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 March 31, 2017

 

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 May 5, 2017, the issuer had 59,612,116 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)
		Emerging growth company [  ]

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. [  ]

 

 

 

TABLE OF CONTENTS

 

Part I.	Financial Information		3
Item 1.	Condensed Consolidated Financial Statements		3
	Condensed Consolidated Balance Sheets March 31, 2017 (unaudited) and December 31, 2016		3
	Condensed Consolidated Statements of Operations Three months ended March 31, 2017 (unaudited) and March 31, 2016 (unaudited)		4
	Condensed Consolidated Statements of Cash Flows Three months ended March 31, 2017 (unaudited) and March 31, 2016 (unaudited)		5
	Notes to Unaudited Condensed Consolidated Financial Statements		6
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		17
Item 3.	Quantitative and Qualitative Disclosures About Market Risk		20
Item 4.	Controls and Procedures		20
Part II.	Other Information		21
Item 1.	Legal Proceedings		21
Item 1A.	Risk Factors		21
Item 6.	Exhibits		26

 

 

PART I - FINANCIAL INFORMATION

 

ITEM 1. FINANCIAL STATEMENTS.

 

Uni-Pixel, Inc.

Condensed Consolidated Balance Sheets

(In thousands, except per share data)

 

		March 31, 2017				December 31, 2016
		(Unaudited)				(Audited)
ASSETS
Current assets
Cash and cash equivalents		$	5,990			$	1,558
Account receivable, net			1,014				1,087
Inventory			963				765
Prepaid licenses, net			4,366				4,635
Prepaid expenses			394				359
Total current assets			12,727				8,404
Property and equipment, net			1,151				1,115
Other long-term assets			144				132
Prepaid licenses, net of current portion			—				729
Total assets		$	14,022			$	10,380
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities
Accounts payable		$	2,870			$	3,486
Accrued liabilities			1,225				1,101
Derivative liability			2,055				658
Total current liabilities			6,150				5,245
Long term liabilities			327				350
Long term debt			724				809
Total liabilities			7,201				6,404
Commitments and contingencies			—				—
Redeemable convertible preferred stock, 10,000,000 shares authorized; 3,000 shares issued and outstanding			625				—
Shareholders’ equity
Common stock, $0.001 par value; 100,000,000 shares authorized, 55,724,162 shares issued and outstanding at March 31, 2017 and 45,122,841 shares issued and outstanding at December 31, 2016			56				45
Additional paid-in capital			192,455				182,558
Accumulated deficit			(186,315	)			(178,627	)
Total shareholders’ equity			6,196				3,976
Total liabilities and shareholders’ equity		$	14,022			$	10,380

 

The accompanying notes are an integral part of these consolidated financial statements.

 

 

Uni-Pixel, Inc.

Condensed Consolidated Statements of Operations

(In thousands, expect per share data)

(Unaudited)

 

		Three Months Ended March 31,
		2017				2016
Revenue		$	1,297			$	850
Cost of revenues			4,340				4,250
Gross margin			(3,043	)			(3,400	)
Selling, general and administrative expenses			1,972				1,852
Research and development			2,869				927
Operating loss			(7,884	)			(6,179	)
Other income (expense)
Amortization of debt issuance costs			(63	)			(526	)
Gain (loss) on change in warrant liability			841				(407	)
Accretion of discount on convertible notes			—				(1,291	)
Interest expense			(20	)			(10	)
Other income (expense), net			758				(2,234	)
Net loss			(7,126	)			(8,413	)
Deemed dividend – accretion on Series A-1 preferred stock			(562	)			—
Net loss attributable to common shareholders		$	(7,688	)		$	(8,413	)
Per share information
Net loss attributable to common shareholders- basic		$	(0.15	)		$	(0.24	)
Net loss attributable to common shareholders- diluted		$	(0.15	)		$	(0.24	)
Weighted average number of basic common shares outstanding			49,665,275				35,797,409
Weighted average number of diluted common shares outstanding			49,665,275				35,797,409

 

See accompanying notes to these unaudited condensed consolidated financial statements.

 

 

Uni-Pixel, Inc.

Condensed Consolidated Statements of Cash Flows

(In thousands, except for share data)

(Unaudited)

 

		Three Months Ended March 31,
		2017				2016
Cash flows from operating activities
Net loss		$	(7,126	)		$	(8,413	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization			1,202				1,280
Restricted stock issuance			259				302
Stock compensation expense			105				167
Amortization of debt issuance costs			63				526
Accretion of discount on convertible note			—				1,291
Net (decrease) increase in fair value of derivative liabilities			(841	)			407
Change in operating assets and liabilities:
Decrease (increase) in accounts receivable			74				(392	)
(Increase) decrease in inventory			(198	)			61
(Increase) decrease in prepaid assets and other current assets			(47	)			219
(Decrease) increase in accounts payable			(615	)			393
Decrease in long-term liabilities			(22	)			(57	)
Decrease in accrued expenses and other liabilities			(55	)			(109	)
Net cash used in operating activities			(7,201	)			(4,325	)
Cash flows from investing activities
Purchase of property and equipment			(59	)			(149	)
Net cash used in investing activities			(59	)			(149	)
Cash flows from financing activities
Decrease in cash restricted for convertible notes payable			—				4,098
Proceeds from issuance of common stock, net			9,083				—
Proceeds from redeemable convertible preferred stock and warrants issued, net			2,698				—
Payments on capital lease			(3	)			—
Payments on long-term debt			(86	)			—
Payments on note payable			—				(2,417	)
Net cash provided by financing activities			11,692				1,681
Net increase (decrease) in cash and cash equivalents			4,432				(2,793	)
Cash and cash equivalents, beginning of period			1,558				7,618
Cash and cash equivalents, end of period		$	5,990			$	4,825
Supplemental disclosures of cash flow information:
Cash paid for interest		$	17			$	8
Cash paid for income taxes		$	—			$	—
Supplemental disclosures of non-cash financing information:
Issuance of common stock to convert notes and interest		$	—			$	1,675
Deemed dividend – accretion on Series A-1 preferred stock			562				—
Beneficial conversion feature assigned to equity		$	460			$	—

 

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 (“Common Stock”), 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 March 31, 2017, Uni-Pixel had accumulated a total deficit of $186.3 million from operations in pursuit of these objectives.

 

As of March 31, 2017, we had cash and cash equivalents of $6.0 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. We have historically financed our operations primarily through the issuance of equity and debt securities and by relying on other commercial financing. Until revenue begins to increase on our products to support our operations we will continue to be highly dependent on financing from third parties. On January 20, 2017, the Company completed the sale of $3 million in convertible, redeemable Preferred shares. The fixed conversion price of the Preferred shares is set at $1.50, subject to potential adjustments which went into effect on April 20, 2017 (note 6). On February 15, 2017, the Company completed a public offering of 10,530,000 shares of Common Stock, raising net proceeds of $9.1 million. Barring unanticipated expenses, we expect the proceeds from these offerings, together with our cash on hand and collaborative agreements with corporate partners, to support our operations through May 11, 2018.

