ITEM 1. BUSINESS
Cautionary Note About Forward-Looking Statements
Certain matters discussed herein may constitute forward-looking statements and as such may involve risks and uncertainties. In this Annual Report on Form 10-K, the words “anticipates,” “believes,” “expects,” “intends,” “future” and similar expressions identify certain forward-looking statements. These forward-looking statements relate to, among other things, expectations of the business environment in which we operate, projections of future performance, perceived opportunities in the market and statements regarding our mission and vision. Our actual results, performance, or achievements may differ significantly from the results, performance or achievements expressed or implied in such forward-looking statements. For discussion of the factors that might cause such a difference, see Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operation.” We undertake no obligation to update or revise such forward-looking statements. We urge readers to review carefully the risk factors described in this Annual Report found in Item 1A.
ITEM 1A. RISK FACTORS
Set forth below are certain risks and uncertainties relating to our business.
You should carefully consider the following information about the risks described below, together with the other information contained in this Annual Report on Form 10-K and in our other filings with the SEC. We believe the risks described below are the risks that are material to us as of the filing date of this Annual Report on Form 10-K. If any of the following risks actually occur, our business financial condition, operating results and future growth prospects would likely be materially and adversely affected. In these circumstances, the market price of our common stock could decline.
Risks Related to 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 December 31, 2015, we had an accumulated total deficit of $149.2 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.
Negative press from the SEC investigation and resulting judgment and stockholder litigation could have a material adverse effect on our business and financial condition.
The negative press resulting from the SEC investigation and resulting judgment and stockholder litigation matters may have harmed our reputation and could otherwise result in a loss of future business. It could also adversely affect the public’s perception of us and lead to reluctance by new parties to do business with us. As a result, our business and financial condition may be materially adversely affected.
We are dependent on a limited number of customers.
We have only recently begun generating revenues from a limited number of customers, and our customer concentration may change significantly from period-to-period depending on a customer’s product cycle and changes in our industry. The loss of a customer, a reduction in net revenues of a customer for any reason, or a failure of a customer to fulfill its financial or other obligations due to us could have a material adverse effect on our business, financial condition, and future revenue stream.
Our operating results may fluctuate significantly as a result of a variety of factors, many of which are outside of our control.
As a result of our limited operating history and the nature of the markets in which we compete, it is extremely difficult for us to forecast accurately. We base our current and future expense levels largely on our investment plans and estimates of future events, although certain of our expense levels are, to a large extent, fixed. We may be unable to adjust spending in a timely manner to compensate for any unexpected revenue shortfall. Accordingly, any significant shortfall in revenues relative to our planned expenditures would have an immediate adverse effect on our business, results of operations and financial condition.
In addition, we are subject to the following factors, among others, that may negatively affect and cause fluctuations in our operating results:
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the timing of programs to our customers;
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the announcement or introduction of new products or technologies by our competitors;
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our ability to upgrade and develop our infrastructure to accommodate growth;
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our ability to attract and retain key personnel in a timely and cost effective manner;
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technical difficulties;
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the amount and timing of operating costs and capital expenditures relating to the expansion of our business, operations, and infrastructure; and
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general economic conditions as well as economic conditions specific to the touchscreen industry.
Further, as a strategic response to changes in the competitive environment, we may from time to time make certain pricing, service, or marketing decisions that could have a material and adverse effect on our business, results of operations, and financial condition. Due to the foregoing factors, our revenues and operating results are and will remain difficult to forecast.
We are exposed to industry downturns and cyclicality in our target markets than may result in fluctuations in our operating results.
The PC and electronics industries have experienced significant economic downturns at various times. These downturns are characterized by diminished product demand, accelerated erosion of average selling prices, and production overcapacity. In addition, the PC and electronics industries are cyclical in nature. We seek to reduce our exposure to industry downturns and cyclicality by providing design and production services for leading companies in rapidly expanding industry segments. We may, however, experience substantial period-to-period fluctuations in future operating results because of general industry conditions or events occurring in the general economy.
If we do not keep pace with technological innovations, our products may not remain competitive and our revenue and operating results may suffer.
We operate in rapidly changing highly competitive markets. Technological advances, the introduction of new products and new design techniques could adversely affect our business unless we are able to adapt to changing conditions. Technological advances could render our solutions less competitive or obsolete, and we may not be able to respond effectively to the technological requirements of evolving markets. Therefore, we will be required to expend substantial funds for and commit significant resources to enhancing and developing new technology which may include purchasing advanced design tools and test equipment, hiring additional highly qualified engineering and other technical personnel, and continuing and expanding research and development activities on existing and potential human interface solutions.
Our research and development efforts with respect to new technologies may not result in customer or market acceptance. Some or all of those technologies may not successfully make the transition from the research and development stage to cost-effective production as a result of technology problems, competitive cost issues, yield problems, and other factors. Even if we successfully complete a research and development effort with respect to a particular technology, our customers may decide not to introduce or may terminate products utilizing the technology for a variety of reasons, including difficulties with other suppliers of components for the products, superior technologies developed by our competitors and unfavorable comparisons of our solutions with these technologies, price considerations and lack of anticipated or actual market demand for the products.
Our business could be harmed if we are unable to develop and utilize new technologies that address the needs of our customers, or our competitors or customers develop and utilize new technologies more effectively or more quickly than we can. Any investments made to enhance or develop new technologies that are not successful could have an adverse effect on our net revenue and operating results.
The length of a customer’s product development and release cycle depends on many factors outside of our control and could cause us to incur significant expenses without offsetting revenues, or revenues that vary significantly from quarter to quarter.
The development and release cycle for customer products is lengthy and unpredictable. OEMS and other customers often undertake significant evaluation and design in the qualification of our products, which contributes to a lengthy product release cycle. A customer’s decision to purchase our technology often requires a lengthy approval process undertaken by several decision makers at the customer. The process requires us to make significant investments of time and resources before we can be sure that we will generate any significant sales to our customers or recover our investment. There is no assurance that a customer will adopt our technology after the evaluation or design phase, and we face the risk that our technology will fail to meet our customer’s technical, performance or cost requirements, or that our products will be replaced by competitive products or alternative technological solutions. Even if our product is satisfactory to our customer, the customer may delay or terminate its product development efforts. The occurrence of any of these events could cause sales to not materialize, be deferred, or be cancelled, which would adversely affect our operating results. Furthermore, the lengthy and variable development and release cycle for products may also have a negative impact on the timing of our revenues, causing our revenues and results of operations to vary significantly from quarter to quarter.
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.
We have had a history of losses and may require additional capital to fund our operations, which capital may not be available on commercially attractive terms or at all.
We have experienced substantial net losses in each fiscal period since our inception. These net losses resulted from a lack of substantial revenues and the significant costs incurred in the development and acceptance of our technology. We may in the future require sources of capital in addition to cash on hand to continue operations and to implement our business plan. We project that we have sufficient liquid assets to continue operating for at least the next twelve months. However, if our operations do not become cash flow positive, we may be forced to seek credit line facilities from financial institutions, equity investments, or debt arrangements. No assurances can be given that we will be successful in obtaining such additional financing on reasonable terms, or at all. If adequate funds are not available when needed on acceptable terms, or at all, we may be unable to adequately fund our business plan, which could have a negative effect on our business, results of operations, and financial condition.
If third parties infringe upon our intellectual property, we may expend significant resources enforcing our rights or suffer competitive injury.
Existing laws, contractual provisions and remedies afford only limited protection for our intellectual property. We may be required to spend significant resources to monitor and police our intellectual property rights. Effective policing of the unauthorized use of our technology or intellectual property is difficult and litigation may be necessary in the future to enforce our intellectual property rights. Intellectual property litigation is not only expensive, but time-consuming, regardless of the merits of any claim, and could divert attention of our management from operating the business. Intellectual property lawsuits are subject to inherent uncertainties due to, among other things, the complexity of the technical issues involved, and we cannot assure you that we will be successful in asserting our intellectual property rights. Attempts may be made to copy or reverse engineer aspects of our technology or to obtain and use information that we regard as proprietary. We may not be able to detect infringement and may lose competitive position in the market before they do so. In addition, competitors may design around our technology or develop competing technologies. We cannot assure you that we will be able to protect our proprietary rights against unauthorized third party copying or use. The unauthorized use of our technology or of our proprietary information by competitors could have an adverse effect on our ability to sell our technology.
The laws of foreign countries may not provide protection of our intellectual property rights to the same extent as the laws of the United States, which may make it more difficult for us to protect our intellectual property.
As part of our business strategy, we target customers and relationships with suppliers and original equipment manufacturers in countries with large populations and propensities for adopting new technologies. However, many of these countries do not address misappropriation of intellectual property nor deter others from developing similar, competing technologies or intellectual property. Effective protection of patents, copyrights, trademarks, trade secrets and other intellectual property may be unavailable or limited in some foreign countries. In particular, the laws of some foreign countries in which we do business may not protect our intellectual property rights to the same extent as the laws of the United States. As a result, we may not be able to effectively prevent competitors in these regions from infringing our intellectual property rights, which could reduce our competitive advantage and ability to compete in those regions and negatively impact our business.
Any claims that our technologies infringe the intellectual property rights of third parties could result in significant costs and have a material adverse effect on our business.
We cannot be certain that our technologies and products do not and will not infringe issued patents or other third party proprietary rights. Any claims, with or without merit, could result in significant litigation costs and diversion of resources, including the attention of management, and could require us to enter into royalty or licensing agreements, any of which could have a material adverse effect on our business. There can be no assurance that such licenses could be obtained on commercially reasonable terms, if at all, or that the terms of any offered licenses would be acceptable to us. We may also have to pay substantial damages to third parties, or indemnify customers or licensees for damages they suffer if the products they purchase from us or the technology they license from us violates any third party intellectual property rights. An adverse determination in a judicial or administrative proceeding, or a failure to obtain necessary licenses to use such third-party technology could prevent us from manufacturing, using, or selling certain of our products, and there is no guarantee that we will able to develop or acquire alternate non-infringing technology.
In addition, we license certain technology used in and for our products from third parties. These third-party licenses are granted with restrictions, and there can be no assurances that such third-party technology will remain available to us on commercially acceptable terms.
If third-party technology currently utilized in our products is no longer available to us on commercially acceptable terms, or if any third party initiates litigation against us for alleged infringement of their proprietary rights, we may not be able to sell certain of our products and we could incur significant costs in defending against litigation or attempting to develop or acquire alternate non-infringing products, which would have an adverse effect on our operating results.
Risks Related to Owning Our Common Stock
Our common stock has experienced significant price and volume volatility, which substantially increases the risk of loss to persons owning our common stock.
Our common stock has traded on The NASDAQ Capital Market as low as $0.48 and as high at $41.42 during the period from December 10, 2010 through December 31, 2015. In addition, the markets for high technology stocks have experienced extreme volatility that has often been unrelated to the operating performance of the particular companies. These broad market fluctuations may adversely affect the trading price of shares our common stock.
The value of an investment in our common stock could decline due to the impact of any of the following factors upon the market price of our common stock:
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Disappointing results from our development efforts;
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Failure to meet our revenue or profit goals or operating budget;
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Decline in demand for our common stock;
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Downward revisions in securities analysts’ estimates or changes in general market conditions;
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Technological innovations by competitors or in competing technologies;
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Investor perception of our industry or our prospects;
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General economic trends;
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Variations in our quarterly operating results;
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Our inability to increase revenues:
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Announcement of new customer relationships by our competitors;
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Departures of our executive officers;
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General conditions in the economy, including fluctuations in interest rates;
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Developments in patents or other intellectual property rights and litigation;
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Developments in our relationships with our customers and suppliers;
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Any significant acts of terrorism against the United States; and
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Our currently limited public float.
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 December 31, 2015, we had outstanding warrants and options exercisable for an aggregate of 13,011,554 shares of common stock at a weighted average exercise price of $2.33 per share. Upon exercise of these warrants or options, we would issue additional shares of our stock. As a result, our current stockholders as a group would own a substantially smaller interest in us and may have less influence on our management and policies than they now have. Furthermore, the holders may sell these shares in the public markets from time to time, without limitations on the timing, amount or method of sale. As our stock price rises, the holders may exercise more of their warrants and options and sell a large number of shares. This could cause the market price of our common stock to decline.
