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UPIP > SEC Filings for UPIP > Form 10-K on 9-Sep-2013All Recent SEC Filings

Show all filings for UNWIRED PLANET, INC.

Form 10-K for UNWIRED PLANET, INC.


9-Sep-2013

Annual Report


Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with, and is qualified entirely by, our consolidated financial statements (including notes to the consolidated financial statements) and the other consolidated financial information appearing elsewhere in this Annual Report on Form 10-K. In addition to historical financial information, the following discussion contains forward-looking statements that reflect our plans, estimates, and beliefs. Some of the information contained in this discussion and analysis, including information with respect to our plans and strategy for our business, includes forward-looking statements that involve risk and uncertainties. Actual results and timing of events could differ from the results described in or implied by the forward-looking statements contained in the following discussion and analysis.


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Overview

Unwired Planet, Inc. (referred to as "Unwired Planet", "UPIP", the "Company", "our", "we", or "us") is an intellectual property licensing company with approximately 2,450 mobile technology patents and patent applications. Prior to the closing of a transaction with a wholly owned subsidiary of Telefonaktiebolaget L M Ericsson ("Ericsson"), our patent portfolio included approximately 200 issued United States and foreign patents and approximately 60 pending applications that cover technologies applicable to the mobile industry. On February 13, 2013, we closed a transaction with Ericsson in which Unwired Planet, LLC ("UP LLC"), a variable interest entity organized and based in Nevada that is consolidated by the Company, acquired approximately 2,150 additional mobile technology patents and patent applications.

Unwired Planet, formerly known as Openwave Systems Inc., was incorporated in 1994 as a Delaware corporation, and we completed our initial public offering in June 1999.

On February 13, 2013, the Company, through a wholly-owned subsidiary, acquired a patent portfolio from Ericsson that consists of approximately 2,150 patents and patent applications and the right to receive 100 additional patents per year for five years beginning in 2014. The acquired patents cover technology utilized in telecommunications infrastructure and mobile devices including, among other things, signal processing, network protocols, radio resource management, voice/text applications, mobility management, software, hardware and antennas and were purchased subject to existing encumbrances.

This purchase does not entitle UP LLC or the Company to royalty payments that are currently being received by Ericsson under third party license agreements on any patents included in the portfolio. Consideration to be paid to Ericsson consists of a nontransferable, limited license to patents held by UP LLC and an amount equal to a percentage of future gross revenues generated by a combined patent portfolio that includes both the Ericsson Patents plus the Company's legacy mobility patents ("fee share").

The fee share that Ericsson will receive from the derived value of the patent portfolio is computed on a tiered basis. Specifically, Ericsson will receive 20% of the first $100 million of gross revenue, 50% of the next $400 million and 70% of any amounts above $500 million. The fee share has no termination date. The Ericsson Patents and the Company's patents (the "combined patent portfolio") have been transferred to UP LLC. UP LLC is capitalized with nominal equity from its two members, Unwired Planet IP Holdings, Inc. and Unwired Planet IP Manager, LLC, both of which are wholly owned by the Company.

The transaction with Ericsson was completed pursuant to a Master Sale Agreement dated January 10, 2013 between (i) Ericsson and its subsidiaries and (ii) the Company and its subsidiaries ("MSA"). In addition, in connection with the completion of the transaction with Ericsson, UP LLC adopted an Amended and Restated Operating Agreement of UP LLC ("Operating Agreement"). Under the terms of the MSA and the Operating Agreement, UP LLC is required to comply with a number of restrictions on its future activities described in detail in Note 4 of the notes to consolidated financial statements.

During fiscal year 2013, we focused on propelling our new business strategy related to the intellectual property business as well as on our restructuring activity. With the majority of restructuring activities behind us, today the Company's business is focused entirely on pursuing a multi-pronged strategy to realize the value of our patent portfolio.

Our strategy ranges from direct licensing or sale of our patents, to litigation, joint ventures, and partnering with one or more intellectual property specialists. We generate revenue by licensing our patented innovations and technologies to companies that develop mobile communications, software infrastructure or hardware and/or develop mobile communications products. Our goal is to continue to create additional licensing opportunities.


