Tableof Contents

 

 

 

**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON,D.C. 20549**

 

**FORM 10-Q**

 
| **x**                                                  | ** ** | **QUARTERLY  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE  ACT OF 1934**                                                                                                                                                                                                                                           |
|--------------------------------------------------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ** **                                             |
| **For the  Quarterly Period Ended June 30, 2008** |
|                                                   |
| **or**                                                 |
| ** **                                             |
| **o**                                                  | ** ** | **TRANSITION  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE  ACT OF 1934**                                                                                                                                                                                                                                          |
| ** **                                             | ** ** | ** **                                                                                                                                                                                                                                                                                                                                        |
|                                                   |       | **For the Transition Period  from                         to                         ** |
|                                                   |       |                                                                                                                                                                                                                                                                                                                                              |
|                                                   |       | **COMMISSION FILE NUMBER: 0-49737**                                                                                                                                                                                                                                                                                                               |

 

**UNI-PIXEL, INC.**

(Exact Name of Registrant as Specified in ItsCharter)

 

| **DELAWARE**                     | ** ** | **75-2926437**      |
|----------------------------------|------------|---------------------|
| (State or Other  Jurisdiction of |       | (I.R.S. Employer    |
| Incorporation or  Organization)  |       | Identification No.) |

 

**8708Technology Forest Place, Suite 100The Woodlands, Texas 77381**

(Address of Principal Executive Offices)

** **

**(281)825-4500**

(Issuer’s Telephone Number, Including AreaCode)

 

Indicateby check mark whether the registrant: (1) has filed all reports requiredto be filed by Section 13 or 15(d) of the Securities Exchange Act of1934 during the preceding 12 months (or for such shorter period that theregistrant was required to file such reports), and (2) has been subject tosuch filing requirements for the past 90 days.   x Yes o No 

 

Indicateby check mark whether the registrant is a shell company (as defined in Rule 12b-2of the Exchange Act).   Yes o   No x

 

Asof August 1, 2008, the issuer had 22,897,418 shares of issued andoutstanding common stock, par value $0.001 per share.

 

Indicateby check mark whether the registrant is a large accelerated filer, anaccelerated filer, a non-accelerated filer, or a smaller reportingcompany.  See definitions of “largeaccelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2of the Exchange Act.

 
| Large  accelerated filer o |   |                                           |   | Accelerated  filer o         |
|----------------------------|--------|------------------------------------------------|--------|------------------------------|
| Non-accelerated  filer o   |   | (Do  not check if a smaller reporting company) |   | Smaller  reporting company x |

 

 

 

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Tableof Contents

 

**TABLE OFCONTENTS**

 
| Part I.  | Financial Information                                                                                                                                                                                                       |   |
|---------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|
|          |                                                                                                                                                                                                                        |   |
| Item 1.       | Financial Statements                                                                                                                                                                                                        |   |
|          |                                                                                                                                                                                                                        |   |
|          | Consolidated Balance Sheets June 30,  2008 (unaudited) and December 31, 2007                                                                                                                                      |   |
|          |                                                                                                                                                                                                                        |   |
|          | Consolidated  Statements of Operations Six months ended June 30, 2008 (unaudited) and June 30,  2007 (unaudited) and cumulative period from inception (February 17,  1998) to June 30, 2008 (unaudited) |   |
|          |                                                                                                                                                                                                                        |   |
|          | Three  months ended June 30, 2008 (unaudited) and June 30, 2007  (unaudited)                                                                                                                                      |   |
|          |                                                                                                                                                                                                                        |   |
|          | Consolidated Statements of Shareholders’ Equity  (Deficit) From inception (February 17, 1998) to June 30, 2008  (unaudited)                                                                                  |   |
|          |                                                                                                                                                                                                                        |   |
|          | Consolidated Statements of Cash Flows Six months ended  June 30, 2008 (unaudited) and June 30, 2007 (unaudited) and  cumulative period from inception (February 17, 1998) to June 30,  2008 (unaudited) |   |
|          |                                                                                                                                                                                                                        |   |
|          | Notes to  Unaudited Consolidated Financial Statements                                                                                                                                                                       |   |
|          |                                                                                                                                                                                                                        |   |
| Item 2.       | Management’s  Discussion and Analysis or Plan of Operation                                                                                                                                                             |   |
|          |                                                                                                                                                                                                                        |   |
| Item 3.       | Quantitative  and Qualitative Disclosures About Market Risk                                                                                                                                                                 |   |
|          |                                                                                                                                                                                                                        |   |
| Item 4.       | Controls and  Procedures                                                                                                                                                                                                    |   |
|          |                                                                                                                                                                                                                        |   |
| Part II. | Other Information                                                                                                                                                                                                           |   |
|          |                                                                                                                                                                                                                        |   |
| Item 6.       | Exhibits                                                                                                                                                                                                                    |   |

 

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**PART I- FINANCIAL INFORMATION**

 

**ITEM 1. FINANCIAL STATEMENTS.**

 

Uni-Pixel, Inc.

(A Development Stage Company)

Consolidated Balance Sheets

 
| ** **                                                                                                                                                                                                                                                                                                                                      | ** ** | **June 30,   2008** | ** ** | **December 31,   2007** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------------|------------|-----------------------------------|------------|
| ** **                                                                                                                                                                                                                                                                                                                                      | ** ** | **(unaudited)**               | ** ** | **(audited)**                     | ** ** |
| **ASSETS**                                                                                                                                                                                                                                                                                                                                      |       |                          |       |                              |       |
| Current assets                                                                                                                                                                                                                                                                                                                                  |       |                          |       |                              |       |
| Cash and cash equivalents                                                                                                                                                                                                                                                                                                                       |       | $                             | 6,070,885  |                              | $          | 11,697,425 |   |
| Prepaid expenses                                                                                                                                                                                                                                                                                                                                |       | 21,772                        |       | 23,672                            |       |
|                                                                                                                                                                                                                                                                                                                                            |       |                          |       |                              |       |
| Total current assets                                                                                                                                                                                                                                                                                                                            |       | 6,092,657                     |       | 11,721,097                        |       |
|                                                                                                                                                                                                                                                                                                                                            |       |                          |       |                              |       |
| Property and equipment, net of accumulated  depreciation of $870,546 and $725,338, at June 30, 2008 and  December 31, 2007, respectively                                                                                                                                                                                              |       | 554,215                       |       | 455,108                           |       |
| Restricted cash, less current portion                                                                                                                                                                                                                                                                                                           |       | 34,877                        |       | 34,877                            |       |
| Intangible assets                                                                                                                                                                                                                                                                                                                               |       | 193,754                       |       | —                            |       |
|                                                                                                                                                                                                                                                                                                                                            |       |                          |       |                              |       |
| Total assets                                                                                                                                                                                                                                                                                                                                    |       | $                             | 6,875,503  |                              | $          | 12,211,082 |   |
|                                                                                                                                                                                                                                                                                                                                            |       |                          |       |                              |       |
| **LIABILITIES  AND SHAREHOLDERS’ EQUITY (DEFICIT)**                                                                                                                                                                                                                                                                                        |       |                          |       |                              |       |
|                                                                                                                                                                                                                                                                                                                                            |       |                          |       |                              |       |
| Current liabilities                                                                                                                                                                                                                                                                                                                             |       |                          |       |                              |       |
| Accounts payable                                                                                                                                                                                                                                                                                                                                |       | $                             | 972,932    |                              | $          | 526,959 |   |
| Accrued expenses                                                                                                                                                                                                                                                                                                                                |       | 215,284                       |       | 405,996                           |       |
| Deferred revenue                                                                                                                                                                                                                                                                                                                                |       | 33,333                        |       | 33,333                            |       |
|                                                                                                                                                                                                                                                                                                                                            |       |                          |       |                              |       |
| Total current liabilities                                                                                                                                                                                                                                                                                                                       |       | 1,221,549                     |       | 966,288                           |       |
|                                                                                                                                                                                                                                                                                                                                            |       |                          |       |                              |       |
| Total liabilities                                                                                                                                                                                                                                                                                                                               |       | 1,221,549                     |       | 966,288                           |       |
|                                                                                                                                                                                                                                                                                                                                            |       |                          |       |                              |       |
| Commitments and contingencies (Note 4)                                                                                                                                                                                                                                                                                                          |       | —                        |       | —                            |       |
|                                                                                                                                                                                                                                                                                                                                            |       |                          |       |                              |       |
| Redeemable convertible Series B  Preferred stock, $0.001 par value; $3.75 per share liquidation preference;  3,200,000 shares authorized, issued and outstanding at June 30, 2008 and  December 31, 2007, less unamortized discount of $5,387,623 and $6,130,743  at June 30, 2008 and December 31, 2007, respectively |       | 7,932,705                     |       | 6,713,531                         |       |
|                                                                                                                                                                                                                                                                                                                                            |       |                          |       |                              |       |
| Redeemable convertible Series C  Preferred stock, $0.001 par value; $11.20 per share liquidation preference;  892,858 shares authorized, issued and outstanding at June 30, 2008 and December 31,  2007, less unamortized discount of $6,476,395 and $7,238,324 at June 30,  2008 and December 31, 2007, respectively  |       | 4,045,684                     |       | 2,887,043                         |       |
|                                                                                                                                                                                                                                                                                                                                            |       |                          |       |                              |       |
| Shareholders’ equity (deficit)                                                                                                                                                                                                                                                                                                             |       |                          |       |                              |       |
| Common stock, $0.001 par value; 100,000,000  shares and 40,000,000 shares authorized at June 30, 2008 and  December 31, 2007, respectively, 22,897,418 shares issued and  outstanding at June 30, 2008 and December 31, 2007                                                                                                |       | 22,897                        |       | 22,897                            |       |
| Additional paid-in capital                                                                                                                                                                                                                                                                                                                      |       | 32,727,616                    |       | 34,512,298                        |       |
| Accumulated deficit during development  stage                                                                                                                                                                                                                                                                                                   |       | (39,074,948                   | )          | (32,890,975                       | )          |
| Total shareholders’ equity (deficit)                                                                                                                                                                                                                                                                                                       |       | (6,324,435                    | )          | 1,644,220                         |       |
|                                                                                                                                                                                                                                                                                                                                            |       |                          |       |                              |       |
| Total liabilities and shareholders’ equity  (deficit)                                                                                                                                                                                                                                                                                      |       | $                             | 6,875,503  |                              | $          | 12,211,082 |   |

 

*See accompanying notes to these consolidated financialstatements.*

 

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Uni-Pixel, Inc.

(A Development Stage Company)

Consolidated Statements ofOperations

(unaudited)

 
| ** **                                                              | ** ** | **Six Months Ended  June 30,** | ** ** | **Cumulative  Period from  February 17, 1998  (date of inception)  to June 30,** | ** ** |
|-------------------------------------------------------------------------|------------|-----------------------------------------------|------------|---------------------------------------------------------------------------------------------------------------------|------------|
| ** **                                                              | ** ** | **2008**                                      | ** ** | **2007**                                                                                                            | ** ** | **2008** | ** ** |
|                                                                    |       |                                          |       |                                                                                                                |       |   |   |
| Revenues                                                                |       |                                          |       |                                                                                                                |       |   |   |
| Development contract revenue                                            |       | $                                             | —     |                                                                                                                | $          | — |   | $ | 1,158,201 |   |
|                                                                    |       |                                          |       |                                                                                                                |       |   |   |
| Total revenues                                                          |       | —                                        |       | —                                                                                                              |       | 1,158,201 |   |
|                                                                    |       |                                          |       |                                                                                                                |       |   |   |
| Cost of revenues                                                        |       | —                                        |       | —                                                                                                              |       | 456,648 |   |
|                                                                    |       |                                          |       |                                                                                                                |       |   |   |
| Gross margin                                                            |       | —                                        |       | —                                                                                                              |       | 701,553 |   |
|                                                                    |       |                                          |       |                                                                                                                |       |   |   |
| Selling, general and administrative  expenses                           |       | 1,837,053                                     |       | 3,356,135                                                                                                           |       | 18,185,660 |   |
| Research and development                                                |       | 4,489,859                                     |       | 1,441,069                                                                                                           |       | 18,782,208 |   |
|                                                                    |       |                                          |       |                                                                                                                |       |   |   |
| Operating loss                                                          |       | (6,326,912                                    | )          | (4,797,204                                                                                                          | )          | (36,266,315 | ) |
|                                                                    |       |                                          |       |                                                                                                                |       |   |   |
| Other income (expense)                                                  |       |                                          |       |                                                                                                                |       |   |   |
| Net decrease in fair value of derivative  liability                     |       | —                                        |       | 382,920                                                                                                             |       | 845,079 |   |
| Other income                                                            |       | —                                        |       | —                                                                                                              |       | 886,886 |   |
| Debt issuance expense                                                   |       | —                                        |       | (94,189                                                                                                             | )          | (644,346 | ) |
| Interest income (expense), net                                          |       | 142,939                                       |       | (977,081                                                                                                            | )          | (2,129,526 | ) |
|                                                                    |       |                                          |       |                                                                                                                |       |   |   |
| Net loss                                                                |       | $                                             | (6,183,973 | )                                                                                                                   | $          | (5,485,554 | ) | $ | (37,308,222 | ) |
|                                                                    |       |                                          |       |                                                                                                                |       |   |   |
| Preferred stock dividends and amortization  of discount                 |       | (2,377,816                                    | )          | (1,178,499                                                                                                          | )          | (6,877,398 | ) |
| Net loss attributable to common  shareholders                           |       | $                                             | (8,561,789 | )                                                                                                                   | $          | (6,664,053 | ) | $ | (44,185,620 | ) |
|                                                                    |       |                                          |       |                                                                                                                |       |   |   |
| Per share information                                                   |       |                                          |       |                                                                                                                |       |   |   |
| Net loss – basic and diluted                                       |       | $                                             | (0.27      | )                                                                                                                   | $          | (0.31 | ) | $ | (4.20 | ) |
| Preferred stock dividends                                               |       | (0.10                                         | )          | (0.07                                                                                                               | )          | (0.77 | ) |
| Net loss attributable to common  shareholders – basic and diluted  |       | $                                             | (0.37      | )                                                                                                                   | $          | (0.38 | ) | $ | (4.97 | ) |
|                                                                    |       |                                          |       |                                                                                                                |       |   |   |
| Weighted average number of basic and  diluted common shares outstanding |       | 22,897,418                                    |       | 17,598,655                                                                                                          |       | 8,890,179 |   |

 

*Seeaccompanying notes to these consolidated financial statements.*

 

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Uni-Pixel, Inc.

