Uni-Pixel (UNXL) has tripled in price since its December 7th press release that it has entered a "multi-million dollar preferred price and license agreement" to introduce touch screen products based on its UniBoss technology. The day-trader's darling now stands with more than 200 million dollar in market capitalization after accounting for the dilutive stock options and warrants and practically zero revenue generated since its existence as a public company since 2006. The intentionally vaguely worded press release one month ago is probably the first tell-tale sign that the story likely extends beyond its self-proclaimed leading edge innovative approach in the alternative non-ITO based transparent conductors market. In fact, during the course of my extensive research on Uni-Pixel, I have come away with the belief that the company intentionally boasted its market opportunity and misled investors about its competitive position within a highly competitive specialized niche market. Furthermore, conversations with well-published scientists in the field further suggest Uni-Pixel's technology is far from established. More importantly, Uni-Pixel's strikingly lack of intellectual property renders itself vulnerable to patent related litigations and could complicate its relationships with existing or future OEMs. This point has already been validated by the recent lawsuit brought by Carlco.
A little background on the company, Uni-Pixel was originally incorporated as Tralas Technologies in 1998 and subsequently changed its name to Uni-Pixel Display. Uni-Pixel was merged into Real-Estateforlease.com in 2004 and became a listed company in 2006 under the ticker symbol "UNXL". It traded on the OTC board until 2010 when it migrated to Nasdaq. Its main technology is UniBoss, an alternative way to create micro-structures on films that could be used to produce touch sensors, which are currently mass manufactured using ITO based technology. Its corporate history is definitely a standout amongst its numerous rivals I identified. While CEO Reed Killion and analysts who cover the stock claim that UniBoss is the most advanced cost effective technology in the alternative non-ITO based transparent conductors market, my research indicates such statements/analysis could be no further from the truth. Its competition ranges from multi-billion dollar multi-nationals to numerous VC backed private companies, and its technologies seem less advanced than its competitors. Before delving into the competitive landscape, however, I would like to point out that the company's potential market size is much smaller than what the company would like its investors to believe.
During the last earnings conference call, Mr. Killion stated that
A touch panel module market opportunity ahead of us is estimated to reach $19 billion by 2018 according to Display Search. That's just on the sensor side of the equation. But as we talked about, we are not limited to just display touch panel sensors.
When commenting on the competition, here's what he had to say
There are many players that have looked for ITO replacement alternatives, and there still are today. There are some that have been ahead of us in the development of the technology that the technology didn't necessarily pan out well, and they've gone back to the drawing board. There are a lot of silver-based technologies out there that are trying to gain some traction and momentum in the market. We think we have an advantage in the way that we print ours. Ours is an additive process. Most of the similar technologies that are out there are photolith, and labor-intensive.
Furthermore, in a more recent conference call following the company's latest press release, Mr. Killion further suggested that its expected gross margin will be over 50%. If all of the statements were true, Uni-Pixel supposedly would have a leading edge technology in a multi-billion dollar market with product gross margin exceeding 50%.
Any forward-looking growth oriented small-cap investor should be loading up the stock hand over fist. Investing, however, is never this simple.
The True Market Opportunity Is Much Smaller
Uni-Pixel currently has a total number of shares outstanding at around 9.7 million shares; in addition, at the current stock price, its outstanding stock options and warrants will add another 3 million shares. It's notable that most of the stock options are awarded to the management as compensation. A rough calculation at the current stock price accounting for the options and warrants yield a market capitalization slightly above 200 million. Given a multi-billion dollar market opportunity and its stated gross margin, 200 million seems to be a fairly meager amount. But what if the real market opportunity for Uni-Pixel's products is and will likely be non-existent or a slim 100 million dollar only a decade later? I will present overwhelming evidence to show Uni-Pixel's recent statements are likely aimed at intentionally misleading the market about the size of its market opportunity.
I would like to start with Uni-Pixel's own words back in 2010 when it first presented UniBoss to the investing public. On page 19 of the following presentation made in November of 2010, the company's own market size projection when the product was first introduced into the market differs significantly from the CEO's more recent comments when discussing the market opportunity of UniBoss. Less than 800 million revenue opportunity in 2016!
