e10vq
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
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þ |
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended June 30, 2006
OR
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o |
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934 |
Commission file number 1-11056
ADVANCED PHOTONIX, INC.
(Exact name of registrant as specified in its charter)
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Delaware
(State or other jurisdiction of incorporation
or organization)
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33-0325826
(I.R.S. Employer Identification Number) |
2925 Boardwalk
Ann Arbor, Michigan 48104
(Address of principal executive offices)
(734) 864-5600
(Registrants telephone number, including area code)
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 is a large accelerated filer, an accelerated filer,
or a non-accelerated filer. See definition of accelerated filer and large accelerated filer in
Rule 12b-2 of the Exchange Act. (Check one):
o Large accelerated filer o Accelerated filer þ Non-accelerated filer
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act). Yes o No þ
As of August 10, 2006 there were 18,950,315 shares of Class A Common Stock, $.001 par value, and
31,691 shares of Class B Common Stock, $.001 par value outstanding.
ADVANCED PHOTONIX, INC.
INDEX
2
PART I FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
Advanced Photonix, Inc.
Condensed Consolidated Balance Sheets
(Unaudited)
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June 30, 2006 |
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March 31, 2006 |
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Assets |
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Current assets: |
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Cash and cash equivalents |
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$ |
5,926,000 |
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$ |
5,933,000 |
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Accounts receivable, net |
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3,522,000 |
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4,387,000 |
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Inventory, net |
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3,385,000 |
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3,434,000 |
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Prepaid expenses and other current assets |
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672,000 |
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711,000 |
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Total current assets |
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13,505,000 |
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14,465,000 |
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Equipment and leasehold improvements, net |
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3,267,000 |
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3,375,000 |
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Other assets |
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Goodwill, net of accumulated amortization of $353,000 for June 30, 2006 and March 31, 2006 |
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4,719,000 |
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4,719,000 |
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Intangibles and patents, net |
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14,006,000 |
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14,355,000 |
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Other assets |
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1,054,000 |
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1,087,000 |
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Total assets |
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$ |
36,551,000 |
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$ |
38,001,000 |
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Liabilities and shareholders equity |
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Current liabilities |
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Line of credit |
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$ |
1,000,000 |
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$ |
1,000,000 |
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Accounts payable and accrued expenses |
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1,757,000 |
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1,934,000 |
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Compensation and related withholdings |
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918,000 |
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697,000 |
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Deferred income |
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77,000 |
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Current portion of long-term debt, related party |
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550,000 |
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500,000 |
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Current portion of long-term debt |
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1,734,000 |
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927,000 |
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Total current liabilities |
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5,959,000 |
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5,135,000 |
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Long-term debt, less current portion |
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5,330,000 |
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6,132,000 |
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Long-term debt, less current portion related party |
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1,851,000 |
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2,401,000 |
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Commitments and contingencies: |
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Class A redeemable convertible preferred stock,
$.001 par value; 780,000 shares authorized; 2006
and 2005 40,000 shares issued and outstanding;
liquidation preference $32,000 |
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32,000 |
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32,000 |
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Shareholders equity: |
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Preferred stock no shares issued and outstanding |
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Class A common stock, $.001 par value, 50,000,000
authorized; June 30, 2006 18,974,006 shares
issued and outstanding, March 31, 2006 18,885,006 shares issued and outstanding |
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19,000 |
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19,000 |
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Class B common stock, $.001 par value; 4,420,113
shares authorized, June 30, 2006 and March 31,
2006 31,691 issued and outstanding |
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Additional paid-in capital |
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40,712,000 |
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40,478,000 |
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Accumulated deficit |
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(17,352,000 |
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(16,196,000 |
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Total shareholders equity |
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23,379,000 |
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24,301,000 |
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Total liabilities and shareholders equity |
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$ |
36,551,000 |
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$ |
38,001,000 |
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See notes to condensed consolidated financial statements.
3
Advanced Photonix, Inc.
Condensed Consolidated Statements of Operations
(Unaudited)
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Three Months Ended |
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June 30, 2006 |
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June 26, 2005 |
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Sales, net |
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$ |
5,668,000 |
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$ |
5,077,000 |
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Cost of products sold |
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3,191,000 |
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2,929,000 |
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Gross profit |
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2,477,000 |
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2,148,000 |
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Operating expenses: |
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Research and development expenses |
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969,000 |
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452,000 |
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Sales, general and administrative expenses |
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2,211,000 |
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1,669,000 |
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Total operating expenses |
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3,180,000 |
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2,121,000 |
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Income (loss) from operations |
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(703,000 |
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27,000 |
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Other income (expense): |
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Interest income |
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58,000 |
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9,000 |
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Interest expense |
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(420,000 |
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(122,000 |
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Interest expense, related party |
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(57,000 |
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(49,000 |
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Other income (expense) |
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(34,000 |
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1,000 |
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Net income (loss) |
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$ |
(1,156,000 |
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$ |
(134,000 |
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Basic and diluted loss per share |
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$ |
(0.06 |
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$ |
(0.01 |
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Weighted average common shares outstanding
Basic and diluted |
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18,980,000 |
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15,133,000 |
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See notes to condensed consolidated financial statements.
4
Advanced Photonix, Inc.