(A Development Stage Company)

Consolidated Statements ofOperations

(unaudited)

 
| ** **                                                              | ** ** | **Three Months Ended  June 30,** | ** ** |
|-------------------------------------------------------------------------|------------|-------------------------------------------------|------------|
| ** **                                                              | ** ** | **2008**                                        | ** ** | **2007** | ** ** |
|                                                                    |       |                                            |       |   |   |
| Revenues                                                                |       |                                            |       |   |   |
| Development contract revenue                                            |       | $                                               | —     |   | $ | — |   |
|                                                                    |       |                                            |       |   |   |
| Total revenues                                                          |       | —                                          |       | — |   |
|                                                                    |       |                                            |       |   |   |
| Cost of revenues                                                        |       | —                                          |       | — |   |
|                                                                    |       |                                            |       |   |   |
| Gross margin                                                            |       | —                                          |       | — |   |
|                                                                    |       |                                            |       |   |   |
| Selling, general and administrative  expenses                           |       | 1,000,209                                       |       | 959,872 |   |
| Research and development                                                |       | 2,221,722                                       |       | 949,831 |   |
|                                                                    |       |                                            |       |   |   |
| Operating loss                                                          |       | (3,221,931                                      | )          | (1,909,703 | ) |
|                                                                    |       |                                            |       |   |   |
| Other income                                                            |       |                                            |       |   |   |
| Net increase in fair value of derivative  liability                     |       | —                                          |       | — |   |
| Other income                                                            |       | —                                          |       | — |   |
| Debt issuance expense                                                   |       | —                                          |       | — |   |
| Interest income, net                                                    |       | 46,219                                          |       | 74,169 |   |
|                                                                    |       |                                            |       |   |   |
| Net loss                                                                |       | $                                               | (3,175,712 | ) | $ | (1,835,534 | ) |
|                                                                    |       |                                            |       |   |   |
| Preferred stock dividends and amortization  of discount                 |       | (1,191,319                                      | )          | (724,167 | ) |
| Net loss attributable to common  shareholders                           |       | $                                               | (4,367,031 | ) | $ | (2,559,701 | ) |
|                                                                    |       |                                            |       |   |   |
| Per share information                                                   |       |                                            |       |   |   |
| Net loss – basic and diluted                                       |       | $                                               | (0.14      | ) | $ | (0.10 | ) |
| Preferred stock dividends                                               |       | (0.05                                           | )          | (0.04 | ) |
| Net loss attributable to common  shareholders – basic and diluted  |       | $                                               | (0.19      | ) | $ | (0.14 | ) |
|                                                                    |       |                                            |       |   |   |
| Weighted average number of basic and  diluted common shares outstanding |       | 22,897,418                                      |       | 18,289,555 |   |

 

*See accompanying notes to these consolidated financial statements.*

 

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Uni-Pixel, Inc.

(ADevelopment Stage Company)

Consolidated Statements of Shareholders’ Equity(Deficit)

 
| ** **                                                                               | ** ** | **Series A  Preferred Stock** | ** ** | ** ** | ** ** | ** **                 | ** ** | ** **     | ** ** | ** **           | ** ** | **Accumulated  Deficit**      | ** ** | **Total**              | ** ** |
|------------------------------------------------------------------------------------------|------------|-----------------------------------------|------------|------------|------------|----------------------------|------------|----------------|------------|----------------------|------------|-------------------------------|------------|------------------------|------------|
| ** **                                                                               | ** ** | **Number**                              | ** ** | ** ** | ** ** | **Common Stock**      | ** ** | **Additional** | ** ** | **Deferred**         | ** ** | **During**                    | ** ** | **Shareholders’** | ** ** |
| ** **                                                                               | ** ** | **of  Shares**                          | ** ** | **Amount** | ** ** | **Number of  Shares** | ** ** | **Amount**     | ** ** | **Paid-In  Capital** | ** ** | **Stock-Based  Compensation** | ** ** | **Development  Stage** | ** ** | **Equity  (Deficit)** | ** ** |
| Founder shares  issued at inception at   February 17, 1998                          |       | —                                  |       | $          | —     |                       | 4,500,000  |           | $          | 4,500                |       | $                             | (500       | )                      | $          | — |   | $ | — |   | $ | 4,000 |   |
| Stock issued  during 1999 (prices ranging from $0.50-$0.62 per share)                    |       | —                                  |       | —     |       | 180,000                    |       | 180            |       | 183,820              |       | —                        |       | —                 |       | 184,000 |   |
| Stock issued  during 2000 (prices ranging from $11.34 - $17.00 per share)                |       | —                                  |       | —     |       | 63,750                     |       | 64             |       | 956,186              |       | —                        |       | —                 |       | 956,250 |   |
| Stock issued  during 2001 (prices ranging from $10.00 - $17.00 per share)                |       | —                                  |       | —     |       | 28,176                     |       | 28             |       | 404,227              |       | —                        |       | —                 |       | 404,255 |   |
| Stock issued  during 2002 (prices ranging from $2.00 - $10.00 per share)                 |       | —                                  |       | —     |       | 157,327                    |       | 157            |       | 353,783              |       | —                        |       | —                 |       | 353,940 |   |
| Deferral of  stock-based compensation                                                    |       | —                                  |       | —     |       | —                     |       | —         |       | 1,100,000            |       | (1,100,000                    | )          | —                 |       | — |   |
| Amortization of  stock-based compensation                                                |       | —                                  |       | —     |       | —                     |       | —         |       | —               |       | 206,250                       |       | —                 |       | 206,250 |   |
| Net loss                                                                                 |       | —                                  |       | —     |       | —                     |       | —         |       | —               |       | —                        |       | (3,968,540             | )          | (3,968,540 | ) |
| Balance,  December 31, 2002                                                         |       | —                                  |       | $          | —     |                       | 4,929,253  |           | $          | 4,929                |       | $                             | 2,997,516  |                   | $          | (893,750 | ) | $ | (3,968,540 | ) | $ | (1,859,845 | ) |
| Stock issued  during 2003 (prices ranging from $1.00 - $2.00 per share)                  |       | —                                  |       | —     |       | 210,827                    |       | 211            |       | 263,943              |       | —                        |       | —                 |       | 264,154 |   |
| Amortization of  stock-based compensation                                                |       | —                                  |       | —     |       | —                     |       | —         |       | —               |       | 275,000                       |       | —                 |       | 275,000 |   |
| Warrants issued                                                                          |       | —                                  |       | —     |       | —                     |       | —         |       | 500,000              |       | —                        |       | —                 |       | 500,000 |   |
| Net loss                                                                                 |       | —                                  |       | —     |       | —                     |       | —         |       | —               |       | —                        |       | (2,492,123             | )          | (2,492,123 | ) |
| Balance,  December 31, 2003                                                         |       | —                                  |       | $          | —     |                       | 5,140,080  |           | $          | 5,140                |       | $                             | 3,761,459  |                   | $          | (618,750 | ) | $ | (6,460,663 | ) | $ | (3,312,814 | ) |
| Issuance of  common stock for services                                                   |       | —                                  |       | —     |       | 738,309                    |       | 738            |       | 316,975              |       | —                        |       | —                 |       | 317,713 |   |
| Conversion of  note payable for common stock                                             |       | —                                  |       | —     |       | 51,008                     |       | 51             |       | 95,052               |       | —                        |       | —                 |       | 95,103 |   |
| Exercise of stock  options                                                               |       | —                                  |       | —     |       | 1,490,000                  |       | 1,490          |       | 28,310               |       | —                        |       | —                 |       | 29,800 |   |
| Exercise of  warrants                                                                    |       | —                                  |       | —     |       | 512,500                    |       | 513            |       | 34,487               |       | —                        |       | —                 |       | 35,000 |   |
| Amortization of  stock-based compensation                                                |       | —                                  |       | —     |       | —                     |       | —         |       | —               |       | 618,750                       |       | —                 |       | 618,750 |   |
| Conversion of  bridge loans                                                              |       | 256,643                                 |       | 257        |       | 850,625                    |       | 851            |       | 1,834,242            |       | —                        |       | —                 |       | 1,835,350 |   |
| Issuance of  preferred stock                                                             |       | 2,565,000                               |       | 2,565      |       | —                     |       | —         |       | 7,646,765            |       | —                        |       | —                 |       | 7,649,330 |   |
| Issuance of  common stock for net assets of REFL                                         |       | —                                  |       | —     |       | 1,100,808                  |       | 1,101          |       | (1,101               | )          | —                        |       | —                 |       | — |   |
| Issuance of  common stock for net assets of Gemini                                       |       | —                                  |       | —     |       | 2,917,250                  |       | 2,917          |       | 26,255               |       | —                        |       | —                 |       | 29,172 |   |
| Net loss                                                                                 |       | —                                  |       | —     |       | —                     |       | —         |       | —               |       | —                        |       | (2,315,332             | )          | (2,315,332 | ) |
| Balance,  December 31, 2004                                                         |       | 2,821,643                               |       | $          | 2,822      |                       | 12,800,580 |           | $          | 12,801               |       | $                             | 13,742,444 |                   | $          | — |   | $ | (8,775,995 | ) | $ | 4,982,072 |   |
| Issuance of  preferred stock                                                             |       | 930,000                                 |       | 930        |       | —                     |       | —         |       | 2,798,370            |       | —                        |       | —                 |       | 2,799,300 |   |
| Conversion of  preferred stock into common stock and payment of preferred stock dividend |       | (1,222,499                              | )          | (1,223     | )          | 2,594,477                  |       | 2,594          |       | 260,296              |       | —                        |       | (261,667               | )          | — |   |
| Issuance of  preferred stock for dividends                                               |       | 156,507                                 |       | 157        |       | —                     |       | —         |       | 547,618              |       | —                        |       | (547,775               | )          | — |   |
| Net loss                                                                                 |       | —                                  |       | —     |       | —                     |       | —         |       | —               |       | —                        |       | (4,966,790             | )          | (4,966,790 | ) |
| Balance, December 31,  2005                                                         |       | 2,685,651                               |       | $          | 2,686      |                       | 15,395,057 |           | $          | 15,395               |       | $                             | 17,348,728 |                   | $          | — |   | $ | (14,552,227 | ) | $ | 2,814,582 |   |
| Conversion of  preferred stock into common stock and payment of preferred stock dividend |       | (450,317                                | )          | (451       | )          | 916,916                    |       | 917            |       | 28,039               |       | —                        |       | (28,505                | )          | — |   |
| Stock  compensation expense                                                              |       | —                                  |       | —     |       | —                     |       | —         |       | 914,755              |       | —                        |       | —                 |       | 914,755 |   |
| Issuance of  warrants to placement agent                                                 |       | —                                  |       | —     |       | —                     |       | —         |       | 37,596               |       | —                        |       | —                 |       | 37,596 |   |
| Issuance of  preferred stock for dividends                                               |       | 134,117                                 |       | 134        |       | —                     |       | —         |       | 469,289              |       | —                        |       | (469,423               | )          | — |   |
| Net loss                                                                                 |       | —                                  |       | —     |       | —                     |       | —         |       | —               |       | —                        |       | (6,485,618             | )          | (6,485,618 | ) |
| Balance,  December 31, 2006                                                         |       | 2,369,451                               |       | $          | 2,369      |                       | 16,311,973 |           | $          | 16,312               |       | $                             | 18,798,407 |                   | $          | — |   | $ | (21,535,773 | ) | $ | (2,718,685 | ) |
| Conversion of  preferred stock into common stock and payment of preferred stock dividend |       | (2,369,451                              | )          | (2,369     | )          | 6,545,445                  |       | 6,545          |       | 455,180              |       | —                        |       | (459,356               | )          | — |   |
| Stock  compensation expense                                                              |       | —                                  |       | —     |       | —                     |       | —         |       | 2,029,326            |       | —                        |       | —                 |       | 2,029,326 |   |
| Issuance of  warrants to consultants                                                     |       | —                                  |       | —     |       | —                     |       | —         |       | 297,891              |       | —                        |       | —                 |       | 297,891 |   |
| Issuance of  warrants to Series B Preferred Stock Investors                         |       | —                                  |       | —     |       | —                     |       | —         |       | 3,715,602            |       | —                        |       | —                 |       | 3,715,602 |   |
| Intrinsic value  of beneficial conversion option on Series B Preferred Stock        |       | —                                  |       | —     |       | —                     |       | —         |       | 3,715,602            |       | —                        |       | —                 |       | 3,715,602 |   |
| Issuance of  common stock for services                                                   |       | —                                  |       | —     |       | 40,000                     |       | 40             |       | 52,360               |       | —                        |       | —                 |       | 52,400 |   |
| Issuance of  warrants to Series C Preferred Stock Investors                         |       | —                                  |       | —     |       | —                     |       | —         |       | 3,809,644            |       | —                        |       | —                 |       | 3,809,644 |   |
| Intrinsic value  of beneficial conversion option on Series C Preferred Stock        |       | —                                  |       | —     |       | —                     |       | —         |       | 3,809,644            |       | —                        |       | —                 |       | 3,809,644 |   |
| Amortization of  discount of Series B Preferred Stock                               |       | —                                  |       | —     |       | —                     |       | —         |       | (1,300,460           | )          | —                        |       | —                 |       | (1,300,460 | ) |
| Amortization of  discount of Series C Preferred Stock                               |       | —                                  |       | —     |       | —                     |       | —         |       | (380,964             | )          | —                        |       | —                 |       | (380,964 | ) |
| Series B  Preferred Stock dividends                                                 |       | —                                  |       | —     |       | —                     |       | —         |       | (844,274             | )          | —                        |       | —                 |       | (844,274 | ) |
| Series C  Preferred Stock dividends                                                 |       | —                                  |       | —     |       | —                     |       | —         |       | (206,028             | )          | —                        |       | —                 |       | (206,028 | ) |
| Reclassification  of derivative liabilities to equity                                    |       | —                                  |       | —     |       | —                     |       | —         |       | 560,368              |       | —                        |       | —                 |       | 560,368 |   |
| Net loss                                                                                 |       | —                                  |       | —     |       | —                     |       | —         |       | —               |       | —                        |       | (10,895,846            | )          | (10,895,846 | ) |
| Balance,  December 31, 2007                                                         |       | —                                  |       | $          | —     |                       | 22,897,418 |           | $          | 22,897               |       | $                             | 34,512,298 |                   | $          | — |   | $ | (32,890,975 | ) | $ | 1,644,220 |   |
| Stock  compensation expense                                                              |       | —                                  |       | —     |       | —                     |       | —         |       | 587,215              |       | —                        |       | —                 |       | 587,215 |   |
| Issuance of  warrants to consultants                                                     |       | —                                  |       | —     |       | —                     |       | —         |       | 5,919                |       | —                        |       | —                 |       | 5,919 |   |
| Amortization of  discount of Series B Preferred Stock                               |       | —                                  |       | —     |       | —                     |       | —         |       | (743,120             | )          | —                        |       | —                 |       | (743,120 | ) |
| Amortization of  discount of Series C Preferred Stock                               |       | —                                  |       | —     |       | —                     |       | —         |       | (761,929             | )          | —                        |       | —                 |       | (761,929 | ) |
| Series B  Preferred Stock dividends                                                 |       | —                                  |       | —     |       | —                     |       | —         |       | (476,055             | )          | —                        |       | —                 |       | (476,055 | ) |
| Series C  Preferred Stock dividends                                                 |       | —                                  |       | —     |       | —                     |       | —         |       | (396,712             | )          | —                        |       | —                 |       | (396,712 | ) |
| Net loss                                                                                 |       | —                                  |       | —     |       | —                     |       | —         |       | —               |       | —                        |       | (6,183,973             | )          | (6,183,973 | ) |
| Balance,  June 30, 2008 (unaudited)                                                 |       | —                                  |       | $          | —     |                       | 22,897,418 |           | $          | 22,897               |       | $                             | 32,727,616 |                   | $          | — |   | $ | (39,074,948 | ) | $ | (6,324,435 | ) |