Knowing the chart above is likely both overly optimistic and dated, I searched other relevant research institutions in the transparent conductors market and came across Nanomarkets. To provide some background on Nanomarkets, it's the leading research establishment aimed at providing market research and industry analysis for transparent conductors, silver inks, conductive coatings and smart coatings and surface. Any serious investor with significant stake, long or short, should pay attention to this premier industry researcher. It publishes an annual review on the transparent conductor market and the research below comes directly from a conference call following its latest industry review publication.
This detailed 8-year projection shows that the majority of the market share in 2019 still belongs to ITO and related technology, followed by carbon nanotube and silver. All the rest, including Uni-Pixel's copper-based solution, will only make around 100-200 million dollars in 2019, largely negligible! The researcher discussed silver and carbon nanotube quite extensively during the interview, but mentioned copper only once in a skipping way.
I suggest all investors in UNXL carefully read the transcript and discussion regarding the transparent conductors market. According to Nanomarkets' projection, the market opportunity for Uni-Pixel's flagship UniBoss product is in fact beyond gruesome. While it's hard to predict what kind of market share UniBoss is likely to have in the other metallic films segment, investors would have to wait a decade to see maybe 50 million dollar revenue assuming UniBoss can take a significant percentage of that market segment.
The True Competitive Advantage Can Hardly Be Found
The previously quoted CEO comments were in fact one of the more toned-down versions when discussing Uni-Pixel's competitive position within the transparent conductors market. The recent sell-side reports tend to suggest Uni-Pixel as the only viable alternative non-ITO based transparent conductor technology. I will discuss the sell-side research in a separate section of the article.
Personally, I cannot help but notice the lack of presence of Uni-Pixel and its "revolutionizing" UniBoss in such a lengthy discussion regarding the future of the industry and its major players. It is hard to ignore the noted absence of UniBoss in such discussion given its CEO's claim of the state-of-the-art nature of its product and technology. To further validate my concerns, a simple Google search of uniboss nanomarkets and uni-pixel nanomarkets both yield no relevant results published by nanomarkets.net. The lack of presence of its technology is worrisome given most of the 200 million dollar market capitalization is riding on that very technology.
While the transparent conductor markets are vast, UniBoss is a relatively niche product focusing on a trend of the small but emerging market for alternative non-ITO based transparent conductors. The existence of such a market and direction of future touch screens are highly uncertain demonstrated by the recent advancements in in-cell technologies by Apple. Within such a highly dynamic marketplace, Uni-Pixel faces competition from well-funded VC-backed private firms such as Cambrios, publicly traded companies like Atmel (ATML), Elk (ELK manufactures many millions of Capacitive Touch sensors every month), C3Nano, etc. Beyond these focused players, giant companies such as 3M (MMM), Agfa (AFGVF.PK), Dow Chemical (DOW), Hitachi Chemical (HCHMY.PK), Mitsubishi (MIELF.PK), SaintGobain, Sumitomo (SMTOF.PK) and Toray (TRYIF.PK) are also aggressively pursuing opportunities in this segment of the market. Apple's in-cell technology further brings the possibility of rendering technologies like UniBoss completely obsolete in the medium term. In fact, many of these firms are in a much more advanced stage in their product development and production compared to Uni-Pixel. I would like to direct my readers' attention to two great examples, Cambrios and 3M.
Cambrios was repeatedly mentioned in the conference call following Nanomarkets' release of its 2012 annual review on the transparent conductors markets. The researcher commented that the market for silver-based product this year is about $20 million and Cambrios, being the leading firm in the space, is dubbed as the important company in the industry when asked which alternative non-ITO based company he considered as important.
I'm going to interpret "importance" as their level of influence. It's not just that they're producing these things; they're companies with the ability to shape. The one that I would mention first is Cambrios. I think Cambrios really deserves a little award for showing that you can develop a new material like this and actually go out and sell it, which is what they're doing. They're moving towards profitability.
In addition to praises from industry research, the strength of Cambrios' patent portfolio simply is on a different level when compared to that of Uni-Pixel. Cambrios, with its 73 patents filed or approved directly related to the technology, makes Uni-Pixel's claim on patent strength outright laughable. While Cambrios and Uni-Pixel do have different emphasis in their approaches to bringing products to the alternative non-ITO based transparent conductors market, it's still of significance to understand what it takes to be a viable competitor in a niche sector. There will be a detailed section dedicated on Uni-Pixel's patent portfolio later in the article.