Condensed Consolidated Statements of Cash Flows
(Unaudited)
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For the three months ended: |
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June 30, 2006 |
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June 26, 2005 |
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Cash flows from operating activities: |
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Net income (loss) |
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$ |
(1,156,000 |
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$ |
(134,000 |
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Adjustment to reconcile net income (loss) to net cash provided by
(used in) operating activities |
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Depreciation and amortization |
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867,000 |
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432,000 |
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Stock compensation |
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117,000 |
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Other provisions |
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(31,000 |
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(18,000 |
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Changes in operating assets and liabilities: |
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Accounts receivable |
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865,000 |
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17,000 |
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Inventories |
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80,000 |
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(203,000 |
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Prepaid expenses and other assets |
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38,000 |
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149,000 |
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Accounts payable and other liabilities |
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(51,000 |
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(521,000 |
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Net cash provided by (used in) operating activities |
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729,000 |
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(278,000 |
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Cash flows from investing activities: |
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Capital expenditures |
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(126,000 |
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(79,000 |
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Patent expenditures |
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(33,000 |
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(31,000 |
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Cash paid for Picotronix, Inc. acquisition |
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(3,500,000 |
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Cash acquired through acquisition of Picotronix, Inc. |
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678,000 |
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Cash paid for acquisition related costs |
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(936,000 |
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Net cash used in investing activities |
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(159,000 |
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(3,868,000 |
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Cash flows from financing activities: |
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Proceeds from bank term loan |
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2,700,000 |
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Payments on bank term loan |
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(225,000 |
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Payments on notes payable |
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(179,000 |
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Payments on notes payable related party |
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(500,000 |
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Proceeds from exercise of warrants |
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303,000 |
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Proceeds from exercise of stock options |
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148,000 |
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44,000 |
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Net cash provided by (used in) financing activities |
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(577,000 |
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2,868,000 |
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Net decrease in cash and cash equivalents |
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(7,000 |
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(1,278,000 |
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Cash and cash equivalents at beginning of year |
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5,933,000 |
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2,757,000 |
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Cash and cash equivalents at end of quarter |
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$ |
5,926,000 |
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$ |
1,479,000 |
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See notes to condensed consolidated financial statements.
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Supplemental disclosure of cash flow information: |
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Cash paid for income taxes |
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$ |
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$ |
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Cash paid for interest |
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$ |
96,000 |
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$ |
37,000 |
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5
Advanced Photonix, Inc.
Notes to Condensed Consolidated Financial Statements
June 30, 2006
Note 1. Basis of Presentation
Business Description
General Advanced Photonix, Inc. (the Company or API), was incorporated under the laws of
the State of Delaware in June 1988. API is a leading supplier of custom optoelectronic
solutions, high-speed optical receivers and Terahertz sensors and instrumentation, serving a
variety of global Original Equipment Manufacturer (OEM) markets including telecommunications,
military/aerospace, industrial sensing/NDT, medical and homeland security. Our optoelectronic
solutions are based on our silicon Large Area Avalanche Photodiode (LAAPD), PIN photodiode and
FILTRODE® detectors. Our patented high-speed optical receivers include Avalanche Photodiode
technology (APD) and PIN (positive-intrinsic-negative) photodiode technology based upon III-V
materials, including InP, InAlAs, and GaAs. Our newly emerging Terahertz sensor product line is
targeted to the industrial non-destructive testing (NDT), quality control, homeland security and
military markets. Using our patented fiber coupled technology and high speed Terahertz
generation and detection sensors, we are engaged in transferring Terahertz technology from the
application development laboratory to the factory floor. We have three manufacturing facilities,
one in Camarillo, CA, one in Dodgeville, WI and one in Ann Arbor, MI.
The accompanying un-audited condensed consolidated financial statements include the accounts of
the Company and the Companys wholly owned subsidiaries, Silicon Sensors Inc. (SSI), Texas
Optoelectronic, Inc. (TOI), Photonic Detectors, Inc. (PDI) and Picometrix, LLC
(Picometrix). The un-audited condensed consolidated financial statements have been prepared in
accordance with accounting principles generally accepted in the United States for interim
financial information and pursuant to the rules and regulations of the Securities and Exchange
Commission. All material inter-company accounts and transactions have been eliminated in
consolidation. Certain information and footnote disclosures normally included in annual
financial statements prepared in accordance with accounting principles generally accepted in the
United States of America have been condensed or omitted pursuant to such rules and regulations.
In the opinion of management, all adjustments, consisting of normal and recurring adjustments,
necessary for a fair presentation of the financial position and the results of operations for
the periods presented have been included. Operating results for the three- month period ended
June 30, 2006 are not necessarily indicative of the results that may be expected for the fiscal
year ending March 31, 2007. For further information, refer to the financial statements and
notes thereto included in the Advanced Photonix, Inc. Annual Report on Form 10-K for the fiscal
year ended March 31, 2006.
Note 2. Changes in Significant Accounting Policies
Stock Compensation Effective April 1, 2006, the Company adopted Statement of Financial
Accounting Standards (SFAS) No. 123(R), Share-Based Payment: An Amendment of FASB Statements
No. 123 and 95 using the modified prospective method. Under this method, compensation cost is
recognized on or after the effective date for the portion of outstanding awards, for which the
requisite service has not yet been rendered, based on the grant date fair value of those awards.
Prior to April 1, 2006, the Company accounted for employee stock options using the intrinsic
value method in accordance with Accounting Principles Board (APB) Opinion No. 25 (APB No.
25), Accounting for Stock Issued to Employees, and adopted the disclosure only alternative of
SFAS No. 123. For stock-based awards issued on or after April 1, 2006, the Company recognizes
the compensation cost on a straight-line basis over the requisite service period for the entire
award. Measurement and attribution of compensation cost for awards that are unvested as of the
effective date of SFAS No. 123(R) are based on the same estimate of the grant-date or
modification-date fair value and the same attribution method used previously under SFAS No. 123.