In addition, warrants covering 9,625,871 shares which were issued in November 2015 have an exercise price of $1.50 per share and have a term of five years from the date of issuance. The exercise price of the warrants and the number of shares for which the warrants are exercisable are subject to certain adjustments if we issue or sell additional shares of common stock or common stock equivalents at a price per share less than the exercise price then in effect, or without consideration. Notwithstanding the foregoing, there will be no adjustment to the exercise price of these warrants or number of warrant shares issuable upon exercise in connection with the issuance of common stock upon Board of Director-approved employee benefit plans or upon the conversion, exercise or payment of certain outstanding, excluded securities.
We may be required to raise additional financing by issuing new securities with terms or rights superior to those of our existing stockholders, which could adversely affect the market price of our shares of common stock and our business.
We may require additional financing to fund future operations, including expansion in current and new markets, development and acquisition, capital costs and the costs of any necessary implementation of technological innovations or alternative technologies. We may not be able to obtain financing on favorable terms, if at all. If we raise additional funds by issuing equity securities, the percentage ownership of our current stockholders will be reduced, and the holders of the new equity securities may have rights superior to those of the holders of shares of common stock, which could adversely affect the market price and the voting power of shares of our common stock. If we raise additional funds by issuing debt securities, the holders of these debt securities would similarly have some rights senior to those of the holders of shares of common stock, and the terms of these debt securities could impose restrictions on operations and create a significant interest expense for us which could have a materially adverse effect on our business.
Our common stock may be delisted from The Nasdaq Capital Market, or NASDAQ.
As previously disclosed, on January 8, 2016, we received a deficiency letter from NASDAQ notifying us that, for the prior 30 consecutive business days, the bid price our common stock had closed below the minimum $1.00 per share requirement for continued inclusion on NASDAQ. If the bid price of our common stock stays 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 March 15, 2016, the last reported sale price of our common stock on NASDAQ was $0.73 per share.
If our stock is delisted from NASDAQ, we will make every possible effort to have it listed on the Over the Counter Bulletin Board (the “OTC Bulletin Board”). If our common stock was to be traded on the OTC Bulletin Board, 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 the ability of stockholders 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 OTC Bulletin Board, we would make every effort to have it available for trading on the National Quotation Bureau’s Pink Sheets, or the Pink Sheets. The Pink Sheets market consists of security firms who act as market makers in the stocks, usually, of very small companies. The bid and asked prices are not quoted electronically, but are quoted daily in “hard copy” which is delivered to firms that subscribe. Stocks that trade in the Pink Sheets are usually not as liquid as those that trade in electronic markets and, often time, the difference between the bid and the asked prices are substantial. As a result, if our common stock were traded on the Pink Sheets, there would likely be a further negative effect on the liquidity, trading market and price of our common stock even compared to what we might suffer if we were traded on the OTC Bulletin Board.
We believe that the listing of our 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 stock would likely be made more difficult and the trading volume and liquidity of our 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.
Shares eligible for future sale may adversely affect the market.
From time to time, certain of our stockholders may be eligible to sell all or some of their shares of common stock by means of ordinary brokerage transactions in the open market pursuant to Rule 144, promulgated under the Securities Act, subject to certain limitations. In general, pursuant to Rule 144, non-affiliate stockholders may sell freely after six months subject only to the current public information requirement (which disappears after one year). Affiliates may sell after six months subject to the Rule 144 volume, manner of sale (for equity securities), current public information and notice requirements. Of the 32,170,778 shares of our common stock outstanding as of December 31, 2015, approximately 31.9 million shares are held by non- “affiliates” and are, or will be, freely tradable without restriction, and the remaining shares are held by our “affiliates”, as of such date. Any substantial sale of our common stock pursuant to Rule 144 or pursuant to any resale prospectus (including sales by investors of securities acquired in connection with this offering) may have a material adverse effect on the market price of our common stock.
We do not expect to pay dividends in the foreseeable future.
We have never paid cash dividends on our shares of common stock, and have no plans to do so in the foreseeable future. We intend to retain earnings, if any, to develop and expand our business operations.
Our charter documents and Delaware law may inhibit a takeover that stockholders consider favorable.
Provisions of our amended and restated certificate of incorporation and amended and restated bylaws and applicable provisions of Delaware law may delay or discourage transactions involving an actual or potential change in our control or change in our management, including transactions in which stockholders might otherwise receive a premium for their shares, or transactions that our stockholders might otherwise deem to be in their best interests. These provisions:
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authorize our board of directors to issue preferred stock without stockholder approval and to designate the rights, preferences and privileges of each class; if issued, such preferred stock would increase the number of outstanding shares of our capital stock and could include terms that may deter an acquisition of us;
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establish advance notice requirements for nominations to the board of directors or for proposals that can be acted on at stockholder meetings;
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limit who may call stockholder meetings;
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do not provide for cumulative voting rights; and
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provide that all vacancies, including newly created directorships, may, except as otherwise required by law, be filled by the affirmative vote of a majority of directors then in office, even if less than a quorum.
In addition, Section 203 of the Delaware General Corporation Law generally limits our ability to engage in any business combination with certain persons who own 15% or more of our outstanding voting stock or any of our associates or affiliates who at any time in the past three years have owned 15% or more of our outstanding voting stock. These provisions may have the effect of entrenching our management team and may deprive you of the opportunity to sell your shares to potential acquirers at a premium over prevailing prices. This potential inability to obtain a control premium could reduce the price of our common stock.
ITEM 1B.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None
ITEM 2.
ITEM 2. PROPERTIES
Our main corporate offices are located at 4699 Old Ironsides Drive, Suite 300, Santa Clara, CA. The operating lease is for 4,478 square feet and terminates on July 14, 2018. We entered into a lease for office and production facilities for approximately 28,918 square feet at 1150 E. Cheyenne Mountain Boulevard, Colorado Springs, Colorado that terminates on October 15, 2016. We also have a lease for office, warehouse and laboratory facilities for approximately 7,186 square feet at 3400 Research Forest Drive, Suite B2, The Woodlands, TX under a third party non-cancelable operating lease through May 31, 2016. We believe these properties are adequate for our operations at this stage of our development.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
Class Action Litigation
In June 2013, two purported class action complaints were filed in the United States District Court, Southern District of New York and the United States District Court, Southern District of Texas against us and our former CEO, former CFO, and former Chairman. The Southern District of New York complaint was voluntarily dismissed by plaintiff on July 2, 2013. The surviving complaint, with the caption Fitzpatrick, Charles J. v. Uni-Pixel, Inc., et. al. (Cause No. 4:13-cv-01649), alleged that we and our officers and directors violated the federal securities laws, specifically Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, by making purportedly false and misleading statements concerning our licensing agreements and product development (the “Class Action Litigation”). The complaint sought unspecified damages on behalf of a purported class of purchasers of our common stock during the period from December 7, 2012 to May 31, 2013. On July 25, 2014, the judge granted in part and denied in part our motion to dismiss the case, significantly limiting the claims remaining in the Class Action Litigation. On August 25, 2014, we filed an answer to the complaint. In November 2014, we entered into a memorandum of understanding to settle the Class Action Litigation. The proposed settlement would result in a payment of $2.35 million in cash to the settlement class, inclusive of fees and expenses. In addition, we agreed to issue $2.15 million in common stock to the settlement class with a range of shares of common stock between 358,333 shares and 430,000 shares, calculated by using the trailing 5 day average stock price from the date of Court approval of the settlement. On April 30, 2015, the Court approved the settlement of the Class Action Litigation on the terms set forth above. As a result, we issued 430,000 shares of common stock. The cash payment portion of the settlement of $2.35 million was paid from insurance proceeds. The common stock portion of this settlement, totaling $2.15 million is included in other expense and in current liabilities (Settlement of Class Action and Derivative Lawsuits) on the accompanying consolidated financial statements. Following the issuance of the common stock in May 2015, this amount was reclassified to Additional Paid In Capital and Common Stock.
Shareholder Derivative Litigation
On February 19, 2014, a shareholder derivative lawsuit, Jason F. Gerzseny v. Reed J. Killion, et. al., was filed in the 165th Judicial District in Harris County, Texas. On February 21, 2014, another shareholder derivative lawsuit, Luis Lim v. Reed J. Killion, et. al., was also filed in Harris County district court. Both complaints alleged various causes of action against certain of our current and former officers and directors, including claims for breach of fiduciary duty, corporate waste, insider selling, and unjust enrichment. On April 8, 2014, these derivative actions were consolidated into one action, captioned In re Uni-Pixel, Inc., Shareholder Derivative Litigation (Cause No. 2014-08251) (the “Shareholder Derivative Litigation”), and on September 9, 2014, plaintiff filed an amended consolidated complaint. On April 13, 2015, the Court approved the settlement of the Shareholder Derivative Litigation, which required the payment of $150,000 in cash and the issuance of 20,833 shares of the common stock. The cash payment portion of the settlement was paid from insurance proceeds. The common stock portion of the settlement, totaling $125,000, is included in other expense and in current liabilities on the accompanying consolidated financial statements. Following issuance of the common stock in April 2015, this amount was reclassified to Additional Paid In Capital and Common Stock.
Securities and Exchange Commission Investigation
On November 19, 2013, we learned that the Fort Worth Regional Office of the United States SEC issued subpoenas concerning our agreements related to our InTouch™ Sensors. We cooperated fully with the SEC regarding this non-public, fact-finding inquiry, and as we disclosed on our Current Report filed with the SEC on March 18, 2016, the U.S. District Court for the Southern District of Texas on March 16, 2016 signed a Final Judgment on a complaint filed by the SEC pursuant to our consent. Without admitting or denying the allegations of the SEC’s complaint, we consented to the Judgment, which permanently enjoins us from violating Sections 10(b) and 13(b)(2)(A) and (B) of the Securities Exchange Act of 1934 (the “Exchange Act”), Rule 10b-5 of the SEC and Section 17(a) of the Securities Act of 1933. The Final Judgment also permanently enjoins the filing with the SEC any periodic report pursuant to Section 13(a) of the Exchange Act and Rules 13a-1, 13a-11, 13a-13 and 12b-20 of the SEC, which contains any untrue statement of material fact, or which omits to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading, or which fails to comply in any material respect with the requirements of Section 13(a) of the Exchange Act and the rules and regulations thereunder. The Final Judgment also provides for a civil penalty in the amount of $750,000 to be paid in accordance with the following schedule:
(1) $20,000, within 14 days of entry of this Final Judgment;
(2) $20,000, within 104 days of entry of this Final Judgment;
(3) $30,000, within 194 days of entry of this Final Judgment;
(4) $45,000, within 284 days of entry of this Final Judgment;
(5) $60,000, within 374 days of entry of this Final Judgment;
(6) $70,000, within 464 days of entry of this Final Judgment;
(7) $80,000, within 554 days of entry of this Final Judgment;
(8) $80,000, within 644 days of entry of this Final Judgment;
(9) $80,000, within 734 days of entry of this Final Judgment;
(10) $85,000, within 824 days of entry of this Final Judgment;
(11) $90,000, within 914 days of entry of this Final Judgment;
(12) $90,000, within 1004 days of entry of this Final Judgment
ITEM 4.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable
PART II
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Market Information
Effective December 10, 2010, our common stock became listed on The NASDAQ Capital Market under the symbol “UNXL”. Prior to that date, our common stock was quoted on the OTC Bulletin Board under the symbol “UNXL” The following table sets forth, for the quarters shown, the range of high and low sales prices of our common stock, reported by The NASDAQ Capital Market.
Holders
According to our transfer agent, as of January 31, 2015 we had approximately 1,003 shareholders of record. This number does not include an indeterminate number of shareholders whose shares are held by brokers in street name.
Dividends
We have never paid dividends on our common stock. Currently, we anticipate that we will retain earnings, if any, to support operations and to finance the growth and development of our business and do not anticipate paying cash dividends on our common stock in the foreseeable future.
Securities Authorized For Issuance Under Equity Compensation Plans
The following table provides information about shares of our common stock that may be issued upon the exercise of options under all of our existing equity compensation plans as of December 31, 2015.
(1)
During 2006 and 2007, we granted a total of 86,668 stock options to board members. As of December 31, 2014, 68,001 stock options remain outstanding.
Please see Note 6 to the Consolidated Financial Statements in Item 8 of Part II of this Annual Report on Form 10-K for additional information about our equity compensation plans.
