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Uni-Pixel, Inc. (NASDAQ:UNXL)

Q1 2013 Earnings Conference Call

April 30, 2013 16:30 ET

Executives

Reed Killion - President and Chief Executive Officer

Dr. Robert Petcavich - Senior Vice President and Chief Technology Officer

Jeff Tomz - Chief Financial Officer

Analysts

Rob Stone - Cowen & Company

Mike Malouf - Craig-Hallum Capital Group

Cody Acree - Williams Financial

Jon Hickman - Ladenburg

Gavin Richey - Rockwood Investment Partners

Scott Vincent - Green River Asset Management

Operator

Good afternoon, everyone, and thank you for participating in today’s conference call to discuss Uni-Pixel’s First Quarter Ended March 31, 2013. Joining us today are Reed Killion, the President and CEO of Uni-Pixel; Dr. Robert Petcavich, the company’s Senior Vice President and Chief Technology Officer; and Jeff Tomz, the company’s CFO. Following their remarks, we will open the call for your questions. Then before we conclude today’s call, I will provide the company’s Safe Harbor statement with important cautions regarding forward-looking statements made during this call.

Before we begin, I would like to remind everyone that this call is being recorded and will be available for replay through May 30, 2013 starting later this evening via the link provided in today’s press release as well as on the company’s website.

Now, I would like to turn the call over to the President and CEO of Uni-Pixel, Mr. Reed Killion. Sir, please proceed.

Reed Killion - President and Chief Executive Officer

Thank you, Michael. Good afternoon everyone. Thanks for joining us today. On today’s call, we are going to talk about the progress we have made for the first quarter of 2013 towards worldwide commercialization of our flagship performance engineered film technology, UniBoss for touch screen sensors. In Q1, we saw a record top and bottom line results as we began to recognize engineering revenue from our first preferred price in capacity licensee for UniBoss. This was with our major PC maker that we signed in December.

This engineering activity includes the dedicated production capacity build-out of 1 million square feet a month for our UniBoss manufacturing capacity developing additional IP and qualifying sensor controller manufacturers and our downstream supply chain. We also laid the groundwork toward engaging our second preferred pricing capacity licensee for the major ecosystem partner as well as negotiating a JDA and manufacturing supply agreement with Eastman Kodak as a manufacturing and supply chain partner, both of which we completed on time and ahead of milestones we laid out during our last quarterly call. But before I go into this further, I’d like to first turn the call over to our CFO, Jeff Tomz who will take us briefly through the financial details of the quarter. Jeff?

Jeff Tomz - Chief Financial Officer

Thank you, Reed. Earlier today, we filed our Form 10-Q with the SEC as well as released our first quarter financial results and a press release. Both of these are available for download from the Investors section of our website at www.unipixel.com.

Our revenue totaled a record $5.1 million in the first quarter of 2013 as compared to marginal revenues in the same year ago quarter. The increase in revenue was primarily the result of a $5 million engineering payment we received from our first preferred price and capacity licensee in the UniBoss. SG&A expenses in the first quarter totaled $2.2 million as compared to $929,000 in the same year ago quarter. The increase was primarily due to increase in legal expenses as well as increase in salary benefits partially driven by an increase in restricted stock expense, bonus accrual, and number of employees.

Our research and development expenses in the first quarter of 2013 totaled $1.9 million as compared to $1.1 million in the same year ago quarter. The increase was primarily due to greater lab expense related to prototype development of product based on performance engineering film. Our net income was a record $0.9 million, or $0.07 per diluted share as compared to a net loss of $2 million, or $0.29 per basic and diluted share in the same year ago quarter. Cash and cash equivalents totaled $15.7 million at March 31, 2013 as compared to $13 million at December 31, 2012. The increase in cash was primarily attributed to the $5 million generated from our engineering payment.

Last week, we completed an equity raise with net proceeds of $41.2 million. We intend to use the proceeds for working capital and general purposes, including adding additional printing and plating equipment for UniBoss for preferred price and capacity license agreements. We believe our existing capital resources are adequate to finance our operations for the foreseeable future as we continue make prudent use of each resources as well as generate revenue from our license agreements.

Now, I would like to turn the call back over to our CEO and President, Reed Killion. Reed?

Reed Killion - President and Chief Executive Officer

Thanks Jeff. As you all know, it was a busy first quarter for Uni-Pixel, particularly after signing a major PC maker as our first preferred price and capacity licensee for the UniBoss in December. Since then, we have focused on building out the qualifying large scale commercialization and production capacity for UniBoss. This has involved ordering, installing, and qualifying new equipment making a number of key hires and working closely with our PC licensee on supply chain qualification efforts and developing prototype designs.

