**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON,D.C. 20549**

 

**FORM 10-QSB**

 
| **x**                                                       | ** ** | **QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF  THE SECURITIES EXCHANGE ACT OF 1934**                                                                                      |
|-------------------------------------------------------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ** **                                                  |
| **For the  Quarterly Period Ended September 30, 2007** |
|                                                        |
| **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 SmallBusiness Issuer as Specified in Its Charter)

 

| **DELAWARE**                                                                  | ** ** | **75-2926437**                        |
|-------------------------------------------------------------------------------|------------|---------------------------------------|
| (State or Other  Jurisdiction of  Incorporation or Organization)              |       | (I.R.S. Employer  Identification No.) |
|                                                                          |       |                                  |
| **8708  Technology Forest Place, Suite 100  The Woodlands, Texas 77381** |
| (Address of Principal  Executive Offices)                                     |
| ** **                                                                    | ** ** | ** **                            |
| **(281)  825-4500**                                                           |
| (Issuer’s Telephone  Number, Including Area Code)                        |

 

Check whether the issuer: (1) filed all reportsrequired to be filed by Section 13 or 15(d) of the Exchange Actduring the past 12 months (or for such shorter period that the registrant wasrequired to file such reports), and (2) has been subject to such filingrequirements for the past 90 days.  x Yes o No

 

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

 

As of November 1, 2007, the issuer had18,758,056 shares of issued and outstanding common stock, par value $0.001 pershare.

 

Transitional Small Business Disclosure Format (CheckOne):   Yes o   No x

 

 

----

 

**TABLE OFCONTENTS**

 
| Part I.  | Financial Information                                                                                                                                                                                                                        |   |
|---------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|
|          |                                                                                                                                                                                                                                         |   |
| Item 1.       | Financial Statements                                                                                                                                                                                                                         |   |
|          |                                                                                                                                                                                                                                         |   |
|          | Consolidated  Balance Sheets  September 30, 2007 (unaudited) and December 31, 2006                                                                                                                                                 |   |
|          |                                                                                                                                                                                                                                         |   |
|          | Consolidated  Statements of Operations  Nine months ended September 30, 2007 (unaudited) and September 30,  2006 (unaudited) and cumulative period from inception (February 17,  1998) to September 30, 2007 (unaudited) |   |
|          |                                                                                                                                                                                                                                         |   |
|          | Three months  ended September 30, 2007 (unaudited) and September 30, 2006  (unaudited)                                                                                                                                             |   |
|          |                                                                                                                                                                                                                                         |   |
|          | Consolidated  Statements of Shareholders’ Equity (Deficit)  From inception (February 17, 1998) to September 30, 2007  (unaudited)                                                                                             |   |
|          |                                                                                                                                                                                                                                         |   |
|          | Consolidated  Statements of Cash Flows  Nine months ended September 30, 2007 (unaudited) and September 30,  2006 (unaudited) and cumulative period from inception (February 17,  1998) to September 30, 2007 (unaudited) |   |
|          |                                                                                                                                                                                                                                         |   |
|          | Notes to  Unaudited Consolidated Financial Statements                                                                                                                                                                                        |   |
|          |                                                                                                                                                                                                                                         |   |
| Item 2.       | Management’s Discussion and Analysis or  Plan of Operation                                                                                                                                                                              |   |
|          |                                                                                                                                                                                                                                         |   |
| Item 3.       | Controls and Procedures                                                                                                                                                                                                                      |   |
|          |                                                                                                                                                                                                                                         |   |
| Part II. | Other Information                                                                                                                                                                                                                            |   |
|          |                                                                                                                                                                                                                                         |   |
| Item 2.       | Unregistered Sales of Equity Securities and  Use of Proceeds                                                                                                                                                                                 |   |
|          |                                                                                                                                                                                                                                         |   |
| Item 5.       | Other Information                                                                                                                                                                                                                            |   |
|          |                                                                                                                                                                                                                                         |   |
| Item 6.       | Exhibits                                                                                                                                                                                                                                     |   |

 

2

----

 

**PART I - FINANCIAL INFORMATION**

 

**ITEM 1.FINANCIAL STATEMENTS.**

 

Uni-Pixel, Inc.

(A Development StageCompany)

ConsolidatedBalance Sheets

 
| ** **                                                                                                                                                                                                                                                                                                             | ** ** | **September 30,  2007** | ** ** | **December 31,  2006** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------|------------|-----------------------------|------------|
| ** **                                                                                                                                                                                                                                                                                                             | ** ** | **(unaudited)**              | ** ** | **(audited)**               | ** ** |
| **ASSETS**                                                                                                                                                                                                                                                                                                             |       |                         |       |                        |       |
| Current  assets                                                                                                                                                                                                                                                                                                        |       |                         |       |                        |       |
| Cash and  cash equivalents                                                                                                                                                                                                                                                                                             |       | $                            | 13,792,224 |                        | $          | 20,188 |   |
| Current  portion of restricted cash                                                                                                                                                                                                                                                                                    |       | —                       |       | 5,123                       |       |
| Deferred  loan costs, net                                                                                                                                                                                                                                                                                              |       | —                       |       | 94,189                      |       |
| Prepaid  expenses                                                                                                                                                                                                                                                                                                      |       | 18,965                       |       | 16,965                      |       |
|                                                                                                                                                                                                                                                                                                                   |       |                         |       |                        |       |
| Total  current assets                                                                                                                                                                                                                                                                                                  |       | 13,811,189                   |       | 136,465                     |       |
|                                                                                                                                                                                                                                                                                                                   |       |                         |       |                        |       |
| Property and  equipment, net of accumulated depreciation of $655,887 and $464,564, at September 30,  2007 and December 31, 2006, respectively                                                                                                                                                                |       | 518,005                      |       | 641,385                     |       |
| Restricted  cash, less current portion                                                                                                                                                                                                                                                                                 |       | 34,877                       |       | 34,877                      |       |
|                                                                                                                                                                                                                                                                                                                   |       |                         |       |                        |       |
| Total assets                                                                                                                                                                                                                                                                                                           |       | $                            | 14,364,071 |                        | $          | 812,727 |   |
|                                                                                                                                                                                                                                                                                                                   |       |                         |       |                        |       |
| **LIABILITIES  AND SHAREHOLDERS’ EQUITY (DEFICIT)**                                                                                                                                                                                                                                                               |       |                         |       |                        |       |
|                                                                                                                                                                                                                                                                                                                   |       |                         |       |                        |       |
| Current  liabilities                                                                                                                                                                                                                                                                                                   |       |                         |       |                        |       |
| Accounts  payable                                                                                                                                                                                                                                                                                                      |       | $                            | 296,992    |                        | $          | 428,733 |   |
| Accrued  expenses                                                                                                                                                                                                                                                                                                      |       | 326,025                      |       | 668,000                     |       |
| Deferred  revenue                                                                                                                                                                                                                                                                                                      |       | 33,333                       |       | 33,333                      |       |
| Derivative  liabilities for Warrants                                                                                                                                                                                                                                                                                   |       | —                       |       | 943,288                     |       |
| Current  portion of notes payable, net of unamortized discounts of $0 and $955,419 at September 30,  2007 and December 31, 2006, respectively                                                                                                                                                                |       | —                       |       | 1,448,571                   |       |
|                                                                                                                                                                                                                                                                                                                   |       |                         |       |                        |       |
| Total  current liabilities                                                                                                                                                                                                                                                                                             |       | 656,350                      |       | 3,521,925                   |       |
|                                                                                                                                                                                                                                                                                                                   |       |                         |       |                        |       |
| Note  payable, less current portion                                                                                                                                                                                                                                                                                    |       | —                       |       | 9,487                       |       |
|                                                                                                                                                                                                                                                                                                                   |       |                         |       |                        |       |
| Total liabilities                                                                                                                                                                                                                                                                                                      |       | 656,350                      |       | 3,531,412                   |       |
|                                                                                                                                                                                                                                                                                                                   |       |                         |       |                        |       |
| Commitments  and contingencies (Note 4)                                                                                                                                                                                                                                                                                |       | —                       |       | —                      |       |
|                                                                                                                                                                                                                                                                                                                   |       |                         |       |                        |       |
| Redeemable  convertible Series B Preferred stock, $0.001 par value; $3.75  liquidation preference; 3,200,000 shares authorized, 3,200,000 and 0 issued  and outstanding at September 30, 2007 and December 31, 2006,  respectively, less unamortized discount of $6,502,304 at September 30,  2007 |       | 5,497,697                    |       | —                      |       |
|                                                                                                                                                                                                                                                                                                                   |       |                         |       |                        |       |
| Redeemable  convertible Series C Preferred stock, $0.001 par value; $11.20  liquidation preference; 892,858 shares authorized, 892,858 and 0 issued and  outstanding at September 30, 2007 and December 31, 2006,  respectively, less unamortized discount of $7,619,288 at September 30,  2007    |       | 2,300,051                    |       | —                      |       |
|                                                                                                                                                                                                                                                                                                                   |       |                         |       |                        |       |
| Shareholders’  equity (deficit)                                                                                                                                                                                                                                                                                   |       |                         |       |                        |       |
| Series A  Preferred stock, $0.001 par value; $3.50 liquidation preference; 4,500,000  shares authorized, 1,474,249 and 2,369,451 issued and outstanding at September 30,  2007 and December 31, 2006, respectively                                                                                      |       | 1,474                        |       | 2,369                       |       |
| Common  stock, $0.001 par value; 100,000,000 shares and 40,000,000 shares authorized  at September 30, 2007 and December 31, 2006, respectively,  18,758,056 and 16,311,973 issued and outstanding at September 30, 2007  and December 31, 2006, respectively                                      |       | 18,758                       |       | 16,312                      |       |
| Additional  paid-in capital                                                                                                                                                                                                                                                                                            |       | 35,583,838                   |       | 18,798,407                  |       |
| Accumulated  deficit during development stage                                                                                                                                                                                                                                                                          |       | (29,694,097                  | )          | (21,535,773                 | )          |
|                                                                                                                                                                                                                                                                                                                   |       |                         |       |                        |       |
| Total  shareholders’ equity (deficit)                                                                                                                                                                                                                                                                             |       | 5,909,973                    |       | (2,718,685                  | )          |
|                                                                                                                                                                                                                                                                                                                   |       |                         |       |                        |       |
| Total  liabilities and shareholders’ equity                                                                                                                                                                                                                                                                       |       | $                            | 14,364,071 |                        | $          | 812,727 |   |

 

*The accompanying notes are an integral part of theseconsolidated financial statements.*

 

3

----

 

Uni-Pixel, Inc.

