the movement in the product warranty liability for the years ended March 31, 2014 and March 31, 2013.
 
   
Years ended March 31,
 
   
2014
   
2013
 
Beginning balance
  $ 63,000     $ 24,000  
Current period accruals
    55,000       51,000  
Used for purpose intended
    (43,000 )     (12,000 )
Ending balance
  $ 75,000     $ 63,000  
 
Shipping and Handling Costs
The Company’s policy is to classify shipping and handling costs as a component of Costs of products sold in the Consolidated Statements of Operations.

Research and Development Costs
The Company charges all research and development costs, including costs associated with development contract revenues, to expense when incurred.  Manufacturing costs associated with the development of a new fabrication process or a new product are expensed until such times as these processes or products are proven through final testing and initial acceptance by the customer. Costs related to revenues on non-recurring engineering services billed to customers are generally classified as Cost of products sold.  The Company generally retains intellectual property rights related to paid research and development contracts.

Advertising Costs
Advertising costs are expensed as incurred.  Advertising expense was approximately $16,000 and $30,000 in fiscal 2014 and fiscal 2013, respectively, and is included in Sales and Marketing expenses in the Consolidated Statements of Operations.
 
Accounting for Stock Based Compensation
The Company estimates the fair value of stock-based awards utilizing the Black-Scholes pricing model for stock options and using the intrinsic value for restricted stock. The fair value of the awards is amortized as compensation expense on a straight-line basis over the requisite service period of the award, which is generally the vesting period.

Accounting for Income Taxes
Income tax provisions and benefits are made for taxes currently payable or refundable, and for deferred income taxes arising from future tax consequences of events that were recognized in the Company’s financial statements or tax returns and tax credit carry forwards. The effects of income taxes are measured based on enacted tax laws and rates applicable to periods in which the differences are expected to reverse. If necessary, a valuation allowance is established to reduce deferred income tax assets to an amount that will more likely than not be realized.

The calculation of federal income taxes involves dealing with uncertainties in the application of complex tax regulations. The Company recognizes liabilities for uncertain tax positions based on a two-step process. The first step involves evaluating the tax position for recognition by determining if the weight of available evidence indicates that it is more likely than not that the position will be sustained on audit, including resolution of related appeals or litigation processes, if any. The second step involves estimating and measuring the tax benefit as the largest amount that is more than 50% likely to be realized upon ultimate settlement. It is inherently difficult and subjective to estimate such amounts, as the Company has to determine the probability of various possible outcomes. Our evaluation of uncertain tax positions is based on factors including, but not limited to, changes in facts or circumstances, changes in tax law, effectively settled issues under audit, and new audit activity. Such a change in recognition or measurement would result in the recognition of a tax benefit or an additional charge to the tax provision.  The Company has taken no tax positions which would require disclosure.  Although the Internal Revenue Service (IRS) is not currently examining any of our income tax returns, tax filings for the fiscal years 2011 to 2013 remain open and are subject to examination.
 
 
55

 

Earnings per Share
Basic EPS is calculated by dividing net income (loss) by the weighted average number of common shares outstanding during the period.  Diluted EPS amounts are based upon the weighted average number of common and common equivalent shares outstanding during the period. The Company uses the treasury stock method to calculate the impact of outstanding stock options and warrants. Common equivalent shares are excluded from the computation in periods in which they have an anti-dilutive effect.    All common stock equivalents have been excluded from the calculation of Diluted EPS due to the net loss in both the years ended March 31, 2014 and 2013.

3.   Inventories
 
Inventories consisted of the following at March 31:

   
2014
   
2013
 
Raw material
  $ 3,093,000     $ 2,600,000  
Work-in-process
    954,000       782,000  
Finished products
    702,000       523,000  
Inventories
  $ 4,749,000     $ 3,905,000  

4.   Equipment and Leasehold Improvements

Equipment and leasehold improvements consisted of the following at March 31:

   
2014
   
2013
 
Machinery and equipment
  $ 10,320,000     $ 9,967,000  
Furniture and fixtures
    744,000       746,000  
Leasehold improvements
    1,027,000       1,083,000  
Computer hardware
    720,000       697,000  
Capitalized software
    1,092,000       1,087,000  
Total assets
    13,903,000       13,580,000  
Accumulated depreciation
    (11,813,000 )     (10,338,000 )
      2,090,000       3,242,000  
Construction-in-process
    54,000       173,000  
Net equipment and leasehold improvements
  $ 2,144,000     $ 3,415,000  
 
Depreciation expense for the fiscal years ended March 31, 2014 and 2013 was approximately $1.5 million and $785,000, respectively.  As disclosed in Note 11, due to the outsourcing of the manufacturing of silicon photodiodes used in the Optosolutions products, the Company determined that an accelerated depreciation charge of approximately $608,000 was necessary to the state the net book value of the idle assets at amounts that could be obtained if the equipment was sold to third party buyers.
 
 
56

 
 
5.  Intangible Assets and Goodwill

Intangible Assets
Intangible assets that have or will have definite lives consist of the following (in thousands):

 
March 31, 2014
 
   
Original
Average Lives
in Years
 
Amortization
Method
Carrying
Value
   
Accumulated Amortization
   
Intangibles
Net
 
                               
Customer list
  15  
Straight Line
$ 190     $ 113     $ 77  
Trademarks
  15  
Cash Flow
  2,270       1,267       1,003  
Technology
  10  
Cash Flow
  10,950       10,672       278  
Distribution rights   7    Straight Line   148       23       125  
Patents pending
      795       --       795  
Patents
     
Straight Line
  1,108       444       664  
Total Intangibles
    $ 15,461     $ 12,519     $ 2,942  
     
 
March 31, 2013
 
   
Original
Average Lives
in Years
 
Amortization
Method
Carrying
Value
   
Accumulated Amortization
   
Intangibles
Net