We have also been very engaged in qualifying our global touch module supply chain for OEMs and ODMs, which addresses the necessary die cutting, tab bonding, and lamination of UniBoss sensor and a controller chip to the display. The signing of the PC licensee was a key milestone, an important demonstration of our stated go-to-market strategy, where we offer reduced pricing and dedicated production capacity to a preferred price and capacity licensee in exchange for financing the expansion of our production capacity. This model works to build out the capacity without giving up the equity, or taking on debt. The other significant benefit is the strategic relationship it enables between the vest of licensee partner allowing Uni-Pixel to leverage the extensive supply chain, engineering and operational expertise and resource of these Fortune 500 companies and the development of UniBoss products and the ecosystem around our touch sensor technology.

The $5 million engineering payment received during the quarter strongly validated this go to market strategy and marked major progress towards the worldwide commercialization of UniBoss. Moreover, we believe that it represents a very tangible demonstration of how the touch ecosystem has begun to recognize the unique advantages of metal mesh touch sensors based on our additive, roll-to-roll, flexible electronics process, especially as compared with traditional subtractive ITO-based touch sensor solution.

As many of you have come to know these advantages include higher touch response and sensitivity, superior touch distinction, better durability, lower power requirements and the ability to scale to many sizes and form factors. As an additive manufacturing process UniBoss is more efficient and sustainable promising lower production cost versus standard ITO-based touch technology and other subtractive ITO replacement technologies. It does this by way of lower materials costs, fewer steps in the manufacturing process and a more simplified supply chain. Our UniBoss roll-to-roll, flexible electronics technology and process is a disruptive entrant in a touch module market that Display Search expects to more than double to $32 billion by 2018.

We met our milestones of shipping production level product by the end of April by fully calibrating and qualifying our printing and plating lines. We’ve begun shipping initial batches of sensors to our PC maker licensee. The initial shipment quantities on the production started at 50 moving to hundreds and thousands over the next several months. With any product ramp it begins with building the qualification units and then through rigorous testing such as accelerated life, environmental testing FCC, Windows 8, etcetera. The testing will begin once production level units are built out by the ODM. We expect the build out to be completed in the next four to six weeks.

Soon after the end of the first quarter, as we predicted on our last call, we announced our second multi-million dollar preferred price and capacity agreement with a major ecosystem partner. They have committed to help facilitate the development and production of products that feature next generation touch screens based on UniBoss. As a developer and manufacturer of technologies that will become an integral part of computing devices used around the world from PCs and laptops to tablets and cell phones, we could not ask for a more ideal ecosystem partner. This relationship allows us to leverage a well established global infrastructure for joint sales and marketing, supply chain management as well as their exceptional engineering and operational expertise. The license fees paid under this agreement will be used to build out an additional 1 million square feet per month of production capacity for UniBoss. The capacity will allow our ecosystem partner to offer its global customer base a touch sensor price performance advantage over ITO-based technology as well as integrate UniBoss technology in its own platforms and products.

Given the capacity commitments we have made it became obvious that we needed to rapidly scale up our UniBoss production capacity. To this end a couple of weeks ago, we entered into a manufacturing and supply agreement with Eastman Kodak with a hundred year history in film innovation and manufacturing Kodak brings to the table unparalleled expertise and core competencies and material science, deposition technologies and large scale manufacturing and commercialization. In addition to ramping up capacity, the Kodak infrastructure allows us to vertically integrate the use of various base materials with chemistry groups PET films informulation gliding and mastering all in one location for the end-to-end manufacturing process. The entire UniBoss roll-to-role flexible printed electronics manufacturing process is vertically integrated from materials to finish product including final test under this relationship. The combined strength of Uni-Pixel and Kodak are creating one of the most synergistic and aligned infrastructures in the worlds as it relates to flexible printed electronics and alternative touch sensor solutions along with Kodak we began construction on a state-of-the-art manufacturing and testing facility at their Eastman Business Park in Rochester, New York.

The facility has over 100,000 square feet of manufacturing space with the ability to grow significantly from the initial build out of our UniBoss roll-to-roll printing and plating line. The initial $24 million which has been allocated to improve and equip the Rochester facility in 2013 includes the installation of two printing lines multiple plating lines, replace purchase orders for two printing process presses and initial four plating lines that we anticipate to be delivered at Rochester facility in June and installed in calibrated by the July-August timeframe.