 

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, 2016, filed with the Securities and Exchange Commission on March 30, 2017 (the “2016 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 three months ended March 31, 2017 compared to what was previously disclosed in the 2016 Form 10-K. The consolidated financial information as of December 31, 2016 included herein has been derived from the Company’s audited consolidated financial statements as of, and for the fiscal year ended, December 31, 2016.

 

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.

 

Reclassification

 

Certain prior year amounts have been reclassified to conform to the current year presentation. The reclassification included reclassifying the royalty payable account to prepaid licenses.

 

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 March 31, 2017 and December 31, 2016. We have not incurred losses related to these deposits.

 

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 $1.0 million and $1.1 million accounts receivable at March 31, 2017 and December 31, 2016, respectively. We had $0 reserved as uncollectible at March 31, 2017 and approximately $5,000 at December 31, 2016.

 

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.

 

 

Series A-1 preferred stock

 

The Series A-1 Preferred Stock contain a substantive conversion option, are redeemable and may convert into a variable number of shares of Common Stock. As a result, under U.S GAAP, we have classified the Series A-1 Preferred Stock within mezzanine equity in our consolidated balance sheet.

 

Warranty expense

 

Warranty on the products is for one year. The Company can repair, replace the product or refund the cost of the product to the customer. Warranty is primarily recorded within the first month from shipment. The Company re-evaluates its estimates at the end of each quarter to assess the adequacy of its recorded warranty liability and adjusts that amount if necessary. The warranty liability is recorded in the accrued liabilities of the consolidated balance sheet. We have approximately $0.2 million and $0.3 million warranty liability balances at March 31, 2017 and December 31, 2016, respectively.

 

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 March 31, 2017, 910,420 restricted stock units and options and warrants to purchase 24,232,107 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 April 2015, the FASB issued ASU No. 2015-03, Interest - Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs (“ASU 2015-03”). The amendments in ASU 2015-03 require that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. The recognition and measurement guidance for debt issuance costs are not affected by the amendments in ASU 2015-03. ASU 2015-03 is effective for us on January 1, 2016. We have adopted ASU 2015-03.

 

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

 

Leases

 

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 October 16, 2018. 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. In December 2016, the Company entered into an operating equipment lease that will begin in March 2017 through February 2020. Future minimum operating lease commitments as of March 31, 2017, are as follows:

 

Year Ending March 31 (in thousands)
Nine months ending 2017		$	1,037
2018			1,063
2019			281
2020			71
2021			—
2022			—
Operating lease total		$	2,452

 

Future minimum capital lease commitments as of March 31, 2017, are as follows:

 

Year Ending March 31 (in thousands)
Nine months ending 2017		$	31
2018			42
2019			42
2020			3
2021			—
2022			—
Gross capital lease total		$	118
Less: interest			35
Capital lease total		$	83

 

 

Securities and Exchange Commission Complaint and Settlement

 

The Company entered into an agreement with the United States Securities and Exchange Commission (“SEC”) on March 16, 2016 signed a final judgment on a complaint filed by the SEC pursuant to our consent (the “Final Judgment”). Without admitting or denying the allegations of the SEC’s complaint, we consented to the Final Judgment. As of March 31, 2017, the remaining settlement accrual is reflected in current liabilities of $265,000 and $310,000 in long-term liabilities.

 

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 also been made, but the Company has disputed other 2016 invoices 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 was 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 of resolving the dispute concerning whether expenses have been reasonably incurred without the assistance of the judicial process. In November 2016, unresolved and disputed invoices totaling approximately $147,750 in fees incurred in 2016 prior to November 2016 were submitted to the Special Master for a determination whether such expenses were reasonably incurred, The Special Master’s determination is still pending. These are the only current invoices submitted for advancement currently disputed without resolution. There can be no assurance that these are the only invoices that will be disputed as this matter proceeds, and therefore the total amount of disputed invoices remains undeterminable at the present time.

 

Note 4 —Equity, Stock Plan and Warrants

 

Common Stock

 

During the three months ended March 31, 2017, we issued 71,321 shares of Common Stock to employees and directors. We also issued 10,530,000 of Common Stock and received proceeds of $9.1 million, net of issuance costs.

 

During the three months ended March 31, 2016, we issued 57,203 shares of Common Stock for three employees.

 

Restricted Stock

 

Total compensation expense recognized for restricted stock was approximately $0.3 million and $0.3 million for the three months ended March 31, 2017 and March 31, 2016, respectively. The Company has recorded approximately $0.3 million, $14,000 and $4,000 of restricted stock expense in selling, general and administrative expenses, research and development expense and cost of revenue, respectively, for the three months ended March 31, 2017, and approximately $0.3 million of restricted stock expense in selling, general and administrative expenses and approximately $0 in research and development expense for the three months ended March 31, 2016.

 

At March 31, 2017, there was $1.5 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 1.95 years. There were 99,582 shares of restricted stock, net that became vested during the three months ended March 31, 2017.

 

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 5,366,667 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 March 31, 2017, there were 535,635 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 $0.1 million and $0.2 million for the three months ended March 31, 2017 and March 31, 2016, respectively. The Company has recorded approximately $46,000, $41,000 and $18,000 of stock compensation expense in selling, general and administrative expenses, research and development expense and cost of revenue for the three months ended March 31, 2017 and approximately $0.1 million, $0.1 million and $18,000 of stock compensation expense in selling, general and administrative expenses, research and development expense and cost of revenue for the three months ended March 31, 2016.

 

 

A summary of the changes in the total stock options outstanding during the three months ended March 31, 2017 follows:

 

						Weighted
						Average
		Options				Exercise Price
Outstanding and expected to vest, at December 31, 2016			2,181,142			$	5.41
Granted			56,000			$	1.11
Forfeited or expired			(57,000	)		$	2.00
Exercised			—			$	—
Outstanding and expected to vest, at March 31, 2017			2,180,142			$	5.38
Vested and exercisable at March 31, 2017			1,652,483			$	6.61

 

The fair value of the Company’s options was estimated on the date of grant using the Black-Scholes valuation model with the following weighted-average assumptions:

 

		Three Months Ended March 31, 2017				Three Months Ended March 31, 2016
Expected life (years)			5 years				5 years
Interest rate			1.95	%			1.21	%
Dividend yield			—				—
Volatility			97.48	%			94.31	%
Forfeiture rate			—				—
Weighted average fair value of options granted		$	0.80			$	0.39

 

At March 31, 2017, there was $0.5 million of total unrecognized compensation cost related to non-vested stock option awards which is expected to be recognized over a weighted-average period of 1.83 years. There was an approximate 0.1 million, net, increase in the vested options during the three months ended March 31, 2017.