6
In accordance with SFAS No. 148, and as required by SFAS 123(R), the required pro forma
disclosure, for periods prior to adoption of SFAS 123(R), is shown below:
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Three months ended |
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June 26, 2005 |
Net Income (loss) , as reported |
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$ |
(134,000 |
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Net income (loss), proforma |
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$ |
(187,000 |
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Basic income (loss) per share, as reported |
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$ |
(0.01 |
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Basic income (loss) per share, proforma |
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$ |
(0.01 |
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Adoption of SFAS 123(R)
During the three months ended June 30, 2006, the Company granted 60,000 stock options with an
estimated total grant-date fair value of $103,700. Of these amounts, the Company estimated that
the stock-based compensation for the awards not expected to vest was zero. During the three
months ended June 30, 2006, the Company recorded stock-based compensation related to stock
options of $117,000 for all unvested options granted prior to and options granted after the
adoption of SFAS 123(R).
As required by SFAS 123(R), management has made an estimate of expected forfeitures and is
recognizing compensation costs only for those equity awards expected to vest. The cumulative
effect of initially adopting SFAS 123(R) was not material.
Valuation Assumptions
In connection with the adoption of SFAS 123(R), the Company estimated the fair value of stock
options using a BSM valuation model. The fair value of each option grant is estimated on the
date of grant using the BSM option valuation model and the straight-line attribution approach
with the following weighted-average assumptions:
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Three months ended |
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June 30, 2006 |
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June 26, 2005 |
Expected term (in years) |
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6.5 |
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6.0 |
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Volatility |
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47.8 |
% |
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8.0 |
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Risk-free interest rate |
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5.0 |
% |
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4.0 |
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Dividend yield |
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0.00 |
% |
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0.00 |
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Stock Options
The Companys various stock option plans provide for the granting of non-qualified and incentive
stock options to purchase up to 3,700,000 shares of common stock for periods not to exceed 10
years. Options typically vest at the rate of 25% per year over four years, except for options
granted under The Directors Plan, which typically vest at the rate of 50% per year over two
years. Under these plans, the option exercise price equals the stocks market price on the date
of grant. Options may be granted to employees, officers, directors and consultants. The
Company has also granted options, under similar terms as above, under no specific shareholder
approved plan.
7
Stock option transactions for quarter ending June 30, 2006 are summarized as follows:
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Weight Average |
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Shares (000) |
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Exercise Price |
Outstanding, March 31, 2006 |
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2,959 |
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$ |
1.74 |
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Granted |
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60 |
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$ |
2.66 |
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Exercised |
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(89 |
) |
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$ |
1.63 |
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Expired |
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(57 |
) |
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$ |
1.40 |
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Outstanding, June 30, 2006 |
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2,873 |
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$ |
1.77 |
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Exercisable, June 30, 2006 |
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2,098 |
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$ |
1.67 |
|
Note 3. Credit Risk
Pervasiveness of Estimates and Risk The preparation of consolidated financial statements in
conformity with accounting principles generally accepted in the United States 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. Financial instruments, which potentially
subject the Company to concentrations of credit risk, consist principally of cash equivalents
and trade accounts receivable.
The Company maintains cash balances at five financial institutions that are insured by the
Federal Deposit Insurance Corporation (FDIC) up to $100,000. As of June 30, 2006, the Company
had cash at three financial institutions in excess of federally insured amounts in the amount of
approximately $1.4 million. As excess cash is available, the Company invests in short-term and
long-term investments, primarily consisting of Government Securities Money Market instruments,
and Repurchase agreements. As of June 30, 2006, the Company held $4.0 million in a short-term
Master Hold-in-Custody Repurchase agreement with a major California bank. Repurchase agreements
are not considered a bank deposit, and are therefore not insured by the FDIC. These funds are
backed by securities owned by Pacific Capital Bank, N.A. and are held in a safekeeping account.
Current interest earned on this short-term investment range from 4-5 %. The investment period
ranges from 7-30 days.
Accounts receivable are unsecured and the Company is at risk to the extent such amount becomes
uncollectible. The Company performs periodic credit evaluations of its customers financial
condition and generally does not require collateral. At June 30, 2006, one customer comprised
12% of accounts receivable. As of March 31, 2006, one customer comprised 14% of accounts
receivable. As of June 30, 2006, the Company had 13 customers with balances over 90 days. As
of March 31, 2006, the Company had 18 customers with balances over 90 days. During the quarters
ended June 30, 2006 and March 31, 2006, no single customer accounted for more than 10% of the
Companys net sales.
Note 4. Detail of Certain Asset Accounts
Accounts Receivable
Accounts receivable consisted of the following:
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|
June 30, 2006 |
|
March 31, 2006 |
|
|
|
Trade receivables, net |
|
$ |
3,337,000 |
|
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$ |
4,068,000 |
|
Unbilled receivables |
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185,000 |
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|
319,000 |
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Total |
|
$ |
3,522,000 |
|
|
$ |
4,387,000 |
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|
8
Inventories
Inventories, which include material, labor and manufacturing overhead, are stated at standard
cost (which approximates the first in, first out method) or market. Inventories consist of the
following at June 30, 2006 and March 31, 2006.
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June 30, 2006 |
|
March 31, 2006 |
Raw material |
|
$ |
3,983,000 |
|
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$ |
4,288,000 |
|
Work-in-process |
|
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1,024,000 |
|
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|
937,000 |
|
Finished products |
|
|
333,000 |
|
|
|
390,000 |
|
|
|
|
Total inventories |
|
|
5,340,000 |
|
|
|
5,615,000 |
|
Less reserve |
|
|
(1,955,000 |
) |
|
|
(2,181,000 |
) |
|
|
|
Inventories, net |
|
$ |
3,385,000 |
|
|
$ |
3,434,000 |
|
|
|
|
Intangible Assets
Intangible Assets The Company records goodwill, which represents the excess of cost over fair
value of net assets. Other intangibles are recorded at cost. These intangible assets are
associated with the value of the acquired non-compete agreement, customer list, trademarks, R&D
contacts, and technology/patents. These other intangible assets are amortized using the
straight-line method over their various estimated useful lives up to 15 years. Goodwill is not
amortized, but is reviewed at least annually for possible impairment.