(A Development StageCompany)

ConsolidatedStatements of Operations

(unaudited)

 
| ** **                                                              | ** ** | **Nine Months Ended  September 30,** | ** **  | **Cumulative  Period from  February 17, 1998  (date of inception)  to September 30,** | ** ** |
|-------------------------------------------------------------------------|------------|-----------------------------------------------------|-------------|--------------------------------------------------------------------------------------------------------------------------|------------|
| ** **                                                              | ** ** | **2007**                                            | ** **  | **2006**                                                                                                                 | ** ** | **2007** | ** ** |
|                                                                    |       |                                                |        |                                                                                                                     |       |   |   |
| Revenues                                                                |       |                                                |        |                                                                                                                     |       |   |   |
| Development  contract revenue                                           |       | $                                                   | —      |                                                                                                                     | $          | 200,000 |   | $ | 1,158,201 |   |
|                                                                    |       |                                                |        |                                                                                                                     |       |   |   |
| Total  revenues                                                         |       | —                                              |        | 200,000                                                                                                                  |       | 1,158,201 |   |
|                                                                    |       |                                                |        |                                                                                                                     |       |   |   |
| Cost of  revenues                                                       |       | —                                              |        | —                                                                                                                   |       | 456,648 |   |
|                                                                    |       |                                                |        |                                                                                                                     |       |   |   |
| Gross margin                                                            |       | —                                              |        | 200,000                                                                                                                  |       | 701,553 |   |
|                                                                    |       |                                                |        |                                                                                                                     |       |   |   |
| Selling,  general and administrative expenses                           |       | 4,959,433                                           |        | 2,358,037                                                                                                                |       | 15,349,353 |   |
| Research and  development                                               |       | 2,516,597                                           |        | 2,290,039                                                                                                                |       | 12,345,720 |   |
|                                                                    |       |                                                |        |                                                                                                                     |       |   |   |
| Operating  loss                                                         |       | (7,476,030                                          | )           | (4,448,076                                                                                                               | )          | (26,993,520 | ) |
|                                                                    |       |                                                |        |                                                                                                                     |       |   |   |
| Other income  (expense)                                                 |       |                                                |        |                                                                                                                     |       |   |   |
| Net decrease  (increase) in fair value of derivative liability          |       | 382,920                                             |        | 240,523                                                                                                                  |       | 845,079 |   |
| Other income                                                            |       | —                                              |        | —                                                                                                                   |       | 886,886 |   |
| Debt  issuance expense                                                  |       | (94,189                                             | )           | (38,297                                                                                                                  | )          | (644,346 | ) |
| Interest  expense, net                                                  |       | (914,166                                            | )           | (273,785                                                                                                                 | )          | (2,423,967 | ) |
|                                                                    |       |                                                |        |                                                                                                                     |       |   |   |
| Net loss                                                                |       | $                                                   | (8,101,465  | )                                                                                                                        | $          | (4,519,635 | ) | $ | (28,329,868 | ) |
|                                                                    |       |                                                |        |                                                                                                                     |       |   |   |
| Preferred  stock dividends and amortization of discount                 |       | (1,899,866                                          | )           | (379,609                                                                                                                 | )          | (3,207,236 | ) |
| Net loss  attributable to common shareholders                           |       | $                                                   | (10,001,331 | )                                                                                                                        | $          | (4,899,244 | ) | $ | (31,537,104 | ) |
|                                                                    |       |                                                |        |                                                                                                                     |       |   |   |
| Per share  information                                                  |       |                                                |        |                                                                                                                     |       |   |   |
| Net loss –  basic and diluted                                      |       | $                                                   | (0.45       | )                                                                                                                        | $          | (0.28 | ) | $ | (3.59 | ) |
| Preferred  stock dividends                                              |       | (0.11                                               | )           | (0.02                                                                                                                    | )          | (0.40 | ) |
| Net loss  attributable to common shareholders – basic and diluted  |       | $                                                   | (0.56       | )                                                                                                                        | $          | (0.30 | ) | $ | (3.99 | ) |
|                                                                    |       |                                                |        |                                                                                                                     |       |   |   |
| Weighted  average number of basic and diluted common shares outstanding |       | 17,989,369                                          |        | 15,938,440                                                                                                               |       | 7,898,246 |   |

 

*The accompanying notes are an integral part of theseconsolidated financial statements.*

 

4

----

 

Uni-Pixel, Inc.

(A Development StageCompany)

ConsolidatedStatements of Operations

(unaudited)

 
| ** **                                                              | ** ** | **Three Months Ended  September 30,** | ** ** |
|-------------------------------------------------------------------------|------------|------------------------------------------------------|------------|
| ** **                                                              | ** ** | **2007**                                             | ** ** | **2006** | ** ** |
|                                                                    |       |                                                 |       |   |   |
| Revenues                                                                |       |                                                 |       |   |   |
| Development  contract revenue                                           |       | $                                                    | —     |   | $ | — |   |
|                                                                    |       |                                                 |       |   |   |
| Total  revenues                                                         |       | —                                               |       | — |   |
|                                                                    |       |                                                 |       |   |   |
| Cost of  revenues                                                       |       | —                                               |       | — |   |
|                                                                    |       |                                                 |       |   |   |
| Gross margin                                                            |       | —                                               |       | — |   |
|                                                                    |       |                                                 |       |   |   |
| Selling,  general and administrative expenses                           |       | 1,603,298                                            |       | 747,049 |   |
| Research and  development                                               |       | 1,075,528                                            |       | 471,733 |   |
|                                                                    |       |                                                 |       |   |   |
| Operating  loss                                                         |       | (2,678,826                                           | )          | (1,218,782 | ) |
|                                                                    |       |                                                 |       |   |   |
| Other income  (expense)                                                 |       |                                                 |       |   |   |
| Net increase  in fair value of derivative liability                     |       | —                                               |       | 388,232 |   |
| Debt  issuance expense                                                  |       | —                                               |       | (28,674 | ) |
| Interest  income (expense), net                                         |       | 62,915                                               |       | (200,234 | ) |
|                                                                    |       |                                                 |       |   |   |
| Net loss                                                                |       | $                                                    | (2,615,911 | ) | $ | (1,059,458 | ) |
|                                                                    |       |                                                 |       |   |   |
| Preferred  stock dividends and amortization of discount                 |       | (721,367                                             | )          | (122,203 | ) |
| Net loss  attributable to common shareholders                           |       | $                                                    | (3,337,278 | ) | $ | (1,181,661 | ) |
|                                                                    |       |                                                 |       |   |   |
| Per share  information                                                  |       |                                                 |       |   |   |
| Net loss –  basic and diluted                                      |       | $                                                    | (0.14      | ) | $ | (0.06 | ) |
| Preferred  stock dividends                                              |       | (0.04                                                | )          | (0.01 | ) |
| Net loss  attributable to common shareholders – basic and diluted  |       | $                                                    | (0.18      | ) | $ | (0.07 | ) |
|                                                                    |       |                                                 |       |   |   |
| Weighted  average number of basic and diluted common shares outstanding |       | 18,758,056                                           |       | 16,161,339 |   |

 

*The accompanying notes are an integral part of theseconsolidated financial statements.*

 

5

----

 

Uni-Pixel, Inc.

(ADevelopment Stage Company)

Consolidated Statements of Shareholders’ Equity (Deficit)

 
| ** **                                                                               | ** ** | **Series A  Preferred Stock** | ** **            | ** ** | ** ** | **Additional  Paid-In  Capital** | ** ** | **Deferred  Stock-Based  Compensation** | ** ** | **Accumulated  Deficit  During  Development  Stage** | ** ** | **Total  Shareholders’  Equity  (Deficit)** | ** ** |
|------------------------------------------------------------------------------------------|------------|-----------------------------------------|-----------------------|------------|------------|----------------------------------|------------|-----------------------------------------|------------|------------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                                                               |
| **Number  of  Shares**                                                                   | ** ** | **Amount**                              | **Common Stock** |
| **Number of  Shares**                                                               | ** ** | **Amount**                              |
| 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 |       | (895,202                                | )                     | (895       | )          | 2,406,083                        |       | 2,406                                   |       | 55,348                                               |       | —                                           |       | (56,859 | ) | — |   |
| Stock compensation expense                                                               |       | —                                  |                  | —     |       | —                           |       | —                                  |       | 1,715,627                                            |       | —                                           |       | — |   | 1,715,627 |   |
| Issuance of warrants to consultants                                                      |       | —                                  |                  | —     |       | —                           |       | —                                  |       | 280,136                                              |       | —                                           |       | — |   | 280,136 |   |
| 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                               |       | —                                  |                  | —     |       | —                           |       | (928,900                                | )          | —                                               |       | —                                           |       |   |   | (928,900 | ) |
| Reclassification of derivative liabilities to equity                                     |       | —                                  |                  | —     |       | —                           |       | —                                  |       | 560,368                                              |       | —                                           |       | — |   | 560,368 |   |
| Net loss                                                                                 |       | —                                  |                  | —     |       | —                           |       | —                                  |       | —                                               |       | —                                           |       | (8,101,465 | ) | (8,101,465 | ) |
| Balance, September 30, 2007 (unaudited)                                             |       | 1,474,249                               |                  | $          | 1,474      |                             | 18,758,056 |                                    | $          | 18,758                                               |       | $                                                | 35,583,838 |   | $ | — |   | $ | (29,694,097 | ) | $ | 5,909,973 |   |

 

*Theaccompanying notes are an integral part of these consolidated financialstatements.*

 

6

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Uni-Pixel, Inc.

(A Development StageCompany)

ConsolidatedStatements of Cash Flows

(unaudited)

 
| ** **                                                                     | ** ** | **Nine Months Ended  September 30,** | ** ** | **Cumulative Period  from February 18,  1998 (date of  inception) to  September 30,** | ** ** |
|--------------------------------------------------------------------------------|------------|-----------------------------------------------------|------------|--------------------------------------------------------------------------------------------------------------------------|------------|
| ** **                                                                     | ** ** | **2007**                                            | ** ** | **2006**                                                                                                                 | ** ** | **2007** | ** ** |
| Cash flows  from operating activities                                          |       |                                                |       |                                                                                                                     |       |   |   |
| Net loss                                                                       |       | $                                                   | (8,101,465 | )                                                                                                                        | $          | (4,519,635 | ) | $ | (28,329,868 | ) |
| Adjustments  to reconcile net loss to net cash used in operating activities:   |       |                                                |       |                                                                                                                     |       |   |   |
| Interest  forgiven                                                             |       | —                                              |       | —                                                                                                                   |       | (91,421 | ) |
| Interest  earned, but not received                                             |       | —                                              |       | 6,297                                                                                                                    |       | — |   |
| Employee  compensation notes payable forgiven                                  |       | —                                              |       | —                                                                                                                   |       | (795,465 | ) |
| Depreciation  and amortization                                                 |       | 199,695                                             |       | 196,551                                                                                                                  |       | 732,006 |   |
| Stock issued  for services                                                     |       | 52,400                                              |       | —                                                                                                                   |       | 512,464 |   |
| Stock  compensation expense                                                    |       | 1,715,627                                           |       | 708,561                                                                                                                  |       | 2,630,382 |   |
| Non-cash  compensation expense                                                 |       | —                                              |       | —                                                                                                                   |       | 1,100,000 |   |
| Amortization  of debt issuance costs                                           |       | 94,189                                              |       | 12,087                                                                                                                   |       | 644,346 |   |
| Amortization  of discounts on notes payable                                    |       | 955,389                                             |       | 245,274                                                                                                                  |       | 1,480,448 |   |
| Net decrease  in fair value of derivatives                                     |       | (382,920                                            | )          | (240,523                                                                                                                 | )          | (845,079 | ) |
| Issuance of  warrants to consultants                                           |       | 280,136                                             |       | —                                                                                                                   |       | 280,136 |   |
| Change in  operating assets and liabilities:                                   |       |                                                |       |                                                                                                                     |       |   |   |
| (Increase)  decrease in cash restricted for note payable and lease obligations |       | 5,123                                               |       | 260,000                                                                                                                  |       | (34,877 | ) |
| (Increase)  in prepaid expenses and other current assets                       |       | (2,000                                              | )          | (142,362                                                                                                                 | )          | (163,311 | ) |
| Increase  (decrease) in accounts payable                                       |       | (131,740                                            | )          | (50,245                                                                                                                  | )          | 296,988 |   |
| Increase in  accrued interest payable                                          |       | —                                              |       | —                                                                                                                   |       | 180,943 |   |
| Increase  (decrease) in accrued expenses and other liabilities                 |       | (341,975                                            | )          | (10,812                                                                                                                  | )          | 1,121,490 |   |
| Increase  (decrease) in deferred revenue                                       |       | —                                              |       | (166,667                                                                                                                 | )          | 33,333 |   |
| Net cash  used in operating activities                                         |       | (5,657,541                                          | )          | (3,701,474                                                                                                               | )          | (21,247,485 | ) |
|                                                                           |       |                                                |       |                                                                                                                     |       |   |   |
| Cash flows  from investing activities                                          |       |                                                |       |                                                                                                                     |       |   |   |
| Purchase of  property and equipment                                            |       | (88,482                                             | )          | (48,187                                                                                                                  | )          | (1,222,220 | ) |
| Proceeds  from the sale of property and equipment                              |       | —                                              |       | —                                                                                                                   |       | 27,792 |   |
| Purchases of  patents, trademarks and organization costs                       |       | —                                              |       | —                                                                                                                   |       | (67,748 | ) |
| Net cash  used in investing activities                                         |       | (88,482                                             | )          | (48,187                                                                                                                  | )          | (1,262,176 | ) |
|                                                                           |       |                                                |       |                                                                                                                     |       |   |   |
| Cash flows  from financing activities                                          |       |                                                |       |                                                                                                                     |       |   |   |
| Proceeds  from notes payable to related party                                  |       | —                                              |       | —                                                                                                                   |       | 115,103 |   |
| Payments on  notes payable to related party                                    |       | —                                              |       | (39,761                                                                                                                  | )          | (164,328 | ) |
| Proceeds  from convertible notes payable                                       |       | —                                              |       | —                                                                                                                   |       | 3,390,000 |   |
| Payments  (payments) on convertible notes payable                              |       | —                                              |       | —                                                                                                                   |       | (1,470,672 | ) |
| Proceeds  (payments) from notes payable, net                                   |       | (2,401,280                                          | )          | 2,177,611                                                                                                                |       | (62,833 | ) |
| Issuance of  warrants to placement agent                                       |       | —                                              |       | 37,598                                                                                                                   |       | 37,596 |   |
| Proceeds  from the issuance of preferred stock, net                            |       | 21,919,339                                          |       | —                                                                                                                   |       | 32,367,969 |   |
| Proceeds  from the issuance of common stock, net                               |       | —                                              |       | —                                                                                                                   |       | 2,089,050 |   |
| Net cash provided  by financing activities                                     |       | 19,518,059                                          |       | 2,175,448                                                                                                                |       | 36,301,885 |   |
|                                                                           |       |                                                |       |                                                                                                                     |       |   |   |
| Net increase  (decrease) in cash and cash equivalents                          |       | 13,772,036                                          |       | (1,574,213                                                                                                               | )          | 13,792,224 |   |
| Cash and  cash equivalents, beginning of period                                |       | 20,188                                              |       | 2,328,385                                                                                                                |       | — |   |
| Cash and  cash equivalents, end of period                                      |       | $                                                   | 13,792,224 |                                                                                                                     | $          | 754,172 |   | $ | 13,792,224 |   |
|                                                                           |       |                                                |       |                                                                                                                     |       |   |   |
| Supplemental  disclosures of cash flow information:                            |       |                                                |       |                                                                                                                     |       |   |   |
| Cash paid  for interest                                                        |       | $                                                   | 134,434    |                                                                                                                     | $          | 66,536 |   | $ | 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                         |       | $                                                   | 1,899,866  |                                                                                                                     | $          | 379,609 |   | $ | 3,207,236 |   |
| Conversion  of notes payable for preferred stock                               |       | $                                                   | —     |                                                                                                                     | $          | — |   | $ | 898,250 |   |
| Conversion  of notes payable for common stock                                  |       | $                                                   | —     |                                                                                                                     | $          | — |   | $ | 980,103 |   |
| Stock issued  for interest                                                     |       | $                                                   | —     |                                                                                                                     | $          | — |   | $ | 81,272 |   |
| Reclassification  of derivatives to equity                                     |       | $                                                   | 560,368    |                                                                                                                     | $          | — |   | $ | 560,368 |   |

