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 September 30, 2016

 

or

 

[  ]	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.)

 

4699 Old Ironsides Drive, Suite 300

Santa Clara, California 95054

(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 [  ] 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 [  ]

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [  ] No [X]

 

As of October 31, 2016, the issuer had 45,043,730 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 [  ]		Accelerated filer [  ]
Non-accelerated filer [  ]		Smaller reporting company [X]
(Do not check if a smaller reporting company)

 

 

 

TABLE OF CONTENTS

 

			Page
Part I.	Financial Information		3
Item 1.	Condensed Consolidated Financial Statements		3
	Condensed Consolidated Balance Sheets September 30, 2016 (unaudited) and December 31, 2015		3
	Condensed Consolidated Statements of Operations Three and nine months ended September 30, 2016 (unaudited) and September 30, 2015 (unaudited)		4
	Condensed Consolidated Statements of Cash Flows Nine months ended September 30, 2016 (unaudited) and September 30, 2015 (unaudited)		5
	Notes to Unaudited Condensed Consolidated Financial Statements		6
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		19
Item 3.	Quantitative and Qualitative Disclosures About Market Risk		25
Item 4.	Controls and Procedures		25
Part II.	Other Information		26
Item 1.	Legal Proceedings		26
Item 1A.	Risk Factors		26
Item 6.	Exhibits		29

 

 

PART I - FINANCIAL INFORMATION

 

ITEM 1. FINANCIAL STATEMENTS.

 

Uni-Pixel, Inc.

Condensed Consolidated Balance Sheets

(In thousands, except per share data)

 

		September 30, 2016				December 31, 2015
		(unaudited)				(Derived from audited financial statements)
ASSETS
Current assets
Cash and cash equivalents		$	6,461			$	7,618
Restricted cash			—				4,098
Account receivable, net			767				334
Inventory			677				769
Debt issuance costs			—				526
Prepaid licenses			4,900				4,900
Prepaid expenses			452				819
Total current assets			13,257				19,064
Property and equipment, net			1,347				1,842
Other long-term assets			13				13
Prepaid licenses, net of current portion			1,954				5,629
Total assets		$	16,571			$	26,548
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities
Accounts payable		$	2,521			$	1,150
Accrued liabilities			855				780
Convertible notes payable			—				2,773
Derivative liability			1,369				491
Total current liabilities			4,745				5,194
Royalty liability, net			700				1,175
Long term liabilities			432				645
Long term debt			—				450
Total liabilities			5,877				7,464
Commitments and contingencies (Note 3)			—				—
Shareholders’ equity
Common stock, $0.001 par value; 100,000,000 shares authorized, 45,043,730 shares issued and outstanding at September 30, 2016 and 32,170,778 shares issued and outstanding at December 31, 2015			45				32
Additional paid-in capital			181,954				168,243
Accumulated deficit			(171,305	)			(149,191	)
Total shareholders’ equity			10,694				19,084
Total liabilities and shareholders’ equity		$	16,571			$	26,548

 

See accompanying notes to these unaudited condensed consolidated financial statements.

 

 

Uni-Pixel, Inc.

Condensed Consolidated Statements of Operations

(In thousands, except per share data)

(unaudited)

 

		Three Months Ended September 30,								Nine Months Ended September 30,
		2016				2015				2016				2015
Revenue		$	907			$	1,498			$	2,714			$	2,867
Cost of revenues			3,231				4,701				11,431				8,128
Gross margin			(2,324	)			(3,203	)			(8,717	)			(5,261	)
Selling, general and administrative expenses			1,882				1,724				5,602				8,368
Research and development			3,119				1,491				5,059				5,690
Operating loss			(7,325	)			(6,418	)			(19,378	)			(19,319	)
Other income (expense)
Debt issuance cost amortization expense			—				(451	)			(526	)			(827	)
Gain (loss) on change in warrant liability			(229	)			1,092				(907	)			4,992
Accretion of discount on convertible notes			—				(4,049	)			(1,291	)			(7,171	)
Interest income (expense), net			(3	)			(194	)			(12	)			(424	)
Other income (expense), net			(232	)			(3,602	)			(2,736	)			(3,430	)
Net loss from continuing operations		$	(7,557	)		$	(10,020	)		$	(22,114	)		$	(22,749	)
Discontinued operations (note 8)
Loss on discontinued operations			—				—				—				(1,093	)
Loss on impairment of property and equipment			—				—				—				(7,608	)
			—				—				—				(8,701	)
Net loss		$	(7,557	)		$	(10,020	)		$	(22,114	)		$	(31,450	)
Per share information
Basic
Loss from continuing operations		$	(0.17	)		$	(0.60	)		$	(0.55	)		$	(1.61	)
Net loss		$	(0.17	)		$	(0.60	)		$	(0.55	)		$	(2.22	)
Diluted
Loss from continuing operations		$	(0.17	)		$	(0.60	)		$	(0.55	)		$	(1.61	)
Net loss		$	(0.17	)		$	(0.60	)		$	(0.55	)		$	(2.22	)
Weighted average number of basic common shares outstanding			45,036,089				16,595,889				40,359,715				14,154,871
Weighted average number of diluted common shares outstanding			45,036,089				16,595,889				40,359,715				14,154,871

 

See accompanying notes to these condensed consolidated financial statements.

 

 

Uni-Pixel, Inc.

Condensed Consolidated Statements of Cash Flows

(In thousands, except per share data)

(unaudited)

 

		Nine Months Ended September 30,
		2016				2015
Cash flows from operating activities
Net loss		$	(22,114	)		$	(31,450	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization			4,002				5,412
Restricted stock issuance			807				1,061
Stock compensation expense			456				1,329
Amortization of debt issuance costs			526				827
Issuance of common stock to convert notes and interest			3				309
Accretion of discount on convertible note			1,291				7,171
Net (gain) loss on change in warrant liability			907				(4,992	)
Discontinued Operations			—				1,093
Loss on R&D equipment related to discontinued operations			—				7,608
Change in operating assets and liabilities:
(Increase) decrease in accounts receivable			(433	)			(932	)
Increase in inventory			92				(1,114	)
Increase in prepaid assets and other current assets			367				(86	)
Increase (decrease) in accounts payable			1,371				817
Increase in accrued expenses and other liabilities			75				5,317
Decrease in long-term liabilities			(214	)			—
Decrease in deferred revenue			—				(4,965	)
Net cash used in operating activities – continuing operations			(12,864	)			(12,595	)
Net cash used in operating activities – discontinued operations			—				(1,093	)
Net cash used in operating activities - total			(12,864	)			(13,688	)
Cash flows from investing activities
Purchase of property and equipment			(308	)			(623	)
Purchase of prepaid licenses			—				(14,000	)
Net cash used in investing activities			(308	)			(14,623	)
Cash flows from financing activities
Decrease (increase) in cash restricted for convertible notes payable			4,098				(5,986	)
Proceeds from issuance of common stock, net			8,389				—
Proceeds from exercise of stock options, net			4				75
Payments on note payable			(2,867	)			(458	)
Proceeds from convertible notes and warrants issued, less debt issuance costs			2,391				13,195
Net cash provided by financing activities			12,015				6,826
Net decrease in cash and cash equivalents			(1,157	)			(21,485	)
Cash and cash equivalents, beginning of period			7,618				23,663
Cash and cash equivalents, end of period		$	6,461			$	2,178
Supplemental disclosures of cash flow information:
Cash paid for interest		$	9			$	101
Cash paid for income taxes		$	—			$	—
Supplemental disclosures of non-cash financing information:
Issuance of common stock for legal settlements		$	—			$	2,275
Issuance of common stock to convert notes and interest		$	1,675			$	8,419
Acquisition of XTouch assets from Atmel		$	—			$	1,821
Beneficial conversion feature on convertible notes		$	—			$	5,970
Warrants issued in connection with convertible notes		$	—			$	5,980

 

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.”

 

On April 16, 2015 we acquired certain assets and licenses related to the manufacture of XTouch touch sensors from Atmel Corporation and CIT Technology Ltd. and we closed a private offering consisting of $15 million in principal amount of our Senior Secured Convertible Promissory Notes together with warrants. On April 22, 2015 we terminated the Manufacturing Facility Installation and Supply Agreement dated April 15, 2013 which was entered into by Uni-Pixel Displays, Inc. and Eastman Kodak Company.

 

Our decision to change the focus of our business from developing and manufacturing InTouch sensors to manufacturing and selling XTouch touch sensors was based on, among other things, the pressure of declining prices and margin compression in the touch sensor market. We believe that our acquisition of the XTouch technology will provide us with a stand-alone, go-to-market strategy that we expect to provide a better economic model and lead to a scalable business in a more rapid time frame.

 

In addition to the flexible electronic films described above, we are developing a hard coat resin that can be applied using film, spray or inkjet coating methods for applications 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.

 

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.

 

As of September 30, 2016, Uni-Pixel had accumulated a total deficit of $171.3 million from operations in pursuit of these objectives.

 

As of September 30, 2016, we had cash and cash equivalents of $6.5 million. Our long-term viability is dependent upon our ability to successfully operate our business, develop our manufacturing process, develop our products, establish the business relationships we need to manufacture and market our products. On October 24, 2016, we entered into a $2.5 million loan and security agreement with Western Alliance Bank where we can borrow up to 90% of eligible accounts receivable at a rate of prime plus 1.25%.

 

The Company is subject to a number of risks, including, but not limited to, whether it can successfully integrate the XTouch operations; whether the manufacture and sale of the XTouch touch sensors will ultimately prove to be profitable; whether the Company will be able to raise capital when it needs to do so; whether the Company can successfully compete in the industry, particularly against larger organizations with greater financial and other resources; whether the Company will continue to receive the services of its key personnel; whether its intellectual property is adequately protected; and other risks related to the electronics 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, 2015, filed with the Securities and Exchange Commission on March 30, 2016 (the “2015 Form 10-K”).

 

 

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 nine months ended September 30, 2016 compared to what was previously disclosed in the 2015 Form 10-K. The consolidated financial information as of December 31, 2015 included herein has been derived from the Company’s audited consolidated financial statements as of, and for the fiscal year ended, December 31, 2015.

 

Significant Accounting Policies

 

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 and intangible assets, the valuation of derivative liability, the potential impairment of property and equipment and intangible assets, deferred taxes, the valuation of non-cash equity awards, and the provision for and disclosure of litigation. Actual results may differ materially from those estimates.

 

Statement 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 September 30, 2016 and December 31, 2015. We have not incurred losses related to these deposits.

 

Restricted cash

 

As of September 30, 2016 and December 31, 2015 we had restricted cash of $0 and $4.1 million, respectively. At December 31, 2015, the $4.1 million of restricted cash represented the amount we were required to maintain on our balance sheet in accordance with the terms of the Securities Purchase Agreement entered into on April 16, 2015 for the sale of our Senior Secured Convertible Promissory Notes. This amount was released from restriction in the first quarter of 2016 upon conversion of the Senior Secured Promissory Notes.

 

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 had $0.7 million and $0.3 million accounts receivable at September 30, 2016 and December 31, 2015, respectively.