3M is a classic example on the other spectrum of Uni-Pixel's competitors. It's a 65 billion dollar company with resources unimaginable for a company like Uni-Pixel. It first introduced its own patterned transparent conductors at the Consumer Electronics Show in 2011. In addition to being two years ahead in its product introduction, 3M's development is clearly in a much more advanced stage when compared with UniBoss.
UniBoss Technology Is Unproven
Armed with a better understanding of its true market potential and competitive environment, I attempted to gain a better understanding of UniBoss' technology. Normally every technology has its pros and cons, but you almost never hear Uni-Pixel mentioning the limitation of UniBoss. My analysis and understanding of UniBoss' technology stem from numerous discussions with unbiased experts and researchers in the nanotechnology sector. Through my conversations with relevant scientists, I've grown to have very strong reservation with regards to UniBoss' viability and legitimacy. The concerns are on a number of fronts.
1) Color. Copper is a reddish-pink color, which is a non-starter for any display.
2) Yield at small sizes. The picture of the 5-um line looks very rough, suggesting it will easily be broken. Furthermore there may be areas in the film that have breaks as fabricated. It is very technically challenging to make such fine lines at high yield in a high-throughput process. Many large corporations have spent money in this area for years without a product.
3) Competition. All the smart money is going to silver nanowire-based solutions at this point because (1) the performance matches or exceeds that of ITO, (2) unlike copper the color is neutral grey, (3) the production process is potentially high-throughput, (4) leverages existing ITO-based patterning technology. Cambrios has announced touch screen products with LG, Shinetsu and others.
4) Degradation. Degradation challenges with silver include electromigration and sensitivity to tarnishing, but electromigration is perhaps not a big issue for the currents used in displays (unknown) and Cambrios has worked hard to make the films resistant to atmospheric degradation. Electromigration is not an issue for copper, but sensitivity to oxidation is an even bigger issue. The copper lines will oxidize in a matter of months unless properly sealed from environmental conditions, but this may also be able to be addressed. This issue, although significant, is relatively minor compared to issues 1-3.
According to Professor Benjamin Wiley from Duke University, the color of copper is likely an important limiting factor for UniBoss' application. In addition, in the product presentation of UniBoss by Dan Van Ostrand, there's observable coppery color with its prototype product which is likely why the company presented another version adding a "blackening agent". The use of blackening agent, however, may impact transparency of the film.
In the most recent earnings conference call, CEO Reed Killion discussed the production side of UniBoss.
Certainly. We have been focused on our in-house production capability and process capability and we are going to expand that. What we are going to focus on in-house is going to be our design capability, our mastering capability where we create a master that's utilized to then apply to our roll-to-roll processing. What we will do after that is the plating step and that placing step is something that we are looking to outsource. We take -- of the 41 steps that are currently utilized to produce a touch sensor, we reduced that to about eight. Our ability to print the bezel circuit and the grid in one step roll-to-roll eliminates a lot of the costly process steps that are associated with ITO and the other ITO alternatives that are looking to support this market. Ours is the only additive step.
So with that we would then go to a plater, Electroless Plating and that plating step can be done roll to roll. We are working on developing that process with some equipment manufacturers. And then it comes out of the plating process and goes to die-cutting, which is a standard die-cutting process.
From the die-cutting, it would go to tabbing, where you would put a flex cable on the sensor. From there it would go to lamination, either a module house that would laminate it to a display panel or directly to a display panel manufacturer where they would do the lamination step themselves. So the ability to bring on platers is going to be critical to meeting the volume demand that we see in 2013.
The management further confirmed and boasted its production technology by claiming it is the only subtractive approach in the market that reduces steps and costs significantly; when discussing production technology, the CEO mentioned it can print 50-ft per minute and the next step is electroless plating at roughly 5-ft per minute.
Specifically, I would like to draw attention to his statement on going to a plater, electroless plating and that plating step can be done roll to roll. Electroless plating of copper is very difficult to control in terms of where the copper grows and how fast. There are a lot of articles out there that discuss deposition rate:
These papers are citing deposition rates of 5 um/hr. Much, much too slow to be used in any high speed, roll-to-roll deposition processes. Fast plating rates can be achieved, but then all the copper in the bath is more likely to crash out of solution.