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.
Intangible assets that have definite lives consist of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2006 |
|
|
March 31, 2006 |
|
|
|
|
Weighted |
|
|
Carrying |
|
Accumulated |
|
Intangibles |
|
|
Carrying |
|
Accumulated |
|
Intangibles |
|
|
|
|
Average |
|
|
Value |
|
Amortization |
|
Net |
|
|
Value |
|
Amortization |
|
Net |
|
|
|
|
Lives |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-Compete
agreement |
|
|
|
15 |
|
|
|
$ |
130 |
|
|
$ |
49 |
|
|
$ |
81 |
|
|
|
$ |
130 |
|
|
$ |
38 |
|
|
$ |
92 |
|
|
Customer list |
|
|
|
3 |
|
|
|
|
825 |
|
|
|
205 |
|
|
|
620 |
|
|
|
|
825 |
|
|
|
170 |
|
|
|
655 |
|
|
Trademarks |
|
|
|
15 |
|
|
|
|
2,270 |
|
|
|
173 |
|
|
|
2,097 |
|
|
|
|
2,270 |
|
|
|
135 |
|
|
|
2,135 |
|
|
R&D contracts |
|
|
|
15 |
|
|
|
|
1,380 |
|
|
|
105 |
|
|
|
1,275 |
|
|
|
|
1,380 |
|
|
|
82 |
|
|
|
1,298 |
|
|
Patents |
|
|
|
|
|
|
|
|
70 |
|
|
|
55 |
|
|
|
15 |
|
|
|
|
70 |
|
|
|
54 |
|
|
|
16 |
|
|
Patents pending |
|
|
|
|
|
|
|
|
216 |
|
|
|
|
|
|
|
216 |
|
|
|
|
184 |
|
|
|
|
|
|
|
184 |
|
|
Technology |
|
|
|
10 |
|
|
|
|
10,950 |
|
|
|
1,248 |
|
|
|
9,702 |
|
|
|
|
10,950 |
|
|
|
975 |
|
|
|
9,975 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Intangibles |
|
|
|
11.4 |
|
|
|
$ |
15,841 |
|
|
$ |
1,835 |
|
|
$ |
14,006 |
|
|
|
$ |
15,809 |
|
|
$ |
1,454 |
|
|
$ |
14,355 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization expense for the quarter ended June 30, 2006 was approximately $383,000 and
$457,000 for the quarter ended March 31, 2006. Patent amortization expense was approximately
$1,000 in quarter ended June 30, 2006 and $1,000 for quarter ended March 31, 2006. The current
patents held by the Company have remaining useful lives ranging from 2 years to 20 years, with a
weighted average remaining useful life of 3.5 years. Assuming no impairment to the intangible
value, future amortization expense for intangible assets and patents are as follows:
|
|
|
|
|
|
|
|
|
|
|
Intangible Assets |
|
|
Patents |
|
2007 (9 months) |
|
$ |
1,174,000 |
|
|
2007 (9 months) |
|
$ |
3,100 |
|
2008 |
|
|
1,521,000 |
|
|
2008 |
|
|
2,400 |
|
2009 |
|
|
1,486,000 |
|
|
2009 |
|
|
1,400 |
|
2010 |
|
|
1,453,000 |
|
|
2010 |
|
|
900 |
|
2011 |
|
|
1,361,000 |
|
|
2011 |
|
|
900 |
|
2012 & after |
|
|
6,780,000 |
|
|
2012 & after |
|
|
6,300 |
|
Total |
|
$ |
13,775,000 |
|
|
Total |
|
$ |
15,000 |
|
Patent pending costs of $216,000 will be amortized beginning the month the patents are
granted.
9
Note 5. Debt
Line of Credit and Short Term Debt
The Company has a revolving line of credit from a regional bank, which provides for borrowings
up to $3.0 million. The line allows for borrowings on 80% of eligible accounts receivable and
40% on eligible inventory, as defined, limited to $1.5 million. All business assets of the
Company secure the line. Repayment is interest only, monthly, with principal due at maturity,
November 3, 2006. Interest is computed at the Wall Street Journal Prime plus 1/2% with a floor
rate of 6.5%. The prime interest rate was 8.25% at June 30, 2006.
Debt & Notes Payable
During FY2006 $3.475 million of the $5 million Convertible debt (Convertible Debt 1st Tranche)
was converted into 1,792,000 shares. At June 30, 2006 the Convertible Debt 1st Tranche balance
was $1,507,000 (net of discount), same as at March 31, 2006.
In September 2005, the Company issued $1.0 million of convertible debt with warrants to purchase
170,164 shares of common stock (Convertible Debt 2nd Tranche). The Company
originally valued the warrants and recorded an increase to additional paid-in-capital amounting
to $1.0 million. Subsequently the Company determined that the beneficial conversion option and
the warrants should have been valued using the Relative Fair Value approach. Accordingly, the
Company recognized in FY 2006 a $574,000 debt discount on the $1.0 million principal value of
the convertible note payable and is amortizing the debt discount over the life of the note. The
note was converted in November 2005 into 472,678 shares of Class A common stock.
In March 2006, the Company issued $4.0 million of convertible debt (Convertible Debt
2nd Tranche) with warrants to purchase 680,658 shares of common stock. The Company
valued the warrants and recorded an increase to additional paid-in-capital amounting to $1.8
million using the Relative Fair Value approach. Accordingly, the Company recognized a $1.8
million debt discount on the $4.0 million principal value of the convertible note payable and is
amortizing the debt discount to interest expense over the life of the note. At June 30, 2006
the Convertible Debt 2nd Tranche was $2.2 million (net of the debt discount).
