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UPIP > SEC Filings for UPIP > Form 10-Q on 7-Feb-2014All Recent SEC Filings

Show all filings for UNWIRED PLANET, INC.

Form 10-Q for UNWIRED PLANET, INC.


7-Feb-2014

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.

Forward-Looking Statements

In addition to historical information, this Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the "Securities Act"), and Section 21E of the Securities Exchange Act of 1934 (the "Exchange Act"), as amended. These forward-looking statements are based upon current expectations and beliefs of our management and are subject to risks and uncertainties that may cause actual events, results of performance to differ materially from those indicated by these statements. Words such as "anticipates", "expects", "intends", "plans", "believes", "seeks", "estimates" and similar expressions identify such forward-looking statements. Such statements address future events and conditions concerning intellectual property acquisition and development, licensing and enforcement activities, capital expenditures, earnings, litigation, regulatory matters, markets for our services, liquidity and capital resources and accounting matters. Actual results in each case could differ materially from those anticipated in such statements by reason of factors such as future economic conditions, changes in demand for our technology, legislative, regulatory and competitive developments in markets in which we and our subsidiaries operate, results of litigation and other circumstances affecting anticipated revenues and costs. The occurrence of the events described above or below could harm our business, results of operations and financial condition. These forward-looking statements are made as of the date of this Quarterly Report on Form 10-Q and we undertake no obligation to revise or publicly release the results of any revision to these forward-looking statements except as required by law. Readers should carefully review the risk factors described in our Annual Report on Form 10-K for the fiscal year ended June 30, 2013 and additional risk factors disclosed in Part II. Other Information, Item 1A. Risk Factors in this Form 10-Q. The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and related notes, and Management's Discussion and Analysis of Financial Condition and Results of Operations, included in our Annual Report on Form 10-K for the fiscal year ended June 30, 2013 and the unaudited condensed consolidated financial statements and related notes contained in this Quarterly Report on Form 10-Q.

Overview of Our Business

Unwired Planet, Inc. (referred to as "Unwired Planet", "UPIP", the "Company", "our", "we", or "us") is an intellectual property licensing company with approximately 2,600 worldwide mobile technology patents and patent applications.

In the prior fiscal year the Company changed its business strategy to focus on its intellectual property and to restructure the Company's business operations. The Company is now focused entirely on pursuing a multi-pronged strategy to realize the value of our patent portfolio.

Our strategy includes direct licensing, litigation when necessary, sale of our patents, joint ventures, and partnering with one or more intellectual property specialists. We intend to 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 generate licensing revenue through fair and reasonable royalties on our intellectual property.

Significant Accounting Policies and Judgments

There have not been any material changes to the significant accounting policies and estimates previously disclosed in our Annual Report on Form 10-K for the fiscal year ended June 30, 2013. We did adopt a new accounting policy relating to how the Company accounts for contingent legal expenses as described in Note
(1) Summary of Significant Accounting Policies in the Notes to Condensed Consolidated Financial Statements in Part 1, which is being applied prospectively for transactions entered into subsequent to June 30, 2013 and has no impact on our previously reported financial condition, results of operations, cash flows, and disclosures.

Results of Operations

Overview of Financial Results During the Three and Six Months Ended December 31, 2013

Revenues

We anticipate generating revenue primarily from licensing our intellectual property.

We did not recognize any license fee revenue during the three and six months ended December 31, 2013. During the three and six months ended December 31, 2012, our license fee revenue was from one customer in the amount of $3,000 and $6,000, respectively. Although we intend to broaden our customer base, there can be no assurance that this objective will be achieved.


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Operating Expenses

The following table represents operating cost and expenses for the three and six
months ended December 31, 2013 and 2012, respectively (in thousands):



                                            Three Months Ended                         Six Months Ended
                                               December 31,            Percent           December 31,           Percent
                                             2013          2012        Change          2013         2012        Change
Operating costs and expenses:
Sales and marketing expense                       -            -              0 %          -            78          -100 %
Patent licensing expenses                      5,743        3,156            82 %      10,546        8,715            21 %
General and administrative                     1,359        4,350           -69 %       3,143        8,141           -61 %
Restructuring and other related costs             -         1,349          -100 %          -         1,806          -100 %

Total operating costs and expenses             7,102        8,855           -20 %      13,689       18,740           -27 %

Sales and marketing expense

Sales and marketing expenses include costs related to public relations, advertising, promotional materials and other market development programs. During the three and six months ended December 31, 2013, the Company did not incur any expenses related to sales and marketing compared to $78,000 in the six month period ended December 31, 2012. Based on our strategy to pursue the intellectual property licensing business, we do not expect to incur material sales and marketing expenses for at least the next twelve months.