 

*Seeaccompanying notes to these consolidated financial statements.*

 

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Uni-Pixel, Inc.

(A Development Stage Company)

Consolidated Statements ofCash Flows

(unaudited)

 
| ** **                                                                   | ** ** | **Six Months Ended  June 30,** | ** ** | **Cumulative Period  from February 18,  1998 (date of  inception) to  June 30,** | ** ** |
|------------------------------------------------------------------------------|------------|-----------------------------------------------|------------|---------------------------------------------------------------------------------------------------------------------|------------|
| ** **                                                                   | ** ** | **2008**                                      | ** ** | **2007**                                                                                                            | ** ** | **2008** | ** ** |
| Cash flows from operating activities                                         |       |                                          |       |                                                                                                                |       |   |   |
| Net loss                                                                     |       | $                                             | (6,183,973 | )                                                                                                                   | $          | (5,485,554 | ) | $ | (37,308,222 | ) |
| Adjustments to reconcile net loss to net  cash used in operating activities: |       |                                          |       |                                                                                                                |       |   |   |
| Interest forgiven                                                            |       | —                                        |       | —                                                                                                              |       | (91,421 | ) |
| Employee compensation notes payable  forgiven                                |       | —                                        |       | —                                                                                                              |       | (795,465 | ) |
| Depreciation and amortization                                                |       | 148,042                                       |       | 131,124                                                                                                             |       | 949,499 |   |
| Stock issued for services                                                    |       | —                                        |       | 52,400                                                                                                              |       | 512,462 |   |
| Stock compensation expense                                                   |       | 587,215                                       |       | 1,160,652                                                                                                           |       | 3,531,296 |   |
| Non-cash compensation expense                                                |       | —                                        |       | —                                                                                                              |       | 1,100,000 |   |
| Amortization of debt issuance costs                                          |       | —                                        |       | 94,189                                                                                                              |       | 644,346 |   |
| Amortization of discounts on notes payable                                   |       | —                                        |       | 955,389                                                                                                             |       | 1,480,448 |   |
| Net decrease in fair value of derivatives                                    |       | —                                        |       | (382,920                                                                                                            | )          | (845,077 | ) |
| Issuance of warrants to consultants                                          |       | 5,919                                         |       | 262,381                                                                                                             |       | 303,810 |   |
| Change in operating assets and liabilities:                                  |       |                                          |       |                                                                                                                |       |   |   |
| Increase in cash restricted for note  payable and lease obligations          |       | —                                        |       | —                                                                                                              |       | (34,877 | ) |
| Decrease (increase) in prepaid expenses and  other current assets            |       | 1,900                                         |       | —                                                                                                              |       | (166,117 | ) |
| Increase (decrease) in accounts payable                                      |       | 445,972                                       |       | (138,087                                                                                                            | )          | 972,926 |   |
| Increase in accrued interest payable                                         |       | —                                        |       | —                                                                                                              |       | 180,943 |   |
| Increase (decrease) in accrued expenses and  other liabilities               |       | (190,712                                      | )          | (516,350                                                                                                            | )          | 1,010,749 |   |
| Increase in deferred revenue                                                 |       | —                                        |       | —                                                                                                              |       | 33,333 |   |
| Net cash used in operating activities                                        |       | (5,185,637                                    | )          | (3,866,776                                                                                                          | )          | (28,521,367 | ) |
|                                                                         |       |                                          |       |                                                                                                                |       |   |   |
| Cash flows from investing activities                                         |       |                                          |       |                                                                                                                |       |   |   |
| Purchase of property and equipment                                           |       | (244,315                                      | )          | (47,068                                                                                                             | )          | (1,473,089 | ) |
| Proceeds from the sale of property and  equipment                            |       | —                                        |       | —                                                                                                              |       | 27,792 |   |
| Purchases of patents, trademarks and  organization costs                     |       | (196,588                                      | )          | —                                                                                                              |       | (264,336 | ) |
| Net cash used in investing activities                                        |       | (440,903                                      | )          | (47,068                                                                                                             | )          | (1,709,633 | ) |
|                                                                         |       |                                          |       |                                                                                                                |       |   |   |
| Cash flows from financing activities                                         |       |                                          |       |                                                                                                                |       |   |   |
| Proceeds from notes payable to related  party                                |       | —                                        |       | —                                                                                                              |       | 115,103 |   |
| Payments on notes payable to related party                                   |       | —                                        |       | —                                                                                                              |       | (164,328 | ) |
| Proceeds from convertible notes payable                                      |       | —                                        |       | —                                                                                                              |       | 3,390,000 |   |
| Payments on convertible notes payable                                        |       | —                                        |       | —                                                                                                              |       | (1,470,672 | ) |
| Net repayments from notes payable                                            |       | —                                        |       | (2,401,280                                                                                                          | )          | (62,833 | ) |
| Issuance of warrants to placement agent                                      |       | —                                        |       | —                                                                                                              |       | 37,596 |   |
| Proceeds from the issuance of preferred  stock, net                          |       | —                                        |       | 12,000,000                                                                                                          |       | 32,367,969 |   |
| Proceeds from the issuance of common stock,  net                             |       | —                                        |       | —                                                                                                              |       | 2,089,050 |   |
| Net cash provided by financing activities                                    |       | —                                        |       | 9,598,720                                                                                                           |       | 36,301,885 |   |
|                                                                         |       |                                          |       |                                                                                                                |       |   |   |
| Net increase (decrease) in cash and cash  equivalents                        |       | (5,626,540                                    | )          | 5,684,876                                                                                                           |       | 6,070,885 |   |
| Cash and cash equivalents, beginning of  period                              |       | 11,697,425                                    |       | 20,188                                                                                                              |       | — |   |
| Cash and cash equivalents, end of period                                     |       | $                                             | 6,070,885  |                                                                                                                | $          | 5,705,064 |   | $ | 6,070,885 |   |
|                                                                         |       |                                          |       |                                                                                                                |       |   |   |
| Supplemental disclosures of cash flow  information:                          |       |                                          |       |                                                                                                                |       |   |   |
| Cash paid for interest                                                       |       | $                                             | —     |                                                                                                                | $          | 134,434 |   | $ | 960,727 |   |
| Cash paid for income taxes                                                   |       | $                                             | —     |                                                                                                                | $          | — |   | $ | — |   |
| Interest capitalized into notes payable                                      |       | $                                             | —     |                                                                                                                | $          | — |   | $ | 8,250 |   |
| Debt issuance cost for warrant issued                                        |       | $                                             | —     |                                                                                                                | $          | — |   | $ | 500,000 |   |
| Preferred stock dividend and amortization  of discount                       |       | $                                             | 2,377,816  |                                                                                                                | $          | 1,178,499 |   | $ | 6,877,398 |   |
| Conversion of notes payable for preferred  stock                             |       | $                                             | —     |                                                                                                                | $          | — |   | $ | 898,250 |   |
| Conversion of notes payable for common  stock                                |       | $                                             | —     |                                                                                                                | $          | — |   | $ | 980,103 |   |
| Stock issued for services                                                    |       | $                                             | —     |                                                                                                                | $          | — |   | $ | 1,612,462 |   |
| Stock issued for interest                                                    |       | $                                             | —     |                                                                                                                | $          | — |   | $ | 81,272 |   |
| Reclassification of derivatives to equity                                    |       | $                                             | —     |                                                                                                                | $          | 560,368 |   | $ | 560,368 |   |
| Intrinsic value of beneficial conversion  options on Preferred Stock         |       | $                                             | —     |                                                                                                                | $          | — |   | $ | 7,525,246 |   |
| Issuance of warrants to Preferred Stock  investors                           |       | $                                             | —     |                                                                                                                | $          | — |   | $ | 7,525,246 |   |

 

*Seeaccompanying notes to these consolidated financial statements.*

 

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**Uni-Pixel, Inc.**

**(A Development Stage Company)**

**Notes to Unaudited ConsolidatedFinancial Statements**

 

**Note 1 – Basis of Presentation, Business and Organization**

 

Uni-Pixel, Inc., aDelaware corporation, is the parent company of our wholly-owned operatingsubsidiary, Uni-Pixel Displays, Inc.  As used herein, “Uni-Pixel,” “we,”“us,” and “our” refer to Uni-Pixel, Inc. and our wholly-owned consolidatedsubsidiary, Uni-Pixel Displays, Inc.  Our common stock, par value$0.001 per share, is quoted on the Over the Counter — Bulletin Board (“OTCBB”)under the ticker symbol “UNXL.”

 

Uni-Pixelis a development stage company that has developed, patented and demonstrated anew color display technology in the form of proof of concept prototypes whichwe call Time Multiplexed Optical Shutter (“TMOS”).  We intend to be aleader in the research, development and commercialization of new flat paneldisplays using TMOS in a variety of applications, such as mobile phones,digital cameras, notebook computers, televisions and other consumer electronicdevices. As of June 30, 2008, we had accumulated a total deficit of $39.1million from operations in pursuit of this objective.

 

Weanticipate that our TMOS displays will be thin, lightweight, andpower-efficient devices, which are highly suitable for use in full-colordisplay applications.  We believe TMOS displays will be able to capture ashare of the growing $60+ billion flat panel display market due to thesignificant advantages it should provide over competing displays with respectto manufacturing and materials cost, brightness, power efficiency, viewingangle, video response time and image quality.  We believe that our technologyleadership and intellectual property position will enable us to generaterevenues initially from TMOS displays for existing vertical market segmentssuch as the military, avionics, and automotive segments, and then subsequentlyfrom consumer electronics markets (i.e., TVs, monitors, personal computers,cameras, games, etc.).