The Company also has a term loan from a regional bank. The loan is guaranteed by all of the
Companys, and its subsidiaries, assets excluding Picometrix LLC intellectual property.
Repayment is principal of $75,000 per month, plus interest, until maturity on May 2, 2008.
Interest is computed at the Wall Street Journal Prime plus 1% with a ceiling of 7.75% and a
floor of 6%. The Company has classified the entire note as a current liability, while we
renegotiate loan covenants. The prime interest rate was 8.25% as of June 30, 2006.
The Michigan Economic Development Corporation (MEDC) entered into two loan agreements with
Picometrix LLC, one in 2004 (MEDC-loan 1) and one in 2005 (MEDC-loan 2). Both loans are
unsecured. MEDC-loan 1 is for an amount up to $1,024,000 with an interest rate of 7% and is
fully amortized by the end of an eight (8) year period (ending on September 15, 2012).
Interest is accrued during the first four years, but not paid, after which time principle plus
accrued interest is paid over the remaining four years. On September 15, 2004 the Company
borrowed $750,000 against the $1.0 million.
MEDC-loan 2 is for an amount up to $1.2 million with an interest rate of 7% and is fully
amortized by the end of a six (6) year period (ending on September 15, 2011). Interest is
accrued during the first two years and paid ratably over the third year. Beginning in the
fourth year principle and accrued interest is paid over the remaining three years. On September
15, 2005 the Company borrowed $600,000 against the $1.2 million.
Related Party Debt
As a result of the acquisition of Picotronix, Inc. (dba Picometrix), the stockholders of
Picometrix received four-year API promissory notes in the aggregate principal amount of $2.9
million (Debt to Related Parties). The notes are payable in four annual installments with the
first being a payment of $500,000 paid May 2006, the second being a payment of $550,000 May
2007, the third being a payment of $900,000 due May 2008 and the fourth being a payment of
$950,500 due May 2009. The notes bear an interest rate of prime plus 1.0% and are secured by all
of the intellectual property of Picometrix. API has the option of prepaying the debt to related
10
parties without penalty. Note holders include Robin Risser and Steve Williamson, the Companys
CFO and CTO respectively.
Debt Maturity Table (in 000s)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FY2012 |
|
|
|
6/30/06 |
|
|
FY2007 |
|
|
FY2008 |
|
|
FY2009 |
|
|
FY2010 |
|
|
FY2011 |
|
|
& Beyond |
|
Bank Term Loan SBB&T |
|
$ |
1,725 |
|
|
$ |
675 |
|
|
$ |
900 |
|
|
$ |
150 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit Line SBB&T |
|
|
1,000 |
|
|
|
1,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
MEDC loan 1 |
|
|
750 |
|
|
|
|
|
|
|
|
|
|
|
109 |
|
|
|
188 |
|
|
|
188 |
|
|
|
265 |
|
MEDC loan 2 |
|
|
600 |
|
|
|
|
|
|
|
|
|
|
|
117 |
|
|
|
200 |
|
|
|
200 |
|
|
|
83 |
|
Convertible Debt
1st Tranche |
|
|
1,507 |
|
|
|
|
|
|
|
1,507 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Convertible Debt
2nd Tranche |
|
|
2,473 |
|
|
|
|
|
|
|
2,473 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt to Related Parties |
|
|
2,401 |
|
|
|
|
|
|
|
550 |
|
|
|
900 |
|
|
|
951 |
|
|
|
|
|
|
|
|
|
Capital leases |
|
|
9 |
|
|
|
9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL |
|
$ |
10,465 |
|
|
$ |
1,684 |
|
|
$ |
5,430 |
|
|
$ |
1,276 |
|
|
$ |
1,339 |
|
|
$ |
388 |
|
|
$ |
348 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note 6. Equity
Shareholders Equity Transactions
During the period ended June 30, 2006, API stock option holders exercised rights to purchase
89,000 shares of Class A Common Stock at approximately $1.67 per share resulting in cash to the
Company of approximately $148,000.
Note 7. Loss Per Share
Net Income (Loss) Per Share
Net income (loss) per share calculations is in accordance with SFAS No. 128, Earnings per
Share. Accordingly, basic earnings (loss) per share are computed by dividing net income (loss)
by the weighted average number of shares outstanding for each year. The impact of Statement 128
on the calculation of earnings per share is as follows:
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
June 31, 2006 |
|
June 26, 2005 |
BASIC AND DILUTED |
|
|
|
|
|
|
|
|
Average Shares Outstanding |
|
|
18,980,000 |
|
|
|
15,133,000 |
|
Net Loss |
|
$ |
(1,156,000 |
) |
|
$ |
(134,000 |
) |
Basic and Diluted Loss Per Share |
|
$ |
(0.06 |
) |
|
$ |
(0.01 |
) |
The dilutive effect of stock options outstanding at June 30, 2006 and June 26, 2005 was not
included in the calculation of diluted loss per share for the three-month periods
because to do so would have had an anti-dilutive effect as the Company had a net loss for each
of these periods. The weighted average number of shares excluded from the diluted loss per share
computation was approximately 3.2 million and 3.7 million for the three-month periods ended June
30, 2006 and June 26, 2005, respectively.
Note 8. Subsequent Events
As of July 24, 2006 the Company dissolved, Texas Optoelectronics, Inc. the Companys wholly
owned subsidiary (TOI). This subsidiary held no assets or claims as of July 24, 2006. The
Company shut down the Garland facility in May 2003 and relocated the TOI assets to the Companys
facilities in Dodgeville, Wisconsin and Camarillo, California.
