Uni-Pixel (NASDAQ:UNXL) has risen over 30% since I published my bearish stance on the stock on January 10th, 2013. Since the publication of my last article, a number of events have occurred, and I would like to share some additional thoughts and information I have obtained. To be clear, I remain convinced that the stock will be trading at $5 or lower after all the hype runs out. With 13.5 million shares outstanding on a fully diluted basis, Unipixel sports a market capitalization of $320 million; yet it did a total of $76,000 in revenue in 2012 according to the 10K filed by the Company after its most recent earnings release. To even remotely justify today's valuation, a giant leap of faith in the management by investors is an absolute requirement. Is the management really credible though?
Before going into details of my latest finding, a 109-page lawsuit discussing the circumstances of Carlco's CIT unit and Uni-Pixel's legal dispute, I would like to raise some concerns I and many others share about the Company's most recent quarterly report and conference call. Specifically, the Company possibly has been in violation of a number of SEC regulations.
Williams Financial Group's research analyst Cody Acree recently initiated Uni-Pixel with a buy rating and a price target of $30 a share on February 11th, 2013. While the initiation report was filled with statements I would disagree in earnest, it is the earnings preview on Uni-Pixel Cody published the morning of February 26th, 2013 that really caught my eye. In the preview, Cody presciently predicted the following:
- Uni-Pixel to recognize $5 million from the previously announced OEM in the first quarter.
- The phase one production is to have 62,000 units per month of capacity available in April.
- Uni-Pixel has already ordered two more printers to be delivered in June and is in discussions with an "ecosystem partner"
Interestingly enough, at 16:30PM when Uni-Pixel released its earnings and hosted the conference call, Reed Killion made the exact same statement in terms of capacity/ecosystem partner and the Company guided $5 million in revenue for the first quarter. Uni-Pixel had been keeping its contract/agreement with the unnamed OEM secret and never formally disclosed the amount of the contract, yet Mr.Acree magically figured out it would be precisely $5 million Uni-Pixel would be recognizing for the first quarter? Or the management blatantly ignored SEC regulation FD and told analyst at Williams Financial Group what revenue number the Company will be booking in the first quarter. SEC Regulation FD prohibits disclosure of material non-public information to certain individuals, such as a stock analyst! For a Company that has booked practically zero revenue for years, a guidance of $5 million revenue in one quarter should be incredibly material. Given the severity of the situation, I believe a SEC investigation is warranted at some point to find out how exactly Cody Acree obtained such information ahead of the general public market.
While the management might have had a hard time resisting the urge to communicate to its cheerleaders about the upcoming $5 million revenue, it had no trouble keeping secret the all-important OEM contract/agreement signed in December. In the 10K filed by Uni-Pixel after market close on Tuesday, the mysterious multi-million OEM preferred pricing and license contract was nowhere to be found among the exhibits. Pursuant to Item 601(b)(10) of Regulation S-K, all material contracts are required to be filed as exhibits subject to redaction. There is simply no plausible explanation for such an omission given the market capitalization of the Company is largely supported by the existence and the relevant terms of such contract. I expect further SEC staff comments and correspondences with the Company upon reviewing of its 10K filing.
Given the management's practices of selective disclosure and failure to disclose material information per SEC Regulations, I find it troubling to rely upon statements made by the management and I find myself questioning its plan to recognize $5 million in revenue in the first quarter. Observing the management's notable lack of respect to SEC rules and regulations, I suggest Mr.Killion and Tomz reviewing GAAP revenue recognition rules before reporting revenue in the first quarter.
Now I want to move onto the best part of the article and something most readers probably haven't been made aware of. In the last article, I briefly discussed the lawsuit surrounding CIT and Uni-Pixel. However, given CIT filed its lawsuit in the England High Court of Justice, I was unable to obtain a copy of the complaint. The circumstances have changed since then and I was able to obtain a copy of the lawsuit detailing the specifics of the case. I believe the lawsuit not only severely questions the credibility of Mr.Reed Killion, but also brings to light important information regarding the development of UniBoss technology and who is the rightful owner of such technology if commercialization were possible.
To begin with, I would like to quote Mr. Reed Killion's response when news of a CIT lawsuit first broke on December 20th, 2012.
"These claims are based on unfounded speculation and inaccurate assumptions, and are completely without merit," said UniPixel President & CEO Reed Killion. "We fully expect the plaintiffs will be ordered to pay whatever legal fees our company might incur to defend these baseless claims."