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To support our new strategy, we sought financing and on June 28, 2013, entered into an Indenture Agreement to provide for the issuance of Senior Secured Notes due 2018 (the "Notes") in an aggregate amount not to exceed $35 million. On this same day, the Company entered into a Note Purchase Agreement for the sale of Notes in the amount of $25 million with Indaba Capital Fund, L.P. ("Indaba"). The Notes were offered at 98% of the principal. From the date of issuance of the Notes up to and inclusive of the second anniversary of the date of issuance, the Notes will bear interest at 12.875%, paid quarterly as payment-in-kind. Payment date is the last day of each quarter, with the initial payment date being June 30, 2013. From the second anniversary of the date of issuance of the Notes up to and inclusive of the maturity date of June 28, 2018, the Notes will bear interest at a per annum rate of 12.5%, paid quarterly in cash. We may elect to pay interest as payment-in-kind with the issuance of additional Notes; provided that in the event of such election, the per annum interest rate will be increased by .375%.

On June 28, 2013, we also entered into a Securities Purchase Agreement for a Registered Direct Offering with Indaba that provided for issuance of 7,530,120 shares of Company common stock, par value $0.001 for $12.5 million.

On June 28, 2013, the Company filed a registration statement on Form S-3 with the Securities and Exchange Commission ("SEC") for a Rights Offering to stockholders as of the record date of July 8, 2013 (collectively, the "Offerees") of 7,530,120 shares of Company common stock, par value $0.001 per share, at a price of $1.66 per share. In connection with the Rights Offering, the Company entered into a Purchase Agreement on June 28, 2013 with Indaba (the "Backstop Purchase Agreement") to which Indaba is obligated to purchase such number of unregistered shares of Company common stock equal to the number of shares offered in the Rights Offering that are not purchased by the Offerees. The Company is also obligated to issue to Indaba 225,904 unregistered shares of Company common stock ("Backstop Fee") in consideration for providing its backstop purchase commitment ("Backstop Purchase Commitment").

The Backstop Purchase Commitment ensures that the Company will have additional capital in the amount of $12.5 million in exchange for the stock compensation fee of 225,904 Company issued shares and as such is part of our financing transactions.

On August 14, 2013, our registration statement was declared effective allowing us to proceed with the Rights Offering. The Rights Offering period started on August 19, 2013 and it will expire at 5:00 pm New York time on September 9, 2013.

The Note Purchase Agreement, Registered Direct Offering, and Backstop Purchase Agreements are collectively referred to as the "Transactions" or "Financing Agreements".

Our strategy is still in the early stages of its implementation. The capital we raised in fiscal 2013 through the Registered Direct Offering Agreement and the Senior Secured Notes will be used to finance our operations, especially patent initiative expense, as we have not yet generated any significant revenues from our new strategy. In fiscal 2013 we recorded losses from continuing operations of $39.7 million.

As of June 30, 2013 we had 16 full time employees.

As we execute our licensing strategy, we anticipate the related revenue in future periods to be unpredictable and volatile. Additionally, legal costs associated with our efforts to license and protect our intellectual property and proprietary rights could be material at any given period and are unpredictable and volatile. Effectively policing and


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enforcing our intellectual property is time consuming and costly. In addition, there can be no assurance that any ongoing or future litigation will be successful.

Critical Accounting Policies and Judgments

We believe that there are several accounting policies that are critical to understanding our business and prospects for our future performance, as these policies affect the reported amounts of revenue and other significant areas that involve management judgment and estimates. These significant accounting policies are:

Classification of continuing and discontinued operations

Revenue Recognition

Stock-based Compensation

Valuation of Investments

Restructuring-related Assessments

Allocation of Proceeds from Debt and Equity transactions with Indaba

These policies and our procedures related to these policies are described in detail below. In addition, please refer to the notes to consolidated financial statements for further discussion of our accounting policies.

Classification of continuing and discontinued operations

Due to the sale of our remaining product businesses in 2012, we have presented financial results for the product businesses as discontinued operations. As the majority of costs related to employees and operations in the past related to our product operations, we identified costs we considered to be related to the ongoing intellectual property business for presentation as continuing operations.