Patent licensing expenses

Patent licensing expenses include legal and consulting costs related to technical and economic evaluation, licensing, maintaining, and 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. We are in a reactive business and some of our licensing expenses are related to the actions taken by defendant companies. Since our strategy focuses on licensing of our patents, we incur significant costs defending our patents and initiating litigation against entities we believe have infringed our patents.

During the three months ended December 31, 2013, patent licensing expenses increased by $2.6 million compared to the corresponding period in the prior year. This increase in patent licensing expenses was primarily attributable to an increase in patent litigation expenses of $0.8 million related to the Apple and Research in Motion, Apple, and Google patent infringement matters referred to in Note 7 to our Condensed Consolidated Financial Statements, an increase in patent maintenance costs of $1.3 million associated with the acquired Ericsson portfolio of patents, and an increase of $0.4 million in licensing expense. We expect that our patent licensing expenses will fluctuate in the future depending on the status of the cases that we are pursuing.

During the six months ended December 31, 2013, patent licensing expenses increased by $1.8 million compared to the corresponding period in the prior year. This increase is primarily attributable to higher patent maintenance costs associated with the acquired Ericsson portfolio of patents.

General and Administrative Expenses

General and administrative expenses consist principally of salary and benefit expenses, travel expenses, and facility costs for our finance, legal, information services, and executive personnel. General and administrative expenses also include outside accounting and corporate legal fees, public company costs, and expenses associated with the board of directors.

During the three months ended December 31, 2013, general and administrative expenses decreased by approximately $3.0 million compared with the corresponding period in the prior year. The decrease was primarily due to our decrease in headcount associated with the sale of our product businesses in April 2012, relocation of the Company headquarters to Reno, Nevada, and the associated reduction in our facilities costs and other operating overhead. We expect our general and administrative expenses to remain at approximately the same level each quarter during fiscal 2014.

During the six months ended December 31, 2013, general and administrative expenses decreased by approximately $5.0 million compared to the corresponding period in the prior year. The decrease in general and administrative expense is primarily associated with the company restructuring and associated decrease in headcount, facilities costs, and other operating overhead.


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Restructuring and Other Related Costs

Since we completed our restructuring efforts during the fiscal year ended June 30, 2013, we did not incur any new restructuring and other related costs nor have our estimates of those costs changed for the three and six months ended December 31, 2013. We do not anticipate any restructuring charges for the remainder of fiscal 2014.

We incurred restructuring and other related costs during the three and six months ended December 31, 2012 $1.3 million and $1.8 million, respectively, consisting of charges associated with estimated severance, facility and accelerated depreciation costs as a result of our relocation to Reno, Nevada.

Interest Income

Interest income was $27,000 and $57,000 for the three months ended December 31, 2013 and 2012, respectively. The decrease resulted from our increased investment in government issued instruments and certificates of deposit, which generally bear lower interest rates than corporate bonds, which were held during the prior period. We expect our investments to be in government instruments and certificates of deposit for the remainder of fiscal 2014.

Interest income was $70,000 and $135,000 for the six months ended December 31, 2013 and 2012, respectively. The decrease resulted from the same reasons as the decrease for the three months ended December 31, 2013 and 2012.

Interest Expense

During the three months ended December 31, 2013, interest expense increased to $0.9 million compared to $0 in the corresponding period in the prior year. The increase was the result of the Company issuing Senior Secured Notes in late fiscal 2013 and associated "in-kind" interest payment and amortization of debt discounts and deferred issue costs. For the remainder of fiscal 2014, we expect our interest expense to increase slightly based upon the compounding nature of the in-kind interest payments.

During the six months ended December 31, 2013, interest expense increased to $1.8 million compared to $3,000 in the corresponding period in the prior year. The increase was the result of the Company issuing Senior Secured Notes in late fiscal 2013 and associated "in- kind" interest payments and amortization of debt discounts and deferred issue costs.

Other Income (Expense), net

During the three months ended December 31, 2013, we recognized approximately $0.4 million other income compared to other expense of $18,000 for the corresponding period in the prior year. The increase in other income primarily consisted of a gain associated with the reduction in the fair value of liability classified consultant stock compensation. The value of this instrument fluctuates with our stock price and remaining time to expiration and is revalued quarterly.

During the six months ended December 31, 2013, we recognized $0.8 million of other income compared with other expense of $43,000 in the corresponding period in the prior year. The increase in other income was primarily associated with the reduction in the fair value of our consultant stock compensation obligation.

Loss from Continuing Operations

For the reasons described above, we reported a loss from continuing operations of $7.5 million and $ 8.8 million for the three months ended December 31, 2013 and 2012, respectively, and of $14.6 million and $18.6 million for the six months ended December 31, 2013 and 2012, respectively.

