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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549 


 
FORM 10-Q 
 

 
x
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the Quarterly Period Ended June 30, 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                           
 
COMMISSION FILE NUMBER: 0-49737
 
UNI-PIXEL, INC.
(Exact Name of Registrant as Specified in Its Charter)
 
DELAWARE
 
75-2926437
(State or Other Jurisdiction of
Incorporation or Organization)
 
(I.R.S. Employer
Identification No.)
 
8708 Technology Forest Place, Suite 100
The Woodlands, Texas 77381
(Address of Principal Executive Offices)
 
(281) 825-4500
(Issuer’s 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.   x Yes o No
 
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 (§232.405 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 x   No o
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).   Yes o   No x
 
As of July 31, 2014, the issuer had 12,350,715 shares of issued and outstanding common stock, par value $0.001 per share.
 
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 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 x
     
Non-accelerated filer o
 
Smaller reporting company o
(Do not check if a smaller reporting company)
   
 
 
TABLE OF CONTENTS
 
Part I.
Financial Information
3
     
Item 1.
3
     
 
   June 30, 2014 (unaudited) and December 31, 2013
3
     
 
  Three and six months ended June 30, 2014 (unaudited) and June 30, 2013 (unaudited)
4
     
 
   From December 31, 2012 to June 30, 2014 (unaudited)
5
     
 
   Six months ended June 30, 2014 (unaudited) and June 30, 2013 (unaudited)
6
     
 
7
     
Item 2.
15
     
Item 3.
20
     
Item 4.
20
     
Part II.
Other Information
21
     
Item 1.
21
     
Item 1A.
21
     
Item 6.
21
     
     
 
 
PART I - FINANCIAL INFORMATION
 
ITEM 1.  FINANCIAL STATEMENTS.
 
Uni-Pixel, Inc.
Condensed Consolidated Balance Sheets
 
   
June 30,
 2014
   
December 31,
2013
 
   
(unaudited)
       
ASSETS
           
Current assets
           
Cash and cash equivalents
 
$
30,360,187
   
$
39,369,574
 
Account receivable, net
   
     
11,409
 
Prepaid expenses
   
142,500
     
 
                 
Total current assets
   
30,502,687
     
39,380,983
 
                 
Property and equipment, net of accumulated depreciation of $7,755,099 and $4,769,453,
   at June 30, 2014 and December 31, 2013, respectively
   
13,886,691
     
15,893,435
 
Restricted cash
   
17,439
     
17,439
 
                 
Total assets
 
$
44,406,817
   
$
55,291,857
 
                 
LIABILITIES AND SHAREHOLDERS’ EQUITY
               
                 
Current liabilities
               
Accounts payable
 
$
606,246
   
$
1,053,748
 
    Deferred revenue
   
5,000,000
     
5,000,000
 
                 
Total current liabilities
   
5,606,246
     
6,053,748
 
                 
Total liabilities
   
5,606,246
     
6,053,748
 
                 
Commitments and contingencies (Note 3)
   
     
 
                 
Shareholders’ equity
               
Common stock, $0.001 par value; 100,000,000 shares authorized, 12,349,047 shares issued and outstanding at June 30, 2014 and 12,244,714 shares issued and outstanding at December 31, 2013
   
12,349
     
12,245
 
Additional paid-in capital
   
137,536,965
     
135,720,308
 
Accumulated deficit
   
(98,748,743
)
   
(86,494,444
)
                 
Total shareholders’ equity
   
38,800,571
     
49,238,109
 
                 
Total liabilities and shareholders’ equity
 
$
44,406,817
   
$
55,291,857
 
 
See accompanying notes to these unaudited condensed consolidated financial statements.
 
 
Uni-Pixel, Inc.
Condensed Consolidated Statements of Operations
(unaudited)

   
Three Months Ended
June 30,
   
Six Months Ended
June 30,
 
   
2014
   
2013
   
2014
   
2013
 
                         
Revenue
 
$
   
$
749
   
$
   
$
5,070,165
 
                                 
Cost of revenues
   
     
385
     
     
3,421 
 
                                 
Gross margin
   
     
364
     
     
5,066,744
 
                                 
Selling, general and administrative expenses
   
3,079,547
     
2,172,777
     
5,947,951
     
4,352,844
 
Research and development
   
2,990,870
     
2,528,303
     
6,315,216
     
4,468,191
 
                                 
Operating loss
   
(6,070,417
)
   
(4,700,716
)
   
(12,263,167
)
   
(3,754,291
)
                                 
Other income (expense)
                               
   Interest income (expense), net
   
4,068
     
5,481
     
8,868
     
6,471
 
                                 
Net loss
 
$
(6,066,349
)
 
$
(4,695,235
)
 
$
(12,254,299
)
 
$
(3,747,820
)
                                 
Per share information
                               
   Net loss - basic
 
$
(0.49
)
 
$
(0.40
)
 
$
(1.00
)
 
$
(0.35
)
   Net loss - diluted
   
(0.49
)
   
(0.40
)
   
(1.00
)
   
(0.35
)
                                 
Weighted average number of basic common shares outstanding
   
12,349,047
     
11,632,702
     
12,311,617
     
10,854,719
 
Weighted average number of diluted common shares outstanding
   
12,349,047
     
11,632,702
     
12,311,617
     
10,854,719
 
 
See accompanying notes to these condensed consolidated financial statements.
 
 
Uni-Pixel, Inc.
Condensed Consolidated Statements of Shareholders’ Equity
 
   
Common Stock
                   
   
Number
         
Additional
         
Total
 
   
of
Shares
   
Amount
   
Paid-In
Capital
   
Accumulated
Deficit
   
Shareholders’
Equity
 
Balance, December 31, 2012
   
9,854,268
   
$
9,854
   
$
85,669,802
   
$
(71,313,550
)
 
$
14,366,106
 
Stock compensation expense
   
     
     
3,406,193
     
     
3,406,193
 
Exercise of warrants
   
454,729
     
455
     
187,528
     
     
187,983
 
Exercise of stock options
   
523,467
     
524
     
3,513,796
     
     
3,514,320
 
Issuance of restricted stock
   
38,000
     
38
     
1,724,470
     
     
1,724,508
 
Issuance of common stock, net of issuance costs
   
1,374,250
     
1,374
     
41,218,519
     
     
41,219,893
 
Net loss
   
     
     
     
(15,180,894
)
   
(15,180,894
)
Balance, December 31, 2013
   
12,244,714
   
$
12,245
   
$
135,720,308
   
$
(86,494,444
)
 
$
49,238,109
 
Stock compensation expense
   
     
     
1,273,879
     
     
1,273,879
 
Exercise of warrants
   
64,699
     
64
     
(64
)
   
     
 
Exercise of stock options
   
4,000
     
4
     
28,516
     
     
28,520
 
Issuance of restricted stock
   
35,634
     
36
     
514,326
     
     
514,362
 
Net loss
   
     
     
     
(12,254,299
)
   
(12,254,299
)
Balance, June 30, 2014 (unaudited)
   
12,349,047
   
$
12,349
   
$
137,536,965
   
$
(98,748,743
)
 
$
38,800,571
 
 
See accompanying notes to these unaudited condensed consolidated financial statements

 
Uni-Pixel, Inc.
Condensed Consolidated Statements of Cash Flows
(unaudited)

   
Six Months Ended
June 30,
 
   
2014
   
2013
 
Cash flows from operating activities
           
Net loss
 
$
(12,254,299
)
 