 

Common Stock Warrants

 

As of March 31, 2017, the Company has 22,051,965 Common Stock warrants outstanding with a weighted average exercise price of $1.08 per share. Information regarding outstanding warrants as of March 31, 2017 is as follows:

 

Grant date		Warrants Outstanding				Exercisable				Weighted Exercise Price				Remaining Life (Years)
June 10, 2009			15,796				15,796			$	7.50				2.18
August 31, 2009			24,934				24,934			$	7.50				2.18
October 2, 2009			205,000				205,000			$	5.00				2.58
March 15, 2010			8,337				8,337			$	7.50				2.75
April 5, 2010			930				930			$	7.50				2.75
November 30, 2015 (1)			14,558,468				14,558,468			$	0.95				3.67
January 20, 2017			2,500,000				2,500,000			$	1.50				4.81
February 21, 2017			4,738,500				4,738,500			$	1.00				4.90
Total			22,051,965				22,051,965

 

(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.

 

In January 2017, we issued warrants covering 2,500,000 shares of Common Stock that have an exercise price of $1.50 per share, are exercisable six months after issuance (the “Initial Exercisability Date”) and a term of five years from the Initial Exercisability Date. The exercise price of such warrants are subject to a one-time adjustment on the Initial Exercisability Date to an amount no less than $1.26 per share.

 

In February 2017, we issued warrants covering 4,738,500 shares of Common Stock that are exercisable, have an exercise price of $1.00 per share and have a term of five (5) years from the date of issuance. A holder may not exercise such warrant and we may not issue shares of Common Stock under such warrant if, after giving effect to the exercise or issuance, the holder together with its affiliates would beneficially own in excess of 4.99% of the outstanding shares of our Common Stock.

 

 

Note 5 — Property and Equipment and Inventory

 

A summary of the components of property and equipment at March 31, 2017 and December 31, 2016 (in thousands) are as follows:

 

		Estimated Useful Lives		March 31, 2017				December 31, 2016
Production equipment		3 to 5 years		$	2,399			$	2,120
Research and development equipment		3 to 5 years			3,583				3,583
Leasehold improvements		5 years			23				23
Computer equipment		5 years			98				98
Office equipment		3 to 5 years			20				20
Construction-in-progress					265				303
					6,388				6,147
Accumulated depreciation					(5,237	)			(5,032	)
Property and equipment, net				$	1,151			$	1,115

 

Depreciation and amortization expense of property and equipment for the three months ended March 31, 2017 and March 31, 2016 was approximately $0.2 million and $0.3 million, respectively.

 

A summary of the components of inventory at March 31, 2017 and December 31, 2016 (in thousands):

 

		March 31, 2017				December 31, 2016
Raw materials		$	713			$	447
Work-in-progress			217				305
Finish Goods			33				13
Inventory		$	963			$	765

 

Note 6 – Senior Secured Convertible Notes and Warrants

 

$15 million Convertible Note

 

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 “April 2015 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 April 2015 Warrant issued to that Investor was adjusted for an additional 38,371 shares of Common Stock for a total of 1,189,492 shares of Common Stock issuable upon exercise of the April 2015 Warrants. 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 when the last Convertible Notes issued pursuant to the Securities Purchase Agreement were purchased.

 

As per the terms of the November 2015 equity transaction, the 1,189,492 April 2015 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 and a term of five years from the date of issuance in the exchange. As discussed in Note 6 above, in February 2017 the warrants issued in the exchange the warrants were repriced at an exercise price of $0.95 per share. The exercise price of the warrants and the number of shares of Common Stock 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 (which is now $0.95 per share), or without consideration.

 

As of March 31, 2017, both Investors had been issued an aggregate of 13,984,411 shares of Common Stock when the Investor had converted as of such date $11.6 million of principal and $0.3 million of interest into shares of Common Stock. There was no outstanding balance on these notes at March 31, 2017 and December 31, 2016.

 

The following table summarizes the charges to interest, amortization and other expense, net:

 

		March 31,2017				March 31,2016
Interest expense on convertible notes		$	—			$	8
Accretion of convertible note discount		$	—			$	1,291

 

$3 million Redeemable Convertible Preferred Stock

 

On January 20, 2017, the Company completed the sale of $3 million of Series A-1 Preferred Stock. The shares of Series A-1 Preferred Stock are convertible into one share of Common Stock at a conversion price of $1.50 per share, subject to adjustment for stock splits, stock dividends, stock combinations, recapitalizations or similar events. Each holder also has the additional right after ninety days after issuance of the Series A-1 Preferred Stock to convert the Series A-1 Preferred Stock into shares of Common Stock at that price which is the lower of (i) the conversion price then in effect and (ii) the greater of (A) $0.35 and (B) 93% of the volume weighted average price of the Common Stock on the trading day immediately preceding the time of the delivery or deemed delivery of the applicable conversion notice. As of March 31, 2017, all 3,000 shares of Series A-1 Preferred Stock were outstanding. We also issued warrants covering 2,500,000 shares of Common Stock that have an exercise price of $1.50 per share, are exercisable six months after issuance (the “Initial Exercisability Date”) and a term of five years from the Initial Exercisability Date. The exercise price of such warrants are subject to a one-time adjustment on the Initial Exercisability Date to an amount no less than $1.26 per share. All of the Preferred shares must be fully converted or redeemed within twelve months from closing.

 

 

The Series A-1 Certificate of Designations provides that at any time on or after January 20, 2018, if the Series A-1 Preferred Stock has not yet been converted into shares of our Common Stock, we may be required, at the option of each holder, to redeem the Series A-1 Preferred Stock, in cash, at a redemption price equal to the greater of 125% of the stated value of the shares of Series A-1 Preferred Stock being redeemed and the intrinsic value of the shares of the Common Stock then issuable upon conversion of the shares of Series A-1 Preferred Stock being redeemed. Alternatively, if a triggering event occurs, each holder may require us (in lieu of requiring us to convert as described above) to redeem all or any number of the Series A-1 Preferred Stock, in cash, at a redemption price equal to the greater of (i) 125% of the $1,000 stated value of each such share of Series A-1 Preferred Stock being redeemed and (ii) the intrinsic value of the shares of the Common Stock then issuable upon conversion of such shares of Series A-1 Preferred Stock being redeemed (without regard to any limitations on conversion in the Series A-1 Certificate of Designations). If we did not have the cash necessary to redeem the Series A-1 Preferred Stock, the holder of the Series A-1 Preferred Stock may cancel the redemption and instead have dividends, which are also convertible, on the Series A-1 Preferred Stock increase, and the conversion price of the Series A-1 Preferred Stock adjust.

 

The Company has the option to redeem the Series A-1 Preferred Stock at any time, in cash, at a redemption price equal to the greater of 125% of the stated value of the shares of Series A-1 Preferred Stock being redeemed and the intrinsic value of the shares of the Common Stock then issuable upon conversion of the shares of Series A-1 Preferred Stock being redeemed.

 

The Series A-1 Certificate of Designations contain certain triggering events including but not limited to: (i) the suspension from trading or failure of our Common Stock to be trading or listed (as applicable) on The Nasdaq Capital Market, or one of the New York Stock Exchange, the NYSE MKT, the Nasdaq Global Select Market, or the Nasdaq Global Market, for a period of five consecutive trading days, (ii) our failure to timely deliver shares of Common Stock upon conversion of the Series A-1 Preferred Stock; (iii) our failure to make payments when due under the Series A-1 Certificate of Designations; and (iv) our bankruptcy or insolvency.