Recent Sales of Unregistered Securities
None.
Issuer Purchases of Equity Securities
None.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
Not Applicable.
ITEM 7.
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION
The following discussion of our financial condition and results of operation should be read in conjunction with the financial statements and related notes that appear elsewhere in this report. This discussion contains forward-looking statements and information relating to our business that reflect our current views and assumptions with respect to future events and are subject to risks and uncertainties, including the risks in the section entitled “Risk Factors”, that may cause our or our industry’s actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by these forward-looking statements.
These forward-looking statements speak only as of the date of this report. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, or achievements. Except as required by applicable law, including the securities laws of the United States, we expressly disclaim any obligation or undertaking to disseminate any update or revisions of any of the forward-looking statements to reflect any change in our expectations with regard thereto or to conform these statements to actual results.
Our financial statements are stated in United States Dollars and are prepared in accordance with accounting principles generally accepted in the United States.
Overview
We develop and market touch sensor films for the touch screen and flexible electronics markets. Our roll-to-roll electronics manufacturing process patterns fine line conductive elements on thin films. We market our technologies for touch panel sensor and hard coat resin for cover glass replacement, and protective cover film applications under the XTouch™ and Diamond Guard® brands.
We believe we are one of the technology leaders in the optical design and manufacturing of large area microstructured polymer film materials and related technologies for the display, flexible electronics, and automotive industries. Our microstructured polymer films, which we refer to as Performance Engineered Films (PEFs), are designed to lower the cost and improve functionality and performance of devices in the markets they address. We make transparent conductive films and flexible electronic films based on our proprietary manufacturing process for high volume, roll to roll printing of flexible thin-film conductor patterns. The process offers precision micro-electronic circuit patterning and modification of surface characteristics over a large area on an ultra-thin, clear, flexible, plastic substrate. These films may be incorporated into computer, tablet, printer and smartphone touch sensors, as well as automotive, applications. We sell the touch screen films under the brand XTouch™, as sub-components of a fully assembled touch sensor module.
In addition to the flexible electronic films described above, we have developed 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 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 and automotive.
In 2016, we will remain focused on balancing the longer-term needs of our business while remaining prudent with our spending in the short term. We believe in the underlying fundamentals of our core business strategy and we are focused on addressing the market trends of mobile devices. We believe our strategy aligns well with the driving forces of the portable device manufacturers. With our strategy, our product pipeline, and the deeper penetration in the various markets, we plan to address our challenges in the following manner:
·
Assume continued uncertainty in the near-term US economic recovery;
·
Grow faster than the markets we serve by focusing on new product introductions to accelerate growth as we enter 2016; and
·
Maintain investments that deliver innovation and product development.
The financial statements presented in this annual report include Uni-Pixel, Inc. and our wholly-owned subsidiary, Uni-Pixel Displays, Inc. All significant intercompany transactions and balances have been eliminated.
Critical Accounting Policies
The following discussion and analysis of financial condition and results of operations is based upon our consolidated financial statements, which have been prepared in conformity with accounting principles generally accepted in the United States of America. Our significant accounting policies are more fully described in the Notes to the Consolidated Financial Statements in Item 8
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Our consolidated financial statements and the related notes thereto called for by this item appear under the caption “Financial Statements” beginning on page of this Annual Report on Form 10-K.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 9A.
ITEM 9A. CONTROLS AND PROCEDURES
(a) Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934) designed to ensure that information required to be disclosed by us in the reports that it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and that the information required to be disclosed by us in reports that it files or submits under the Securities Exchange Act of 1934 is accumulated and communicated to its management, including its Chief Executive Officer (principal executive officer) and Chief Financial Officer (principal financial and accounting officer), as appropriate to allow timely decisions regarding required disclosure.
We carried out an evaluation as of December 31, 2015, under the supervision and with the participation of our management, including its Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures. Based on such evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of December 31, 2015. In designing and evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. We have designed its disclosure controls and procedures to reach a level of reasonable assurance of achieving the desired control objectives.
(b) Management’s Annual Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rule 13a-15(f) and 15d-15(f) of the Exchange Act. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of our assets; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that our receipts and expenditures are being made only in accordance with authorizations of our management and directors; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on the financial statements.
Our management assessed the effectiveness of our internal control over financial reporting as of December 31, 2015 based upon the criteria established in Internal Control-Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) and concluded that our internal control over financial reporting was effective as of that date.
As a smaller reporting company, pursuant to the rules of the SEC, this Annual Report on Form 10-K does not include an attestation report of our independent registered public accounting firm for the year ended December 31, 2015.
(c) Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934, as amended) that occurred during our most recently completed fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
ITEM 9B.
ITEM 9B. OTHER INFORMATION
None
PART III
ITEM 10.
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The information required by this item is set forth under “Election of Directors,” “Executive Officers,” “Code of Ethics for Senior Financial Officers,” “Section 16(a) Beneficial Ownership Reporting Compliance,” and “Corporate Governance and Board Matters” in the Company’s Definitive Proxy Statement to be filed with the SEC for our 2016 Annual Meeting of Stockholders (the “2016 Proxy Statement”), and is incorporated herein by reference.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is set forth under the captions “Executive Compensation and Other Information,” “Corporate Governance and Board Matters - Director Compensation,” “Compensation Committee Interlocks,” “Compensation Committee Report,” “Payments Upon Termination and Change in Control” in the 2016 Proxy Statement, and is incorporated herein by reference.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The information required by this item is set forth under the captions “Equity Compensation Plan Information” and “Security Ownership of Management and Certain Beneficial owners,” in the 2016 Proxy Statement, and is incorporated herein by reference.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
The information required by this item is set forth under the captions “Certain Relationships and Related Transactions” and “Corporate Governance and Board Matters - Director Independence,” in the 2016 Proxy Statement, and is incorporated herein by reference.
ITEM 14.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information required by this item is set forth under the caption “Audit Information - Fees Paid to Independent Registered Public Accounting Firm,” in the 2016 Proxy Statement, and is incorporated herein by reference.
PART IV
ITEM 15.
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
Exhibit No.
Description of Document
3.1
Amended and Restated Certificate of Incorporation of Uni-Pixel, Inc. (6)
3.2
Form of Certificate of Amendment to Amended and Restated Certificate of Incorporation of Uni-Pixel, Inc. (6)
3.3
Amended and Restated Bylaws of Uni-Pixel, Inc. (1)
4.1
Form of common stock certificate (3)
4.2
Form of Warrant to be granted to MDB Capital Group LLC (6)
4.3
Form of Warrant (13)
4.4
Secured Promissory Note (10)
4.5
Form of Senior Secured Convertible Note (10)
4.6
Form of Registration Rights Agreement between Uni-Pixel, Inc. and the investors listed on the Schedule of Buyers (10)
4.7
Form of Warrant, dated November 24, 2015 (13)
10.1
Employee Intellectual Property Assignment and Nondisclosure Agreement (1) (2)
10.2
Uni-Pixel, Inc. 2005 Stock Incentive Plan (1) (2)
10.3
Uni-Pixel, Inc. 2005 Stock Incentive Plan - Notice of Stock Option Award (1) (2)
10.4
Agreement and Plan of Merger and Reorganization Among Real-Estateforlease.com, Inc., Uni-Pixel Merger Sub, Inc., Gemini V, Inc., Uni-Pixel Displays, Inc. and those Stockholders of Real-Estateforlease.com, Inc. Listed on Exhibit “A” as “Company Stockholders” (1)
10.5
Uni-Pixel, Inc. 2007 Stock Incentive Plan (4) (2)
10.6
Uni-Pixel, Inc. 2010 Stock Incentive Plan (5) (2)
10.7
Uni-Pixel, Inc. 2011 Stock Incentive Plan (7) (2)
10.8
Preferred Price and Capacity License Agreement (including Statement of Work No. 1, as amended) dated November 20, 2012 (8) (10) (15)
10.9
Capacity License Agreement dated March 21, 2013 (8) (13) (16)
10.10
Amended Capacity License Agreement dated April 21, 2014 (9) (15)
10.11
Purchase and Sale Agreement by and between Uni-Pixel Displays, Inc. as Buyer and Atmel Corporation as Seller (10)
10.12
XTouch Patent License Agreement between Uni-Pixel Displays, Inc. and Atmel Corporation (10)
10.13
XTouch Intellectual Property License Agreement between Uni-Pixel Displays, Inc. and Atmel Corporation (10)
10.14
Transition Services Agreement between Uni-Pixel Displays, Inc. and Atmel Corporation (10)
10.15
Lease Agreement by and between Atmel Corporation as Lessor and Uni-Pixel Displays, Inc. as Lessee (Building 2) (10)
10.16
Lease Agreement by and between Atmel Corporation as Lessor and Uni-Pixel Displays, Inc. as Lessee (Building 4) (10)
10.17
Bill of Sale and Assignment and Assumption Agreement (10)
10.18
FLT (Fine Line Technology) Patent License between Uni-Pixel Displays, Inc. and CIT Technology Limited (10)
10.19
FLT (Fine Line Technology) Intellectual Property License between Uni-Pixel Displays, Inc. and CIT Technology Limited (10)
10.20
Agreement for the Provision of Manufacturing and Technology Transfer Services between CIT Technology Limited and Uni-Pixel Displays, Inc. (10)
10.21
Form of Securities Purchase Agreement between Uni-Pixel, Inc. and the investors listed on the Schedule of Buyers (10)
10.22
Pledge and Security Agreement made by Uni-Pixel, Inc. and Uni-Pixel Displays, Inc. in favor of Hudson Bay Master Fund Ltd. as Collateral Agent (10)
10.23
Guaranty Agreement issued by Uni-Pixel Displays, Inc. in favor of the investors listed on the Schedule of Buyers (10)
10.24
Form of Lock-Up Agreement (10)
10.25
Offer Letter, dated as of May 21, 2015, by and between Uni-Pixel, Inc. and Ms. Christine Russell (11)
10.26
Offer Letter, dated as of May 1, 2015, by and between Uni-Pixel, Inc. and Mr. Jalil Shaikh (12)
10.27
Form of Subscription Agreement, dated November 24, 2015 (13)
10.28
Placement Agency Agreement, dated November 24, 2015, between Uni-Pixel, Inc. and Roth Capital Partners, LLC (13)
10.29
Waiver and Consent with Hudson Bay Master Fund Ltd. (14)
Code of Ethics (9)
Subsidiaries (14)
23.1
Consent of PMB Helin Donovan, LLP, Independent Registered Public Accounting Firm (14)
31.1
Certification of the Chief Executive Officer, President and Principal Executive Officer of Uni-Pixel, Inc., pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (14)
31.2
Certification of the Chief Financial Officer of Uni-Pixel, Inc., pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (14)
32.1
Certification of the Chief Executive Officer, President and Principal Executive Officer of Uni-Pixel, Inc., pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (14)
32.2
Certification of the Chief Financial Officer of Uni-Pixel, Inc., pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (14)
The following financial information from this Annual Report on Form 10-K for the fiscal year ended December 31, 2015, formatted in XBRL (Extensible Business Reporting Language) and furnished electronically herewith: (i) the Condensed Balance Sheets; (ii) the Condensed Statements of Operations; (iii) the Condensed Statements of Cash Flows; and (iv) the Notes to Financial Statements, tagged as blocks of text and in detail (14)
(1)
Previously filed as an exhibit to our Form 10-SB, filed on February 18, 2005, and incorporated by reference hereto.
(2)
Management contract or compensation plan or arrangement.
(3)
Previously filed as an exhibit to our Form 10-KSB, filed on March 28, 2006, and incorporated by reference hereto.
(4)
Previously filed as an exhibit to our Form 8-K, filed on September 20, 2007, and incorporated by reference hereto.
(5)
Previously filed as an exhibit to our Form S-8, filed on June 4, 2010, and incorporated by reference hereto.
(6)
Previously filed as an exhibit to our Form S-1, Amendment #3, filed on December 1, 2010, and incorporated by reference hereto.
(7)
Previously filed as an exhibit to our Form S-8, filed on September 15, 2011, and incorporated by reference hereto.
(8)
Previously filed as an exhibit to our Amendment No. 1 to Form 10-K, filed on January 27, 2015, and incorporated by reference hereto.
(9)
Previously filed as an exhibit to our Form 10-K, filed on February 26, 2015, and incorporated by reference hereto.