Costs we identified as relating to continuing operations include costs related to all personnel dedicated to our patent initiatives, including external legal fees and support personnel. Additionally, certain general and administrative costs were included, which are equivalent to the resources we expect to have on an ongoing basis after our transition to an intellectual property business. This includes costs related to our Chief Executive Officer ("CEO") and Chief Financial Officer, as well as accounting, information systems, and support personnel. All compensation, benefits, stock-based compensation, and restructuring costs, if any, associated with these positions, were included in ongoing operations. Additionally, we included costs related to being a public company, such as external audit costs, costs associated with the Sarbanes-Oxley Act, board of directors fees, SEC filings and NASDAQ fees.

Facilities and information technology costs were allocated based upon the percentage of headcount of the employees assumed to be working primarily for the intellectual property business. Restructuring costs related to facilities remained in continuing operations, as we have retained the related liabilities. All other historical costs were classified as discontinued operations as they were considered necessary to support the product business.

Revenue Recognition

We recognize revenue from the licensing of our intellectual property when the following fundamental criteria are met: (i) persuasive evidence of an arrangement exists, (ii) delivery has occurred, (iii) the sales price is fixed or determinable,


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and (iv) collection of resulting receivables is reasonably assured. To date, revenue from upfront payments from licensees for the licensing of our patents has been recognized when the arrangement is mutually signed, since there has been no delivery or future performance obligation and the other three criteria are met upon signing the arrangement. When patent licensing arrangements include royalties for future sales of the licensees' products using our licensed patented technology, revenue is recognized when the royalty report is received from the licensee, at which time the fixed and determinable criteria are met.

On February 13, 2013, the Company, through a wholly-owned subsidiary, acquired a patent portfolio from a wholly owned subsidiary of Ericsson that consists of approximately 2,150 patents and patent applications and the right to receive 100 additional patents per year for five years beginning in 2014. The acquired patents cover technology utilized in telecommunications infrastructure and mobile devices including, among other things, signal processing, network protocols, radio resource management, voice/text applications, mobility management, software, hardware and antennas and were purchased by the Company subject to existing encumbrances.

Because of the restrictions on UP LLC and the rights and obligations of Ericsson after the transaction, the Company, for accounting purposes, has concluded that its arrangement with Ericsson is executory in nature and accordingly has not given current recognition to it. Specifically, the company has not recognized an asset value for the patents received and has not recorded revenue from the license issued to Ericsson. Revenues earned from licensing the combined patent portfolio will be recognized when the criteria for recognition have been met. The fee share to Ericsson will be recorded as a reduction in gross revenue when the fee share is paid or payable. See Note 4 of the notes to the consolidated financial statements for more details.

Stock-based Compensation

Stock-based compensation is recorded utilizing the fair value recognition provisions of accounting guidance, which requires the use of judgment and estimates in performing multiple calculations. We have estimated the expected volatility as an input into the Black-Scholes-Merton valuation formula when assessing the fair value of options granted. Our estimate of volatility was based upon the historical volatility experienced in our stock price, as well as implied volatility in market traded options on our common stock when appropriate. During fiscal 2013, 2012 and 2011, implied volatility was not utilized in our valuation of options granted due to the lack of option contracts with a strike price similar to our stock option grants. To the extent volatility of our stock price increases in the future, our estimates of the fair value of options granted in the future could increase, thereby increasing stock-based compensation expense in future periods. Our expected term of options granted is derived from actual post-vesting option cancellation and exercise experience, as well as the average midpoint between vesting and the contractual term for outstanding options.

On February 14, 2013 the Company issued market based stock to a consultant for services provided in connection with the Ericsson transaction. If the volume weighted average trading price of the Company's common stock over any 20 consecutive trading days equals or exceeds $3.00 ("First Incentive Fee") prior to August 14, 2014 the consultant will receive 500,000 shares of Company common stock. An additional 700,000 shares of Company common stock will be issued if prior to February 12, 2015 the volume weighted average trading price of the Company's common stock over any 20 consecutive trading days equals or exceeds $5.00 ("Second Incentive Fee"). The awards related to the Incentive Fees will only vest if the respective Company common stock price targets are met. The fair value of the awards for the Incentive Fees will be remeasured on a quarterly basis using a Monte Carlo simulation method and any changes in fair value will be recognized as expense or income in the statement of operations. As of June 30, 2013, the fair value of the Incentive Fee awards was estimated at $0.9 million and was recognized as a liability. To the extent volatility of our stock


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price increases or decreases in the future, our estimates of the fair value of the market based stock options granted in the future could increase or decrease, thereby increasing or decreasing other income or expenses in future periods.

