Uni-Pixel's CEO Presents at Operational Update Conference Call (Transcript)

Jun.25.14 | About: Uni-Pixel, Inc. (UNXL)

Uni-Pixel, Inc. (NASDAQ:UNXL)

Operational Update Conference Call

June 25, 2014 04:30 PM ET

Executives

Jeffrey A. Hawthorne – President and Chief Executive Officer

Analysts

Rob W. Stone – Cowen & Co.

Michael Fawzy Malouf – Craig-Hallum Capital Group LLC

Jon R. Hickman – Ladenburg Thalmann & Co., Inc.

Alex M. Blanton – Clear Harbor Asset Management LLC

Cody G. Acree – Ascendiant Capital Markets LLC

Operator

Good afternoon, everyone, and thank you for participating in today’s conference call to discuss UniPixel’s Operational Progress. Joining us today is the President and CEO of UniPixel, Jeff Hawthorne; and the company’s CFO, Jeff Tomz. Following Mr. Hawthorne’s remarks, we will open the call to your questions. Then before we conclude today’s call, I’ll provide the company’s Safe Harbor statement with important cautions regarding forward-looking statements made during this call.

I would like to remind everyone that this call is being recorded. The recording will be available for replay through July 25, 2014, starting later this evening, via the link provided in today’s press release, as well as on the company’s website at www.unipixel.com.

Now I would like to turn the call over to the President and Chief Executive Officer of UniPixel, Mr. Jeff Hawthorne. Sir, please go ahead.

Jeffrey A. Hawthorne

Thank you, Evonda. Good afternoon, everyone, and thank you for joining us today. Today I want to give an update on our recently achieved milestone for UniPixel’s InTouch sensors, a projected capacitive, multi-touch sensor film, and particularly how we have achieved roll-to-roll pilot production and capabilities.

Since our last quarterly call in May, our teams have made tremendous progress in further advancing our roll-to-roll printing, manufacturing process, finalizing the ink and substrate, and resolving our major roll-to-roll plating technical challenges.

In fact, we have achieved the breakthrough in a roll-to-roll plating process, overcoming the previously reported challenges through modification of hardware and chemistry configurations. The new process conditions have been successfully demonstrated in the roll-to-roll pilot production process, achieving a step-change improvement in plating fine-line conductive elements on our touch sensor film.

We now have a fully-functional, roll-to-roll pilot production line comprised of a plating line at the company’s Texas facility, and printing, final testing, and packaging at the Kodak facility, which is a state-of-the-art manufacturing and testing facility within the Eastman Business Park in Rochester, New York.

Along with Kodak our manufacturing partner, we have begun conducting roll-to-roll pilot manufacturing and yield studies on the overall process, and we have started the technology transfer of the modified plating process to the production plating assets in the Kodak facility.

Having achieved roll-to-roll pilot production capability, we are now focused on ramping overall product yields. We are also using the pilot line to scale hardware, processes, and manufacturing procedures, and to validate product quality criteria for volume production.

The pilot production line gives us the ability to collect data on hundreds of sensors. We are using the data to identify and resolve challenges, and this helps us improve overall yield. Resolving the yield issues will involve understanding how the process equipment and process vary over longer periods of time such as weeks and months.

We expect to learn how to fine tune key process variables and fine tune preventive maintenance in the frequency of such maintenance on the production equipment. To reduce development complexity and speed the time-to-market of our first InTouch Sensor product, UniPixel and Kodak technical work streams have been primarily focused on the initial development project for the tablet market, and we have been working closely with a certain tablet manufacturer. There are two primary reasons why we focused on the tablet market for initial product development.

First, there are fewer technical challenges to address in the initial development and this allows our teams to focus on our overall roll-to-roll manufacturing process development. Second, tablets are the second largest segment of the touch sensor market, and is expected to grow at a 9% compound annual growth rate to 448 million units shipped annually by 2018, according to DisplaySearch.

We also continue to make progress on the newly established product and technical technology development roadmap that addresses the larger form factor, all-in-one PC market. We are running concurrent development projects to support release of an all-in-one touch sensor product.

ITL’s film price has recently dropped to around $3 per square foot. However, the actual finished cost of its touch sensor ranges from $12 to $20 per square foot depending on the size. The finished sensor is typically comprised of two ITO films, optical quality adhesives, lamination, as well as overhead cost to cover yield loss. Prices of finished touch sensor modules range from $25 to $45 per square foot. The touch sensor cost typically ranges from 30% to 50% of the module price, which again depends on the size and the sensor module configuration.