 

Property and equipment

 

Property and equipment, consisting primarily of production equipment, 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.

 

Convertible debt

 

The Company accounts for its convertible debt as equal to its proceeds, less unamortized discounts. The Company records discounts on its convertible debt for the fair value of freestanding and embedded derivatives as well as beneficial conversion features associated with the issuance of the debt. Discounts are amortized over the life of the convertible debt.

 

 

Inventory

 

Inventory is stated at the lower of cost or market. Cost is determined using standard cost, which approximates the first-in, first-out method. Adjustments to reduce the carrying value of inventory to its net realizable value are made for estimated excess, obsolete or impaired balances. These adjustments are measured as the excess of the cost of the inventory over its market value based upon assumptions about future demand and charged to cost of revenue. At the point of the loss recognition, a new, lower cost basis for that inventory is established, and subsequent changes in facts and circumstances do not result in the restoration of the original cost basis or increases in the newly established cost basis.

 

Derivative liabilities

 

In accordance with ASC 815-40-25 and ASC 815-10-15 Derivatives and Hedging and ASC 480-10-25 Liabilities-Distinguishing from Equity, the Company’s convertible notes are accounted for net, outside of shareholders’ equity and warrants are accounted for as liabilities at their fair value during periods where the full ratchet anti-dilution provision is in effect.

 

The warrants are accounted for a liability at their fair value at each reporting period. The value of the derivative warrant liability will be re-measured at each reporting period with changes in fair value recorded as earnings or losses. To derive an estimate of the fair value of these warrants, a binomial model is utilized that computes the impact of share dilution upon the exercise of the warrant shares. This process relies upon inputs such as shares outstanding, estimated stock prices, strike price and volatility assumptions to dynamically adjust the payoff of the warrants in the presence of the dilution effect.

 

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 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. When the contracts provide for milestone or other interim payments, the Company will recognize revenue under the milestone method. The milestone method requires the Company to deem all milestone payments within each contract as either substantive or non-substantive. That conclusion is determined based upon a thorough review of each contract and the Company’s deliverables committed to in each contract. For substantive milestones, the Company concludes that upon achievement of each milestone, the amount of the corresponding defined payments is commensurate with the effort required to achieve such milestone or the value of the delivered item. The payment associated with each milestone relates solely to past performance and is deemed reasonable upon consideration of the deliverables and the payment terms within the contract. For non-substantive milestones, including advance payments, the recognition of such payments are pro-rated to the substantive milestones.

 

Loss per share data

 

Basic 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.

 

At September 30, 2016, 1,260,000 restricted shares and options and warrants to purchase 11,675,251 shares of common stock at exercise prices ranging from $0.55 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.

 

Fair Value of Financial Instruments

 

ASC Topic 820, Fair Value Measurement and Disclosures, defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. This topic also establishes a fair value hierarchy, which requires classification based on observable and unobservable inputs when measuring fair value. The fair value hierarchy distinguishes between assumptions based on market data (observable inputs) and an entity’s own assumptions (unobservable inputs). The hierarchy consists of three levels:

 

Level 1 – Quoted prices in active markets for identical assets and liabilities;

 

Level 2 – Inputs other than level one inputs that are either directly or indirectly observable; and

 

Level 3 – Unobservable inputs developed using estimates and assumptions, which are developed by the reporting entity and reflect those assumptions that a market participant would use.

 

Our financial instruments consist of accounts receivable, prepaid expenses, a derivative liability and accounts payable. We believe the fair values of our accounts receivable, prepaid expenses and accounts payable reflect their respective carrying amounts given the short term nature of these instruments. The derivative liability is measured at fair value on a recurring basis.

 

 

Recently issued accounting pronouncements

 

In February 2016, the Financial Accounting Standards Update (ASU) 2016-02 Leases (Topic). This ASU requires a lessee to recognize a right-of-use asset and a lease liability under most operating leases in its balance sheet. For public companies, the ASU is effective for annual and interim periods beginning after December 15, 2018. Early adoption is permitted. The Company is currently evaluating the effects that the adoption of ASU 2016-02 will have on the 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, 2017 and 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

 

In conjunction with the acquisition of the XTouch technology, the Company entered into a lease for office and production facilities for approximately 28,918 square feet at 1150 E. Cheyenne Mountain Boulevard, Colorado Springs, Colorado 80906 under a third party non-cancelable operating lease through April 15, 2017. In July 2015, the company entered into a lease for office space for 4,478 square feet at 4699 Old Ironsides Drive, Ste. 300, Santa Clara, CA 95054 through July 14, 2018. In addition, the company leases approximately 7,186 square feet at 3400 Research Forest Drive, Suite B2, The Woodlands, TX that expires on May 31, 2018. Future minimum lease commitments as of September 30, 2016 are as follows:

 

Year Ending September 30 (in thousands)
Three months ending 2016		$	189
2017			463
2018			141
2019			—
2020			—
2021			—
Total		$	793

 

Eco-System Partner Royalty Obligation

 

In April 2013, we entered into an agreement with Intel Corporation (“Intel”) (the “Capacity License Agreement”) whereby we were to receive $10 million of cash proceeds to assist us in increasing our production capacity. Under the terms of the Capacity License Agreement, there were two milestones with related contingent consideration of $5 million for each milestone plus certain commissions as described below. The Capacity License Agreement required us to purchase certain equipment, which we purchased in 2013 and which we consider not a substantive milestone. The Capacity License Agreement required us to have the capability to produce at least 1 million sensor units per month (as defined in the Capacity License Agreement) by April 2014, which we consider a substantive milestone. We received $5 million in May 2013, which is non-refundable and was recorded as deferred revenue in the consolidated balance sheet at December 31, 2014. Upon achieving the deliverables of the Capacity License Agreement, we would have paid a commission to Intel of 10% on revenue derived from the sales of InTouch™ Sensors jointly developed with Kodak made directly to Designated Customers. The commission amount was to be paid until the aggregate commissions paid equaled the commission cap of $18.5 million. The term of the Capacity License 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 Intel 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 Intel (the “Amended Capacity License Agreement”). The Amended Capacity License Agreement modified the original Capacity License Agreement terms as follows: 1) the inability of the Company to reach, by April 2014, the minimum production capability and the required quality standards specified in the Capacity License Agreement will no longer constitute a material breach to the Capacity License Agreement; 2) the total amount of cash proceeds to be received was reduced from $10 million to $5 million, which included the $5 million we received in May 2013; 3) the cap on the commission amount was reduced from $18.5 million to $6.25 million; 4) the term “commission” is defined as 10% of gross revenue from the sale of all sensors sold by the Company, which includes sales of InTouch™ Sensors to all customers including, but not limited to, Intel and its Designated Customers; 5) if the Company becomes the subject of any proceeding under any bankruptcy, insolvency or liquidation law, the Company will assign all title and ownership to the Equipment to Intel; and 6) if the Company materially breaches the Amended Capacity License Agreement, which breach is not cured within 30 days after receipt of notice from Intel, the Company may choose to either (A) pre-pay the cap on the commission to Intel (less the total of all previously paid commissions) or (B) assign all title and ownership to the Equipment to Intel. The only remaining milestone of the Amended Capacity License Agreement is the capability to produce at least 1 million sensors units per month. The Capacity License Agreement pertained to the InTouch™ Sensor technology that was jointly developed with Kodak pursuant to an agreement that was terminated after the acquisition of the XTouch sensor technology in 2015 and the Company has abandoned this InTouch™ Sensor technology.

 

 

In the fourth quarter of 2015, the Company recorded a $5.0 million gain on relief of deferred revenue liability for discontinued operations. The $5 million was originally received in 2013 and under the terms of the Capacity License Agreement, pertained to the Capacity License Agreement that was based on the InTouch™ Sensor technology which is no longer used.

 

In March 2016, Intel requested that the Company refund over time the $5 million discussed above that the Company had received from Intel in May 2013. The Company declined to refund the money as the payment was not refundable under the Amended Capacity License Agreement or otherwise due to Intel. As noted above, the agreement with Intel pertained to a technology that the Company abandoned when it terminated its joint development agreement with Kodak in 2015. Intel requested that the refund be accomplished by the Company paying Intel commissions on XTouch sensor revenue until the $5 million was refunded. The Company responded that no commissions are owed under the Amended Capacity License Agreement because it is not selling the abandoned InTouch™ Sensors or otherwise using the technology covered by the Amended Capacity License Agreement in its current products. The only products the Company has recognized revenue on are based on the XTouch sensor technology acquired from Atmel Corporation and CIT Technology Ltd. in April of 2015. No litigation or other legal proceeding has commenced on Intel’s request. The Company has engaged in discussions with Intel regarding formulation of a mutually agreeable commercial relationship. While it is not possible to predict the outcome of these discussions with certainty at the present time, if the Company is unable to reach an acceptable relationship, it intends to vigorously contest any claim that Intel might make.

 

Securities and Exchange Commission Complaint against former Officers of the Company and Settlement with the Company

 

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 our InTouch™ Sensors. The Company cooperated fully with the SEC regarding this non-public, fact-finding inquiry, which resulted in a complaint filed by the SEC on March 9, 2016 naming the Company and two of the Company’s former executive officers as defendants. The allegations of the SEC in this complaint against the two former executive officers, Reed Killion and Jeffrey Tomz, who were respectively the Chief Executive Officer and Chief Financial Officer of the Company during the relevant periods of time at issue in the SEC’s complaint, include that they made more than $2 million in personal profits from selling their own shares of the Company’s common stock following disclosures regarding the Company’s agreement related to our InTouch™ Sensors.

 

On March 16, 2016, the U.S. District Court for the Southern District of Texas on March 16, 2016 signed a final judgment on this complaint pursuant to our consent (the “Final Judgment”), which the Company gave without admitting or denying the allegations of the SEC’s complaint. Without admitting or denying the allegations of the SEC’s complaint, we consented to the Final Judgment, which permanently enjoins us from violating Sections 10(b) and 13(b)(2)(A) and (B) of the Securities Exchange Act of 1934 (the “Exchange Act”), Rule 10b-5 of the SEC and Section 17(a) of the Securities Act of 1933. The Final Judgment also permanently enjoins the filing with the SEC any periodic report pursuant to Section 13(a) of the Exchange Act and Rules 13a-1, 13a-11, 13a-13 and 12b-20 of the SEC, which contains any untrue statement of material fact, or which omits to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading, or which fails to comply in any material respect with the requirements of Section 13(a) of the Exchange Act and the rules and regulations thereunder. The Final Judgment also provides for a civil penalty in the amount of $750,000 to be paid in accordance with the following schedule:

 

(1) $20,000, within 14 days of entry of the Final Judgment;

(2) $20,000, within 104 days of entry of the Final Judgment;

(3) $30,000, within 194 days of entry of the Final Judgment;

(4) $45,000, within 284 days of entry of the Final Judgment;

(5) $60,000, within 374 days of entry of the Final Judgment;

(6) $70,000, within 464 days of entry of the Final Judgment;

(7) $80,000, within 554 days of entry of the Final Judgment;

(8) $80,000, within 644 days of entry of the Final Judgment;

(9) $80,000, within 734 days of entry of the Final Judgment;

(10) $85,000, within 824 days of entry of the Final Judgment;

(11) $90,000, within 914 days of entry of the Final Judgment;

(12) $90,000, within 1004 days of entry of the Final Judgment

 

The $750,000 settlement was recorded in other expense on the consolidated statement of operations for the year ended December 31, 2015. As of September 30, 2016, the remaining settlement accrual is reflected in current liabilities of $255,000 and $425,000 in long-term liabilities.