And our existing Lufkin facility, we expect to have two new plating lines production ready by the end of June. With the existing equipment on our Lufkin facility, we recently reached our target for production equipment capacity in April at 60,000 square feet per month. We are now on track to ramp up equipment max capacity to 200,000 square feet per month by the end of June, 700,000 by the end of September and 1.3 million by January of 2014. Our plan is to build out equipment capacity to 10 million units a month by the end of 2014. The increased capacity can be accomplished by expanding the Rochester site and adding additional printing and plating lines, while increasing the throughput of our printing and plating lines with continuous process improvement implementation. In addition to establishing sensor production capacity we will continue to work with our licensees to develop a global touch module supply chain or OEMs and ODMs which includes die cutting, tab bonding and lamination of the module the display as I expressed earlier.

Part of these works includes continuing to develop prototypes with announced controller manufacturers Texas Instruments as well as N-trig for its dual sensor panel and multi-touch input used on mobile computing devices. We have also qualified multiple other touch controller manufacturers reflecting our controller agnostic approach. We are working with Synaptics, one of the leading controller manufacturers in the world as well as (indiscernible) and others. Together we are working towards yielding integrated touch solutions that offer price performance advantage superior to what we could possibly accomplished independently. While much light has been on UniBoss in recent months, we have continued to feel significant interest in Diamond Guard Hard Coat film especially as combined solution with UniBoss.

We designed Diamond Guard to offer superior film scratch and abrasion resistant as a low cost substitute for glass. It is super hard rated 6H scratch resistance and making it highly resistant to scratching, abrasion and shattering. The film is also very thin, light and flexible with the glass equivalent gloss finish. The implementation of Diamond Guard is also less labor intensive to utilize than glass. And unlike glass it is available on large rolls that can be die cut or laser cut to size. The large roll format can also save manufacturing cost that allows direct printing of roll-to-roll graphics or decorative graphics, which includes bezels, logos, multi-color borders for consumer electronics automotive and industrial aesthetics. Also unlike glass it does not require free and post processing steps like the special surface treatment for glass that allows inks to adhere. The functional prototypes we produced demonstrate the laminating Diamond Guard with UniBoss eliminates the need for protective covered glass or sensor glass in several applications or I should say many applications.

As a combined solution this offers a thinner product at a highly comparative cost. We anticipate UniBoss to be the significant growth drivers for Diamond Guard sales in 2013 and 2014. We are also revealing the Diamond Guard film only business. We have been asked and our actively considering selling the Diamond Guard hard coat resin for use in pre-dimensional applications like molded cases and lenses. And all over the course of last several months we believe we have met our milestones and deliverables and have set the company on a solid course for growth or profitability in 2013. Our focus for the remainder of the year will be on building out equipment capacity and ramping UniBoss production or working closely with our global licensees and manufacturing partners on the new designs and production opportunities.

We will also pursue additional preferred pricing capacity licensees and expand our downstream relationships with LCD panel manufacturers, touch panel module manufacturers, and ODMs. Also as a developer of disruptive technology, we continue to protect our achievements by strengthening our IP portfolio with new patent and patent applications. We currently have filed or having the process of filing more than 100 patents on our performance engineered films and proprietary hard coat chemistry.

Finally, I would like to mention that we made some exceptional new hires to support our operational platform and global commercialization efforts. And this includes Robert Berg as our VP of Global Sales and Marketing and Robert Rusenko, our recently appointed Vice President of Manufacturing may bring our current employee count to 28, which we expect to grow to around 40 by the end of the year. Still we plan to maintain a very efficient operational structure like our UniBoss roll-to-roll flexibility electronics manufacturing process, a structure that has been creating a tremendous amount of value while maintaining a relatively small footprint.

Now with that, I would like to open the call up to questions. Michael, please provide appropriate instructions.

Question-and-Answer Session

Operator

Thank you, sir. (Operator Instructions) And our first question comes from line of Rob Stone with Cowen & Company. Please go ahead.

Rob Stone - Cowen & Company

Hi.

Reed Killion

Hello, Rob.

Rob Stone - Cowen & Company

Lots of stuff going on. Reed, I wanted to spend a minute on the decision to push capacity up to 10 million a month by the end of next year. Could you give us a little more color on the kind of interest and potential engagement you are seeing beyond the preferred capacity license customers, I am assuming that a build out of that size must be motivated by some significant number of potential relationships?