 

*Theaccompanying notes are an integral part of these consolidated financialstatements.*

 

7

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**Uni-Pixel, Inc.**

**(A Development Stage Company)**

**Notes to UnauditedConsolidated Financial Statements**

 

**Note 1 – Basis of Presentation, Business andOrganization**

 

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

 

Uni-Pixel is a development stage company that hasdeveloped, patented and demonstrated a new color display technology in the form ofproof of 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. As of September 30, 2007, we had accumulated a totaldeficit of $29.7 million from operations in pursuit of this objective.

 

We anticipate that our TMOS displays will be thin,lightweight, and power-efficient devices, which are highly suitable for use infull-color display applications. We believe TMOS displays will be able tocapture a share of the growing $60+ billion flat panel display market dueto the significant advantages it should provide over competing displays withrespect to manufacturing and materials cost, brightness, power efficiency,viewing angle, video response time and image quality. We believe that ourtechnology leadership and intellectual property position will enable us togenerate revenues initially from TMOS displays for existing vertical marketsegments such as the military, avionics, and automotive segments, and thensubsequently from consumer electronics markets (i.e., TVs, monitors, personalcomputers, cameras, games, etc.).

 

Our strategy is to develop further our proprietaryTMOS technology to the point of initially manufacturing small volumes of highperformance displays for military applications. We intend to utilize contractmanufacturing for product fabrication to augment our internal capabilities in theshort term. We also plan to be a supplier of our key thin film component and toenter into joint ventures in certain vertical market segments to exploit theexisting manufacturing 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, digitalcameras, laptop computers, and other consumer electronic devices. Through ourinternal research 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. We currentlyhave fifteen issued patents and fifty pending patent applications filed in keyvenues worldwide including regionally in Europe, Asia Pacific, South and NorthAmerica and contemplate obtaining exclusive field-of-use licenses, with theright to sublicense, to complementary technologies from targeted strategicpartners and U.S. national laboratories.

 

Through September 30, 2007, we have beenprimarily engaged in developing our initial product technology, recruitingpersonnel, commencing our U.S. operations and raising capital. In the course ofour development activities, we have sustained losses and expect such losses tocontinue through at least 2008. We will finance our operations primarilythrough our existing cash and possible future financing transactions.

 

Our ability to operate profitably under our currentbusiness plan is largely contingent upon our success in developing beyond proofof concept to final prototypes and supporting transferable manufacturingprocesses to partners to produce for sale our products and upon our successfuldevelopment of markets for our products and successful manufacturingrelationships. We may be required to obtain additional capital in thefuture to expand our operations. No assurance can be given that we will be ableto develop our products, successfully develop the markets for our products orprofitable manufacturing methods, or raise any such additional capital as wemight need, either through equity or debt financing, on satisfactory terms orat all. Additionally, no assurance can be given that any such financing, ifobtained, will be adequate to meet our ultimate capital needs and to supportour growth. If adequate capital cannot be obtained on satisfactory terms, ouroperations could be negatively impacted.

 

If we achieve growth in our operations in the nextfew years, such growth could place a strain on our management, administrative,operational and financial infrastructure. Our ability to manage our currentoperations and future growth requires the continued improvement of operational,financial and management controls, reporting systems and procedures. Inaddition, we may find it necessary to hire additional management,financial and sales and marketing personnel to manage our expanding operations.If we are unable to manage this growth effectively and successfully, ourbusiness, operating results and financial condition may be materiallyadversely affected.

 

As of September 30, 2007, we had cash and cashequivalents of $13.8 million. We believe that our existing capital resourcesare adequate to finance our operations until December 2008. However, ourlong-term viability is dependent upon

 

8

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successfuloperation of our business, our ability to develop our manufacturing process,our ability to sign partnership agreements, the development of our products andour ability to raise additional debt and equity to meet our businessobjectives.

 

*Acquisition and merger and basis of presentation*

 

Uni-Pixel, Inc. was originally incorporated inthe State of Nevada as Super Shops, Inc. On November 15, 1999, SuperShops and its sister companies filed an amended petition under Chapter 11of the United States Bankruptcy Code. On July 31, 2000, the court approvedSuper Shops’ Amended Joint Plan of Reorganization. On October 13, 2000,and in accordance with the Plan of Reorganization, the management of SuperShops changed its state of incorporation from Nevada to Delaware by mergingwith and into NEV Acquisition Corp., a Delaware corporation formed solely forthe purpose of effecting the reincorporation. On June 13, 2001, NEVAcquisition 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 incorporatedon 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.

 

Our wholly-owned subsidiary, Uni-Pixel Displays, Inc.,was originally incorporated as Tralas Technologies, Inc., a Texascorporation, on February 17, 1998. Tralas Technologies, Inc. changedits name to Uni-Pixel Displays, Inc. during 2001. On December 7, 2004,Real-Estateforlease.com, Inc. entered into a merger agreement withUni-Pixel Displays, Inc. and certain other parties pursuant to whichUni-Pixel Displays, Inc. became a wholly-owned subsidiary ofReal-Estateforlease.com, Inc. Pursuant to the merger, we changed our nameto “Uni-Pixel, Inc.” at the annual meeting of our stockholders held in January 2005.

 

The financial statements presented in this quarterlyreport include Uni-Pixel, Inc. and our wholly-owned subsidiary, Uni-PixelDisplays, Inc. All significant intercompany transactions and balances havebeen eliminated. Uni-Pixel Displays, Inc. was, for accounting purposes,the surviving entity of the merger, and accordingly for the periods prior tothe merger, the financial statements reflect the financial position, results ofoperations and cash flows of Uni-Pixel Displays, Inc. The assets,liabilities, operations and cash flows of Real-Estateforlease.com, Inc.are included in the consolidated financial statements from December 10,2004 onward.

 

**Note 2 -****                 ****Liquidity**

 

Uni-Pixel has sustained losses and negative cashflows from operations since its inception. The Company’s ability to meet itsobligations in the ordinary course of business is dependent upon its ability toestablish profitable operations, raise additional financing through public orprivate equity financings, enter into collaborative or other arrangements withcorporate sources, or secure other sources of financing to fund operations.

 

On February 13, 2007, the Company raised $12million in a private placement of 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 of its Series C Convertible PreferredStock (see Note 5), which management believes will enable the Company tocontinue operations until December 2008.

 

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

 

*Interim financial information*

 

The financial statements included herein, which havenot been audited pursuant to the rules and regulations of the Securitiesand Exchange Commission, reflect all adjustments which, in the opinion ofmanagement, are necessary for a fair presentation of financial position,results of operations and cash flows for the interim periods on a basisconsistent with the annual audited statements. All such adjustments are of anormal recurring nature. The results of operations for interim periods are notnecessarily indicative of the results that may be expected for any otherinterim period or for a full year. Certain information, accounting policies andfootnote disclosures normally included in financial statements prepared inconformity with accounting principles generally accepted in the United Statesof America have been omitted pursuant to such rules and regulations, althoughwe believe that the disclosures are adequate to make the information presentednot misleading. These financial statements should

 

9

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beread in conjunction with our audited financial statements included in our Form 10-KSB,for the year ended December 31, 2006, filed with the Securities andExchange Commission on March 6, 2007.

 

*Use of estimates*

 

The preparation of financial statements inconformity with accounting principles generally accepted in the United Statesof America requires us to make estimates and assumptions that affect thereported amounts of assets and liabilities, disclosures of contingent assetsand liabilities at the date of the financial statements and the reportedamounts of revenues and expenses during the reporting period. Examples includeprovisions for bad debts, useful lives of property and equipment and intangibleassets, impairment of property and equipment and intangible assets, deferredtaxes, and the provision for and disclosure of litigation and losscontingencies. Actual results may differ materially from those estimates.

 

*Statement of cash flows*

 

For purposes of the statements of cash flows, weconsider all highly liquid investments (i.e., investments which, whenpurchased, have original maturities of three months or less) to be cashequivalents.

 

*Concentration of credit risk*

 

We maintain our cash primarily with major U.S.domestic banks. The amounts held in these banks exceed from time to time theinsured limit of $100,000 and exceeded that balance at September 30, 2007and December 31, 2006 by $13,329,852 and $7,411, respectively. The termsof these deposits are on demand to minimize risk. We have not incurred lossesrelated to these deposits.

 

*Restricted cash*

 

As of September 30, 2007 and December 31,2006, we had restricted cash of $34,877 and $40,000, respectively. Theseamounts secured certain obligations under our lease agreement for our principalfacility located in The Woodlands, Texas at both September 30, 2007 and December 31,2006. The restricted cash has been segregated into current and long-termclassifications based on its anticipated liquidation.

 

*Property and equipment*

 

Property and equipment, consisting primarily of labequipment, computer equipment, software, leasehold improvements, and officefurniture and fixtures is carried at cost less accumulated depreciation andamortization. Depreciation and amortization for financial reporting purposes isprovided by the straight-line method over the estimated useful lives of threeto five years. Leasehold improvements are amortized using the straight-linemethod over the remaining lease term or the life of the asset, whichever isshorter. The cost of repairs and maintenance is charged as an expense asincurred. Gains or losses related to retirements or dispositions of fixedassets are recognized in the period incurred.

 

*Intangible assets*

 

Our intangible assets represent patent applicationswhich are recorded at cost. We have filed applications for patents inconnection with technologies being developed. The patent applications and anypatents issued as a result of these applications are important to theprotection of our technologies that may result from our research anddevelopment efforts. Costs associated with patent applications and maintainingpatents are capitalized and will be amortized over the life of the patents. Wereview the value recorded for intangible assets to assess recoverability fromfuture operations using undiscounted cash flows. Impairments are recognized inoperating results to the extent the carrying value exceeds fair valuedetermined based on the net present value of estimated future cash flows.