 

 

Complaint by former Officers of the Company for Advancement of Expenses

 

The Company’s Amended and Restated Bylaws contain provisions regarding indemnification and advancement of expenses actually and reasonably incurred by the Company’s officers in connection with civil, criminal, administrative or investigative matters provided that such officers acted in good faith and in a manner such officers reasonably believed to be in or not opposed to the best interests of the Company, and, with respect to any criminal action or proceeding, had no reason or cause to believe such officer’s conduct was unlawful. The advancement of expenses is expressly conditioned upon receipt of an undertaking by the officer to repay all such amounts so advanced in the event that it shall ultimately be determined that the officer is not entitled to be indemnified by the Company. The Company, or its insurance company, has paid as agreed all invoices for all years through the end of 2015 for the defense of Messrs. Killion and Tomz in the investigation by the SEC that resulted in the filing of the complaint against them by the SEC. A portion of payments for 2016 invoices have has also been made, but the Company has disputed other 2016 invoices totaling approximately $265,000 as containing expenses that have not been reasonably incurred by Messrs. Killion and Tomz in defense of the SEC’s complaint. Through the course of 2016, the Company has been in discussions with counsel to Messrs. Killion and Tomz of resolving counsels’ charges on these invoices. Notwithstanding those discussions, on August 22, 2016, Messrs. Killion and Tomz filed an action against the Company for advancement of expenses in the Delaware Chancery Court. The Company has contested the claims made by Messrs. Killion and Tomz that it has not advanced expenses reasonably incurred by them in the underlying action brought by the SEC. In October 2016, the Chancery Court appointed a former Vice Chancellor of the Delaware Chancery Court to act as a Special Master to determine whether expenses are reasonably incurred to the extent that the Company and Messrs. Killion and Tomz are not capable to resolve the dispute concerning whether expenses have been reasonably incurred without the assistance of the judicial process.

 

Note 4 —Equity, Stock Plan and Warrants

 

Common Stock

 

During the nine months ended September 30, 2016, we (1) issued 833,252 shares of common stock to directors and employees; (2) issued 1,595,000 shares related to exercise of warrants; (3) issued 6,152,500 shares and received proceeds of $8.4 million, net of issuance costs of $0.8 million.

 

During the nine months ended September 30, 2015, we (1) issued 12,500 shares of common stock for cash in connection with the exercise of stock options; (2) issued 105,017 shares of common stock to various directors, officers and employees as stock awards; (3) issued 20,833 shares of common stock for the settlement of the derivative lawsuit; (4) issued 430,000 shares of common stock for the settlement of the class action lawsuit; and (5) issued 6,548,225 shares of common stock to convert $8.1 million of principal and $0.3 million of interest into shares of common stock.

 

Restricted Stock

 

Total compensation expense recognized for restricted stock was approximately $1.0 million and $1.1 million for the nine months ended September 30, 2016 and September 30, 2015, respectively. The Company has recorded approximately $1.0 million, $15,000 and $15,000 of restricted stock expense in selling, general and administrative expenses, research and development expense and cost of revenue for the nine months ended September 30, 2016, respectively and approximately $0.9 million and $0.2 million of restricted stock expense in selling, general and administrative expenses and research and development expense for the nine months ended September 30, 2015, respectively.

 

In the nine months ended September 30, 2016 the Company granted 1,260,000 restricted stock units (“RSUs”) with a grant-date fair value of approximately $1.9 million or $1.50 per share.

 

RSUs are converted into shares of the Company’s common stock upon vesting on a one-for-one basis. Typically, vesting of RSUs is subject to the employee’s continuing service to the Company. RSUs generally vest over a period of three years and are expensed ratably on a straight line basis over their respective vesting period net of estimated forfeitures. The fair value of the RSUs granted is the product of the number of shares granted and the grant date fair value of the Company’s common stock. The RSUs that will vest in future periods will be net-share settled such that the Company will withhold shares with value equivalent to the employees’ minimum statutory obligation for the applicable income and other employment taxes, and remitted the cash to the appropriate taxing authorities. The total shares to be withheld will be based on the value of the RSUs on their vesting date as determined by the Company’s closing stock price.

 

At September 30, 2016, there was $2.3 million of total unrecognized compensation cost related to non-vested shares of restricted stock which is expected to be recognized over a weighted-average period of 2.23 years. There were 429,938 shares of restricted stock, net that became vested during the nine months ended September 30, 2016.

 

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 5,500,001 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 September 30, 2016, there were 482,553 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 $0.4 million and $1.3 million for the nine months ended September 30, 2016 and September 30, 2015, respectively. The Company has recorded approximately $0.2 million, $0.8 million and $66,000 of stock compensation expense in selling, general and administrative expenses research and development expense and cost of revenue for the nine months ended September 30, 2016 and approximately $0.5 million, 0.8 million and $46,000 of stock compensation expense in selling, general and administrative expenses, research and development expense and cost of revenue for the nine months ended September 30, 2015.

 

A summary of the changes in the total stock options outstanding during the nine months ended September 30, 2016 follows:

 

						Weighted
						Average
		Options				Exercise Price
Outstanding and expected to vest, at December 31, 2015			1,941,194			$	6.54
Granted			418,000			$	1.39
Forfeited or expired			(156,253	)		$	9.36
Exercised			(3,050	)		$	1.23
Outstanding and expected to vest, at September 30, 2016			2,199,891			$	5.37
Vested and exercisable at September 30, 2016			1,536,078			$	7.02

 

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 September 30, 2016				Three Months ended September 30, 2015				Nine Months ended September 30, 2016				Nine Months ended September 30, 2015
Expected life (years)			5 years				5 years				5 years				5 years
Interest rate			1.11	%			1.63	%			1.11 to 1.63	%			1.31 to 1.63	%
Dividend yield			—				—				—				—
Volatility			97.48	%			157.66	%			97.48 to 157.66	%			144.34 to 157.66	%
Forfeiture rate			—				—				—				—
Weighted average fair value of options granted		$	1.11			$	1.15			$	1.02			$	1.41

 

At September 30, 2016, there was $0.8 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 2.01 years. There were approximately 0.5 million, net options that became vested during the nine months ended September 30, 2016.

 

Common Stock Warrants

 

As of September 30, 2016, the Company has 9,475,360 common stock warrants outstanding with a weighted average exercise price of $1.61 per share. Information regarding outstanding warrants as of September 30, 2016 is as follows:

 

Grant date		Warrants Outstanding				Exercisable				Weighted Exercise Price				Remaining Life (Years)
June 10, 2009			15,796				15,796			$	7.50				2.68
August 31, 2009			24,934				24,934			$	7.50				2.68
October 2, 2009			205,000				205,000			$	5.00				3.08
March 15, 2010			8,337				8,337			$	7.50				3.25
April 5, 2010			930				930			$	7.50				3.25
April 16, 2015 (1)			1,151,121				1,151,121			$	1.50				3.25
November 5, 2015 (1)			38,371				38,371			$	1.50				3.50
November 30, 2015 (1)			8,030,871				8,030,871			$	1.50				4.17
Total			9,475,360				9,475,360

 

(1)

The exercise price of the warrants and the number of shares for which the warrants are exercisable are subject to certain adjustments if the Company issues or sells additional shares of common stock or common stock equivalents at a price per share less than the exercise price then in effect, or without consideration.

 

 

Note 5 — Property and Equipment and Inventory

 

A summary of the components of property and equipment (in thousands) at September 30, 2016 and December 31, 2015 are as follows:

 

		Estimated Useful Lives		September 30, 2016				December 31, 2015
Production equipment		3 to 5 years		$	2,051			$	1,966
Research and development equipment		3 to 5 years			3,581				3,572
Leasehold improvements		5 years			23				23
Computer equipment		5 years			98				98
Office equipment		3 to 5 years			20				20
Construction-in-progress					389				176
					6,162				5,855
Accumulated depreciation					(4,815	)			(4,013	)
Property and equipment, net				$	1,347			$	1,842

 

Depreciation for the nine months ended September 30, 2016 and September 30, 2015 was approximately $0.8 million and $3.6 million, respectively.

 

A summary of the components of inventory at September 30, 2016 and December 31, 2015 (in thousands):

 

		September 30, 2016				December 31, 2015
Raw materials		$	239			$	419
Work-in-progress			426				328
Finish Goods			12				22
Inventory		$	677			$	769

 

Note 6 — Senior Secured Convertible Notes and Warrants

 

Concurrent with the consummation of the XTouch acquisition, on April 16, 2015 (the “Effective Date”), and pursuant to a Securities Purchase Agreement, we sold $15 million in Senior Secured Convertible Notes, together with warrants for the purchase of 1,151,121 shares of our common stock (the “Warrants”), to two accredited investors (the “Investors”). In addition, we sold an additional $0.5 million Convertible Note to one of these Investors in November 2015, and the Warrant issued to that Investor was adjusted for an additional 38,371 shares of common stock. The number of shares of common stock subject to the Warrants equaled 65% of the number of shares of common stock the Investors would receive if the Convertible Notes were converted at the Conversion Price (as defined below) on the trading day immediately prior to the Effective Date.

 

The Convertible Notes accrue simple interest at the rate of 9% per year (“Interest”). On November 23, 2015, the Interest was reduced to 4%. The Convertible Notes together with all accrued and unpaid Interest were due and payable on April 16, 2016 (the “Maturity Date”). The Investors may, at any time, elect to convert the Convertible Notes into shares of our common stock at the conversion price, subject to certain beneficial ownership limitations. The conversion price is the lesser of $8.47 per share (the “Conversion Price”), subject to adjustment as set forth in the Convertible Notes for stock splits, dividends, recapitalizations and similar events, which equaled 110% of the last closing price of our common stock prior to the execution and delivery of the Securities Purchase Agreement and 85% of the lowest closing sale price during the prior 30 trading day period. As of February 16, 2016, the Convertible Note had been fully repaid.