$
(3,747,820
)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
               
Depreciation and amortization
   
2,985,646
     
539,470
 
Restricted stock issuance
   
514,362
     
763,966
 
Stock compensation expense
   
1,273,879
     
1,461,804
 
Change in operating assets and liabilities:
               
Decrease in accounts receivable
   
11,409
     
 
(Increase) decrease in prepaid assets and other current assets
   
(142,500
)
   
160,320
 
Increase (decrease) in accounts payable
   
(447,502
)
   
940,527
 
Increase in bonus accrual
   
     
273,675
 
Increase in deferred revenue
   
     
5,000,000
 
Net cash provided by (used in) operating activities
   
(8,059,005
)
   
5,391,942
 
                 
Cash flows from investing activities
               
Purchase of property and equipment
   
(978,902
)
   
(8,857,640
)
Net cash used in investing activities
   
(978,902
)
   
(8,857,640
)
                 
Cash flows from financing activities
               
    Proceeds from exercise of warrants, net
   
     
151,982
 
    Proceeds from exercise of stock options, net
   
28,520
     
2,502,131
 
    Proceeds from the issuance of common stock, net
   
     
41,219,893
 
Net cash provided by financing activities
   
28,520
     
43,874,006
 
                 
Net increase (decrease) in cash and cash equivalents
   
(9,009,387
)
   
40,408,308
 
Cash and cash equivalents, beginning of period
   
39,369,574
     
13,000,372
 
Cash and cash equivalents, end of period
 
$
30,360,187
   
$
53,408,680
 
                 
Supplemental disclosures of cash flow information:
               
Cash paid for interest
 
$
   
$
 
Cash paid for income taxes
 
$
   
$
 
                 
Supplemental disclosures of non-cash financing information:
               
Issuance of 64,699 shares of common stock in exchange for the cashless exercise of warrants to purchase 126,433 shares of common stock for the six months ended June 30, 2014.  Issuance of 399,629 shares of common stock in exchange for the cashless exercise of warrants to purchase 505,661 shares of common stock for the six months ended June 30, 2013.
 
$
323,486
   
$
2,151,182
 
 
See accompanying notes to these unaudited condensed consolidated financial statements.
 
 
Uni-Pixel, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements
 
Note 1 — Basis of Presentation, Business and Organization
 
Uni-Pixel, Inc., a Delaware corporation, is the parent company of Uni-Pixel Displays, Inc., its wholly-owned operating subsidiary.  As used herein, “Uni-Pixel,” “the Company,” “we,” “us,” and “our” refer to Uni-Pixel, Inc. and Uni-Pixel Displays, Inc.  Our common stock, par value $0.001 per share, is quoted on The NASDAQ Capital Market under the ticker symbol “UNXL.”

We are a production stage company delivering our Performance Engineered Film™ (PEF) products to the display, touch screen and flexible electronics market segments.  We recently rebranded our PEF production process as Copperhead™.  We have also recently rebranded the touch sensors made with the Copperhead™ process as InTouch™ sensors.

We make transparent conductive films and flexible electronic films based on our proprietary Copperhead™ manufacturing process for high volume, roll to roll printing of flexible thin-film conductor patterns. The Copperhead™ process offers precision micro-electronic circuit patterning and modification of surface characteristics over a large area on an ultra-thin, clear, flexible, plastic substrate. These films may be incorporated into touch sensors, capacitive switches, general lighting, automotive, antenna, display and shielding applications.  We intend to sell the touch screen films, under the brand InTouch™, as sub-components of a touch sensor module.  

In addition to the flexible electronic films described above, we are currently sampling our hard coat resin and protective films for use with multiple types of devices either as protective cover films, a cover lens replacement or a conformal hard coat for plastic components. We plan to sell our hard coat resin and optical films under the Diamond Guard™ brand.  Furthermore, we plan to leverage our past work in developing the Time Multiplexed Optical Shutter (TMOS) technology, which we sold in May 2010, for other marketable applications, such as low cost LCD backlights and general lighting films. We intend to explore the business potential within these applications and pursue those markets that offer profitable opportunities either through licensing or direct production and sales.  

Our strategy is to further develop our proprietary Performance Engineered Film™ technology around the vertical markets that we have identified as high growth profitable market opportunities.  These markets include touch sensors, antennas, automotive and lighting. We have and will continue to utilize contract manufacturing for prototype fabrication to augment our internal capabilities in the short term. We also plan to enter into licensing arrangements, joint developments or ventures in key market segments to exploit the manufacturing and distribution channels of those companies with whom we contract.

As of June 30, 2014, Uni-Pixel had accumulated a total deficit of $98.7 million from operations in pursuit of these objectives.
 
Since our inception, we have been primarily engaged in developing our initial product technologies, recruiting personnel, commencing our operations and obtaining sufficient capital to meet our working capital needs. In the course of our development activities, we have sustained losses through June 30, 2014. We will finance our operations primarily through our existing cash and possible future financing transactions.
 
As of June 30, 2014, we had cash and cash equivalents of $30.4 million.  We believe that our existing capital resources are adequate to finance our operations until at least December 31, 2014 based on our current long-term business plan.  However, our long-term viability is dependent upon our ability to successfully operate our business, develop our manufacturing process, sign licensing, development and distribution agreements, develop our products and raise additional capital through offerings of our debt or equity securities to meet our business objectives.
 
The Company is subject to a number of risks, including the financial performance of its current products; the potential need for additional financings; its ability to successfully commercialize its product candidates; the uncertainty of the Company’s research and development efforts resulting in future successful commercial products; significant competition from larger organizations; reliance on the proprietary technology of others; dependence on key personnel; uncertain patent protection; dependence on corporate partners and collaborators;  as well as other changes in the electronic market industry.

Basis of Presentation
 
The condensed consolidated financial statements presented in this quarterly report include Uni-Pixel, Inc. and our wholly-owned subsidiary, Uni-Pixel Displays, Inc. All significant intercompany transactions and balances have been eliminated.

 
Note 2 — Summary of Significant Accounting Policies
 
Interim financial information
 
The condensed consolidated financial statements included herein, which have not been audited pursuant to the rules and regulations of the Securities and Exchange Commission, reflect all adjustments which, in the opinion of management, are necessary for a fair presentation of financial position, results of operations and cash flows for the interim periods on a basis consistent with the annual audited statements. All such adjustments are of a normal recurring nature. The results of operations for interim periods are not necessarily indicative of the results that may be expected for any other interim period or for a full year. Certain information, accounting policies and footnote disclosures normally included in condensed consolidated financial statements prepared in conformity with accounting principles generally accepted in the United States of America have been omitted pursuant to such rules and regulations, although we believe that the disclosures are adequate to make the information presented not misleading. These condensed consolidated financial statements should be read in conjunction with our audited consolidated financial statements included in our Form 10-K, for the year ended December 31, 2013, filed with the Securities and Exchange Commission on February 26, 2014.

The accounting and reporting policies of the Company conform to U.S. generally accepted accounting principles (GAAP) and to the practices within the technology industry.  There have been no significant changes in the Company’s significant accounting policies during the six months ended June 30, 2014 compared to what was previously disclosed in the Company’s Annual Report on 10-K for the year ended December 31, 2013. The consolidated financial information as of December 31, 2013 included herein has been derived from the Company’s audited consolidated financial statements as of, and for the fiscal year ended, December 31, 2013.