 

*Derivative instruments*

 

We account for all derivative financial instrumentsin accordance with SFAS No. 133, “Accounting for Derivative Instrumentsand Hedging Activities.” Derivative financial instruments are recorded asliabilities in the consolidated balance sheet and are measured at fair value.When available, quoted market prices are used in determining fair value.However, if quoted market prices are not available, we estimate fair valueusing either quoted market prices of financial instruments with similarcharacteristics or other valuation techniques. These derivative liabilities aremarked-to-market each quarter with the change in fair value recorded in theincome statement.

 

10

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We utilize the Black-Scholes option-pricing model todetermine the fair value of our freestanding derivative instruments. Keyassumptions of the Black-Scholes option-pricing model include applicablevolatility rates, risk-free interest rates and the instruments’ expectedremaining life. We also determined a fair value for our various embeddedderivatives within our $1.5 million and $0.9 million convertible notes by usinga layered discounted probability-weighted cash flow model. The assumptions usedin both modeling techniques required significant management judgment andestimates of future fluctuation in stock price as well as changes in futureinterest rates. The reader should reference Note 6 for further details inregards to our derivative liabilities.

 

*Revenue recognition*

 

We recognize revenue over the period the service isperformed in accordance with SEC Staff Accounting Bulletin No. 104, “RevenueRecognition 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.

 

Revenue from licenses and other up front fees arerecognized on a ratable basis over the term of the respective agreement.

 

Revenue from development contracts are recognizedwhen the contract is completed and collectibility is reasonably assured. Deferredrevenue on these contracts of $33,333 and $33,333 at September 30, 2007and December 31, 2006, respectively, consists of a development contract toproduce and deliver a prototype device. During the first quarter ended March 31,2006, the Company fulfilled its obligation with a customer in providing aproduct prototype, and has released deferred income of $200,000 into earnedrevenues during the period. The costs incurred with this prototype wereincurred in prior periods as a component of research and development expenses.

 

*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, theFinancial Accounting Standards Board (“FASB”) issued SFAS No. 123 (Revised2004) (“SFAS No. 123(R)”), *“Share BasedPayment,”* which eliminates the use of APB Opinion No. 25 andwill require us to measure the cost of employee services received in exchangefor an award of equity instruments based on the grant-date fair value of theaward. That cost will be recognized over the period during which an employee isrequired to provide service in exchange for the reward—known as the requisiteservice period. No compensation cost is recognized for equity instruments forwhich employees do not render the requisite service. The grant-date fair valueof employee share options and similar instruments will be estimated usingoption-pricing models adjusted for the unique characteristics of thoseinstruments. We have implemented SFAS No. 123(R) effective January 1,2006.

 

We may, from time to time, issue common stock, stockoptions or common stock warrants to acquire services or goods fromnon-employees. Common stock, stock options and common stock warrants issued topersons other than employees or directors are recorded on the basis of theirfair value, as required by SFAS No. 123 (“SFAS No. 123”), “*Accounting for Stock Based Compensation”,* which is measuredas of the date required by EITF Issue 96-18 (“EITF 96-18”), *“Accounting for Equity Instruments That Are Issued toOther Than Employees for Acquiring, or in Conjunction with Selling, Goods orServices.”*  In accordance with EITF 96-18, the stockoptions or common stock warrants are valued using the Black-Scholes model onthe basis of the market price of the underlying common stock on the “valuationdate,” which for options and warrants related to contracts that havesubstantial disincentives to non-performance, is the date of the contract, andfor all other contracts is the vesting date. Expense related to the options andwarrants is recognized on a straight-line basis over the shorter of the periodover which services are to be received or the vesting period. Where expensemust be recognized prior to a valuation date, the expense is computed under theBlack-Scholes model on the basis of the market price of the underlying commonstock at the end of the period, and any subsequent changes in the market priceof the underlying common stock through the valuation date is reflected in theexpense recorded in the subsequent period in which that change occurs.

 

The following disclosures provide informationregarding the Company’s stock-based compensation awards, all of which areclassified as equity awards in accordance with SFAS No. 123(R):

 

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*Stock options.*The Company grants stock options to employeesthat allow them to purchase shares of the Company’s common stock. Options arealso granted to members of the Board of Directors. The Company determines thefair value of stock options at the date of grant using the Black-Scholesvaluation model. Most options vest annually over a three-year service period. TheCompany will issue new shares upon the exercise of stock options.

 

Total compensation expense recognized for optionswas approximately $1.7 million and $0.7 million for the nine months ended September 30,2007 and September 30, 2006, respectively.

 

A summary of the changes in the total stock optionsoutstanding during the nine months ended September 30, 2007 follows:

 

 
| ** **                                         | ** ** | ** **  | ** ** | **Weighted**            | ** ** |
|----------------------------------------------------|------------|-------------|------------|-------------------------|------------|
| ** **                                         | ** ** | ** **  | ** ** | **Average**             | ** ** |
| ** **                                         | ** ** | **Options** | ** ** | **Exercise Price** | ** ** |
| Outstanding  at December 31, 2006             |       | 3,661,667   |       | $                       | 1.25       |   |
| Granted                                            |       | 1,987,500   |       | 1.41                    |       |
| Forfeited or  expired                              |       | (1,011,667  | )          | 1.26                    |       |
| Exercised                                          |       | —      |       | —                  |       |
| Outstanding  at September 30, 2007            |       | 4,637,500   |       | $                       | 1.59       |   |
| Vested and  exercisable at September 30, 2007 |       | 2,394,272   |       | $                       | 1.66       |   |

 

The fair value of the Company’s options wereestimated on the date of grant using the Black-Scholes valuation model with thefollowing weighted-average assumptions:

 
| ** **             | ** ** | **Three Months  ended  September 30,  2007** | ** ** | **Three Months  ended  September 30,  2006** | ** ** | **Nine Months  ended  September 30,  2007** | ** ** | **Nine Months  ended  September 30,  2006** | ** ** |
|------------------------|------------|--------------------------------------------------------|------------|--------------------------------------------------------|------------|-------------------------------------------------------|------------|-------------------------------------------------------|------------|
| Expected  life (years) |       | 5 years                                           |       | 5 years                                           |       | 5 years                                          |       | 5 years                                          |       |
| Interest  rate         |       | 4.52                                                   | %          | 5.00                                                   | %          | 4.52 to 5.10                                          | %          | 5.00                                                  | %          |
| Dividend  yield        |       | —                                                 |       | —                                                 |       | —                                                |       | —                                                |       |
| Volatility             |       | 82.12                                                  | %          | 63.74                                                  | %          | 82.12                                                 | %          | 63.74                                                 | %          |
| Forfeiture  rate       |       | —                                                 |       | —                                                 |       | —                                                |       | —                                                |       |

 

At September 30, 2007,there was $2.1 million of total unrecognized compensation cost related tonon-vested stock option awards which is expected to be recognized over aweighted-average period of 1.39 years. There were 283,221 and 1,723,981 optionsthat became vested during the three months and nine months ended September 30,2007, respectively.

 

*Income taxes*

 

An asset and liability approach is used forfinancial accounting and reporting for income taxes. Deferred income taxesarise from temporary differences between income tax and financial reporting andprincipally relate to recognition of revenue and expenses in different periodsfor financial and tax accounting purposes and are measured using currentlyenacted tax rates and laws. In addition, a deferred tax asset can be generatedby 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.

 

No benefit has been recognized on the net loss asthe realization of the net operating loss carryforward cannot be assured.

 

*Loss per share data*

 

Basic loss per share is calculated based on theweighted average common shares outstanding during the period, after givingeffect to the manner in which the merger was accounted for as described inNote 1. Diluted earnings per share also gives effect to the dilutiveeffect of stock options, warrants (calculated based on the treasury stockmethod) and convertible notes and convertible preferred stock. The Company doesnot present diluted earnings per share for years in which it incurred net lossesas the effect is antidilutive.

 

At September 30, 2007, options and warrants topurchase 18,483,968 shares of common stock at exercise prices ranging from$1.10 to $2.00 per share were outstanding, but were not included in thecomputation of diluted earnings per share as their effect would beantidilutive.

 

12

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*Fair value of financial instruments*

 

Our financial instruments consist of accountsreceivable, accounts payable, notes payable and derivative liabilities. Webelieve the fair values of our accounts receivable, accounts payable, notespayable and derivative liabilities reflect their respective carrying amounts.

 

*Recent accounting pronouncements*

 

Effective at the beginning of the first quarter of2007, the Company adopted the provision of FIN 48, “Accounting for Uncertaintyin Income Taxes, an interpretation of FASB Statement No. 109” (“FIN 48”). FIN48 contains a two-step approach to recognizing and measuring uncertain taxpositions accounted for in accordance with SFAS No. 109, “Accounting forIncome Taxes.”  The first step is toevaluate the tax position for recognition by determining if the weight ofavailable evidence indicates that it is more likely than not that the positionwill be sustained on audit, including resolution of related appeals orlitigation processes, if any. The second step is to measure the tax benefit asthe largest amount that is more than 50% likely of being realized upon ultimatesettlement.

 

As a result of the implementation of FIN 48, theCompany has not changed any of its tax accrual estimates. The Company filesU.S. federal and U.S. state tax returns. For state tax returns the Company isgenerally no longer subject to tax examinations for years prior to 1996.

 

In September 2006, the Financial AccountingStandards Board (“FASB”) issued Statement No. 157, “Fair ValueMeasurements” (“FAS 157”), which addresses how companies should measure fairvalue when they are required to use a fair value measure for recognition ordisclosure purposes under generally accepted accounting principles (“GAAP”). Asa result of FAS 157, there is now a common definition of fair value to be usedthroughout GAAP, which is expected to make the measurement of fair value moreconsistent and comparable. The Company must adopt FAS 157 in fiscal 2008, andmanagement currently does not expect the impact to be material to itsconsolidated financial statements.

 

In February 2006, the FASB issued SFAS No. 155,“Accounting for Certain Hybrid Financial Instruments—an amendment of FASBStatements No. 133 and 140,” to permit fair value remeasurement for anyhybrid financial instrument that contains an embedded derivative that otherwisewould require bifurcation in accordance with the provisions of SFAS No. 133,“Accounting for Derivative Instruments and Hedging Activities.” The Companyadopted SFAS No. 155 in fiscal year 2007. SFAS 155 did not have a materialimpact on the Company’s consolidated financial statements.

 

****In February 2007, the FASBissued SFAS No. 159, “The Fair Value Option for Financial Assets andFinancial Liabilities”, which permits entities to choose to measure manyfinancial instruments and certain other items at fair value. The objective isto improve financial reporting by providing entities with the opportunity tomitigate volatility in reported earnings caused by measuring related assets andliabilities differently without having to apply complex hedge accountingprovisions. The statement amends SFAS No. 115, “Accounting for CertainInvestments in Debt and Equity”.****

 

In December 2006, the FASB issued the FASBStaff Position (FSP) No. EITF 00-19-2, (“FSP EITF 00-19-2”), Accountingfor Registration Payment Arrangements. This FSP addresses an issuer’saccounting for registration payment arrangements. This FSP specifies that thecontingent obligation to make future payments or otherwise transferconsideration under a registration payment arrangement, whether issued as aseparate agreement or included as a provision of a financial instrument orother agreement, should be separately recognized and measured in accordancewith FASB Statement No. 5, Accounting for Contingencies. The guidance inthis FSP amends FASB Statements No. 133, Accounting for DerivativeInstruments and Hedging Activities, and No. 150, Accounting for CertainFinancial Instruments with Characteristics of both Liabilities and Equity, andFASB Interpretation No. 45, Guarantor’s Accounting and DisclosureRequirements for Guarantees, Including Indirect Guarantees of Indebtedness ofOthers, to include scope exceptions for registration payment arrangements. ThisFSP further clarifies that a financial instrument subject to a registrationpayment arrangement should be accounted for in accordance with other applicablegenerally accepted accounting principles (GAAP) without regard to thecontingent obligation to transfer consideration pursuant to the registrationpayment arrangement. This FSP shall be effective immediately for registrationpayment arrangements and the financial instruments subject to thosearrangements that are entered into or modified subsequent to the date ofissuance of this FSP, or for financial statements issued for fiscal yearsbeginning after December 15, 2006, and interim periods within those fiscalyears.