 

The Warrants when issued had a five-year term and a per share exercise price of $9.63, subject to adjustment as set forth in the Warrants, which equaled 125% of the closing price of our common stock prior to the Effective Date. If, after the Effective Date, we issue or sell, or are deemed to have issued or sold, any shares of common stock (with the exception of certain Excluded Securities, as those are defined in the Warrants) for a consideration per share less than a price equal to the exercise price of the Warrants in effect immediately prior to such issue or sale (or deemed issuance or sale) (a “Dilutive Issuance”), then immediately after the Dilutive Issuance, (x) if the Dilutive Issuance occurs prior to the one year anniversary of the Effective Date, then the exercise price then in effect will be reduced to an amount equal to the product of (A) the exercise price in effect immediately prior to the Dilutive Issuance and (B) the quotient determined by dividing (1) the sum of (I) the product derived by multiplying the exercise price in effect immediately prior to the Dilutive Issuance and the number of Common Shares Deemed Outstanding (as defined in the Warrants) immediately prior to the Dilutive Issuance plus (II) the consideration, if any, received by us on such Dilutive Issuance, by (2) the product derived by multiplying (I) the exercise price in effect immediately prior to the Dilutive Issuance by (II) the number of Common Shares Deemed Outstanding immediately after the Dilutive Issuance and (y) if the Dilutive Issuance occurs after the one year anniversary of the Effective Date but within five years of the Effective Date, the exercise price then in effect will be reduced to an amount equal to the price of the shares of common stock issued in the Dilutive Issuance. The Warrants will be exercisable for cash, but if a prospectus covering the shares of common stock underlying the Warrants is not available, the Investors may exercise the Warrants using a cashless exercise provision. The Warrants may not be exercised if, after giving effect to the exercise, the Investor would beneficially own in excess of 4.99% or 9.99% of the outstanding shares of common stock, depending on the Investor. At the Investor’s option, the cap applicable to the exercise of the Warrants may be raised or lowered to any other percentage not in excess of 9.99%, except that any increase will only be effective upon 61-days’ prior notice to us.

 

 

As per the terms of the November 2015 equity transaction, the 1,189,492 Warrants were exchanged for new warrants to purchase an equivalent number of shares of common stock in the same form and same terms as the warrants issued in such equity transaction, including a repricing to $1.50 per share exercise price. The exercise price of the Warrants and the number of shares for which the Warrants are exercisable are subject to certain adjustments if the Company issues or sells additional shares of common stock or common stock equivalents at a price per share less than the exercise price then in effect, or without consideration. Notwithstanding the foregoing, there will be no adjustment to the exercise price of the Warrants or number of warrant shares issuable upon exercise in connection with the issuance of common stock upon Board of Director-approved employee benefit plans or upon the conversion, exercise or payment of certain outstanding, excluded securities.

 

Pursuant to a Pledge and Security Agreement (the “Security Agreement”) we entered into in favor of Hudson Bay Fund LP as Collateral Agent, the Convertible Notes are secured by a perfected first priority security interest in all of our assets and are senior in right of payment to all of our existing and future indebtedness, subject to Permitted Liens, as defined in the Convertible Notes. With the exception of Permitted Liens, we have agreed that we will not grant a security interest in our assets so long as the Convertible Notes remain outstanding and that we will not incur any new debt except for Permitted Indebtedness, as that term is defined in the Convertible Notes.

 

In conjunction with the issuance of the Convertible Notes and the Warrants, we entered into a Registration Rights Agreement pursuant to which we agreed to file a registration statement covering the sum of (i) 200% of the maximum number of shares underlying the Convertible Notes and (ii) the maximum number of shares underlying the Warrants (the “Registrable Securities”). We have agreed to keep any registration statement we file pursuant to the Registration Rights Agreement effective until the earlier of (i) the date as of which the Investors may sell all of the Registrable Securities covered by the Registration. Statement without restriction or limitation pursuant to Rule 144 and without the requirement to be in compliance with Rule 144(c)(1) (or any successor thereto) or (ii) the date on which the Investors shall have sold all of the securities covered by such Registration Statement.

 

We were to use our reasonable best efforts to have the registration statement declared effective within 90 days after the Effective Date (the “Registration Statement Effective Date”). If we failed to register the Registrable Securities or the registration statement is not declared effective by the SEC before the Registration Statement Effective Date, or if on any day after the Registration Statement Effective Date, sales of the Registrable Securities required to be included on the Registration Statement cannot be made (collectively, a “Registration Default”), we will pay to each Investor an amount in cash equal to 1% of the aggregate Purchase Price (as that term is defined in the Securities Purchase Agreement) of the Investor’s Registrable Securities, whether or not the Registrable Securities were included in the registration statement, and 1% per month (or a portion thereof pro rata) that the Registration Default continues to exist. We are not required to make these payment if, when a Registration Default occurs, the Investors can freely sell our common stock pursuant to Rule 144 without restriction or limitation. We filed the registration statement within 90 days and therefore did not have to make any payments to the Investors.

 

Investors in the offering have the right to participate for no less than 35% of any future offering of our equity or equity equivalent securities until the second anniversary of the Effective Date when the Convertible Notes were purchased.

 

We had agreed to keep at least $6.0 million of restricted cash on our balance sheet at all times until the Maturity Date or until the outstanding principal amount of the Convertible Notes is less than $6.0 million, at which time the amount of restricted cash we are required to keep on our balance sheet will be adjusted downward, dollar for dollar. As of September 30, 2016 and December 31, 2015, the restricted cash was $0 and $4.1 million, respectively.

 

As additional security for repayment of the Convertible Notes, Uni-Pixel Displays, Inc. entered into to a Guarantee Agreement in favor of the Investors.

 

Cowen and Company, LLC acted as our financial advisor in the acquisition of the assets and as our placement agent in the financing transaction. We paid Cowen and Company, LLC approximately $1.7 million for these services.

 

On April 16, 2015, the Company determined that the Convertible Notes had a carrying amount of $3.1 million. The Company utilized a binomial model in determining the fair market value of the Warrants of $6.0 million.

 

 

The Company also determined there was a beneficial conversion feature (“BCF”) as a result of the intrinsic value between the effective exercise price and the market price at the time of conversion of $6.0 million. The BCF was included in additional paid in capital. As a result of the down-round protection on the warrants, they have been accounted for as a derivative liability upon issuance and at December 31, 2015.

 

At inception, the Convertible Notes balance (in thousands) and unamortized discount in millions were as follows:

 

Convertible notes		$	15,000
Discount attributable to warrants			(5,980	)
Discount attributable to BCF			(5,970	)
Carrying amount of Convertible Notes at inception		$	3,050

 

As of September 30, 2016, the Investors were issued an aggregate of 13,984,411 shares of common stock on the conversion of $11.6 million of principal and $0.3 million of interest As of September 30, 2016 the convertible note balances were $0.

 

The following table summarizes the charges to interest, amortization and other expense, net for the nine months ended September 30, 2016 (in thousands):

 

		September 30, 2016				September 30, 2015
Interest expense on convertible notes		$	9			$	434
Accretion of convertible not discount		$	1,291			$	7,171

 

Note 7 — Agreements with Atmel Corporation and CIT Technology LTD.

 

Atmel Corporation Asset Acquisition and License Agreements

 

On April 16, 2015 (the “Effective Date”), Uni-Pixel Displays, Inc. (“Displays”) acquired from Atmel Corporation (“Atmel”), pursuant to the terms of a Purchase and Sale Agreement, a Patent License Agreement, an IP License Agreement, a Bill of Sale and Assignment and Assumption Agreement and two leases for real property, certain assets used for the production of capacitive touch sensors comprised of fine lines of copper metal photo lithographically patterned and plated on flexible plastic film (the “Touch Sensors”). $450,000 was paid for the machinery, parts and equipment needed to manufacture the Touch Sensors and the existing inventory on hand. Displays paid this amount with a secured promissory note due on or before the earlier of (i) the second anniversary of the Effective Date or (ii) the sale of equity and/or debt securities after the Effective Date pursuant to which Displays or any affiliate of our receives gross proceeds of no less than $5 million. Interest accrues on the unpaid principal amount at a rate equal to 2% per annum compounded semi-annually and is to be paid in arrears semi-annually, commencing with the six-month anniversary of the Effective Date. Displays has granted to Atmel a security interest in the purchased assets and all accounts receivable subsequently arising from Display’s manufacture and sale of Touch Sensors and all proceeds therefrom. Pursuant to the Purchase and Sale Agreement, Displays assumed certain liabilities of Atmel, including open purchase and supply orders, related to the Touch Sensor business. In April 2016, the $450,000 promissory note was fully repaid.

 

Through the Patent License Agreement, Atmel licensed to Displays a non-sublicensable, worldwide, royalty-bearing license under its Touch Sensors patents to make or have made, use, offer for sale, sell, and import the Touch Sensors. In consideration for this license, Displays agreed to pay an annual royalty fee during the initial five year term of the license (the “Initial Term”) of the greater of $3.25 million or 3.33% of the total net sales (as defined in the Patent License Agreement) of the Touch Sensors during the Initial Term. Displays has the right to renew the license for a term of 10 years. If Displays exercises this right, the annual royalty fee will consist of 2.5% of the total net sales of the Touch Sensors until it reaches a total of $16.75 million, at which time no further annual royalty fees will be due. Upon execution of the Patent License Agreement, Displays paid a non-refundable, non-returnable prepayment of minimum annual royalty fees of $9.33 million (the “Royalty Prepayment”). The Royalty Prepayment will be applied to the annual royalty fees Displays owes under the Patent License Agreement. If, during the Initial Term, Displays’ cash balances as of the quarter end immediately prior to the date of the royalty period to which an unpaid annual royalty relates is less than $30 million, it may pay the annual royalty fee with a secured promissory note. Atmel has agreed that it will not enter into a license agreement for the licensed patents that is effective prior to the second anniversary of the Effective Date.

 

Through the IP License Agreement, Atmel licensed to Displays a non-sublicensable, worldwide, royalty-free license to the intellectual property necessary to make or have made, use, offer for sale, sell, and import the Touch Sensors. The term of the IP License Agreement is co-extensive with the term of the Patent License Agreement. Atmel has agreed that it will not enter into a license agreement for the licensed intellectual property that is effective prior to the second anniversary of the Effective Date.

 

 

As part of the business combination acquisition, Displays also entered into leases with Atmel Corporation for Building 2 and Building 4, both of which are located at 1150 E. Cheyenne Mountain Boulevard, Colorado Springs, Colorado. The term of each lease is 18 months (the “Primary Lease Term”). The term of each lease may be extended for two additional six month periods. During the Primary Lease Term, the initial base rent for each of Building 2 and Building 4 will be $100 per month. During the first renewal term, the monthly base rent for Building 2 will be $5,625 and during the second renewal term the monthly base rent will be $8,437. During the first renewal term, the monthly base rent for Building 4 will be $39,375 and during the second renewal term the monthly base rent will be $59,062. Aside from the base rent, Displays is responsible for the payment of its share of operating expenses attributable to the buildings, real estate taxes attributable to the buildings, sales and personal property taxes, utilities and additional services provided by Atmel (as defined in the leases). The Company extended the lease until April 15, 2017.

 

Transition Services Agreement

 

In conjunction with the above-described transaction, Displays and Atmel entered into a Transition Services Agreement. Pursuant to the Transition Services Agreement, Atmel agreed to provide the following services for the periods described: (i) quality assurance and failure analysis services for the XTouch Touch Sensors for a period of six months starting from the Effective Date, (ii) operations services for a period of 30 days starting from the Effective Date and (iii) other services, as those are defined in the Transition Services Agreement, for a period of three months starting from the Effective Date. In exchange for the services, Displays has agreed to pay reasonable and documented direct costs incurred by Atmel in performing the services together with actual out-of-pocket third-party expenses reasonably incurred by Atmel in providing the services. The service fees include, but are not limited to, (a) the actual out-of-pocket employment costs (base salary, payroll taxes and out-of-pocket medical benefits) for the individuals performing the services (based on the actual time expended by such individuals in performing the services), (b) costs of materials, (c) the actual out-of-pocket third-party expenses reasonably incurred by Atmel in providing the services, and (d) direct supervisory and management expenses incurred by Atmel in providing the services. On the Effective Date, we paid $0.4 million to Atmel and was applied against certain designated services. The transition services have been completed.