Reed Killion

Certainly, the ecosystem partner was that we have aligned with as introduced to several customers, one such customer produces about 100 million units a year that’s down from both smartphones, notebooks, tablets, all-in-one’s large area surface computing etcetera. There has been some tenant manufacturers that have expressed an interest in smartphones to the tune of 400 million units a year annually. There are multiple other applications that people have brought to us from an interest standpoint. And we believe that based on the price performance curve that we offer that to be a significant player in the space, we are going to have to build out capacity to at least support about 10% of the overall touch sensor market, which we anticipate to be about 1 million square feet. So, 10 million of month, that’s about 120 million a year that would put us in that position. So, yes, there is interest outside our current ecosystem and PC manufacturing partner. There is a tremendous amount of interest in smartphones, tablets, notebooks, all in ones, and we have also had some people contact us about automotive, and how this can be applied to the automotive as well as the industrial space, so, capacity is going to be important.

Rob Stone - Cowen & Company

Okay. I’m glad you mentioned smartphones, that was actually going to be my next question, I mean, everyone is aware of the issues with ITO and larger format devices and the difficulty getting the cost out of Windows 8 to some look to make them more attractive, but ITO capacity and displays have done pretty well in smartphones up to now. What would you say are the main things driving customers to one, I consider replacing ITO on smaller format screen?

Reed Killion

I think the number one driver is pricing performance again. The ability for us to meet specific price points with our process we can align in smartphones or we can align in larger area applications, but even at the square footage price that we talked around of $20, we still have a slight advantage on price. The other thing is the combination of the hard coat with our UniBoss to have a lower cost overall solution, glass makes up anywhere from, I guess 20% to 35% depending on which application you are in, the cost of a module and if you could potentially get away from glass on the chemically strength in glass and go to a solution and get a lighter phone that’s probably a little bit more durable.

Rob Stone - Cowen & Company

Finally a quick question for Jeff, if I may, OpEx came in quite a bit higher than we were thinking and you mentioned the legal as a significant factor. Can you give us a sense of how much of that is for legal I assume its related to some legal action came up in the last few months and how should we be thinking about the run rate of SG&A and R&D excluding sort of unusual legal expense? Thanks.

Jeff Tomz

Sure this is Jeff, legal expense is about $700,000 this first quarter about $250,000 of that was related to our patent filing and the balance is related to working on a those various losses that’s out there and business responses so forth. I believe in Q2 our legal expenses will go down because – and then I believe that in Q2 that our run rate for SG&A and R&D on a combined basis on a monthly basis will be about $1 million a month excluding capital expenditures.

Rob Stone - Cowen & Company

That’s cash expense or including stock-based comp?

Jeff Tomz

Probably about $800,000 excluding – which will exclude stock based compensation.

Rob Stone - Cowen & Company

Okay. Thank you.

Operator

And our next question comes from the line of Mike Malouf, Craig-Hallum Capital Group.

Reed Killion

Hello Mike, is anybody there, Mike?

Mike Malouf - Craig-Hallum Capital Group

Hi can you hear me okay?

Reed Killion

I can now.

Mike Malouf - Craig-Hallum Capital Group

Okay, sorry about that. Thanks for taking the call and way to go on, so much accomplished this year. I wanted to ask a couple of questions on competition. I’m wondering if you can talk a little bit about what you’re seeing out there on the traditional side for ITO whether or not pricing when they’re obviously seeing you come in, you’re seeing pricing come down getting closer to your price and are they doing anything or can they do anything to increase their performance. And I guess second of all on the alternative to ITO maybe if you can talk a little bit about what you’re seeing with regards to some of your ecosystem and the OEM partners that you’re talking to what else is on horizon with regards to alternative ITO? Thanks.

Reed Killion

Certainly, there is a lot of players out there that have put a lot of dollars into expanding infrastructure around ITO. And we are seeing some of that infrastructure come online. There is a strong demand for ITO build centers and we think that demand will continue. Although with the announced capacity, I don’t think that some of the information that we’ve heard back that the pricing is going to come down in Q4 that doesn’t really bother us that much from a competitive standpoint. We can lower our prices to remain competitive and offer a price performance advantage without really hurting our bottom line that much.