(10)
Previously filed as an exhibit to our Form 8-K, filed on April 17, 2015, and incorporated by reference hereto.
(11)
Previously filed as an exhibit to our Form 8-K, filed on May 28, 2015, and incorporated by reference hereto.
(12)
Previously filed as an exhibit to our Form 8-K, filed on June 1, 2015, and incorporated by reference hereto.
(13)
Previously filed as an exhibit to our Form 8-K, filed on November 24, 2015, and incorporated by reference hereto
(14)
Filed herewith.
(15)
We continue to believe that no law, rule or regulation requires the filing of this agreement, but we are filing the agreement at the direction of the Securities and Exchange Commission.
(16)
Confidential treatment is requested for certain portions of this exhibit pursuant to Rule 24b-2 under the Securities Exchange Act of 1934. In accordance with Rule 24b-2, these confidential portions have been omitted from this exhibit and filed separately with the Securities and Exchange Commission.
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the Registrant has caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
In accordance with the Exchange Act, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
Signature
Title
Date
/s/ Jeff A. Hawthorne
Chief Executive Officer (Principal Executive Officer), President and Director
March 30, 2016
Jeff A. Hawthorne
/s/ Christine A. Russell
Chief Financial Officer (Principal Financial and Accounting Officer) and Secretary
March 30, 2016
Christine A. Russell
/s/ Carl J. Yankowski
Director
March 30, 2016
Carl J. Yankowski
/s/ Bruce I Berkoff
Director
March 30, 2016
Bruce I. Berkoff
/s/ Ross A. Young
Director
March 30, 2016
Ross A. Young
/s/ William Wayne Patterson
Director
March 30, 2016
William Wayne Patterson
/s/ Anthony J. LeVecchio
Director
March 30, 2016
Anthony J. LeVecchio
/s/ Malcolm J. Thompson
Director
March 30, 2016
Malcolm J. Thompson
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
OF UNI-PIXEL, INC.
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets, December 31, 2015 and 2014
Consolidated Statements of Operations for the years ended December 31, 2015 and 2014 and 2013
Consolidated Statements of Shareholders’ Equity from December 31, 2012 to December 31, 2015
Consolidated Statements of Cash Flows for the years ended December 31, 2015 and 2014 and 2013
Notes to Audited Consolidated Financial Statements
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders of
Uni-Pixel, Inc.:
We have audited the accompanying consolidated balance sheets of Uni-Pixel, Inc. (the ”Company”) as of December 31, 2015 and 2014, and the related consolidated statements of operations, shareholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2015. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audit as of December 31, 2015 in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting at December 31, 2015. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion at December 31, 2015. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of the Company's internal control over financial reporting as of December 31, 2014, based on criteria established in Internal Control - Integrated Framework (2013) issued by COSO and our report dated February 26, 2015 expressed an unqualified opinion thereon.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Uni-Pixel, Inc. as of December 31, 2015 and 2014, and the related consolidated statements of operations, shareholders’ equity, and cash flows for each of the years in the three year period ended December 31, 2015 in conformity with accounting principles generally accepted in the United States of America.
PMB Helin Donovan LLP
/s/ PMB Helin Donovan LLP
March 30, 2016
Dallas, Texas
Uni-Pixel, Inc.
Consolidated Balance Sheets
(In thousands, except per share data)
The accompanying notes are an integral part of these consolidated financial statements.
Uni-Pixel, Inc.
Consolidated Statements of Operations
(In thousands, except per share data)
The accompanying notes are an integral part of these consolidated financial statements.
Uni-Pixel, Inc.
Consolidated Statements of Shareholders’ Equity
(In thousands, except for share data)
The accompanying notes are an integral part of these consolidated financial statements.
Uni-Pixel, Inc.
Consolidated Statements of Cash Flows
(In thousands, except per share data)
The accompanying notes are an integral part of these consolidated financial statements.
UNI-PIXEL, INC.
Notes to the Audited Consolidated Financial Statements
Note 1 - Basis of Presentation, Business and Organization
Uni-Pixel, Inc., a Delaware corporation, is the parent company of Uni-Pixel Displays, Inc., its wholly-owned operating subsidiary. As used herein, “Uni-Pixel,” “the Company,” “we,” “us,” and “our” refer to Uni-Pixel, Inc. and Uni-Pixel Displays, Inc. Our common stock, par value $0.001 per share, is quoted on The NASDAQ Capital Market under the ticker symbol “UNXL.”
We believe we are one of the technology leaders in the optical design and manufacturing of large area microstructured polymer film materials and related technologies for the display, flexible electronics, and automotive industries. Our microstructured polymer films, which we refer to as Performance Engineered Films (PEFs), are designed to lower the cost and improve functionality and performance of devices in the markets they address. We make transparent conductive films and flexible electronic films based on our proprietary manufacturing process for high volume, roll to roll printing of flexible thin-film conductor patterns. The process offers precision micro-electronic circuit patterning and modification of surface characteristics over a large area on an ultra-thin, clear, flexible, plastic substrate. These films may be incorporated into computer, tablet, printer and smartphone touch sensors, as well as automotive, applications. We sell the touch screen films under the brand XTouch™, as sub-components of a fully assembled touch sensor module.
In addition to the flexible electronic films described above, we have developed 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 sell our hard coat resin and optical films under the Diamond Guard® brand.
On April 16, 2015 (the “Closing Date”), our wholly-owned subsidiary, Uni-Pixel Displays, Inc. (“Displays”), acquired from Atmel Corporation (“Atmel”), pursuant to the terms of a Purchase and Sale Agreement, a Patent License Agreement, an IP License Agreement, a Bill of Sale and Assignment and Assumption Agreement and two leases for real property, certain assets used for the production of capacitive touch sensors comprised of fine lines of copper metal photo lithographically patterned and plated on flexible plastic film (the “Touch Sensors”). Displays paid $450,000 for the machinery, parts and equipment needed to manufacture the Touch Sensors and the existing inventory on hand by issuing to Atmel a secured promissory note (the “Atmel Note”) which is due on or before the earlier of (i) the second anniversary of the closing date or (ii) the sale of equity and/or debt securities after the closing date pursuant to which Displays or any affiliate of ours receives gross proceeds of no less than $5 million. The promissory note is secured by the purchased assets and certain accounts receivable. 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 closing date. 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 of the Touch Sensors during the Initial Term. Displays has the unilateral 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 closing 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 Closing Date.
As part of the asset acquisition, Displays also entered into leases with Atmel Corporation for Building 2 and Building 4, both of which are located at 1150 E. Cheyenne Mountain Boulevard, Colorado Springs, Colorado. The term of each lease is 18 months (the “Primary Lease Term”). The term of each lease may be extended for two additional six month periods. We believe that Building 2 and Building 4 are currently suitable for the operations related to the manufacture and distribution of the Touch Sensors.
Displays also acquired from CIT Technology Limited, an FLT (Fine Line Technology) Patent License Agreement and an FLT (Fine Line Technology) Intellectual Property License Agreement and entered into an agreement for the provision of manufacturing and technology transfer services.
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 and automotive. We have and will continue to utilize contract manufacturing for prototype fabrication to augment our internal capabilities in the short term. We also plan to enter into licensing arrangements, joint developments or ventures in key market segments to exploit the manufacturing and distribution channels of those companies with whom we contract.
As of December 31, 2015, Uni-Pixel had accumulated a total deficit of $149.2 million from operations in pursuit of these objectives.
As of December 31, 2015, we had cash and cash equivalents of $11.7 million which includes $4.1 million of restricted cash. As of February 2016, the $4.1 million of restricted cash was released and received. We believe that our existing capital resources are adequate to finance our operations until at least December 31, 2016 based on our current long-term business plan. However, our long-term viability is dependent upon our ability to successfully operate our business, develop our manufacturing process, sign partnership agreements, develop our products and raise additional capital either as debt or through offerings of our securities to meet our business objectives.
The Company is subject to a number of risks, including the financial performance of its current products; the potential need for additional financings; its ability to successfully commercialize its product candidates; the uncertainty of the Company’s research and development efforts resulting in future successful commercial products; significant competition from larger organizations; reliance on the proprietary technology of others; dependence on key personnel; uncertain patent protection; dependence on corporate partners and collaborators; as well as other changes in the electronic market industry.
Basis of Presentation
The consolidated financial statements presented in this annual 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
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, valuation of derivative liability, impairment of property and equipment and intangible assets, deferred taxes, and the provision for and disclosure of litigation and loss contingencies and stock based compensation. Actual results may differ materially from those estimates.
Reclassification
Certain prior year amounts have been reclassified to conform to the year presentation. The reclassification includes reclassifying assets held for sale from fixed assets related to our discontinue operations. We also reclassified certain expenses in research and development to discontinued operations. The amounts for the prior periods have been reclassified to be consistent with the current year presentation and have no impact on previously reported financials.
Statements of cash flows
For purposes of the statements of cash flows, we consider all highly liquid investments (i.e., investments which, when purchased, have original maturities of three months or less) to be cash equivalents.
Concentration of credit risk
We maintain our cash primarily 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 December 31, 2015 and December 31, 2014. The amounts held in these banks did exceed the insured limit of $250,000 as of December 31, 2015 and December 31, 2014. We have not incurred losses related to these deposits.
Restricted cash
As of December 31, 2015, we had restricted cash of $4.1 million. As of February 2016, the remaining $4.1 million has been released and received by the Company. This amount related to our Convertible Note.
Accounts Receivable
The carrying value of our accounts receivable, net of allowance for doubtful accounts, represents their estimated net realizable value. We estimate the allowance for doubtful accounts based on type of customer, age of outstanding receivable, historical collection trends, and existing economic conditions. If events or changes in circumstances indicate that a specific receivable balance may be unrealizable, further consideration is given to the collectability of those balances, and the allowance is adjusted accordingly. Receivable balances deemed uncollectible are written off against the allowance. We have $0.3 million and $0 accounts receivable balances at December 31, 2015 and 2014, respectively, none of which was reserved as uncollectible.
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 and beneficial conversion features associated with the issuance of the debt. Discounts are amortized over the life of the convertible debt. The convertible debt is presented on the face of the financial statement as proceeds less the balance of unamortized discounts.
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.
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.
Property and equipment
Property and equipment, consisting primarily of lab equipment, computer equipment, software, leasehold improvements, and office furniture and fixtures is carried at cost less accumulated depreciation and amortization. Depreciation and amortization for financial reporting purposes is provided by the straight-line method over the estimated useful lives of three to five years. Leasehold improvements are amortized using the straight-line method over the remaining lease term or the life of the asset, whichever is shorter. The cost of repairs and maintenance is charged as an expense as incurred. Gains or losses related to retirements or dispositions of fixed assets are recognized in the period incurred.
Revenue recognition
We recognize revenue over the period the service is performed. In general, this requires that four basic criteria must be met before revenue can be recognized: (1) persuasive evidence that an arrangement exists, (2) delivery has occurred or services have been rendered, (3) the fee is fixed and determinable, and (4) collectability is reasonably assured.
Advance payments are deferred until shipment of product has occurred or services have 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. Contracts with Dell, Inc. (“Dell”) and Intel Corporation (“Intel”) entered into during 2012 and 2013, respectively, are being accounted for 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.
In December 2012, the Company and Dell entered into a touch sensor Preferred Price and Capacity License Agreement and entered into Statement of Work Number One (collectively, the “Original Agreement”) to manufacture specified touch sensors. Statement of Work Number One had three phases and three milestones. The three phases were as follows:
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Phase 1 - The parties were to engage with designated manufacturers to design product solutions based on the Company’s technology
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Phase 2 - The Company was to deliver production-quality samples of products based on Dell’s specifications for specific products
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Phase 3 - The Company was to deliver to the designated manufacturers production-level volumes in calendar year 2013
The three milestones were as follows:
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Milestone 1 - Execution of contract (non-substantive) and completion of new plating manufacturing facility per specifications on or about April 30, 2013 (substantive) - $5 million
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Milestone 2 - Deliver production quality metal mesh sensors on or around July 31, 2013 (substantive) - $5 million
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Milestone 3 - Production purchase order at production level volumes to be delivered in calendar year 2013 (non-substantive) - $5 million
During 2013, we recognized $5.0 million of revenue from Dell as non-recurring engineering revenue under the milestone method for completion of Milestone 1. Because this was a one-time payment, the Company does not believe that the loss of this customer would have a material adverse effect on the Company’s business.