 

CIT Technology Ltd. License Agreements and Manufacturing and Technology Transfer Agreement

 

On the Effective Date Displays entered into an FLT (Fine Line Technology) Patent License Agreement (the “CIT Patent License Agreement”), an FLT (Fine Line Technology) Intellectual Property License Agreement (the “CIT IP License Agreement”) and a Manufacturing and Technology Transfer Agreement (the “Manufacturing Agreement”) with CIT Technology Ltd. (“CIT”).

 

Through the CIT Patent License Agreement, CIT licensed to Displays a non-sublicensable, worldwide, royalty-bearing license under its fine line technology (“FLT”) patents to make or have made, use, offer for sale, sell, and import licensed FLT products (the “Licensed Products”), which are defined as capacitive touch sensors comprising fine lines of copper metal printed on flexible plastic film. In consideration for this license, Displays agreed to pay an annual royalty fee during the initial five year term of the license (the “Initial License Term”) of the greater of $1.65 million or 1.67% of the total net sales (as defined in the CIT Patent License Agreement) of the Licensed Products during the Initial License Term. Displays has the right to renew the license for a term of 10 years. If Displays exercises this right, the annual royalty fee will consist of 1.67% of the total net sales of the Licensed Products until it reaches a total of $8.25 million, at which time no further annual royalty fees will be due. Further, the total royalty fees payable for the initial 5 year term and the subsequent 10 year term is capped at $30 million. Upon execution of the CIT Patent License Agreement, Displays paid a non-refundable, non-returnable prepayment of minimum annual royalty fees of $4.67 million (the “CIT Royalty Prepayment”). The CIT Royalty Prepayment will be applied to the annual royalty fees Displays owes under the CIT Patent License Agreement. If, during the Initial License Term, Displays’ cash balances as of the quarter end immediately prior to the date of the royalty period to which an unpaid annual royalty relates is less than $30 million, Displays may pay the annual royalty fee with a secured promissory note. CIT has agreed that it will not enter into a license agreement for the licensed patents as they relate to the Licensed Products that is effective prior to the second anniversary of the Effective Date.

 

Through the CIT IP License Agreement, CIT licensed to Displays a non-sublicensable, worldwide, royalty-free license to the intellectual property necessary to make or have made, use, offer for sale, sell, and import the Licensed Products. The term of the CIT IP License Agreement is co-extensive with the term of the CIT Patent License Agreement. CIT has agreed that it will not enter into a license agreement for the licensed intellectual property as it relates to the Licensed Products that is effective prior to the second anniversary of the Effective Date.

 

The Manufacturing Agreement had a term of six months, where Displays agreed that for a period of 16 consecutive weeks it will order, on a weekly basis, 11,500 linear meters of coated film manufactured by CIT at a cost of $7.90 per linear meter. The agreement had been completed and the process was transferred to the Colorado Springs facility in fiscal year 2015.

 

 

The following unaudited pro-forma financial information presents the Company’s condensed financial results (in thousands) for the nine months ended September 30, 2015 as if the acquisitions had occurred as of January 1, 2015:

 

		Nine Months Ended September 30, 2015
Revenue		$	4,238
Net loss continuing operations			(27,615	)
Net loss discontinued operations			(8,701	)
Net loss		$	(36,316	)
Basic and diluted continuing operations		$	(1.97	)
Basic and diluted net loss		$	(2.62	)

 

These pro-forma results have been prepared for comparative purposes only and are not necessarily indicative of the results of operations that actually would have resulted had the acquisitions been effective at the beginning of 2015 and are not necessarily representative of future results. The pro-forma results include the following adjustments:

 

	●	Revenue of $1,371,000 from XSense for the quarter ended March 31, 2015; and
	●	Cost of sales of approximately $2,467,000 for the quarter ended March 31, 2015; and
	●	Approximately $826,000 of other expense for the quarter ended March 31, 2015 for financing the XSense acquisition.

 

Note 8 — Loss on Discontinued Operations

 

On April 22, 2015 Displays exercised its right to terminate the Manufacturing Facility Installation and Supply Agreement dated April 15, 2013 (the “Supply Agreement”), which was entered into by Displays and Eastman Kodak Company (“Kodak”).

 

Displays did not renew that certain Joint Development Agreement dated February 5, 2013, also with Kodak, which was related to flexible patterned conductive films.

 

In connection with the discontinued operations, the Company took a $7.6 million write down on equipment in the second quarter of 2015.

 

Note 9 — Fair Value Measurements

 

Liabilities measured at fair value (in thousands) on a recurring basis are summarized as follows:

 

														Carrying
		Fair Value Measurements Using Inputs												Amount at
Financial Instruments		Level 1				Level 2				Level 3				September 30, 2016
Liabilities:
Derivative liability		$	-			$	1,369			$	-			$	1,369
Total		$	-			$	1,369			$	-			$	1,369

 

As described further in Note 6, the derivative liability is related to warrants to purchase 1,189,492 shares of common stock issued by the Company in connection with our Convertible Note, which included a down-round protection on the warrants. These warrants were not issued with the intent of effectively hedging any future cash flow, fair value of any asset, liability or any net investment in a foreign operation. The fair value of these warrants were $6.0 million at inception. The Company recognized $0.9 million of other expense for the nine months ended September 30, 2016 in the accompanying consolidated statements of operations, resulting from the increase in the fair value of the derivative liability at September 30, 2016 as compared to December 31, 2015. The derivative liability will continue to be measured at fair value, with changes in fair value recognized in earnings, until the warrants are exercised, expire or are otherwise extinguished.

 

Note 10 — Revenue and Credit Concentrations

 

During the nine months ended September 30, 2016 and 2015, revenues (in thousands) by customers with more than 10% of revenue were as follows:

 

		Nine months ended September 30, 2016								Nine months ended September 30, 2015
		Amount				%				Amount				%
Company A		$	1,284				47	%		$	1,839				64	%
Company B			704				26	%			930				32	%
Company C			626				23	%			—				—	%
Total		$	2,614				96	%		$	2,769				96	%

 

 

As of September 30, 2016 and December 31, 2015 customers with more than 10% of accounts receivables balances (in thousands) were as follows:

 

		As of September 30, 2016								As of December 31, 2015
		Amount				%				Amount				%
Company A		$	139				18	%		$	133				40	%
Company B			76				10	%			164				49	%
Company C			530				69	%			—				—	%
Total		$	745				97	%		$	297				89	%

 

Note 11 — Subsequent Event

 

On October 24, 2016, the Company entered into a $2.5 million two year loan and security agreement with Western Alliance Bank. The agreement allows the Company to borrow up to 90% of its gross eligible trade receivables at an interest rate of prime plus 1.25%. The line is secured by all the assets of the Company, including intellectual property.

 

 

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 possibility that we will be unable to successfully combine the XTouch business and operations with our business and operations, the development of technologies superior to our technologies, the loss of key customers of the XTouch products, our inability to achieve cost savings following the acquisition of the XTouch business, the imposition of unanticipated liabilities as a result of the acquisition of the XTouch business, 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.

 

Recent Acquisition, Financing and Change in Business Strategy

 

On April 16, 2015 we acquired certain assets and licenses related to the manufacture of XTouch touch sensors from Atmel Corporation and CIT Technology Ltd. and we closed a private offering consisting of $15 million in principal amount of our Senior Secured Convertible Promissory Notes (the “Notes”) together with warrants. A more complete discussion of these transactions is included in Note 7 to our financial statements, which are included at Item 1 of Part I of this report, and in the Current Report on Form 8-K that we filed with the Securities and Exchange Commission on April 17, 2015.

 

On April 22, 2015 we terminated the Manufacturing Facility Installation and Supply Agreement dated April 15, 2013 which was entered into by our wholly owned subsidiary, Uni-Pixel Displays, Inc., and Eastman Kodak Company. A more complete discussion of this matter is included in Note 8 to our financial statements, which are included at Item 1 of Part I of this report, and in the Current Report on Form 8-K that we filed with the Securities and Exchange Commission on April 27, 2015.

 

Our decision to change the focus of our business from developing and manufacturing InTouch sensors to manufacturing and selling XTouch touch sensors was based on, among other things, the pressure of declining prices and margin compression in the touch sensor market. We believe that our acquistion of the XTouch technology will provide us with a stand-alone, go-to-market strategy that we expect to provide a better economic model and lead to a scalable business in a more rapid time frame.

 

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 nine months ended September 30, 2016, 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 2015 Form 10-K.

 

Derivative liabilities: The Company, in accordance with ASC 815-40-25 and ASC 815-10-15 Derivatives and Hedging and ASC 480-10-25 Liabilities-Distinguishing from Equity, convertible preferred shares are accounted for net, outside of shareholder’s equity and warrants are accounted for as liabilities at their fair value during periods where the full ratchet anti-dilution provision is in effect.

 

The warrants are accounted for a liability at their fair value at each reporting period. The value of the derivative warrant liability will be re-measured at each reporting period with changes in fair value recorded as earnings. To derive an estimate of the fair value of these warrants, a binomial model is utilized that computes the impact of share dilution upon the exercise of the warrant shares. This process relies upon inputs such as shares outstanding, estimated stock prices, strike price and volatility assumptions to dynamically adjust the payoff of the warrants in the presence of the dilution effect.

 

Revenue Recognition: The Company sells its products to original equipment manufacturers (“OEMs”) and distributors and recognizes revenue when the rights and risks of ownership have passed to the customer, when persuasive evidence of an arrangement exists, the product has been delivered, the price is fixed or determinable, and collection of the resulting receivable is reasonably assured. Allowances for sales returns and other credits are recorded at the time of sale.

 

Contracts and customer purchase orders are used to determine the existence of an arrangement. Shipping documents are used to verify delivery. The Company assesses whether the price is fixed or determinable based on the payment terms associated with the transaction and whether the sales price is subject to refund or adjustment. The Company assesses collectability based primarily on the creditworthiness of the customer as determined by credit checks and analysis, as well as the customer’s payment history. Sales terms do not include post-shipment obligations except for product warranty.

 

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 is recognized over the contract term based on achievement of milestones. When the contracts provide for milestone or other interim payments, the Company will recognize revenue under the milestone method. The milestone method requires the Company to designate all milestone payments within each contract as either substantive or non-substantive. That conclusion is determined based upon a thorough review of each contract and the deliverables to be made by the Company pursuant to each contract. For substantive milestones, the Company concludes that upon achievement of each milestone, the amount of the corresponding defined payments is commensurate with the effort required to achieve such milestone or the value of the delivered item. The payment associated with each milestone relates solely to past performance and is deemed reasonable upon consideration of the deliverables and the payment terms within the contract. For non-substantive milestones, including advance payments, the recognition of such payments is pro-rated to the substantive milestones.