Another piece of evidence that questions the viability of an electroless process is the list of metals in their data sheet: Cu, Ni, Sn, Cr, Ag, Au
Cr cannot be deposited electrolessly, and it is a very toxic and difficult electroplating process.
Also, while it is relatively straightforward to switch metals with a vapor-phase deposition process, it is not quite possible to switch for electrochemical or electroless plating; otherwise, the whole bath chemistry is different and it's time consuming to get it to properly function.
Finally, perhaps the most obvious point to a layman, the lack of market validation for UniBoss technology over the past two and half years is the biggest tell-tell sign. UniBoss was first unveiled on May 28th, 2010 through a press release to the general public as well as an investor presentation. "Commercial products shipping Q4 2010". Indeed, it has been two more years of zero revenue since the management's last prediction of commercialization of the same technology. Last month, in an investor conference call with Williams Financial Group, the CEO seems again to believe that it will be supply constrained in 2013 and analysts conservatively estimated a 120 million dollar revenue for Uni-Pixel. I wonder why all of a sudden, UniBoss caught its big break? Or did it really catch a big break?
Patent Portfolio Is Slim And Legally Challenged
As a tech company claiming a leading edge market position in nanotechnology, Uni-Pixel's patent position seems conspicuously weak. In 2010, Uni-Pixel appears to have sold all of its patents to Rambus, according to its 10K, on Page F-13. The balance of patents was cleared to zero. Since the 2011 10-K published on March 08, 2012, the company claims to own 3 issued patents. I however found 4 patents, 2 issued by Europe, 1 by Japan and 1 by the US. It is possible that either the company is negligent or they do not own one of them. However, only one of them is related to a touch sensor. The four patents are the following
2505047 - Europe, 2012-03-10, FORMATION OF ELECTRICALLY CONDUCTIVE PATTERN BY SURFACE ENERGY MODIFICATION (The only one related to UniBoss, and the only one that was applied after 2010)
2328695 - Europe, 2011-08-08, MICROSTRUCTURES TO REDUCE THE APPEARANCE OF FINGERPRINTS ON SURFACES
2011013686 - Japan, 2011-01-20, DISPLAY DEVICE COMPRISING LIGHT GUIDE
8,102,413 - US, 2012-1-24, STEREOSCOPIC IMAGING APPARATUS INCORPORATING A PARALLAX BARRIER
With four approved patents and only one directly related to the touch sensor technology, it's very difficult to fathom how cutting-edge Uni-Pixel's technology could possibly be. Moreover, Uni-Pixel's noticeable lack of patented technology renders itself vulnerable to lawsuits.
And rightly so.
On December 20, Uni-Pixel issued a strongly worded press release firmly denying any relevancy and merits with regards to Carlco's recently filed lawsuit in the UK. With curiosity, I attempted to find additional information regarding the potential merits and demerits of the related litigation.
The PPT by CIT in 2009, earlier than 2010, presents the same technological details as described on Unipixel's website. Also it agrees with statements made during the company's conference calls. CIT ultimately belongs to Atmel. Given that CIT likely filed a patent prior to its 2009 presentation, Uni-Pixel most likely will face significant challenges in its legal battles rather than baseless speculation as claimed by CEO Reed Killion.
Not knowing the detailed cooperation between Carlco and Uni-Pixel and relevant patent laws, I am certainly not in a position to judge merits of the litigation. However, Uni-Pixel's perfunctory dismissal of the lawsuit likely doesn't answer enough questions raised by the case. Any potential future or existing OEM partnerships are also in jeopardy if Uni-Pixel doesn't own the intellectual property of UniBoss. Furthermore, CEO Reed Killion has stated on multiple occasions that Uni-Pixel intends to outsource manufacturing; without strong IP, the company really doesn't have anything given its lack of manufacturing capacity.