 

If a triggering event occurs, each Holder may require us to redeem all or any number of the Series A-1 Preferred Stock, in cash, at a redemption price equal to the greater of (i) 125% of the $1,000 stated value of each such share of Series A-1 Preferred Stock being redeemed and (ii) the intrinsic value of the shares of our Common Stock then issuable upon conversion of such shares of Series A-1 Preferred Stock being redeemed (without regard to any limitations on conversion in the Series A-1 Certificate of Designations).

 

At any time a triggering event has occurred through the earlier of (x) the date of the cure of such triggering event and (y) the 20^th trading day after we have delivered written notice to such Holder of such triggering event, each Holder may also alternatively convert Series A-1 Preferred Stock into shares of our Common Stock at the Triggering Event Conversion Price (as defined below) instead of the Conversion Price, subject to certain beneficial ownership limitations described below. The “Triggering Event Conversion Price” is defined as that price which is defined as that price which is the lower of (i) the Conversion Price then in effect and (ii) the greater of (A) $0.35 and (B) the higher of (I) 85% of the lowest VWAP of our Common Stock on any trading day during the five consecutive trading day period ending and including the trading day immediately preceding the delivery of the applicable conversion notice and (II) $0.35.

 

The Series A-1 Preferred Stock and the Warrants may not be converted or exercised, as applicable, if, after giving effect to such conversion or exercise, as applicable, the holder of the Series A-1 Preferred Stock or Warrant, as applicable, together with its affiliates would beneficially own in excess of 4.99% of our outstanding shares of Common Stock. At each holder’s option, such conversion or exercise blocker may be raised or lowered to any other percentage not in excess of 9.99%.

 

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 $0.8 million. The BCF was included in additional paid in capital. The Company utilized a binomial model in determining the fair market value of the Warrants.

 

At inception, the preferred stock balance and unamortized discount were as follows:

 

Redeemable Convertible Preferred Stock Series A-1		$	3,000
Discount attributable to warrants			(2,238	)
Discount attributable to deferred issuance costs			(302	)
Discount attributable to BCF			(460	)
Carrying amount of Series A-1 Preferred Stock		$	—

 

At March 31, 2017, the preferred stock debt balance (in thousands) and unamortized discount in millions were as follows:

 

Redeemable Convertible Preferred Stock Series A-1		$	3,000
Discount attributable to warrants			(1,771	)
Discount attributable to deferred issuance costs			(239	)
Discount attributable to BCF			(365	)
Carrying amount of Series A-1		$	625

 

The Company amortized $562,000 of discount as a deemed dividend for the three months ended March 31, 2017. On April 24, 2017 6,676 shares of Common Stock were issued in connection with the preferred stock transaction for the conversion of 5 shares of preferred stock of $5,000 at a conversion price of $.749 per share. On May 1, 2017 3,827,939 shares of Common Stock were issued in connection with the preferred stock transaction for the conversion of 1,555 shares of preferred stock of $1,555,000 at a conversion price of $.406 per share. Due to the preferred stock conversion the November 30, 2015 warrants were repriced to $.406. On May 9, 2017, 42,326 shares of Common Stock were issued in connection with the preferred stock transaction for the conversion of 20 shares of preferred stock of $20,000 at a conversion price of $.472 per share.

 

 

Line of Credit

 

On October 24, 2016, Uni-Pixel, Inc. (the “Company”) along with its subsidiary Uni-Pixel Displays, Inc. (together with the Company referred to as the “Borrowers”), entered into a Loan and Security Agreement dated October 18, 2016 (the “Loan Agreement”) with Western Alliance Bank (the “Bank”) through its Bridge Bank division, with credit support provided by the Export-Import Bank of the United States pursuant to the terms of a Borrower Agreement of the Company and a Borrower Agreement of Uni-Pixel Displays, Inc., each dated as of October 24, 2016 (each a “Borrower Agreement” and collectively, the “Borrower Agreements”). The Borrower Agreements are substantially similar in form.

 

Under the terms of the Loan Agreement, the Borrowers may borrow up to $2.5 million on a revolving basis based on a percentage of eligible export-related accounts. This Loan Agreement is for a two-year period ending October 18, 2018. Total borrowings under the line may not exceed 90% of eligible-export related accounts. Borrowings under the line will bear interest at the prime rate plus 1.25 percent. The line is secured by all of the assets of the Borrowers, including intellectual property. We have $0.7 million and $0.8 million line of credit balances at March 31, 2017 and December 31, 2016, respectively.

 

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, XSense, a business formerly within Atmel Corporation and which consists of 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. The fair value of the acquired machinery, parts and equipment was $1.4 million. 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.

 

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, 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 a net value of $810,000 which has been included within prepaid and other current assets on the accompanying balance sheet. 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 $8,438. 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 $59,063. 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).

 

On February 15, 2017, Displays and Atmel and Atmel’s successor, Microchip Technology (Barbados) II Inc., entered into a Letter Agreement Amendment (the “Amendment”) to the Patent License Agreement and the IP License Agreement (collectively with the Patent License Agreement, the “License Agreements”). The Amendment adds an affiliate of Atmel, Microchip Technology (Barbados) II Inc., as a party to the License Agreements. The Amendment also revises the respective License Agreements to provide that the licenses granted under the License Agreements allow for Displays to enter into a non-transferable, non-assignable, non-exclusive, royalty-bearing sublicense solely to General Interface Solution Limited, a Samoa corporation (“GIS”), to make, use offer for sale, sell and import Licensed XSense Products (as defined in the License Agreements), subject to certain terms provided for in the Amendment. Furthermore, the Amendment provides that if a sublicense agreement is in effect at the time that the License Agreements are terminated for any reason, then such sublicense will survive and remain in full force and effect with Atmel having assumed such sublicense agreement.

 

 

The Amendment increases the annual royalty rate for all sales of Licensed XSense Products by the Company under the Patent License Agreement, not including any sublicense arrangement, to 4%. The Amendment also provides that the definition of Sales Price (which is used to calculate the royalty rate) in the Patent License Agreement means the gross revenue recognized by the Company from the sale, use or other disposition of a TouchScreen by the Company. In addition, the Amendment adds that the Company shall pay Atmel a separate royalty rate of 5.7% for any GIS sublicenses, based on the manufacturing costs used by the Company to calculate the royalty payable under its sublicense agreement with GIS (the “Sublicense Price”), provided always that the Sublicense Price shall be reflect an arm’s length transaction between a willing licensor and a willing licensee and be no less than the manufacturing cost incurred by other manufacturers involving the most similar products sold in the same volume in an arms-length transaction, as reasonably determined by Displays and auditable by Atmel. A minimum of 4% of the 5.7% royalty rate owed to Atmel for a sublicense agreement with GIS must be paid in cash, in which case the remaining 1.7% will be paid to Atmel in the Company’s stock or other consideration as mutually agreed upon by the parties. Furthermore, the maximum cumulative annual royalties payable for the GIS sublicense is $13,250,000. Royalties from the GIS sublicense are separate from and do not count toward the minimum annual royalty amount paid for Display’s license under the Patent License Agreement during the Initial Term, the maximum cumulative annual royalties during the Renewal Period (as such term is defined in the Patent License Agreement), nor the calculation of when the Royalty Prepayment has been fully used and credited.