 

In April 2013, we entered into an agreement with Intel (the “Capacity License Agreement”), whereby we were to receive $10 million of cash proceeds to assist us in increasing our production capacity. Under the terms of the Capacity License Agreement, there were two milestones with related contingent consideration of $5 million for each milestone plus certain commissions as described below. The Capacity License Agreement required us to purchase certain equipment, which we purchased in 2013 and which we considered not a substantive milestone. The Capacity License Agreement required us to have the capability to produce at least 1 million sensor units per month (as defined in the Capacity License Agreement) by April 2014, which we considered a substantive milestone. We received $5 million in May 2013, which was non-refundable. Upon achieving the deliverables of the Capacity License Agreement, we would have paid a commission to Intel of 10% on revenue derived from the sales of InTouch™ Sensors made directly to Intel or to those of Intel’s manufacturing partners that use Intel’s Preferred Price and Capacity License Agreement (“Designated Customers”). The commission amount was to be paid until the aggregate commissions paid equaled the commission cap of $18.5 million. The term of the Capacity License 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 Intel to make Intel whole on any remaining amounts due under the commission cap of $18.5 million.

 

In April 2014, we entered into the Amended Capacity License Agreement with Intel (the “Amended Capacity License Agreement”). The Amended Capacity License Agreement modified the original Capacity License Agreement terms as follows: 1) the inability of the Company to reach, by April 2014, the minimum production capability and the required quality standards specified in the Capacity License Agreement will no longer constitute a material breach to the Capacity License Agreement; 2) the total amount of cash proceeds to be received was reduced from $10 million to $5 million, which included the $5 million we received in May 2013; 3) the cap on the commission amount was reduced from $18.5 million to $6.25 million; 4) the term “commission” is defined as 10% of gross revenue from the sale of all sensors sold by the Company, which includes sales of sensors to all customers including, but not limited to, Intel and its Designated Customers; 5) if the Company becomes the subject of any proceeding under any bankruptcy, insolvency or liquidation law, the Company will assign all title and ownership to certain designated equipment (the “Equipment”) to Intel; and 6) if the Company materially breaches the Amended Capacity License Agreement, which breach is not cured within 30 days after receipt of notice from Intel, the Company may choose to either (A) pre-pay the cap on the commission to Intel (less the total of all previously paid commissions) or (B) assign all title and ownership to the Equipment to Intel.

 

 

As the Company has discontinued its joint development activities with Kodak to develop, manufacture and market touch sensors based on the InTouch technology (Note 8), the Company is currently in discussions with Intel regarding the Capacity License Agreement.

 

Cost of Revenues, Selling, General and Administrative Expenses and Research and Development Expenses: The primary purpose of our facilities in Colorado Spring, Colorado and The Woodlands, Texas is for manufacturing, 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 facilities in Colorado Springs, Colorado and 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 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.

 

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.

 

RESULTS OF OPERATIONS

 

Comparison of the nine months ending September 30, 2016 and 2015

 

REVENUES. Revenues were $2.7 million for the nine months ended September 30, 2016 as compared to $2.9 million for the nine months ended September 30, 2015. Revenues for the nine months ended September 30, 2016 and 2015 were mainly comprised of sales of XTouch sensors.

 

COST OF REVENUES. Cost of revenues include all direct expenses associated with the delivery of services and costs of manufacturing including internal labor costs and materials. Cost of revenues was $11.4 million for the nine months ended September 30, 2016 and $8.1 million for the nine months ended September 30, 2015. We recorded cost of revenue expenses for the full nine months in 2016 compared to only six months in 2015 as we did not begin to ship products until the second quarter of 2015.

 

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and administrative expenses decreased by 33% or approximately $2.8 million, to $5.6 million for the nine months ended September 30, 2016 from $8.4 million for the nine months ended September 30, 2015. The major changes to selling, general and administrative expenses are as follows:

 

a) Salaries and benefits decreased by approximately $0.2 million to $2.6 million for the nine months ended September 30, 2016 compared to $2.8 million for the nine months ended September 30, 2015 due to the following: a decrease in severance to approximately $8,000 for the nine months ended September 30, 2016 compared to $0.1 million for the nine months ended September 30, 2015; a decrease in stock compensation expense to $0.2 million for the nine months ended September 30, 2016 compared to $0.5 million for the nine months ended September 30, 2015; and an increase in restricted stock expense to $1.0 million for the nine months ended September 30, 2016 compared to $0.8 million for the nine months ended September 30, 2015;

 

b) Legal expense decreased by approximately $0.1 million to $0.9 million for the nine months ended September 30, 2016 compared to $1.0 million for the nine months ended September 30, 2015;

 

c) Contractor expense increased by approximately $0.1 million to $0.2 million for the nine months ended September 30, 2016 compared to $0.1 million for the nine months ended September 30, 2015;

 

 

d) Travel and office expense increased by approximately $0.3 million to $0.6 million for the nine months ended September 30, 2016 compared to $0.3 million for the nine months ended September 30, 2015 primarily due to increased travel visiting potential customers;

 

e) Depreciation and amortization expense decreased by approximately $3.0 million to $0.2 million for the nine months ended September 30, 2016 compared to $3.2 million for the nine months ended September 30, 2015.

 

RESEARCH AND DEVELOPMENT. Research and development expenses decreased by approximately $0.6 million, or 11%, during the nine months ended September 30, 2016 to $5.1 million from $5.7 million for the nine months ended September 30, 2015. The major changes to research and development expenses are as follows:

 

a) Salaries and benefits attributable to research and development decreased by approximately $1.3 million to $1.6 million for the nine months ended September 30, 2016 compared to $2.9 million for the nine months ended September 30, 2015 primarily due to the following: a decrease in salaries to $1.2 million for the nine months ended September 30, 2016 compared to $1.5 million for the nine months ended September 30, 2015; a decrease in severance to $0 for the nine months ended September 30, 2016 compared to $0.1 million for the nine months ended September 30, 2015; a decrease in stock compensation expense to $0.2 million for the nine months ended September 30, 2016 compared to $0.8 million for the nine months ended September 30, 2015; and a decrease in restricted stock expense to approximately $15,000 for the nine months ended September 30, 2016 compared to $0.2 million for the nine months ended September 30, 2015;

 

b) License amortization expense attributable to research and development increased by approximately $0.5 million to $0.5 million for the nine months ended September 30, 2016 compared to $0 for the nine months ended September 30, 2015 related to the patents acquired from Atmel Corporation;

 

c) Mask expense increased by approximately $0.6 million to $0.6 million for the nine months ended September 30, 2016 compared to $0 for the nine months ended September 30, 2015 related to the new product introduction programs;

 

c) Research and development manufacturing labor expense increased by approximately $0.4 million to $0.4 million for the nine months ended September 30, 2016 compared to $0 for the nine months ended September 30, 2015;

 

d) Lab and material expense decreased by approximately $0.9 million to $1.0 million for the nine months ended September 30, 2016 compared to $1.9 million for the nine months ended September 30, 2015;

 

b) Consulting expense attributable to research and development increased by approximately $0.2 million to $0.4 million for the nine months ended September 30, 2016 compared to $0.2 million for the nine months ended September 30, 2015; and

 

d) Travel expense decreased by approximately $0.1 million to $0.2 million for the nine months ended September 30, 2016 compared to $0.3 million for the nine months ended September 30, 2015 primarily due to offsite management of research and development activities.

 

OTHER INCOME (EXPENSE), NET.

 

Debt issuance expense decreased from $0.8 million for the nine months ended September 30, 2015 to $0.5 for the nine months ended September 30, 2016, primarily due to the offering of the Notes completed in April 2015 and the decreased balance of debt outstanding.

 

Gain or loss on change in warrant liability decreased from a $5.0 million gain for the nine months ended September 30, 2015 to approximately $0.9 million loss for the nine months ended September 30, 2016, due to the offering of the Notes completed in April 2015 and the decrease in stock price in 2015 and increase in stock price in 2016.

 

Accretion on convertible notes expense decreased from $7.2 million for the nine months ended September 30, 2015 to approximately $1.3 million for the nine months ended September 30, 2016 due to the offering of the Notes completed in April 2015.

 

Interest expense, net, decreased to approximately $12,000 for the nine months ended September 30, 2016 as compared to expense of $0.4 million for the nine months ended September 30, 2015, primarily due to the interest expense associated with the offering of the Notes completed in April 2015.

 

NET LOSS. Net loss from continuing operations was $22.1 million for the nine months ended September 30, 2016, as compared to a net loss from continuing operations of $22.7 million for the nine months ended September 30, 2015. Loss on discontinued operations was $0 for the nine months ended September 30, 2016, as compared to a loss on discontinued operations of $8.7 million for the nine months ended September 30, 2015. Net loss was $22.1 million for the nine months ended September 30, 2016, as compared to a net loss of $31.5 million for the nine months ended September 30, 2015.

 

 

Comparison of the three months ending September 30, 2016 and 2015

 

REVENUES. Revenues were $0.9 million for the three months ended September 30, 2016 as compared to $1.5 million for the three months ended September 30, 2015. Revenues for the three months ended September 30, 2016 and 2015 were mainly comprised of sales of XTouch sensors.

 

COST OF REVENUES. Cost of revenues include all direct expenses associated with the delivery of services and costs of manufacturing including internal labor costs and materials. Cost of revenues were $3.2 million for the three months ended September 30, 2016 and $4.7 million for the three months ended September 30, 2015. The major changes to cost of revenues are as follows:

 

a) Materials and chemicals decreased by approximately $0.5 million to $0.6 million for the three months ended September 30, 2016 compared to $1.1 million for the three months ended September 30, 2015;

 

b) Warranty expense decreased by approximately $0.4 million to approximately $48,000 for the three months ended September 30, 2016 compared to $0.4 million for the three months ended September 30, 2015;

 

c) Facility expense decreased by approximately $0.2 million to $0.3 million for the three months September 30, 2016 compared to $0.5 million for the three months ended September 30, 2015;

 

d) Depreciation and amortization expense decreased by approximately $0.3 million to $0.9 million for the three months ended September 30, 2016 compared to $1.2 million for the three months ended September 30, 2015;

 

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and administrative expenses increased by 12% or approximately $0.2 million, to $1.9 million for the three months ended September 30, 2016 from $1.7 million for the three months ended September 30, 2015. The major changes to selling, general and administrative expenses are as follows:

 

a) Legal expense increased by approximately $0.2 million to $0.3 million for the three months ended September 30, 2016 compared to approximately $0.1 million for the three months ended September 30, 2015;

 

b) Travel expense expense increased by approximately $64,000 to approximately $128,000 for the three months ended September 30, 2016 compared to approximately $64,000 for the three months ended September 30, 2015 primarily due to increased travel visiting existing and potential customers;

 

c) Depreciation and amortization expense decreased by approximately $41,000 to approximately $55,000 for the three months ended September 30, 2016 compared to $0.1 million for the three months ended September 30, 2015.