As we advance our process development activities, we continue to expect that our additive roll-to-roll flexible electronics process fully priced and performance competitive. This will be largely due to its lower cost base, especially in comparison to traditional photolithographic subtractive ITO based and ITO alternative touch sensor solution.

In addition to making progress with our roll-to-roll touch sensor manufacturing process, we have advanced our Diamond Guard hard-coat resin technology. We have successfully coated PET film with Diamond Guard hard-coat resin at a pilot production coating facility using production-length film coating trial runs.

Diamond Guard’s pilot coating ranges from 4H to 6H hardness levels, as compared to most hard coat alternatives that range from 2H to 3H. We continue to work to scale resin and coating technology to a full production quality film product. The Diamond Guard coating performance attributes have generated attentions from a number of coaters who are interested in working with us.

In terms of Diamond Guard and especially with our InTouch Sensors, any new products introduction involving complex materials engineering and leading edge manufacturing technology can be challenging. However, with our initial product development focus strategy, we have made tremendous progress over the past seven weeks by resolving major technical challenges with roll-to-roll plating and we have achieved roll-to-roll pilot production capability.

I’m confident that our team working closely with Kodak will in due course be able to modify the remaining plating lines, ramp yields, and achieve a reliable, high-volume, roll-to-roll production process for our InTouch Sensors. We plan to provide an update on our progress towards achieving volume touch sensor production in the second half of 2014 when we have our second quarter earning call in early August.

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

Question-and-Answer Session

Operator

Certainly. (Operator Instructions) We’ll take our first question from Rob Stone with Cowen and Company.

Rob W. Stone – Cowen & Co.

Hi, Jeff. I wonder if you could just provide a little more color on, what you mean by achieving pilot production but not sufficient yields for commercial production. In other words, what were you looking for in terms of volume or consistency or how did you measure the bar that you need to clear? Thanks.

Jeffrey A. Hawthorne

Yes. Hi, Rob, thanks for your question. As your developed processes you go from lab based to a pilot production and then ultimately to full production. At the very – since we just now achieved pilot production capability, typically the yields are going to be low, there will be variable. But the good news is now you are collecting data over hundreds of samples that you are getting statistically meaningful results.

And so you can put together an analysis and Pareto what might be the causes of the yield and the yield variability. And so that’s really where we’re at right now is, we’re in that early stage of running a multiple rolls through the pilot line, collecting data on hundreds of sensors and really going through that analysis.

I think the other thing as I pointed out in the call, but I would like to reemphasize a bit, you will see yield impact and yield variation that are time dependent. So, you might have steady state for the piece of the process, but it starts to drift over time, or you may have thought, you covered all the preventive maintenance issues and cycles on a piece of equipment, but you find something new or a maintenance frequency changes. So those are the kinds of things that we’re going to be looking at and resolving as we go on.

Rob W. Stone – Cowen & Co.

Okay. A follow-up question on testing if I may, I think you said that printing and testing and packing are happening at the Kodak facility. So that means you have roll-to-roll testing capability as well. Are you using the test equipment that’s meant to be used alternatively for volume production?

Jeffrey A. Hawthorne

Yes. So I mean, again, for the pilot line you want to try to mimic as close as possible the equipment configuration that you are going to have for a volume production line. And so, yes, the testing capability is what we believe will be the volume production equipment and that is in Rochester.

Rob W. Stone – Cowen & Co.

Okay. And what’s different between the pilot plating line in Texas, hence the lines which you transferring to in Rochester?

Jeffrey A. Hawthorne

Well, as I said, we’ve made a number of hardware modifications to the luck in line and some chemistry modifications to the luck in line in order to resolve this roll-to-roll plating issue that we’ve been trying to overcome. And so now we’re just basically we’re mapping out the transports land and how best to proceed to update the – or upgrade the assets that are in Kodak.

Rob W. Stone – Cowen & Co.

So, does that involve a meaningful cost in terms of capital equipment change or can give us some sense of a scope of hardware modifications?

Jeffrey A. Hawthorne

Yes. We are still mapping out, there is a couple of different options in terms of how to go about modifying – making this modification. But there is – we don’t believe it’s going to be a meaningful impact in terms of capital investment.

Rob W. Stone – Cowen & Co.

Okay. Thank you. I’ll jump back in the queue.

Jeffrey A. Hawthorne

Okay. Thanks, Rob.

Operator

Our next question will come from Mike Malouf with Craig-Hallum Capital Group.

