** **

**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON, D.C. 20549**

 

**FORM10-QSB**

 
| **ý** | ** ** | **QUARTERLY  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES  EXCHANGE ACT OF 1934**                                                                                                                                                                                                                                           |
|------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ** ** | ** ** | ** **                                                                                                                                                                                                                                                                                                                                        |
|       |       | **For the Quarterly Period Ended March 31, 2006**                                                                                                                                                                                                                                                                                                 |
|       |       |                                                                                                                                                                                                                                                                                                                                              |
| ** ** | ** ** | **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 Small Business 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 reports required to be filed by Section 13 or15(d) of the Exchange Act during the past 12 months (or for such shorterperiod that the registrant was required to file such reports), and (2) hasbeen subject to such filing requirements for the past 90days.   ý Yes o No

 

Indicate by check markwhether the registrant is a shell company (as defined in Rule 12b-2 of theExchange Act).   Yes o   No ý

 

As of May 12, 2006, theissuer had 15,949,717 shares of issued and outstanding common stock, par value$0.001 per share.

 

Transitional Small BusinessDisclosure Format (Check One):   Yes o   No ý

 

 

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**TABLE OF CONTENTS**

 
| Part I.  | Financial Information                                                                                                                                                                    |   |
|---------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|
|          |                                                                                                                                                                                     |   |
| Item 1.       | Financial Statements                                                                                                                                                                     |   |
|          |                                                                                                                                                                                     |   |
|          | Consolidated Balance Sheets  March 31, 2006 (unaudited) and December 31, 2005                                                                                                       |   |
|          |                                                                                                                                                                                     |   |
|          |                                                                                                                                                                                     |   |
|          | Consolidated Statements of  Operations  Three months ended March 31, 2006 (unaudited) and March 31, 2005 (unaudited)  and cumulative period from inception to March 31, 2006 (unaudited) |   |
|          |                                                                                                                                                                                     |   |
|          |                                                                                                                                                                                     |   |
|          | Consolidated Statements of  Shareholders’ Equity  From inception to March 31, 2006 (unaudited)                                                                                      |   |
|          |                                                                                                                                                                                     |   |
|          |                                                                                                                                                                                     |   |
|          | Consolidated  Statements of Cash Flows  Three months ended March 31, 2006 (unaudited) and March 31, 2005 (unaudited)  and cumulative period from inception to March 31, 2006 (unaudited) |   |
|          |                                                                                                                                                                                     |   |
|          |                                                                                                                                                                                     |   |
|          | Notes to Unaudited  Consolidated Financial Statements                                                                                                                                    |   |
|          |                                                                                                                                                                                     |   |
| Item 2.       | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                                                                                              |   |
|          |                                                                                                                                                                                     |   |
| Item 3.       | Controls  and Procedures                                                                                                                                                                 |   |
|          |                                                                                                                                                                                     |   |
| Part II. | Other  Information                                                                                                                                                                       |   |
|          |                                                                                                                                                                                     |   |
| Item 6.       | Exhibits                                                                                                                                                                                 |   |

 

2

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**PART I- FINANCIAL INFORMATION**

 

**ITEM 1.****FINANCIALSTATEMENTS.**

 

Uni-Pixel, Inc.(A Development StageCompany)Consolidated Balance Sheets

 
| ** **                                                                                                                                                                                            | ** ** | **March 31,  2006** | ** ** | **December 31,  2005** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|---------------------|------------|-----------------------------|------------|
| ** **                                                                                                                                                                                            | ** ** | **(unaudited)**     | ** ** | **(audited)**               | ** ** |
| **ASSETS**                                                                                                                                                                                            |       |                |       |                        |       |
| Current  assets                                                                                                                                                                                       |       |                |       |                        |       |
| Cash and cash equivalents                                                                                                                                                                             |       | $                   | 644,361    |                        | $          | 2,328,385 |   |
| Restricted cash                                                                                                                                                                                       |       | 202,000             |       | 40,000                      |       |
| Interest receivable                                                                                                                                                                                   |       | 8,813               |       | 6,297                       |       |
| Prepaid expenses                                                                                                                                                                                      |       | 16,963              |       | 16,965                      |       |
|                                                                                                                                                                                                  |       |                |       |                        |       |
| Total current assets                                                                                                                                                                                  |       | 872,137             |       | 2,391,647                   |       |
|                                                                                                                                                                                                  |       |                |       |                        |       |
| Property and equipment, net of accumulated  depreciation of $269,383 and $203,709, at March 31, 2006 and December 31,  2005, respectively                                                             |       | 836,566             |       | 854,052                     |       |
| Restricted  cash, less current portion                                                                                                                                                                |       | 98,000              |       | 260,000                     |       |
|                                                                                                                                                                                                  |       |                |       |                        |       |
| Total assets                                                                                                                                                                                          |       | $                   | 1,806,703  |                        | $          | 3,505,699 |   |
|                                                                                                                                                                                                  |       |                |       |                        |       |
| **LIABILITIES AND SHAREHOLDERS’ EQUITY**                                                                                                                                                         |       |                |       |                        |       |
|                                                                                                                                                                                                  |       |                |       |                        |       |
| Current  liabilities                                                                                                                                                                                  |       |                |       |                        |       |
| Accounts payable                                                                                                                                                                                      |       | $                   | 332,822    |                        | $          | 278,749 |   |
| Accrued expenses                                                                                                                                                                                      |       | 7,651               |       | 10,812                      |       |
| Deferred revenue                                                                                                                                                                                      |       | —              |       | 200,000                     |       |
| Current portion of note payable                                                                                                                                                                       |       | 125,917             |       | 144,019                     |       |
|                                                                                                                                                                                                  |       |                |       |                        |       |
| Total current liabilities                                                                                                                                                                             |       | 466,390             |       | 633,580                     |       |
|                                                                                                                                                                                                  |       |                |       |                        |       |
| Note  payable, less current portion                                                                                                                                                                   |       | 30,276              |       | 57,537                      |       |
|                                                                                                                                                                                                  |       |                |       |                        |       |
| Total liabilities                                                                                                                                                                                     |       | 496,666             |       | 691,117                     |       |
|                                                                                                                                                                                                  |       |                |       |                        |       |
| Shareholders’  equity                                                                                                                                                                            |       |                |       |                        |       |
| Preferred stock, $0.001 par value; $3.50  liquidation preference; 10,000,000 shares authorized, 2,433,334 and 2,685,651  issued and outstanding at March 31, 2006 and December 31, 2005, respectively |       | 2,433               |       | 2,686                       |       |
| Common stock, $0.001 par value; 40,000,000  shares authorized, 15,903,137 and 15,395,057 issued and outstanding at March  31, 2006 and December 31, 2005, respectively                                |       | 15,903              |       | 15,395                      |       |
| Additional paid-in capital                                                                                                                                                                            |       | 17,546,571          |       | 17,348,728                  |       |
| Accumulated deficit during development  stage                                                                                                                                                         |       | (16,254,870         | )          | (14,552,227                 | )          |
|                                                                                                                                                                                                  |       |                |       |                        |       |
| Total shareholders’ equity                                                                                                                                                                       |       | 1,310,037           |       | 2,814,582                   |       |
|                                                                                                                                                                                                  |       |                |       |                        |       |
| Total  liabilities and shareholders’ equity                                                                                                                                                      |       | $                   | 1,806,703  |                        | $          | 3,505,699 |   |

 

*The accompanying notes are anintegral part of these consolidated financial statements.*

 