 

Ourstrategy is to develop further our proprietary TMOS technology to the point ofinitially manufacturing small volumes of high performance displays for militaryapplications.  We intend to utilize contract manufacturing for productfabrication to augment our internal capabilities in the short term.  Wealso plan to be a supplier of our key thin film component and to enter intojoint ventures in certain vertical market segments to exploit the existingmanufacturing and distribution channels of our targeted partners.  Wefurther plan to license our technology to display manufacturers and supportingpartner companies for use in applications such as mobile phones, digital cameras,laptop computers, and other consumer electronic devices. Through our internalresearch and development efforts we have established a portfolio ofTMOS-related patents and patent applications and other intellectual propertyrights that support these joint venture and licensing strategies.  Wecurrently have fifteen issued patents and fifty pending patent applicationsfiled in key venues worldwide including regionally in Europe, Asia Pacific,South and North America and contemplate obtaining exclusive field-of-uselicenses, with the right to sublicense, to complementary technologies fromtargeted strategic partners and U.S. national laboratories.

 

ThroughJune 30, 2008, we have been primarily engaged in developing our initialproduct technology, recruiting personnel, commencing our U.S. operations andraising capital. In the course of our development activities, we have sustainedlosses and expect such losses to continue through at least 2008. We willfinance our operations primarily through our existing cash and possible futurefinancing transactions.

 

Ourability to operate profitably under our current business plan is largelycontingent upon our success in developing beyond proof of concept to finalprototypes and supporting transferable manufacturing processes to partners toproduce for sale our products and upon our successful development of marketsfor our products and successful manufacturing relationships.  We may berequired to obtain additional capital in the future to expand our operations.No assurance can be given that we will be able to develop our products,successfully develop the markets for our products or profitable manufacturingmethods, or raise any such additional capital as we might need, either throughequity or debt financing, on satisfactory terms or at all. Additionally, noassurance can be given that any such financing, if obtained, will be adequateto meet our ultimate capital needs or to support our growth. If adequatecapital cannot be obtained on satisfactory terms, our operations could benegatively impacted.

 

Ifwe achieve growth in our operations in the next few years, such growth couldplace a strain on our management, administrative, operational and financialinfrastructure. Our ability to manage our current operations and future growthrequires the continued improvement of operational, financial and managementcontrols, reporting systems and procedures. In addition, we may find itnecessary to hire additional management, financial and sales and marketingpersonnel to manage our expanding operations. If we are unable to manage thisgrowth effectively and successfully, our business, operating results andfinancial condition may be materially adversely affected.

 

Asof June 30, 2008, we had cash and cash equivalents of $6.1 million. We believe that our existing capital resources are adequate to finance ouroperations until December 2008. However, our long-term viability is dependent upon our ability to 

 

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successfully operate our business, developour manufacturing process, sign partnership agreements, develop our productsand raise additional debt and equity to meet our business objectives.

 

*Acquisition and merger and basis of presentation*

 

Uni-Pixel, Inc.was originally incorporated in the State of Nevada as Super Shops, Inc. OnNovember 15, 1999, Super Shops and its sister companies filed an amendedpetition under Chapter 11 of the United States Bankruptcy Code. On July 31,2000, the court approved Super Shops’ Amended Joint Plan of Reorganization. On October 13,2000, and in accordance with the Plan of Reorganization, the management ofSuper Shops changed its state of incorporation from Nevada to Delaware bymerging with and into NEV Acquisition Corp., a Delaware corporation formedsolely for the purpose of effecting the reincorporation. On June 13, 2001,NEV Acquisition Corp. changed its corporate name to Real-Estateforlease.com, Inc.,as a result of the merger transaction discussed in the following paragraph.

 

Real-Estateforlease.com, Inc.was incorporated on May 24, 2001, in the State of Delaware to serve as abusiness-to-business internet information intermediary providing turnkeymarketing services to facilitate the leasing of commercial real estateproperties. On June 13, 2001, the management of NEV Acquisition Corp.entered into an Agreement and Plan of Merger with Real-Estateforlease.com, Inc.pursuant to which the sole stockholder and founder of Real-Estateforlease.com, Inc.exchanged his equity ownership interest in Real-Estateforlease.com, Inc.for 9,500,000 shares (or approximately 96%) of NEV Acquisition Corp.’s commonstock. At the time of the merger between Real-Estateforlease.com, Inc. andNEV Acquisition Corp., Real-Estateforlease.com, Inc. had no operations andessentially no assets. Efforts by Real-Estateforlease.com, Inc. toimplement its business plan ceased in June 2002. Prior toReal-Estateforlease.com, Inc.’s merger with Uni-Pixel Displays, Inc.,as described in the next paragraph, Real-Estateforlease.com, Inc. had nooperations and no material assets or liabilities.

 

Ourwholly-owned subsidiary, Uni-Pixel Displays, Inc., was originallyincorporated as Tralas Technologies, Inc., a Texas corporation, on February 17,1998. Tralas Technologies, Inc. changed its name to Uni-Pixel Displays, Inc.during 2001. On December 7, 2004, Real-Estateforlease.com, Inc.entered into a merger agreement with Uni-Pixel Displays, Inc. and certainother parties pursuant to which Uni-Pixel Displays, Inc. became awholly-owned subsidiary of Real-Estateforlease.com, Inc. Pursuant to themerger, we changed our name to “Uni-Pixel, Inc.” at the annual meeting ofour stockholders held in January 2005.

 

Thefinancial statements presented in this quarterly report include Uni-Pixel, Inc.and our wholly-owned subsidiary, Uni-Pixel Displays, Inc. All significantintercompany transactions and balances have been eliminated. Uni-Pixel Displays, Inc.was, for accounting purposes, the surviving entity of the merger, andaccordingly for the periods prior to the merger, the financial statementsreflect the financial position, results of operations and cash flows ofUni-Pixel Displays, Inc.  The assets, liabilities, operations andcash flows of Real-Estateforlease.com, Inc. are included in theconsolidated financial statements from December 10, 2004 onward.

 

**Note 2 - Liquidity**

 

Our accompanying consolidated financial statementshave been prepared assuiming that we will continue as a going concern, whichcontemplates realization of assets and the satisfaction of liabilities in thenormal course of business.  However,Uni-Pixel has sustained losses and negative cash flows from operations sinceits inception. The Company’s ability to meet its obligations in the ordinarycourse of business is dependent upon its ability to establish profitableoperations, raise additional financing through public or private equityfinancings, enter into collaborative or other arrangements with corporatesources, or secure other sources of financing to fund operations.  The Company’s management may be forced toreduce operating expenses or delay planned expenditures commensurate with itslevel of working capital.

 

OnFebruary 13, 2007, the Company raised $12 million in a private placementof its Series B Convertible Preferred Stock (see Note 5) and on September 28,2007, the Company raised an additional $10 million in a private placement ofits Series C Convertible Preferred Stock (see Note 5), which managementbelieves will enable the Company to continue operations until December 2008.

 

**Note 3- Summary of Significant Accounting Policies**

 

*Interim financial information*

 

Thefinancial statements included herein, which have not been audited pursuant tothe rules and regulations of the Securities and Exchange Commission,reflect all adjustments which, in the opinion of management, are necessary fora fair presentation of financial position, results of operations and cash flowsfor the interim periods on a basis consistent with the annual auditedstatements. All such adjustments are of a normal recurring nature. The resultsof operations for interim periods are not necessarily indicative of the resultsthat may be expected for any other interim period or for a full year. Certaininformation, 

 

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accounting policies and footnote disclosuresnormally included in financial statements prepared in conformity withaccounting principles generally accepted in the United States of America havebeen omitted pursuant to such rules and regulations, although we believethat the disclosures are adequate to make the information presented notmisleading. These financial statements should be read in conjunction with ouraudited financial statements included in our Form 10-KSB, for the yearended December 31, 2007, filed with the Securities and Exchange Commissionon March 7, 2008.

 

*Use of estimates*

 

Thepreparation of financial statements in conformity with accounting principlesgenerally accepted in the United States of America requires us to makeestimates and assumptions that affect the reported amounts of assets andliabilities, disclosures of contingent assets and liabilities at the date ofthe financial statements and the reported amounts of revenues and expensesduring the reporting period. Examples include provisions for bad debts, useful livesof property and equipment and intangible assets, impairment of property andequipment and intangible assets, deferred taxes, and the provision for anddisclosure of litigation and loss contingencies. Actual results may differmaterially from those estimates.

 

*Statement of cash flows*

 

Forpurposes of the statements of cash flows, we consider all highly liquidinvestments (i.e., investments which, when purchased, have original maturitiesof three months or less) to be cash equivalents.

 

*Concentration of credit risk*

 

Wemaintain our cash primarily with major U.S. domestic banks. The amounts held inthese banks exceed from time to time the insured limit of $100,000 and exceededthat balance as of June 30, 2008 and December 31, 2007 by $5,569,306and $11,279,525, respectively. The terms of these deposits are on demand tominimize risk.  We have not incurred losses related to these deposits.

 

*Restricted cash*

 

Asof June 30, 2008 and December 31, 2007, we had restricted cash of$34,877.  This amounts secured certainobligations under our lease agreement for our principal facility located in TheWoodlands, Texas as of both June 30, 2008 and December 31, 2007.  The restricted cash has been segregated intocurrent and long-term classifications based on its anticipated liquidation.

 

*Property and equipment*

 

Propertyand equipment, consisting primarily of lab equipment, computer equipment,software, leasehold improvements, and office furniture and fixtures is carriedat cost less accumulated depreciation and amortization. Depreciation andamortization for financial reporting purposes is provided by the straight-linemethod over the estimated useful lives of three to five years. Leaseholdimprovements are amortized using the straight-line method over the remaininglease term or the life of the asset, whichever is shorter. The cost of repairsand maintenance is charged as an expense as incurred.  Gains or losses related to retirements ordispositions of fixed assets are recognized in the period incurred.

 

*Intangible assets*

 

Ourintangible assets represent patents and patent applications, acquired fromthird parties, which are recorded at cost and amortized over the life of thepatent.  We review the value recorded for intangible assets to assessrecoverability from future operations using undiscounted cash flows.Impairments are recognized in operating results to the extent the carryingvalue exceeds fair value determined based on the net present value of estimatedfuture cash flows.

 

*Derivativeinstruments*

 

Weaccount for all derivative financial instruments in accordance with SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities.” Derivativefinancial instruments are recorded as liabilities in the consolidated balancesheet and are measured at fair value. When available, quoted market prices areused in determining fair value. However, if quoted market prices are notavailable, we estimate fair value using either quoted market prices offinancial instruments with similar characteristics or other valuationtechniques.  These derivative liabilitiesare marked-to-market each quarter with the change in fair value recorded in theincome statement.

 

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*Revenue recognition*

 

Werecognize revenue over the period the service is performed in accordance withSEC Staff Accounting Bulletin No. 104, “Revenue Recognition in FinancialStatements” (“SAB 104”). In general, SAB 104 requires that four basiccriteria must be met before revenue can be recognized: (1) persuasiveevidence that an arrangement exists, (2) delivery has occurred or servicesrendered, (3) the fee is fixed and determinable, and (4) collectibilityis reasonably assured.

 

Revenuefrom licenses and other up front fees are recognized on a ratable basis overthe term of the respective agreement.

 

Revenuefrom development contracts are recognized when the contract is completed andcollectibility is reasonably assured. Deferred revenue on these contracts of $33,333 as of June 30, 2008and December 31, 2007 consists of a development contract to produce anddeliver a prototype device.

 

*Research and development expenses*

 

Research and developmentcosts are expensed as incurred and include salaries and benefits, costs paid tothird-party contractors for research, development and manufacturing ofmaterials and devices, and a portion of facilities cost. Prototype developmentcosts are a significant component of research and development expenses andinclude costs associated with third-party contractors. Invoicing fromthird-party contractors for services performed can lag several months.  Weaccrue the costs of services rendered in connection with third-party contractoractivities based on our estimate of management fees, site management andmonitoring costs and data management costs. Actual costs may differ fromestimated costs in some cases and are adjusted for in the period in which theybecome known.

 

*Stock-based compensation*

 

In December 2004, the Financial Accounting Standards Board (“FASB”)issued SFAS No. 123 (Revised 2004) (“SFAS No. 123(R)”), *“Share Based Payment,”* which eliminatesthe use of APB Opinion No. 25 and will require us to measure the cost ofemployee services received in exchange for an award of equity instruments basedon the grant-date fair value of the award. That cost will be recognized overthe period during which an employee is required to provide service in exchangefor the reward—known as the requisite service period. No compensation cost isrecognized for equity instruments for which employees do not render therequisite service. The grant-date fair value of employee share options andsimilar instruments will be estimated using option-pricing models adjusted forthe unique characteristics of those instruments. We have implemented SFAS No. 123(R) effectiveJanuary 1, 2006.