11
Item 2. Management Discussion and Analysis of Financial Condition and Results of Operations
Critical Accounting Policies and Estimates
The discussion and analysis of our financial condition and results of operations is based on our
condensed consolidated financial statements, which have been prepared in conformity with
accounting principles generally accepted in the United States of America. Our 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 to be 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. Management uses 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 allowances, impairment costs, depreciation and amortization, warranty costs,
taxes and contingencies. Management has identified the following accounting policies as critical
to an understanding of our financial statements and/or as areas most dependent on managements
judgment and estimates.
Revenue Recognition
In accordance with Staff Accounting Bulletin No. 104, the Company recognizes revenue from the
sale of products when the products are shipped to the customer. Revenues from the sale of
services consist of non-recurring engineering charges, which are recognized when the services
have been rendered. Historically, sales returns have amounted to less than 1% of gross sales and
all sales are recorded net of sales returns and discounts.
Inventory Obsolescence
Slow moving and obsolete inventories are reviewed throughout the year. To calculate a
reserve for obsolescence, we begin with a review of our slow moving inventory. Any inventory,
which has been slow moving within the past 12 months, is evaluated and reserved if deemed
appropriate. In addition, any residual inventory, which is customer specific and remaining on
hand at the time of contract completion, is reserved for at the standard unit cost. 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. Items identified as useable in the near future are then excluded from slow moving and
obsolete inventory and the remaining amount is then reserved as slow moving and obsolete.
Additionally, non-cancelable open purchase orders for parts we are obligated to purchase where
demand has been reduced may be reserved. Reserves for open purchase orders where the market
price is lower than the purchase order price are also established. If a product that had
previously been reserved for is subsequently sold, the amount of reserve specific to that item
is then reversed.
Impairment of Long-Lived Assets
The Company continually reviews the recoverability of the carrying value of long-lived assets
using the methodology prescribed in Statement of Financial Accounting Standards (SFAS) 144,
Accounting for the Impairment and Disposal of Long-Lived Assets. The Company also reviews
long-lived assets and the related intangible assets for impairment whenever events or changes in
circumstances indicate that the carrying value of such assets may not be recoverable. Upon such
an occurrence, recoverability of these assets is determined by comparing the forecasted
undiscounted net cash flows to which the assets relate, to the carrying amount. If the asset is
determined to be unable to recover its carrying value, then intangible assets, if any, are
written down first, followed by the other long-lived assets to fair value. Fair value is
determined based on discounted cash flows, appraised values or managements estimates, depending
on the nature of the assets.
12
Deferred Tax Asset Valuation Allowance
We record a deferred income tax asset in jurisdictions where we generate a loss. We also record
a valuation allowance against these deferred tax assets in accordance with SFAS 109, Accounting
for Income Taxes, when, in managements judgment, it is more likely than not that the deferred
income tax assets will not be realized in the foreseeable future.
Results of Operations
Revenues
The Company predominantly operates in one industry segment, light and radiation detection
devices that it sells to multiple markets including telecommunications, industrial sensing/NDT,
military/aerospace, medical, and homeland security. Revenues by market consisted of the
following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
Revenue |
|
June 30, 2006 |
|
|
% |
|
|
June 26, 2005 |
|
|
% |
|
Telecommunications |
|
$ |
743,000 |
|
|
|
13.1 |
% |
|
|
505,000 |
|
|
|
10.0 |
% |
Industrial Sensing/NDT |
|
|
2,412,000 |
|
|
|
42.5 |
% |
|
|
2,163,000 |
|
|
|
42.6 |
% |
Military/Aerospace |
|
|
1,868,000 |
|
|
|
33.0 |
% |
|
|
1,214,000 |
|
|
|
23.9 |
% |
Medical |
|
|
634,000 |
|
|
|
11.2 |
% |
|
|
697,000 |
|
|
|
13.7 |
% |
Homeland Security |
|
|
11,000 |
|
|
|
0.2 |
% |
|
|
498,000 |
|
|
|
9.8 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Revenue |
|
$ |
5,668,000 |
|
|
|
100 |
% |
|
$ |
5,077,000 |
|
|
|
100 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
The Companys revenues for the quarter ended June 30, 2006 were $5.7 million, an increase of
$0.6 million, or 12% over revenues of $5.1 million for the quarter ended June 26, 2005.
The Company had substantial growth in the telecommunications and military/aerospace markets in
the 1st quarter ended June 30, 2006 (Q1 07) as compared to the quarter ended June 26,
2005 (Q1 06). Telecommunications market revenues were $743,000, an increase of 47% (or $238,000)
over Q1 06 revenues of $505,000. Military/aerospace market revenues were $1,868,000, an increase
of 54% (or $655,000) over Q1 06 revenues of $1,214,000. Industrial Sensing/NDT market revenues
increased to $2,412,000 an increase of 11% (or $249,000) over Q1 06 revenues of $2,163,000.
The revenue increases of $1,141,000 from the telecommunications; military/aerospace and
Industrial sensing/NDT markets were partially offset by reductions in revenue of $550,000 from
the homeland security and medical markets. Homeland security revenues were $11,000, a decline
of $487,000, due primarily to the delay in government Terahertz development contracts from the
Transportation Security Administration (TSA). Medical market revenues were $634,000 a drop of
$63,000 (or 9%) over the same quarter of the prior year revenues of $697,000.
The Company expects continued strong revenue growth lead by high growth in the
telecommunications market. The Company expects to continue to experience uneven quarterly
revenue in the homeland security market due primarily to the unpredictable nature of the timing
of government development contracts.
Costs and expenses
Cost of product sales for Q1 07 was 56% of sales (or $3.2 million) as compared to 58% of sales
(or $2.9 million) for Q1 06. The improvement in cost of product sales as percent of sales is
primarily attributable to product mix. As a result, gross profit increased to $2.5 million (or
44% of sales) for Q1 07 from $2.1 million for Q1 06, an increase of 19%.