Significant Accounting Policies
 
There have been no material changes to the Company’s significant accounting policies during the six months ended June 30, 2014 as compared to the significant accounting policies disclosed in Note 2 of the Company’s consolidated financial statements in the Annual Report on Form 10-K for the year ended December 31, 2013.
 
Use of estimates
 
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Examples include provisions for bad debts, useful lives of property and equipment, impairment of property and equipment, deferred taxes, and the provision for and disclosure of litigation and loss contingencies and stock based compensation. Actual results may differ materially from those estimates.
 
Statements of cash flows
 
For purposes of the statements of cash flows, we consider all highly liquid investments (i.e., investments which, when purchased, have original maturities of three months or less) to be cash equivalents.

Concentration of credit risk
 
We maintain our cash with major U.S. domestic banks.   The amounts held in interest bearing accounts periodically exceed the Federal Deposit Insurance Corporation (“FDIC”) insured limit of $250,000 at June 30, 2014 and December 31, 2013.  The amounts held in these banks exceeded the insured limit of $250,000 as of June 30, 2014 and December 31, 2013.   We have not incurred losses related to these deposits.

Restricted cash

As of June 30, 2014 and December 31, 2013, we had restricted cash of $17,439. This amount secured certain obligations under our lease agreement for our principal facility located in The Woodlands, Texas as of both June 30, 2014 and December 31, 2013.  The restricted cash is reflected in a long-term classification based on its anticipated liquidation.

Accounts Receivable

The carrying value of our accounts receivable, net of allowance for doubtful accounts, represents their estimated net realizable value. We estimate the allowance for doubtful accounts based on type of customer, age of outstanding receivable, historical collection trends, and existing economic conditions.  If events or changes in circumstances indicate that a specific receivable balance may be unrealizable, further consideration is given to the collectability of those balances, and the allowance is adjusted accordingly.  Receivable balances deemed uncollectible are written off against the allowance.  We have $0 and $11,409 accounts receivable balances at June 30, 2014 and December 31, 2013, respectively, none of which was reserved as uncollectible.
 
 
Property and equipment

Property and equipment, consisting primarily of lab equipment, computer equipment, software, leasehold improvements, and office furniture and fixtures is carried at cost less accumulated depreciation and amortization. Depreciation and amortization for financial reporting purposes is provided by the straight-line method over the estimated useful lives of three to five years. Leasehold improvements are amortized using the straight-line method over the remaining lease term or the life of the asset, whichever is shorter. The cost of repairs and maintenance is charged as an expense as incurred.  Gains or losses related to retirements or dispositions of fixed assets are recognized in the period incurred.

Revenue recognition

We recognize revenue over the period the service is performed. In general, this requires that four basic criteria must be met before revenue can be recognized: (1) persuasive evidence that an arrangement exists, (2) delivery has occurred or services have been rendered, (3) the fee is fixed and determinable, and (4) collectability is reasonably assured.

Advance payments are deferred until shipment of product has occurred or the service has been rendered.
 
Revenue from licenses and other up-front fees is recognized on a ratable basis over the term of the respective agreement.

Revenue on certain fixed price contracts where we provide research and development services is recognized over the contract term based on achievement of milestones.

Under the milestone method, we recognized $5.0 million of revenue from a PC manufacturer in the first quarter of 2013 as non-recurring engineering revenue.

Effective, February 25, 2014, the Company has revised its touch sensors Preferred Price and Capacity License Agreement with its PC OEM partner (signed December 7, 2012) to waive the notebook limited exclusivity option. The exclusivity waiver allows the Company the opportunity to sell its touch sensors for use in competing notebook applications. There will be no additional milestone payments recognized under the new terms and conditions of the agreement, with the preferred pricing and capacity aspects of the agreement remaining unchanged. Under the original agreement with the PC OEM partner, there were three milestones.  Under the revised agreement with the PC OEM partner, there is one milestone, and this milestone was achieved in 2013. The Company continues to work closely with the PC OEM partner in product design and development.

In April 2013, we entered into an agreement with an Eco-System Partner (the “Agreement”), whereby we were going to receive $10 million of cash proceeds to assist us in increasing our production capacity. Under the terms of the Agreement, there were two milestones.  The Agreement required us to purchase certain equipment that was completed in 2013 which we consider not substantive.   The Agreement required us to have the capability to produce at least 1 million sensor units per month (as defined in the Agreement) by April 2014 which we consider substantive.  We received $5 million in May 2013, which is non-refundable and is recorded as deferred revenue in the accompanying consolidated balance sheet at June 30, 2014.  Upon achieving the deliverables of the Agreement, we would have paid a commission to the Eco-System Partner of 10%, on revenue derived from the sales of InTouch™ Sensors directly to the Eco-System Partner or to those of the Eco-System Partner’s manufacturing partners that use the Eco-System Partner’s Preferred Price and Capacity License Agreement.  The commission amount was to be paid until the aggregate commissions paid equaled the commission cap of $18.5 million.  The term of the Agreement is the later of 3 years or the full payment of the commission cap.  If the Company committed a material breach of the license agreement, certain equipment of the Company with an original cost of approximately $10.1 million would be assigned to the Eco-System Partner to make them whole on any remaining amounts due under the commission cap of $18.5 million.

In April 2014, we entered into the First Amendment to the Capacity License Agreement with the Eco-System Partner (the “Amended Agreement”).  The Amended Agreement modified the contract terms as follows: 1) the requirement to reach the minimum production capability and meet the required quality standards specified in the Agreement by April 2014 was removed; 2) the total amount of cash proceeds to be received was reduced from $10 million to $5 million (the $5 million was already received in May 2013); 3) the cap on the commission amount was reduced from $18.5 million to $6.25 million; and 4) if the Company becomes subject to bankruptcy, insolvency or liquidation or commits a material breach of the license agreement, certain equipment of the Company with an original cost of approximately $10.1 million will be assigned to the Eco-System Partner to make them whole on any remaining amounts due under the commission cap of $6.25 million.   The only remaining milestone of the Amended Agreement is the capability to produce at least 1 million sensors units per month.

Income (loss) per share data
 
            Basic income (loss) per share is calculated based on the weighted average common shares outstanding during the period.  Diluted earnings per share also gives effect to the dilutive effect of stock options, warrants (calculated based on the treasury stock method), convertible notes and convertible preferred stock. The Company does not present diluted earnings per share for years in which it incurred net losses as the effect is antidilutive.
            
 
At June 30, 2014, 285,666 restricted shares and options and warrants to purchase 2,431,647 shares of common stock at exercise prices ranging from $5.00 to $38.70 per share were outstanding, and were not included in the computation of diluted earnings per share as their effect would be anti-dilutive.
 
Recently issued accounting pronouncements
 
Accounting standards that have been issued or proposed by the FASB or other standards-setting bodies are not expected to have a material impact on the Company’s financial position, results of operations or cash flows.

Accounting Guidance Not Yet Effective
 
In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers.   ASU 2014-09 requires an entity to recognize 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.  To achieve this core principle, the guidance provides that an entity should apply the following steps: (1) identify the contract(s) with a customer; (2) identify the performance obligations in the contract; (3) determine the transaction price; (4) allocate the transaction price to the performance obligations in the contract; and (5) recognize revenue when, or as, the entity satisfies a performance obligation.  The Company expects to adopt ASU 2014-09 for the fiscal year ending December 31, 2016 and the Company will continue to assess the impact on its financial statements.

Other accounting standards that have been issued or proposed by the FASB or other standards-setting bodies are not expected to have a material impact on the Company’s financial position, results of operations and cash flows.