 

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 ten 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 five year term and the subsequent ten 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.

 

On December 21, 2016, Displays entered into the First Amendment (the “Patent Amendment”) to the FLT Patent License Agreement (the “Patent License Agreement”) and the First Amendment (the “IP Amendment”, and collectively with the Patent Amendment, the “Amendments”) to the FLT (Fine Line Technology) Intellectual Property License Agreement (the “IP License Agreement”, and collectively with the Patent License Agreement, the “License Agreements”) with CIT. Displays originally entered into the License Agreements with CIT, as previously disclosed by the Company, on April 16, 2015.

 

The Amendments revise the respective License Agreements to provide that the licenses granted by CIT to Displays for the Licensed FLT Patents (as defined in the Patent License Agreement) and the Licensed FLT IP (as defined in the IP License Agreement) are provided on an exclusive and sublicenseable basis. Notwithstanding the foregoing, such exclusivity to the Licensed FLT Patents and License FLT IP is subject to a license by CIT to CPI Innovation Services Limited for use with non-touchscreens. Furthermore, the Amendments to the License Agreements provide that if a sublicense agreement is in effect at the time that the License Agreements are terminated for any reason then such sublicense will survive and remain in full force and effect, and from and after the effective date of such termination with respect to Displays, the sublicensee party will be deemed to have the rights of Displays under the respective License Agreement on a non-exclusive, non-sublicenseable basis, and will become responsible for complying with the terms and conditions of the respective License Agreement, as amended, pertaining to confidentiality, recordkeeping and auditing.

 

 

The Patent Amendment also revises the definition of sales price (which is used to calculate the royalty to be paid to CIT) in the Patent License Agreement to provide a calculation of the sales price in a sublicense transaction situation. Specifically, sales price is defined in the Patent Amendment to mean (a) gross revenues of Displays recognized from the sale, use or other disposition, but not to sublicensees, of a Licensed FLT Product (as defined in the Patent License Agreement) by Displays (including affiliates of Displays) or (b) the amount used by Displays under its agreement with the relevant sublicensee to calculate the royalty payable to Displays by the relevant sublicensee in respect of Licensed FLT Products manufactured by the sublicensee (the “Sublicense Price”), provided always that the Sublicense Price shall be a bona fides amount reflecting an arm’s length transaction between a willing licensor and a willing licensee.

 

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 has been completed and the process has been transferred to the Colorado Springs facility fiscal 2015.

 

Note 8 — 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				March 31, 2017
Liabilities:
Convertible note derivative liabilities		$	-			$	640			$	-			$	640
Preferred stock derivative liabilities			-				1,415				-				1,415
Total		$	-			$	2,055			$	-			$	2,055

 

														Carrying
		Fair Value Measurements Using Inputs												Amount at
Financial Instruments		Level 1				Level 2				Level 3				December 31, 2016
Liabilities:
Convertible note derivative liabilities		$	-			$	658			$	-			$	658
Total		$	-			$	658			$	-			$	658

 

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 $15 million 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 approximately $18,000 of other expense for the three months ended March 31, 2017 in the accompanying consolidated statements of operations, resulting from the decrease in the fair value of the derivative liability at March 31, 2017 as compared to December 31, 2016. 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.

 

In addition, on January 20, 2017, the Company incurred a derivative liability related to the purchase of warrants for 2,500,000 shares of Common Stock issued in connection with our $3 million redeemable convertible preferred stock. 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 $2.2 million at inception. The Company recognized $0.8 million as a gain for the three months ended March 31, 2017 in the accompanying consolidated statements of operations, resulting from the decrease in the fair value to $1.4 million of the derivative liability at March 31, 2017. 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 9 — Revenue and Credit Concentrations

 

The Company operates in one business segment and uses one measurement of profitability for its business.

 

During the three months ended March 31, 2017 and 2016, revenues by customers (in thousands) with more than 10% of revenue were as follows:

 

		As of March 31, 2017								As of March 31, 2016
		Amount				%				Amount				%
Company A		$	582				45	%		$	-				-	%
Company B			511				39	%			460				54	%
Company C			75				6	%			357				42	%
Total		$	1,186				90	%		$	817				96	%

 

 

As of March 31, 2017 and December 31, 2016 customers with more than 10% of accounts receivables balances (in thousands) were as follows:

 

		As of March 31, 2017								As of December 31, 2016
		Amount				%				Amount				%
Company A		$	491				49	%		$	739				68	%
Company B			333				33	%			121				11	%
Company C			65				6	%			171				16	%
Total		$	889				88	%		$	1,031				95	%

 

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 XSense business and operations with our business and operations, the development of technologies superior to our technologies, the loss of key customers of the XSense products, our inability to achieve cost savings following the acquisition of the XSense business, the imposition of unanticipated liabilities as a result of the acquisition of the XSense 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.

 

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 6 and 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 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 purchase 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 three months ended March 31, 2017, as compared to the critical accounting policies and estimates disclosed in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in our Annual Report on Form 10-K for the year ended December 31, 2016, which was filed with the SEC on March 30, 2017.

 

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

 

Advance payments are deferred until shipment of product has occurred or the service has been rendered.

 

Revenue from licenses and other up-front fees are recognized on a ratable basis over the term of the respective agreement.

 

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

 

Cost of Revenues, Selling, General and Administrative Expenses and Research and Development Expenses: The primary purpose of our facilities in Colorado Springs, Colorado and The Woodlands, Texas and Santa Clara, CA is for manufacturing, to conduct research on the development, testing and delivery of our prototype devices, to pursue the commercialization of our products and general office purposes.

 

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. Forfeitures are recorded when grants are forfeited.

 

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 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 as a liability at their fair value at each reporting period. The value of the derivative 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, bond discount rate, strike price and volatility assumptions to dynamically adjust the payoff of the warrants in the presence of the dilution effect.

 

 

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 three months ending March 31, 2017 and 2016

 

REVENUES. Revenues were $1.3 million for the three months ended March 31, 2017 as compared to $0.9 million for the three months ended March 31, 2016. Revenues for the three months ended March 31, 2017 and March 31, 2016 were mainly comprised of sales of XTouch sensors.

 

COST OF REVENUES. Cost of revenues include all direct and indirect expenses associated with the delivery of sensors including employee related costs, material, chemicals, license amortization, depreciation and facility costs. Cost of revenues were $4.3 million for the three months ended March 31, 2017 and March 31, 2016.

