Uni-Pixel Gains New Customer Traction But Risks Remain Heading Into Earnings

Recent program wins have validated Uni-Pixel's XTouch sensors and put the company in position to hit analyst revenue targets in 2016.

Cash is king and Uni-Pixel will need additional access to additional capital in the coming months.

Uni-Pixel's senior convertible note is paid in full, which provides financial flexibility to raise additional funds outside of an equity raise.

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Uni-Pixel (NASDAQ:UNXL) is set to report Q4 earnings on March 3 after the closing bell. Over the last weeks and months Uni-Pixel has announced several program wins that provide a line of site to grow revenue within a range of analyst estimates for 2016. Uni-Pixel announced on February 17th that the senior secured notes issued to fund the acquisition of Atmel's (NASDAQ:ATML) sensor technology has been paid in full.

Uni-Pixel's management has done a great job thus far to generate new business and the next big tests facing the company are strategically managing and finding cash to fund operations beyond Q2 2016.

Uni-Pixel's CFO Christine Russell laid out several potential avenues to raise cash during the Q3 conference call. As it turned out Uni-Pixel raised cash via equity financing less than three weeks after the Q3 conference call. At this point all options are on the table, but I do expect the company to veer away from another equity raise and look for alternative funding arrangements.

We'll also be able to access outside capital for a number of financial sources, and those sources might include a strategic partnership funding, it might include traditional bank AR financing and it might include equity financing. (Uni-Pixel CFO Christine Russell Q3 Conference Call Transcipt)

Uni-Pixel was sitting on $8.2m of cash as of 9/30/15 and the secondary offering in November was expected to yield about $7.5m of cash, which puts the balance up to $15.7m. Uni-Pixel is burning $3 to $4m a quarter in cash to operate the current business assuming revenue of $2 to $3m a quarter.

Analysts expect Uni-Pixel to report $2.35m of revenue in Q4, which includes a low estimate of $1.7m and a high estimate of $3.0m. Looking ahead to Q1 2016 analysts expect the company to report $3.78m of revenue, which includes a low estimate of $2.75m and a high estimate of $4.75m.

I believe both revenue targets for Q4 and Q1 are achievable based on the company's existing customers and recent contract wins that were expected to contribute revenue beginning in Q4. I expect Uni-Pixel to finish 2015 with $10.4m of cash assuming $3.7m of cash was burned from operations in Q4 2015 and $1.6m of the convertible note paid in cash.

Uni-Pixel needs to print positive gross margins in Q1 to limit cash burned from operations and preserve cash to grow the business. Assuming Uni-Pixel prints positive gross margins in Q1 I expect cash burn to come in between $2 and $3m in Q1 based on $4.9m of revenue.

The biggest factors to producing positive gross margins from operations are material costs and overhead absorption. Increases in plant volume allows fixed manufacturing costs to be spread over more units, which in turn lowers manufacturing costs per unit.

The XTouch basecoat film is one example of material input costs that can be successfully reduced beginning in Q1 2016. The company successfully transferred the XTouch basecoat film operation from a third party in the United Kingdom to its manufacturing facility in Colorado Springs, CO, in December 2015. This transfer of technology is expected to drive down basecoat film costs by up to 67% with further savings as volumes increase.

As I stated above I'm looking for Uni-Pixel to finish 2015 with $12m of cash, but I expect Uni-Pixel's cash balance to end Q1 with between $3m and $4m on the books. Uni-Pixel issued a press release that the company had paid off the remaining convertible debt in full, which would result in a cash draw of $4.4m in Q1 2016. Additionally, a $2-3m cash burn from operations in Q1 would push Uni-Pixel's $10.4m balance as of 12/31/15 down to $3-4m as of 3/31/2016.

Uni-Pixel requires $12 to $15m of quarterly revenue assuming a gross margin between 20% and 30% to breakeven on operating cash flow. My quarterly revenue estimates for 2016 anticipate Uni-Pixel reaching cash flow breakeven no sooner than Q4 2016. The risks to my model are timing of programs as well as unit pricing and volume estimates.

Listed below is a short summary of Uni-Pixel's recent awarded and expected contract wins.

• 10-inch tablet for a leading PC manufacturer in Japan with revenue expected beginning in Q4 2015 through Q4 2016. Estimated $7-14m of revenue generated in 2016.

• 8-inch Android tablet for major US wireless carrier with volume production beginning in Q3. Estimated $6-10m of revenue generated in 2016.

• 2-in-1 convertible PC/tablet for a Tier 1 customer with volume production beginning in Q4. Estimated $6-10m of revenue generated in 2016.

• 15.6-inch point of sale terminal for a touchscreen and touchscreen enabled systems with volume production beginning in Q2 pending successful testing and validation by the customer. Estimated of $6-10m revenue generated in 2016.

My estimated 2016 revenue by quarter and the full year can be seen below. Image source and estimates provided by Wall Street Forensics.

My full year estimate for 2016 has Uni-Pixel generating $38.4 million of revenue based on four new programs listed above as well as existing revenue generating programs.

Analysts expect 2016 full-year revenue to come in between $25.8m and $45m, which results in an average estimate of $35.4 million. At this point based on a sum of the parts bottom up analysis I believe the analysts have this one figured out.

It will be mission critical for Uni-Pixel to obtain additional financing over the next several weeks to continue operations without interruption. The good news is that the company is debt free, but the bad news is shares are still trading under $1.00 and a cash raise via another equity offering would dilute shareholders even further at the current price level.

If Uni-Pixel's products are making headway with Tier 1 customers a strategic investment from one of UniPixel's customers could be a viable option. Another option on the table is the financing of Uni-Pixel's accounts receivable balance.

Based on my estimates and projects I believe Uni-Pixel needs an additional $10m to bridge operations through Q4, until the company has the potential to become cash flow breakeven. However, with Uni-Pixel's market cap hovering just below $25m a $10m cash raise without further dilution to shareholders will test CFO Christine Russell's ability to preserve shareholder value.

As always investors that invest in micro caps should be aware of the risk associated with market volatility and company specific news.