Note 3 —   Commitments and Contingencies
 
Leases
 
The Company has entered into a lease for office, warehouse and laboratory facilities for approximately 13,079 square feet at 8708 Technology Forest Pl., Ste. 100, The Woodlands, Texas 77381 under a third party non-cancelable operating lease, the term of which continues through April 30, 2016.  Further, the Company has also entered into a lease for office, warehouse and laboratory facilities for approximately 7,186 square feet at 3400 Research Forest Drive, Suite B2, The Woodlands, Texas 77381 under a third party non-cancelable operating lease, the term of which continues through May 31, 2016. Future minimum lease commitments as of June 30, 2014 are as follows:

Year Ending December 31
     
Six months ending 2014
 
$
179,574
 
2015
 
345,528
 
2016
 
133,184
 
2017
 
--
 
2018
 
--
 
2019
 
--
 
Thereafter
 
--
 
Total
 
$
658,286
 
 
The lease for 8708 Technology Forest Pl., Ste. 100, The Woodlands, Texas 77381 provides the Company with a right to extend the lease term for two additional five year terms or one term of ten years, at the Company’s option.  

Eco-System Partner Royalty Obligation

In April 2013, we entered into an agreement with an Eco-System Partner (the “Agreement”), whereby we were going to receive $10 million of cash proceeds to assist us in increasing our production capacity. Under the terms of the Agreement, there were two milestones.  The Agreement required us to purchase certain equipment that was completed in 2013 which we consider not substantive.   The Agreement required us to have the capability to produce at least 1 million sensor units per month (as defined in the Agreement) by April 2014 which we consider substantive.  We received $5 million in May 2013, which is non-refundable and is recorded as deferred revenue in the accompanying consolidated balance sheet at June 30, 2014.  Upon achieving the deliverables of the Agreement, we would have paid a commission to the Eco-System Partner of 10%, on revenue derived from the sales of InTouch™ Sensors directly to the Eco-System Partner or to those of the Eco-System Partner’s manufacturing partners that use the Eco-System Partner’s Preferred Price and Capacity License Agreement.  The commission amount was to be paid until the aggregate commissions paid equaled the commission cap of $18.5 million.  The term of the Agreement is the later of 3 years or the full payment of the commission cap.  If the Company committed a material breach of the license agreement, certain equipment of the Company with an original cost of approximately $10.1 million would be assigned to the Eco-System Partner to make them whole on any remaining amounts due under the commission cap of $18.5 million.
 
 
In April 2014, we entered into the First Amendment to the Capacity License Agreement with the Eco-System Partner (the “Amended Agreement”).  The Amended Agreement modified the contract terms as follows: 1) the requirement to reach the minimum production capability and meet the required quality standards specified in the Agreement by April 2014 was removed; 2) the total amount of cash proceeds to be received was reduced from $10 million to $5 million (the $5 million was already received in May 2013); 3) the cap on the commission amount was reduced from $18.5 million to $6.25 million; and 4) if the Company becomes subject to bankruptcy, insolvency or liquidation or commits a material breach of the license agreement, certain equipment of the Company with an original cost of approximately $10.1 million will be assigned to the Eco-System Partner to make them whole on any remaining amounts due under the commission cap of $6.25 million.   The only remaining milestone of the Amended Agreement is the capability to produce at least 1 million sensors units per month.

Litigation 

In April 2014, Conductive Inkjet Technology Limited (CIT) and Uni-Pixel Displays, Inc. (Uni-Pixel) have agreed to settle their on-going litigation in the U.S. and the UK. CIT has agreed to withdraw its UK claims that Uni-Pixel has used CIT’s confidential information for a number of unauthorized purposes relating to its current technology, its past technology and also two of its patent filings. Uni-Pixel has agreed to withdraw its U.S. claims for declarations that it did not do what CIT alleges, and that CIT breached an agreement between the parties by issuing its claims in the UK courts. CIT further agreed to release any current and future claims to Uni-Pixel’s past and current technology, patents, and other property based on the subject matter of the suits. Uni-Pixel further agreed to grant CIT certain limited rights to use technology that would be protected by the patents arising from the disputed patent filings. No money will change hands as part of the settlement.  The parties agree that Uni-Pixel owes no further duty of confidentiality to CIT regarding any CIT technology. There are no admissions of any wrong-doing in connection with this dispute.

Class Action Litigation 

In June 2013, two purported class action complaints were filed in the United States District Court, Southern District of New York and the United States District Court, Southern District of Texas against the Company and our CEO, CFO, and Chairman. The Southern District of New York complaint was voluntarily dismissed by plaintiff on July 2, 2013.  The surviving complaint alleges that we and our officers and directors violated the federal securities laws, specifically Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, by making purportedly false and misleading statements concerning our licensing agreements and product development.  The complaint seeks unspecified damages on behalf of a purported class of purchasers of our common stock during the period from December 7, 2012 to May 31, 2013.  We will vigorously defend against this lawsuit.  The Company has directors' and officers' and corporate liability insurance to cover risks associated with securities claims filed against the Company or its directors and officers and has notified its insurers of these actions.  Based on the very early stage of the litigation, it is not possible to estimate the amount or range of possible loss that might result from an adverse judgment or a settlement of this matter. 

Shareholder Derivative Litigation
 
On February 19, 2014, a shareholder derivative lawsuit, Jason F. Gerzseny v. Reed J. Killion, et. al., was filed in the 165th Judicial District in Harris County, Texas.  On February 21, 2014, another shareholder derivative lawsuit, Luis Lim v. Reed J. Killion, et. al., was also filed in Harris County district court.  Both complaints allege various causes of action against certain current and former officers and directors, including claims for breach of fiduciary duty, corporate waste, insider selling, and unjust enrichment.  The Company intends to vigorously defend against these lawsuits, and has directors’ and officers’ liability insurance to cover risks associated with derivative claims against its directors and officers and has notified its insurers of these actions.  Based on the very early stage of the litigation, it is not possible to estimate the amount or range of possible loss that might result from an adverse judgment or a settlement of these matters. 
 
Securities and Exchange Commission Investigation

On November 19, 2013, the Company learned that the Fort Worth Regional Office of the United States Securities and Exchange Commission (“SEC”) issued subpoenas concerning the Company’s agreements related to its InTouch Sensors.  The Company is cooperating fully with the SEC regarding this non-public, fact-finding inquiry. The SEC has informed the Company that this inquiry should not be construed as an indication that any violations of law have occurred or that the SEC has any negative opinion of any person, entity or security. The Company does not intend to comment further on this matter unless and until this matter is closed or further action is taken by the SEC which, in the Company’s judgment, merits further comment or public disclosure.
 

Employment agreements

As of June 30, 2014, the Company does not have any employment agreements outstanding, other than the arrangement with Mr. Jeff Hawthorne.  Mr. Jeff Hawthorne, Chief Executive Officer and President of the Company, is an “at-will” employee, Mr. Hawthorne’s employment can be terminated by the Company or by him, at any time and for any reason.   The Company has agreed that, if his employment is terminated as a result of a Change of Control, Mr. Hawthorne will receive a severance payment consisting of 2 times his annual base salary and all remaining options and restricted shares of stock shall become vested immediately.

