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Citron Research released a short report on UniPixel (UNXL) yesterday morning. Much of Citron's report simply rehashed the same tired short claims we've heard ad nauseam on SA. There were some new attacks in the piece, however, which are worthy of discussion.

What's New Shorty?

Citron alleges that it spoke with a Director at Alvarez & Marsal who said that half of UniBoss had been sold for $12mn. This would be a remarkable development were it true. The market thinks UniPixel and the company's UniBoss touch sensor technology is worth something on the order of $350mn but the CEO just turned around and sold half of it for $12mn? Could Reed Killion really be that inept? Is the market that far off the mark in its assessment of UniBoss's value? Or is there something more to this story?

We don't know the details of the Kodak relationship yet, but we know that UniPixel hasn't sold any business or part of a business to anyone. If it had, this would qualify as a material event, and the company would have had to file an 8K.

Citron has either misinterpreted something it was told by someone at Alvarez, the Alvarez Director was misinformed, or either Citron or Alvarez are just fabricating a story to suit their purposes. Alvarez happens to be the financial advisor to the committee of unsecured creditors in the Kodak bankruptcy proceedings. In other words, it represents bondholders who are trying to get money from Kodak. Given its bias, it's entirely within the realm of possibility they would try to make Kodak's life difficult. But let's not go there. Let's give Citron and Alvarez the benefit of the doubt, and assume this was some kind of miscommunication.

How could a miscommunication like that happen? It might not be that difficult. We don't know much about the economics behind the partnership between Kodak and UniPixel. Perhaps the structure is similar to a traditional Joint Venture, whereby each party would bear responsibility for half of the costs, and receive half of the revenue from product sales. If this were the case, then UniPixel might receive $12 or $15mn from Kodak to pay for equipment costs, and Kodak would receive half of the economics on UniBoss sales. A low-level Director at Alvarez might have caught a glimpse of working documents and made a mistake. A 50% split became a 50% sale, and a $12mn contribution toward equipment became a $12mn purchase price. We'll probably never know for sure, but we do know for certain that UniPixel has not sold all or part of its UniBoss business.

The $12mn figure proposed in Citron's note fails to pass any sort of sniff test. If UniBoss is a fraud then no one would pay $12mn for fifty percent. If UniBoss is not a fraud, then customers are indeed paying $15mn just to access 1mn units/mo of capacity, and no one would sell a business like that at a $24mn valuation.

The Offering

Citron's report quotes Reed Killion last week saying:

The preferred price and capacity model we've implemented, starting with our major PC manufacturer licensee, enables us to build out capacity without requiring financing that would involve equity dilution or debt, and thereby enhancing shareholder value.

The purpose of the quote is to imply that the company's stock offering of this week is somehow inconsistent with its public position on the issue. Yet, it appears that Citron failed to read the statement carefully. Mr. Killion states that it is the preferred price and capacity model which enables the firm to build capacity without dilution. The strategy UniPixel is undertaking now is outside the auspices of the preferred price and capacity license deals, and it does require outside capital. Thus raising equity isn't inconsistent with anything in the above statement.

This bears further explanation because it is an important point. UniPixel could progress at a moderate pace, signing more preferred price and capacity licenses. Yet, negotiating these deals is a time consuming process which limits the company's build-out. UniPixel has a limited window of opportunity to build as much capacity as possible and meet the needs of its Ecosystem Partner. Those needs could approach 10 million units per month. If UniPixel & Kodak don't build this capacity, one of their potential competitors eventually will, and the opportunity will be lost. To capitalize on this opportunity, UniPixel needed to act outside the preferred price and capacity structure to secure the cash it needed quickly.

The second quotation in the Citron report came from a conference call:

We believe our existing capital resources are adequate to finance our operations through at least the end of 2013 as we continue to make prudent use of these resources as well as begin to generate revenue from the recently announced preferred price capacity agreement for UniBoss with our major PC maker. Our ability to leverage partner infrastructure without diluting shareholders or giving up equity in the company has been a part of our executive team strategy on building shareholder value.

Again, Mr. Killion is speaking to the preferred price and capacity license model when he speaks about leveraging partner infrastructure without diluting shareholders. Notably he did not say, "we will never raise equity," nor did he say, "we will rely solely on the preferred price and capacity model for all of our future growth." Had he made those statements, we would have a problem.

Atmel vs. UniPixel

Citron's misunderstanding of the UniPixel story is on full-display in the report's graphical comparison of UniPixel's R&D spend to that of Atmel (ATML) since 2008. What is this supposed to prove? Atmel didn't even develop its XSense touch sensor product. That work was done by CIT/Carclo. Atmel is busy supporting a $1.4bn semiconductor manufacturing business. You better believe it'd spend a lot more in R&D than development-stage UniPixel. It is difficult to take Citron's research seriously when it offers this kind of analysis to make a point. It demonstrates very little understanding of UniPixel, XSense, or the touch market more generally.

