Green River Asset's  Instablog

Just a couple of quick notes from the Society for Information Display conference which is taking place this week in Vancouver, Canada.

Here's a link to a presentation given by Zane Ball of Intel entitled "Touch Everywhere." Zane makes the case that not only is touch going to be found in all manner of displays as it becomes less expensive, but touch will also be a catalyst for a full refresh cycle in the installed base of computers. That opportunity equates to over 500 million units (perhaps $5bn+ in sensor revenue).

Note page seven of the presentation lists ecosystem touch partners, where UniPixel's logo is prominently displayed. Flatfrog is also there and so are several traditional touch module suppliers and integrators.

It's also interesting that Intel focuses on the fact that "touch is driving higher resolution displays for closer viewing." This statement says quite a bit about their faith in Uniboss to provide a high-quality viewing experience. I believe UniBoss will be found in some of the highest resolution screens on the market.

Geoff Walker of Intel gave a short course entitled "Fundamentals of Touch Technology" on Sunday. Geoff is a renowned expert in the field. In addition to working as a technologist at Intel where he helps coordinate touch strategy across business groups, he is President of Walker Mobile. His presentations usually give a good bird's-eye view of the touch landscape.

A friend who attended Geoff's course shot me an email Sunday. He quoted Walker saying with respect to metal mesh, "printing is where this is going." Earlier Walker had said that UniPixel is the only direct printing process of which he is aware.

I am trying to get a copy of Geoff's presentation to post.

If you've heard anything out of SID please share it in the comments section below. If you have access to a presentation you'd like me to post just send me a note through SA.

Disclosure: I am long UNXL.

UniPixel shares traded down 26 percent Friday on startlingly heavy volume of seven million shares. A number of different factors came together to drive the stock lower. I'm presenting what I've heard about each of these below, along with some of my own commentary. I would emphasize that much of this is based on rumors circulating amongst the buy and sell-side on Friday.

1) On Thursday the US PTO published an Apple patent application related to a touch sensor design for large area touch screens. I can understand how this would cause some uncertainty, but it's hard for me to believe this would create a large decline in UniPixel's share price. The patent addresses the design of a grid pattern for a touch sensor. OEMs/display manufacturers sometimes design their own sensor patterns for use on their machines. They may patent these designs. There isn't much new in this development, obviously most OEM and display companies don't manufacture their own sensors - they request that their sensor supplier use their proprietary design. In other words, if Apple were to one day work with UniPixel, Apple might have UniPixel engineer UniBoss according to the design assembled in the patent application.

2) There was a story on Bloomberg that Goldberg Capital, a top five holder of UniPixel, had lightened their stake. Again, it's hard for me to believe this headline would cause panic selling. Regardless, the story was false. Goldberg didn't buy enough shares in the recent secondary offering to keep their percentage ownership in the company flat - I guess that's what the author intended to say. Further, I spoke with Goldberg Capital Friday; they were buying shares in the open market during the panic selling.

3) Craig Hallum made some comments about ATML beginning to ramp production. Atmel had mentioned that they would soon be qualified on their last quarterly call, so I don't read this part of the Hallum call as the kind of call that would move UniPixel.

Another part of Hallum's call had to do with the fact that Atmel said that their line would produce 1mn units/mo which would equate to around $100mn annually. This boils down to around $8.30/unit if you simply divide the units by the revenue, so some salespeople at Hallum may have been making the call that Atmel would be pricing at around $10/unit.

There are a couple things wrong with this analysis. The $8.30 figure would be correct if Atmel achieved 100% yields, and produced at capacity for the entire year. If you look at most analyst models for UniPixel, you'll see that they have the company producing at levels far below capacity (some at 20-30%) for the first couple years of production. In fact, in my model UniPixel ends the year at a bit over 1mn units/mo capacity but is generating revenue at a rate of just $20mn annually. Yet you would be mistaken if you assumed that I was using a price of $1.60/unit for UniBoss. Instead, I'm assuming that the company is producing at levels far below stated capacity. Atmel is likely doing the same in their prediction of revenue generation.