Note 4 —Equity, Stock Plan and Warrants
 
Common Stock

During the six months ended June 30, 2014, (1) we issued 4,000 shares of common stock for cash in connection with the exercise of stock options; (2) issued 64,699 shares of common stock as a result of the cashless exercise of warrants; and (3) issued 35,634 shares of common stock to various directors and officers as stock awards;

During the six months ended June 30, 2013, we (1) issued 381,718 shares of common stock for cash in connection with the exercise of stock options; (2) issued 27,622 shares of common stock for cash in connection with the exercise of warrants; (3) issued 399,629 shares of common stock as a result of the cashless exercise of warrants; and (4) issued 1,374,250 shares of common stock and received proceeds of $41.2 million, net of issuance costs of $2.8 million.

Stock Incentive Plans

The Company has adopted four stock incentive plans: the 2005 Stock Incentive Plan, the 2007 Stock Incentive Plan, the 2010 Stock Incentive Plan and the 2011 Stock Incentive Plan (collectively, the “Stock Incentive Plans”).  The Stock Incentive Plans allow for an aggregate of up to 2,300,001 shares of our common stock to be awarded through incentive and non-qualified stock options, stock appreciation rights, restricted stock, performance shares and other types of awards.

Our Stock Incentive Plans are administered by our Board of Directors, which has the sole discretion to select participants who will receive the awards and to determine the type, size and terms of each award granted.  As of June 30, 2014, there were 178,271 shares available for issuance under the Stock Incentive Plans.

The following disclosures provide information regarding the Company’s stock-based compensation awards, all of which are classified as equity awards:

Total compensation expense recognized for options was approximately $1.3 million and $1.5 million for the six months ended June 30, 2014 and June 30, 2013, respectively.  The Company has recorded approximately $0.4 million of stock compensation expense in selling, general and administrative expenses and approximately $0.8 million in research and development expense for the six months ended June 30, 2014 and approximately $0.7 million of stock compensation expense in selling, general and administrative expenses and approximately $0.8 million in research and development expense for the six months ended June 30, 2013.

A summary of the changes in the total stock options outstanding during the six months ended June 30, 2014 follows:
 
           
Weighted
 
         
Average
 
   
Options
   
Exercise Price
 
Outstanding and expected to vest, at December 31, 2013
   
2,015,380
   
$
10.48
 
Granted
   
113,000
   
$
8.38
 
Forfeited or expired
   
(46,833)
   
$
17.10
 
Exercised
   
(4,000)
   
$
7.13
 
Outstanding and expected to vest, at June 30, 2014
   
2,077,547
   
$
10.23
 
Vested and exercisable at June 30, 2014
   
1,736,200
   
$
8.38
 
 
 
The fair values of the Company’s options were estimated on the date of grant using the Black-Scholes valuation model with the following weighted-average assumptions:

   
Three Months
ended
June 30,
 2014
   
Three Months
ended
June 30,
 2013
   
Six Months
ended
June 30,
 2014
   
Six Months
ended
June 30,
 2013
 
Expected life (years)
 
5 years
   
5 years
   
5 years
   
5 years
 
Interest rate
  1.61 to 1.74 %     0.68 to 1.48 %     1.61 to 1.74 %     0.69 to 1.48 %  
Dividend yield
                       
Volatility
  129.58 to 130.03 %     77.91 to 124.49 %     129.58 to 130.03 %     57.26 to 124.49 %  
Forfeiture rate
                       
Weighted average fair value of options granted
  $ 7.19     $ 22.70     $ 7.19     $ 19.75  
  
At June 30, 2014, there was $4.2 million of total unrecognized compensation cost related to non-vested stock option awards which is expected to be recognized over a weighted-average period of 1.13 years.  There were approximately 0.4 million options that became vested during the six months ended June 30, 2014.

Common Stock Warrants

As of June 30, 2014, the Company has 354,100 common stock warrants outstanding with a weighted average exercise price of $8.27 per share.  Information regarding outstanding warrants as of June 30, 2014 is as follows:

Grant date
 
Warrants
Outstanding
 
Exercisable
 
Weighted
Exercise
Price
 
Remaining
Life
(Years)
December 9, 2004
 
63,641
 
63,641
 
$
20.70
 
0.42
June 10, 2009
 
15,796
 
15,796
 
$
7.50
 
4.93
August 31, 2009
 
24,934
 
24,934
 
$
7.50
 
4.93
October 2, 2009
 
205,000
 
205,000
 
$
5.00
 
5.33
March 15, 2010
 
8,337
 
8,337
 
$
7.50
 
5.50
April 5, 2010
 
930
 
930
 
$
7.50
 
5.50
December 15, 2010
 
35,462
 
35,462
 
$
6.00
 
1.42
                 
Total                      
 
354,100
 
354,100
       

Note 5 — Property and Equipment

A summary of the components of property and equipment at June 30, 2014 and December 31, 2013 are as follows:
 
   
Estimated
Useful
Lives
 
June 30, 2014
   
December 31,
2013
 
Research and development equipment
 
3 to 5 years
 
$
20,814,179
   
$
19,277,573
 
Leasehold improvements
 
5 years
   
385,323
     
385,323
 
Computer equipment
 
5 years
   
97,740
     
97,740
 
Office equipment
 
3 to 5 years
   
95,144
     
95,144
 
Construction-in-progress
       
249,404
     
807,108
 
         
21,641,790
     
20,662,888
 
Accumulated depreciation
       
(7,755,099
)
   
(4,769,453
)
Property and equipment, net
     
$
13,886,691
   
$
15,893,435
 
                     

Depreciation and amortization expense of property and equipment for the six months ended June 30, 2014 and June 30, 2013 was approximately $2,986,000 and $539,000, respectively.
 
 
Note 6 — Fair Value Measurements
 
The Company accounts for its financial assets and liabilities that are remeasured and reported at fair value at each reporting period and non-financial assets and liabilities that are remeasured and reported at fair value at least annually.

In general, fair values determined by Level 1 inputs utilize quoted prices (unadjusted) in active markets for identical assets or liabilities. Fair values determined by Level 2 inputs utilize observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the related assets or liabilities. Fair values determined by Level 3 inputs are unobservable data points for the asset or liability, and include situations where there is little, if any, market activity for the asset or liability. The Company’s financial assets consist solely of cash and cash equivalents and accounts receivable.
 
Note 7 — Revenue and Credit Concentrations
 
During the six months ended June 30, 2014 and 2013, revenues by customers with more than 10% of revenue were as follows:

   
Six months ended
June 30, 2014
   
Six months ended
June 30, 2013
 
   
Amount
   
%
   
Amount
   
%
 
Company A
   
-
     
-
%
 
$
5,000,000
     
99
%
Total
 
$
-
     
-
%
 
$
5,000,000
     
99
%
 
As of June 30, 2014 and December 31, 2013 customers with more than 10% of accounts receivables balances were as follows:
 
   
As of June 30, 2014
   
As of December 31, 2013
 
   
Amount
   
%
   
Amount
   
%
 
Company B
   
-
     
-
%
   
11,409
     
100
%
Total
 
$
-
     
-
%
 
$
11,409
     
100
%

Note 8 — Subsequent Event

None.
 
 
ITEM 2.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
Forward Looking Statements
 
This report, including the documents that we incorporate by reference, may contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”).