With respect to competing technologies, obviously we have that to their ITO replacements we have seen that sense in the market and I believe that they are starting to win some designs and I don’t know if they’re shipping products yet. And I believe they’ve started shipping some products. We have seen Fuji in the market and they have ship some product. We have seen Cambrios which is a silver-based solution at the market but I don’t know where they are on shipping product they were supposed to be in a year or two. Bob do you got anybody else that you guys are…

Dr. Robert Petcavich

Yeah. Mike as you know a couple of weeks ago we participated in Intel developers touch conference in Beijing, China and on the deck with us there was both Cambrios and a company called (indiscernible) and optical technology. And one thing we can say we did actually interact touch devices that both of technologies we are in to it we saw dramatically slowness in response of both those displayed although pessimistically they didn’t look good performance wise, we’re not so sure that they have place in a much bigger mass market like tumor electronics but they may find very good niche market. But that’s the only two technologies we saw in that conference.

Reed Killion

We’ve heard some I think LG has been working on some technology in their labs, we have not seen it in the market nobody has really come to us and said that they consider that a viable production process yet. But interesting technology we have done a research to the extent that we can and we believe that our cost basis is still going to be much better than what they could produced.

Mike Malouf - Craig-Hallum Capital Group

Great and then as we look at the $20 a unit that’s your sign in these potential pricing and supply agreements with early the two that you have signed, when you take a look at I guess the remaining $8 million that you are sort of looking to build out for 2014. Are you expecting or should we expect other similar type agreements to be signed prior to actually get in the orders or would you actually sell the orders without a preferred price and capacity license, and if so would that price be at $20 or would it be above that $20? Thanks.

Reed Killion

We are going to continue with the preferred price and capacity model. It gives us the ability to engage with the customer base and leveraged resources were applicable. It gives the ecosystem partner and PC manufacturer partner a price performance curve advantage. And I think that there is other players out there that are going to want that same advantage. So, it’s a cart/horse scenario, we will get the horse first, which is the capacity to pull the cart.

Mike Malouf - Craig-Hallum Capital Group

Great. And could I just get a little bit more color on the first ramp that you are doing, I think you said you had to go through testing and that would take four to six weeks…

Reed Killion

Yeah.

Mike Malouf - Craig-Hallum Capital Group

I was trying to get a little sense over the next – as you look over the next three to four months, how do you sort of think production ramps up?

Reed Killion

We had to qualify our lines internal with respect to production level process. So, we had to qualify the printing line, we had to qualify the plating line, then we had to qualify our film. We have done environmental testing and some accelerated life testing and things of that on the film. Now, it’s a situation where we have qualified our process. Now, we have to qualify with the device. So, we’ll start – we started by shipping 50 units for a beta build-out or alpha build-out. Then that goes through ODM build-out of the product, where there is 50 units or notebooks that will be tested through life and environmental accelerated life testing, FCC etcetera. Once that is passed, then you have kind of the golden samples that lead you to production. So, let’s say, depending on whose building and now the timeline that they can build out, that’s probably a four to six-week process. And then the accelerated life testing can take anywhere from 20 to 60 days depending on how they do it.

Mike Malouf - Craig-Hallum Capital Group

Okay. And then so do you still think – I mean, when do you think that we would actually see the first products using your product on the shelf?

Reed Killion

It’s a process that we believe will put us on the shelf in the September timeframe third quarter.

Mike Malouf - Craig-Hallum Capital Group

Perfect. Thanks a lot. No further questions from me.

Reed Killion

Thank you.

Operator

And our next question comes from the line of Cody Acree with Williams Financial. Please go ahead.

Cody Acree - Williams Financial

Thanks for taking my question guys. Hey, congrats on progress.

Reed Killion

Thank you, sir.

Cody Acree - Williams Financial

Reed and team, I guess if you look at the I guess some of the speculation that’s been out there around the financial terms on the Kodak, I know there is only so much you can give, but Reed to the extent that you can provide some color that would be very helpful overall?

Reed Killion

Certainly. We have a joint development agreement and a supply agreement that we have announced publicly. And there will be some revenue sharing and the revenue sharing will be on equitable terms. The first 24 million, the initial 24 million has been allocated to build out the facility in Rochester, and we are not limited to that 24 million. There are a lot of other things that go into this effort relative to building out infrastructure and resources on the Kodak side to help support this. So, we are very excited about the opportunity with them and we believe that from a synergy standpoint being able to vertically integrate, where we have the PET film manufacturer basically onsite. PET film plays a big role on what we are doing. It’s actually what we print on and it is the most costly material used in our technology. Having that in-house and being able to ensure quality a film is really key to us yielding good production results. So, as we move forward with this and as it becomes public, we will certainly address the revenue sharing and how we do it.

Cody Acree - Williams Financial

And Reed, when you talk about the benefits of vertical integration, if you look at what this might run you if you are building this on your own, you are buying off the markets through all of these components. Just around maybe a relative standpoint or percentage standpoint, how much do you think the actual cost of production is going to save you by producing vertically at Kodak versus if you build it out at Lufkin?