3

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Uni-Pixel, Inc.(A Development Stage Company)Consolidated Statements of Operations(unaudited)

 
| ** **                                                              | ** ** | **Three Months Ended  March 31,** | ** ** | **Cumulative  Period from  February 17, 1998  (date of inception)  to March 31,** | ** ** |
|-------------------------------------------------------------------------|------------|-----------------------------------|------------|----------------------------------------------------------------------------------------|------------|
| ** **                                                              | ** ** | **2006**                          | ** ** | **2005**                                                                               | ** ** | **2006** | ** ** |
|                                                                    |       |                              |       |                                                                                   |       |   |   |
| Revenues                                                                |       |                              |       |                                                                                   |       |   |   |
| Development  contract revenue                                           |       | $                                 | 200,000    |                                                                                   | $          | 18,219 |   | $ | 1,158,201 |   |
|                                                                    |       |                              |       |                                                                                   |       |   |   |
| Total revenues                                                          |       | 200,000                           |       | 18,219                                                                                 |       | 1,158,201 |   |
|                                                                    |       |                              |       |                                                                                   |       |   |   |
| Cost of  revenues                                                       |       | —                            |       | 9,109                                                                                  |       | 456,648 |   |
|                                                                    |       |                              |       |                                                                                   |       |   |   |
| Gross margin                                                            |       | 200,000                           |       | 9,110                                                                                  |       | 701,553 |   |
|                                                                    |       |                              |       |                                                                                   |       |   |   |
| Selling,  general and administrative expenses                           |       | 830,263                           |       | 512,381                                                                                |       | 7,711,020 |   |
| Research and  development                                               |       | 1,080,112                         |       | 507,543                                                                                |       | 8,041,298 |   |
|                                                                    |       |                              |       |                                                                                   |       |   |   |
| Operating loss                                                          |       | (1,710,375                        | )          | (1,010,814                                                                             | )          | (15,050,765 | ) |
|                                                                    |       |                              |       |                                                                                   |       |   |   |
| Other income  (expense)                                                 |       |                              |       |                                                                                   |       |   |   |
| Other income                                                            |       | —                            |       | —                                                                                 |       | 886,886 |   |
| Debt issuance expense                                                   |       | —                            |       | —                                                                                 |       | (500,000 | ) |
| Interest income (expense), net                                          |       | 13,767                            |       | 23,606                                                                                 |       | (775,514 | ) |
|                                                                    |       |                              |       |                                                                                   |       |   |   |
| Net loss                                                                |       | $                                 | (1,696,608 | )                                                                                      | $          | (987,208 | ) | $ | (15,439,393 | ) |
|                                                                    |       |                              |       |                                                                                   |       |   |   |
| Preferred  stock dividends                                              |       | (132,040                          | )          | (185,853                                                                               | )          | (941,482 | ) |
| Net loss  attributable to common shareholders                           |       | $                                 | (1,828,648 | )                                                                                      | $          | (1,173,061 | ) | $ | (16,380,875 | ) |
|                                                                    |       |                              |       |                                                                                   |       |   |   |
| Per share  information                                                  |       |                              |       |                                                                                   |       |   |   |
| Net loss — basic and diluted                                       |       | $                                 | (0.11      | )                                                                                      | $          | (0.08 | ) | $ | (2.49 | ) |
| Preferred stock dividends                                               |       | (0.01                             | )          | (0.01                                                                                  | )          | (0.15 | ) |
| Net loss  attributable to common shareholders — basic and diluted  |       | $                                 | (0.12      | )                                                                                      | $          | (0.09 | ) | $ | (2.64 | ) |
|                                                                    |       |                              |       |                                                                                   |       |   |   |
| Weighted average number of basic and  diluted common shares outstanding |       | 15,667,897                        |       | 12,800,580                                                                             |       | 6,203,022 |   |

 

*The accompanying notes are anintegral part of these consolidated financial statements.*

 

4

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Uni-Pixel, Inc.(A Development Stage Company)Consolidated Statements of Shareholders’ Equity

 
|                                                                                     | ** ** | **Series A**    | ** ** | ** ** | ** ** | ** **        |       | ** **     |   | ** **   |   | **Accumulated**  |       | ** **             |   |
|------------------------------------------------------------------------------------------|------------|----------------------|------------|------------|------------|-------------------|------------|----------------|--------|--------------|--------|------------------|------------|------------------------|--------|
|                                                                                     | ** ** | **Preferred  Stock** | ** ** | ** ** | ** ** | ** **        |       | ** **     |   | ** **   |   | **Deficit**      |       | **Total**              |   |
|                                                                                     | ** ** | **Number**           | ** ** | ** ** | ** ** | **Common  Stock** |       | **Additional** |   | **Deferred** |   | **During**       |       | **Shareholders’** |   |
|                                                                                     | ** ** | **of**               | ** ** | ** ** | ** ** | **Number  of**    | ** ** | ** **     |   | **Paid-In**  |   | **Stock-Based**  |       | **Development**        |   | **Equity** |   |
|                                                                                     | ** ** | **Shares**           | ** ** | **Amount** | ** ** | **Shares**        | ** ** | **Amount**     |   | **Capital**  |   | **Compensation** |       | **Stage**              |   | **(Deficit)** |   |
| Founder shares  issued at inception at February 17, 1998                                 |       | —               |       | $          | —     |              | 4,500,000  |           | $      | 4,500        |   | $                | (500       | )                      | $      | — |   | $ | — |   | $ | 4,000 |   |
| Stock issued  during 1999 (prices ranging from $0.50 - $0.62 per share)                  |       | —               |       | —     |       | 180,000           |       | 180            |   | 183,820      |   | —           |       | —                 |   | 184,000 |   |
| Stock issued  during 2000 (prices ranging from $11.34 - $17.00 per share)                |       | —               |       | —     |       | 63,750            |       | 64             |   | 956,186      |   | —           |       | —                 |   | 956,250 |   |
| Stock issued  during 2001 (prices ranging from $10.00 - $17.00 per share)                |       | —               |       | —     |       | 28,176            |       | 28             |   | 404,227      |   | —           |       | —                 |   | 404,255 |   |
| Stock issued  during 2002 (prices ranging from $2.00 - $10.00 per share)                 |       | —               |       | —     |       | 157,327           |       | 157            |   | 353,783      |   | —           |       | —                 |   | 359,940 |   |
| 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            |   | 34,488       |   | —           |       | —                 |   | 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 |       | (252,317             | )          | (253       | )          | 508,080           |       | 508            |   | 5,780        |   |             |       | (6,035                 | )      | — |   |
| Stock  compensation expense                                                              |       |                 |       |       |       |              |       |           |   | 192,063      |   |             |       |                   |   | 192,063 |   |
| Net loss                                                                                 |       |                 |       |       |       |              |       |           |   |         |   |             |       | (1,696,608             | )      | (1,696,608 | ) |
| Balance, March 31, 2006 (unaudited)                                                      |       | 2,433,334            |       | $          | 2,433      |              | 15,903,137 |           | $      | 15,903       |   | $                | 17,546,571 |                   | $      | — |   | $ | (16,254,870 | ) | $ | 1,310,037 |   |

 

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

 

5

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Uni-Pixel, Inc.(A Development Stage Company)Consolidated Statements of Cash Flows(unaudited)