Forward-looking statements in or incorporated by reference in this report include, without limitation, statements related to our plans, strategies, objectives, expectations, intentions and adequacy of resources.  Investors are cautioned that such forward-looking statements involve risks and uncertainties.  Important factors that could cause actual results to differ materially from those indicated in the forward-looking statements include, but are not limited to, the rate and degree of market acceptance of our products, our ability to develop and market new and enhanced products, our ability to obtain financing as and when we need it, competition from existing and new products and our ability to effectively react to other risks and uncertainties described from time to time in our SEC filings, such as fluctuation of quarterly financial results, reliance on third party manufacturers and suppliers, litigation or other proceedings, government regulation and stock price volatility.

In some cases, you can identify forward-looking statements by terminology such as ‘‘may,’’ ‘‘will,’’ ‘‘should,’’ ‘‘could,’’ ‘‘expects,’’ ‘‘plans,’’ ‘‘intends,’’ ‘‘anticipates,’’ ‘‘believes,’’ ‘‘estimates,’’ ‘‘predicts,’’ ‘‘potential,’’ or ‘‘continue’’ or the negative of such terms or other comparable terminology.  Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements.  Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date such statements are made.  We do not undertake any obligation to publicly update or revise any forward-looking statement.

Critical Accounting Policies and Estimates
 
In preparing our condensed consolidated financial statements in accordance with accounting principles generally accepted in the U.S. and pursuant to the rules and regulations promulgated by the SEC, we make assumptions, judgments and estimates that can have a significant impact on our net income/(loss) and affect the reported amounts of certain assets, liabilities, revenue and expenses, and related disclosures. We base our assumptions, judgments and estimates on historical experience and various other factors that we believe to be reasonable under the circumstances. Actual results could differ materially from these estimates under different assumptions or conditions. On a regular basis, we evaluate our assumptions, judgments and estimates. We also discuss our critical accounting policies and estimates with the Audit Committee of our Board of Directors.
 
We believe that the assumptions, judgments and estimates involved in the accounting for revenue recognition, income taxes, and long-lived assets, have the greatest impact on our condensed consolidated financial statements, so we consider these to be our critical accounting policies. Historically, our assumptions, judgments and estimates relative to our critical accounting policies have not differed materially from actual results.
 
There have been no significant changes to our critical accounting policies and estimates during the six months ended June 30, 2014, as compared to the critical accounting policies and estimates disclosed in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in our Annual Report on Form 10-K for the year ended December 31, 2013, which was filed with the SEC on February 26, 2014.
 
Recent Accounting Pronouncements
 
See Note 2 of our accompanying condensed consolidated financial statements for a full description of recent accounting pronouncements and our expectation of their impact, if any, on our results of operations and financial condition.
 
Revenue Recognition:  We recognize revenue over the period the service is performed or when the product is delivered. In general, this requires that four basic criteria must be met before revenue can be recognized: (1) persuasive evidence that an arrangement exists, (2) delivery has occurred or services have been rendered, (3) the fee is fixed and determinable, and (4) collectability is reasonably assured.

Advance payments are deferred until shipment of product has occurred or the service has been rendered.
 
Revenue from licenses and other up-front fees are recognized on a ratable basis over the term of the respective agreement.

Revenue on certain fixed price contracts where we provide research and development services are recognized over the contract term based on achievement of milestones.
 
 
Under the milestone method, we recognized $5.0 million of revenue from a PC manufacturer in the first quarter of 2013 as non-recurring engineering revenue.

Effective, February 25, 2014, the Company has revised its touch sensors Preferred Price and Capacity License Agreement with its PC OEM partner (signed December 7, 2012) to waive the notebook limited exclusivity option. The exclusivity waiver allows the Company the opportunity to sell its touch sensors for use in competing notebook applications. There will be no additional milestone payments recognized under the new terms and conditions of the agreement, with the preferred pricing and capacity aspects of the agreement remaining unchanged. Under the original agreement with the PC OEM partner, there were three milestones.  Under the revised agreement with the PC OEM partner, there is one milestone, and this milestone was achieved in 2013. The Company continues to work closely with the PC OEM partner in product design and development.

In April 2013, we entered into an agreement with an Eco-System Partner (the “Agreement”), whereby we were going to receive $10 million of cash proceeds to assist us in increasing our production capacity. Under the terms of the Agreement, there were two milestones.  The Agreement required us to purchase certain equipment that was completed in 2013 which we consider not substantive.   The Agreement required us to have the capability to produce at least 1 million sensor units per month (as defined in the Agreement) by April 2014 which we consider substantive.  We received $5 million in May 2013, which is non-refundable and is recorded as deferred revenue in the accompanying consolidated balance sheet at June 30, 2014.  Upon achieving the deliverables of the Agreement, we would have paid a commission to the Eco-System Partner of 10%, on revenue derived from the sales of InTouch™ Sensors directly to the Eco-System Partner or to those of the Eco-System Partner’s manufacturing partners that use the Eco-System Partner’s Preferred Price and Capacity License Agreement.  The commission amount was to be paid until the aggregate commissions paid equaled the commission cap of $18.5 million.  The term of the Agreement is the later of 3 years or the full payment of the commission cap.  If the Company committed a material breach of the license agreement, certain equipment of the Company with an original cost of approximately $10.1 million would be assigned to the Eco-System Partner to make them whole on any remaining amounts due under the commission cap of $18.5 million.

In April 2014, we entered into the First Amendment to the Capacity License Agreement with the Eco-System Partner (the “Amended Agreement”).  The Amended Agreement modified the contract terms as follows: 1) the requirement to reach the minimum production capability and meet the required quality standards specified in the Agreement by April 2014 was removed; 2) the total amount of cash proceeds to be received was reduced from $10 million to $5 million (the $5 million was already received in May 2013); 3) the cap on the commission amount was reduced from $18.5 million to $6.25 million; and 4) if the Company becomes subject to bankruptcy, insolvency or liquidation or commits a material breach of the license agreement, certain equipment of the Company with an original cost of approximately $10.1 million will be assigned to the Eco-System Partner to make them whole on any remaining amounts due under the commission cap of $6.25 million.   The only remaining milestone of the Amended Agreement is the capability to produce at least 1 million sensors units per month.

Cost of Revenues, Selling, General and Administrative Expenses and Research and Development Expenses:  The primary purpose of our facility in The Woodlands, Texas is to conduct research on the development, testing and delivery of our prototype devices, and to pursue the commercialization of our products.
 
If, in the future, the purposes for which we operate our facility in The Woodlands, Texas, or any new facilities we open, changes, the allocation of the costs incurred in operating that facility between cost of sales and research and development expenses could change to reflect such operational changes.
 
Research and Development Expenses:  Research and development costs are expensed as incurred and include salaries and benefits, costs paid to third-party contractors for research, development and manufacturing of materials and devices, and a portion of facilities cost. Prototype development costs are a significant component of research and development expenses and include costs associated with third-party contractors. Invoicing from third-party contractors for services performed can lag several months. We accrue the costs of services rendered in connection with third-party contractor activities based on our estimate of management fees, site management and monitoring costs and data management costs. Actual costs may differ in some cases from estimated costs and are adjusted for in the period in which they become known. 

Stock-Based Compensation:  We measure stock-based compensation expense for all share-based awards granted based on the estimated fair value of those awards at grant-date. The fair values of stock option awards are estimated using a Black-Scholes valuation model. The compensation costs are recognized net of any estimated forfeitures on a straight-line basis over either the employee’s requisite service period or other such vesting requirements as are stipulated in the stock option award agreements.  No compensation cost is recognized for equity instruments for which employees do not render the requisite service.  Forfeiture rates are estimated at grant date based on historical experience and adjusted in subsequent periods for any differences in actual forfeitures from those estimates.
 