Discontinued Operations, net of tax

We recognized income from discontinued operations of approximately $0.2 million during the three months ended December 31, 2013 compared with a loss from discontinued operations of $2.8 million in the corresponding period in the prior year. The income in the three months ended December 31, 2013 was primarily due to a property tax refund for a facility. The loss from discontinued operations during the three months ended December 31, 2012 of $2.8 million were primarily attributable to payroll, severance, change in control payments, modification of stock-based compensation, and professional service costs associated with winding down the product lines businesses that were sold in the fourth quarter of the 2012 fiscal year.


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We recognized income from discontinued operations of approximately $0.1 million during the six months ended December 31, 2013 compared with the loss from discontinued operations of $8.1 million in the corresponding period in the prior year. The income from discontinued operations in the six months ended December 31, 2013 was attributable to a property tax refund described less costs we have incurred to close foreign subsidiaries related to product line businesses that were sold in the 2012 fiscal year. The loss from discontinued operation in the six months ended December 31, 2012 consisted of a loss of $0.8 million on sale of our discontinued operations and a loss of $7.3 million were primarily attributable to payroll, severance, change in control payments, modification of stock-based compensation, and professional service costs associated with winding down the product line business that were sold in the fourth quarter of the 2012 fiscal year. We do not expect the remaining costs to close our foreign subsidiaries will be material.

Net Loss

For the reasons described above, we reported a net loss of $7.3 million and $11.6 million for the three months ended December 31, 2013 and 2012, respectively, and a net loss of $14.5 million and $26.7 million for the six months ended December 31, 2013 and 2012, respectively.

Liquidity and Capital Resources

As of December 31, 2013, our working capital was approximately $44.6 million, a decrease of approximately $21.1 million or 32% from June 30, 2013. This decrease is primarily the result of purchasing long-term investments. We expect our total cash and investments of $72.9 million as of December 31, 2013 to be sufficient to meet our operating needs for at least the next twelve months.

The following table presents our cash flows for the three months ended December 31, 2013 and 2012 (in thousands):

                                                           Six Months Ended
                                                          December 31, 2013
                                                         2013           2012
     Cash provided by (used in) operating activities       2,374        (30,072 )
     Cash provided by (used in) investing activities     (51,277 )       13,700
     Cash provided by financing activities                12,353          1,278

We have obtained a majority of our cash and investments through the recent completion of our debt and equity offering resulting in net proceeds of approximately $49.4 million of which $36.9 million were received at the end of fiscal 2013. In addition, approximately $17.3 million of restricted cash was released during the first quarter of fiscal 2014 upon the termination of a credit facility with Silicon Valley Bank.

Cash provided by (used in) operating activities

Cash provided by operating activities during the six months ended December 31, 2013 was $2.4 million compared to cash used in operating activities of $30.1 during the same period of 2012. The $32.5 million increase in cash provided by operations was primarily attributable to the following:

In July 2013 a restriction on a $17.3 million cash collateral account for a letter of credit relating to a lease on the Company's former headquarters was removed and the cash collateral was returned to the Company compared to an increase in restricted cash of $0.7 million during the six month ended December 31, 2012 related to cash transferred into a Rabbi trust to fund a severance payment obligation. The effect of these transactions was an increase in cash provided by operating activities of $17.9 million.

The Company reported a $14.5 million net loss for the six months ended December 31, 2013 compared to a $26.7 million net loss in the corresponding period of the prior year. The above decrease in the net loss resulted in a $12.2 million increase in cash provided by operating activities for the reasons discussed above in Results of Operations.

Accrued restructuring costs decreased $0.3 million during the six months ended December 31, 2013 compared to a $6.3 million decrease in the corresponding period of the prior year. The above changes in accrued restructuring costs resulted in a $6.0 million increase in net cash provided by operating activities.

Prepaid assets, deposits and other assets increased $0.2 million during the six months ended December 31, 2013 compared to a $2.4 million decrease in the corresponding period of the prior year. This resulted in a $2.6 million decrease in net cash provided by operating activities and is primarily attributable to a reduction in prepaid hardware and software maintenance costs during the six months ended December 31, 2012 with the relocation of our facilities to Reno, Nevada


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Cash provided by (used in) investing activities

Cash used in investing activities during the six months ended December 31, 2013 was $51.3 million compared to cash provided by investing activities of $13.7 million during the corresponding period of the prior year. The $65 million increase in cash used in investing activities was largely due to the purchase of approximately $68.3 million of government instruments and certificates of deposit and receipt of $17.1 million of proceeds from the sale and maturity of previously held available for sale securities for the six months ended December 31, 2013 compared to the purchase of $11.0 million of investments and the receipt of $26.5 million of maturities or sales of investments in the corresponding period of the prior year. The effect of these purchases and maturity or sales of investments resulted in an increase in cash used in investing activities of $66.7 million.