 

Wemay, from time to time, issue common stock, stock options or common stockwarrants to acquire services or goods from non-employees. Common stock, stockoptions and common stock warrants issued to persons other than employees ordirectors are recorded on the basis of their fair value, as required by SFAS No. 123(R),  which is measured as of the date required byEITF Issue 96-18 (“EITF 96-18”), *“Accountingfor Equity Instruments That Are Issued to Other Than Employees for Acquiring,or in Conjunction with Selling, Goods or Services.”*  Inaccordance with EITF 96-18, the stock options or common stock warrants arevalued using the Black-Scholes model on the basis of the market price of theunderlying common stock on the “valuation date,” which for options and warrantsrelated to contracts that have substantial disincentives to non-performance, isthe date of the contract, and for all other contracts is the vesting date.Expense related to the options and warrants is recognized on a straight-linebasis over the shorter of the period over which services are to be received orthe vesting period. Where expense must be recognized prior to a valuation date,the expense is computed under the Black-Scholes model on the basis of themarket price of the underlying common stock at the end of the period, and anysubsequent changes in the market price of the underlying common stock through thevaluation date is reflected in the expense recorded in the subsequent period inwhich that change occurs.

 

*Income taxes*

 

Anasset and liability approach is used for financial accounting and reporting forincome taxes. Deferred income taxes arise from temporary differences betweenincome tax and financial reporting and principally relate to recognition ofrevenue and expenses in different periods for financial and tax accountingpurposes and are measured using currently enacted tax rates and laws. In addition,a deferred tax asset can be generated by net operating loss carryforwards.   If it is more likely than not that someportion or all of a deferred tax asset will not be realized, a valuationallowance is recognized.

 

TheCompany has losses carried forward for income tax purposes to June 30,2008. There are no current or deferred tax expenses for the three and six monthperiods ended June 30 2008 and 2007 due to the Company’s loss position.The Company has fully reserved for any benefits of these losses. The deferredtax consequences of temporary differences in reporting items for financialstatement and income tax purposes are recognized, as appropriate. Realizationof the future tax benefits related to the deferred tax assets is dependent onmany factors, including the Company’s ability to generate taxable income withinthe net 

 

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operating loss carryforward period.Management has considered these factors in reaching its conclusion as to thevaluation allowance for financial reporting purposes. Accordingly, no benefithas been recognized on the net loss as the realization of the net operating losscarryforward cannot be assured.

 

*Loss per share data*

 

Basicloss per share is calculated based on the weighted average common sharesoutstanding during the period, after giving effect to the manner in which themerger was accounted for as described in Note 1. Diluted earnings pershare also gives effect to the dilutive effect of stock options, warrants(calculated based on the treasury stock method) and convertible notes andconvertible preferred stock. The Company does not present diluted earnings pershare for years in which it incurred net losses as the effect is antidilutive.

 

AtJune 30, 2008, options and warrants to purchase 19,624,593 shares ofcommon stock at exercise prices ranging from $1.10 to $2.00 per share wereoutstanding, but were not included in the computation of diluted earnings pershare as their effect would be antidilutive. Further, at June 30, 2008, 17,760,438 shares of common stock,convertible from Series B Convertible Preferred Stock and associateddividends, were not included in the computation of diluted earnings per shareas there effect would be antidilutive. Further, at June 30, 2008, 7,573,393 shares of common stock,convertible from Series C Convertible Preferred Stock and associateddividends, were not included in the computation of diluted earnings per shareas there effect would be antidilutive.

 

*Fair value of financial instruments*

 

Ourfinancial instruments consist of accounts receivable, accounts payable, notespayable and derivative liabilities. We believe the fair values of our accountsreceivable, accounts payable, notes payable and derivative liabilities reflecttheir respective carrying amounts.

 

*Recently adopted accounting pronouncements*

 

Effectiveat the beginning of the first quarter of 2007, the Company adopted theprovision of FIN 48, “Accounting for Uncertainty in Income Taxes, aninterpretation of FASB Statement No. 109” (“FIN 48”).  FIN 48 contains a two-step approach torecognizing and measuring uncertain tax positions accounted for in accordancewith SFAS No. 109, “Accounting for Income Taxes.”  The first step is to evaluate the taxposition for recognition by determining if the weight of available evidenceindicates that it is more likely than not that the position will be sustainedon audit, including resolution of related appeals or litigation processes, ifany.  The second step is to measure thetax benefit as the largest amount that is more than 50% likely of beingrealized upon ultimate settlement.

 

                As a result of theimplementation of FIN 48, the Company has not changed any of its tax accrualestimates.  The Company files U.S.federal and U.S. state tax returns.  Forstate tax returns the Company is generally no longer subject to taxexaminations for years prior to 1996.

 

EffectiveJanuary 1, 2008, the Company partially adopted SFAS 157, which provides aframework for measuring fair value. Fair value is defined as the price thatwould be received for an asset or paid to transfer a liability (an exit price)in the principal or most advantageous market for the asset or liability in anorderly transaction between market participants at the measurement date. Thepartial adoption of this standard only resulted in additional disclosurerequirements and had no financial statement impact. Delayed application of thisstatement is permitted for nonfinancial assets and nonfinancial liabilities,except for items that are recognized or disclosed at fair value in thefinancial statements on a recurring basis (at least annually), until fiscalyears beginning after November 15, 2008, and interim periods within thosefiscal years. The Company has not applied the provisions of SFAS 157 forintangible assets and long-lived assets measured for fair value for impairmentassessment under Statement 144, *Accountingfor the Impairment or Disposal of Long-Lived Assets.*Refer to Note 6 — Fair Value Disclosure (SFAS 157Disclosure)****of theunaudited consolidated financial statements for further information regardingthe fair value of the Company’s financial instruments.

 

EffectiveJanuary 1, 2008, the Company adopted SFAS No. 159, *The Fair Value Option for Financial Assets and Liabilities – Including an Amendment of SFAS No. 115*(SFAS159). This standard permits an entity to choose to measure many financialinstruments and certain other items at fair value. Most of the provisions inSFAS No. 159 are elective; however, the amendment to SFAS No. 115, *Accounting for Certain Investments in Debt and EquitySecurities,*applies to all entities with available-for-sale andtrading securities. The fair value option established by SFAS 159 permits theCompany to choose to measure eligible items at fair value at specified electiondates. The Company will report unrealized gains and losses on items for whichthe fair value option has been elected in earnings at each subsequent reportingdate. The fair value option: (a) may be applied instrument by instrument,with a few exceptions, such as investments otherwise accounted for by the equity method; (b) is 

 

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irrevocable (unless a new election dateoccurs); and (c) is applied only to entire instruments and not to portionsof instruments. In connection with the adoption of this standard, the Companydid not elect any additional financial instruments to be recorded at fairvalue.

 

*Recent accounting pronouncements*

 

InMarch 2008, the Financial Accounting Standards Board issued SFAS No. 161,*Disclosures about Derivative Instruments andHedging Activities — an Amendment of Statement No. 133*(SFAS161). SFAS 161 enhances disclosure requirements about (a) how and why anentity uses derivative instruments, (b) how derivative instruments andrelated hedged items are accounted for under SFAS No. 133 and its relatedinterpretations, and (c) how derivative instruments and related hedgeditems affect an entity’s financial position, financial performance and cashflows. This statement is effective for financial statements issued for fiscalyears and interim periods beginning after November 15, 2008, with earlyapplication encouraged. The Company is currently evaluating the impact ofadoption of SFAS 161.

 

InMay 2008, the FASB issued Staff Position (FSP) EITF 03-6-1, *Determining Whether Instruments Granted inShare-Based Payment Transactions are Participating Securities*. Thisstaff position addresses whether instruments granted in share-based paymenttransactions are participating securities prior to vesting and, therefore, needto be included in the allocation in computing earnings per share under thetwo-class method described in SFAS 128, *EarningsPer Share.*The FASB concluded that all outstanding unvestedshare-based payment awards that contain rights to nonforfeitable dividendsparticipate in undistributed earnings with common shareholders. If awards areconsidered participating securities, the Company is required to apply thetwo-class method of computing basic and diluted earnings per share. FSP EITF03-6-1 is effective for fiscal years beginning after December 15, 2008 andinterim periods within those fiscal years. Early adoption is prohibited. TheCompany is currently evaluating the impact of adoption of this guidance.

 

InNovember 2007, FASB issued EITF 07-1, “**Accounting for Collaborative Arrangements”**(“EITF 07-1”)**.”**  EITF 07-1 requires additionaldisclosures related to collaborative arrangements. EITF 07-1 is effective forfiscal years beginning after December 15, 2008.  The Company iscurrently assessing the impact the adoption of EITF 07-1 will have on theCompany’s consolidated financial statements.

 

InDecember 2007, the FASB issued SFAS No. 141 (Revised 2007), BusinessCombinations - Revised 2007. SFAS 141 R provides guidance on improving therelevance, representational faithfulness, and comparability of information thata reporting entity provides in its financial reports about a businesscombination and its effects. SFAS 141R applies to business combinations whereis the acquisition date is on or after the beginning of the first annualreporting period beginning on or after December 15, 2008. The Company isin the process of analyzing the effects SFAS 141R will have on the Company’sfinancial statements.

 

InDecember 2007, the FASB also issued SFAS No. 160, NoncontrollingInterests in Consolidated Financial Statements, which establishes accountingand reporting standards to improve the relevance, comparability, andtransparency of financial information in its consolidated financial statementsthat include an outstanding noncontrolling interest in one or moresubsidiaries. SFAS 160 is effective for fiscal years, and the interim periodswithin those fiscal years, beginning on or after December 15, 2008.Management of the Company does not expect the adoption of this pronouncement tohave a material impact on its financial statements.

 

InMay 2008, the FASB released SFAS No. 162, **“The Hierarchy of Generally AcceptedAccounting Principles.”**  SFAS No. 162 identifies thesources of accounting principles and the framework for selecting the principlesused in the preparation of financial statements of nongovernmental entitiesthat presented in conformity with generally accepted accounting principles inthe United States of America. SFAS No. 162 will be effective 60 daysfollowing the SEC’s approval of the PCAOB amendments to AU Section 411, **The Meaning ofPresent Fairly in Conformity With Generally Accepted Accounting Principles**. The Company does not believe SFAS 162 will have a significant impact on theCompany’s consolidated financial statements.

 

**Note 4 -**** ****Commitments and Contingencies**

 

*Leases*

 

The Company has entered into a lease for office, warehouse andlaboratory facilities in The Woodlands, Texas under a third partynon-cancelable operating lease through 2010. Future minimum lease commitmentsas of June 30, 2008 are as follows:

 

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| **Year Ending December 31** | ** ** | ** ** | ** ** |
|--------------------------------------------|------------|------------|------------|
| 2008                                       |       | $          | 101,635    |   |
| 2009                                       |       | 206,267    |       |
| 2010                                       |       | 191,825    |       |
| 2011                                       |       | —     |       |
| 2012                                       |       | —     |       |
| Thereafter                                 |       | —     |       |
| Total                                      |       | $          | 499,727    |   |

 

This lease provides the Company with a 5-year renewal option.

 

**Note 5 -**** ****Redeemable Preferred Stock, Equity, Stock Plan andWarrants**

 

*Equity instruments issued to non-employees*

 

From time to time, in order to preserve cash and to fund our operatingactivities, common stock or other equity instruments may be issued for cash orin exchange for goods or services. Equity instruments issued for goods orservices are recorded at the fair value of the goods or services received orthe fair value of the equity instruments issued, whichever is more reliablymeasurable.  During 2007, we did thefollowing:

 

·                  Effective January 15, 2007, we requestedand Lusierna Asset Management, Ltd. (the “Consultant”) agreed to provideconsulting and advisory services to us pursuant to and in accordance with ourrequest, including but not limited to, advice regarding corporate structuring,the identification of potential candidates for our board of directors andtransaction structuring.  Inconsideration of the consulting services, we agreed that at the time of, andsubject to, the closing of no less than gross proceeds of $12,000,000 from thesale of the Company’s equity in a private placement, (the “**OfferingThreshold Closing**”), the Company (i) issued to theConsultant, simultaneously with the Offering Threshold Closing, initialclosing, a three year warrant to purchase 750,000 shares (the “**Option Shares**”) of our commonstock, at an exercise price of $1.10 per Option Share, with a cashless exerciseprovision and no anti-dilution adjustment, and (ii) we paid to theConsultant a fee of $480,000.  TheCompany utilized the Black-Scholes methodology in determining thefair market value of the warrants of $217,007 and recorded the expense inthe first quarter of 2007.  TheConsultants’ fee of $480,000 was paid from the proceeds of the PurchaseAgreement, described below, and expensed in the first quarter of 2007.

 

·                  Effective February 13, 2007 we enteredinto an Investor Relations Agreement with Lusierna Asset Management, Ltd. (the “Consultant”)which provides that the Agreement will terminate on the date twelve (12) monthsfrom the Commencement Date, unless otherwise subject to earliertermination.  During the term of thisAgreement, the Consultant shall provide public and investor relations services(collectively, the “**Services**”)to us, to result in improved investor recognition of Uni-Pixel, Inc., abroader following by analysts and institutions to include providing directly,or managing the delivery of, a wide range of services, including, but notlimited to:

 

·                  Proactive marketing of the Company directlyto security analysts, stockbrokers and portfolio managers and investors.

·                  Assisting the Company in gaining mediacoverage both locally and nationally.

·                  Assisting in the preparation of pressreleases, including monitoring wire service coverage of the Company foraccuracy and pickup.

·                  Preparing presentations relating to theCompany for meetings with analysts, registered representatives and portfoliomanagers, other large investors, and sponsored forums.

·                  Assisting in preparing information kits aboutthe Company in response to press and/or investor inquiries.