In my view, the lawsuit filed by Carlco is likely the beginning of Uni-Pixel's patent legal troubles. Another patent search on Google with electroless plating copper touch screen yields patents belong almost exclusively to 3M. 3M also patented a type of touch screen in 2009. In the patent, it stated "after printing and curing, the inks can be electroless plated with metals such as copper, resulting in high conductivity. Seed ink manufacturers include CIT, a division of Carlco". Another few 3M patents also have observed similarity to Uni-Pixel's published or publicly stated processes. With only one patent in place, Uni-Pixel's potential of growing into a major player in a fiercely competitive niche market is slim. With this in mind, I extend my research into the management team, including its CTO, Dr. Robert J. Petcavich.
Management Team May Have Misplaced Incentives
When the UniBoss prototype was first presented during a SID Display Week held between May 24th and 28th in Seattle, Dr. Robert Petcavich and Dr. Ram Ramakrishnan were among the presenters to showcase the innovative approach. However, the scientists at Uni-Pixel all seem to be part-time scientists. Dr. Robert Petcavich openly lists himself as the president of Health Beacons Inc., while Dr. Ram Ramakrishnan is apparently the president of A&B Lab even though he lists Director of Materials and Processing Engineering of Unipixel on his Linkedin profile. With the company's two top scientists wearing multiple hats, I truly wonder how innovative and leading edge its research could possibly be. And its meager approved patent portfolio may come as much less of a surprise to people. Further, how could Uni-Pixel compete with a myriad of formidable competitors fighting for the same niche market and a few hundred million dollar revenue opportunities in 2018. A further point looking into Dr. Petcavich, the LA Times article detailed Dr. Petcavich's prior venture which seems to be filled with empty promises of technologies with a bright future and a lack of eventual monetization opportunity. Although it bears little relevance to today's discussion, I believe a CTO's track record is of importance and relevance to the investing public.
Another important footnote on Uni-Pixel's 10K further raises eyebrows. On page 34, it details the vesting schedule of options for executives in the management team. A significant portion of options will be vested on 1/28/2012. It could be a mere coincidence that a timely and vaguely worded contract was announced a little less than two months ago tripling the stock price. It's also hugely concerning the fashion in which executives of Uni-Pixel presented the company, including its emphasis on size of market opportunity and the lack of clarity on its competitive position.
Sell-side Research Has Been Overly Optimistic
Uni-Pixel today is covered mainly by three brokerage firms that provide equity research. They are MDB Capital Group, Craig-Hallium and Williams Financial Group.
MDB Capital Group, a consultant for Uni-Pixel itself, published an investment thesis on Uni-Pixel back in April of 2012 and in its competitive analysis, MDB highlighted a number of competitors but seemingly dismissed all of them as uncompetitive when compared with Uni-Pixel's technology. The thorough discussion on the competitive landscape in this article should provide a much more comprehensive picture.
Craig-Hallium also recently published a number of research reports rating the stock as a strong buy, citing its competitive position and market opportunities. The senior research analyst, Mike Malouf, who penned these reports, claims to have talked to numerous industry contacts and confirmed Uni-Pixel's technology is indeed market leading. My research seems to show the complete contrary. Additionally, on Craig-Hallium's website, Mr. Malouf is listed as a consumer industrial and clean technology analyst. I hold my reservation on Mr. Malouf's recommendation in the nanotechnology space.
Finally, commenting on Uni-Pixel's recent business projection and product gross margin of over 50% cited in numerous analyst research reports, I find the number somewhat hard to believe. Cambrios, the leading silver nanowire based solution provider, is still only close to breaking even after seven years. With such a competitive landscape, there's little economic rationale for any OEM to allow a small player such as Uni-Pixel without much patent protection to achieve a gross margin even close to that number.
My research shows that:
- The potential addressable market is a negligible $100-200m in 2019, compared with $19b the management would like the investors to listen;
- Uni-Pixel's technology has weaknesses that the management did not want to convey, and this technology has been disregarded by the competitors with better technology and financial resources;
- Uni-Pixel has only one non-US patent approved to show for its UniBoss technology and this very patent is challenged by its Europe competitor immediately after approval.
- The management has a track record of delivery failures.
I thus believe the company's long-term viability is severely questionable. The current exploratory types of relationships with certain OEMs are unlikely to yield major revenue opportunity for the company due to flaws I discussed in this article. Even if the company were to achieve limited success and generate some small revenue opportunities, the valuation of the company at $200 million is still way out of whack given the long-term competitive landscape and overall market opportunity for its product.
Disclosure: I am short UNXL.