UniPixel, You Spend Too Much /Not Enough

Citron attacks the company for spending around $10mn to develop UniBoss. Other shorts have attacked UniPixel for over-spending during development. Which is it, guys? The fact is that the technological know-how behind UniBoss has been in development for longer than just the last three years, so the $10mn figure may understate the true spend. This doesn't make a difference, however. Developing UniBoss took a lot of brain power from a team of very bright engineers, and it took a development laboratory with some off-the-shelf equipment that was subsequently modified to suit UniPixel's purposes. It wasn't a super-expensive endeavor.

Big things start from modest beginnings all the time. Any technology investor understands this. Sometimes the most disruptive technologies, and the biggest success stories, start with a couple of guys in a garage. To say that you can't create a disruptive technology with $10mn, a group of talented engineers, and a few years of development seems quite off-track.

A Lonely OTC Company

The Citron author claims that UniBoss went unnoticed by the tech community for three years. He states, "Nobody was excited about either the technology or the prospect of investing in the company over the past 3 years." Yet, I know that I was excited a year ago, and I thought the company was a steal at $5. He's correct that there were fewer investors paying attention then, but I know several who had done a remarkable amount of due diligence on the company and they were quite excited. Rightly so, it turns out.

Mystery Deals

UniPixel has made two announcements involving partners who remain unnamed for competitive reasons. This is commonplace in the technology space, especially in deals involving the supply chain. Here's an example from a well-known brand just a couple weeks ago. We could find thousands more if we wanted to take the time to do so.

Citron points out that we don't know much about the terms of these deals and this is true. Neither UniPixel nor its partners are eager to reveal certain sensitive details around these deals - and there's nothing unusual about that whatsoever. What we do know, however, is that the first partner has made the first $5mn, milestone-based payment. UNXL has also disclosed that another installment is likely to be received from the PC OEM in 2Q. The company has also publicly disclosed that it will receive the first part of its Ecosystem Partner payment in 2Q. This doesn't sound like hype to me, Citron. It sounds more like the cash register beginning to sing.

Citron goes on to point out that bears believe the Kodak deal is, "no more than UniPixel renting space from Kodak and paying them money for manufacturing." This view would seem to contradict the way Kodak's CEO described the situation in his press release. He called UniPixel an, "innovative and effective partner." Notice that he didn't call them a tenant or a customer. Kodak's Perez goes on to describe the agreement as, "a major advance for Kodak's functional printing initiative…Functional printing is a key growth area for Commercial Imaging…and Commercial Imaging is Kodak's future." It sounds more like UniPixel is going to be an integral part of Kodak's growth plans. Citron and the shorts seem to have a vastly different take on the deal than Kodak's CEO.

The author of the Citron report claims that "no concrete contracts have been signed to deliver products." Well, we have concrete contracts to deliver capacity, and it doesn't take a great leap of imagination to see why a customer who pays for capacity would eventually want product delivered. The company will be shipping product in the immediate future, so P.O.s will be arriving before long.

Character Assassination.....Attempt

Citron's characterization of insiders and promoters is so one-sided and factually challenged that it hardly merits discussion. It starts off with an attack on Bernie Marren. I haven't had the pleasure of meeting Mr. Marren personally, but I know a couple of people who do know him, and they tell me that he is legendary for his contributions in Silicon Valley. This interview from Stanford University's Silicon Genesis Library would seem to support this point of view. The library is a collection of oral interviews with people Stanford deems "pioneers of the semiconductor industry."

Yet Citron wants us to believe Mr. Marren has led one failure after another. Citron's report asserts that Mr. Marren ran Western Micro into bankruptcy, but this is a lie. You'll note in the interview above that Western Micro changed names to Savoir Technology, became the largest distributor of IBM equipment, and grew to around $800mn in sales before being sold to Avnet.

Citron's analysis also fails to note that Bernie Marren has had an incredibly successful career as Founder and President of the Semiconductor Industry Association, as President of American Microsystems, and as an executive with Fairchild Semiconductor.

Citron's research notes that Jeff Tomz worked at Isolagen, and Citron calls the company a fraud. Yet lawsuits against Isolagen were dismissed and Tomz was never found guilty of any wrongdoing whatsoever. Tomz left Isolagen a full four years before the company ran into difficulty.

Citron's author further reveals his lack of knowledge when he identifies Martin Selbrede as UniPixel's CSO. Martin left the company years ago.