13
Research and development (R&D) expenses increased by $517,000 (or 114%) to $969,000 during Q1 07
compared to $452,000 in Q1 06. The increase in R & D expenses is the result of the Companys
investment in the high-speed optical receiver and terahertz product platforms. We expect that
future R&D expenses will be at least at the same level or greater during the current fiscal
year, as we continue our investment in our high growth opportunities.
Marketing and sales expenses increased by $215,000 (or 68%) to $532,000 in Q1 07, which is 9% of
sales as compared to 6% of sales (or $316,000) for Q1 06. The increase was primarily
attributable to the high-speed optical receivers product platform growth initiatives, including
the growth of external field sales, field engineering support and development of the
corresponding internal sales organization. The Company has largely completed the expansion of
the domestic field sales force for the high-speed optical receiver and optosolutions product
platforms. The Company is committed to expanding its business development functions in the
Terahertz product platform and military market and anticipates further increases in
compensation, travel and related expenses during fiscal 2007 for these purposes.
Total general and administrative expenses increased by $327,000 (24%) to approximately $1.68
million as compared to $1.35 million in Q1 06. This increase was primarily the result of the
Picometrix acquisition, including a $171,000 increase in intangible amortization expense.
Expressed as a percentage of net sales, general and administrative expenses represented 29.6% in
Q1 07 as compared to 26.7% in Q1 06. The Company expects G&A expenses to remain relatively
stable except for expenses relating to Sarbanes-Oxley Act section 404. Section 404, internal
controls, requires the Company to be compliant by fiscal year ending March 2008, based on
current market capitalization. External costs required to be in compliance will materially
increase over the next two years.
Interest income in Q1 07 totaled approximately $58,000, an increase of $48,000 over Q1 06, due
primarily to interest earned on substantially higher cash and cash equivalent balances invested
at higher rates of interest.
Interest expense for the Q1 07 was $477,000 compared to $171,000 in Q1 06, an increase of
$306,000. The increase is primarily attributed to the amortization of convertible notes
discounts of $217,000 for the implied value of the warrants associated with the Round 1 & 2
convertible note financing. The remaining note discount of $1,556,000 at June 30, 2006 will be
amortized to interest expense through Oct 2007. If the note is converted prior to Oct 2007 any
remaining note discount amount will be expensed at the time of conversion. The balance of the
interest expense is primarily comprised of $36,000 in interest expense on convertible notes,
$24,000 in interest expense on the Michigan Economic Development Corporation notes and interest
expense on related party notes of $26,000.
Net loss for Q1 2007 was $1,156,000, as compared to net loss of $134,000 in Q1 2006. The
increase of approximately $1 million in losses is primarily comprised of non-cash expense
totaling $451,000, non-recurring expenses from wafer fabrication consolidation of $33,000 and
increased R&D expense of $516,000. Non-cash operating expenses increased $451,000 which
includes the result of the adoption of 123R for the expensing of stock option grants of
$117,000, interest expense increase of $217,000 related to convertible notes discount
amortization and an increase in the intangible amortization expenses of $117,000.
The Company expects the wafer fabrication consolidation expenses to increase during the
consolidation period over the balance of the fiscal year. The Company has projected wafer
fabrication consolidation expense to range from $600,000 to $700,000 for this fiscal year. The
Companys future benefits, as a result of the wafer fabrication consolidation, include cost
savings through increased efficiencies, reduced scrap, improved process capability, and higher
yields. In addition the consolidation will provide new capabilities for product development,
leading to growth opportunities through new product introductions.
Liquidity and Capital Resources
At June 30, 2006, the Company had unrestricted cash and cash equivalents of $5.9 million, the
same amount as at March 31, 2006. The Company believes that current cash levels combined with
our revolving line of credit will be sufficient for our 2007 fiscal year.
14
The Company maintains a revolving line of credit with a regional bank that provides for
borrowings up to $3.0 million, based on 80% of the Companys eligible accounts receivable and
40% of the Companys eligible inventory, subject to certain limitations as defined by the
agreement. At June 30, 2006, the outstanding balance on the line was $1.0 million. All
business assets of the Company secure the line. As most recently amended, repayment is
interest only monthly, with principal due at maturity date on November 3, 2006. Interest is
computed at the prime rate as published in the Wall Street Journal plus 1/2% with a floor of 6.5%.
The prime interest rate was 8.25% at June 30, 2006.
The Company anticipates capital expenditures in FY 07 of approximately $1,800,000, including
equipment and facility expenditures associated with the wafer fabrication consolidation into the
Ann Arbor, Michigan facility. The Company has a bank line of credit of $3.0 million of which $1
million has been used and Michigan Economic Development Corporation (MEDC) long term note
commitment of $2.2 million, of which $1.35 million has used. The company does not anticipate
requiring additional sources of financing for FY 07.
Operating Activities
Net cash provided by operating activities of $729,000 for the quarter ended June 30, 2006 was
primarily the result of a decrease in accounts receivable of $865,000 and lower inventory
balances of $80,000 and prepaid balance of $38,000; offset by a decrease in accounts payable of
$(48,000), net operating loss of $(1,156,000), depreciation and amortization of $867,000, and
stock compensation (123R) of $117,000.
Investing Activities
Net cash used in investing activities was $159,000 for the quarter ended June 30, 2006. Capital
expenditure activity for Q1 3007 accounted for $126,000 of the cash used, and patent
expenditures were $33,000 for the quarter.
Financing Activities
Net cash used in financing activities was $577,000 for the quarter ended June 30, 2006. This
reflects the principle payment on the term loan of $225,000 and the annual note payable to
related parties of $500,000. Employees exercised stock options for approximately $148,000. The
Company is exposed to interest rate risk for marketable securities. We continually monitor
interest rates and will attempt to utilize the best possible avenues of investment as excess
cash becomes available.