Reed Killion

Well, first off, we – it’s time to market, Cody. And if we had to build out the Lufkin facility to support the capacity that we are requiring, it would take probably another year just to build out the facility, to build the facility. They already have the permits there. So, that’s not an issue, but if we were to build this from the ground up somewhere else, it might take 18 months to get in there. And we have a window of opportunity that we want to take advantage of immediately. So, being able to utilize in infrastructure like the one that’s available to Kodak is you really can’t put a dollar value on it. It’s extremely important. So, that said that’s one of reasons why we went that direction. If we had to build a PET film manufacturing site, I mean, that can get extremely costly. I don’t know what they run about?

Cody Acree - Williams Financial

Hundreds of millions of dollars?

Reed Killion

Yeah. So, just like all the rest of the components to go into our manufacturing process, Cody, the base film is critical to suggest in high yields and have a control of that base film and no one else can get there and that would be – give us a significant competitive advantage.

Cody Acree - Williams Financial

Speaking of…

Reed Killion

Why don’t you go into it, because I know the question come up, why don’t you talk about the competitive advantage that Kodak brings relative to some of the other things that they were not with us?

Jeff Tomz

Yeah. In addition to the film, they are experts at the manufacturing process this year, large scae manufacturing. They also are experts at Nanoinks and inks in general and production of those inks that they make inkjet, didn’t make inkjet products and we need our inks manufactured with very high quality. They also brought a number of expertise printing and mastering. They are experts at functional credit products, some of the equipment we have. There is a design here. So, if you look at all the various components in the manufacturing process and materials that we use here, we couldn’t have found a better match for taking our know-how and technology and process to a much larger scale on a global scale actually.

Cody Acree - Williams Financial

And I guess one of the things I was trying to get to, so if you are looking at your cost of production in Lufkin versus your cost of production knowing that there is only for the benefits that Kodak brings, but just absolute dollar-to-dollar, especially if you are talking about a cost plus that cost becomes very important role for what’s our starting point. You believe that there is a material or an immaterial advantage on your cost structure if you are building a Kodak?

Reed Killion

Materials and process as you get up the scale, I think you said material or immaterial advantage, I would say, it would be material, because if the yield is not where it needs to be then, that’s going to bite you in the end. So, are you just talking about raw materials?

Cody Acree - Williams Financial

Yeah. So, I guess we are starting from some kind of a point, so this is some type of a cost plus and whatever that is an important starting point. So, it sounds as though Kodak, should they be able to get you to a lower starting point to apples-to-apples. It might not be that much of a material to your actual bottom dollar if you are producing much more efficient partner?

Reed Killion

Yes, that’s true. You answered the question.

Cody Acree - Williams Financial

I thought I might have. And with the $24 million for Kodak, is that primarily or at least the portion that Kodak is contributing, is that primarily the build out or the tools all coming to year end?

Reed Killion

That’s the combination mostly from their part, it’s build out. From our part, it’s tools.

Cody Acree - Williams Financial

And then lastly….

Reed Killion

The process, the formulations, the capital equipment, those are the things are pushing into that facility may will also push capital equipment into that facility as well as resources and operations and expertise. Test and quality is a huge part of what they are going to bring to the party as well.

Cody Acree - Williams Financial

There is maybe more on the testing side represented the initial product site?

Reed Killion

Their ability to do those – we’ve got an extensive meteorology capability, but it’s nowhere close to what they can do and their test and reliability and the fact that they have run hundred gears. We couldn’t duplicate that.

Dr. Robert Petcavich

It would cost us I mean if we were to start scraps trying to duplicate not only their equipment, but expertise we’re talking probably tens of million to dollars, expect hundreds of million of dollars to get to the same.

Reed Killion

Okay, thanks. Is there resources type of capability.

Cody Acree - Williams Financial

And then guys last one for me and Reed I know you’re not talking about this past but in that early stages I guess this happens sort of any company, if you’re looking at different stages of ramp, but you’re starting to get especially now with increased coverage is starting with a pretty large delta between your near term and out quarter estimates. How long before you think you might be comfortable with your level of visibility start to write a better range for not only the short term but maybe intermediate term target on actual equipment of that actual unit?

Reed Killion

Yeah. I think you’re looking at guidance basically on numbers, so were probably 2014, we will start giving guidance.

Cody Acree - Williams Financial

Alright, very good. Thanks guys.