 
RESULTS OF OPERATIONS

Comparison of the six months ending June 30, 2014 and 2013
 
REVENUES.  During the first quarter of 2010, we began to manufacture, market and sell our thin film product.  We also earn engineering revenue.

Revenues were $0 for the six months ended June 30, 2014 as compared to $5,070,165 for the six months ended June 30, 2013, a decrease of $5,070,165.  $5.0 million of revenue from a PC manufacturer was recognized in the six months ended June 30, 2013 as non-recurring engineering revenue.
 
COST OF REVENUES.  Cost of revenues include all direct expenses associated with the delivery of services including internal labor costs. Cost of revenues was $0 for the six months ended June 30, 2014 and $3,421 for the six months ended June 30, 2013.
 
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and administrative expenses increased by 37% or approximately $1,595,000, to $5,947,951 for the six months ended June 30, 2014 from $4,352,844 for the six months ended June 30, 2013.  The major changes to selling, general and administrative expenses are as follows:
 
a)  Salaries and benefits decreased by approximately $428,000 to $1,699,000 for the six months ended June 30, 2014 compared to $2,127,000 for the six months ended June 30, 2013 due to the following: an increase in salaries to $806,000 for the six months ended June 30, 2014 compared to $679,000 for the six months ended June 30, 2013 due to an increase in the number of employees; a decrease in stock compensation expense to $481,000 for the six months ended June 30, 2014 compared to $691,000 for the six months ended June 30, 2013; a decrease in restricted stock expense to $251,000 for the six months ended June 30, 2014 compared to $522,000 for the six months ended June 30, 2013; and a decrease in employee bonus expense to $0 for the six months ended June 30, 2014 compared to $134,000 for the six months ended June 30, 2013;

b) Contract labor expense increased by approximately $22,000 to $79,000 for the six months ended June 30, 2014 compared to $57,000 for the six months ended June 30, 2013;
 
c) Legal expense decreased by approximately $633,000 to $551,000 for the six months ended June 30, 2014 compared to $1,184,000 for the six months ended June 30, 2013 primarily due to a decrease in legal fees incurred related to the UK Action, the Texas Action, the class action lawsuit and patent related legal work;
 
d) Accounting expense increased by approximately $43,000 to $91,000 for the six months ended June 30, 2014 compared to $48,000 for the six months ended June 30, 2013; 

e) Office expense increased by approximately $41,000 to $59,000 for the six months ended June 30, 2014 compared to $18,000 for the six months ended June 30, 2013; 

f) Travel expense increased by approximately $22,000 to $158,000 for the six months ended June 30, 2014 compared to $136,000 for the six months ended June 30, 2013; 
 
g) Depreciation and amortization expense increased by approximately $2,447,000 to $2,986,000 for the six months ended June 30, 2014 compared to $539,000 for the six months ended June 30, 2013.
 
RESEARCH AND DEVELOPMENT. Research and development expenses increased by approximately $1,847,000, or 41%, during the six months ended June 30, 2014 to $6,315,216 from $4,468,191 for the six months ended June 30, 2013. The primary reason for the increase in research and development expense is due to an increase in lab expense related to prototype development.  The major changes to research and development expenses are as follows:
 
a) Salaries and benefits attributable to research and development increased by approximately $492,000 to $2,619,000 for the six months ended June 30, 2014 compared to $2,127,000 for the six months ended June 30, 2013 due to the following: an increase in salaries to $1,293,000 for the six months ended June 30, 2014 compared to $904,000 for the six months ended June 30, 2013 due to an increase in the number of employees; an increase in stock compensation expense to $793,000 for the six months ended June 30, 2014 compared to $771,000 for the six months ended June 30, 2013; an increase in restricted stock expense to $263,000 for the six months ended June 30, 2014 compared to $242,000 for the six months ended June 30, 2013; and a decrease in employee bonus expense to $0 for the six months ended June 30, 2014 compared to $139,000 for the six months ended June 30, 2013;

b) Consulting expense attributable to research and development increased by approximately $2,000 to $2,000 for the six months ended June 30, 2014 compared to $0 for the six months ended June 30, 2013;
 
 
c) Lab expense increased by approximately $1,321,000 to $3,337,000 for the six months ended June 30, 2014 compared to $2,016,000 for the six months ended June 30, 2013 primarily due to increased services related to prototype development; and
 
d) Travel expense increased by approximately $62,000 to $151,000 for the six months ended June 30, 2014 compared to $89,000 for the six months ended June 30, 2013.

OTHER INCOME (EXPENSE), NET.  

Interest income, net, increased to income of $8,868 for the six months ended June 30, 2014 as compared to income of $6,471 for the six months ended June 30, 2013, primarily due to an increase in the average cash on hand during the six months ended June 30, 2014.
 
NET INCOME (LOSS).   Net loss was $12,254,299 for the six months ended June 30, 2014, as compared to a net loss of $3,747,820 for the six months ended June 30, 2013.  

Comparison of the three months ending June 30, 2014 and 2013
 
REVENUES.  During the first quarter of 2010, we began to manufacture, market and sell our thin film product. We also earn engineering revenue.

Revenues were $0 for the three months ended June 30, 2014 as compared to $749 for the three months ended June 30, 2013, a decrease of $749.
 
COST OF REVENUES.  Cost of revenues include all direct expenses associated with the delivery of services including internal labor costs. Cost of revenues was $0 for the three months ended June 30, 2014 and $385 for the three months ended June 30, 2013.  
 
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and administrative expenses increased by 42% or approximately $907,000, to $3,079,547 for the three months ended June 30, 2014 from $2,172,777 for the three months ended June 30, 2013.  The major changes to selling, general and administrative expenses are as follows:
 
a)  Salaries and benefits decreased by approximately $192,000 to $970,000 for the three months ended June 30, 2014 compared to $1,162,000 for the three months ended June 30, 2013 primarily due to the following: an increase in salaries to $413,000 for the three months ended June 30, 2014 compared to $369,000 for the three months ended June 30, 2013 due to an increase in the number of employees; a decrease in stock compensation expense to $219,000 for the three months ended June 30, 2014 compared to $374,000 for the three months ended June 30, 2013; a decrease in restricted stock expense of $256,000 for the three months ended June 30, 2014 compared to $370,000 the three months ended June 30, 2013;

b) Contract labor expense increased by approximately $6,000 to $42,000 for the three months ended June 30, 2014 compared to $36,000 for the three months ended June 30, 2013;
 
c) Legal expense decreased by approximately $195,000 to $255,000 for the three months ended June 30, 2014 compared to $450,000 for the three months ended June 30, 2013 primarily due to a decrease in legal fees incurred related to the UK Actions, the Texas Action and the class action lawsuit offset by an increase in legal fees incurred for patent related legal work;
 
d) Accounting expense increased by approximately $29,000 to $49,000 for the three months ended June 30, 2014 compared to $20,000 for the three months ended June 30, 2013; 

e) Office expense increased by approximately $11,000 to $26,000 for the three months ended June 30, 2014 compared to $15,000 for the three months ended June 30, 2013; 

f) Travel expense stayed constant at $71,000 for the three months ended June 30, 2014 compared to $71,000 for the three months ended June 30, 2013; 
 
g) Depreciation and amortization expense increased by approximately $1,162,000 to $1,483,000 for the three months ended June 30, 2014 compared to $321,000 for the three months ended June 30, 2013.
 