Effective February 25, 2014, the Company and Dell entered into Amendment No. 1 to Statement of Work No. 1 (the “Amendment”). The Amendment affirmed that the parties had agreed not to proceed with Phase 2 and Phase 3 as described in the Original Agreement and agreed that, as a result, no further payments were due to the Company. The Amendment also revised the Milestone 2 due date from July 31, 2013 to June 30, 2014 and terminated the exclusivity option relating to notebook computers, which required the Company to exclusively make and sell touch sensor film to Dell for notebook computer or hybrid devices that were launched in calendar year 2013. The exclusivity waiver allows the Company the opportunity to sell its touch sensors for use in competing notebook applications. The preferred pricing and capacity aspects of the Original Agreement remained unchanged.
In April 2013, we entered into an agreement with Intel (the “Agreement”), whereby we were to receive $10 million of cash proceeds to assist us in increasing our production capacity. Under the terms of the Agreement, there were two milestones with related contingent consideration of $5 million for each milestone plus certain commissions as described below. The Agreement required us to purchase certain equipment, which we purchased in 2013 and which we consider not a substantive milestone. The Agreement required us to have the capability to produce at least 1 million sensor units per month (as defined in the Agreement) by April 2014, which we consider a substantive milestone. We received $5 million in May 2013, which is non-refundable and is recorded as deferred revenue in the accompanying consolidated balance sheet at December 31, 2014. As of December 31, 2015 the $5 million is no longer in deferred revenue. Please refer to Note 5. Upon achieving the deliverables of the Agreement, we would have paid a commission to Intel of 10% on revenue derived from the sales of InTouch™ Sensors jointly developed by Kodak made directly to Intel or to those of Intel’s manufacturing partners that use Intel’s Preferred Price and Capacity License Agreement (“Designated Customers”). The commission amount was to be paid until the aggregate commissions paid equaled the commission cap of $18.5 million. The term of the Agreement is the later of 3 years or the full payment of the commission cap. If the Company committed a material breach of the license agreement, certain equipment of the Company with an original cost of approximately $10.1 million would be assigned to Intel to make them whole on any remaining amounts due under the commission cap of $18.5 million. In April 2014, we entered into the First Amendment to the Capacity License Agreement with Intel (the “Amended Agreement”). The Amended Agreement modified the original Agreement terms as follows: 1) the inability of the Company to reach, by April 2014, the minimum production capability and the required quality standards specified in the Agreement will no longer constitute a material breach to the Agreement; 2) the total amount of cash proceeds to be received was reduced from $10 million to $5 million, which included the $5 million we received in May 2013; 3) the cap on the commission amount was reduced from $18.5 million to $6.25 million; 4) the term “commission” was defined as 10% of gross revenue from the sale of all InTouch™ sensors sold by the Company, which includes sales of sensors to all customers including, but not limited to, Intel and its Designated Customers; 5) if the Company becomes the subject of any proceeding under any bankruptcy, insolvency or liquidation law, the Company will assign all title and ownership to certain designated equipment (the “Equipment”) to Intel; and 6) if the Company materially breaches the Amended Agreement, which breach is not cured within 30 days after receipt of notice from Intel, the Company may choose to either (A) pre-pay the cap on the commission to Intel (less the total of all previously paid commissions) or (B) assign all title and ownership to the Equipment to Intel. The only remaining milestone of the Amended Agreement was the capability to produce at least 1 million sensors units per month. However, the Capacity License Agreement pertained to the old technology that was jointly developed by Kodak was terminated in April 2015 and the Company has abandoned this technology. Therefore, the Company recorded a $5 million gain on relief of deferred revenue liability for discontinued operations in the fourth quarter of 2015. See Note 5.
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 from estimated costs in some cases and are adjusted for in the period in which they become known.
Stock-based compensation
We recognize the cost of stock options and restricted stock in accordance with Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) Topic 718 Compensation - Stock Compensation (“Topic 718”). Topic 718 requires us to measure the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award. That cost will be recognized over the period during which an employee is required to provide service in exchange for the reward-known as the requisite service period. No compensation cost is recognized for equity instruments for which employees do not render the requisite service. The grant-date fair value of employee share options and similar instruments will be estimated using option-pricing models adjusted for the unique characteristics of those instruments.
We may, from time to time, issue common stock, stock options or common stock warrants to acquire services or goods from non-employees. Common stock, stock options and common stock warrants issued to persons other than employees or directors are recorded on the basis of their fair value, as required by Topic 718 which is measured as of the date required by FASB ASC Topic 505 Equity (“Topic 505”). In accordance with Topic 505, the stock options or common stock warrants are valued using the Black-Scholes model on the basis of the market price of the underlying common stock on the “valuation date,” which for options and warrants related to contracts that have substantial disincentives to non-performance, is the date of the contract, and for all other contracts is the vesting date. Expense related to the options and warrants is recognized on a straight-line basis over the shorter of the period over which services are to be received or the vesting period. Where expense must be recognized prior to a valuation date, the expense is computed under the Black-Scholes model on the basis of the market price of the underlying common stock at the end of the period, and any subsequent changes in the market price of the underlying common stock through the valuation date is reflected in the expense recorded in the subsequent period in which that change occurs.
The following disclosures provide information regarding the Company’s stock-based compensation awards, all of which are classified as equity awards in accordance with Topic 718:
Stock options
The Company grants stock options to employees that allow them to purchase shares of the Company’s common stock. Options are also granted to members of the Board of Directors. The Company determines the fair value of stock options at the date of grant using the Black-Scholes valuation model. The risk-free interest rate was derived from the Daily Treasury Yield Curve Rates as published by the U.S. Department of the Treasury as of the grant date for terms equal to the expected terms of the options,. The expected volatility was based on the historical volatility of the Company’s stock price over the expected term of the options. Most options vest annually over a three-year service period or monthly over a three-year period. The Company will issue new shares of common stock upon the exercise of stock options.
Total compensation expense recognized for options was approximately $1.5 million, $2.4 million and $3.4 million for the twelve months ended December 31, 2015, December 31, 2014 and December 31, 2013, respectively.
Equity instruments issued to non-employees
From time to time, in order to preserve cash and to fund operating activities, common stock or other equity instruments may be issued for cash or in exchange for goods or services. Equity instruments issued for goods or services are recorded at the fair value of the goods or services received or the fair value of the equity instruments issued, whichever is more reliably measurable.
Income taxes
An asset and liability approach is used for financial accounting and reporting for income taxes. Deferred income taxes arise from temporary differences between income tax and financial reporting and principally relate to recognition of revenue and expenses in different periods for financial and tax accounting purposes and are measured using currently enacted tax rates and laws. In addition, a deferred tax asset can be generated by net operating loss carryforwards. If it is more likely than not that some portion or all of a deferred tax asset will not be realized, a valuation allowance is recognized.
The Company has losses carried forward for income tax purposes to December 31, 2015. There are no current or deferred tax expenses for the twelve month periods ended December 31, 2015, 2014 and 2013 due to the Company’s loss position. The Company has fully reserved for any benefits of these losses. The deferred tax consequences of temporary differences in reporting items for financial statement and income tax purposes are recognized, as appropriate. Realization of the future tax benefits related to the deferred tax assets is dependent on many factors, including the Company’s ability to generate taxable income within the net operating loss carryforward period. Management has considered these factors in reaching its conclusion as to the valuation allowance for financial reporting purposes. Accordingly, no benefit has been recognized on the net loss as the realization of the net operating loss carryforward cannot be assured.
The Company regularly assesses uncertain tax positions in each of the tax jurisdictions in which it has operations and accounts for the related financial statement implications. Unrecognized tax benefits are reported using the two-step approach under which tax effects of a position are recognized only if it is “more-likely-than-not” to be sustained and the amount of the tax benefit recognized is equal to the largest tax benefit that is greater than fifty percent likely of being realized upon ultimate settlement of the tax position. Determining the appropriate level of unrecognized tax benefits requires the Company to exercise judgment regarding the uncertain application of tax law. The amount of unrecognized tax benefits is adjusted when information becomes available or when an event occurs indicating a change is appropriate. Future changes in unrecognized tax benefits requirements could have a material impact on the results of operations. The Company evaluated its tax positions and determined that there were no uncertain tax positions for the years ended December 31, 2015, 2014 and 2013.
The Company files U.S. federal and U.S. state tax returns. The Company is generally no longer subject to tax examinations relating to federal and state tax returns for years prior to 2011.
The Company is subject to Texas franchise tax, which is based on taxable margin, rather than being based on federal taxable income. For the years ended December 31, 2015 and 2015, the Company has no Texas margin tax obligation.
Loss per share data
Basic loss per share is calculated based on the weighted average common shares outstanding during the period. Diluted loss per share also gives effect to the dilutive effect of stock options, warrants (calculated based on the treasury stock method) and Convertible Notes and convertible preferred stock. The Company does not present diluted loss per share for years in which it incurred net losses as the effect is antidilutive.
At December 31, 2015, options and warrants to purchase 13,011,554 shares of common stock at exercise prices ranging from $1.22 to $38.70 per share were outstanding, but were not included in the computation of diluted loss per share as their effect would be antidilutive.
At December 31, 2014, options and warrants to purchase 2,351,803 shares of common stock at exercise prices ranging from $5.00 to $38.70 per share were outstanding, but were not included in the computation of diluted loss per share as their effect would be antidilutive.
At December 31, 2013, options and warrants to purchase 2,495,913 shares of common stock at exercise prices ranging from $5.00 to $38.70 per share were outstanding, but were not included in the computation of diluted loss per share as their effect would be antidilutive.
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, 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
Accounting standards that have been issued or proposed by the FASB or other standards-setting bodies are not expected to have a material impact on the Company’s financial position, results of operations or cash flows.
Accounting Guidance Not Yet Effective
In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers. ASU 2014-09 requires an entity to recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. To achieve this core principle, the guidance provides that an entity should apply the following steps: (1) identify the contract(s) with a customer; (2) identify the performance obligations in the contract; (3) determine the transaction price; (4) allocate the transaction price to the performance obligations in the contract; and (5) recognize revenue when, or as, the entity satisfies a performance obligation. The Company expects to adopt ASU 2014-09 for the fiscal year ending December 31, 2017 and the Company will continue to assess the impact on its financial statements.
Other accounting standards that have been issued or proposed by the FASB or other standards-setting bodies are not expected to have a material impact on the Company’s financial position, results of operations and cash flows.
Note 3 - Property and Equipment and Inventory
A summary of the components of property and equipment at December 31:
Depreciation and amortization expense of property and equipment for the years ended December 31, 2015, 2014 and 2013 was $3.9 million, $6.1 million and $2.2 million, respectively. With the agreement with Kodak signed on August 2015, following the termination of the joint development project, the Company had a $10.2 million write-down of the assets and accumulated depreciation.
A summary of the components of inventory
Note 4 - Income Taxes
The Company has a cumulative net operating loss for tax purposes of approximately $125.1 million, $91.9 million and $64.3 million at December 31, 2015, 2014 and 2013, respectively. The Company has a potential deferred tax asset of approximately $42.6 million as a result of this net operating loss carry forward at December 31, 2015. In assessing the realization of deferred tax assets, management considers whether it is likely that some portion or all of the deferred tax assets will be realized. The ultimate realization of deferred tax assets is dependent upon the Company attaining future taxable income during periods in which those temporary differences become deductible. Due to the uncertainty surrounding the realization of the benefits of its tax attributes, including net operating loss carryforwards, in future tax returns, the Company has provided a 100% valuation allowance on its deferred tax assets. The valuation allowance increased by approximately $11.3 million, $4.4 million and $6.7 million for the years ended December 31, 2015 and 2014, respectively.
The following table sets forth a reconciliation of the statutory federal income tax for the year ended December 31 (in thousands):
The Company’s deferred tax assets consist of the following (in thousands) as of December 31:
The net operating loss carryforward began to expire in 2015, if not utilized. Internal Revenue Code Section 382 limits net operating loss and tax credit carryforwards when an ownership change of more than fifty percent of the value of the stock in a loss corporation occurs within a three-year period. This change occurred during the year ended December 31, 2004. It is possible that additional changes in control may result in additional Section 382 limits. Accordingly, the ability to utilize remaining net operating loss and tax credit carryforwards has been significantly restricted with the recent equity transactions.