The detail of the case paints a very different picture. While the CEO was being completely dismissive of the merits of the case, lawyers of Uni-Pixel filed a countersuit in Texas contesting CIT violated the Non-Disclosure Agreement because CIT filed the lawsuit in the UK instead of Texas as required by a NDA signed in 2010 which supersedes the two prior NDA signed in 2005 and 2006 . Without addressing any of the important claims and evidence provided in the UK lawsuit, the lawyers of Uni-Pixel are simply trying to seek equitable and injunctive relief because CIT might have sued at an inappropriate venue as governed by a NDA signed in 2010. The case has since been moved to United States District Court for the Southern District of Texas, Houston Division.
Now, investors are able to independently evaluate the merits of CIT's argument instead of relying on the opinion of Mr. Reed Killion. Upon reading the 109-page document, I find the CEO's initial stance on the lawsuit highly troubling. Furthermore, on February 8th, 2013, CIT filed a motion to dismiss in the U.S District Court. I believe Uni-Pixel's lawsuit against CIT on a venue dispute will most likely be dismissed in the near future and the case will go back to its normal proceeding in the England High Court of Justice.
CIT and Uni-Pixel signed three NDAs (Mutual Non-Disclosure Agreement) in 2005, 2006 and 2010 respectively.
"The first English proceeding asserts that Uni-Pixel breached a Mutual Non-Disclosure Agreement effective as of June 8, 2005 (the "2005 NDA") by failing to hold in confidence information disclosed to Uni-Pixel during that agreement's term (which concluded on June 8, 2006). That English action also asserts that Uni-Pixel breached noncontractual duties of confidence regarding disclosures made to it both (NYSE:I) during the term of the 2005 NDA, and (ii) after the 2005 NDA expired to approximately March 2009".
More specifically, CIT shared with Uni-Pixel important technologies and know-hows on metal printing which are the subject of the NDA according to page 6 and 7 of Exhibit 3 for the purpose of developing TMOS display.
"[The Claimant] has developed a high quality patented metal printing process and technology. This simple and flexible technology enables metals to be deposited at high speed and low temperature. This is achieved by separating the process into a high resolution digital deposition step followed by a metallization step. In the first step, a UV curable catalytic template layer is inkjet printed using piezoelectric drop-on-demand print heads and then a subsequent aqueous metallization step deposits metal onto and into this printed layer".
In a subsequent correspondence with Mr. John Kelly at Uni-Pixel, CIT further clarified it may be willing to license its technology for the referenced project with Xennia, which is TMOS.
"Further to your discussions with Nick of Xennia regarding your request to possibly utilise the background IPR of our Company. I can confirm that following your acceptance of the above referenced Xennia proposal and a successful outcome against the project, [the Claimant] is prepared to meet with [the Defendant] at your request, to determine the viability of [the Claimant] granting a license to [the Defendant], on commercial terms, of [the Claimant's] background IPR in so far as such a license would be required to exploit and IPR generated from the above referenced project with Xennia".
"In the premises, the Defendant owed the following equitable duties in respect of the Disclosed CIT Technology to the Claimant: i. not to use any of the Disclosed CIT Technology other than for the purposes of the TMOS Project; ii. to commercially exploit TMOS Project Technology only to the extent that such use did not constitute use of any other Disclosed CIT Technology; and not otherwise to commercially exploit the Disclosed CIT Technology for any purpose without first obtaining the licence of the Claimant".
CIT went on discussing in grand details how certain patents filed by Uni-Pixel and technology discussed by the CEO and CTO in printed magazines and investor presentations left CIT with little doubt that Uni-Pixel had taken the know-how it obtained pursuant to NDA and developed it into UniBoss. Upon reading the entire lawsuit, I find Mr.Killion's statement that CIT's claims are completely without merit to be laughable. It is clear that coming into the TMOS project, Uni-Pixel had zero experience in metal printing technology and processes, yet after selling TMOS patents to Rambus, all of a sudden, Uni-Pixel is going to transform the touch screen market with the very same technology. Additionally, Uni-Pixel's own management has stated in the past that it developed UniBoss over the course of its development of TMOS. That statement now reads more ironic than innovative. I advise all investors with a stake in Uni-Pixel to carefully review the information brought to light by the lawsuit and make your own judgments.
The lawsuit will run its course; so will Uni-Pixel's stock. I remain convinced to stay short Uni-Pixel for all the reasons I stated in my first article as well as two new reasons. One, I now have severe doubt with regards to whether Uni-Pixel has rightful claim to the UniBoss technology given the new information brought to light by the lawsuit. Two, I am skeptical of the management's credibility given its past business practices and disclosure practices. I wonder how comfortable the partnered OEM would be upon reading the lawsuit and further investigating the origin of the UniBoss technology.
(Editor's Note: A quote that appeared originally has been removed per the author's request.)
Disclosure: I am short UNXL. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.