RESEARCH AND DEVELOPMENT. Research and development expenses increased by approximately $463,000, or 18%, during the three months ended June 30, 2014 to $2,990,870 from $2,528,303 for the three months ended June 30, 2013. The primary reason for the increase in research and development expense is due to increased lab expense related to prototype development.  The major changes to research and development expenses are as follows:
 
 
a) Salaries and benefits attributable to research and development increased by approximately $90,000 to $1,272,000 for the three months ended June 30, 2014 compared to $1,182,000 for the three months ended June 30, 2013 primarily due to the following: an increase in salaries to $636,000 for the three months ended June 30, 2014 compared to $480,000 for the three months ended June 30, 2013 due to increased number of employees; a decrease in stock compensation expense to $374,000 for the three months ended June 30, 2014 compared to $457,000 for the three months ended June 30, 2013; a decrease in restricted stock expense to $139,000 for the three months ended June 30, 2014 compared to $172,000 for the three months ended June 30, 2013;
 
b) Lab expense increased by approximately $344,000 to $1,525,000 for the three months ended June 30, 2014 compared to $1,181,000 for the three months ended June 30, 2013 primarily due to increased services related to prototype development; and
 
c) Travel expense increased by approximately $16,000 to $84,000 for the three months ended June 30, 2014 compared to $68,000 for the three months ended June 30, 2013.

OTHER INCOME (EXPENSE), NET.  

Interest income, net, decreased to income of $4,068 for the three months ended June 30, 2014 as compared to income of $5,481 for the three months ended June 30, 2013, primarily due to a decrease in the average cash on hand during the three months ended June 30, 2014.    

NET INCOME (LOSS).   Net loss was $6,066,349 for the three months ended June 30, 2014, as compared to a net loss of $4,695,235 for the three months ended June 30, 2013.  
 
Off-Balance Sheet Transactions
 
We do not engage in material off-balance sheet transactions.

LIQUIDITY AND CAPITAL RESOURCES
 
We have historically financed our operations primarily through the issuance of equity and debt securities and by relying on other commercial financing. Until our products begin to earn enough revenue to support our operations, which may never happen, we will continue to be highly dependent on financing from third parties.  On April 23, 2013 we sold 1,374,250 shares of our common stock, raising net proceeds of approximately $41.2 million.  Barring unanticipated expenses, we expect the proceeds from this offering to support our operations until at least December 31, 2014.

Operating Activities
 
Cash used in operating activities during the six months ended June 30, 2014 was $8,059,005 as compared to cash provided by operating activities during the six months ended June 30, 2013 was $5,391,942.

Investing Activities
 
Cash used for investing activities during the six months ended June 30, 2014 was $978,902 as compared to $8,857,640 of cash used for the six months ended June 30, 2013.  The use of cash for investing activities during the six months ended June 30, 2014 and during the six months ended June 30, 2013 was primarily attributable to the purchase of equipment related to our research and development activities and for anticipated production.     
 
Financing Activities
 
Historically, we have financed our operating and investing activities primarily from the sale of registered shares of our common stock to the public, short-term loans from private placements of convertible notes, private placements of equity securities and the sale of certain intellectual property.
 
The total net cash provided by financing activities was $28,520 for the six months ended June 30, 2014, which includes:
·  
     $28,520 of net proceeds from the exercise of stock options.

The total net cash provided by financing activities was $43,874,006 for the six months ended June 30, 2013, which includes:
·  
     $151,982 of net proceeds from the exercise of warrants;
·  
     $2,502,131 of net proceeds from the exercise of stock options; and
·  
   $41,219,893 of net proceeds from the issuance of common stock.
 
 
Working Capital
 
Our primary sources of liquidity have included the sale of registered shares of our common stock to the public, short-term loans from private placements of convertible notes, private placements of equity securities and the sale of certain intellectual property.

As of June 30, 2014, we had a cash balance of approximately $30.4 million and working capital of $24.9 million.  We project that current cash reserves will sustain our operations through December 31, 2014, and we are not aware of any trends or potential events that are likely to adversely impact our short term liquidity through this term.  As noted above, we raised net proceeds of approximately $41.2 million in April 2013 through the sale of our common stock.

ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
 
Not applicable.
 
ITEM 4.  CONTROLS AND PROCEDURES.
 
Disclosure Controls and Procedures
 
As of June 30, 2014, management, including our Chief Executive Officer (principal executive officer) and Chief Financial Officer (principal financial and accounting officer), performed an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934.  Based on their evaluation, management concluded that, as of June 30, 2014, our disclosure controls and procedures are effective to ensure that material information required to be disclosed by us in the reports that we file or submit under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms.
 
Changes in Internal Control Over Financial Reporting
 
We maintain a system of internal control over financial reporting that is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of consolidated financial statements for external purposes in accordance with accounting principles generally accepted in the United States.  Based on the most recent evaluation, our Chief Executive Officer and Chief Financial Officer have determined that no significant changes in our internal control over financial reporting occurred during our most recent fiscal quarter that have materially affected, or are reasonably like to materially affect, our internal control over financial reporting.

 
PART II - OTHER INFORMATION
 
ITEM 1.  LEGAL PROCEEDINGS

Please see Note 3 to our unaudited financial statements for a description of the legal proceedings to which the Company is a party.  In April 2014, Conductive Inkjet Technology Limited (CIT) and Uni-Pixel Displays, Inc. (Uni-Pixel) agreed to settle their on-going litigation in the U.S. and the UK.  Other than this settlement, there were no material developments in legal proceedings during the quarter ended June 30, 2014.

ITEM 1A.  RISK FACTORS

We incorporate herein by reference the risk factors included in our Annual Report on Form 10-K, which we filed with the Securities and Exchange Commission on February 26, 2014.

ITEM 6.  EXHIBITS.
 
Exhibit No.
 
 Description of Document
 
3.1
 
Composite Certificate of Incorporation of Uni-Pixel, Inc. (1)
 
3.2
 
Amended and Restated Bylaws of Uni-Pixel, Inc. (2)
 
31.1
   
31.2
   
32.1
   
32.2
   
101.INS
 
XBRL Instance Document
 
101.SCH
 
XBRL Taxonomy Extension Schema
 
101.CAL
 
XBRL Taxonomy Extension Calculation Linkbase
 
101.DEF
 
XBRL Taxonomy Extension Definition Linkbase
 
101.LAB
 
XBRL Taxonomy Extension Label Linkbase
 
101.PRE
 
XBRL Taxonomy Extension Presentation Linkbase
 
       
 
(1) Previously filed as an exhibit to Post-Effective Amendment No. 1 to the Company’s S-1 registration statement, number 333-169279 which was filed with the SEC on December 10, 2010 and incorporated by reference hereto.
 
(2) Previously filed as an exhibit to the Company’s Form 10-SB, filed on February 18, 2005, and incorporated by reference hereto.
 
(3) Filed herewith
(4) The certification attached as Exhibit 32.1 and Exhibit 32.2 accompany this Quarterly Report on From 10-Q pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, shall not be deemed “filed” by the Registrant for purposes of Section 18 of the Securities Exchange Act of 1934, as amended.
 
 
 
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
 
   
UNI-PIXEL, INC.
       
       
 
August 7, 2014
 
By:
/s/ Jeff A. Hawthorne
 
Date
 
Jeff A. Hawthorne, Chief Executive Officer and President
         
   
By:
/s/ Jeffrey W. Tomz
 
     
Jeffrey W. Tomz, Chief Financial Officer
 
         

 
 
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