 

RESEARCH AND DEVELOPMENT. Research and development expenses increased by approximately $1.6 million, or 107%, during the three months ended September 30, 2016 to $3.1 million from $1.5 million for the three months ended September 30, 2015. The major changes to research and development expenses are as follows:

 

a) Salaries and benefits attributable to research and development decreased by approximately $0.2 million to $0.6 million for the three months ended September 30, 2016 compared to $0.8 million for the three months ended September 30, 2015 primarily due to the following: a decreased in stock compensation expense to approximately $43,000 for the three months ended September 30, 2016 compared to $0.2 million for the three months ended September 30, 2015;

 

b) Lab expense increased by approximately $0.2 million to $0.5 million for the three months ended September 30, 2016 compared to $0.3 million for the three months ended September 30, 2015;

 

c) Research and development manufacturing labor expense increased by approximately $0.4 million to $0.4 million for the three months ended September 30, 2016 compared to $0 for the three months ended September 30, 2015;

 

d) License amortization expense increased by approximately $0.5 million to $0.5 million for the three months ended September 30, 2016 compared to $0 for the three months ended September 30, 2015; and

 

e) Mask expense increased by approximately $0.6 to $0.6 million for the three months ended September 30, 2016 compared to $0 for the three months ended September 30, 2015.

 

OTHER INCOME (EXPENSE), NET.

 

Debt issuance expense decreased to $0 for the three months ended September 30, 2015 compared to $0.5 for the three months ended September 30, 2015 due to the offering of Notes completed in April 2015.

 

Gain or loss on change in warrant liability decreased from a gain of $1.1 for the three months ended September 30, 2015 to a loss of approximately $0.2 million for the three months ended September 30, 2016, primarily due to the offering of the Notes completed in April 2015 and the decrease in stock price in 2015 and increase in stock price in 2016.

 

 

Accretion on convertible notes expense decreased from $4.0 for the three months ended September 30, 2015 to approximately $0 for the three months ended September 30, 2016 due to the offering of the Notes completed in April 2015 being fully repaid during 2016.

 

Interest expense, net, decreased to an expense of approximately $3,000 for the three months ended September 30, 2016 as compared from an expense of $0.2 million for the three months ended September 30, 2015, primarily due to the decreased interest expense associated with the offering of Notes completed in April 2015.

 

NET LOSS. Net loss was $7.6 million for the three months ended September 30, 2016, as compared to a net loss from continuing operations of $10.0 million for the three months ended September 30, 2015.

 

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, including through further offerings of our debt and equity securities. On April 16, 2015, we sold $15 million in principal amount of our Senior Secured Convertible Promissory Notes. As of September 30, 2016 the Notes have been fully repaid. On November 30, 2015, we sold 9,625,871 shares for net proceeds of approximately $7.2 million. On June 2, 2016, we sold 6,152,500 shares for net proceeds of approximately $8.4 million. In addition, we received cash proceeds of $2.4 million in connection with warrant exercises in the first half of 2016, and as we have approximately 9.5 million warrants outstanding, it is possible that additional cash proceeds could be received as a result of the exercise of such warrants. We expect the proceeds from the sale of our common stock, together with our cash on hand, to support our operations through December 31, 2016. Furthermore, as noted above in Note 11 – Subsequent Events to our financial statements on October 24, 2016, we entered into a two year $2.5 million loan and security agreement with Western Alliance Bank where we can borrow up to 90% of eligible accounts receivable at an interest rate of prime plus 1.25%. Based on the proceeds raised from the sale of our common stock, potential borrowing on our loan agreement, possible warrant exercises and our cash on hand, we expect to support our operations over the next 12 months.

 

Operating Activities

 

Cash used in operating activities during the nine months ended September 30, 2016 was $12.9 million as compared to cash used in operating activities during the nine months ended September 30, 2015 of $13.7 million. Cash used in operating activities are primarily due to net loss in operations.

 

Investing Activities

 

Cash used for investing activities during the nine months ended September 30, 2016 was $0.3 million as compared to $14.6 million of cash used for the nine months ended September 30, 2015. The use of cash for investing activities during the nine months ended September 30, 2016 was related to purchases of equipment. The use of cash for investing activities during the nine months ended September 30, 2015 was primarily attributable to the purchase of prepaid licenses.

 

Investing Activities

 

Historically, we have financed our operating and investing activities primarily from the proceeds of private placements and public offerings of common stock, convertible investor notes, and a preferred stock offering. However, in 2015 the Company began recording revenue from shipments and expects this to continue in the future.

 

The total net cash provided by financing activities was $12.0 million for the nine months ended September 30, 2016, which was comprised of proceeds from issuance of common stock of $8.4 million, $2.4 million from the exercise of warrants, $4.1 million of release of restricted cash offset by $2.9 million of payments on notes payable.

 

The total net cash provided by financing activities was $6.8 million for the nine months ended September 30, 2015, which was comprised of increase of $6.0 million in cash restricted for note payable, $0.1 million of net proceeds from the exercise of stock options and $13.2 million in net proceeds from the issuance of a convertible note, less debt issuance costs offset by $0.5 million of payments on notes payable.

 

 

Working Capital

 

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. In the second quarter of 2016, we received $2.4 million from exercise of warrants. On June 2, 2016, we sold 6,152,500 shares for net proceeds of approximately $8.4 million. We expect the proceeds from the exercise of warrants, proceeds from our sale of shares and our revenue shipments, together with our cash on hand, and potential borrowings under our loan agreement to support our operations over the next 12 months.

 

As of September 30, 2016, we had a cash balance of approximately $6.5 million and working capital of $8.5 million.

 

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

 

Not applicable.

 

ITEM 4. CONTROLS AND PROCEDURES.

 

Disclosure Controls and Procedures

 

As of September 30, 2016, 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 September 30, 2016, 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

 

Securities and Exchange Commission Complaint against former Officers of the Company

 

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 our InTouch™ Sensors. The Company cooperated fully with the SEC regarding this non-public, fact-finding inquiry, which resulted in a complaint filed by the SEC on March 9, 2016 naming the Company and two of the Company’s former executive officers as defendants. The U.S. District Court for the Southern District of Texas on March 16, 2016 signed a final judgment, providing for, among other things, a civil penalty in the amount of $750,000 on this complaint pursuant to our consent (the “Final Judgment”), which the Company gave without admitting or denying the allegations of the SEC’s complaint.

 

The allegations of the SEC in this complaint against the two former executive officers, Reed Killion and Jeffrey Tomz, who were respectively the Chief Executive Officer and Chief Financial Officer of the Company during the relevant periods of time at issue in the SEC’s complaint, include that they made more than $2 million in personal profits from selling their own shares of the Company’s common stock following disclosures regarding the Company’s agreement related to our InTouch™ Sensors. The Company’s Amended and Restated Bylaws contain provisions regarding indemnification and advancement of expenses actually and reasonably incurred by the Company’s officers in connection with civil, criminal, administrative or investigative matters provided that such officers acted in good faith and in a manner such officers reasonably believed to be in or not opposed to the best interests of the Company, and, with respect to any criminal action or proceeding, had no reason or cause to believe such officer’s conduct was unlawful. The advancement of expenses is expressly conditioned upon receipt of an undertaking by the officer to repay all such amounts so advanced in the event that it shall ultimately be determined that the officer is not entitled to be indemnified by the Company.

 

Complaint by former Officers of the Company for Advancement of Expenses

 

The Company, or its insurance company, has paid as agreed all invoices for all years through the end of 2015 for the defense of Messrs. Killion and Tomz in the investigation by the SEC that resulted in the filing of the complaint against them by the SEC. A portion of payments for 2016 invoices have has also been made, but the Company has disputed other 2016 invoices totaling approximately $265,000 as containing expenses that have not been reasonably incurred by Messrs. Killion and Tomz in defense of the SEC’s complaint. Through the course of 2016, the Company has been in discussions with counsel to Messrs. Killion and Tomz of resolving counsels’ charges on these invoices. Notwithstanding those discussions, on August 22, 2016, Messrs. Killion and Tomz filed an action against the Company for advancement of expenses in the Delaware Chancery Court. The Company has contested the claims made by Messrs. Killion and Tomz that it has not advanced expenses reasonably incurred by them in the underlying action brought by the SEC. In October 2016, the Chancery Court appointed a former Vice Chancellor of the Delaware Chancery Court to act as a Special Master to determine whether expenses are reasonably incurred to the extent that the Company and Messrs. Killion and Tomz are not capable to resolve the dispute concerning whether expenses have been reasonably incurred without the assistance of the judicial process.

 

Intel Corporation

 

The Company’s Capacity License Agreement with Intel, as amended by the Amended Capacity License Agreement, provided for a payment of a commission to Intel of ten percent of gross revenue from the sale InTouch™ Sensors jointly developed by the Company and Kodak. In March 2016, Intel requested that the Company refund over time the $5 million paid to the Company in May 2013 pursuant to the terms of the Capacity License Agreement. The Company declined to refund the money as the payment was not refundable under the Amended Capacity License Agreement or otherwise due to Intel. The agreement with Intel pertained to a technology that the Company abandoned when it terminated its joint development agreement with Kodak in 2015. Intel requested that the refund be accomplished by the Company paying Intel commissions on XTouch sensor revenue until the $5 million was refunded. The Company responded that no commissions are owed under the Amended Capacity License Agreement because it is not selling the abandoned InTouch™ Sensors or otherwise using the technology covered by the Amended Capacity License Agreement in its current products. The only products the Company has recognized revenue on are based on the XTouch sensor technology acquired from Atmel Corporation and CIT Technology Ltd. in April 2015. No litigation or other legal proceeding has commenced on Intel’s request. The Company is engaged in discussions with Intel regarding formulation of a mutually agreeable commercial relationship. While it is not possible to predict the outcome of these discussions with certainty at the present time, if the Company is unable to reach an acceptable commercial relationship, it intends to vigorously contest any claim that Intel might make.

 

ITEM 1A. RISK FACTORS

 

We incorporate herein by reference the risk factors included in the 2015 Form 10-K, which we filed with the Securities and Exchange Commission on March 30, 2016. The following are risks set forth in our Annual Report on Form 10-K which are reiterated and updated below as well as certain new risks related to our business.

 

 

Expansion into new markets may increase the complexity of our business, cause us to increase our research and development expenses to develop new products and technologies or cause our capital expenditures to increase, and if we are unable to successfully adapt our business processes and product offerings as required by these new markets, our ability to grow will be adversely affected.

 

As we expand our product lines to sell into new markets, such as automotive, the overall complexity of our business may increase at an accelerated rate and we may become subject to different market dynamics. These dynamics may include, among other things, different demand volume, seasonality, product requirements, sales channels, and warranty and return policies. In addition, expansion into other markets may result in increases in research and development expenses and substantial investments in manufacturing capability or technology enhancements. If we fail to successfully expand into new markets with products that we do not currently offer, we may lose business to our competitors or new entrants who offer these products.

 

If we fail to develop and introduce new or enhanced solutions on a timely basis, our ability to attract and retain customers could be impaired, and our revenues and competitive position may be harmed.