Based on current plans and business conditions, we believe our existing working capital and
borrowing capacity, coupled with the funds generated from our operations, will be sufficient to
fund our anticipated working capital and capital expenditures for the next twelve months.
However, if we make an acquisition requiring amounts in excess of our cash and cash equivalents
balance, it may be necessary to raise debt or equity in the private or public securities
markets.
We identify and disclose all of our significant off balance sheet arrangements and related party
transactions. We do not utilize special purpose entities or have any known financial
relationships with other companies special purpose entities.
Operating Leases We enter into operating leases where the economic climate is favorable. The
liquidity impact of operating leases is not material.
Purchase Commitments We have purchase commitments for materials, supplies, services, and
property, plant and equipment as part of the normal course of business. Commitments to purchase
inventory at above-market prices have been reserved. Certain supply contracts may contain
penalty provisions for early termination. Based on current expectations, we do not believe that
we are reasonably likely to incur any material amount of penalties under these contracts.
Other Contractual Obligations We do not have material financial guarantees that are
reasonably likely to affect liquidity.
Summary of Contractual Obligations and Commitments A summary of our future contractual
payments related to debt, lease obligations, and non-cancelable open purchase orders is as
follows
15
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-Cancelable |
|
|
|
|
|
|
Operating |
|
|
Purchase |
|
|
|
|
Period ending June 30, 2006 |
|
Leases |
|
|
Orders |
|
|
Total |
|
2007(nine months) |
|
$ |
864,000 |
|
|
$ |
1,764,000 |
|
|
$ |
2,628,000 |
|
2008 |
|
|
1,115,000 |
|
|
|
|
|
|
|
1,115,000 |
|
2009 |
|
|
1,035,000 |
|
|
|
|
|
|
|
1,035,000 |
|
2010 |
|
|
704,000 |
|
|
|
|
|
|
|
704,000 |
|
2011 |
|
|
176,000 |
|
|
|
|
|
|
|
176,000 |
|
2012 and thereafter |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
3,894,000 |
|
|
$ |
1,764,000 |
|
|
$ |
5,658,000 |
|
|
|
|
|
|
|
|
|
|
|
Item 3. Quantitative and Qualitative Disclosures about Market Risk
At June 30, 2006, all of the Companys interest rate exposure is linked to the prime rate,
subject to certain limitations. As such, we are at risk to the extent of changes in the prime
rate and do not believe that moderate changes in the prime rate will materially affect our
operating results or financial condition. The interest rate risk is hedged by an interest rate
cap of 7.75% on the term loan of $2,700,000 relating to the purchase of Picometrix.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures Our Chief Executive Officer and Chief
Financial Officers (the Certifying Officers) are responsible for establishing and maintaining
disclosure controls and procedures for the Company. The Certifying Officers have designed such
disclosure controls and procedures to ensure that material information is made known to them,
particularly during the period in which this report was prepared. The Certifying Officers have
evaluated the effectiveness of the Companys disclosure controls and procedures (as defined in
Exchange Act Rule 13a-15(e) and 15d-15(e)) as of the end of the period covered by this quarterly
report and believe that the Companys disclosure controls and procedures are effective based on
the required evaluation. API management reconfigured our Corporate and Camarillo accounting and
disclosure controls and transferred certain accounting and external reporting functions to our
Ann Arbor office. We will continue to review and assess future needs and responsibilities in all
locations and may make future changes. We believe that these changes may have a material affect
on our internal controls and procedures. It is management opinion that this will reduce costs
and strengthen controls and procedures upon completion.
Forward Looking Statements
The information contained herein includes forward looking statements that are based on
assumptions that management believes to be reasonable but are subject to inherent uncertainties
and risks including, but not limited to, risks associated with the integration of newly acquired
businesses, unforeseen technological obstacles which may prevent or slow the development and/or
manufacture of new products, limited (or slower than anticipated) customer acceptance of new
products which have been and are being developed by the Company, the availability of other
competing technologies and a decline in the general demand for optoelectronic products.
16
Part II OTHER INFORMATION
Item 1. Legal Proceedings
None
Item 1A. Risk Factors
There have been no material changes with respect to the risk factors disclosed in the
Companys Annual Report on Form 10-K for the fiscal year ended March 31, 2006.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
None
Item 3. Defaults upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
The following documents are filed as Exhibits to this report:
|
|
|
Exhibit |
No. |
31.1
|
|
Certificate of the Registrants Chairman, Chief Executive Officer,
and Director pursuant to Section 302 of the Sarbanes-Oxley Act of
2002 |
|
|
|
31.2
|
|
Certificate of the Registrants Chief Financial Officer, and
Secretary pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
|
|
|
32.1
|
|
Certificate pursuant to 18 U.S.C. Section 1350, as adopted pursuant
to Section 906 of the Sarbanes- Oxley Act of 2002 |
|
|
|
32.2
|
|
Certificate pursuant to 18 U.S.C. Section 1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002 |
17
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused
this report to be signed on its behalf by the undersigned thereunto duly authorized.
Advanced Photonix, Inc.
(Registrant)
August 14, 2006
|
|
|
/s/ Richard Kurtz |
|
|
|
|
|
Richard Kurtz |
|
|
Chairman, Chief Executive Officer |
|
|
And Director |
|
|
|
|
|
/s/ Robin Risser |
|
|
|
|
|
Chief Financial Officer |
|
|
And Director |
|
|
18
Exhibit Index
|
|
|
Exhibit
No. |
|
Description |
31.1
|
|
Certificate of the Registrants Chairman, Chief Executive
Officer, and Director pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002 |
|
|
|
31.2
|
|
Certificate of the Registrants Chief Financial Officer, and
Secretary pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002 |
|
|
|
32.1
|
|
Certificate pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
|
|
|
32.2
|
|
Certificate pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
19