 
| ** **                                                                   | ** ** | **Three Months Ended  March 31,** | ** ** | **Cumulative Period  from February 18,  1998 (date of  inception) to  March 31,** | ** ** |
|------------------------------------------------------------------------------|------------|-----------------------------------|------------|----------------------------------------------------------------------------------------|------------|
| ** **                                                                   | ** ** | **2006**                          | ** ** | **2005**                                                                               | ** ** | **2006** | ** ** |
| Cash flows  from operating activities                                        |       |                              |       |                                                                                   |       |   |   |
| Net loss                                                                     |       | $                                 | (1,696,608 | )                                                                                      | $          | (987,208 | ) | $ | (15,439,393 | ) |
| Adjustments to reconcile net loss to net  cash used in operating activities: |       |                              |       |                                                                                   |       |   |   |
| Interest forgiven                                                            |       | —                            |       | —                                                                                 |       | (91,421 | ) |
| Interest earned, but not received                                            |       | (2,516                            | )          | —                                                                                 |       | (8,813 | ) |
| Employee compensation notes payable  forgiven                                |       | —                            |       | —                                                                                 |       | (795,465 | ) |
| Depreciation and amortization                                                |       | 65,674                            |       | 18,104                                                                                 |       | 337,131 |   |
| Stock issued for services                                                    |       | —                            |       | —                                                                                 |       | 460,062 |   |
| Stock compensation expense                                                   |       | 192,063                           |       | —                                                                                 |       | 192,063 |   |
| Non-cash compensation expense                                                |       | —                            |       | —                                                                                 |       | 1,100,000 |   |
| Amortization of debt issuance costs                                          |       | —                            |       | —                                                                                 |       | 500,000 |   |
| Cash restricted for note payable and lease  obligations                      |       | —                            |       | —                                                                                 |       | (300,000 | ) |
| Change in operating assets and liabilities:                                  |       |                              |       |                                                                                   |       |   |   |
| Increase in related party receivables                                        |       | —                            |       | (2,000                                                                                 | )          | — |   |
| (Increase) decrease in prepaid expenses and  other current assets            |       | 2                                 |       | (14,209                                                                                | )          | (16,963 | ) |
| Increase in accounts payable                                                 |       | 54,072                            |       | 264,457                                                                                |       | 332,818 |   |
| Increase (decrease) in accrued interest  payable                             |       | —                            |       | (7,635                                                                                 | )          | 180,943 |   |
| Increase (decrease) in accrued expenses and  other liabilities               |       | (3,161                            | )          | (17,844                                                                                | )          | 803,116 |   |
| Decrease in deferred revenue                                                 |       | (200,000                          | )          | —                                                                                 |       | — |   |
| Net cash used in operating activities                                        |       | (1,590,474                        | )          | (746,335                                                                               | )          | (12,745,922 | ) |
|                                                                         |       |                              |       |                                                                                   |       |   |   |
| Cash flows  from investing activities                                        |       |                              |       |                                                                                   |       |   |   |
| Purchase of property and equipment                                           |       | (48,185                           | )          | (373,841                                                                               | )          | (1,133,736 | ) |
| 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                                        |       | (48,185                           | )          | (373,841                                                                               | )          | (1,173,692 | ) |
|                                                                         |       |                              |       |                                                                                   |       |   |   |
| Cash flows  from financing activities                                        |       |                              |       |                                                                                   |       |   |   |
| Proceeds from notes payable to related  party                                |       | —                            |       | —                                                                                 |       | 115,103 |   |
| Payments on notes payable to related party                                   |       | (20,000                           | )          | (48,163                                                                                | )          | (144,567 | ) |
| Proceeds from convertible notes payable                                      |       | —                            |       | —                                                                                 |       | 3,390,000 |   |
| Payments on convertible notes payable                                        |       | —                            |       | —                                                                                 |       | (1,470,672 | ) |
| Proceeds (payments) from notes payable, net                                  |       | (25,365                           | )          | —                                                                                 |       | 136,431 |   |
| Proceeds from the issuance of preferred  stock, net                          |       | —                            |       | 2,799,300                                                                              |       | 10,448,630 |   |
| Proceeds from the issuance of common stock,  net                             |       | —                            |       | —                                                                                 |       | 2,089,050 |   |
| Net cash provided by (used in) financing  activities                         |       | (45,365                           | )          | 2,751,137                                                                              |       | 14,563,975 |   |
|                                                                         |       |                              |       |                                                                                   |       |   |   |
| Net increase  (decrease) in cash and cash equivalents                        |       | (1,684,024                        | )          | 1,630,961                                                                              |       | 644,361 |   |
| Cash and  cash equivalents, beginning of period                              |       | 2,328,385                         |       | 5,342,641                                                                              |       | — |   |
| Cash and  cash equivalents, end of period                                    |       | $                                 | 644,361    |                                                                                   | $          | 6,973,602 |   | $ | 644,361 |   |
|                                                                         |       |                              |       |                                                                                   |       |   |   |
| Supplemental  disclosures of cash flow information:                          |       |                              |       |                                                                                   |       |   |   |
| Cash paid for interest                                                       |       | $                                 | 3,512      |                                                                                   | $          | 12,458 |   | $ | 745,505 |   |
| Interest capitalized into notes payable                                      |       | $                                 | —     |                                                                                   | $          | — |   | $ | 8,250 |   |
| Debt issuance cost for warrant issued                                        |       | $                                 | —     |                                                                                   | $          | — |   | $ | 500,000 |   |
| Preferred stock dividend                                                     |       | $                                 | 132,040    |                                                                                   | $          | 185,853 |   | $ | 941,482 |   |
| Conversion of notes payable for preferred  stock                             |       | $                                 | —     |                                                                                   | $          | — |   | $ | 898,250 |   |
| Conversion of notes payable for common  stock                                |       | $                                 | —     |                                                                                   | $          | — |   | $ | 980,103 |   |
| Stock issued for services                                                    |       | $                                 | —     |                                                                                   | $          | — |   | $ | 1,560,062 |   |
| Stock issued for interest                                                    |       | $                                 | —     |                                                                                   | $          | — |   | $ | 81,272 |   |

* *

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

 

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**Uni-Pixel, Inc.(A Development Stage Company)Notes to Unaudited Consolidated Financial Statements**

 

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

 

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

 

Uni-Pixel is a developmentstage company that has developed, patented and demonstrated a new color displaytechnology in the form of proof of concept prototypes which we call TimeMultiplexed Optical Shutter (“TMOS”).  We intend to be a leader in theresearch, development and commercialization of new flat panel displays usingTMOS in a variety of applications, such as mobile phones, digital cameras,notebook computers, televisions and other consumer electronic devices. As ofMarch 31, 2006, we had accumulated a total deficit of $16.3 million fromoperations in pursuit of this objective.

 

We anticipate that our TMOSdisplays will be thin, lightweight, and power-efficient devices, which arehighly suitable for use in full-color display applications.  We believe TMOSdisplays will be able to capture a share of the growing $60+ billion flatpanel display market due to the significant advantages it should provide overcompeting displays with respect to manufacturing and materials cost,brightness, power efficiency, viewing angle, video response time and imagequality.  We believe that our technology leadership and intellectualproperty position will enable us to generate revenues initially from TMOSdisplays for existing vertical market segments such as the military, avionics,and automotive segments, and then subsequently from consumer electronicsmarkets (i.e., TVs, monitors, personal computers, cameras, games, etc.).

 

Our strategy is to developfurther our proprietary TMOS technology to the point of initially manufacturingsmall volumes of high performance displays for military applications.  Weintend to utilize contract manufacturing for product fabrication to augment ourinternal capabilities in the short term.  We also plan to enter into jointventures in certain vertical market segments to exploit the existingmanufacturing and distribution channels of our targeted partners.  Wefurther plan to license our technology to display manufacturers for use inapplications such as mobile phones, digital cameras, laptop computers, andother consumer electronic devices. Through our internal research anddevelopment efforts we have established a portfolio of TMOS-related patents andpatent applications and other intellectual property rights that support thesejoint venture and licensing strategies.  We currently have nine issuedpatents and twenty-three pending patent applications worldwide and contemplateobtaining exclusive field-of-use licenses, with the right to sublicense, tocomplementary technologies from targeted strategic partners and U.S. nationallaboratories.

 

Through March 31, 2006, wehave been primarily engaged in developing our initial product technology,recruiting personnel, commencing our U.S. operations and raising capital. Inthe course of our development activities, we have sustained losses and expectsuch losses to continue through at least 2006. We will finance our operationsprimarily through our existing cash and possible future financing transactions.

 

Our ability to operateprofitably under our current business plan is largely contingent upon oursuccess in developing beyond proof of concept to final prototypes andmanufacturing for sale our products and upon our successful development ofmarkets for our products and profitable manufacturing processes.  We maybe required to obtain additional capital in the future to expand ouroperations. No assurance can be given that we will be able to develop ourproducts, successfully develop the markets for our products or profitablemanufacturing methods, or raise any such additional capital as we might need,either through equity or debt financing, on satisfactory terms or at all.Additionally, no assurance can be given that any such financing, if obtained,will be adequate to meet our ultimate capital needs and to support our growth.If adequate capital cannot be obtained on satisfactory terms, our operationscould be negatively impacted.