 

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and administrative expenses increased by 6% or approximately $0.1 million, to $2.0 million for the three months ended March 31, 2017 from $1.9 million for the three months ended March 31, 2016. The major changes to selling, general and administrative expenses are as follows:

 

a) Legal expense increased by approximately $0.3 million to $0.6 million for the three months ended March 31, 2017 compared to $0.3 million for the three months ended March 31, 2016;

 

b) Office and computer expense decreased by approximately $0.1 million to $47,000 million for the three months ended March 31, 2017 compared to approximately $0.1 million for the three months ended March 31, 2016;

 

RESEARCH AND DEVELOPMENT. Research and development expenses increased by approximately $2.0 million, or 209%, during the three months ended March 31, 2017 to $2.9 million from $0.9 million for the three months ended March 31, 2016. The major changes to research and development expenses are as follows:

 

a) Salaries and benefits attributable to research and development increased by approximately $0.3 million to $0.8 million for the three months ended March 31, 2017 compared to $0.5 million for the three months ended March 31, 2016 primarily due to the following: an increase in salaries and benefits to $0.7 million for the three months ended March 31, 2017 compared to $0.4 million for the three months ended March 31, 2016 due to an increase number of employees;

 

b) License amortization expense attributable to research and development increased by approximately $0.4 million to $0.4 million for the three months ended March 31, 2017 compared to $0 for the three months ended March 31, 2016 related to the patents acquired from Atmel Corporation;

 

c) Research and development manufacturing labor expense increased by approximately $0.4 million to $0.4 million for the three months ended March 31, 2017 compared to $0 for the three months ended March 31, 2016;

 

d) Lab and material expense increased by approximately $0.6 million to $0.8 million for the three months ended March 31, 2017 compared to $0.2 million for the three months ended March 31, 2016; and

 

e) Facilities expense increased by approximately $0.2 million to $0.2 million for the three months ended March 31, 2017 compared to $0 million for the three months ended March 31, 2016.

 

OTHER INCOME (EXPENSE).

 

Debt issuance expense decreased to $0.1 million for the three months ended March 31, 2017 compared to $0.5 million for the three months ended March 31, 2016 due to the offering of Notes completed in April 2015 and redeemable convertible preferred stock completed in January 2017.

 

Gain (loss) on change in warrant liability decreased to a loss of $0.8 for the three months ended March 31, 2017 compared to a loss of ($0.4) million for the three months ended March 31, 2016 primarily due to the offering of the Notes completed in April 2015 and redeemable convertible preferred stock completed in January 2017.

 

Accretion on convertible notes expense decreased to $0 for the three months ended March 31, 2017 from $1.3 million for the three months ended March 31, 2016 due to the offering of the Notes completed in April 2015.

 

Interest expense, net, decreased to expense of $20,000 for the three months ended March 31, 2017 as compared to income of $10,000 for the three months ended March 31, 2016, primarily due to the increased interest expense associated with the offering of Notes completed in April 2015, interest associated with the new line of credit entered into during Q4 of 2016 and capital equipment lease interest.

 

Net loss. Net loss was $7.4 million for the three months ended March 31, 2017, as compared to a net loss of $8.4 million for the three months ended March 31, 2016.

 

 

Net loss attributable to common shareholders was $7.8 million for the three months ended March 31, 2017, as compared to a net loss attributable to common shareholders of $8.4 million for the three months ended March 31, 2016.

 

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 revenue begins to increase on our products to support our operations we will continue to be highly dependent on financing from third parties. On January 20, 2017, the company completed the sale of $3 million in redeemable convertible preferred stock. The fixed conversion price of the redeemable convertible preferred stock is set at $1.50, subject to potential adjustments which primarily do not arise until after 90 days. On February 15, 2017, the Company completed a public offering of 10,530,000 shares of common stock, raising net proceeds of $9.1 million. Barring unanticipated expenses, we expect the proceeds from these offerings, together with our cash on hand and collaborative agreements with corporate partners, to support our operations through May 11, 2018.

 

As of March 31, 2017, we had a cash balance of approximately $6.0 million and working capital of $6.6 million.

 

Operating Activities

 

Cash used in operating activities during the three months ended March 31, 2017 was $7.1 million as compared to $4.3 million used during the three months ended March 31, 2016. The increase was primarily due to an increase in net loss.

 

Investing Activities

 

Cash used for investing activities during the three months ended March 31, 2017 was $0.1 million as compared to $0.2 million of cash used for the three months ended March 31, 2016. The use of cash for investing activities during the three months ended March 31, 2016 was attributable to the purchase of equipment.

 

Financing 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 2017 and the future.

 

The total net cash provided by financing activities was $11.7 million for the three months ended March 31, 2017, which was comprised of $9.1 million for net proceeds from issuance of Common Stock and net proceeds from issuance of redeemable convertible preferred stock of $2.7 million.

 

The total net cash provided by financing activities was $1.7 million for the three months ended March 31, 2016, which was comprised of release of our restricted cash offset by payments for our convertible note.

 

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

 

Not applicable.

 

ITEM 4. CONTROLS AND PROCEDURES.

 

Disclosure Controls and Procedures

 

As of March 31, 2017, 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 March 31, 2017, 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 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 also been made, but the Company has disputed other 2016 invoices 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 was 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 of resolving the dispute concerning whether expenses have been reasonably incurred without the assistance of the judicial process. In November 2016, unresolved and disputed invoices totaling approximately $147,750 in fees incurred in 2016 prior to November 2016 were submitted to the Special Master for a determination whether such expenses were reasonably incurred, The Special Master’s determination is still pending. These are the only current invoices submitted for advancement currently disputed without resolution. There can be no assurance that these are the only invoices that will be disputed as this matter proceeds, and therefore the total amount of disputed invoices remains undeterminable at the present time.

 

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 engaged in discussions with Intel during 2016 regarding formulation of a mutually agreeable commercial relationship, but those discussions did not result in the formulation of any new commercial relationship and there are no current discussions ongoing with Intel.

 

ITEM 1A. RISK FACTORS

 

We incorporate herein by reference the risk factors included in our Annual Report on Form 10-K, which we filed with the Securities and Exchange Commission on March 30, 2017. 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 March 31, 2017, we had an accumulated total deficit of $186.3 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, liquidity, financial condition and prospects.

 

 

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 business combination and license transactions, or may disrupt our current operations, which could have a material adverse effect on our business, financial position, liquidity, prospects and/or results of operations.

 

On April 16, 2015, we acquired from Atmel Corporation the rights and capabilities to make XTouch Touch Sensors. 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 business combination 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 (“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.

 

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.

 

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 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 May 5, 2017, we had outstanding warrants and options exercisable for an aggregate of 43,693,317 shares of Common Stock at a weighted average exercise price of $0.73 per share. Upon exercise of these warrants or options, we would issue additional shares of our Common 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.