 

The markets for our products are characterized by rapid technological change, frequent new product introductions, changes in customer requirements and evolving industry standards, all with an underlying pressure to reduce cost and meet stringent reliability and qualification requirements. In order to compete effectively, we must continually introduce new products or enhance existing products and accurately anticipate customer requirements for new and upgraded products. The introduction of new products by our competitors, the market acceptance of solutions based on new or alternative technologies, or the emergence of new industry standards could render our existing or future solutions obsolete. Our failure to anticipate or timely develop new or enhanced solutions or technologies in response to technological shifts or changes in customer requirements could result in decreased revenues and an increase in design wins by our competitors.

 

New product development or the enhancement of existing products is subject to a number of risks and uncertainties. We may experience difficulties with solution design, manufacturing or otherwise that could delay or prevent the introduction of new or enhanced solutions. Alternatively, even if technical engineering hurdles can be overcome, we must successfully anticipate customer requirements regarding features and performance, the new or enhanced products must be competitively priced, and they must become available during the window of time when customers are ready to purchase our solutions.

 

Even after new or enhanced products are developed, we must be able to successfully bring them to market. The success of new product introductions depends on a number of factors including, but not limited to, timely and successful product development, market acceptance, our ability to manage the risks associated with new product production ramp-up issues, the effective management of purchase commitments and inventory levels in line with anticipated product demand, the availability of products in appropriate quantities and costs to meet anticipated demand, and the risk that new products may have quality or other defects in the early stages of introduction. Ramping of production capacity also entails risks of delays which can limit our ability to realize the full benefit of new product introduction. We cannot assure you that we will be able to identify, develop, manufacture, market or support new or enhanced products successfully, if at all, or on a timely basis. Accordingly, we cannot determine in advance the ultimate effect of new product introductions and transitions, and any failure to manage new product introduction risks could adversely affect our revenues and therefore our business.

 

We are a company with a limited operating history, our future profitability is uncertain and we anticipate future losses and negative cash flow, which may limit or delay our ability to become profitable.

 

We are a company with a limited operating history and little revenues to date. We may never be able to produce material revenues or operate on a profitable basis. As a result, we have incurred losses since our inception and expect to experience operating losses and negative cash flow for the foreseeable future. As of September 30, 2016, we had an accumulated total deficit of $171.3 million.

 

We anticipate our losses will continue to increase from current levels because we expect to incur additional costs and expenses related to prototype development, consulting costs, laboratory development costs, marketing and other promotional activities, the addition of engineering and manufacturing personnel, and the continued development of relationships with strategic business partners. Moreover, planned products based upon our Performance Engineered Film™ technology may never become commercially viable and thus may never generate any revenues. Even if we find commercially viable applications for our Performance Engineered Film™ technology and materials, we may never recover our research and development expenses.

 

We have had a history of losses and may require additional capital to fund our operations, which capital may not be available on commercially attractive terms or at all.

 

We have experienced substantial net losses in each fiscal period since our inception. These net losses resulted from a lack of substantial revenues and the significant costs incurred in the development and acceptance of our technology. We may in the future require sources of capital in addition to cash on hand to continue operations and to implement our business plan. We project that we have sufficient liquid assets to continue operating for at least the next twelve months. However, if our operations do not become cash flow positive, we may be forced to seek credit line facilities from financial institutions, equity investments, or debt arrangements. No assurances can be given that we will be successful in obtaining such additional financing on reasonable terms, or at all. If adequate funds are not available when needed on acceptable terms, or at all, we may be unable to adequately fund our business plan, which could have a negative effect on our business, results of operations, and financial condition.

 

 

Restrictive covenants under our credit facility with Western Alliance Bank may adversely affect our operations.

 

If we utilize our loan and security agreement with Western Alliance Bank, it contains a number of restrictive covenants that will impose significant operating and financial restrictions on our ability to, without prior written consent from Western Alliance Bank:

 

	●	Convey, sell, lease, transfer or otherwise dispose of or permit any of the Company or its subsidiaries to transfer, all or any part of any of their business or property, other than: (i) transfers of inventory in the ordinary course of business; (ii) transfers of non-exclusive licenses and similar arrangements for the use of the property of the Company or its subsidiaries in the ordinary course of business; or (iii) transfers of worn-out or obsolete equipment which was not financed by Western Alliance Bank;
	●	Merge or consolidate, or permit any of the Company or its subsidiaries to merge or consolidate, with or into any other business organization, or acquire, or permit any of their subsidiaries to acquire, all or substantially all of the capital stock or property of another person or suffer or permit a change in control;
	●	Create, incur, assume or be or remain liable with respect to any indebtedness, or permit any of their subsidiaries so to do, other than indebtedness permitted under the loan and security agreement with Western Alliance Bank;
	●	Create, incur, assume or suffer to exist any lien with respect to any of the property of either of them (including without limitation, their intellectual property), other than liens permitted under the loan and security agreement with Western Alliance Bank;
	●	Pay any dividends or make any other distribution or payment on account of or in redemption, retirement or purchase of any capital stock, or permit any of their subsidiaries to do so other than as permitted under the loan and security agreement with Western Alliance Bank;
	●	Directly or indirectly acquire or own, or make any investment in or to any person, or permit any of their subsidiaries so to do, other than investments permitted under the loan and security agreement with Western Alliance Bank;
	●	Make or contract to make, without Western Alliance Bank’s prior written consent, capital expenditures (including leasehold improvements) or incur liability for rentals of property (including both real and personal property) in an aggregate amount in any fiscal year in excess of $500,000; and
	●	Make any material changes to the Company’s organizational structure or identity.

 

We have a significant number of outstanding warrants and options, and future sales of the underlying shares of common stock could adversely affect the market price of our common stock.

 

As of September 30, 2016, we had outstanding warrants and options exercisable for an aggregate of 11,675,251 shares of common stock at a weighted average exercise price of $2.31 per share. Upon exercise of these warrants or options, we would issue additional shares of our stock. As a result, our current stockholders as a group would own a substantially smaller interest in us and may have less influence on our management and policies than they now have. Furthermore, the holders may sell these shares in the public markets from time to time, without limitations on the timing, amount or method of sale. As our stock price rises, the holders may exercise more of their warrants and options and sell a large number of shares. This could cause the market price of our common stock to decline.

 

In addition, warrants covering 9,625,871 shares which were issued in November 2015 have an exercise price of $1.50 per share and have a term of five years from the date of issuance. In the second quarter of 2016, 1,595,000 warrants were exercised and as of September 30, 2016, 8,030,871 of such warrants are still outstanding. The exercise price of the warrants and the number of shares for which the warrants are exercisable are subject to certain adjustments if we issue or sell additional shares of common stock or common stock equivalents at a price per share less than the exercise price then in effect, or without consideration. Notwithstanding the foregoing, there will be no adjustment to the exercise price of these warrants or number of warrant shares issuable upon exercise in connection with the issuance of common stock upon Board of Director-approved employee benefit plans or upon the conversion, exercise or payment of certain outstanding, excluded securities.

 

We may be required to raise additional financing by issuing new securities with terms or rights superior to those of our existing stockholders, which could adversely affect the market price of our shares of common stock and our business.

 

We may require additional financing to fund future operations, including expansion in current and new markets, development and acquisition, capital costs and the costs of any necessary implementation of technological innovations or alternative technologies. We may not be able to obtain financing on favorable terms, if at all. If we raise additional funds by issuing equity securities, the percentage ownership of our current stockholders will be reduced, and the holders of the new equity securities may have rights superior to those of the holders of shares of common stock, which could adversely affect the market price and the voting power of shares of our common stock. If we raise additional funds by issuing debt securities, the holders of these debt securities would similarly have some rights senior to those of the holders of shares of common stock, and the terms of these debt securities could impose restrictions on operations and create a significant interest expense for us which could have a materially adverse effect on our business.

 

 

The market price of our common stock has been volatile, and the value of stockholders’ investments could decline significantly.

 

The trading price for our common stock has been, and may continue to be, volatile. The price at which our common stock trades depends upon a number of factors, many of which are beyond our control. These factors include our historical and anticipated operating results, our financial situation, announcements of technological innovations or new products by us or our competitors, customer and vendor relationships, our ability or inability to raise the additional capital we may need and the terms on which we raise it, changes in earnings estimates by analysts and general market and economic conditions. Further, broad market fluctuations may lower the market price of our common stock and affect our trading volume.

 

We may not be able to successfully integrate the production of the XTouch Touch Sensors into our ongoing business operations, which may result in our inability to fully realize the intended benefits of the asset acquisition and license transactions, or may disrupt our current operations, which could have a material adverse effect on our business, financial position and/or results of operations.

 

We are in the process of integrating the production of the XTouch Touch Sensors into our business, and this process may absorb significant management attention, produce unforeseen operating difficulties and expenditures and may not produce the favorable business and market opportunities the asset acquisition and license transactions were intended to provide. If we fail to successfully integrate the XTouch business into our business, our business, financial position and results of operations could be materially adversely affected.

 

Provisions in our Amended and Restated Bylaws provide for indemnification of officers and directors in certain circumstances, which could require us to direct funds away from our business.

 

Our Amended and Restated Bylaws contain provisions regarding indemnification and advancement of expenses actually and reasonably incurred by any person who is or was a party to a threatened, pending, or completed civil, criminal, administrative or investigative matter by reason of the fact that such person is or was a director, officer, employee, or agent of the Company, provided that such person acted in good faith and in a manner he or she reasonably believed to be in or not opposed to the best interests of the Company, and, with respect to any criminal action or proceeding, had no reason or cause to believe his or her conduct was unlawful. The advancement of expenses is expressly conditioned upon receipt of an undertaking by the director, officer, employee, or agent to repay all such amounts so advanced in the event that it shall ultimately be determined that he or she is not entitled to be indemnified by the Company. Funds so advanced or paid in fulfillment of our indemnification obligations (including satisfaction of defense costs, judgments, fines and expenses) may be funds we need for the operation and growth of our business.

 

ITEM 6. EXHIBITS.

 

Exhibit No.		Description of Document
10.1		Loan and Security Agreement by and between Uni-Pixel, Inc., Uni-Pixel Displays, Inc., and Western Alliance Bank, dated October 18, 2016 and entered into on October 24, 2016.
31.1		Certification of the Chief Executive Officer and Principal Executive Officer of Uni-Pixel, Inc.,Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (2)
31.2		Certification of the Chief Financial Offer of Uni-Pixel, Inc., pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (2)
32.1		Certification of the Chief Executive Officer and Principal Executive Officer of Uni-Pixel, Inc.,Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (2) (3)
32.2		Certification of the Chief Financial Offer of Uni-Pixel, Inc., pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (2) (3)

 

(1) Filed herewith. Previously filed as an exhibit to our Form 8-K, filed on October 28, 2016 and re-filed herewith to correct a typographical error in the previously filed exhibit.

(2) Filed herewith

(3) 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.

 

 

SIGNATURES

 

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.
Date: November 10, 2016	By:	/s/ Jeff A. Hawthorne
		Jeff A. Hawthorne, Chief Executive Officer and President
	By:	/s/ Christine A. Russell
		Christine A. Russell, Chief Financial Officer