 

If we achieve growth in ouroperations in the next few years, such growth could place a strain on ourmanagement, administrative, operational and financial infrastructure. Ourability to manage our current operations and future growth requires thecontinued improvement of operational, financial and management controls,reporting systems and procedures. In addition, we may find it necessary to hireadditional management, financial and sales and marketing personnel to manageour expanding operations. If we are unable to manage this growth effectivelyand successfully, our business, operating results and financial condition maybe materially adversely affected.

 

As of March 31, 2006, we hadcash and cash equivalents of $0.6 million.  We believe that our existingcapital resources are adequate to finance our operations until May 2006,however our long-term viability is dependent upon successful operation of

 

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our business, our ability to develop ourmanufacturing process, the development of our products and our ability to raiseadditional debt and equity to meet our business objectives.

 

*Acquisitionand merger and basis of presentation*

 

Uni-Pixel, Inc. wasoriginally incorporated in the State of Nevada as Super Shops, Inc. OnNovember 15, 1999, Super Shops and its sister companies filed an amendedpetition under Chapter 11 of the United States Bankruptcy Code. OnJuly 31, 2000, the court approved Super Shops’ Amended Joint Plan ofReorganization. On October 13, 2000, and in accordance with the Plan ofReorganization, the management of Super Shops changed its state ofincorporation from Nevada to Delaware by merging with and into NEV AcquisitionCorp., a Delaware corporation formed solely for the purpose of effecting thereincorporation. On June 13, 2001, NEV Acquisition Corp. changed itscorporate name to Real-Estateforlease.com, Inc., as a result of the mergertransaction discussed in the following paragraph.

 

Real-Estateforlease.com, Inc.was incorporated on May 24, 2001, in the State of Delaware to serve as abusiness-to-business internet information intermediary providing turnkey marketingservices to facilitate the leasing of commercial real estate properties. OnJune 13, 2001, the management of NEV Acquisition Corp. entered into anAgreement and Plan of Merger with Real-Estateforlease.com, Inc. pursuantto 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 TralasTechnologies, Inc., a Texas corporation, on February 17, 1998. TralasTechnologies, Inc. changed its name to Uni-Pixel Displays, Inc.during 2001. On December 7, 2004, Real-Estateforlease.com, Inc.entered into a merger agreement with Uni-Pixel Displays, Inc. and certainother parties pursuant to which Uni-Pixel Displays, Inc. became awholly-owned subsidiary of Real-Estateforlease.com, Inc. Pursuant to themerger, we changed our name to “Uni-Pixel, Inc.” at the annual meeting ofour stockholders held in January 2005.

 

The financial statementspresented in this quarterly report include Uni-Pixel, Inc. and ourwholly-owned subsidiary, Uni-Pixel Displays, Inc. All significantintercompany transactions and balances have been eliminated. Uni-PixelDisplays, Inc. was, for accounting purposes, the surviving entity of themerger, and accordingly for the periods prior to the merger, the financialstatements reflect the financial position, results of operations and cash flowsof Uni-Pixel Displays, Inc.  The assets, liabilities, operations andcash flows of Real-Estateforlease.com, Inc. are included in theconsolidated financial statements from December 10, 2004 onward.

 

**Note 2 - GoingConcern**

 

The accompanying financialstatements have been prepared assuming Uni-Pixel will continue as a goingconcern.  Uni-Pixel has sustained losses and negative cash flows fromoperations since its inception. The Company’s ability to meet its obligationsin the ordinary course of business is dependent upon its ability to establishprofitable operations, raise additional financing through public or privateequity financings, enter into collaborative or other arrangements withcorporate sources, or secure other sources of financing to fund operations.These matters raise substantial doubt about the Company’s ability to continueas a going concern. The financial statements do not include any adjustmentsthat might result from the outcome of this uncertainty.

 

In December 2005, Uni-Pixelentered into an agreement with CIBC World Markets Corp. (“CIBC”) wherebyUni-Pixel retained CIBC to act, on an exclusive basis, as Uni-Pixel’s agent ina private placement of one or more classes of series of securities to a limitednumber of sophisticated investors. Management is currently in negotiations with a number of strategicinvestors, who have expressed an interest in making an investment inUni-Pixel.  These discussions areongoing, and some of the potential investors are currently conducting their duediligence procedures.  However, there canbe no assurance of the outcome of these negotiations.  In the event Uni-Pixel is not able to secureequity financing on acceptable terms, Uni-Pixel’s ability to develop itstechnology and achieve profitability may be adversely affected.

 

**Note 3 - Summary of SignificantAccounting Policies**

 

*Interimfinancial information*

 

The financial statementsincluded herein, which have not been audited pursuant to the rules andregulations of the Securities and Exchange Commission, reflect all adjustmentswhich, in the opinion of management, are necessary for a fair presentation offinancial position, results of operations and cash flows for the interimperiods on a basis consistent with the annual

 

8

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audited statements. All such adjustments areof a normal recurring nature. The results of operations for interim periods arenot necessarily indicative of the results that may be expected for any otherinterim period or of a full year. Certain information, accounting policies andfootnote disclosures normally included in financial statements prepared inaccordance with accounting principles generally accepted in the United Statesof America have been omitted pursuant to such rules and regulations,although we believe that the disclosures are adequate to make the informationpresented not misleading. These financial statements should be read inconjunction with our audited financial statements included in ourForm 10-KSB, for the year ended December 31, 2005, filed with theSecurities and Exchange Commission on March 28, 2006.

 

*Use ofestimates*

 

The preparation of financialstatements in conformity with accounting principles generally accepted in theUnited States of America requires us to make estimates and assumptions thataffect the reported amounts of assets and liabilities, disclosures ofcontingent assets and liabilities at the date of the financial statements andthe reported amounts of revenues and expenses during the reporting period.Examples include provisions for bad debts, useful lives of property andequipment and intangible assets, impairment of property and equipment andintangible assets, deferred taxes, and the provision for and disclosure oflitigation and loss contingencies. Actual results may differ materially fromthose estimates.

 

*Statementof cash flows*

 

For purposes of thestatements of cash flows, we consider all highly liquid investments (i.e.,investments which, when purchased, have original maturities of three months orless) to be cash equivalents.

 

*Concentrationof credit risk*

 

We maintain our cashprimarily with major U.S. domestic banks. The amounts held in these banksexceed the insured limit of $100,000 from time to time and exceeded thatbalance at March 31, 2006 and December 31, 2005 by $378,000 and  $2,063,000, respectively. The terms of thesedeposits are on demand to minimize risk.  We have not incurred lossesrelated to these deposits.

 

*Restrictedcash*

 

As of March 31, 2006, we hadrestricted cash of $300,000.  Of this amount, $220,000 collateralizes along-term note payable for the purchase of measurement equipment. Additionally, $80,000 of this amount secures certain obligations under ourlease agreement for our principal facility located in The Woodlands,Texas.  The restricted cash has beensegregated into current and long-term classifications based on its anticipatedliquidation.

 

*Propertyand equipment*

 

Property and equipment,consisting primarily of lab equipment, computer equipment, software, leaseholdimprovements, and office furniture and fixtures is carried at cost lessaccumulated depreciation and amortization. Depreciation and amortization forfinancial reporting purposes is provided by the straight-line method over theestimated useful lives of three to five years. Leasehold improvements areamortized using the straight-line method over the remaining lease term or thelife of the asset, whichever is shorter. The cost of repairs and maintenance ischarged as an expense as incurred.  Gainsor losses related to retirements or dispositions of fixed assets are recognizedin the period incurred.