 

The Company adopted FSP EITF 00-19-2 beginning in2007. The adoption of this FSP did not have a material effect upon the Company’sfinancial statements.

 

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

 

*Leases*

 

The Company has entered intoa lease for office, warehouse and laboratory facilities in The Woodlands, Texasunder a third party non-cancelable operating lease through 2010. Future minimumlease commitments as of September 30, 2007 are as follows:

 

| **Year Ending December 31** | ** ** | ** ** | ** ** |
|--------------------------------------------|------------|------------|------------|
| 2007                                       |       | $          | 50,136     |   |
| 2008                                       |       | 202,997    |       |
| 2009                                       |       | 206,267    |       |
| 2010                                       |       | 191,825    |       |
| 2011                                       |       | —     |       |
| Thereafter                                 |       | —     |       |
| Total                                      |       | $          | 651,225    |   |

 

This lease provides theCompany with a 5-year renewal option.

 

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

 

*Equity instruments issued tonon-employees*

 

From time to time, in orderto preserve cash and to fund our operating activities, common stock or otherequity instruments may be issued for cash or in exchange for goods orservices. Equity instruments issued for goods or services are recorded at thefair value of the goods or services received or the fair value of the equityinstruments issued, whichever is more reliably measurable. During the ninemonths ended September 30, 2007, we did the following:

 

•                  EffectiveJanuary 15, 2007, we requested and Lusierna Asset Management, Ltd. (the “Consultant”)agreed to provide consulting and advisory services to us pursuant to and inaccordance with our request, including but not limited to, advice regardingcorporate structuring, the identification of potential candidates for our boardof directors and transaction structuring. In consideration of the consultingservices, we agreed that at the time of, and subject to, the closing of no lessthan gross proceeds of $12,000,000 from the sale of the Company’s equity in aprivate placement, (the “**Offering Threshold Closing**”),the Company (i) issued to the Consultant, simultaneously with the OfferingThreshold Closing, initial closing, a three year warrant to purchase 750,000shares (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. The Company utilized the Black-Scholes methodology in determiningthe fair market value of the warrants of $217,007 and recorded the expensein the first quarter of 2007. The Consultants’ fee of $480,000 was paid fromthe proceeds of the Purchase Agreement, described below, and expensed in thefirst quarter of 2007.

 

•                  EffectiveFebruary 13, 2007 we entered into an Investor Relations Agreement withLusierna Asset Management, Ltd. (the “Consultant”) which provides that theAgreement will terminate on the date twelve (12) months from the Commencement Date,unless otherwise subject to earlier termination. 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:

 

•                  Proactivemarketing of the Company directly to security analysts, stockbrokers and portfoliomanagers and investors.

•                  Assistingthe Company in gaining media coverage both locally and nationally.

•                  Assistingin the preparation of press releases, including monitoring wire servicecoverage of the Company for accuracy and pickup.

•                  Preparingpresentations relating to the Company for meetings with analysts, registeredrepresentatives and portfolio managers, other large investors, and sponsoredforums.

•                  Assistingin preparing information kits about the Company in response to press and/orinvestor inquiries.

•                  Providingsuch other services and assistance as Consultant and the Company shall deemnecessary or appropriate to enhance the Company’s business.

 

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The Consultant shall receive $10,000 per monthpayable monthly on the tenth (10th) day of each month, commencing onthe tenth (10th) day of the month following the month in which theCommencement Date occurs and a three (3) year warrant (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. TheCompany utilized the Black-Scholes methodology in determining thefair market value of the warrants of $86,803 and this amount is expensedover 12 months.

 

*Common Stock*

 

During the three monthsended March 31, 2007, (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; and (3) issued1,810,578 shares of common stock in connection with the conversion of 676,107shares of Series A Preferred Stock and accrued dividends.

 

During the three monthsended June 30, 2007, (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) issued595,505 shares of common stock in connection with the conversion of 219,095shares of Series A Preferred Stock and accrued dividends and (4) issued40,000 shares of common stock for consulting services.

 

During the three monthsended September 30, 2007, (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; and (3) issuedno shares of common stock in connection with the conversion of Series APreferred Stock and accrued dividends.

 

*Series A ConvertiblePreferred Stock*

 

Effective February 13, 2007, each share of Series AConvertible Preferred Stock is convertible into 2.6515 shares of common stockat any time after issuance, together with accrued dividends at 6% per annumpayable in cash or additional shares of Series A Preferred Stock at theoption of the Company. On December 31, 2007, all outstanding sharesof Series A Preferred Stock, if any, shall automatically convert on thatdate into common stock.

 

*Series B ConvertiblePreferred Stock*

 

On February 13, 2007,the Company entered into a Securities Purchase Agreement (the “PurchaseAgreement”) with The Raptor Global Portfolio Ltd., The Tudor BVI GlobalPortfolio Ltd., Tudor Proprietary Trading, L.L.C. and The Altar Rock Fund L.P.(collectively, the “Purchasers”) pursuant to which the Company 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 of the Company’s commonstock, par value $0.001 for an aggregate purchase price of $12,000,000. As the Series BConvertible Preferred Stock is redeemable for cash at the option of the holderafter five years, the Series B Convertible Preferred Stock is classifiedas temporary equity on the balance sheet. In accordance with EITF 00-27, theCompany determined that the Series B Convertible Preferred Stock had anintrinsic value of the conversion of option of $3,715,602, which was creditedto additional paid-in capital in the first quarter of 2007, and is beingamortized over five years. The Company utilized the Black-Scholesmethodology in determining the fair market value of the warrantsof $3,715,602, which was credited to additional paid-in capital in the firstquarter of 2007, and is being amortized over five years.

 

Dividends shall accrue,whether or not declared and paid, on the Series B Preferred Stock at therate per annum of 8%, and shall be cumulative as to any dividends not declaredand paid in any year, compounding annually at the same rate. Each share of Series BPreferred Stock may, at the option of the holder, be converted at any time intoa number of fully paid and non-assessable shares of common stock of the Companyequal to the quotient obtained by dividing the original issue price of $3.75for the Series B Preferred Shares, plus all accrued and unpaid Series BPreferred Stock dividends and any other declared and unpaid dividends, by theinitial Series B Preferred Stock conversion price of $0.75, which issubject to adjustment from time to time in accordance with the Certificate ofDesignations.

 

*Series C ConvertiblePreferred Stock*

 

On September 28, 2007, the Company entered intoa Securities Purchase Agreement (the “ ML Purchase Agreement”) with MerrillLynch Pierce, Fenner & Smith Incorporated (the “ ML Purchaser”)pursuant to which the Company sold on that date

 

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ina private placement to the ML Purchaser (a) 892,858 authorized butunissued shares of the Company’s Series C Preferred Stock, par value$0.001 per share (the “Series C Preferred Stock”), and (b) warrants (the “MLWarrants”) to purchase, in aggregate, up to 3,214,289 shares of the Company’scommon stock, par value $0.001 for an aggregate purchase price of$10,000,009.60. As the Series C Convertible Preferred Stock is redeemablefor cash at the option of the holder after five years, the Series CConvertible Preferred Stock is classified as temporary equity on the balancesheet. In accordance with EITF 00-27, the Company determined that the Series CConvertible Preferred Stock had an intrinsic value of the conversion of optionof $3,809,644, which was credited to additional paid-in capital in the thirdquarter of 2007, and is being amortized over five years. The Company utilizedthe Black-Scholes methodology in determining the fair market value ofthe warrants of $3,809,644, which was credited to additional paid-incapital in the third quarter of 2007, and is being amortized over five years.

 

Dividends shall accrue,whether or not declared and paid, on the Series C Preferred Stock at therate per annum of 8%, and shall be cumulative as to any dividends not declaredand paid in any year, compounding annually at the same rate. Each share of Series CPreferred Stock may, at the option of the holder, be converted at any time intoa number of fully paid and non-assessable shares of common stock of the Companyequal to the quotient obtained by dividing the original issue price of $11.20for the Series C Preferred Shares, plus all accrued and unpaid Series CPreferred Stock dividends and any other declared and unpaid dividends, by theinitial Series C Preferred Stock conversion price of $1.40, which issubject to adjustment from time to time in accordance with the Certificate ofDesignations.

 

*2005 Stock Incentive Plan*

 

Effective January 27,2005, we adopted the Uni-Pixel, Inc. 2005 Stock Incentive Plan. The StockIncentive Plan is discretionary and allows for an aggregate of up to 2,000,000shares of our common stock to be awarded through incentive and non-qualifiedstock options and stock appreciation rights. The Stock Incentive Plan isadministered by our Board of Directors, which has exclusive discretion toselect participants who will receive the awards and to determine the type, sizeand terms of each award granted.

 

In the first quarter of2007, we did not grant any options under the 2005 Stock Incentive Plan and atotal of 1,667 stock options with an exercise price of $2.00 per share to oneemployee were forfeited.

 

In the second quarter of2007, we did not grant any options under the 2005 Stock Incentive Plan and atotal of 10,000 stock options with an exercise price of $1.90 per share to oneemployee were forfeited.

 

In the third quarter of2007, we granted a total of 350,000 options to purchase our common stock withan exercise price of $1.45 per share to eight employees. These options vestmonthly over 36 months.

 

*2007 Stock Incentive Plan*

 

Effective August 21,2007, we adopted the Uni-Pixel, Inc. 2007 Stock Incentive Plan. The StockIncentive Plan is discretionary and allows for an aggregate of up to 4,000,000shares of our common stock to be awarded through incentive and non-qualifiedstock options and stock appreciation rights. The Stock Incentive Plan isadministered by our Board of Directors, which has exclusive discretion toselect participants who will receive the awards and to determine the type, sizeand terms of each award granted.

 

In the third quarter of2007, we granted a total of 1,337,500 options to purchase our common stock withan exercise price of $1.45 per share to nine employees. These options vestmonthly over 36 months.

 

*Other Stock Options*

 

In the first quarter of 2007, we granted a total of300,000 options to purchase our common stock with an exercise price of $1.19per share to three board members. These options vest monthly over 36 months.

 

On February 1, 2007, the 1,000,000 options withan exercise price of $1.25 per share granted to Mr. Carl Yankowski on October 1,2006, were cancelled as Mr. Yankowski did not become Chief ExecutiveOfficer of Uni-Pixel, Inc. by January 31, 2007.

 

On February 13, 2007, in connection with the Series BConvertible Preferred Stock Purchase Agreement, the 1,000,000 options with anexercise price of $1.25 per share granted to Mr. Carl Yankowski on May 23,2006 have all vested due to the Company’s completion of an equity financing of$10 million or more. The Company utilized the Black-Scholesmethodology in determining the fair market value of the warrantsof $726,241 and this amount was expensed in the first quarter of 2007.

 

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**Note 6 – Notes Payable**

 

Note payables consist of the following:

 
| ** **                          | ** ** | **September 30,  2007** | ** ** | **December 31,  2006** | ** ** |
|-------------------------------------|------------|------------------------------|------------|-----------------------------|------------|
| Vehicle  secured note payable       |       | —                       |       | 13,477                      |       |
| Secured  convertible note payable   |       | —                       |       | 1,500,000                   |       |
| Unsecured  convertible note payable |       | —                       |       | 900,000                     |       |
|                                |       |                         |       |                        |       |
| Notional  balances                  |       | —                       |       | 2,413,477                   |       |
| Less:  unamortized discount         |       | —                       |       | 955,419                     |       |
| Less:  current portion              |       | —                       |       | 1,448,571                   |       |
| Notes  payable, long-term portion   |       | $                            | —     |                        | $          | 9,487 |   |
|                                     |            |                              |            |                             |            |  |  |

 

During 2005, the Company entered into a note payableagreement to purchase a vehicle with an original balance of $20,092, that isrepayable in monthly installments of principal and interest of $391 at 6.31%per annum and matures March 2010. The vehicle was sold in the secondquarter of 2007. This note payable had an outstanding balance of $0 at September 30,2007 and $13,477 at December 31, 2006.

 

*Secured convertible note -*

 

On May 26, 2006, Uni-Pixel, Inc. enteredinto Securities Purchase Agreements with Trident Growth Fund, L.P. andCapSource Fund, L.P. pursuant to which Uni-Pixel issued 12% Senior SecuredConvertible Debentures (the “Convertible Note”) for the principal amount of$1,500,000. The Convertible Note was paid in full in February 2007.