The other significant point is that Atmel is selling their XSense into smaller form factor devices. In these devices, ITO is more competitive from a price perspective, and XSense would likely be priced at less than $20 ft2. If UniBoss sells into these markets, it would face the same pricing environment. I believe that the company has even referenced this on a call. Most analysts have reflected reduced pricing in their UniPixel models as production volumes ramp significantly, and the company expands its product base into smaller devices.

4) I thought the most significant rumor that came to light Friday was the one regarding UniBoss's revenue ramp delays attributed to Microsoft Blue. To put this development into context it's necessary to understand how it fits into the short thesis. Professional shorts (as opposed to the shorts who comment on SA) don't believe that UNXL will be able to produce commercial quantities of UniBoss. Part of their thesis holds that as UniBoss begins its scheduled production ramp we will begin to hear about delays. These delays will always be attributed to someone other than UniPixel, but the ramp will be delayed over and over again.

The Microsoft Blue delay fits perfectly into this short thesis. Many of the larger longs understand this thesis, and they may have been shaken by the Blue delay as well. In my opinion, this rumor was the most important driver of the selling on Friday. That an item like this can drive the stock down more than 25 percent, speaks to the nerves of investors who understand what a critical juncture we're approaching on the road to commercializing UniBoss.

Some have speculated that a delay attributed to Microsoft Blue is sheer nonsense. This is just an excuse to cover for the fact that UniPixel is having problems producing UniBoss. I don't believe this is the case. As suggested in this article, the updated OS from Microsoft is going to have a large impact on the notebook market, particularly in the third quarter. Why launch a new model with an operating system that will be outdated as soon as it hits the shelves?

The Microsoft Blue delay is real. Could it also be hiding something more insidious inside UniPixel? Sure, but I think the possibility is remote. The company's body language has never been as strong as it is now concerning the manufacturing process around UniBoss. The new product is benefiting from the combined oversight and collaboration of some of the best process and technology engineering talent in the world. These engineers hail from companies such as Kodak, Dell, and Intel (the latter two being my best guess). UniPixel management seems very excited about the pace at which production is developing.

We investors need to get used to the fact that UniPixel is just a component supplier within several large systems. Delays are commonplace in these systems because the systems are complex and involve so many players. A last minute tweak to some software might cause problems for a controller which needs to be redesigned. This might lead to changes in the touch sensor or to other parts of the system, and there is a cascading effect which introduces more delays. All component suppliers are used to these delays. This is why it's important to have a portfolio of customers and design wins - one might be advanced while another is delayed. UniPixel is putting together a portfolio, but it's not there yet. This leaves the company vulnerable to specific model delays (and to system delays in this case).

Conclusion:

With the UniPixel shares down 25 percent on no real fundamental change, long-term investors (like Goldberg) were accumulating shares Friday, and they will return to the stock Monday morning. That said, the shorts have made a point. The Microsoft hitch has highlighted the fragility and uncertainty in the UniPixel story - some of which cannot be controlled by UniPixel and/or Kodak. This may be the first of many bumps in the road - get used to it. Delays logically increase UniPixel's risk premium. Each side has something to which they can cling regarding Friday's sell-off.

My perspective hasn't changed meaningfully. I think that the probability that UniPixel and Kodak will successfully commercialize UniBoss is still high, but the timing of that commercialization has become less certain (warranting a small sell-off). Recent support for the commercialization argument has come from some competitive successes. These successes have validated metal mesh as a viable technology. The hardware industry is coming to understand that not only is metal mesh real, it is the logical answer to producing large format touch displays. This is removing obstacles to the adoption of the technology. Very high quality products embedded with metal mesh sensors are appearing on the shelves of your local Best Buy and in other places. The proof is here, metal mesh works and it produces high quality displays.