Michael Fawzy Malouf – Craig-Hallum Capital Group LLC

Great. Thanks for taking my questions. I’m wondering if you could give us a little bit of update on where we stand, when you sort of project forward where gross margins you think will settle out on the process. I know that, under the previous communication with previous management team, we had some expectations, but I’m wondering what – as you’ve gone through this pilot process what you see going forward?

Jeffrey A. Hawthorne

Yes, Mike, I’m – we’re probably going to be less transparent at this stage in terms of gross margins. As I said, I think, the modelling that we’ve done, certainly as we’ve really ramped the factory and fully absorbed their capacity, there we believe that we still have a very good amount of gross margin even given the pricing trends that we are seeing in the market today. It will be again dependent on, what display or what sensor size you go after? But I would say that right now actually the manufacturing model that we have seems to be holding together pretty well.

Michael Fawzy Malouf – Craig-Hallum Capital Group LLC

And maybe at the same time, can you give us a little bit of an update on the Eastman Kodak relationship? We still sort of expecting equitable sort of “50:50” split after the Eastman Kodak cost, is that how you think about it almost like a splitting of the gross profit per say?

Jeffrey A. Hawthorne

There has been no change in terms of whatever agreements that were put in place with Kodak. We still believe that those agreements are solid. Again, in terms of how we are progressing through this development and now into pilot production and how we move into volume production, I think the viewpoint of both management teams at UniPixel and Kodak is let’s go with the agreements that we have.

Michael Fawzy Malouf – Craig-Hallum Capital Group LLC

And with regards to the pilots or the tablet that you are looking at, what’s the screen size on that?

Jeffrey A. Hawthorne

We didn’t disclose the exact size. It’s going to be the smaller form factor to that.

Michael Fawzy Malouf – Craig-Hallum Capital Group LLC

Sort of that 7-inch kind of thing 7…

Jeffrey A. Hawthorne

Yes, it’s in that range.

Michael Fawzy Malouf – Craig-Hallum Capital Group LLC

Okay. I’ll hop back in the queue myself. Thanks.

Jeffrey A. Hawthorne

All right, Mike. Thanks for your questions.

Operator

(Operator Instructions) Your next from Jon Hickman with Ladenburg.

Jon R. Hickman – Ladenburg Thalmann & Co., Inc.

Hi. Can you tell – have you delivered any samples to your (indiscernible) partner that would come off the pilot production line?

Jeffrey A. Hawthorne

We have – we’ve delivered a very small number of samples at this point. We are getting ready to deliver more.

Jon R. Hickman – Ladenburg Thalmann & Co., Inc.

Okay. And so, could you give us a little, I mean, with this breakthrough kind of gradual or did you like hit upon the chemistry – this is kind of like – on a particularly moment can you elaborate on that a little bit?

Jeffrey A. Hawthorne

It was not an immediate on high I mean that the teams have gone off and done a lot of investigative work they put together a number of cause effect trees to run down and there was a fair amount of experimentation both in the lab, and in more of the roll-to-roll configurations before we really were settled in on high resolution, so it was a lot of hardcore engineering work to get to this point.

Jon R. Hickman – Ladenburg Thalmann & Co., Inc.

Okay, and then there was some talk about maybe visiting Kodak, maybe it’s a day there, is that still something that’s possibility in fall or something like that?

Jeffrey A. Hawthorne

Yes, it is and that’s probably still the timeframe that we’re looking at this fall, and again it’s a little early just from the standpoint that hey, we just got the pilot production up and running, and I think everybody is really focused on what’s continued the yield studies in the ramp, and once we’ve got more data on that then we can start to think about when is appropriate time to bring people in, but again right now the fall timeframe is what we’re thinking.

Jon R. Hickman – Ladenburg Thalmann & Co., Inc.

So, if can you stay on this current path of development path, can you deliver broader to your customer for by the end of the year?

Jeffrey A. Hawthorne

Well, again we’ll give you an update in our second quarter earnings call in early August, but where we stand today I certainly feel more optimistic about it, but – that’s kind of the program goal that we’re marching towards right now.

Jon R. Hickman – Ladenburg Thalmann & Co., Inc.

Thank you, and then one last question, in your discussion about the prices for ITO right now, you said that its up in the $3 range but that’s you need two of those, so but then there is some other factors that you talked about. So that mean like the base price is $6 or $7 per square foot.

Jeffrey A. Hawthorne

No, I mean if you basically take so if you for example, if you have a film-film touch sensor configuration, which is basically what you would have to do with ITO. So you have to take two ITO films you have to bond it together with an optically clear adhesive, there is the lamination process, there is going to be yield drop out particularly as it get to larger display or larger sensor slices. That is basically – that’s the equivalent of what we’re going to be able to produce in our process. So, and if you put that stack together then you really more and in the $12 per square foot range again that’s where we feel like we have the real cost advantage.