Valuation of Investment

Level 1 inputs, quoted prices in active markets for identical assets or liabilities, provide the most reliable evidence of fair value. Level 1 inputs, quoted prices in active markets, are available for all of our investments and are used to determine the fair value of our investments.

As of June 30, 2012 and June 30, 2011, $2.2 million and $4.4 million, respectively, in auction rate securities ("ARS"), recorded in long-term investments on the consolidated balance sheet, were considered illiquid based upon lack of recent auction results. We estimated the fair value of these auction rate securities based on: (1) financial standing of the issuer; (2) size of position held and the liquidity of the market; (3) contractual restrictions on disposition; (4) pending public offering with respect to the financial instrument; (5) pending reorganization activity affecting the financial instrument; (6) reported prices and the extent of the public trading in similar financial instruments of the issuer or comparable companies; (7) ability of the issuer to obtain required financing; (8) changes in the economic conditions affecting the issuer; (9) a recent purchase of the sale of a security of the issuer; (10) pricing by other dealers in similar securities; (11) financial statements of any underlying ARS portfolio investments; (12) successful auction/early redemption; (13) failing auctions until maturity; or (14) default and the estimated cash flows for each scenario. Other factors are considered, such as interest rate effects, liquidity, trinomial probabilities, recovery rates, value of the investments held by the issuer and the financial condition and credit ratings of the issuer, insurers, and parent companies, as applicable. Assumptions of probabilities of default, probabilities of passing auction, and probabilities of earning the maximum rate for each period are based upon the risks, the underlying investments collateralizing the ARS, the maturity date of the ARS, the maximum rate of the ARS and current market conditions, and third party professional judgment.

Restructuring-related Assessments

Our critical accounting policy and judgment as it relates to restructuring-related assessments includes our estimate of facility costs. To determine facility costs, which consist of the loss after our cost recovery efforts from subleasing a building, some estimates were made related to: (1) the time period over which the relevant building would remain vacant; (2) sublease terms; and (3) sublease rates, including common area charges. The facility cost is an estimate that may be adjusted in the future upon triggering events (such as changes in estimates of time and rates to sublease, based upon current market conditions, or changes in actual sublease rates).

Allocation of Proceeds from Debt and Equity Transactions with Indaba

The Financing Agreement Transactions, including the Senior Secured Notes, Registered Direct Offering and the Backstop Purchase Commitment and Backstop Fee were accounted for using fair value measurement. Fair value measurement requires that assets and liabilities be measured and recorded at their fair value; the amount that represents the price that would be received to sell the asset or paid to transfer the liability. Because these Transactions occurred simultaneously, they were accounted for using relative fair value. The proceeds from the Senior Secured Notes and, Registered Direct Offering were allocated to the Senior Secured Notes, Registered Direct Offering and the Backstop Purchase Commitment and Backstop Fee based on their relative fair value.

Various factors were considered in determining the fair value of the Transactions. These factors include (1) closing price per share on the date the Transactions closed; (2) cash interest payments on the Notes;
(3) payment-in-kind


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payments on the Notes; (4) principal prepayment of the Notes; (5) the Notes maturity date; (6) the Notes debt covenants; (7) discount rates; (8) market interest rates; (9) Company projections; (10) comparable issues and spread analysis; (11) Capital Asset Pricing Model scenarios; (12) and backstop purchase commitment scenarios.

Summary of Operating Results for Fiscal 2013, 2012 and 2011

Revenues

We generate patent revenue, which is derived from licensing our intellectual property.