·                  Providing such other services and assistanceas Consultant and the Company shall deem necessary or appropriate to enhancethe Company’s business.

 

TheConsultant shall receive $10,000 per month payable monthly on the tenth (10th)day of each month, commencing on the tenth (10th) day of the monthfollowing the month in which the Commencement Date occurs and a three (3) yearwarrant (the “**Warrant**”) to purchase 300,000shares of restricted Uni-Pixel, Inc. common stock at an exercise price of$1.10 per share, with a cashless exercise provision and no anti-dilutionadjustment. The Warrant shall vest in twelve (12) monthly installments on thetenth (10th) day of each month, commencing in the First PaymentMonth. The initial payment shall be for 75,000 shares, with the remaining225,000 shares equally divided into the remaining eleven (11)installments.  The Company 

 

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utilizedthe Black-Scholes methodology in determining the fair market value ofthe warrants of $86,803 and this amount is expensed over 12 months.

 

*Common Stock*

 

During the three monthsended March 31, 2008, (1) we issued no shares of common stock forcash in connection with the exercise of stock options; (2) issued noshares of common stock in exchange for cashless exercise of warrants; (3) issuedno shares of common stock in connection with the conversion of Series BPreferred Stock and accrued dividends; and (4) issued no shares of commonstock in connection with the conversion of Series C Preferred Stock andaccrued dividends.

 

During the three monthsended June 30, 2008, (1) we issued no shares of common stock for cashin connection with the exercise of stock options; (2) issued no shares ofcommon stock in exchange for cashless exercise of warrants; (3) issued noshares of common stock in connection with the conversion of Series BPreferred Stock and accrued dividends; and (4) issued no shares of commonstock in connection with the conversion of Series C Preferred Stock andaccrued dividends.

 

*Series B Convertible Preferred Stock*

 

On February 13, 2007, the Company entered into a SecuritiesPurchase Agreement (the “Purchase Agreement”) with The Raptor Global PortfolioLtd., The Tudor BVI Global Portfolio Ltd., Tudor Proprietary Trading, L.L.C.and The Altar Rock Fund L.P. (collectively, the “Purchasers”) pursuant to whichthe Company sold on that date in a private placement to the Purchasers (a) 3,200,000shares of the Company’s Series B Convertible Preferred Stock, par value$0.001 per share (the “Series B Preferred Stock”), and (b) warrants (the “Series BWarrants”) to purchase, in aggregate, up to 6,839,279 shares of the Company’scommon stock, par value $0.001 for an aggregate purchase price of$12,000,000.  As the Series BPreferred Stock is redeemable for cash at the option of the holder after fiveyears, the Series B Preferred Stock is classified as temporary equity onthe balance sheet.  In accordance withEITF 00-27, the Company determined that the Series B Preferred Stockcontained a beneficial conversion feature with an intrinsic value of$3,715,602, which was credited to additional paid-in capital in the firstquarter of 2007, and is being amortized over five years.  The Company utilized the Black-Scholesmethodology in determining the fair market value of the Series BWarrants of $3,715,602, which was credited to additional paid-in capital in thefirst quarter of 2007, and is being amortized over five years.

 

Dividends shall accrue, whether or not declared and paid, on the Series BPreferred Stock at the rate per annum of 8%, and shall be cumulative as to anydividends not declared and paid in any year, compounding annually at the samerate.  These dividends are charged toadditional paid-in capital.  Each shareof Series B Preferred Stock may, at the option of the holder, be convertedat any time into a number of fully paid and non-assessable shares of commonstock of the Company equal to the quotient obtained by dividing the originalissue price of $3.75 for the Series B Preferred Shares, plus all accruedand unpaid Series B Preferred Stock dividends and any other declared andunpaid dividends, by the initial Series B Preferred Stock conversion priceof $0.75, which is subject to adjustment from time to time in accordance withthe Certificate of Designations.  As of June 30,2008, there were 3,200,000 shares of Series B Preferred Stock outstanding,with cumulative unpaid dividends of approximately $1,320,329 or 352,088 sharesof Series B Preferred Stock.

 

*Series C Convertible Preferred Stock*

 

OnSeptember 28, 2007, the Company entered into a Securities PurchaseAgreement (the “ ML Purchase Agreement”) with Merrill Lynch Pierce, Fenner &Smith Incorporated (“Merrill Lynch”) pursuant to which the Company sold on thatdate in a private placement to Merrill Lynch (a) 892,858 shares of theCompany’s Series C Convertible Preferred Stock, par value $0.001 per share(the “Series CPreferred Stock”), and (b) warrants (the “ML Warrants”) topurchase, in aggregate, up to 3,214,289 shares of the Company’s common stock,par value $0.001 for an aggregate purchase price of $10,000,010.  As the Series C Preferred Stock isredeemable for cash at the option of the holder after five years, the Series CPreferred Stock is classified as temporary equity on the balance sheet.  In accordance with EITF 00-27, the Companydetermined that the Series C Preferred Stock contained a beneficialconversion feature with an intrinsic value of $3,809,644, which was credited toadditional paid-in capital in the third quarter of 2007, and is being amortizedover five years.  The Company utilizedthe Black-Scholes methodology in determining the fair market value of the MLWarrants of $3,809,644, which was credited to additional paid-in capital in thethird quarter of 2007, and is being amortized over five years.

 

Dividends shall accrue, whether or not declared and paid, on the Series CPreferred Stock at the rate per annum of 8%, and shall be cumulative as to anydividends not declared and paid in any year, compounding annually at the samerate. These dividends are charged to additional paid-in capital.  Each share of Series C Preferred Stockmay, at the option of the holder, be converted at any time into a number offully paid and non-assessable shares of common stock of the Company equal tothe quotient obtained by dividing the original issue price of $11.20 for the Series CPreferred Shares, plus all accrued and unpaid Series C Preferred Stockdividends and any other declared and unpaid dividends, by the initial Series CPreferred Stock conversion 

 

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price of $1.40, which issubject to adjustment from time to time in accordance with the Certificate ofDesignations.  As of June 30, 2008,there were 892,858 shares of Series C Preferred Stock outstanding, withcumulative unpaid dividends of approximately $602,740 or 53,816 shares of Series CPreferred Stock.

 

*Stock-based Compensation*

 

*2005 Stock Incentive Plan*

 

Effective January 27, 2005, we adopted the Uni-Pixel, Inc.2005 Stock Incentive Plan. The Stock Incentive Plan is discretionary and allowsfor an aggregate of up to 2,000,000 shares of our common stock to be awardedthrough incentive and non-qualified stock options and stock appreciationrights. The Stock Incentive Plan is administered by our Board of Directors,which has exclusive discretion to select participants who will receive theawards and to determine the type, size and terms of each award granted.

 

In the first quarter of 2008, we did not grant any options under the2005 Stock Incentive Plan.

 

In the second quarter of 2008, we did not grant any options under the2005 Stock Incentive Plan.

 

*2007 Stock Incentive Plan*

 

Effective August 21, 2007, we adopted the Uni-Pixel, Inc.2007 Stock Incentive Plan. The Stock Incentive Plan is discretionary and allowsfor an aggregate of up to 4,000,000 shares of our common stock to be awardedthrough incentive and non-qualified stock options and stock appreciationrights. The Stock Incentive Plan is administered by our Board of Directors,which has exclusive discretion to select participants who will receive theawards and to determine the type, size and terms of each award granted.

 

In the first quarter of 2008, we granted a total of 600,000 options topurchase our common stock with an exercise price of $1.45 per share to threeemployees.  These options vest monthlyover 36 months.

 

In the second quarter of 2008, we granted a total of 465,625 options topurchase our common stock with an exercise price of $1.45 per share to nineemployees.  425,625 of these options vestmonthly over 36 months.  40,000 of theseoptions vest 1/3rd on theone year anniversary of the date of grant, 1/3rd on thesecond year anniversary of the date of grant, and 1/3rd on thethird year anniversary of the date of grant.

 

*Other Stock Options*

 

In the first quarter of 2008, we did not grant any other stock options.

 

In the second quarter of 2008, we did not grant any other stockoptions.

 

Thefollowing disclosures provide information regarding the Company’s stock-basedcompensation awards, all of which are classified as equity awards in accordancewith SFAS No. 123(R):

 

*Stock options.*The Company grants stock options to employees that allow them topurchase shares of the Company’s common stock. Options are also granted tomembers of the Board of Directors.  TheCompany determines the fair value of stock options at the date of grant usingthe Black-Scholes valuation model.  Mostoptions vest annually over a three-year service period.  The Company will issue new shares upon theexercise of stock options.

 

Totalcompensation expense recognized for options was approximately $0.6 millionand $1.2 million for the six months ended June 30, 2008 and June 30,2007, respectively.

 

Asummary of the changes in the total stock options outstanding during the sixmonths ended June 30, 2008 follows:

 

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| ** **                                    | ** ** | ** **  | ** ** | **Weighted**            | ** ** |
|-----------------------------------------------|------------|-------------|------------|-------------------------|------------|
| ** **                                    | ** ** | ** **  | ** ** | **Average**             | ** ** |
| ** **                                    | ** ** | **Options** | ** ** | **Exercise Price** | ** ** |
| Outstanding at December 31, 2007         |       | 4,712,500   |       | $                       | 1.58       |   |
| Granted                                       |       | 1,065,625   |       | 1.45                    |       |
| Forfeited or expired                          |       | —      |       | —                  |       |
| Exercised                                     |       | —      |       | —                  |       |
| Outstanding at June 30, 2008             |       | 5,778,125   |       | $                       | 1.56       |   |
| Vested and exercisable at June 30,  2008 |       | 3,362,578   |       | $                       | 1.65       |   |

 

Thefair value of the Company’s options were estimated on the date of grant usingthe Black-Scholes valuation model with the following weighted-averageassumptions:

 
| ** **            | ** ** | **Three Months  ended  June 30,   2008** | ** ** | **Three Months  ended  June 30,   2007** | ** ** | **Six Months  ended  June 30,   2008** | ** ** | **Six Months  ended  June 30,   2007** | ** ** |
|-----------------------|------------|---------------------------------------------------------|------------|---------------------------------------------------------|------------|-------------------------------------------------------|------------|-------------------------------------------------------|------------|
| Expected life (years) |       | 5 years                                            |       | 5 years                                            |       | 5 years                                          |       | 5 years                                          |       |
| Interest rate         |       | 0.90 to 1.97                                            | %          | 5.1                                                     | %          | 0.90 to 3.27                                          | %          | 5.1                                                   | %          |
| Dividend yield        |       | —                                                  |       | —                                                  |       | —                                                |       | —                                                |       |
| Volatility            |       | 108.47                                                  | %          | 82.12                                                   | %          | 108.47                                                | %          | 82.12                                                 | %          |
| Forfeiture rate       |       | —                                                  |       | —                                                  |       | —                                                |       | —                                                |       |

 

AtJune 30, 2008, there was $2.1 million of total unrecognized compensationcost related to non-vested stock option awards which is expected to berecognized over a weighted-average period of 1.28 years.  There were 801,639 options that became vestedduring the six months ended June 30, 2008.

 

**Note 6 -**** ****Fair Value Measurements**

 

                As of January 1,2008, the Company implemented FAS No. 157, *Fair Value Measurements*(“FAS 157”) for its financial assetsand liabilities that are remeasured and reported at fair value at eachreporting period and non-financial assets and liabilities that are remeasuredand reported at fair value at least annually. In accordance with the provisionsof FSP No. FAS 157-2, *Effective Date ofFASB Statement No. 157*, the Company elected to deferimplementation of FAS 157 as it relates to its non-financial assets andnon-financial liabilities that are recognized and disclosed at fair value inthe financial statements on a nonrecurring basis until January 1, 2009.

 

                In general, fairvalues determined by Level 1 inputs utilize quoted prices (unadjusted) inactive markets for identical assets or liabilities. Fair values determined byLevel 2 inputs utilize observable inputs other than Level 1 prices, such asquoted prices for similar assets or liabilities, quoted prices in markets thatare not active or other inputs that are observable or can be corroborated byobservable market data for substantially the full term of the related assets orliabilities. Fair values determined by Level 3 inputs are unobservable datapoints for the asset or liability, and include situations where there islittle, if any, market activity for the asset or liability. The following tablepresents information about the Company’s financial assets that have beenmeasured at fair value as of June 30, 2008, and indicates the fair valuehierarchy of the valuation inputs utilized to determine such fair value (inthousands):

 
| ** **                                           | ** ** | ** **          | ** ** | **Quoted**         | ** ** | **Significant**    | ** ** |
|------------------------------------------------------|------------|---------------------|------------|--------------------|------------|--------------------|------------|
| ** **                                           | ** ** | **Fair Value** | ** ** | **Prices in** | ** ** | **Other**          | ** ** |
| ** **                                           | ** ** | **at**              | ** ** | **Active**         | ** ** | **Observable**     | ** ** |
| ** **                                           | ** ** | **June 30,**   | ** ** | **Markets**        | ** ** | **Inputs**         | ** ** |
| **Description**                                      | ** ** | **2008**            | ** ** | **(Level 1)** | ** ** | **(Level 2)** | ** ** |
| Assets:                                              |       |                |       |               |       |               |       |
| Cash and cash equivalents                            |       | $                   | 6,070,885  |               | $          | 6,070,885          |       | $ | — |   |
|                                                 |       |                |       |               |       |               |       |
| Assets measured at fair value at  June 30, 2008 |       | $                   | 6,070,885  |               | $          | 6,070,885          |       | $ | — |   |

 

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**ITEM 2. MANAGEMENT’S DISCUSSION ANDANALYSIS OR PLAN OF OPERATON.**

 

**ForwardLooking Statements**

 

Some of the information inthis report contains forward-looking information that involve risks anduncertainties.  Our forward-lookingstatements express our current expectations or forecasts of possible futureresults or events, including projections of future performance, statements ofmanagement’s plans and objectives, future contracts, and forecasts of trendsand other matters.  You can identifythese statements by the fact that they do not relate strictly to historic orcurrent facts and often use words such as “anticipate,” “believe,” “plan,” “expect,”“future,” “intend,” “may,” “will,” “should,” “estimate,” “predict,” “potential,”“continue,” and other words and expressions of similar meaning.  No assurance can be given that the results inany forward-looking statement will be achieved and actual results could beaffected by one or more factors, which could cause them to differmaterially.  For these statements, weclaim the protection of the safe harbor for forward-looking statements containedin the Private Securities Litigation Reform Act. You should also considercarefully the statements under “Description of Business - Risk Factors” in our2007 Form 10-KSB, which address factors that could cause our actualresults to differ from those set forth in the forward-looking statements.