Unless we generate cash from operations or financing activities, we do not intend to make additional material investments for the remainder of fiscal 2014.

Cash flows provided by financing activities

Cash provided by financing activities during the six months ended December 31, 2013 was $12.4 million compared to $1.3 million in the corresponding period of the prior year. The $11.1 million increase in cash provided by financing activities is primarily attributable to the following:

The Company received proceeds of $12.5 million from our rights offering in September 2013. There was no rights offering in the same period of 2012, which resulted in a $12.5 million increase in cash provided by financing activities.

The Company paid a total of $1.5 million of debt and equity issuance costs during the six months ended December 31, 2013 of which $1.0 million of the above costs were accrued as of June 30, 2013. Approximately $0.4 million of equity costs associated with the rights offering described above were incurred and paid in the six month period ending December 31, 2013. There were no comparable costs in the corresponding period of the prior year.

While we believe that our current working capital and anticipated cash flows from operations, as well as proceeds from our financing activities, and the release of the restricted cash will be adequate to meet our cash needs for daily operations and capital expenditures for at least the next 12 months, we may elect to raise additional capital through the sale of additional equity or debt securities. If additional funds are raised through the issuance of additional debt securities, these securities could have rights, preferences and privileges senior to holders of our common stock and the terms of any debt could impose restrictions on our operations. The sale of additional equity or convertible debt securities could result in additional dilution to our stockholders and additional financing may not be available in amounts or on terms acceptable to us. We also may pursue contingency arrangements related to our legal cases and/or alternative financing contracts to increase our available cash and fund our patent licensing expenses.

There can be no assurance that we will be able to raise additional capital in amounts sufficient to meet our requirements, if at all. If additional financing is necessary and we are unable to obtain the additional financing, we may be required to reduce the scope of our planned intellectual property initiatives, which could harm our business, financial condition and operating results. In the meantime, we will continue to manage our cash and investment portfolio in a manner designed to facilitate adequate cash and cash equivalents to fund our operations as well as future acquisitions, if any, for the next twelve months.

Long-Term Debt Obligations and Commitments

As of December 31, 2013, our principal long-term debt obligation consisted of 12 7/8 % Senior Secured Notes ("Notes") in the amount of $25 million due in June 2018 with an effective interest rate of 17.2%. From the date of issuance of the Notes up to and inclusive of the second anniversary of the date of issuance or June 2015, we will make interest only quarterly "in-kind" payments. Beginning in the third year after the date of issuance, the Company has the option to make quarterly cash interest only payments at a nominal rate of 12.5% per annum.

The Company may redeem some or all of the Notes on or after June 28, 2014 with the net cash proceeds from the sale, lease, conveyance, transfer or other disposition of its patents at a redemption price equal to 115% plus accrued and unpaid interest. In addition, the Company may redeem some or all of the Notes at any time on or after June 28, 2015 at a redemption price initially equal to 110% and declining over time, in each case, plus accrued and unpaid interest. As of the date of this report, we are in compliance with our debt covenants on the Notes.

In September 2013, the Company entered into an agreement with a law firm, providing for legal services on a partial contingency and partial flat fee basis (the "September 2013 Agreement"). The September 2013 Agreement provides the law firm will be the Company's legal counsel in connection with the Company's patent infringement litigation matters with Google, Inc., Apple, Inc. and Research in Motion Ltd. (the "Patent Enforcement Matters"). Under the September 2013 Agreement, the Company will pay the law firm a flat fee of


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$0.5 million per month for 24 months (the "24-Month Period") effective July 2013. In the event of resolution of any of the Patent Enforcement Matters prior to the conclusion of the 24-Month Period, the flat monthly fee is subject to certain downward adjustments.

In addition to the flat monthly fee, the Company will pay the law firm a contingency fee based on a sliding scale percentage of any negotiated fees, settlements or judgments awarded, if any, up to a maximum of $70 million. The term of the agreement is five years and may be extended for certain conditions.

In October 2013, the Company entered into an agreement with a second law firm, providing for legal services on a partial contingency and partial fixed fee basis (the "October 2013 Agreement"). The October 2013 Agreement provides the law firm will be the Company's legal counsel in connection with the Company's patent infringement litigation matter with Square, Inc.

Under the October 2013 Agreement, the Company expects to pay the law firm a fixed fee over two years with the first payment due in July of 2014. The Company is responsible for payment of all expenses incurred by the firm under the October 2013 Agreement. In addition to the fixed fee and expenses, the Company will pay the law firm a contingency fee calculated as a percentage of any recovery after deduction for fixed fees, costs and revenue sharing obligations.

Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to investors.

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