Note 5 - Commitments and Contingencies
Leases
The Company has entered into a lease for office, warehouse and laboratory facilities for approximately 13,079 square feet at 8708 Technology Forest Pl., Ste. 100, The Woodlands, Texas 77381 under a third party non-cancelable operating lease through April 30, 2016. This lease was terminated early on September 30, 2015 for $40,000. The Company has also entered into a lease for office, warehouse and laboratory facilities for approximately 7,186 square feet at 3400 Research Forest Drive, Suite B2, The Woodlands, Texas 77381 under a third party non-cancelable operating lease through May 31, 2016. 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 15, 2016. 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. Future minimum lease commitments as of December 31, 2015 are as follows:
Rent expense for 2015, 2014 and 2013 was $804,000, $361,000 and $286,000, respectively.
Royalty Obligation to Intel Corporation
In April 2013, we entered into an agreement with Intel (the “Agreement”), whereby we were to receive $10 million of cash proceeds to assist us in increasing our production capacity. Under the terms of the Agreement, there were two milestones with related contingent consideration of $5 million for each milestone plus certain commissions as described below. The Agreement required us to purchase certain equipment, which we purchased in 2013 and which we consider not a substantive milestone. The Agreement required us to have the capability to produce at least 1 million sensor units per month (as defined in the Agreement) by April 2014, which we consider a substantive milestone. We received $5 million in May 2013, which is non-refundable and is recorded as deferred revenue in the accompanying consolidated balance sheet at December 31, 2014. As of December 31, 2015 the $5 million is no longer in deferred revenue. Upon achieving the deliverables of the Agreement, we would have paid a commission to Intel of 10% on revenue derived from the sales of InTouch™ Sensors jointly developed with Kodak made directly to Intel or to those of Intel’s manufacturing partners that use Intel’s Preferred Price and Capacity License Agreement (“Designated Customers”). The commission amount was to be paid until the aggregate commissions paid equaled the commission cap of $18.5 million. The term of the Agreement is the later of 3 years or the full payment of the commission cap. If the Company committed a material breach of the license agreement, certain equipment of the Company with an original cost of approximately $10.1 million would be assigned to Intel to make them whole on any remaining amounts due under the commission cap of $18.5 million.
In April 2014, we entered into the First Amendment to the Capacity License Agreement with Intel (the “Amended Agreement”). The Amended Agreement modified the original Agreement terms as follows: 1) the inability of the Company to reach, by April 2014, the minimum production capability and the required quality standards specified in the Agreement will no longer constitute a material breach to the Agreement; 2) the total amount of cash proceeds to be received was reduced from $10 million to $5 million, which included the $5 million we received in May 2013; 3) the cap on the commission amount was reduced from $18.5 million to $6.25 million; 4) the term “commission” is defined as 10% of gross revenue from the sale of all sensors sold by the Company, which includes sales of InTouch™ Sensors to all customers including, but not limited to, Intel and its Designated Customers; 5) if the Company becomes the subject of any proceeding under any bankruptcy, insolvency or liquidation law, the Company will assign all title and ownership to certain designated equipment (the “Equipment”) to Intel; and 6) if the Company materially breaches the Amended Agreement, which breach is not cured within 30 days after receipt of notice from Intel, the Company may choose to either (A) pre-pay the cap on the commission to Intel (less the total of all previously paid commissions) or (B) assign all title and ownership to the Equipment to Intel. The only remaining milestone of the Amended Agreement is the capability to produce at least 1 million sensors units per month.
In the fourth quarter of 2015, the Company recorded a $5.0 million gain on relief of deferred revenue liability for discontinued operations. The $5 million was originally received in 2013 and was related to the technology in the Capacity License Agreement that was based on the InTouch™ Sensor technology which is no longer used. The InTouch™ Sensor technology was developed in the partnership with Kodak which was terminated in April 2015.
Class Action Litigation and Settlement
In June 2013, two purported class action complaints were filed in the United States District Court, Southern District of New York and the United States District Court, Southern District of Texas against the Company and our former CEO, former CFO, and former Chairman. The Southern District of New York complaint was voluntarily dismissed by plaintiff on July 2, 2013. The surviving complaint, with the caption Fitzpatrick, Charles J. v. Uni-Pixel, Inc., et. al. (Cause No. 4:13-cv-01649), alleged that we and our officers and directors violated the federal securities laws, specifically Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, by making purportedly false and misleading statements concerning our licensing agreements and product development (the “Class Action Litigation”). The complaint sought unspecified damages on behalf of a purported class of purchasers of our common stock during the period from December 7, 2012 to May 31, 2013. On July 25, 2014, the judge granted in part and denied in part our motion to dismiss the case, significantly limiting the claims remaining in the Class Action Litigation. On August 25, 2014, we filed an answer to the complaint. In November 2014, we entered into a memorandum of understanding to settle the Class Action Litigation. The proposed settlement would result in a payment of $2.35 million in cash to the settlement class, inclusive of fees and expenses. In addition, we agreed to issue $2.15 million in common stock to the settlement class with a range of shares of common stock between 358,333 shares and 430,000 shares, calculated by using the trailing 5 day average stock price from the date of Court approval of the settlement. On April 30, 2015, the Court approved the settlement of the Class Action Litigation on the terms set forth above. As a result, the Company issued 430,000 shares of common stock. The cash payment portion of the settlement of $2.35 million was paid from insurance proceeds. The common stock portion of this settlement, totaling $2.15 million is included in other expense and in current liabilities (Settlement of Class Action and Derivative Lawsuits) on the accompanying consolidated financial statements. Following the issuance of the common stock in May 2015, this amount was reclassified to Additional Paid In Capital and Common Stock.
Shareholder Derivative Litigation
On February 19, 2014, a shareholder derivative lawsuit, Jason F. Gerzseny v. Reed J. Killion, et. al., was filed in the 165th Judicial District in Harris County, Texas. On February 21, 2014, another shareholder derivative lawsuit, Luis Lim v. Reed J. Killion, et. al., was also filed in Harris County district court. Both complaints alleged various causes of action against certain of the Company’s current and former officers and directors, including claims for breach of fiduciary duty, corporate waste, insider selling, and unjust enrichment. On April 8, 2014, these derivative actions were consolidated into one action, captioned In re Uni-Pixel, Inc., Shareholder Derivative Litigation (Cause No. 2014-08251) (the “Shareholder Derivative Litigation”), and on September 9, 2014, plaintiff filed an amended consolidated complaint. On April 13, 2015, the Court approved the settlement of the Shareholder Derivative Litigation, which required the payment of $150,000 in cash and the issuance of 20,833 shares of the common stock. The cash payment portion of the settlement was paid from insurance proceeds. The common stock portion of the settlement, totaling $125,000, is included in other expense and in current liabilities on the accompanying consolidated financial statements. Following issuance of the common stock in April 2015, this amount was reclassified to Additional Paid In Capital and Common Stock.
Securities and Exchange Commission Investigation
On November 19, 2013, the Company learned that the Fort Worth Regional Office of the United States Securities and Exchange Commission (“SEC”) issued subpoenas concerning the Company’s agreements related to our InTouch™ Sensors. The Company cooperated fully with the SEC regarding this non-public, fact-finding inquiry, and the U.S. District Court for the Southern District of Texas on March 16, 2016 signed a Final Judgment on a complaint filed by the SEC pursuant to our consent. Without admitting or denying the allegations of the SEC’s complaint, we consented to the Judgment, which permanently enjoins us from violating Sections 10(b) and 13(b)(2)(A) and (B) of the Securities Exchange Act of 1934 (the “Exchange Act”), Rule 10b-5 of the SEC and Section 17(a) of the Securities Act of 1933. The Final Judgment also permanently enjoins the filing with the SEC any periodic report pursuant to Section 13(a) of the Exchange Act and Rules 13a-1, 13a-11, 13a-13 and 12b-20 of the SEC, which contains any untrue statement of material fact, or which omits to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading, or which fails to comply in any material respect with the requirements of Section 13(a) of the Exchange Act and the rules and regulations thereunder. The Final Judgment also provides for a civil penalty in the amount of $750,000 to be paid in accordance with the following schedule:
(1) $20,000, within 14 days of entry of this Final Judgment;
(2) $20,000, within 104 days of entry of this Final Judgment;
(3) $30,000, within 194 days of entry of this Final Judgment;
(4) $45,000, within 284 days of entry of this Final Judgment;
(5) $60,000, within 374 days of entry of this Final Judgment;
(6) $70,000, within 464 days of entry of this Final Judgment;
(7) $80,000, within 554 days of entry of this Final Judgment;
(8) $80,000, within 644 days of entry of this Final Judgment;
(9) $80,000, within 734 days of entry of this Final Judgment;
(10) $85,000, within 824 days of entry of this Final Judgment;
(11) $90,000, within 914 days of entry of this Final Judgment;
(12) $90,000, within 1004 days of entry of this Final Judgment
The $750,000 settlement was recorded in other expense on the consolidated income statement and $115,000 in current liabilities and $635,000 in long-term liabilities in the consolidated balance sheet at December 31, 2015.
Employment agreements
As of December 31, 2015, the Company does not have any employment agreements outstanding. The Company has agreed that, if the employment of Jeff Hawthorne, the Company’s Chief Executive Officer and President, is terminated as a result of a Change of Control, Mr. Hawthorne will receive a severance payment consisting of 2 times his annual base salary and all unvested options and restricted shares of stock shall become vested immediately. The Company has also agreed that, if the employment of Christine Russell, the Company’s Chief Financial Officer, is terminated during the period that begins when negotiations for a Change in Control (as defined in the offer letter dated May 21, 2015) begin and ends on the nine month anniversary of the closing of the Change in Control transaction and such termination is not a termination for any other reason, (i) Ms. Russell will receive a severance payment equal to one year of her annual salary, (ii) all unvested equity awards she may have received during her employment will, to the extent that such awards are unvested, immediately vest and (iii) should she elect to continue to receive group health benefits under COBRA, for a period of 12 months following her termination the Company will pay the premiums for her continuation coverage, up to a maximum of $1,500 per month.
Note 6 - Equity, Stock Plan and Warrants
Common Stock
During the year ended December 31, 2015, we (1) issued 14,000 shares of common stock for cash in connection with the exercise of stock options; (2) issued 144,952 shares of common stock to various directors, officers and employees as stock awards; (3) issued 20,833 shares of common stock for the settlement of the derivative lawsuit; (4) issued 430,000 shares of common stock for the settlement of the class action lawsuit; (5) issued 9,584,407 shares of common stock to convert $10.0 million of principal and $0.3 million of interest into shares of common stock (6) issued 9,625,871 shares of common stock and received proceeds of $7.2 million, net of issuance costs of $1.0 million.
During the year ended December 31, 2014, the Company (1) issued 5,668 shares of common stock for cash in connection with the exercise of stock options; (2) issued 64,699 shares of common stock as a result of the cashless exercise of warrants; and (3) issued 35,634 shares of common stock to various directors and officers in connection with the vesting of restricted stock awards.
During the year ended December 31, 2013, the Company (1) issued 523,467 shares of common stock for cash in connection with the exercise of stock options; (2) issued 33,622 shares of common stock for cash in connection with the exercise of warrants; (3) issued 421,107 shares of common stock as a result of the cashless exercise of warrants; (4) issued 38,000 shares of common stock to various directors and officers in connection with the vesting of restricted stock awards; and (5) issued 1,374,250 shares of common stock and received proceeds of $41.2 million, net of issuance costs of $2.8 million.
Restricted Stock
Total compensation expense recognized for restricted stock was approximately $1.4 million, $1.3 million and $1.7 million for the fiscal years ended December 31, 2015, December 31, 2014 and December 31, 2013, respectively. The Company has recorded approximately $1.1 million of restricted stock expense in selling, general and administrative expenses and approximately $0.3 million in research and development expense for the fiscal year ended December 31, 2015, approximately $0.8 million of restricted stock expense in selling, general and administrative expenses and approximately $0.5 million in research and development expense for the fiscal year ended December 31, 2014 and approximately $1.2 million of restricted stock expense in selling, general and administrative expenses and approximately $0.5 million in research and development expense for the fiscal year ended December 31, 2013.