Operator

And our next question comes from the line of Jon Hickman with Ladenburg. Please go ahead.

Jon Hickman - Ladenburg

Hi guys.

Reed Killion

Hi, Jon.

Jon Hickman - Ladenburg

You’ve been busy.

Reed Killion

Yes we have.

Jon Hickman - Ladenburg

Yes.

Reed Killion

It’s a bit busy.

Jon Hickman - Ladenburg

Yeah, I have a couple and most of my questions have been answered. I do you have a couple with all that you just said about Kodak what they bring to the table. Can you duplicate some of that in Lufkin?

Reed Killion

Don’t have the facility to do so the infrastructure to do or the operational expertise to do so what we can duplicate is the plating.

Jon Hickman - Ladenburg

Okay.

Reed Killion

But we’re going to bring into what Kodak brings us is the vertical integration of the manufacturing of the PET film itself. The manufacturing of the inks that we have developeds internally and the printing mastering as well as plating and final test, so again its all of our vertical integration and scale. The facility that we are in and building out starts out at 120,000 square feet, but there is an additional probably 340,000 square feet available to us that we can scale into pretty quickly and that entire building is close to 1 million square feet, so it’s from an infrastructure standpoint it will be hard to duplicate that.

Jon Hickman - Ladenburg

So, where is that PET film coming from for Lufkin, is it coming from Kodak are you will be getting it somewhere else?

Reed Killion

We have qualified Carestream, Kodak and DuPont.

Jon Hickman - Ladenburg

Okay. So, do you anticipate that this facility in Kodak – at Kodak’s Rochester will be the main I mean you talked about 10 million units per month by the end of 2014 most of that…

Reed Killion

That’s what we – that’s our goal that’s what we will make.

Jon Hickman - Ladenburg

Yeah. That’s your goal. Would you anticipate the multiple come out of Rochester then are you...?

Reed Killion

Absolutely.

Jon Hickman - Ladenburg

Okay. So, one more question here.

Reed Killion

And you can reach that capacity by doing several things one we’ve modeled what we believe is relatively conservative on the printing capability. But you can also increase throughput on the plating lines by altering chemistry and these lines that we’re putting in the Kodak facility in Rochester 90 foot lines compared to the 60 foot line that we have in Lufkin and this throughput on those lines can be increased several ways. So, those are some other things that we will be working on to.

Jon Hickman - Ladenburg

Okay. And just push you just a little bit if you anticipate your OEM being able to have product on the shelf by end of the September timeframe. I would imagine your shipments have to start sometime ahead of that. So, when – could you give us some idea when you might start getting paid for your units basically out the door?

Reed Killion

We’ll start hitting production level volume that we’ve already been paid for some of them the license agreement picks up some of the prototype effort. So we’ve been paid for some of them. But as far as orders that we get specifically for that that will be probably in the June timeframe that those orders will be significant enough to build.

Jon Hickman - Ladenburg

Okay that’s all from me. Thank you.

Reed Killion

Thank you.

Operator

And our next question comes from the line of Mason Jones with (indiscernible) Advisors. Please go ahead.

Reed Killion

Hi Mason.

Unidentified Analyst

Hi Reed. Congratulations on a great quarter. I had a question with regard to the yield you’ve been seeing coming off your line number one? And number two could you speak a little bit how you think of yield to go up when you are partnering with Kodak and ultimately you have any insight or sight into what the ultimate gross margin maybe based on those yields that you are kind of expecting to get there?

Reed Killion

You caught me right to open, this might be for you, so you can post it somewhere. It’s what we are looking at is one of the biggest problems that we thought let’s talk about something that’s negative not that I want to, but one of the biggest problems we found was that if the PET film has defects in it, it doesn’t print well and if it doesn’t print well, it doesn’t play well. What we have seen that’s very positive if we printed inflates, which is exceptional. So, we have focused a lot on the PET film. We went from yields of 20% to 70% just by changing out the film.

Unidentified Analyst

Okay.

Reed Killion

That’s where we are today. We got about a 70% yield on the things that we think and we plan on improving that through quality inspection of the film as it comes in and some of the in line vision equipment that we are installing as well. So, we can pick up problem immediately. So, it’s – we are positive and headed in the right direction. The margins on this as I have said before are north of 50%.

Unidentified Analyst

Great.

Reed Killion

Okay.

Operator

And our next question comes from the line of Gavin Richey with Rockwood Investment Partners. Please go ahead.

Reed Killion

Hi Gavin.