 

*Intangibleassets*

 

Our intangible assetsrepresent patent applications which are recorded at cost.  We have filedapplications for patents in connection with technologies being developed. Thepatent applications and any patents issued as a result of these applicationsare important to the protection of our technologies that may result from ourresearch and development efforts. Costs associated with patent applications andmaintaining patents are capitalized and will be amortized over the life of thepatents.  We review the value recorded for intangibles to assessrecoverability from future operations using undiscounted cash flows.Impairments are recognized in operating results to the extent the carryingvalue exceeds fair value determined based on the net present value of estimatedfuture cash flows.

 

*Revenuerecognition*

 

We recognize revenue overthe period the service is performed in accordance with SEC Staff AccountingBulletin No. 104, “Revenue Recognition in Financial Statements” (“SAB 104”).In general, SAB 104 requires that four basic criteria must

 

9

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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) collectibility is reasonably assured.

 

Revenue from licenses andother up front fees are recognized on a ratable basis over the term of therespective agreement.

 

Revenue from developmentcontracts are recognized when the contract is complete and collectibility isreasonably assured.  Deferred revenue onthese contracts of $0 and $200,000 at March 31, 2006 and December 31, 2005,respectively, consists of a development contract to produce and deliver aprototype device.   During the firstquarter ended March 31, 2006, the Company fulfilled its obligation with acustomer in providing a product prototype, and has released deferred income of$200,000 into earned revenues during the period.  The costs incurred withthis prototype were incurred in prior periods as a component of research anddevelopment expenses.

 

*Researchand 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-basedcompensation*

 

InDecember 2004, the FASB issued SFAS No. 123 (Revised 2004) (“SFAS No.123(R)”), *“Share Based Payment,”*which eliminates the use of APB Opinion No. 25 and will require us tomeasure the cost of employee services received in exchange for an award ofequity instruments based on the grant-date fair value of the award. That costwill be recognized over the period during which an employee is required toprovide service in exchange for the reward—known as the requisite serviceperiod. No compensation cost is recognized for equity instruments for which employeesdo not render the requisite service. The grant-date fair value of employeeshare options and similar instruments will be estimated using option-pricingmodels adjusted for the unique characteristics of those instruments. We haveimplemented SFAS No. 123(R) effective January 1, 2006.

 

We may, from time to time,issue common stock, stock options or common stock warrants to acquire servicesor goods from non-employees. Common stock, stock options and common stockwarrants issued to persons other than employees or directors are recorded onthe basis of their fair value, as required by SFAS No. 123—”*Accounting for Stock Based Compensation”,* which is measuredas of the date required by EITF Issue 96-18, *“Accounting for Equity Instruments That Are Issued to Other ThanEmployees for Acquiring, or in Conjunction with Selling, Goods or Services.”* In accordance with EITF 96-18, the stock options or common stockwarrants are valued using the Black-Scholes model on the basis of the marketprice of the underlying common stock on the “valuation date,” which for optionsand warrants related to contracts that have substantial disincentives tonon-performance, is the date of the contract, and for all other contracts isthe vesting date. Expense related to the options and warrants is recognized ona straight-line basis over the shorter of the period over which services are tobe received or the vesting period. Where expense must be recognized prior to avaluation date, the expense is computed under the Black-Scholes model on thebasis of the market price of the underlying common stock at the end of theperiod, and any subsequent changes in the market price of the underlying commonstock through the valuation date is reflected in the expense recorded in thesubsequent period in which that change occurs.

 

The following disclosuresprovide information regarding the Company’s stock-based compensation awards,all of which are classified as equity awards in accordance with SFASNo. 123(R):

 

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

 

Total compensation expenserecognized for options was approximately $0.2 million in the first quarterof 2006.

 

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A summary of the changes inthe total stock options outstanding during the three months ended March 31,2006 follows:

 
| ** **                                     | ** ** | **Options** | ** ** | **Weighted  Average  Exercise Price** | ** ** |
|------------------------------------------------|------------|-------------|------------|---------------------------------------|------------|
| Outstanding  at December 31, 2005         |       | 1,805,000   |       | $                                     | 4.00       |   |
| Granted                                        |       | —      |       | —                                |       |
| Forfeited or  expired                          |       | —      |       | —                                |       |
| Exercised                                      |       | —      |       | —                                |       |
| Outstanding  at March 31, 2006            |       | 1,805,000   |       | $                                     | 4.00       |   |
| Vested and  exercisable at March 31, 2006 |       | 319,565     |       | $                                     | 4.00       |   |

 

The fair value of theCompany’s options were estimated on the date of grant using the Black-Scholesvaluation model with the following weighted-average assumptions:

 
| ** **             | ** ** | **Three Months  ended  March 31, 2006** | ** ** | **Three Months  ended  March 31, 2005** | ** ** |
|------------------------|------------|-----------------------------------------|------------|-----------------------------------------|------------|
| Expected  life (years) |       | 5 years                                 |       | 5 years                                 |       |
| Interest  rate         |       | 4                                       | %          | 4                                       | %          |
| Dividend  yield        |       | —                                  |       | —                                  |       |
| Volatility             |       | 40.05                                   | %          | 40.05                                   | %          |

 

The following table presentsinformation on net loss and diluted loss per share for the three months endedMarch 31, 2006 determined in accordance with SFAS No. 123(R),compared to the pro forma information determined under SFAS 123 for the threemonths ended March 31, 2005:

 
| ** **                                                                                                                                                            | ** ** | **Three Months Ended March 31,** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|---------------------------------------|------------|
| ** **                                                                                                                                                            | ** ** | **2006**                              | ** ** | **2005** | ** ** |
|                                                                                                                                                                  |       |                                  |       |   |   |
| Net loss attributable to common  shareholders - as reported                                                                                                           |       | $                                     | (1,828,648 | ) | $ | (1,173,061 | ) |
| Add:  stock-based compensation                                                                                                                                        |       | N/A                                   |       | N/A |   |
| Less: total stock-based employee  compensation expense determined under fair value based method for all awards  granted to employees, net of related tax effect of $0 |       | N/A                                   |       | (30,159 | ) |
| Net loss -  pro forma                                                                                                                                                 |       | $                                     | (1,828,648 | ) | $ | (1,203,220 | ) |
|                                                                                                                                                                  |       |                                  |       |   |   |
| Net loss per share attributable to common  shareholders - as reported                                                                                                 |       |                                  |       |   |   |
| Basic and diluted                                                                                                                                                     |       | $                                     | (0.12      | ) | $ | (0.09 | ) |
| Net loss per share attributable to common  shareholders - pro forma                                                                                                   |       |                                  |       |   |   |
| Basic and diluted                                                                                                                                                     |       | $                                     | (0.12      | ) | $ | (0.09 | ) |

 

*Incometaxes*

 

An asset and liabilityapproach is used for financial accounting and reporting for income taxes.Deferred income taxes arise from temporary differences between income tax andfinancial reporting and principally relate to recognition of revenue and expensesin different periods for financial and tax accounting purposes and are measuredusing currently enacted tax rates and laws. In addition, a deferred tax assetcan be generated by net operating loss carryforwards.   If it is more likely than not that some portionor all of a deferred tax asset will not be realized, a valuation allowance isrecognized.

 

No benefit has beenrecognized on the net loss as the realization of the net operating losscarryforward cannot be assured.

 

*Loss pershare data*

 

Basic loss per share iscalculated based on the weighted average common shares outstanding during theperiod, after giving effect to the manner in which the merger was accounted foras described in Note 1. Diluted earnings per share also gives effect tothe dilutive effect of stock options, warrants (calculated based on thetreasury stock method) and convertible notes and

 

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convertiblepreferred stock. The Company does not present diluted earnings per share foryears in which it incurred net losses as the effect is antidilutive.

 

At March 31, 2006, options and warrants topurchase 2,853,500 shares of common stock at exercise prices ranging from $1.75to $4.00 per share were outstanding, but were not included in the computationof diluted earnings per share as their effect would be antidilutive.

 

*Fair Value of Financial Instruments*

 

Our financial instruments consist of accountsreceivable and accounts payable. We believe the fair values of our accountsreceivable, accounts payable and note payable reflect their respective carryingamounts.