I think the shorts are mistaken to believe that ATML/CIT, Mirae Nanotech, or FujiFilms could produce a workable mesh and that Kodak/UniPixel cannot. XSense shows us that a small company can invent a ground-breaking technology in the field - later to be commercialized by a large partner (even if that partner has limited experience in commercial films). Mirae's success shows us that a smallish functional film producer can bring a somewhat inferior, 10 micron silver emulsion product to work in a high quality, large format display (such as Samsung's 23" AIO shown above). UniPixel has a more elegant solution than these firms, and I believe the obstacles to UniBoss production are fewer. This small technology outfit produced a breakthrough in fine-line conductor printing, and now the behemoth functional printing expert, Kodak, will commercialize it with UniPixel's help.

None of this suggests that UniPixel's UniBoss is a guaranteed success, but it would worry me if I were a short. Knowing that UniBoss claims a process that is simpler than that of its competitors, and materials that are often easier with which to work, I would be uncomfortable assuming that Kodak and UniPixel could not achieve success. UniPixel has demonstrated they can hit product specifications in less-than-ideal, small run situations. They've also told us that the product holds up well in all manner of tests on a stand-alone basis, leading me to believe that the chances of testing successfully when integrated into a display are very high. They could fail, but the stars have certainly aligned favorably.

It's going to take a few quarters to rid the production monkey from UniPixel's back. There will be more set-backs, but there will also be plenty more victories. My guess is that future delays or set-backs will not impact UniPixel shares to the extent we saw last Friday.

Finally, and most importantly, I would just like to mention that all of us are wishing you a speedy recovery, Al. We miss your commentary and want you back in the saddle (though we would like to see you slow down your pace) as soon as you are healthy. Best Wishes Al. GRA

Disclosure: I am long UNXL.

UniPixel Defeats CIT in Important First Round of Litigation

Last Tuesday, April 30, United States District Judge, Sim Lake, handed CIT/Carclo its first defeat in the ongoing litigation between CIT and UniPixel. Judge Lake granted UniPixel's motion for remand, rejecting Carclo's arguments to hear the case in Federal Court, and sending the case back to UniPixel's home-turf state court in the 284th Judicial District in Montgomery County, Texas.

As a reminder, in December 2012 CIT filed two suits in the UK against UniPixel alleging that UniPixel violated the terms of NDAs the companies had signed (most notably relying on the 2005 NDA), and alleging that UniPixel used CIT's technology in two of their own patent applications.

In January of this year UniPixel responded to the CIT suits with actions in the Montgomery County, Texas court. UniPixel asked that a Montgomery county judge issue a preliminary ruling affirming that CIT's claims should be addressed in Montgomery County, that CIT breached terms of their agreement by filing in the UK, that UniPixel did not violate terms of the NDAs, and that UniPixel should be compensated for all related costs.

CIT subsequently attempted to remove the UniPixel action from state court to federal court, causing Unipixel to file a motion to remand this case back to Montgomery County. As noted above, the federal judge has ruled in favor of Unipixel's motion to remand - UniPixel won this fight.

I spent some time with a lawyer and a couple other people close to these developments to understand the ramifications of the ruling. While on the surface this may seem to be a small victory, the reality is that it carries quite a bit of significance.

Texas HR 274, filed on 2/2/11, and signed into law by Governor Rick Perry on 6/17/11 empowers state trial courts to dismiss frivolous lawsuits immediately if there is no basis in law or fact for the lawsuit. The statute also authorizes the court to impose sanctions on a litigant who commences a frivolous action. This is commonly referred to as a "loser pays" law, and it is not applicable in federal district courts. In other words, if CIT wanted to drag this case out over a longer period of time, and reduce their chances of paying sanctions they would logically try to have the case removed to federal courts.