To date our patent revenues have been from two licensees, Microsoft, Inc. ("Microsoft") and Mobixell Networks, Inc. ("Mobixell Networks") as shown in the following table:

                                       % of Total Revenue Fiscal Year
                                               Ended June 30,
                                     2013             2012           2011
               Microsoft                                 100 %           -
               Mobixell Networks        100 %              -           100 %

The following table presents the key revenue information for fiscal 2013, 2012 and 2011, respectively (dollars in thousands):

                                                         Percent Change        Percent Change
                    Fiscal Year ended June 30,            FY 2013 from          FY 2012 from
                 2013            2012        2011           FY 2012               FY 2011
  Revenues:
  Patents       $   142        $ 15,050     $ 4,019
  Fee share         (21 )             -           -

  Net revenue   $   121        $ 15,050     $ 4,019                  -99 %                 274 %

Patents Revenues and Fee Share

During the first quarter of fiscal 2011, we entered into a license agreement with Mobixell Networks for a fee of $4.0 million plus future royalties from domestic sales of products and related services covered under the patent license after September 22, 2010. We received royalties related to this agreement during the first, second, and third quarters of fiscal 2013. In the fourth quarter of fiscal 2013, Mobixell Networks exercised its rights under the licensing agreement to buy out all further royalty obligations. The buyout amount was calculated based on the licensing agreement and was equal to $0.1 million. Ericsson received its fee share of the buyout in the amount of $21,000 in accordance with the terms of the Ericsson agreement. See Note 4 of the Notes to the Consolidated Financial Statements for a further description of the fee share agreement.

During the first quarter of fiscal 2012, we entered into a license agreement with Microsoft whereby we licensed to them rights to all of Unwired Planet's patents for a fee of $15.1 million which was received during the second quarter of fiscal 2012.


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Operating Expenses

The following table represents operating expenses for fiscal 2013, 2012 and
2011, respectively (dollars in thousands):



                                                               Fiscal Year ended June 30,
                                                      Percent                            Percent
                                                      Increase                           Increase
                                       2013          (Decrease)           2012          (Decrease)           2011
Sales and marketing expense          $    109                -82 %      $    614                100 %      $      -
Patent initiative expense              16,281                 24 %        13,089                285 %         3,398
General and administrative             21,451                180 %         7,651                 33 %         5,732
Restructuring and other costs           1,771                -34 %         2,666                 20 %         2,226

Total operating expenses             $ 39,612                 65 %      $ 24,020                112 %      $ 11,356

Sales and marketing expense

Sales and marketing expenses in fiscal 2013 include costs related to public relations, advertising, promotional materials and other market development programs. In fiscal 2013 we incurred $0.1 million in sales and marketing expense. With the sale of our product business, we have limited sales and marketing expense going forward.

The $0.6 million of sales and marketing expense incurred during fiscal 2012 consisted primarily of commissions of $0.4 million incurred during the first quarter of fiscal 2012 in connection with the patent deal signed in the quarter, as well as $0.2 million in marketing expense incurred during the fourth quarter of fiscal 2012.

Prior to fiscal 2012, patent revenues were not subject to a commission plan and our marketing activities were related to the discontinued operations.

Patent initiative expenses

Patent initiative expenses include legal and consulting costs related to defending or asserting our patents, as well as salary and benefit expenses and travel expenses for our employees engaged in these activities on a full-time basis. Patent Initiative expenses are by far our largest expenses. We are in a reactive business and some of our licensing expenses are related to the actions taken by defendant companies. Although our strategy focuses on licensing, we sometimes have to resort to legal actions to protect our patent rights.

During the fiscal year ended June 30, 2013, patent initiative expenses increased by approximately 24%, or $3.2 million, compared with the prior fiscal year. This increase is primarily due to an increase in legal expenses associated with patent litigation and an increase in patent maintenance costs associated with the acquired Ericsson patents. In fiscal 2013, our litigation expense included legal fees in the first half of 2013 supporting the ITC and Delaware District Court cases filed and announced in August 2011, as well as the patent infringement cases against each of Apple and Google filed in the U.S. District Court for the District of Nevada in September 2012. The Company withdrew the ITC investigation in October 2012. In addition, we incurred $0.9 million in patent maintenance costs in fiscal 2013 associated with the acquired Ericsson patents. Going forward, legal costs associated with our efforts to license and protect our intellectual property and proprietary rights could be material at any given period.

During the fiscal year ended June 30, 2012, patent initiative expenses increased by 285%, or $9.7 million, compared with the prior fiscal year. This increase was primarily due to a $9.3 million increase in legal expenses associated with . . .

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