During the year ended December 31, 2015:
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On July 31, 2015, the Company issued 560,000 shares of restricted stock to various directors and officers. On the date of grant, these 560,000 shares of restricted stock were valued at $694,400. The 560,000 shares of restricted stock vest 1/3rd on July 31, 2016, 1/3rd on July 31, 2017 and 1/3rd on July 31, 2018.
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On November 20, 2015, the Company issued 39,935 shares of restricted stock to three employees. On the date of grant, these 39,935 shares of restricted stock were valued at $49,919. The 39,935 shares of restricted stock vested 100% on November 20, 2015.
During the year ended December 31, 2014:
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On April 14, 2014, the Company issued 232,400 shares of restricted stock to various directors and officers. On the date of grant, these 232,400 shares of restricted stock were valued at $1,975,400. The 232,400 shares of restricted stock vest 1/3rd on April 14, 2015, 1/3rd on April 14, 2016 and 1/3rd on April 14, 2017.
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On September 8, 2014, the Company issued 6,250 shares of restricted stock to an employee. On the date of grant, these 6,250 shares of restricted stock were valued at $46,313. The 6,250 shares of restricted stock vest 100% on March 1, 2015.
During the year ended December 31, 2013:
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On January 15, 2013, the Company issued 38,000 shares of restricted stock to various directors and officers. On the date of grant, these 38,000 shares of restricted stock were valued at $621,300. The 38,000 shares of restricted stock vested 100% on August 16, 2013.
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On April 26, 2013, the Company issued 106,900 shares of restricted stock to various directors and officers. On the date of grant, these 106,900 shares of restricted stock were valued at $4,137,030. The 106,900 shares of restricted stock vest 1/3rd on March 1, 2014, 1/3rd on March 1, 2015 and 1/3rd on March 1, 2015.
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On April 26, 2013, the Company issued 74,500 shares of restricted stock to various officers. On the date of grant, these 74,500 shares of restricted stock were valued at $2,883,150. The 74,500 shares of restricted stock vest 100% if certain performance criteria were met. All 74,500 shares of restricted stock were forfeited as of December 31, 2013 as certain performance criteria were not met.
At December 31, 2015, there was $1.3 million of total unrecognized compensation cost related to non-vested shares of restricted stock which is expected to be recognized over a weighted-average period of 1.83 years. There were 144,952 shares of restricted stock, net that became vested during the twelve months ended December 31, 2015.
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 3,900,001 shares of our common stock to be awarded through incentive and non-qualified stock options and stock appreciation rights.
Our Stock Incentive Plans are administered by our Board of Directors, which has exclusive discretion to select participants who will receive the awards and to determine the type, size and terms of each award granted. As of December 31, 2015, there were 513,837 shares available for issuance under the Stock Incentive Plans.
Total compensation expense recognized for options was approximately $1.5 million, $2.4 million and $3.4 million for the fiscal years ended December 31, 2015, December 31, 2014 and December 31, 2013, respectively. The Company has recorded approximately $0.6 million of stock compensation expense in selling, general and administrative expenses and approximately $0.9 million in research and development expense for the fiscal year ended December 31, 2015, approximately $0.8 million of stock compensation expense in selling, general and administrative expenses and approximately $1.6 million in research and development expense for the fiscal year ended December 31, 2014 and approximately $1.5 million of stock compensation expense in selling, general and administrative expenses and approximately $1.9 million in research and development expense for the fiscal year ended December 31, 2013.
The following table provides information about shares of common stock that may be issued upon the exercise of options under the Stock Incentive Plans as of December 31, 2015.
(1)
During 2006 and 2007, we granted a total of 86,668 stock options to board members. As of December 31, 2015, 68,001 stock options remain outstanding.
Summary Stock Option and Warrant Information
Information regarding the options and warrants granted in 2015, 2014 and 2013 is as follows:
The intrinsic value of outstanding, and expected, stock options as of December 31, 2015 is approximately $0.
The weighted average option and warrant exercise price information for 2015, 2014 and 2013 is as follows:
The fair values of the Company’s options were estimated on the date of grant using the Black-Scholes valuation model with the following weighted-average assumptions:
The risk-free interest rate was derived from the Daily Treasury Yield Curve Rates as published by the U.S. Department of the Treasury as of the grant date for terms equal to the expected terms of the options,. The expected volatility was based on the historical volatility of the Company’s stock price over the expected term of the options. At December 31, 2015, there was $0.9 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 1.68 years. There were 1.5 million options, net, that became vested during the twelve months ended December 31, 2015.
Significant option and warrant groups outstanding at December 31, 2015 and related weighted average exercise price and life information is as follows:
As of December 31, 2015:
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The weighted average exercise price of stock options outstanding, and expected to vest, is $6.54.
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The weighted average remaining life in years of stock options outstanding, and expected to vest, is 5.24.
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The weighted average exercise price of warrants outstanding, and expected to vest, is $1.59.
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The weighted average remaining life in years of warrants outstanding, and expect to vest, is 4.89.
Note 7 - Senior Secured Convertible Notes and Warrants
Concurrent with the consummation of the XTouch acquisition, on April 16, 2015 (the “Effective Date”), and pursuant to a Securities Purchase Agreement, we sold $15 million in Senior Secured Convertible Notes, together with warrants for the purchase of 1,151,121 shares of our common stock (the “Warrants”), to two accredited investors (the “Investors”). In addition, we sold an additional $0.5 million Convertible Note to one of these Investors in November 2015, and the Warrant issued to that Investor was adjusted for an additional 38,371 shares of common stock. The number of shares of common stock subject to the Warrants equaled 65% of the number of shares of common stock the Investors would receive if the Convertible Notes were converted at the Conversion Price (as defined below) on the trading day immediately prior to the Effective Date.
The Convertible Notes accrue simple interest at the rate of 9% per year (“Interest”). On November 23, 2015, the Interest was reduced to 4%. The Convertible Notes together with all accrued and unpaid Interest are due and payable on April 16, 2016 (the “Maturity Date”). The Investors may, at any time, elect to convert the Convertible Notes into shares of our common stock at the conversion price, subject to certain beneficial ownership limitations. The conversion price is the lesser of $8.47 per share (the “Conversion Price”), subject to adjustment as set forth in the Convertible Notes for stock splits, dividends, recapitalizations and similar events, which equaled 110% of the last closing price of our common stock prior to the execution and delivery of the Securities Purchase Agreement and 85% of the lowest closing sale price during the prior 30 trading day period.
Provided there has been no Equity Conditions Failure, as defined in the Convertible Notes, we will pay the Installment Amount, as defined in the Convertible Notes, by converting all or some of the Installment Amount into common stock (a “Company Conversion”). However, we may also, at our option, pay the Installment Amount by redeeming the Installment Amount in cash (a “Company Redemption”) or by any combination of a Company Conversion and a Company Redemption. Any Company Conversion occurs at a price which is the lower of the Conversion Price and 85% of the lower of the arithmetic average of the 4 lowest daily weighted average prices of the common stock during the prior 12 consecutive trading days and the closing sale price on the prior day.
The Investors have the right to accelerate payment on each monthly redemption date of up to two monthly redemption amounts upon written notice to us, and the Investors have the option to be paid such accelerated amount in common stock as if it were a Company Conversion. The Investors also have the right to defer payment of a monthly redemption amount.
Following an Event of Default, as defined in the Convertible Notes, the Investors may require us to redeem all or any portion of the Convertible Notes. The redemption amount may be paid in cash or with shares of our common stock, at the election of the Investor, at a price equal to the Event of Default Redemption Price, as defined in the Convertible Notes.
The Warrants when issued had a five-year term and a per share exercise price of $9.63, subject to adjustment as set forth in the Warrants, which equaled 125% of the closing price of our common stock prior to the Effective Date. If, after the Effective Date, we issue or sell, or are deemed to have issued or sold, any shares of common stock (with the exception of certain Excluded Securities, as those are defined in the Warrants) for a consideration per share less than a price equal to the exercise price of the Warrants in effect immediately prior to such issue or sale (or deemed issuance or sale) (a “Dilutive Issuance”), then immediately after the Dilutive Issuance, (x) if the Dilutive Issuance occurs prior to the one year anniversary of the Effective Date, then the exercise price then in effect will be reduced to an amount equal to the product of (A) the exercise price in effect immediately prior to the Dilutive Issuance and (B) the quotient determined by dividing (1) the sum of (I) the product derived by multiplying the exercise price in effect immediately prior to the Dilutive Issuance and the number of Common Shares Deemed Outstanding (as defined in the Warrants) immediately prior to the Dilutive Issuance plus (II) the consideration, if any, received by us on such Dilutive Issuance, by (2) the product derived by multiplying (I) the exercise price in effect immediately prior to the Dilutive Issuance by (II) the number of Common Shares Deemed Outstanding immediately after the Dilutive Issuance and (y) if the Dilutive Issuance occurs after the one year anniversary of the Effective Date but within five years of the Effective Date, the exercise price then in effect will be reduced to an amount equal to the price of the shares of common stock issued in the Dilutive Issuance. The Warrants will be exercisable for cash, but if a prospectus covering the shares of common stock underlying the Warrants is not available, the Investors may exercise the Warrants using a cashless exercise provision. The Warrants may not be exercised if, after giving effect to the exercise, the Investor would beneficially own in excess of 4.99% or 9.99% of the outstanding shares of common stock, depending on the Investor. At the Investor’s option, the cap applicable to the exercise of the Warrants may be raised or lowered to any other percentage not in excess of 9.99%, except that any increase will only be effective upon 61-days’ prior notice to us.
As per the terms of the November 2015 equity transaction, the 1,189,492 Warrants were exchanged for new warrants to purchase an equivalent number of shares of common stock in the same form and same terms as the warrants issued in such equity transaction, including a repricing to $1.50 per share exercise price. The exercise price of the Warrants and the number of shares for which the Warrants are exercisable are subject to certain adjustments if the Company issues or sells additional shares of common stock or common stock equivalents at a price per share less than the exercise price then in effect, or without consideration. Notwithstanding the foregoing, there will be no adjustment to the exercise price of the Warrants or number of warrant shares issuable upon exercise in connection with the issuance of common stock upon Board of Director-approved employee benefit plans or upon the conversion, exercise or payment of certain outstanding, excluded securities.
Pursuant to a Pledge and Security Agreement (the “Security Agreement”) we entered into in favor of Hudson Bay Fund LP as Collateral Agent, the Convertible Notes are secured by a perfected first priority security interest in all of our assets and are senior in right of payment to all of our existing and future indebtedness, subject to Permitted Liens, as defined in the Convertible Notes. With the exception of Permitted Liens, we have agreed that we will not grant a security interest in our assets so long as the Convertible Notes remain outstanding and that we will not incur any new debt except for Permitted Indebtedness, as that term is defined in the Convertible Notes.
In conjunction with the issuance of the Convertible Notes and the Warrants, we entered into a Registration Rights Agreement pursuant to which we agreed to file a registration statement covering the sum of (i) 200% of the maximum number of shares underlying the Convertible Notes and (ii) the maximum number of shares underlying the Warrants (the “Registrable Securities”). We have agreed to keep any registration statement we file pursuant to the Registration Rights Agreement effective until the earlier of (i) the date as of which the Investors may sell all of the Registrable Securities covered by the Registration Statement without restriction or limitation pursuant to Rule 144 and without the requirement to be in compliance with Rule 144(c)(1) (or any successor thereto) or (ii) the date on which the Investors shall have sold all of the securities covered by such Registration Statement.
We were to use our reasonable best efforts to have the registration statement declared effective within 90 days after the Effective Date (the “Registration Statement Effective Date”). If we failed to register the Registrable Securities or the registration statement is not declared effective by the SEC before the Registration Statement Effective Date, or if on any day after the Registration Statement Effective Date, sales of the Registrable Securities required to be included on the Registration Statement cannot be made (collectively, a “Registration Default”), we will pay to each Investor an amount in cash equal to 1% of the aggregate Purchase Price (as that term is defined in the Securities Purchase Agreement) of the Investor’s Registrable Securities, whether or not the Registrable Securities were included in the registration statement, and 1% per month (or a portion thereof pro rata) that the Registration Default continues to exist. We are not required to make these payment if, when a Registration Default occurs, the Investors can freely sell our common stock pursuant to Rule 144 without restriction or limitation. We filed the registration statement within 90 days and therefore did not have to make any payments to the Investors.