 

*Recent accounting pronouncements*

 

On July 14, 2005, FASB issued its ExposureDraft, “Accounting for Uncertain Tax Positions”, which is a proposedinterpretation to FASB Statement No. 109, “Accounting for Income Taxes.”This proposed interpretation would require an enterprise to recognize, in itsfinancial statements, the best estimate of the impact of a tax position. Inevaluating whether the probable recognition threshold has been met, thisproposed interpretation would require the presumption that the tax positionwill be evaluated during an audit by taxing authorities. The term probable isused in this proposed interpretation consistent with its use in FASB Statement No. 5,“Accounting Contingencies”, to mean “the future event or events are likely tooccur.” Individual tax positions that fail to meet the probable recognitionthreshold will generally result in either (a) a reduction in the deferredtax asset or an increase in a deferred tax liability or (b) an increase ina liability for income taxes payable or the reduction of an income tax refundreceivable. The impact may also include both (a) and (b). Theproposed interpretation would be effective as of the end of the first fiscal yearending after December 15, 2005. The initial recognition of the effect ofapplying the proposed interpretation would be a cumulative effect of a changein accounting principle. The comment period for the proposed interpretationended on October 28, 2005. The Company is currently evaluating the impactof the Exposure Draft on its financial statements.

 

Effective July 1, 2005, the Company adoptedSFAS No. 153, Exchanges of Nonmonetary Assets, an amendment of AccountingPrinciples Board (“APB”) Opinion No. 29 (“SFAS 153”). SFAS 153 amendedprior guidance to eliminate the exception for nonmonetary exchanges of similarproductive assets and replaced it with a general exception for exchanges ofnonmonetary assets that do not have commercial substance. A nonmonetaryexchange has commercial substance if the future cash flows of the entity areexpected to change significantly as a result of the exchange. The provisions ofSFAS 153 were required to be applied prospectively. SFAS 153 did not have amaterial impact on the Company’s unaudited interim consolidated financialstatements.

 

In May 2005, the FASB issued SFAS No. 154,Accounting Changes and Error Corrections, a replacement of APB Opinion No. 20and FASB Statement No. 3 (“SFAS 154”). The statement requires retrospectiveapplication to prior periods’ financial statements for a voluntary change inaccounting principle unless it is deemed impracticable. It also requires that achange in the method of depreciation, amortization, or depletion forlong-lived, non-financial assets be accounted for as a change in accountingestimate rather than a change in accounting principle. SFAS 154 is effectivefor accounting changes and corrections of errors made in fiscal years beginningafter December 15, 2005. SFAS 154 is not expected to have a materialimpact on the Company’s consolidated financial statements.

 

In March 2006, the Financial AccountingStandards Board (“FASB”) issued SFAS No. 156, “Accounting for Servicing ofFinancial Assets—an amendment of FASB Statement No. 140,” that providesguidance on accounting for separately recognized servicing assets and servicingliabilities. In accordance with the provisions of SFAS No. 156, separatelyrecognized servicing assets and servicing liabilities must be initiallymeasured at fair value, if practicable. Subsequent to initial recognition, theCompany may use either the amortization method or the fair valuemeasurement method to account for servicing assets and servicing liabilitieswithin the scope of this Statement. The Company will adopt SFAS No. 156 infiscal year 2007. SFAS 156 is not expected to have a material impact on theCompany’s consolidated 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 Companywill adopt SFAS No. 155 in fiscal year 2007. SFAS 155 is not expected tohave a material impact on the Company’s consolidated financial statements.

 

In April 2006, the FASB issued FASB Staff Position(FSP) FIN 46(R)-6, “Determining the Variability to Be Considered in ApplyingFASB Interpretation No. 46(R)”, that will become effective beginning thirdquarter of 2006. FSP FIN No. 46(R)-6 clarifies that the variability to beconsidered in applying Interpretation 46(R) shall be based on an analysis ofthe design of the

 

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variableinterest entity. The adoption of this FSP is not expected to have a materialeffect on the Company’s consolidated financial statements.

 

**Note 4****                        ****Commitments andContingencies**

 

Leases

 

The Company has entered intoa lease for office, warehouse and laboratory facility in The Woodlands, Texasunder a third party non-cancelable operating lease through 2010. Future minimumlease commitments are as follows as of March 31, 2006:

 

| **Year Ending December 31** | ** ** | ** ** | ** ** |
|----------------------------------|------------|------------|------------|
| 2006                             |       | $          | 147,411    |   |
| 2007                             |       | 199,727    |       |
| 2008                             |       | 202,997    |       |
| 2009                             |       | 206,267    |       |
| 2010                             |       | 191,825    |       |
| Thereafter                       |       | —     |       |
| Total                            |       | $          | 948,227    |   |

 

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

 

**Note 5****                        ****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 threemonths ended March 31, 2006, we did not issue equity instruments tonon-employees.

 

*Common Stock*

 

During the three monthsended March 31, 2006, we issued no shares of common stock for cash inconnection with the exercise of stock options and issued no shares of common stockin exchange for cashless exercise of warrants.

 

*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 2,000,000 sharesof our common stock to be awarded through incentive and non-qualified stockoptions and stock appreciation rights. The Stock Incentive Plan is administeredby our Board of Directors, which has exclusive discretion to selectparticipants who will receive the awards and to determine the type, size andterms of each award granted.

 

In the first quarter of2006, we did not grant any options.

 

**ITEM 2.   MANAGEMENT’S DISCUSSION AND ANALYSIS OFFINANCIAL CONDITION AND RESULTS OF OPERATIONS.**

 

The following discussion andanalysis should be read in conjunction with the consolidated financialstatements including the notes thereto.

 

**Cautionary Statement for Purposes of the “Safe Harbor” Provisions ofthe Private Securities Litigation Reform Act of 1995**

 

Some of theinformation in this report contains forward-looking information that involverisks and uncertainties. Our forward-looking statements express our currentexpectations or forecasts of possible future results or events, includingprojections of future performance, statements of management’s plans andobjectives, future contracts, and forecasts of trends and other matters. Youcan identify these statements by the fact that they do not related 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 similarmeaning. No assurance can be given that the results in any forward-looking statementwill be achieved and actual results could be affected by one or more factors,which could cause them to differ materially. For these statements, we claim theprotection of the safe harbor for forward-looking statements contained in thePrivate Securities Litigation Reform Act. You should also consider carefullythe statements under “Description of Business - Risk Factors” in our Form10-KSB, for the year ended December 31, 2005, which address factors that couldcause our actual results to differ from those set forth in the forward-lookingstatements.

 

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*CRITICAL ACCOUNTING POLICIES*

 

The following discussion andanalysis of financial condition and results of operations is based upon ourconsolidated financial statements, which have been prepared in conformity withaccounting principles generally accepted in the United States of America. Oursignificant accounting policies are more fully described in Note 3 ofNotes to the unaudited Consolidated Financial Statements. However, certainaccounting policies and estimates are particularly important to theunderstanding of our financial position and results of operations and requirethe application of significant judgment by our management or can be materiallyaffected by changes from period to period in economic factors or conditionsthat are outside of our control. As a result, they are subject to an inherentdegree of uncertainty. In applying these policies, our management uses theirjudgment to determine the appropriate assumptions to be used in thedetermination of certain estimates. Those estimates are based on our historicaloperations, our future business plans and projected financial results, theterms of existing contracts, our observance of trends in the industry,information provided by our customers and information available from otheroutside sources, as appropriate. The following discusses our significantaccounting policies and estimates.

 

*RevenueRecognition:*  Werecognize revenue over the period the service is performed in accordance withSEC Staff Accounting Bulletin No. 104, “Revenue Recognition in FinancialStatements” (“SAB 104”). In general, SAB 104 requires that four basic criteriamust be met before revenue can be recognized: (1) persuasive evidence thatan arrangement exists, (2) delivery has occurred or services rendered, (3) thefee is fixed and determinable, and (4) collectibility is reasonablyassured.