The other attacks Citron makes on analysts and promoters demonstrate nothing other than the desperate nature of the report. UniPixel doesn't choose the promoters Citron references. Citron's attack on Cody Acree seems very mean-spirited. What did Cody ever do to you, Citron?

Turning the Tables on Shorty

The great irony in the UniPixel soap opera is that some of the short authors who have been so quick to accuse management of perpetrating a fraud have failed to prove anything of the sort. Yet these same shorts have clearly and deliberately defrauded long investors through their deceitful claims.

A few examples follow:

  • · In this article author Xuhua Zhou accused management of making statements "aimed at intentionally misleading the market about the size of its market opportunity." He claimed to show that management had originally claimed their market opportunity was only $800mn rather than the $19bn opportunity management recently cited. However, the slide that the author referenced to support his $800mn contention clearly and obviously stated the opportunity was for the "Mobile Touch Panel Market Only." Management hadn't intentionally misled anyone, but the author had, and the facts are there for all to see.
  • · In the same article, the author went on to say, "My analysis and understanding of UniBoss' technology stem from numerous discussions with unbiased experts and researchers in the nanotechnology sector." He then cited research from Assistant Professor Benjamin Wiley of Duke, and from research association Nanomarkets. Yet each of these sources had business interests in the nano-materials market, and had every motivation to promote those technologies over UniPixel's printed copper mesh. To say that they were "unbiased" was absolutely untrue, yet I would imagine their "unbiased" opinions helped some longs out of their UNXL shares at $15.
  • · In this article, author Adam Gefvert, relates that, "One of the people I interviewed was touch screen expert Ivan Jimenez." Mr. Jimenez proceeded to make several factually incorrect assertions about UniBoss in the article. After the article's release, Mr. Jimenez was harassed about his inaccuracies before he disassociated himself from the "expert" tag, specifically stating "I am not an expert."
  • · In this article, Xuhua Zhou, claimed "there is simply no plausible explanation" for the omission of UNXL's contract with the PC OEM per SEC Item 601 (B) (10) of Regulation S-K. Yet before he published the article, he knew there was a highly plausible reason this contract was not filed. He knew that the company didn't have to file the contract because it was entered into in the "ordinary course of business" - an exemption the regulation clearly allows. Mr. Zhou knew of this exemption because he was very familiar with the regulation, and because I had told him that this exemption applied to UniPixel prior to his article's publication.

If At First You Don't Succeed, Keep Banging Your Head Against The Wall

It's not just lies that have hurt the short case on UniPixel, it's also weak and faulty analysis. The shorts' arguments have been proven wrong over and over again. Undeterred, the shorts simply throw something else against the wall to see if it will stick. There's nothing wrong with the tactic, but shorts and longs alike should recognize the pattern, and understand that a constantly morphing short story is a big warning sign. The shorts are rudderless.

Consider some of the past short stories on UniPixel put forth on SA and other boards which can be proven false:

· UniPixel doesn't even make UniBoss. Wrong.

· UniPixel doesn't have a contract with a PC OEM. Wrong.

· UniPixel will never be paid by the PC OEM. Wrong.

· The market for touch sensors is tiny. Wrong.

· ITO sensor prices are collapsing. Wrong.

· UniBoss cannot function in a working prototype. Wrong.

· UniPixel violated SEC regulations by not filing its Dell contract. Wrong.

· Bob Petcavich works at UniPixel part-time. Wrong.

· Dell (DELL) engineers are not involved with UniBoss - just a rogue Dell employee. Wrong.

· Kodak is a customer, not a partner. Wrong.

· Three of UNXL's officers have been convicted of fraud. Wrong.

· MDB pulled its research coverage of UniPixel. Wrong.

· UniBoss's mesh lines are easily broken. Wrong.

· It's impossible to plate copper at speeds management claims. Wrong.

· There is no market validation of UniBoss's technology. Wrong.

· UniPixel's intellectual property is inadequately protected. Wrong.

· Sell-side research has been overly optimistic. Wrong.

· Management has lied in the past. Wrong.

We could go on with many more, but it's getting late and the pattern is clear. Rest assured that Citron and the shorts will come up with more crazy UNXL short stories like those above, but don't let them fool you out of your stock. Do your homework, and make sure you aren't Citron's next victim.

Update from the author: Since the publication of this article, Alvarez & Marsal has issued a statement denying all assertions and statements attributed to the firm in the Citron report. Further, Alvarez & Marsal deny knowledge about any transfer of ownership with respect to UniPixel and/or UniBoss in connection with the Kodak agreement. Once again it has proven costly to listen to the shorts on this name.

Source: UniPixel: Hey Citron, Where's The Beef?