Gavin Richey - Rockwood Investment Partners

Hello, hi how are you? Just a quick question on working capital when will there start to be inventory on the balance sheet?

Reed Killion

Significant inventory of prior one incur until the third or fourth quarter of 2013.

Gavin Richey - Rockwood Investment Partners

Thanks.

Reed Killion

Anything else?

Operator

And our next question comes from the line of Scott Vincent with Green River Asset Management. Please go ahead.

Reed Killion

Hi Scott.

Scott Vincent - Green River Asset Management

Hi Reed, how are you?

Reed Killion

Doing well. Thank you.

Scott Vincent - Green River Asset Management

Good. So question for you with regard to testing, the prototype testing, environmental testing you guys referenced earlier, units go through the same kind of testing when you guys were on batch production so is that give you a measure of how comfort as to what the result of the test will be?

Reed Killion

It’s a little bit different Scott, and what we are doing internally. We don’t do it with laminated panels. We do it with just the plain film or simple film laminations. But actually this will be in finished devices, which is a little bit different and little bit tougher task, but because the film will be savaged and pretty much capsulated by either glass or polymers inside of the display, it should hold up to all the rigorous testing and that’s the stage where we are at right now.

Scott Vincent - Green River Asset Management

Okay great. And then follow up on question that you guys just got asked by yield we do you expect that has volumes pick up your yields would also rise I understand small volumes your yields probably suffer a little bit is that speed equipment of running because you’re still thinking to bring a things am I right on that assumption?

Reed Killion

Absolutely right long runs are better on yield and short runs.

Scott Vincent - Green River Asset Management

Okay great. And then final question here inline testing any more detail you can provide on that would be helpful and I’d also love to hear about Kodak involvement if any at Lufkin as you kind of ramp up your testing in that facility?

Reed Killion

The testing is a group effort. There is no question about that. They are intimately involved in it and it’s a daily conversation as to how we implement it and where we go with it. We have basically two direct teams that we’re going with it in parallel one is to get us in production a little bit quicker. Yeah, there is more extensive base to the capabilities of what we can do with it is as for us in line electrical testing. So, it’s very important to be able to capture that data real time. Once we have been shipping millions of units a month then you can go to statistical data. And those are example and still feel pretty comfortable and what you dealing. One of the biggest concerns that you have when you are testing a touch panel sensor or a module is the test itself actually destroying it or affecting the yield. So, in line test roll-to-roll process is delicate and something that we want to make sure that we can do without destroying the product.

Scott Vincent - Green River Asset Management

Great.

Operator

At this time, this concludes our question-and-answer session. I would now like to turn the call back over to Mr. Killion. Mr. Killion, please proceed.

Reed Killion - President and Chief Executive Officer

Thank you, Michael. I would like to thank the continued support of our staff, partners and shareholders. We look forward to speak to you on the next call. Thank you very much. Operator?

Operator

Before we conclude today’s call I would like to take a moment to read the Company’s Safe Harbor Statement. All statements made by management during this call that are not based on historical fact are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 and the provisions of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended.

Such forward-looking statements include but are not limited to those made by Mr. Killion regarding anticipated demand of UniBoss and Diamond Guard based products and solutions, expectations of revenue ramp up with Diamond Guard film product and solutions, expectations of revenue ramp up capacity ramp up and volume production with UniBoss based products and solutions, expectations from a joint sales and marking efforts and anticipated product launches.

While management has based any forward looking statements made during the call on its current expectations, the information on which set expectations are based may change. These forward looking statements rely on a number of assumptions concerning future events and are subject to a number of risks, uncertainties and other factors, many of which are outside of the Company’s control that could cause the actual result to materially differ from such statements.

Such risk, uncertainties and other factors include but are not necessarily limited to those set forth under Item 1A Risk Factors in the Company’s Annual Report on Form 10-K for the year ended December 31, 2012. We operate in a highly competitive and rapidly changing environment, thus new and unforeseen risks may arise. Accordingly you should not place any reliance on forward-looking statements as a prediction of actual results. The company disclaims any intention to and undertakes no obligation to update and revise any forward-looking statements.

You are also urged to carefully review and consider the other various disclosures in the Company’s Annual Report on Form 10-K for the year ended December 31,2012 as well as other public filings with the SEC since such date.

Now again, I would like to remind everyone that this call will be available for replay through May 13, starting later this evening via the link provided in today’s Press Release as well as available in the Investors section of the Company’s website.

Thank you, ladies and gentlemen for joining us today for our presentation. You may now disconnect.

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