The remand to Montgomery County court creates a real risk for CIT and could cause the company to come to a more realistic assessment of the facts surrounding this case, leading them to drop all or part of their claims. While it's true that the UK also has a "loser pays" system, facing this obstacle on an opponent's home turf is another matter altogether.

Perhaps just as important, Judge Sim's ruling may influence the UK court's decision. Apparently the UK judge has been waiting for the US rulings before issuing his jurisdictional determination. The fact that a US District Judge rejected CIT's two principal arguments for keeping the matter in federal court is likely to carry weight in the UK court's determination. CIT had argued that the 2010 NDA didn't supersede the 2005 NDA (CIT is relying on the 2005 NDA because it is narrower in scope than the 2010 agreement, and it does not specify venue selection), and that UniPixel waived its rights to enforce the venue-selection clause when it relied on both the 2005 and 2006 NDAs in support of its claim against CIT. Judge Sim stated he was, "not persuaded by either argument."

Even if not for the US District Court ruling, the likelihood of all claims being heard in a Montgomery County court would still be high. The 2010 NDA specifically dictates that the agreement be governed by the laws of the state of Texas and that the "VENUE SHOULD LIE EXCLUSIVELY IN THE COURTS OF MONTGOMERY COUNTY TEXAS." It's the only section of the document laid out in all capital letters - making it very difficult for the judge to miss. The 2010 NDA also states, "This Agreement supersedes any and all prior agreements." The 2005 and 2006 NDAs did not specify jurisdictions.

Regardless of where the hearings take place, the fact remains that CIT's claims look weak at best. My best guess is that CIT eventually drops most or all of this fight to avoid monetary and reputational damage sometime after the venue is finalized.

The claims that form the very foundation of CIT's case rely on the notion that UniPixel uses CIT's technology that is "inkjet printed using piezoelectric drop-on-demand printheads" and that UniPixel uses CIT's proprietary ink material formulations. Yet these claims are at odds with the simple, indisputable facts surrounding UniBoss.

UniPixel does NOT use "inkjet printed using piezoelectric drop-on-demand printheads" in UniBoss's production process. Instead, UniPixel uses a proprietary flexographic micro-contact print methodology. You will not find an inkjet printhead anywhere near the UniBoss production process.

In addition, UniBoss does NOT use palladium acetate - one of two "primary components" in CIT's proprietary ink. How is it possible that UniPixel has stolen CIT's ink formula when UniPixel doesn't even use what CIT believes is one of the most critical components of its recipe? CIT accuses UniPixel of stealing its secret chocolate chip cookie recipe, but the claim doesn't even make sense - UniPixel is making crème brulee.

The fact that UniBoss does not rely whatsoever on these and other of the fundamental processes and materials necessary in CIT's proprietary methodology, make it highly unlikely that CIT will prevail in its claims. This is true whether those claims are heard in the UK or in Montgomery County, Texas. Furthermore, the fact that CIT would assert that UniBoss does rely on these technologies reveals how little CIT understands the UniBoss product and process. CIT's fundamental misunderstanding of the basic technologies used in UniBoss production leave the impression that its lawsuits are frivolous, and that they create a liability for CIT.

We may not know the final outcome of this conflict for months or years. Yet based on this initial ruling and the facts surrounding the litigation, it appears that UniPixel is in a good position to defend its ownership and use of the UniBoss technology, and to potentially recover costs and perhaps damages at the expense of CIT.

CIT's pursuit of what is arguably a frivolous lawsuit makes the firm look desperate and frightened. Why would CIT lash out at UniPixel with wildly inaccurate claims when CIT appears to have the lead in bringing product to market? What purpose does this serve? Why is CIT so threatened by the UniBoss technology? Perhaps they understand that a truly additive, roll-to-roll process will enjoy scale economies that XSense's production process cannot approach. If this is true then CIT is pursuing a perfectly logical strategy. In football (American football for all you Brits) we call it the Hail Mary.

Disclosure: I am long UNXL.