Jon R. Hickman – Ladenburg Thalmann & Co., Inc.

Okay, I’ll relinquish the question to someone else.

Jeffrey A. Hawthorne

All right John, thank you.

Operator

(Operator Instructions) We’ll hear next from Alex Blanton with Clear Harbor Asset Management.

Alex M. Blanton – Clear Harbor Asset Management LLC

Thank you. Just a quick question on a negative that has been prominent online from certain parties that Kodak relationship must not being going well because they’ve been laying off engineers on this project. Could you comment on that? Is there any truth to that? And if so, why would they do that?

Jeffrey A. Hawthorne

I’m not aware of it. I mean, all the team members that we have been interacting with over the course of this project, there’s been no change. So I can’t comment to Kodak’s overall policy, but from my own observation I haven’t seen any changes.

Alex M. Blanton – Clear Harbor Asset Management LLC

Okay. So there were some people that argued that if there were certain problems that Kodak was running into and they had solved those problems that might be why they didn’t need as many engineers as right now. That’s the possibility. Isn’t it?

Jeffrey A. Hawthorne

Yes. Again, look, we got the technology development. We’ve got ramping a pilot production line, still involves a significant amount of engineering work. There will be continuous engineering even after you get into volume production in terms of continually refining your process. So, again, I haven’t seen any changes from my perspective.

Alex M. Blanton – Clear Harbor Asset Management LLC

Okay. That’s what I got. Thank you.

Jeffrey A. Hawthorne

Welcome.

Operator

Our next question will come from Cody Acree with Ascendiant Capital.

Cody G. Acree – Ascendiant Capital Markets LLC

Thanks for taking my question. And Jeff, your prior management team and the discussion and the information that they were communicating to the Street to ecosystem partners, so you’re getting some customer base, obviously a lot different than where you’re sitting today and I know you kind of go back into a lot of clean up of that. But I’m just wondering if you can update us on the status of those less prior ecosystem partnership relationships again for customers? I think there’s people still around.

Jeffrey A. Hawthorne

They’re all still around. They’re all very interested. They’re all continuing to express an interest in obtaining samples in significant quantity from us. We continued to update our ecosystem partner, our PC OEM partners and we continued to monitor and feed the relationships, I’d say they’re quite good at this point.

Cody G. Acree – Ascendiant Capital Markets LLC

And then last on the item, the market opportunity for UniPixel was extremely large when UniPixel first started down this path and started to make announcements about PC partners and then opportunity. ITO price was still very expensive and your competitors are still very immature. You now have that process significantly delayed. ITO is down a lot in price and other competitors had developed technology. I guess I just would like you to discuss maybe what the window of opportunity is and how that’s changed over the last few quarters.

Jeffrey A. Hawthorne

Well, look, we haven’t – I mean you see more metal mesh potential competition out there. From what we can sell there hasn’t been much traction. ITO is barely in black or probably in the red, the pricing that they’re at from a cost perspective and yet module suppliers are wanting to go lower. And so I think there’s still a strong demand for an ITO alternative that has the performance capability and has the cost points that we can achieve.

So I believe there is still strong market opportunity for us. We certainly see that in terms of what the served available market is and what our funnel looks like. So, from my perspective and particularly as you get into all in ones, I mean, there is definitely a strong desire to have the performance capability that metal mesh could bring to an all – what ITO can provide today.

Cody G. Acree – Ascendiant Capital Markets LLC

All right. Great, thank you.

Operator

At this time this concludes our question-and-answer session. I would now like to turn the call back over to Mr. Hawthorne. Please go ahead, sir.

Jeffrey A. Hawthorne

Thank you, operator. I would like to thank the continued support of our staff, partners, and shareholders. I look forward to speaking with you all on our next call. Thank you very much.

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 historically 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 management regarding anticipated demand of Touch Sensors and Diamond Guard products and solutions, expectations of overcoming remaining technical hurdles, outlook for our commercial manufacturing timeline, and expectations of commercial volume production or shipments of products.

While management has based any forward-looking statements made during this call on its current expectations, the information on which such expectations or base 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 actual results to materially differ from such statements.

Such risks, 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, 2013. We operate in a highly competitive and rapidly changing environment, thus new or 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 or 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, 2013, as well as other public filings with the SEC since such date.

Again, I would like to remind everyone this call will be available for replay through July 25, starting later this evening via the link provided in today’s press release as well as available in the investor 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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