 

We issued warrants in November 2015, of which 34,046,596 are outstanding as of May 5, 2017 and have an exercise price of $0.406224 per share (as adjusted for the issuance and sale of our Common Stock and warrants on February 15, 2017) and have a term of five years from the date of issuance. The exercise price of the warrants and the number of shares of Common Stock 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 (including as a result of conversion of our preferred stock) at a price per share less than the exercise price then in effect (which is now $0.406224 per share), 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. In the event of an adjustment to the number of shares of Common Stock for which the warrants are exercisable, at this time, we have a limited number of shares of Common Stock authorized that are not currently issued, outstanding or otherwise reserved for potential issuance. We have included as an item on the agenda for our upcoming annual meeting of stockholders an increase in the authorized number of shares of Common Stock.

 

In January 2017, we issued warrants covering 2,500,000 shares of Common Stock that have an exercise price of $1.50 per share, are exercisable six months after issuance (the “Initial Exercisability Date”) and a term of five years from the Initial Exercisability Date. The exercise price of such warrants are subject to a one-time adjustment on the Initial Exercisability Date to an amount no less than $1.26 per share. In addition, if on the Initial Exercisability Date, the exercise price of the warrants, as adjusted pursuant to their terms, exceeds 93% of the lowest volume-weighted average price of our Common Stock on NASDAQ for any trading day during trading hours and as reported by Bloomberg commencing on the date of issuance of the warrants and including the trading day immediately prior to the Initial Exercisability Date (the “Market Price”), the exercise price of the warrants shall be adjusted to such Market Price. Notwithstanding the foregoing, the exercise price of the warrants shall not be adjusted to an amount less than $1.26 per share, unless and until such time as the Company obtains approval of its stockholders to the transactions contemplated by the warrant documents.

 

In February 2017, we issued warrants covering 4,738,500 shares of Common Stock that are exercisable, have an exercise price of $1.00 per share and have a term of five years from the date of issuance. A holder may not exercise such warrant and we may not issue shares of Common Stock under such warrant if, after giving effect to the exercise or issuance, the holder together with its affiliates would beneficially own in excess of 4.99% of the outstanding shares of our Common Stock. At each holder’s option, the cap may be increased or decreased to any other percentage not in excess of 9.99%, except that any increase will not be effective until the sixty-first day after notice to us. The holders of such warrants are entitled to acquire options, convertible securities or rights to purchase our securities or property granted, issued or sold pro rata to the holders of our Common Stock on an “as if exercised for Common Stock” basis. The holders of such warrants are entitled to receive any dividend or other distribution of our assets (or rights to acquire our assets), on an “as if exercised for Common Stock” basis. Furthermore, such warrants prohibit us from entering into transactions constituting a “fundamental transaction” (as defined in such warrants) unless the successor entity assumes all of our obligations under such warrants and the other transaction documents in a written agreement approved by the “required holders” of such warrants. The definition of “fundamental transactions” includes, but is not limited to, mergers, a sale of all or substantially all of our assets, certain tender offers and other transactions that result in a change of control.

 

We have shares of Series A-1 Preferred Stock, which are convertible into shares of our Common Stock, currently outstanding. Their conversion will cause dilution to existing and new stockholders.

 

The Certificate of Designations of Preferences, Rights and Limitations of Series A-1 Preferred Stock (the “Series A-1 Certificate of Designations”) provides that our shares of Series A-1 Convertible Preferred Stock (“Series A-1 Preferred Stock”) are convertible into one share of Common Stock at a conversion price of $1.50 per share, subject to adjustment for stock splits, stock dividends, stock combinations, recapitalizations or similar events. Each holder also has the additional right after ninety days after issuance of the Series A-1 Preferred Stock to convert the Series A-1 Preferred Stock into shares of Common Stock at that price which is the lower of (i) the conversion price then in effect and (ii) the greater of (A) $0.35 and (B) 93% of the volume weighted average price of the Common Stock on the trading day immediately preceding the time of the delivery or deemed delivery of the applicable conversion notice. Currently, all 3,000 shares of Series A-1 Preferred Stock are outstanding. The ninetieth day after issuance of the Series A-1 Preferred Stock occurred on April 20, 2017, and such right became effective on the following day (April 21, 2017). All conversions are subject to certain beneficial ownership limitations.

 

 

The Series A-1 Certificate of Designations also contain certain triggering events including but not limited to: (i) the suspension from trading or failure of the Common Stock to be trading or listed (as applicable) on a national securities exchange for a period of five consecutive trading days, and (ii) the failure of the Company to timely deliver shares of Common Stock upon conversion of the Series A-1 Preferred Stock or to make payments when due under the Series A-1 Certificate of Designations. At any time a triggering event has occurred through the earlier of (x) the date of the cure of such triggering event and (y) the 20th trading day after the Company has delivered written notice to such holder of such triggering event, each holder may convert its Series A-1 Preferred Stock into shares of Common Stock at that price which is defined as that price which is the lower of (i) the conversion price then in effect and (ii) the greater of (A) $0.35 and (B) the higher of (I) 85% of the lowest volume weighted average price of the Common Stock on any trading day during the five consecutive trading day period ending and including the trading day immediately preceding the delivery of the applicable conversion notice and (II) $0.35.

 

The Series A-1 Certificate of Designations also provides that, subject to the satisfaction of customary equity conditions and the beneficial ownership limitations, at any time the volume weighted average price of our Common Stock is greater than or equal to $1.50 per share, the Company may, by written notice, require each holder to convert up to its pro rata share of 20% of the aggregate dollar trading volume (as reported on Bloomberg, LP) of the Common Stock on the Nasdaq Capital Market over the ten consecutive trading day period immediately prior to the date of notice of such mandatory conversion.

 

The conversion of our outstanding Series A-1 Preferred Stock into Common Stock would dilute the then-existing stockholders’ percentage ownership of Common Stock, and any sales in the public market of Common Stock issuable upon such conversion could adversely affect prevailing market prices for the Common Stock.

 

Our shares of Series A-1 Preferred Stock may be subject to cash redemption, which would decrease the capital available for our business.

 

The Series A-1 Certificate of Designations provides that at any time on or after January 20, 2018, if the Series A-1 Preferred Stock has not yet been converted into shares of our Common Stock, we may be required, at the option of each holder, to redeem the Series A-1 Preferred Stock, in cash, at a redemption price equal to the greater of 125% of the stated value of the shares of Series A-1 Preferred Stock being redeemed and the intrinsic value of the shares of the Common Stock then issuable upon conversion of the shares of Series A-1 Preferred Stock being redeemed. Alternatively, if a triggering event occurs, each holder may require us (in lieu of requiring us to convert as described above) to redeem all or any number of the Series A-1 Preferred Stock, in cash, at a redemption price equal to the greater of (i) 125% of the $1,000 stated value of each such share of Series A-1 Preferred Stock being redeemed and (ii) the intrinsic value of the shares of the Common Stock then issuable upon conversion of such shares of Series A-1 Preferred Stock being redeemed (without regard to any limitations on conversion in the Series A-1 Certificate of Designations). If we did not have the cash necessary to redeem the Series A-1 Preferred Stock, the holder of the Series A-1 Preferred Stock may cancel the redemption and instead have dividends, which are also convertible, on the Series A-1 Preferred Stock increase, and the conversion price of the Series A-1 Preferred Stock adjust.