 

*CRITICAL ACCOUNTING POLICIES*

 

The following discussion and analysis of financial condition andresults of operations is based upon our consolidated financial statements,which have been prepared in conformity with accounting principles generallyaccepted in the United States of America. Our significant accounting policiesare more fully described in Note 3 of Notes to the unaudited ConsolidatedFinancial Statements. However, certain accounting policies and estimates areparticularly important to the understanding of our financial position andresults of operations and require the application of significant judgment byour management or can be materially affected by changes from period to periodin economic factors or conditions that are outside of our control.  As aresult, they are subject to an inherent degree of uncertainty. In applyingthese policies, our management uses their judgment to determine the appropriateassumptions to be used in the determination of certain estimates. Thoseestimates are based on our historical operations, our future business plans andprojected financial results, the terms of existing contracts, our observance oftrends in the industry, information provided by our customers and informationavailable from other outside sources, as appropriate. The following discussesour significant accounting policies and estimates.

 

*Revenue Recognition:*  We recognize revenue over the periodthe service is performed in accordance with SEC Staff Accounting Bulletin No. 104,“Revenue Recognition in Financial Statements” (“SAB 104”). In general, SAB 104requires that four basic criteria must be met before revenue can be recognized:(1) persuasive evidence that an arrangement exists, (2) delivery hasoccurred or services rendered, (3) the fee is fixed and determinable, and (4) collectibilityis reasonably assured.

 

Advance payments are deferred until shipment. The amount of the revenuedeferred represents the fair value of the remaining undelivered productsmeasured in accordance with Emerging Issues Task Force Issue (“EITF”) 00-21, *“Accounting for Revenue Arrangements with MultipleDeliverables,”* which addresses the issue of accounting forarrangements that involve the delivery of multiple products or services.

 

Revenue from licenses and other up-front fees are recognized on aratable basis over the term of the respective agreement.

 

*Cost of Revenues and Selling, General andAdministrative Expenses and Research and Development Expenses:*  In an effort to consolidate ourexecutive management team, we moved our headquarters from Austin, Texas to TheWoodlands, Texas during the third quarter of 2005.  The primary purpose ofour facility in The Woodlands, Texas is to conduct research on the development,testing and delivery of our prototype devices, and the commercialization of ourproducts.

 

If, in the future, the purposes for which we operate our facility inThe Woodlands, Texas, or any new facilities we open, changes, the allocation ofthe costs incurred in operating that facility between cost of sales andresearch and development expenses could change to reflect such operationalchanges.

 

*Research and Development Expenses:*  Research and development costs areexpensed as incurred and include salaries and benefits, costs paid tothird-party contractors for research, development and manufacturing ofmaterials and devices, and a portion of facilities cost. Prototype developmentcosts are a significant component of research and development expenses andinclude costs associated with third-party contractors. Invoicing fromthird-party contractors for services performed can lag several months. Weaccrue the costs of services rendered in connection with third-party contractoractivities based on our estimate of management fees, site management andmonitoring costs and data management costs. Actual costs may differ in somecases from estimated costs and are adjusted for in the period in which theybecome known.

 

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*Intangible Assets:*  Our intangible assets represent patents and patent applications,acquired from third parties, which are recorded at cost and amortized over thelife of the patent.  We review the value recorded for intangible assets toassess recoverability from future operations using undiscounted cash flows.Impairments are recognized in operating results to the extent the carryingvalue exceeds fair value determined based on the net present value of estimatedfuture cash flows.

 

*Stock-Based Compensation:*  Beginning in the quarter beginning January 1,2006, we adopted SFAS No. 123 (Revised 2004), *“Share Based Payment,”* which eliminates the use of APBOpinion No. 25 and we will be required to measure the cost of employeeservices received in exchange for an award of equity instruments based on thegrant-date fair value of the award. That cost will be recognized over theperiod during which an employee is required to provide service in exchange for thereward—the requisite service period. No compensation cost will be recognizedfor equity instruments for which employees do not render the requisite service.The grant-date fair value of employee share options and similar instrumentswill be estimated using option-pricing models adjusted for the uniquecharacteristics of those instruments. SFAS No. 123 (Revised 2004) must beapplied to all options granted or modified after its effective date and also torecognize the cost associated with the portion of any option awards made beforeits effective date for which the associated service has not been rendered as ofits effective date.

 

Prior to January 1, 2006, we accounted for our stock-basedcompensation under the provisions of Statement of Financial AccountingStandards (“SFAS”) No. 123 — “Accounting for Stock Based Compensation.”Under SFAS No. 123, we are permitted to either record expenses for stockoptions and other employee compensation plans based on their fair value at thedate of grant or to continue to apply the provisions of Accounting PrinciplesBoard Opinion No. 25 “Accounting for Stock Issued to Employees,” (“APB No. 25”),and recognize compensation expense, if any, based on the intrinsic value of theequity instrument at the measurement date. We have elected to continuefollowing the provisions of APB No. 25. Stock options issued to personsother than employees or directors are recorded on the basis of their fair valueas required by SFAS No. 123.

 

*RESULTS OF OPERATIONS*

 

Comparisonof the six months ending June 30, 2008 and 2007

 

REVENUES.  We are a development stage company that has developed,patented and demonstrated a new color display technology in the form of proofof concept prototypes which we call Time Multiplexed Optical Shutter (“TMOS”). We intend to be a leader in the research, development and commercialization ofnew flat panel displays using TMOS in a variety of applications, such as mobilephones, digital cameras, notebook computers, televisions and other consumerelectronic devices. From inception, we have had a limited amount of revenuethat is derived from development contracts.

 

Revenues stayed constant at $0 for the six months ended June 30,2008, as compared to the six months ended June 30, 2007.

 

COST OF REVENUES.  Cost of revenues include all direct expensesassociated with the delivery of services including internal labor costs. Costof revenues for the six months ended June 30, 2008 and the six monthsended June 30, 2007 was $0.

 

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general andadministrative expenses decreased by 45% or approximately $1,519,000, to$1,837,053 for the six months ended June 30, 2008 from $3,356,135 for thesix months ended June 30, 2007.  The major components of the decreaseare as follows:

 

a)  Salaries and benefits decreased by approximately $900,000 to$904,000 for the six months ended June 30, 2008 compared to $1,804,000 forthe six months ended June 30, 2007, due to a decrease in stockcompensation expense of approximately $742,000 to $349,000 for the six monthsended June 30, 2008 compared to $1,091,000 for the six months ended June 30,2007;

 

b) Contract labor decreased by approximately $58,000 to $8,000 for thesix months ended June 30, 2008 compared to $66,000 for the six monthsended June 30, 2007;

 

c) Legal expense increased by approximately $64,000 to $205,000 for thesix months ended June 30, 2008 compared to $141,000 for the six monthsended June 30, 2007;

 

d) Accounting expense increased by approximately $12,000 to $52,000 forthe six months ended June 30, 2008 compared to $40,000 for the six monthsended June 30, 2007;

 

e) Office expense decreased by approximately $27,000 to $44,000 for thesix months ended June 30, 2008 compared to $71,000 for the six monthsended June 30, 2007;

 

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f) Travel expense decreased by approximately $17,000 to $30,000 for thesix months ended June 30, 2008 compared to $47,000 for the six monthsended June 30, 2007;

 

g) Depreciation and amortization expense increased by approximately$17,000 to $148,000 for the six months ended June 30, 2008 compared to$131,000 for the six months ended June 30, 2007;

 

h) A one time professional consulting fee of $697,000 was incurred forthe six months ended June 30, 2007.

 

RESEARCH AND DEVELOPMENT. Research and development expenses increasedby approximately $3,049,000 during the six months ended June 30, 2008 to $4,489,859from $1,441,069 for the six months ended June 30, 2007. The majorcomponents of the increase are as follows:

 

a) Salaries and benefits attributable to research and developmentincreased by approximately $769,000 to $1,340,000 for the six months ended June 30,2008 compared to $571,000 for the six months ended June 30, 2007 due to anincrease in the number of research and development employees and the level ofcompensation for these employees and due to an increase in stock compensationexpense of approximately $169,000 to $239,000 for the six months ended June 30,2008 compared to $70,000 for the six months ended June 30, 2007;

 

b) Consulting expense attributable to research and developmentincreased by approximately $272,000 to $770,000 for the six months ended June 30,2008 compared to $498,000 for the six months ended June 30, 2007 primarilydue to increased services related to prototype development;

 

c) Lab expense increased by approximately $1,856,000 to $2,037,000 forthe six months ended June 30, 2008 compared to $181,000 for the six monthsended June 30, 2007 primarily due to increased services related toprototype development; and

 

d) Travel expense attributable to research and development increased byapproximately $97,000 to $210,000 for the six months ended June 30, 2007compared to $113,000 for the six months ended June 30, 2006.

 

OTHER INCOME (EXPENSE).

 

a) Net decrease in fair value of derivative liabilities was an incomeof $382,920 for the six months ended June 30, 2007, relating to theWarrant issued in connection with the 12% Senior Secured Convertible Debenturesin May 2006 and the Warrant issued in connection with the 10% SeniorUnsecured Convertible Debentures in September 2006.

 

b) Debt issuance expense was $94,189 for the six months ended June 30,2007, due to the debt raised in May 2006 and September 2006.

 

c)****Interest income(expense), net increased to income of $142,939 for the six months ended June 30,2008 as compared to $(977,081) for the six months ended June 30, 2007, primarilydue to a) more cash on hand during the six months ended June 30, 2008 andb) during the six months ended June 30, 2007, the payment of interest onthe $1,500,000 loan received in May 2006, the amortization of the discounton the Warrant issued in connection with the 12% Senior Secured ConvertibleDebentures in May 2006, the payment of interest on the $900,000 loanreceived in September 2006, and the amortization of the discount on theWarrant issued in connection with the 10% Senior Unsecured ConvertibleDebentures in September 2006.

 

NET LOSS.**  **Netloss increased to $6,183,973 for the six months ended June 30, 2008, ascompared to $5,485,554 for the six months ended June 30, 2007. We computeour net loss per share on the basis of net loss attributable to commonstockholders, which included the effects of certain items not included in thedetermination of net loss. Net loss attributable to common stockholders for thesix months ended June 30, 2008 was $8,561,789 as compared to a net lossattributable to common stockholders of $6,664,053 for the six months ended June 30,2007. The net loss attributable to common stockholders for the six months endedJune 30, 2008 includes $2,377,816 of accrued but unpaid preferred stockdividends and amortization of preferred stock discount.  The net loss attributable to commonstockholders for the six months ended June 30, 2007 includes $1,178,499 ofaccrued but unpaid preferred stock dividends and amortization of preferredstock discount.

 

Comparisonof the three months ending June 30, 2008 and 2007

 

REVENUES.  We are a development stage company that has developed,patented and demonstrated a new color display technology in the form of proofof concept prototypes which we call Time Multiplexed Optical Shutter (“TMOS”). We intend to be a leader in the research, development and commercialization ofnew flat panel displays using TMOS in a variety of applications, such as mobilephones, digital cameras, notebook computers, televisions and other consumerelectronic devices. From inception, we have had a limited amount of revenuethat is derived from development contracts.

 

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Revenues were $0 for the three months ended June 30, 2008 and thethree months ended June 30, 2007.

 

COST OF REVENUES.  Cost of revenues include all direct expensesassociated with the delivery of services including internal labor costs. Costof revenues for the three months ended June 30, 2008 and the three monthsended June 30, 2007 was $0.