 

Commonstock purchase warrants-

 

In connection with the Securities PurchaseAgreement, both Trident Growth Fund, L.P. and CapSource Fund, L.P. receivedCommon Stock Purchase Warrants (“Warrant”) to purchase a number of shares ofour Common Stock subject to adjustments as follows: 750,000 divided by thelesser of (a) $1.75 per share or (b) 70% of the average price pershare of the Common Stock and Common Stock Equivalents sold to any Personin the first Qualifying Transaction to be consummated following the OriginalIssue Date, all as defined in the Common Stock Purchase Warrants. The CommonStock Purchase Warrants may be exercised at any time within 5 years at aprice equal to the lesser of (a) $1.75 per share or (b) 90% of theaverage price per share of the Common Stock and Common Stock Equivalents soldto any Person in the first Qualifying Transaction to be consummated following theInitial Exercise Date, as defined in the Common Stock Purchase Warrants. In September 2006,the total number of warrants to be issued to Trident Growth Fund, L.P. andCapSource Fund, L.P. was fixed at 1,500,000 warrants. However, the Companybelieved that the ultimate amount of warrants was negotiable until the $12million placement was complete in February 2007. As such, the Companycontinued to classify the warrants as derivative liabilities at December 31,2006. Effective February 13, 2007, the Company reclassified the derivativeliabilities for warrants to additional paid in capital. Effective in September 2006,the Common Stock Purchase Warrants may be exercised at any time within 5years at a price equal to $1.25 per share.

 

The Warrant is a freestanding derivative financialinstrument. Using the  Black-Scholes  Method, the  fair  value of the derivative was computed at$1,298,031 at inception on May 24, 2006 and recorded as a derivativeliability which  resulted  in a  reduction of the initial carryingamount (as unamortized discount) of the Convertible Note. This derivativeliability is marked-to-market each quarter with the change in fair valuerecorded in the income statement. Unamortized discount is amortized to interestexpense using the effective interest method over the life of the ConvertibleNote, or 12 months. The remaining unamortized discount was recorded in theincome statement in the first quarter of 2007 when the derivative liabilitieswere reclassified to additional paid in capital.

 

Thecomponents of the Convertible Note at inception and at December 31, 2006were as follows:

 

ConvertibleNote at Inception (May 24, 2006) -

 

As a result of these contract provisions, theConvertible Note balance at Inception (May 24, 2006) was adjusted asfollows:

 

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| Notional balance of Convertible Note at May  24, 2006                               |   | $          | 1,500,000 |   |
|-------------------------------------------------------------------------------------|--------|------------|-----------|--------|
| Adjustments:                                                                        |   |       |      |
| Discount for derivative liability - Warrant                                         |   | (1,298,031 | )         |
| Discount for deferred loan costs paid to  Trident and CapSource on Convertible Note |   | (75,000    | )         |
| Convertible Note balance, net of  unamortized discount at May 24, 2006              |   | $          | 126,969   |   |

 

ConvertibleNote at December 31, 2006 -

 

The Convertible Note balance on the consolidated balance sheet as ofDecember 31, 2006 is comprised of the following:

 
| Notional balance of Convertible Note at  December 31, 2006                  |   | $        | 1,500,000 |   |
|-----------------------------------------------------------------------------|--------|----------|-----------|--------|
| Adjustments:                                                                |   |     |      |
| Unamortized discount                                                        |   | (876,896 | )         |
| Convertible Note balance, net of  unamortized discount at December 31, 2006 |   | $        | 623,104   |   |

 

TheConvertible Note was repaid in full on February 13, 2007.

 

Changein unamortized discount and loan costs of the Convertible Note -

 

Forthe year ended December 31, 2006, the discount on the Convertible Note changedfor amortization of discounts for derivative liabilities related to theConvertible Note and Warrant and for amortization of loan costs paid to thelender in connection with the Convertible Note. The total discount on theConvertible Note changed from $1,373,031 at inception to $876,896 at December31, 2006, to $0 at September 30, 2007, as the remaining unamortized discountwas recorded in the income statement in the first quarter of 2007 when thederivative liabilities were reclassified to additional paid in capital.

 

Thefollowing assumptions were used in the preparation of the Warrant valuations atinception (May 24, 2006), December 31, 2006 and February 13, 2007:

 

Black-ScholesMethodology:

 
| ** **              | ** ** | **Inception** | ** ** | **December 31, 2006** | ** ** | **February 13, 2007** | ** ** |
|-------------------------|------------|---------------|------------|---------------------------------|------------|---------------------------------|------------|
| **Assumptions**         | ** ** | **Warrant**   | ** ** | **Warrant**                     | ** ** | **Warrant**                     | ** ** |
|                    |       |          |       |                            |       |                            |       |
| Dividend yield          |       | 0.00          | %          | 0.00                            | %          | 0.00                            | %          |
| Risk-free interest rate |       | 4.93          | %          | 5.10                            | %          | 5.10                            | %          |
| Volatility              |       | 63.74         | %          | 63.74                           | %          | 68.80                           | %          |
| Expected Term           |       | 5.00 years    |       | 4.39 years                      |       | 4.27 years                      |       |

 

Changein fair value of derivatives instruments-

 

Thenet decrease in derivative liability for the Warrant (marked-to-market) of$348,927 for the nine months ended September 30, 2007, has been recordedunder Other income in the accompanying consolidated statements of operations.

 

*Unsecuredconvertible note -*

 

OnSeptember 12, 2006, Uni-Pixel, Inc. entered into Securities Purchase Agreementswith various investors pursuant to which Uni-Pixel issued 10% Senior UnsecuredConvertible Debentures (the “Unsecured Convertible Note”) for the principalamount of $900,000. The Unsecured Convertible Note was paid in full in February2007.

 

Inconnection with the Securities Purchase Agreement, the Company issued 144,000warrants at $1.25 per share to the investors. The warrants will expire in fiveyears.

 

Asconsideration for the Placement Agent services in connection with theSecurities Purchase Agreement, the Company issued 50,400 warrants at $1.25 tothe Placement Agent or its designees. The warrants will expire in five years. Inaddition, the Placement Agent received a commission equal to 5%, or $45,000.

 

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TheUnsecured Convertible Note was a hybrid instrument which contained bothfreestanding derivative financial instruments and an embedded derivativefeature which individually warranted separate accounting as a derivativeinstrument under SFAS No. 133. The freestanding derivative financial instrumentincluded the investor’s warrants, which were valued individually, and totaled$107,416 at inception on September 12, 2006. The Company identified an embeddedderivative feature related to the conversion price within the UnsecuredConvertible Note. However, its fair market value was insignificant atinception.

 

Commonstock purchase warrants-

 

Inconnection with the Securities Purchase Agreement, the investors receivedCommon Stock Purchase Warrants (“Warrant”) to purchase 144,000 shares of ourCommon Stock at $1.25.

 

TheWarrant was a freestanding derivative financial instrument. Using the  Black-Scholes Method,  the  fair value of the derivative was computed at $107,416 at inception onSeptember 12, 2006 and recorded as a derivative liability which  resulted in  a  reduction of the initial carrying amount (asunamortized discount) of the Unsecured Convertible Note. This derivativeliability is marked-to-market each quarter with the change in fair valuerecorded in the income statement. Unamortized discount was amortized tointerest expense using the effective interest method over the life of theUnsecured Convertible Note, or 12 months. The remaining unamortized discountwas recorded in the income statement in the first quarter of 2007 when thederivative liabilities were reclassified to additional paid in capital.

 

Thecomponents of the Unsecured Convertible Note at inception and at December 31,2006 were as follows:

 

UnsecuredConvertible Note at Inception (September 12, 2006) -

 

Asa result of these contract provisions, the Unsecured Convertible Note balanceat Inception (September 12, 2006) was adjusted as follows:

 
| Notional balance of Unsecured Convertible  Note at September 12, 2006                  |   | $        | 900,000 |   |
|----------------------------------------------------------------------------------------|--------|----------|---------|--------|
| Adjustments:                                                                           |   |     |    |
| Discount for derivative liability - Warrant                                            |   | (107,416 | )       |
| Unsecured Convertible Note balance, net of  unamortized discount at September 12, 2006 |   | $        | 792,584 |   |

 

UnsecuredConvertible Note at December 31, 2006 -

 

TheUnsecured Convertible Note balance on the consolidated balance sheet as ofDecember 31, 2006 is comprised of the following:

 
| Notional balance of Unsecured Convertible  Note at December 31, 2006                  |   | $       | 900,000 |   |
|---------------------------------------------------------------------------------------|--------|---------|---------|--------|
| Adjustments:                                                                          |   |    |    |
| Unamortized discount                                                                  |   | (78,493 | )       |
| Unsecured Convertible Note balance, net of  unamortized discount at December 31, 2006 |   | $       | 821,507 |   |

 

TheUnsecured Convertible Note was repaid in full on February 13, 2007.

 

Changein unamortized discount and loan costs of the Unsecured Convertible Note -

 

Forthe year ended December 31, 2006, the discount on the Unsecured ConvertibleNote changed for amortization of discounts for derivative liabilities relatedto the Unsecured Convertible Note and Warrant and for amortization of loancosts paid in connection with both the Unsecured Convertible Note. The totaldiscount on the Unsecured Convertible Note changed from $107,416 at inceptionto $78,493 at December 31, 2006, to $0 at September 30, 2007, as the remainingunamortized discount was recorded in the income statement in the first quarterof 2007 when the derivative liabilities were reclassified to additional paid incapital.

 

Thefollowing assumptions were used in the preparation of the Warrant valuations atInception (September 12, 2006) and December 31, 2006 and February 13, 2007:

 

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Black-ScholesMethodology:

 
| ** **              | ** ** | **Inception** | ** ** | **December 31, 2006** | ** ** | **February 13, 2007** | ** ** |
|-------------------------|------------|---------------|------------|---------------------------------|------------|---------------------------------|------------|
| **Assumptions**         | ** ** | **Warrant**   | ** ** | **Warrant**                     | ** ** | **Warrant**                     | ** ** |
| Dividend yield          |       | 0.00          | %          | 0.00                            | %          | 0.00                            | %          |
| Risk-free interest rate |       | 5.10          | %          | 5.10                            | %          | 5.10                            | %          |
| Volatility              |       | 63.74         | %          | 63.74                           | %          | 68.80                           | %          |
| Expected Term           |       | 5.00 years    |       | 4.70 years                      |       | 4.57 years                      |       |

 

Changein fair value of derivatives instruments-

 

Thenet decrease in derivative liability for the Warrant (fair value) of $33,993for the nine months ended September 30, 2007, has been recorded under Otherincome in the accompanying consolidated statements of operations.

 

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

 

**ForwardLooking Statements**

 

Someof the information in this report contains forward-looking information thatinvolve risks and uncertainties. Our forward-looking statements express ourcurrent expectations or forecasts of possible future results or events,including projections of future performance, statements of management’s plansand objectives, future contracts, and forecasts of trends and other matters. Youcan identify these statements by the fact that they do not relate strictly tohistoric or current 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 assurancecan be given that the results in any forward-looking statement will be achievedand actual results could be affected by one or more factors, which could causethem to differ materially. For these statements, we claim the protection of thesafe harbor for forward-looking statements contained in the Private SecuritiesLitigation Reform Act. You should also consider carefully the statements under “Descriptionof Business - Risk Factors” in our 2006 Form 10-KSB, which address factors thatcould cause our actual results to differ from those set forth in theforward-looking statements.

 

*CRITICAL ACCOUNTING POLICIES*

 

The following discussion and analysis of financialcondition and results of operations is based upon our consolidated financialstatements, which have been prepared in conformity with accounting principlesgenerally accepted in the United States of America. Our significant accountingpolicies are more fully described in Note 3 of Notes to the unauditedConsolidated Financial Statements. However, certain accounting policies andestimates are particularly important to the understanding of our financialposition and results of operations and require the application of significantjudgment by our management or can be materially affected by changes from periodto period in economic factors or conditions that are outside of ourcontrol.  As a result, they are subject to an inherent degree ofuncertainty. In applying these policies, our management uses their judgment todetermine the appropriate assumptions to be used in the determination ofcertain estimates. Those estimates are based on our historical operations, ourfuture business plans and projected financial results, the terms of existingcontracts, our observance of trends in the industry, information provided byour customers and information available from other outside sources, as appropriate.The following discusses our significant accounting policies and estimates.