 

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Advance payments aredeferred until shipment. The amount of the revenue deferred represents the fairvalue of the remaining undelivered products measured in accordance withEmerging Issues Task Force Issue (“EITF”) 00-21, *“Accounting for Revenue Arrangements with Multiple Deliverables,”*which addresses the issue of accounting for arrangements that involve thedelivery of multiple products or services.

 

Revenue from licenses andother up-front fees are recognized on a ratable basis over the term of therespective agreement.

 

*Cost ofRevenues and Selling, General and Administrative Expenses and Research andDevelopment Expenses:* In an effort to consolidate our executive management team, we moved ourheadquarters from Austin, Texas to The Woodlands, Texas during the thirdquarter of 2005. The primary purpose of our facility in The Woodlands, Texas isto conduct research on the development, testing and delivery of our prototypedevices, and the commercialization of our products.

 

If, in the future, thepurposes for which we operate our facility in The Woodlands, Texas, or any newfacilities we open, changes, the allocation of the costs incurred in operatingthat facility between cost of sales and research and development expenses couldchange to reflect such operational changes.

 

*Researchand Development Expenses:*  Research and development costs are expensed as incurred andinclude salaries and benefits, costs paid to third-party contractors forresearch, development and manufacturing of materials and devices, and a portionof facilities cost. Prototype development costs are a significant component ofresearch and development expenses and include costs associated with third-partycontractors. Invoicing from third-party contractors for services performed canlag several months. We accrue the costs of services rendered in connection withthird-party contractor activities based on our estimate of management fees,site management and monitoring costs and data management costs. Actual costs may differin some cases from estimated costs and are adjusted for in the period in whichthey become known.

 

*IntangibleAssets:*  Ourintangible assets represent patent applications which are recorded at cost. Wehave filed applications for patents in connection with technologies beingdeveloped. The patent applications and any patents issued as a result of theseapplications are important to the protection of our technologies that may resultfrom our research and development efforts. Costs associated with patentapplications and maintaining patents are capitalized and will be amortized overthe life of the patents. We review the value recorded for intangibles to assessrecoverability from future operations using undiscounted cash flows.Impairments are recognized in operating results to the extent the carrying valueexceeds fair value determined based on the net present value of estimatedfuture cash flows. The projection of future cash flows requires us to makeestimates about when product approvals may be obtained, and the amount offuture revenues. The actual future results could differ significantly fromthese estimates, and resulting changes in the estimates of future cash flowscould be significant and could affect the recoverability of intangible assets.

 

*Stock-BasedCompensation:* Beginning in the quarter beginning January 1, 2006, we adopted SFAS No. 123(Revised 2004), *“Share Based Payment,”*which eliminates the use of APB Opinion No. 25 and we will be required tomeasure the cost of employee services received in exchange for an award ofequity instruments based on the grant-date fair value of the award. That costwill be recognized over the period during which an employee is required toprovide service in exchange for the reward—the requisite service period. Nocompensation cost will be recognized for equity instruments for which employeesdo not render the requisite service. The grant-date fair value of employeeshare options and similar instruments will be estimated using option-pricingmodels adjusted for the unique characteristics of those instruments. SFAS No. 123(Revised 2004) must be applied to all options granted or modified after itseffective date and also to recognize the cost associated with the portion ofany option awards made before its effective date for which the associatedservice has not been rendered as of its effective date.

 

Prior to January 1,2006, we accounted for our stock-based compensation under the provisions ofStatement of Financial Accounting Standards (“SFAS”) No. 123— “Accountingfor Stock Based Compensation.” Under SFAS No. 123, we are permitted toeither record expenses for stock options and other employee compensation plansbased on their fair value at the date of grant or to continue to apply theprovisions of Accounting Principles Board Opinion No. 25 “Accounting forStock Issued to Employees,” (“APB No. 25”), and recognize compensationexpense, if any, based on the intrinsic value of the equity instrument at themeasurement date. We have elected to continue following the provisions of APB No. 25.Stock options issued to persons other than employees or directors are recordedon the basis of their fair value as required by SFAS No. 123.

 

*RESULTS OF OPERATIONS*

 

Comparison of the three months ending March 31,2006 and 2005

 

REVENUES. We are adevelopment stage company that has developed, patented and demonstrated a newcolor display technology in the form of proof of concept prototypes whichwe call Time Multiplexed Optical Shutter (“TMOS”). We intend to be a leader inthe research, development and commercialization of new flat panel displaysusing TMOS in a variety of

 

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applications, such as mobile phones, digitalcameras, notebook computers, televisions and other consumer electronic devices.From inception, we have had a limited amount of revenue that is derived fromdevelopment contracts.

 

Revenues increased to$200,000 for the three months ended March 31, 2006, as compared to $18,219for the three months ended March 31, 2005, due to the revenues recognizedfrom the work specific to a development contract during each of thoserespective periods.

 

COST OF REVENUES. Cost ofrevenues include all direct expenses associated with the delivery of servicesincluding internal labor costs. Cost of revenues for the three months ended March 31,2006 decreased to $0 as compared to $9,109 for the three months ended March 31,2005. No cost of revenues was recognized as the cost of revenues was expensedin the period incurred prior to 2006 as a component of research and developmentexpenses.

 

SELLING, GENERAL ANDADMINISTRATIVE EXPENSES. Selling, general and administrative expenses increasedby 62% or $317,882, to $830,263 for the three months ended March 31, 2006from $512,381 for the three months ended March 31, 2005. The majorcomponents of the increase are as follows:

 

a)  Salaries andbenefits increased by approximately $277,000 to $448,000 for the three monthsended March 31, 2006 compared to $171,000 for the three months ended March 31,2005 due to a increase in the number of selling, general and administrativeemployees and a stock compensation expense of $147,000 for the three monthsended March 31, 2006;

 

b) Contract labor decreasedby approximately $37,000 to $52,000 for the three months ended March 31,2006 compared to $89,000 for the three months ended March 31, 2005;

 

c) Legal expense decreasedby approximately $25,000 to $111,000 for the three months ended March 31,2006 compared to $136,000 for the three months ended March 31, 2005;

 

d) Accounting expensedecreased by approximately $1,000 to $21,000 for the three months ended March 31,2006 compared to $22,000 for the three months ended March 31, 2005;

 

e) Office expense increasedby approximately $19,000 to $39,000 for the three months ended March 31,2006 compared to $20,000 for the three months ended March 31, 2005;

 

f) Travel expense increasedby approximately $10,000 to $30,000 for the three months ended March 31,2006 compared to $20,000 for three months ended March 31, 2005;  and

 

g) Depreciation andamortization expense increased by approximately $48,000 to $66,000 for thethree months ended March 31, 2006 compared to $18,000 for the three monthsended March 31, 2005 as a result of an increase in property and equipmentduring the three months ended March 31, 2006.

 

RESEARCH AND DEVELOPMENT.Research and development expenses increased by approximately $572,569 duringthe three months ended March 31, 2006 to $1,080,112 from $507,543 for thethree months ended March 31, 2005. The major components of the increaseare as follows:

 

a) Salaries and benefitsattributable to research and development increased by approximately $106,000 to$397,000 for the three months ended March 31, 2006 compared to $291,000for the three months ended March 31, 2005 due to an increase in the numberof research and development employees and the level of compensation for theseemployees, including executive pay increases and a stock compensation expenseof $45,000 for the three months ended March 31, 2006;

 

b) Consulting expenseattributable to research and development increased by approximately $378,000 to$521,000 for the three months ended March 31, 2006 compared to $143,000for the three months ended March 31, 2005 primarily due to increasedservices related to prototype development and an increase in legal expensesrelated to patent work;

 

c) Lab expense increased byapproximately $59,000 to $64,000 for the three months ended March 31, 2006compared to $5,000 for the three months ended March 31, 2005; and

 

d) Travel expenseattributable to research and development increased by approximately $2,000 to$41,000 for the three months ended March 31, 2006 compared to $39,000 forthe three months ended March 31, 2005.

