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Background & Sources

I know there's been a lot interest in Uni-Pixel (UNXL) lately, particularly on Seeking Alpha and other investment-oriented message boards. In fact, I first heard about UNXL from Green River Asset's long thesis posted on Value Investors Club. From what I can tell, there are only two distinctly opposing views on the Company, their IP, their future prospects, and (most importantly) their stock price.

So much ink has been spilled over the last few weeks on UNXL that, like many of you, I don't know what to believe. There have been so many over-hyped rumors of partnerships with Dell (NASDAQ:DELL) & Intel (NASDAQ:INTC), patent litigation against UNXL, pump & dump scandals, and more. It has become impossible for the average investor/trader to digest all of the information out there - let alone know which pieces to believe. Even if you have gone through all of the information out there, buying or shorting UNXL for the long term requires a ton of faith in the unknowable: future value of the IP, and management's ability to execute.

In an attempt to cut through the excess quantity of speculative articles written about UNXL, I have done some digging through public SEC documents. This article is the composite of my research, which I have attempted to put into an easily digestible and enjoyable format (you'll see what I mean). I will not cite third-party articles written by potentially biased sources, nor will I blatantly make up misinformation (which seems very common around here). All of the information below is sourced directly from the SEC (mostly from the 10-years worth of 10-K filings available for UNXL). The numbers below are indisputable in that regard.

For your convenience, I have aggregated all of my sources into Evernote. I encourage you all to thumb through the documents at least for a few moments (because we both know you haven't; if you had looked at them already we wouldn't be where we are right now). I have included 10-years worth of financial statements, annual filings, management compensation data, and a bit about the shady backgrounds of management. Further, as you read, I will distinguish between my beliefs and facts.

This article doesn't include trading advice. Please study the facts, do your homework, and form your own logical conclusions before trading.

My Thesis

From 2004 to 2012, I believe that Uni-Pixel has been more than just a development stage tech Company with a good story. Rather, I believe from the moment Uni-Pixel went public (through a very silent merger with an already-listed defunct shell company in 2004), it has existed only to raise capital in the form of public securities - then siphon that capital directly into management's pockets.

While they may have attempted to do some real work along the way, the Company's legacy can be summed up in four succinct facts: (1) UNXL has burned all but 1.8% of total capital that they have raised since 2004 through their daily operations (excluding the recent equity-raise); (2) a sum equal to 77% of all burned capital was reported as salaries & benefits to employees over the same period; (3) the 3 to 5 employees with the highest salaries (mostly C-Suite managers) took home total reported compensation equal to 38% of total burned capital over the same period; and (4) Reed Killion, the Company's CEO since 2004, had total compensation equal to 12% (equivalent to $5.6MM, or an average of $618k annually) of burned capital over the same period.

In summary: put in a dark room with a pile of money, these guys effectively shoved as much as they could into their pockets - then burned whatever was left. In August 2012, they went back to the market and asked for (and received) another $12.3MM. I wonder what will happen next.

The Burden of Proof (now for the numbers)

I thought a Q&A format would be fun for this section:

  • How much 'Cash From Financing' has UNXL brought into the Company since it began reporting as a public entity in 2004 (net of all returns of capital, like dividends and debt maturities)?

(click to enlarge)

If we take that $60.5MM total capital raised, then exclude the $12.3MM that they just raised, we arrive at $48.1MM total capital brought in from the markets (that the manager's have actually had time to utilize).

  • $48.1MM - Wow, that's a lot of money. So what did they do with it?

Well, they used it in their daily operations to generate revenues and profits, by selling their thin film technology (which has been the core of their business since 2004, according to SEC filings) to customers. Let's see how those operations went by looking at Revenues & Cash Flow from Operations (because cash doesn't lie, but managers do):

(click to enlarge)

Since 2004, management used that $48.1MM of capital to generate only $1MM of revenues. Further, they burned cash at an average rate of $5.3MM per year, for a total of $47.3MM burned cash by simply going to work in the morning. In sum, they burned all but $877k of the original $48.1MM.

  • Jeez. That's pretty gruesome. Hopefully a lot of those dollars were spent developing some pretty sweet assets, infrastructure, and technology.

Actually, no. Not only has the Company not produced any readily-marketable products, but their greatest annual expenses have been in the form of employee compensation. UNXL did us the favor of disclosing exactly how much compensation their employees received in the form of both salaries & benefits:

(click to enlarge)

$36.4MM was spent compensating the Company's employees since 2004. We also know that the Company had between 10 & 29 employees at any given time, which means the average UNXL employee would have received $2.1MM in compensation if they had stayed with the Company for all 9 years - while effectively producing nothing of value. Average compensation per-person, per-year was $236k.

Doing some quick math: the total reported compensation ($36.4MM) divided by total cash burned ($47.3MM) yields the 77% that I quoted you in my thesis.

  • Ok. That seems a bit egregious, maybe someone should have talked to HR. Where was management while all this was happening?

Well, it's funny you should ask - because UNXL's named executive officers were actually the primary beneficiaries of the generous compensation structure:

(click to enlarge)

There was obviously a lot of turnover in key management positions over the 9 years that we have reported data for. But, we can see that the CEO seat was paid a total of $5.6MM, while the CFO seat was paid $3.6MM (Jeff Tomz + James Tassone). Just these two management seats alone had compensation levels equivalent to 12% and 8% of total cash burned, respectively.

  • How could the Company's failure & the consistent misallocation of capital result in such high compensation for UNXL's leaders?

Management compensation is determined by UNXL's compensation committee. The committee is composed of 3 of the Company's board members. Speaking of the Board of Directors, let's look at their compensation as of the latest proxy statement:

Can you guess which 3 members form the UNXL's Compensation Committee? If you guessed Marren, Berkoff, and Young - you'd be correct.

In addition, the stock-based comp offered to the Board of Directors was granted on November 28th, 2012 and vested immediately. Despite this fact, only Bernard Marren sold (a fraction of) his shares on the vesting date in November (the latter single red arrow). Everyone else waited a few weeks for the very timely ramp in volumes and stock price that occurred shortly after (double red arrows):

(click to enlarge)

  • So, are you saying that everyone at UNXL with any sort of oversight responsibility is likely rotten?

Yes, I believe they are. I also believe that we may be able to look toward management's backgrounds for further data points. In fact, Frank DeLape (UNXL's original Board Chairman and all-time highest paid executive) and Jeffrey Tomz (current UNXL CFO) worked together at a Company called Isolagen (ILE) in the mid 2000's. During their tenure, they were jointly implicated in a class action securities lawsuit against the Company and its officers for alleged insider trading. Isolagen settled for $4.4MM, DeLape and Tomz both left the Company, and Isolagen went bankrupt shortly thereafter.

Conclusion

Given management's long history of failure and misallocation of capital, I believe the current 3,865x Price/Sales multiple is unjustifiable.

I believe that shareholders' only shot at sustainable growth is (1) electing a team of fresh Board members at the upcoming Annual Meeting on April 26th, (2) subsequently replacing the entire management team, and (3) promptly re-evaluating the value of UNXL's IP and long-term strategy.

On the other hand, shareholders can opt to stick with Killion & crew. I believe if management is not replaced, UNXL will likely operate for another 2 years at its current cash-burn rate before running out of capital implying (1) a valuation of $0 for shareholders, and (2) a [even more] wealthy management team.

I think investors need to be asking themselves two key questions before even thinking about the value of UniBoss and the rumored OEM partnerships:

  • Do I really want to be the one holding the bag of cash when the lights go out again?
  • Will this time be different?

Good luck!

Source: Uni-Pixel: Following The Money