 

*Revenue Recognition:*  We recognize revenue over the periodthe service is performed in accordance with SEC Staff Accounting BulletinNo. 104, “Revenue Recognition in Financial Statements” (“SAB 104”). Ingeneral, SAB 104 requires that four basic criteria must be met before revenuecan be recognized: (1) persuasive evidence that an arrangement exists,(2) delivery has occurred or services rendered, (3) the fee is fixedand determinable, and (4) collectibility is reasonably assured.

 

Advance payments are deferred until shipment. Theamount of the revenue deferred represents the fair value of the remainingundelivered products measured in accordance with Emerging Issues Task Force Issue(“EITF”) 00-21, *“Accounting for RevenueArrangements with Multiple Deliverables,”* which addresses the issueof accounting for arrangements that involve the delivery of multiple productsor services.

 

Revenue from licenses and other up-front fees are recognizedon a ratable basis over the term of the respective agreement.

 

*Cost of Revenues and Selling,General and Administrative Expenses and Research and Development Expenses:*  In an effort to consolidate ourexecutive management team, we moved our headquarters from Austin, Texas to TheWoodlands, Texas

 

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duringthe third quarter of 2005.  The primary purpose of our facility in TheWoodlands, Texas is to conduct research on the development, testing and deliveryof our prototype devices, and the commercialization of our products.

 

If, in the future, the purposes for which we operateour facility in The Woodlands, Texas, or any new facilities we open, changes,the allocation of the costs incurred in operating that facility between cost ofsales and research and development expenses could change to reflect suchoperational changes.

 

*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.

 

*Intangible Assets:*  Our intangible assets represent patentapplications which are recorded at cost. We have filed applications for patentsin connection with technologies being developed. The patent applications andany patents issued as a result of these applications are important to theprotection of our technologies that may result from our research anddevelopment efforts. Costs associated with patent applications and maintainingpatents are capitalized and will be amortized over the life of the patents. Wereview the value recorded for intangibles to assess recoverability from futureoperations using undiscounted cash flows. Impairments are recognized inoperating results to the extent the carrying value exceeds fair valuedetermined based on the net present value of estimated future cash flows. Theprojection of future cash flows requires us to make estimates about whenproduct approvals may be obtained, and the amount of future revenues. Theactual future results could differ significantly from these estimates, andresulting changes in the estimates of future cash flows could be significantand could affect the recoverability of intangible assets.

 

*Stock-Based Compensation:*  Beginning in the quarter beginningJanuary 1, 2006, we adopted SFAS No. 123 (Revised 2004), *“Share Based Payment,”* which eliminatesthe use of APB Opinion No. 25 and we will be required to measure the costof employee services received in exchange for an award of equity instrumentsbased on the grant-date fair value of the award. That cost will be recognizedover the period during which an employee is required to provide service inexchange for the reward—the requisite service period. No compensation cost willbe recognized 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. SFAS No. 123 (Revised2004) must be applied to all options granted or modified after its effectivedate and also to recognize the cost associated with the portion of any optionawards made before its effective date for which the associated service has notbeen rendered as of its effective date.

 

Prior to January 1, 2006, we accounted for ourstock-based compensation under the provisions of Statement of FinancialAccounting Standards (“SFAS”) No. 123— “Accounting for Stock BasedCompensation.” Under SFAS No. 123, we are permitted to either recordexpenses for stock options and other employee compensation plans based on theirfair value at the date of grant or to continue to apply the provisions ofAccounting Principles Board Opinion No. 25 “Accounting for Stock Issued toEmployees,” (“APB No. 25”), and recognize compensation expense, if any,based on the intrinsic value of the equity instrument at the measurement date.We have elected to continue following the provisions of APB No. 25. Stockoptions issued to persons other than employees or directors are recorded on thebasis of their fair value as required by SFAS No. 123.

 

*RESULTS OF OPERATIONS*

 

Comparison of the nine months ending September 30, 2007 and 2006

 

REVENUES.  We are a development stage companythat has developed, patented and demonstrated a new color display technology inthe form of proof of concept prototypes which we call Time Multiplexed OpticalShutter (“TMOS”).  We intend to be a leader in the research, developmentand commercialization of new flat panel displays using TMOS in a variety ofapplications, such as mobile phones, digital cameras, notebook computers,televisions and other consumer electronic devices. From inception, we have hada limited amount of revenue that is derived from development contracts.

 

Revenues decreased to $0 for the nine months endedSeptember 30, 2007, as compared to $200,000 for the nine months ended September30, 2006, due to the revenues recognized from the work specific to adevelopment contract during each of those respective periods.

 

COST OF REVENUES.  Cost of revenues include alldirect expenses associated with the delivery of services including internallabor costs. Cost of revenues for the nine months ended September 30, 2007 andthe nine months ended September 30, 2006 

 

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was$0. No cost of revenues was recognized in the nine months ended September 30,2006 as the cost of revenues was expensed in the period incurred prior to 2006as a component of research and development expenses.

 

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES.Selling, general and administrative expenses increased by 110% or approximately$2,601,000 million, to $4,959,433 for the nine months ended September 30, 2007from $2,358,037 for the nine months ended September 30, 2006.  The majorcomponents of the increase are as follows:

 

a)  Salaries and benefits increased byapproximately $1,628,000 to $3,000,000 for the nine months ended September 30,2007 compared to $1,372,000 for the nine months ended September 30, 2006, dueto an increase in the number of selling, general and administrative employeesand an increase in stock compensation expense of approximately $1,035,000 to$1,595,000 for the nine months ended September 30, 2007 compared to $560,000for the nine months ended September 30, 2006;

 

b) Contract labor decreased by approximately $78,000to $68,000 for the nine months ended September 30, 2007 compared to $146,000for the nine months ended September 30, 2006;

 

c) Legal expense decreased by approximately $17,000to $238,000 for the nine months ended September 30, 2007 compared to $255,000for the nine months ended September 30, 2006;

 

d) Accounting expense increased by approximately$5,000 to $52,000 for the nine months ended September 30, 2007 compared to$47,000 for the nine months ended September 30, 2006;

 

e) Office expense increased by approximately $25,000to $108,000 for the nine months ended September 30, 2007 compared to $83,000for the nine months ended September 30, 2006;

 

f) Travel expense decreased by approximately $5,000to $72,000 for the nine months ended September 30, 2007 compared to $77,000 forthe nine months ended September 30, 2006;

 

g) Depreciation and amortization expense increasedby approximately $3,000 to $200,000 for the nine months ended September 30,2007 compared to $197,000 for the nine months ended September 30, 2006;

 

h) A one time professional consulting fee of$697,000 was incurred for the nine months ended September 30, 2007.

 

RESEARCH AND DEVELOPMENT. Research and developmentexpenses increased by approximately $227,000 during the nine months endedSeptember 30, 2007 to $2,516,597 from $2,290,039 for the nine months endedSeptember 30, 2006. The major components of the increase are as follows:

 

a) Salaries and benefits attributable to researchand development decreased by approximately $13,000 to $1,033,000 for the nine monthsended September 30, 2007 compared to $1,046,000 for the nine months endedSeptember 30, 2006 due to a decrease in the number of research and developmentemployees and the level of compensation for these employees and due to andecrease in stock compensation expense of approximately $27,000 to $121,000 forthe nine months ended September 30, 2007 compared to $148,000 for the ninemonths ended September 30, 2006;

 

b) Consulting expense attributable to research anddevelopment decreased by approximately $124,000 to $782,000 for the nine monthsended September 30, 2007 compared to $906,000 for the nine months endedSeptember 30, 2006 primarily due to decreased services related to prototypedevelopment;

 

c) Lab expense increased by approximately $263,000 to$360,000 for the nine months ended September 30, 2007 compared to $97,000 forthe nine months ended September 30, 2006; and

 

d) Travel expense attributable to research anddevelopment increased by approximately $142,000 to $220,000 for the nine monthsended September 30, 2007 compared to $78,000 for the nine months endedSeptember 30, 2006.

 

OTHER INCOME (EXPENSE).

 

a) Net decrease (increase) in fair value ofderivative liabilities decreased to an income of $382,920 for the nine monthsended September 30, 2007 as compared to an income of $240,523 during the ninemonths ended September 30, 2006, relating to the Warrant issued in connectionwith the 12% Senior Secured Convertible Debentures in May 2006 and the Warrantissued in connection with the 10% Senior Unsecured Convertible Debentures inSeptember 2006. The Warrants are freestanding derivative financial instruments.These derivative liabilities are marked-to-market each quarter with the changein fair value recorded in the income statement.

 

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b) Debt issuance expense increased to $94,189 forthe nine months ended September 30, 2007 as compared to $38,297 during the ninemonths ended September 30, 2006, due to the debt raised in May 2006 andSeptember 2006.

 

c)****Interestincome (expense), net increased to ($914,166) for the nine months endedSeptember 30, 2007 as compared to $(273,785) for the nine months endedSeptember 30, 2006, primarily due to less cash on hand, the payment of intereston the $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 loan receivedin September 2006, and the amortization of the discount on the Warrant issuedin connection with the 10% Senior Unsecured Convertible Debentures in September2006.

 

NET LOSS.**  **Net loss increased to $8,101,465 for the nine months ended September30, 2007, as compared to $4,519,635 for the nine months ended September 30,2006. We compute our net loss per share on the basis of net loss attributableto common stockholders, which included the effects of certain items notincluded in the determination of net loss. Net loss attributable to common stockholdersfor the nine months ended September 30, 2007 was $10,001,331 as compared to anet loss attributable to common stockholders of $4,899,244 for the nine monthsended September 30, 2006. The net loss attributable to common stockholders forthe nine months ended September 30, 2007 includes $1,899,866 of accrued butunpaid preferred stock dividends and amortization of preferred stock discount. Thenet loss attributable to common stockholders for the nine months endedSeptember 30, 2006 includes $379,609 of accrued but unpaid preferred stockdividends.

 

Comparison of the three months ending September 30, 2007 and 2006

 

REVENUES.  We are a development stage companythat has developed, patented and demonstrated a new color display technology inthe form of proof of concept prototypes which we call Time Multiplexed OpticalShutter (“TMOS”).  We intend to be a leader in the research, developmentand commercialization of new flat panel displays using TMOS in a variety ofapplications, such as mobile phones, digital cameras, notebook computers,televisions and other consumer electronic devices. From inception, we have hada limited amount of revenue that is derived from development contracts.

 

Revenues were $0 for the three months endedSeptember 30, 2007 and the three months ended September 30, 2006.

 

COST OF REVENUES.  Cost of revenues include alldirect expenses associated with the delivery of services including internallabor costs. Cost of revenues for the three months ended September 30, 2007 andthe three months ended September 30, 2007 was $0.

 

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES.Selling, general and administrative expenses increased by 115% or $856,000, to$1,603,298 for the three months ended September 30, 2007 from $747,049 for thethree months ended September 30, 2006.  The major components of theincrease are as follows:

 

a)  Salaries and benefits increased byapproximately $709,000 to $1,196,000 for the three months ended September 30,2007 compared to $487,000 for the three months ended September 30, 2006 due toan increase in the number of selling, general and administrative employees anddue to an increase in stock compensation expense of approximately $238,000 to$504,000 for the three months ended September 30, 2007 compared to $266,000 forthe three months ended September 30, 2006;

 

b) Contract labor decreased by approximately $26,000to $3,000 for the three months ended September 30, 2007 compared to $29,000 forthe three months ended September 30, 2006;

 

c) Legal expense increased by approximately $32,000to $97,000 for the three months ended September 30, 2007 compared to $65,000for the three months ended September 30, 2006;

 

d) Accounting expense increased by approximately$2,000 to $12,000 for the three months ended September 30, 2007 compared to$10,000 for the three months ended September 30, 2006;

 

e) Office expense increased by approximately $14,000to $37,000 for the three months ended September 30, 2007 compared to $23,000for the three months ended September 30, 2006;

 

f) Travel expense decreased by approximately $2,000to $25,000 for the three months ended September 30, 2007 compared to $27,000for the three months ended September 30, 2006;

 

g) Depreciation and amortization increased byapproximately $4,000 to $69,000 for the three months ended September 30, 2007compared to $65,000 for the three months ended September 30, 2006;

 

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RESEARCH AND DEVELOPMENT. Research and developmentexpenses increased by approximately $604,000 during the three months endedSeptember 30, 2007 to $1,075,528 from $471,733 for the three months endedSeptember 30, 2006. The major components of the increase are as follows:

 

a) Salaries and benefits attributable to researchand development increased by approximately $211,000 to $462,000 for the threemonths ended September 30, 2007 compared to $251,000 for the three months endedSeptember 30, 2006 due to an increase in the number of research and developmentemployees and the level of compensation for these employees and due to andecrease in stock compensation expense of approximately $7,000 to $51,000 forthe three months ended September 30, 2007 compared to $58,000 for the threemonths ended September 30, 2006;

 

b) Consulting expense attributable to research anddevelopment increased by approximately $111,000 to $283,000 for the threemonths ended September 30, 2007 compared to $172,000 for the three months endedSeptember 30, 2006 primarily due to increased services related to prototypedevelopment;

 

c) Lab expense increased by approximately $176,000to $179,000 for the three months ended September 30, 2007 compared to $3,000for the three months ended September 30, 2006; and

 

d) Travel expense attributable to research anddevelopment increased by approximately $92,000 to $107,000 for the three monthsended September 30, 2007 compared to $15,000 for the three months endedSeptember 30, 2006.