 

In addition, at our option, we may redeem the Series A-1 Preferred Stock at any time, in cash, at a redemption price equal to the greater of 125% of the stated value of the shares of Series A-1 Preferred Stock being redeemed and the intrinsic value of the shares of the Common Stock then issuable upon conversion of the shares of Series A-1 Preferred Stock being redeemed.

 

Our shares of Series A-1 Preferred Stock are entitled to certain rights, privileges and preferences over our Common Stock, including a preference upon a liquidation, dissolution or winding up of our Company, which will reduce amounts available for distribution to the holders of our Common Stock.

 

The holders of our shares of Series A-1 Preferred Stock are entitled to payment, prior to payment to the holders of Common Stock in the event of liquidation of the Company. If we are dissolved, liquidated or wound up at a time when the Series A-1 Preferred Stock remain outstanding, the holders of the Series A-1 Preferred Stock will be entitled to receive only an amount equal to the liquidation preference (as it may be adjusted from time to time), plus any accumulated and unpaid dividends, to the extent that we have funds legally available. Any remaining assets will be distributable to holders of our other equity securities.

 

Shares of Series A-1 Preferred Stock will generally have no voting rights, except as required by law and except that the consent of holders of a majority of the outstanding Series A-1 Preferred Stock will be required to amend any provision of the Company’s certificate of incorporation that would have a materially adverse effect on the rights of the holders of the Series A-1 Preferred Stock and as otherwise specified in the Series A-1 Certificate of Designations.

 

Our Common Stock may be delisted from The Nasdaq Capital Market, or NASDAQ.

 

In order to maintain continued inclusion of our Common Stock for trading on NASDAQ, we are required to maintain a minimum $1.00 per share bid price for our Common Stock. If the bid price of our Common Stock is below $1.00 for an extended period, or we are unable to continue to meet NASDAQ’s listing maintenance standards for any other reason, our Common Stock could be delisted from NASDAQ.

 

On April 13, 2017, we received a deficiency letter from the Listing Qualifications Department (the “Staff”) of NASDAQ notifying us that, for the prior thirty consecutive business days, the bid price for the Company’s Common Stock had closed below the minimum $1.00 per share requirement for continued inclusion on the Nasdaq Capital Market pursuant to Nasdaq Listing Rule 5550(a)(2) (the “Rule”). The notice has no immediate effect on the listing or trading of our Common Stock and will continue to trade on NASDAQ under the symbol “UNXL”.

 

 

In accordance with Nasdaq Listing Rule 5810(c)(3)(A), we were given 180 calendar days, or until October 10, 2017 to regain compliance with the Rule. If, at any time before October 10, 2017, the bid price for the our Common Stock closes at $1.00 or more for a minimum of 10 consecutive business days as required under Nasdaq Listing Rule 5810(c)(3)(A), the Staff will provide written notification to us that we comply with the Rule. If we do not regain compliance with the Rule by October 10, 2017, but meets the NASDAQ initial inclusion criteria set forth in Nasdaq Listing Rule 5505, except for the $1.00 per share bid price requirement, we may be granted an additional 180 calendar day compliance period. We intend to actively monitor the bid price for our Common Stock until October 10, 2017, and will consider all available options to resolve the deficiency and regain compliance with the NASDAQ minimum bid price requirement.

 

If we do not regain compliance with the Rule by October 10, 2017 and are not eligible for an additional compliance period at that time, the Staff will provide written notification to us that our Common Stock may be delisted. At that time, we may appeal the Staff’s delisting determination to a Nasdaq Listing Qualifications Panel (“Panel”). We would remain listed pending the Panel’s decision. There can be no assurance that, if we do appeal a subsequent delisting determination by the Staff to the Panel, that such appeal would be successful.

 

If our Common Stock is delisted from NASDAQ, we will make every possible effort to have it listed on the OTCQX Market (the “OTCQX”). If our Common Stock was to be traded on the OTCQX, the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and related SEC rules would impose additional sales practice requirements on broker-dealers that sell our securities. These rules may adversely affect your ability to sell our Common Stock and otherwise negatively affect the liquidity, trading market and price of our Common Stock.

 

If our Common Stock would not be able to be traded on the OTCQX or on another over-the-counter market, the OTCQB, we expect that our Common Stock would be eligible to be quoted on the OTC Markets Group’s OTC Pink platform (the “OTC Pink”). The OTC Pink securities market consists of security firms who act as market makers in the stocks, usually, of very small companies. The OTC Pink is a significantly more limited market than NASDAQ, and the quotation of our Common Stock on the OTC Pink may result in a less liquid market available for existing and potential stockholders to trade our Common Stock and could further depress the trading price of our Common Stock.

 

As discussed above, the delisting of our Common Stock from NASDAQ (or such other national securities exchange) for a period of five consecutive trading days or more constitutes a triggering event under our Series A-1 Certificate of Designations and would allow the holders of Series A-1 Preferred Stock to convert their shares of Series A-1 Preferred Stock into shares of Common Stock at a price which is the lower of (i) the conversion price then in effect and (ii) the greater of (A) $0.35 and (B) the higher of (I) 85% of the lowest volume weighted average price of the Common Stock on any trading day during the five consecutive trading day period ending and including the trading day immediately preceding the delivery of the applicable conversion notice and (II) $0.35. Furthermore, an equity condition failure would occur if delisting from NASDAQ (or such other national securities exchange) has reasonably been threatened by NASDAQ (or such other national securities exchange) or suspension of our Common Stock listing has occurred (other than suspensions of not more than two days and due to a business announcements by us). The existence of an equity condition failure will prevent us from being able to exercise our right to mandatory conversion of the Series A-1 Preferred Stock into shares of our Common Stock.

 

We believe that the listing of our Common Stock on a recognized national trading market, such as NASDAQ, is an important part of our business and strategy. Such a listing helps our stockholders by providing a readily available trading market with current quotations. Without such a listing, the sale or purchase of our Common Stock would likely be made more difficult and the trading volume and liquidity of our Common Stock would likely decline. Furthermore, a delisting from NASDAQ would result in negative publicity and would negatively impact our ability to raise capital in the future.

 

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 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 Common Stock or preferred stock, 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 of our Common Stock 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.

 

ITEM 6. EXHIBITS.

 

Exhibit No.		Description of Document
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 (1)
31.2		Certification of the Chief Financial Offer of Uni-Pixel, Inc., pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (1)
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 (1) (2)
32.2		Certification of the Chief Financial Officer of Uni-Pixel, Inc., pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (1) (2)

 

(1) Filed herewith

 

(2) 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 has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

	UNI-PIXEL, INC.
May 11, 2017	By:	/s/ Jeff A. Hawthorne
Date		Jeff A. Hawthorne, Chief Executive Officer and President
	By:	/s/ Christine A. Russell
		Christine A. Russell, Chief Financial Officer