 

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OTHER INCOME (EXPENSE).

 

a)****Interest income (expense), net decreased to $13,767 for thethree months ended March 31, 2006 as compared to $23,606 for the threemonths ended March 31, 2005 primarily due to less cash on hand.

 

NET LOSS. ** **Netloss increased to $1,696,608 for the three months ended March 31, 2006, ascompared to $987,208 for the three months ended March 31, 2005. We computeour net loss per share on the basis of net loss attributable to commonstockholders, which included the effects of certain items not included in thedetermination of net loss. Net loss attributable to common stockholders for thethree months ended March 31, 2006 was $1,828,648 as compared to a net lossattributable to common stockholders of $1,173,061 for the three months ended March 31,2005. The net loss attributable to common stockholders for the three monthsended March 31, 2006 includes $132,040 of accrued but unpaid preferredstock dividends. The net loss attributable to common stockholders for the threemonths ended March 31, 2005 includes $185,853 of accrued but unpaidpreferred stock dividends.

 

**Off-Balance Sheet Transactions**

 

We do not engage in materialoff-balance sheet transactions.

 

*LIQUIDITY AND CAPITAL RESOURCES*

 

Operating Activities

 

Cash used in operatingactivities during the three months ended March 31, 2006 increased to$1,590,474 as compared to $746,335 used for the three months ended March 31,2005. The increase is primarily a result of increases in the first three monthsof 2006 in research and development spending and general and administrativeexpenses resulting from additional employee salary and related employee costs.

 

Investing Activities

 

Cash used for investingactivities during the three months ended March 31, 2006 amounted to$48,185, as compared to $373,841 used for investing activities for the threemonths ended March 31, 2005 due to our decreased spending on computers,furniture, laboratory, metrology and testing equipment in the three monthsended March 31, 2006.

 

Financing Activities

 

We have financed ouroperating and investing activities primarily from the proceeds of privateplacements of common stock, convertible investor notes, and a preferred stockoffering which we closed in December 2004 and January 2005. Duringthe three months ended March 31, 2006, the total net cash used by financingactivities was ($45,365). The ($45,365) includes: a) $20,000 payments on notespayable to related party and b) $25,365 net payments on notes payable. Thetotal net cash provided by financing activities was $2,751,137 for the threemonths ended March 31, 2005. The $2,751,137 includes: a) $48,163 paymentson notes payable to related party and b) $2,799,300 net from cash sales ofshares of our Series A Preferred Stock.

 

Working Capital

 

As of March 31, 2006,we had a cash balance of $0.6 million. We project that current cash reserveswill sustain our operations at least through May 2006.

 

We are a development stagecompany and have not experienced significant operations since our formation. Wereached a positive working capital position as of the first quarter of 2005 asa result of our financing activities. We have incurred significant operatinglosses during each of the years 2002 through 2005 and the first quarter ended March 31,2006. We intend to utilize a proprietary methodology for development of ourdisplays. Our principal activities, from the beginning of the developmentstage, have been organizational matters, capital raising activities includingissuance of stock, product research and development, fund raising, and marketresearch.

 

To date, we have had only afew revenue-generating services or development contracts. These include aprototype development agreement with a large personal computer company, and aSmall Business Innovation Research (SBIR) Phase One agreement with the U.S. AirForce for $98,214 and a follow-on Phase Two agreement for $686,966. We alsoentered into a prototype development agreement with Lockheed Martin, a largemilitary contractor, in October 2005, for which we have received fullpayment from Lockheed Martin. Our immediate customer prospects are limited toLockheed Martin, with which we entered

 

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into a License and Strategic Business Agreementdated October 5, 2005. See “Risk Factors” included in our Form 10K-SB,filed with the Securities and Exchange Commission on March 28, 2006.

 

Management will work toestablish specific applications for our display technology that will generatesignificant revenues, and cash flows to support operations. Our ability tocontinue as a going concern will be dependent upon achieving profitableoperations, and obtaining additional funding from current shareholders and newinvestors.

 

In December 2005, weentered into an agreement with CIBC World Markets Corp. (“CIBC”) whereby weretained CIBC to act, on an exclusive basis, as our agent in a privateplacement of one or more classes of series of securities to a limitednumber of sophisticated investors. Management is currently in negotiations witha number of strategic investors, who have expressed an interest in making aninvestment in the Company. These discussions are ongoing, and some of thepotential investors are currently conducting their due diligence procedures.However, there can be no assurance of the outcome of these negotiations. In theevent the Company is not able to secure equity financing on acceptable terms,the Company’s ability to develop its technology and achieve profitability may beadversely affected.

 

**ITEM 3. CONTROLSAND PROCEDURES.**

 

Disclosure Controls and Procedures

 

As of March 31, 2006,management, including our President and Chief Financial Officer, performed anevaluation of the effectiveness of the design and operation of our disclosurecontrols and procedures, as defined in Rules 13a-15(e) and 15d-15(e) underthe Exchange Act. Based upon that evaluation, management, including ourPresident and our Chief Financial Officer, concluded that, as of March 31,2006, our disclosure controls and procedures are effective to ensure that materialinformation required to be disclosed by us in the reports that we file orsubmit under the Securities Exchange Act of 1934, as amended, is recorded,processed, summarized and reported, within the time periods specified in theSecurities and Exchange Commission’s rules and forms, and that it isaccumulated and communicated to management, including our President and ChiefFinancial Officer, as appropriate, to allow timely decisions regarding requireddisclosure.

 

Changes in Internal Control Over Financial Reporting

 

We maintain a system ofinternal control over financial reporting that is designed to providereasonable assurance regarding the reliability of financial reporting and thepreparation of financial statements for external purposes in accordance withaccounting principles generally accepted in the United States. Based on themost recent evaluation, our President and Chief Financial Officer havedetermined that no significant changes in our internal control over financialreporting occurred during our most recent fiscal quarter that have materiallyaffected, or are reasonably like to materially affect, our internal controlover financial reporting.

 

**PART II- OTHER INFORMATION**

 

**ITEM 6.EXHIBITS.**

 
| **Exhibit********No.** | ** ** | **Description**                                                                                                  |
|------------------------|------------|------------------------------------------------------------------------------------------------------------------|
| 3.1                    |       | Amended and Restated Certificate of Incorporation of Real-Estateforlease.com, Inc.  (1)                     |
| 3.2                    |       | Amended and Restated Bylaws of Uni-Pixel, Inc. (1)                                                          |
| 4.1                    |       | Certificate of Designations of Real-Estateforlease.com, Inc. Series A  Convertible Preferred Stock (1) |
| 4.2                    |       | Junior Subordinated Unsecured Promissory Note (1)                                                                |
| 4.3                    |       | Common Stock Purchase Warrant No. 1 (1)                                                                     |
| 4.4                    |       | Common Stock Purchase Warrant No. 2 (1)                                                                     |
| 4.5                    |       | Common Stock Purchase Warrant No. 3 (1)                                                                     |
| 4.6                    |       | Form of Common Stock certificate (2)                                                                        |

 

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| 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 (3) |
|------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 31.2 |   | Certification of the Chief Financial Officer of  Uni-Pixel, Inc., pursuant to Section 302 of the Sarbanes-Oxley Act  of 2002 (3)                   |
| 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 (3) |
| 32.2 |   | Certification of the Chief Financial Officer of  Uni-Pixel, Inc., pursuant to Section 906 of the Sarbanes-Oxley Act  of 2002 (3)                   |

 

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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) |   | Filed herewith                                                                                                                                     |

 

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**SIGNATURES**

 

In accordance with the requirements of the ExchangeAct, the registrant caused this report to be signed on its behalf by the undersigned,thereunto duly authorized.

 
|              |   | **UNI-PIXEL, INC.** |
|-------------------|--------|--------------------------|
|              |   |                     |
| May 12, 2006 |   | By:                      | /s/ James A. Tassone |   |
| Date              |   |                     | James A. Tassone, Chief Financial Officer |

 

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