 

OTHER INCOME (EXPENSE).

 

a) Net increase in fair value of derivativeliabilities decreased to $0 for the three months ended September 30, 2007 ascompared to $388,232 during the three months ended September30, 2006, relatingto the Warrant issued in connection with the 12% Senior Secured ConvertibleDebentures in May 2006 and the Warrant issued in connection with the 10% SeniorUnsecured Convertible Debentures in September 2006. The Warrants arefreestanding derivative financial instruments. These derivative liabilities aremarked-to-market each quarter with the change in fair value recorded in theincome statement.

 

b) Debt issuance expense decreased to $0 for thethree months ended September 30, 2007 as compared to $28,674 during the threemonths ended September 30, 2006, due to the debt raised in May 2006 andSeptember 2006.

 

c)****Interestincome (expense), net increased to $62,915 for the three months ended September30, 2007 as compared to and expense of $200,234 for the three months endedSeptember 30, 2006 primarily due to more cash on hand, the payment of intereston the $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 loan receivedin September 2006, and the amortization of the discount on the Warrant issued inconnection with the 10% Senior Unsecured Convertible Debentures in September2006.

 

NET LOSS.**  **Net loss increased to $2,615,911 for the three months endedSeptember 30, 2007, as compared to $1,059,458 for the three months endedSeptember 30, 2006. We compute our net loss per share on the basis of net lossattributable to common stockholders, which included the effects of certainitems not included in the determination of net loss. Net loss attributable tocommon stockholders for the three months ended September 30, 2007 was$3,337,278 as compared to a net loss attributable to common stockholders of$1,181,661 for the three months ended September 30, 2006. The net lossattributable to common stockholders for the three months ended September 30,2007 includes $721,367 of accrued but unpaid preferred stock dividends andamortization of preferred stock discount. The net loss attributable to commonstockholders for the three months ended September 30, 2006 includes $122,203 ofaccrued but unpaid preferred stock dividends.

 

**Off-Balance Sheet Transactions**

 

We do not engage in material off-balance sheettransactions.

 

*LIQUIDITY AND CAPITAL RESOURCES*

 

Operating Activities

 

Cash used in operating activities during the ninemonths ended September 30, 2007 increased to $5,657,541 as compared to$3,701,474 used for the nine months ended September 30, 2006. The increase isprimarily a result of increases in the first nine months of 2007 in general andadministrative expenses resulting from additional employee salary and relatedemployee costs and a one time cash Consulting Fee expense of $480,000.

 

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Investing Activities

 

Cash used for investing activities during the ninemonths ended September 30, 2007 amounted to $88,482, as compared to $48,187used for investing activities for the nine months ended September 30, 2006.

 

Financing Activities

 

We have financed our operating and investingactivities primarily from the proceeds of private placements of common stock,convertible investor notes, Series A Convertible Preferred Stock offering whichwe closed in December 2004 and January 2005 and Series B ConvertiblePreferred Stock offering which we closed in February 2007 and Series CConvertible Preferred Stock offering we closed in September 2007. During thenine months ended September 30, 2007, the total net cash provided by financingactivities was $19,518,059, which includes: a) $2,401,280 payments on notespayable and b) $21,919,339 net proceeds from the issuance of Series B ConvertiblePreferred Stock and Series C Convertible Preferred Stock. During the ninemonths ended September 30, 2006, the total net cash provided by financingactivities was $2,175,448, which includes: a) $39,761 payments on notes payableto related party, b) $2,177,611 proceeds from notes payable and c) $37,598 fromthe issuance of warrants to placement agent..

 

Working Capital

 

As of September 30, 2007, wehad a cash balance of $13.8 million.  We project that current cashreserves will sustain our operations at least through December 2008, and we arenot aware of any trends or potential events that are likely to impact our shortterm liquidity through this term.

 

On February 13, 2007, weentered into a Securities Purchase Agreement (the “Purchase Agreement”) withThe Raptor Global Portfolio Ltd., The Tudor BVI Global Portfolio Ltd., TudorProprietary Trading, L.L.C. and The Altar Rock Fund L.P. (collectively, the “Purchasers”)pursuant to which we sold on that date in a private placement to the Purchasers(a) 3,200,000 authorized but unissued shares of the Company’s Series BPreferred 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 the Company’s common stock, par value $0.001, for anaggregate purchase price of $12,000,000.

 

On September 28, 2007, theCompany entered into a Securities Purchase Agreement (the “ ML PurchaseAgreement”) with Merrill Lynch Pierce, Fenner & Smith Incorporated (the “ML Purchaser”) pursuant to which the Company sold on that date in a privateplacement to the ML Purchaser (a) 892,858 authorized but unissued shares of theCompany’s Series C Preferred Stock, par value $0.001 per share (the “Series C PreferredStock”), and (b) warrants (the “ML Warrants”) to purchase, in aggregate,up to 3,214,289 shares of the Company’s common stock, par value $0.001 for anaggregate purchase price of $10,000,009.60.

 

We are a development stage company and have notexperienced significant operations since our formation. We reached a positiveworking capital position as of the first quarter of 2005 as a result of ourfinancing activities. We have incurred significant operating losses during theyears ended December 31, 2002, 2003, 2004, 2005 and 2006 and the ninemonths ended September 30, 2007. We intend to utilize a proprietary methodologyfor development of our displays. Our principal activities, from the beginningof the development stage, have been organizational matters, capital raisingactivities including issuance of stock, product research and development, fundraising, and market research.

 

To date, we have had only a few revenue-generatingservices or development contracts.  These include a prototype developmentagreement with a large personal computer company, and a Small BusinessInnovation Research (SBIR) Phase One agreement with the U.S. Air Force for$98,214 and a follow-on Phase Two agreement for $686,966.  We also enteredinto a prototype development agreement with Lockheed Martin, a large militarycontractor, in October 2005, for which we have received full payment fromLockheed Martin.  Our immediate customer prospects are limited to LockheedMartin, with which we entered into a License and Strategic Business Agreementdated October 5, 2005. See “Risk Factors” included in our 2006 Form 10-KSB.

 

Management will work to establish specificapplications for our display technology that will generate significantrevenues, and cash flows to support operations.

 

**ITEM 3.  CONTROLS ANDPROCEDURES.**

 

Disclosure Controls and Procedures

 

As of September 30, 2007, management, including ourPresident and Chief Financial Officer, performed an evaluation of theeffectiveness of the design and operation of our disclosure controls and procedures,as defined in Rules 13a-15(e) and 15d-15(e)

 

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underthe Securities Exchange Act of 1934. Based on their evaluation, management,including our President and our Chief Financial Officer, concluded that, as ofSeptember 30, 2007, our disclosure controls and procedures are effective toensure that material information required to be disclosed by us in the reportsthat we file or submit under the Securities Exchange Act of 1934, as amended,is recorded, processed, summarized and reported, within the time periodsspecified in the Securities and Exchange Commission’s rules and forms, andthat it is accumulated and communicated to management, including our Presidentand Chief Financial Officer, as appropriate, to allow timely decisionsregarding required disclosure.

 

Changes in Internal Control Over Financial Reporting

 

We maintain a system of internal control overfinancial reporting that is designed to provide reasonable assurance regardingthe reliability of financial reporting and the preparation of financialstatements for external purposes in accordance with accounting principlesgenerally accepted in the United States. Based on the most recent evaluation,our President and Chief Financial Officer have determined that no significantchanges in our internal control over financial reporting occurred during ourmost recent fiscal quarter that have materially affected, or are reasonablylike to materially affect, our internal control over financial reporting.

 

**PART II - OTHER INFORMATION**

 

**ITEM 2.  UNREGISTERED SALES OFEQUITY SECURITIES AND USE OF PROCEEDS.**

 

OnFebruary 13, 2007, we entered into a Securities Purchase Agreement (the “PurchaseAgreement”) with The Raptor Global Portfolio Ltd., The Tudor BVI GlobalPortfolio Ltd., Tudor Proprietary Trading, L.L.C. and The Altar Rock Fund L.P.(collectively, the “Purchasers”) pursuant to which we sold on that date in aprivate placement to the Purchasers (a) 3,200,000 authorized but unissuedshares of the Company’s Series B Preferred Stock, par value $0.001 per share(the “SeriesB Preferred Stock”), and (b) warrants (the “Warrants”) to purchase, inaggregate, up to 6,839,279 shares at $1.24 per share, of the Company’s commonstock, par value $0.001, for an aggregate purchase price of $12,000,000. TheCompany utilized the Black-Scholes methodology in determining thefair market value of the warrants of $3,715,602, which was credited toadditional paid-in capital in the first quarter of 2007.

 

Inconnection with the Purchase Agreement, the Company and the Purchasers alsoentered into an Investors’ Rights Agreement dated as of February 13, 2007 (the “Investors’Rights Agreement”), pursuant to which the Company granted to the Purchaserscertain rights with respect to the Series B Preferred Stock and the Warrantssold (including the shares of common stock issuable upon exercise of theWarrants) under the Purchase Agreement.

 

Subsequentto the $12 million financing, we paid approximately $2.8 million to repayexisting notes payable and related accrued interest.

 

OnSeptember 28, 2007, the Company entered into a Securities Purchase Agreement(the “ML Purchase Agreement”) with Merrill Lynch Pierce, Fenner & SmithIncorporated (the “ ML Purchaser”) pursuant to which the Company sold on thatdate in a private placement to the ML Purchaser (a) 892,858 authorized butunissued shares of the Company’s Series C Preferred Stock, par value $0.001 pershare (the “SeriesC Preferred Stock”), and (b) warrants (the “ML Warrants”) to purchase,in aggregate, up to 3,214,289 shares of the Company’s common stock, par value$0.001 for an aggregate purchase price of $10,000,009.60. The Company utilizedthe Black-Scholes methodology in determining the fair market value ofthe warrants of $3,809,644, which was credited to additional paid-incapital in the third quarter of 2007, and is being amortized over five years.

 

Inconnection with the ML Purchase Agreement, the Company and the ML Purchasersalso entered into an Investors’ Rights Agreement dated as of September 28, 2007(the “ ML Investors’ Rights Agreement”), pursuant to which the Company grantedto the ML Purchasers certain rights with respect to the Series C PreferredStock and the ML Warrants sold (including the shares of common stock issuableupon exercise of the ML Warrants) under the ML Purchase Agreement.

 

These securities were issued without registration inreliance upon the exemption from registration provided by Section 4(2) of theSecurities Act of 1933 because of the limited number of purchasers, theseparate negotiation of each transaction with each purchaser, the absence ofany public solicitation or advertising and the restriction of such securitiesfrom resale.

 

**ITEM 5.  OTHER INFORMATION.**

 

See the disclosure contained in Item 2 of this PartII.

 

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**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 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.** |
|-------------------|---------------------|
|              |                |   |
|              |                |   |
| November  9, 2007 |                | By: | /s/ James  A. Tassone |   |
| Date              |                |   | James  A. Tassone, Chief Financial Officer |
|                   |                     |  |  |  |  |

 

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