Investors in the offering have the right to participate for no less than 35% of any future offering of our equity or equity equivalent securities until the second anniversary of the Effective Date when the Convertible Notes were purchased.
We have agreed to keep at least $6.0 million of restricted cash on our balance sheet at all times until the Maturity Date or until the outstanding principal amount of the Convertible Notes is less than $6.0 million, at which time the amount of restricted cash we are required to keep on our balance sheet will be adjusted downward, dollar for dollar. As of December 31, the restricted cash was $4.1 million.
As additional security for repayment of the Convertible Notes, Uni-Pixel Displays, Inc. entered into to a Guarantee Agreement in favor of the Investors.
Cowen and Company, LLC acted as our financial advisor in the acquisition of the assets and as our placement agent in the financing transaction. We paid Cowen and Company, LLC approximately $1.7 million for these services.
On April 16, 2015, the Company determined that the Convertible Notes had a carrying amount of $3.1 million. The Company utilized a binomial model in determining the fair market value of the Warrants of $6.0 million.
The Company also determined there was a beneficial conversion feature (“BCF”) as a result of the intrinsic value between the effective exercise price and the market price at the time of conversion of $6.0 million. The BCF was included in additional paid in capital. As a result of the down-round protection on the warrants, they have been accounted for as a derivative liability upon issuance and at December 31, 2015.
At inception, the Convertible Notes balance and unamortized discount in millions were as follows:
As of December 31, 2015, both Investors had been issued an aggregate of 9,584,407 shares of common stock when the Investor had converted as of such date $10.0 million of principal and $0.3 million of interest into shares of common stock.
At December 31, 2015, the unamortized discount on the Convertible Notes is approximately $1.3 million. The following table reflects the Convertible Notes at December 31, 2015:
The following table summarizes the charges to interest, amortization and other expense, net for the year ended December 31, 2015:
As of February 16, 2016, the Convertible Note had been fully repaid.
Note 8 - Agreements with Atmel Corporation and CIT Technology LTD.
Atmel Corporation Asset Acquisition and License Agreements
On April 16, 2015 (the “Effective Date”), Uni-Pixel Displays, Inc. (“Displays”) acquired from Atmel Corporation (“Atmel”), pursuant to the terms of a Purchase and Sale Agreement, a Patent License Agreement, an IP License Agreement, a Bill of Sale and Assignment and Assumption Agreement and two leases for real property, certain assets used for the production of capacitive touch sensors comprised of fine lines of copper metal photo lithographically patterned and plated on flexible plastic film (the “Touch Sensors”). $450,000 was paid for the machinery, parts and equipment needed to manufacture the Touch Sensors and the existing inventory on hand. Displays paid this amount with a secured promissory note due on or before the earlier of (i) the second anniversary of the Effective Date or (ii) the sale of equity and/or debt securities after the Effective Date pursuant to which Displays or any affiliate of our receives gross proceeds of no less than $5 million. Interest accrues on the unpaid principal amount at a rate equal to 2% per annum compounded semi-annually and is to be paid in arrears semi-annually, commencing with the six-month anniversary of the Effective Date. Displays has granted to Atmel a security interest in the purchased assets and all accounts receivable subsequently arising from Display’s manufacture and sale of Touch Sensors and all proceeds therefrom. Pursuant to the Purchase and Sale Agreement, Displays assumed certain liabilities of Atmel, including open purchase and supply orders, related to the Touch Sensor business.
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 asset acquisition, Displays also entered into leases with Atmel Corporation for Building 2 and Building 4, both of which are located at 1150 E. Cheyenne Mountain Boulevard, Colorado Springs, Colorado. The term of each lease is 18 months (the “Primary Lease Term”). The term of each lease may be extended for two additional six month periods. During the Primary Lease Term, the initial base rent for each of Building 2 and Building 4 will be $100 per month. During the first renewal term, the monthly base rent for Building 2 will be $5,625 and during the second renewal term the monthly base rent will be $8,437.50. During the first renewal term, the monthly base rent for Building 4 will be $39,375 and during the second renewal term the monthly base rent will be $59,062.50. 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).
Transition Services Agreement
In conjunction with the above-described transaction, Displays and Atmel entered into a Transition Services Agreement. Pursuant to the Transition Services Agreement, Atmel agreed to provide the following services for the periods described: (i) quality assurance and failure analysis services for the XTouch Touch Sensors for a period of six months starting from the Effective Date, (ii) operations services for a period of 30 days starting from the Effective Date and (iii) other services, as those are defined in the Transition Services Agreement, for a period of three months starting from the Effective Date. In exchange for the services, Displays has agreed to pay reasonable and documented direct costs incurred by Atmel in performing the services together with actual out-of-pocket third-party expenses reasonably incurred by Atmel in providing the services. The service fees include, but are not limited to, (a) the actual out-of-pocket employment costs (base salary, payroll taxes and out-of-pocket medical benefits) for the individuals performing the services (based on the actual time expended by such individuals in performing the services), (b) costs of materials, (c) the actual out-of-pocket third-party expenses reasonably incurred by Atmel in providing the services, and (d) direct supervisory and management expenses incurred by Atmel in providing the services. On the Effective Date, we paid $0.4 million to Atmel and was applied against certain designated services. As of December 31, 2015 the transition services have been completed.
CIT Technology Ltd. License Agreements and Manufacturing and Technology Transfer Agreement
On the Effective Date Displays entered into an FLT (Fine Line Technology) Patent License Agreement (the “CIT Patent License Agreement”), an FLT (Fine Line Technology) Intellectual Property License Agreement (the “CIT IP License Agreement”) and a Manufacturing and Technology Transfer Agreement (the “Manufacturing Agreement”) with CIT Technology Ltd. (“CIT”).
Through the CIT Patent License Agreement, CIT licensed to Displays a non-sublicensable, worldwide, royalty-bearing license under its fine line technology (“FLT”) patents to make or have made, use, offer for sale, sell, and import licensed FLT products (the “Licensed Products”), which are defined as capacitive touch sensors comprising fine lines of copper metal printed on flexible plastic film. In consideration for this license, Displays agreed to pay an annual royalty fee during the initial five year term of the license (the “Initial License Term”) of the greater of $1.65 million or 1.67% of the total net sales (as defined in the CIT Patent License Agreement) of the Licensed Products during the Initial License Term. Displays has the right to renew the license for a term of 10 years. If Displays exercises this right, the annual royalty fee will consist of 1.67% of the total net sales of the Licensed Products until it reaches a total of $8.25 million, at which time no further annual royalty fees will be due. Further, the total royalty fees payable for the initial 5 year term and the subsequent 10 year term is capped at $30 million. Upon execution of the CIT Patent License Agreement, Displays paid a non-refundable, non-returnable prepayment of minimum annual royalty fees of $4.67 million (the “CIT Royalty Prepayment”). The CIT Royalty Prepayment will be applied to the annual royalty fees Displays owes under the CIT Patent License Agreement. If, during the Initial License Term, Displays’ cash balances as of the quarter end immediately prior to the date of the royalty period to which an unpaid annual royalty relates is less than $30 million, Displays may pay the annual royalty fee with a secured promissory note. CIT has agreed that it will not enter into a license agreement for the licensed patents as they relate to the Licensed Products that is effective prior to the second anniversary of the Effective Date.
Through the CIT IP License Agreement, CIT licensed to Displays a non-sublicensable, worldwide, royalty-free license to the intellectual property necessary to make or have made, use, offer for sale, sell, and import the Licensed Products. The term of the CIT IP License Agreement is co-extensive with the term of the CIT Patent License Agreement. CIT has agreed that it will not enter into a license agreement for the licensed intellectual property as it relates to the Licensed Products that is effective prior to the second anniversary of the Effective Date.
The Manufacturing Agreement had a term of six months, where Displays agreed that for a period of 16 consecutive weeks it will order, on a weekly basis, 11,500 linear meters of coated film manufactured by CIT at a cost of $7.90 per linear meter. The agreement has been completed and the process has been transferred to the Colorado Springs facility as of December 31, 2015.
Note 9 - Loss on Discontinued Operations
On April 22, 2015, the Company, through its wholly owned subsidiary, Uni-Pixel Displays, Inc. (“Displays”), exercised its right to terminate that certain Manufacturing Facility Installation and Supply Agreement dated April 15, 2013 (the “Supply Agreement”), which was entered into by Displays and Eastman Kodak Company (“Kodak”). The term of the Supply Agreement was to end on December 31, 2017.
Uni-Pixel did not renew that certain Joint Development Agreement dated February 5, 2013, also with Kodak, which was related to flexible patterned conductive films.
In connection with the discontinued operations, the Company took a $7.6 million write down on equipment in the second quarter of 2015.
On August 17, 2015, the Company transferred all assets to Kodak with a net book value of $0. The Company wrote down all the assets transferred in the second quarter. In addition, the Company granted Kodak an exclusive, perpetual, irrevocable, worldwide, royalty-free license with the right to sublicense. This exclusive license is for Know-How that was developed before July 23, 2015 and is owned by the Uni-Pixel. In addition, the license included patents related to the Kodak agreement. Furthermore, the Company granted a non-exclusive license for any Know-How that was created between July 24, 2015 and the effective date of the agreement. In addition, the Company granted a non-exclusive license patent for any applications, which are owned or licensable by the Company, that have a first effective filing date on or before July 24, 2015.
In the fourth quarter of 2015, the Company recorded a $5.0 million gain on relief of deferred revenue liability for discontinued operations. The $5.0 million was originally received in 2013 and was part of the technology in the capacity agreement that was based on the InTouch™ Sensor technology which is no longer used. The InTouch™ Sensor technology was developed in the partnership with Kodak which was terminated in April 2015. See note 5.
Note 10 - Fair Value Measurements
Liabilities measured at fair value on a recurring basis are summarized as follows:
As described in Note 7, the derivative liability is related to warrants to purchase 1,151,121 shares of common stock issued by the Company in connection with our Convertible Note of $15.0 million in April 2015, which included a down-round protection on the warrants. The original exercise price of these warrants were $9.63 per share and they expire in April 2020. With the additional $0.5 million in Convertible Note issued in November 2015, the original Warrant was adjusted for an additional 38,371 shares of common stock. In connection with the November 2015 equity transaction (Note 7), the total outstanding warrants for 1,189,492 warrants were repriced to $1.50 per share. 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 as described in Note 7 and $0.5 million at December 31, 2015 and are recorded as a derivative liability in the accompanying consolidated balance sheets. The Company recognized $5.5 million of other expense in 2015 in the accompanying consolidated statements of operations, resulting from the decrease in the fair value of the derivative liability at December 31, 2015. The derivative liability will be measured at fair value, with changes in fair value recognized in earnings, until the warrants are exercised, expire or are otherwise extinguished.
Note 11 - Employee Benefit Plan
401(k) Plan
Effective February 2007, the Company created an employee benefit plan available to all full-time employees under Section 401(k) of the Internal Revenue Code ("401(k) plan"). Employees may make contributions up to a specified percentage of their compensation, as defined. The Company is not obligated to make contributions under the 401(k) plan and did not make any matching employer contribution to the 401(k) Plan in 2015, 2014 or 2013.
Note 12 - Business Segments, Revenue and Credit Concentrations
The Company operates in one business segment and uses one measurement of profitability for its business.
During the twelve months ended December 31, 2015, 2014 and 2013, revenues by customers (in thousands) with more than 10% of revenue were as follows:
As of December 31, 2015, 2014 and 2013, customers with more than 10% of accounts receivable balances (in thousands) were as follows:
Note 13 - Subsequent Events
On January 4, 2016, the Company issued 1,745,404 shares of its common stock, $0.001 par value, to Hudson Bay Master Fund in payment of $750,000 of principal on the Convertible Note held by such investor. On January 15, 2016, the Company issued 1,876,444 shares of its common stock, $0.001 par value, to Hudson Bay Master Fund in payment of $650,000 of principal. On February 16, the Company issued 778,156 shares of its common stock, $0.001 par value, to Hudson Bay Master Fund in payment of $275,000 of principal, at which time the Convertible Note was fully repaid. In March 2016, the Company settled with the SEC. See note 5.
Note 14 - Quarterly Financial Data (Unaudited)
The Company’s unaudited quarterly financial data for 2015 and 2014 is summarized below (in thousands).