 

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general andadministrative expenses increased by 4% or $40,000, to $1,000,209 for the threemonths ended June 30, 2008 from $959,872 for the three months ended June 30,2007.  The major components of the increase are as follows:

 

a)  Salaries and benefits decreased by approximately $67,000 to$494,000 for the three months ended June 30, 2008 compared to $561,000 forthe three months ended June 30, 2007 due to a decrease in stockcompensation expense of approximately $50,000 to $141,000 for the three monthsended June 30, 2008 compared to $191,000 for the three months ended June 30,2007;

 

b) Contract labor decreased by approximately $2,000 to $5,000 for thethree months ended June 30, 2008 compared to $7,000 for the three monthsended June 30, 2007;

 

c) Legal expense increased by approximately $87,000 to $139,000 for thethree months ended June 30, 2008 compared to $52,000 for the three monthsended June 30, 2007;

 

d) Accounting expense decreased by approximately $2,000 to $20,000 forthe three months ended June 30, 2008 compared to $22,000 for the threemonths ended June 30, 2007;

 

e) Office expense decreased by approximately $23,000 to $20,000 for thethree months ended June 30, 2008 compared to $43,000 for the three monthsended June 30, 2007;

 

f) Travel expense decreased by approximately $2,000 to $16,000 for thethree months ended June 30, 2008 compared to $18,000 for the three monthsended June 30, 2007;

 

g) Depreciation and amortization expense increased by approximately$12,000 to $78,000 for the three monthes ended June 30, 2008 compared to$66,000 for the three months ended June 30, 2007.

 

RESEARCH AND DEVELOPMENT. Research and development expenses increasedby approximately $1,272,000 during the three months ended June 30, 2008 to$2,221,722 from $949,831 for the three months ended June 30, 2007. Themajor components of the increase are as follows:

 

a) Salaries and benefits attributable to research and developmentincreased by approximately $433,000 to $731,000 for the three months ended June 30,2008 compared to $298,000 for the three months ended June 30, 2007 due toan increase in the number of research and development employees and the levelof compensation for these employees and due to an increase in stockcompensation expense of approximately $76,000 to $111,000 for the three monthsended June 30, 2008 compared to $35,000 for the three months ended June 30,2007;

 

b) Consulting expense attributable to research and developmentdecreased by approximately $103,000 to $263,000 for the three months ended June 30,2008 compared to $366,000 for the three months ended June 30, 2007;

 

c) Lab expense increased by approximately $886,000 to $1,051,000 forthe thee months ended June 30, 2008 compared to $165,000 for the threemonths ended June 30, 2007 primarily due to increased services related toprototype development; and

 

d) Travel expense attributable to research and development increased byapproximately $18,000 to $107,000 for the three months ended June 30, 2008compared to $89,000 for the three months ended June 30, 2007.

 

OTHER INCOME (EXPENSE).

 

a)****Interest income(expense), net decreased to $46,219 for the three months ended June 30,2008 as compared to $74,169 for the three months ended June 30, 2007primarily due to less cash on hand.

 

NET LOSS.**  **Netloss increased to $3,175,712 for the three months ended June 30, 2008, ascompared to $1,835,534 for the three months ended June 30, 2007. Wecompute our net loss per share on the basis of net loss attributable to commonstockholders, which included the effects of certain items not included in thedetermination of net loss. Net loss attributable to 

 

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common stockholders for thethree months ended June 30, 2008 was $4,367,031 as compared to a net lossattributable to common stockholders of $2,559,701 for the three months ended June 30,2007. The net loss attributable to common stockholders for the three monthsended June 30, 2008 includes $1,191,319 of accrued but unpaid preferredstock dividends and amortization of preferred stock discount.  The net loss attributable to commonstockholders for the three months ended June 30, 2007 includes $724,167 ofaccrued but unpaid preferred stock dividends.

 

**Off-Balance Sheet Transactions**

 

We do not engage in material off-balance sheet transactions.

 

*LIQUIDITY AND CAPITAL RESOURCES*

 

OperatingActivities

 

Cash used in operating activities during the six months ended June 30,2008 increased to $5,185,637 as compared to $3,866,776 used for the six monthsended June 30, 2007. This is primarily attributable to an increase inresearch and development expense for the six months ended June 30, 2008and is offset by the one time cash Consulting Fee expense of $480,000 thatincurred during the six months ended June 30, 2007.

 

InvestingActivities

 

Cash used for investing activities during the six months ended June 30,2008 amounted to $440,903, as compared to $47,068 used for investing activitiesfor the six months ended June 30, 2007. This is primarily attributable tothe acquisition of patents and patent applications in the second quarter of2008 in the amount of approximately $197,000.

 

FinancingActivities

 

We have financed our operating and investing activities primarily fromthe proceeds of private placements of common stock, convertible investor notes,Series A Convertible Preferred Stock offering which we closed in December 2004and January 2005 and Series B Convertible Preferred Stock offeringwhich we closed in February 2007 and Series C Convertible PreferredStock offering we closed in September 2007. During the six months ended June 30,2008, the total net cash provided by financing activities was $0.  During the six months ended June 30,2007, the total net cash provided by financing activities was $9,598,720, whichincludes: a) $2,401,280 payments on notes payable and b) $12,000,000 netproceeds from the issuance of Series B Convertible Preferred Stock.

 

WorkingCapital

 

As of June 30, 2008, we had a cash balance of $6.1 million. We project that current cash reserves will sustain our operations at leastthrough December 2008, and we are not aware of any trends or potentialevents that are likely to impact our short term liquidity through this term.

 

On February 13, 2007, we entered into a Securities Purchase Agreement(the “Purchase Agreement”) with The Raptor Global Portfolio Ltd., The Tudor BVIGlobal Portfolio Ltd., Tudor Proprietary Trading, L.L.C. and The Altar RockFund L.P. (collectively, the “Purchasers”) pursuant to which we sold on thatdate in a private placement to the Purchasers (a) 3,200,000 authorized butunissued shares of the Company’s Series B Preferred Stock, par value$0.001 per share (the “Series B Preferred Stock”), and (b) warrants (the “Warrants”)to purchase, in aggregate, up to 6,839,279 shares at $1.24 per share, of theCompany’s common stock, par value $0.001, for an aggregate purchase price of$12,000,000.

 

On September 28, 2007, the Company entered into a SecuritiesPurchase Agreement (the “ ML Purchase Agreement”) with Merrill Lynch Pierce,Fenner & Smith Incorporated (the “ ML Purchaser”) pursuant to whichthe Company sold on that date in a private placement to the ML Purchaser (a) 892,858authorized but unissued shares of the Company’s Series C Preferred Stock,par value $0.001 per share (the “Series C Preferred Stock”), and (b) warrants(the “ML Warrants”) to purchase, in aggregate, up to 3,214,289 shares of theCompany’s common stock, par value $0.001 for an aggregate purchase price of$10,000,010.

 

Weare a development stage company and have not experienced significant operationssince our formation. We reached a positive working capital position as of thefirst quarter of 2005 as a result of our financing activities. We have incurredsignificant operating losses during the years ended December 31, 2002,2003, 2004, 2005, 2006 and 2007 and the six months ended June 30, 2008. Weintend to utilize a proprietary methodology for development of our displays.Our principal activities, from the beginning of the development stage, havebeen organizational matters, capital raising activities including issuance ofstock, product research and development, fund raising, and market research.

 

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Todate, we have had only a few revenue-generating services or developmentcontracts.  These include a prototype development agreement with a largepersonal computer company, and a Small Business Innovation Research (SBIR)Phase One agreement with the U.S. Air Force for $98,214 and a follow-on PhaseTwo agreement for $686,966.  We also entered into a prototype developmentagreement with Lockheed Martin, a large military contractor, in October 2005,for which we have received full payment. Our immediate customer prospects are limited to Lockheed Martin, withwhich we entered into a License and Strategic Business Agreement dated October 5,2005.  See “Risk Factors” included in our2007 Form 10-KSB.

 

Managementwill work to establish specific applications for our display technology thatwill generate significant revenues and cash flows to support operations.

 

**ITEM 3.  QUANTITATIVE ANDQUALITATIVE DISCLOSURES ABOUT MARKET RISK.**

 

Not applicable.

 

**ITEM 4.  CONTROLS ANDPROCEDURES.**

 

DisclosureControls and Procedures

 

As of June 30, 2008, management, including our Chief ExecutiveOfficer and Chief Financial Officer, performed an evaluation of theeffectiveness of the design and operation of our disclosure controls andprocedures, as defined in Rules 13a-15(e) and 15d-15(e) underthe Securities Exchange Act of 1934. Based on their evaluation, management concluded that, as of June 30,2008, our disclosure controls and procedures are effective to ensure thatmaterial information required to be disclosed by us in the reports that we fileor submit under the Securities Exchange Act of 1934, as amended, is recorded,processed, summarized and reported, within the time periods specified in theSecurities and Exchange Commission’s rules and forms, and that it isaccumulated and communicated to management, including our Chief ExecutiveOfficer and Chief Financial Officer, as appropriate, to allow timely decisionsregarding required disclosure.

 

Changesin Internal Control Over Financial Reporting

 

We maintain a system of internal control over financial reporting thatis designed to provide reasonable assurance regarding the reliability offinancial reporting and the preparation of financial statements for externalpurposes in accordance with accounting principles generally accepted in theUnited States.  Based on the most recentevaluation, our Chief Executive Officer and Chief Financial Officer havedetermined that no significant changes in our internal control over financialreporting occurred during our most recent fiscal quarter that have materiallyaffected, or are reasonably like to materially affect, our internal controlover financial reporting.

 

**PART II - OTHER INFORMATION**

 

**ITEM 6. EXHIBITS.**

 
| **Exhibit  No.** | ** ** | **Description**                                                                                                                              |
|------------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------|
| 3.1              |       | Amended  and Restated Certificate of Incorporation of  Real-Estateforlease.com, Inc. (1)                                                |
| 3.2              |       | Amended  and Restated Bylaws of Uni-Pixel, Inc. (1)                                                                                     |
| 4.1              |       | Certificate  of Designations of Real-Estateforlease.com, Inc. Series A  Convertible Preferred Stock (1)                            |
| 4.2              |       | Junior  Subordinated Unsecured Promissory Note (1)                                                                                           |
| 4.3              |       | Common  Stock Purchase Warrant No. 1 (1)                                                                                                |
| 4.4              |       | Common  Stock Purchase Warrant No. 2 (1)                                                                                                |
| 4.5              |       | Common  Stock Purchase Warrant No. 3 (1)                                                                                                |
| 4.6              |       | Form of  Common Stock certificate (2)                                                                                                   |
| 4.7              |       | Uni-Pixel, Inc.  12% Senior Secured Convertible Debenture No. 1 issued to Trident Growth  Fund, L.P., dated May 24, 2006. (3) |
| 4.8              |       | Uni-Pixel, Inc.  12% Senior Secured Convertible Debenture No. 1 issued to CapSource Fund,  L.P., dated May 24, 2006. (3)      |
| 4.9              |       | Uni-Pixel, Inc.  10% Senior Unsecured Convertible Debenture dated September 12, 2006.(4)                                           |
| 4.10             |       | Common  Stock Purchase Warrant No. 1 issued to Trident Growth Fund, L.P., dated  May 24, 2006. (3)                                 |
| 4.11             |       | Common  Stock Purchase Warrant No. 1 issued to CapSource Fund, L.P., dated  May 24, 2006. (3)                                      |
| 4.12             |       | Common  Stock Purchase Warrant dated September 12, 2006. (4)                                                                            |
| 10.1             |       | Securities  Purchase Agreement dated May 24, 2006, by and between  Uni-Pixel, Inc., Uni-Pixel Displays, Inc., Trident    |

 

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|   |   | Growth  Fund, L.P. and CapSource Fund, L.P. (3)                                                                                                                           |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.2   |   | Security  Agreement dated May 24, 2006, by and between Uni-Pixel, Inc.,  Uni-Pixel Displays, Inc., Trident Growth Fund, L.P. and CapSource Fund,  L.P. (3) |
| 10.3   |   | Securities  Purchase Agreement dated September 12, 2006 (4)                                                                                                          |
| 31.1   |   | Certification  of the President and Principal Executive Officer of Uni-Pixel, Inc.,  pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (5)              |
| 31.2   |   | Certification  of the Chief Financial Officer of Uni-Pixel, Inc., pursuant to  Section 302 of the Sarbanes-Oxley Act of 2002 (5)                                |
| 32.1   |   | Certification  of the President and Principal Executive Officer of Uni-Pixel, Inc.,  pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (5)              |
| 32.2   |   | Certification  of the Chief Financial Officer of Uni-Pixel, Inc., pursuant to  Section 906 of the Sarbanes-Oxley Act of 2002 (5)                                |

 

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| (1) |   | Previously  filed as an exhibit to the Company’s Form 10-SB, filed on  February 18, 2005, and incorporated by reference hereto. |
|-----|--------|------------------------------------------------------------------------------------------------------------------------------------------------|
| (2) |   | Previously  filed as an exhibit to the Company’s Form 10-KSB, filed on  March 28, 2006, and incorporated by reference hereto.   |
| (3) |   | Previously  filed as an exhibit to the Company’s Form 10-QSB, filed on  August 14, 2006, and incorporated by reference hereto.  |
| (4) |   | Previously  filed as an exhibit to the Company’s Form 8-K, filed on September, 2006,  and incorporated by reference hereto.          |
| (5) |   | Filed  herewith                                                                                                                                |

 

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**SIGNATURES**

 

Inaccordance with the requirements of the Exchange Act, the registrant causedthis report to be signed on its behalf by the undersigned, thereunto dulyauthorized.

 
|                  | **UNI-PIXEL, INC.** |
|-----------------------|---------------------|
|                  |                |   |
|                  |                |   |
| August 12,  2008 |                | By: | /s/ James  A. Tassone |
| Date                  |                | James  A. Tassone, Chief Financial Officer |
|                       |                     |  |  |

 

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