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TMCNet:  UNWIRED PLANET, INC. - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations.

[November 07, 2012]

UNWIRED PLANET, INC. - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations.

(Edgar Glimpses Via Acquire Media NewsEdge) 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, and Section 21E of the Securities Exchange Act of 1934, as amended. These forward-looking statements are based upon current expectations and beliefs of management and are subject to risks and uncertainties that may cause actual events, results or performance to differ materially from those indicated by these statements. Words such as "anticipates," "expects," "intends," "plans," "believes," "seeks," "estimates" and similar expressions identify forward-looking statements. Forward-looking statements include, among other things, statements regarding our ability to effectively pursue strategic alternatives for our products business, our ability to attract and retain customers, our ability to obtain and expand market acceptance for our products and services, our expectations concerning our future financial performance and potential or expected competition and growth in our markets and markets in which we expect to compete, our business strategy, projected plans and objectives, anticipated cost savings from restructurings, our ability to realize anticipated benefits of our acquisitions on a timely basis, our estimates with respect to future operating results, including, without limitation, earnings, cash flow and revenue and any statements of assumptions underlying the foregoing. These forward-looking statements are only predictions. Risks and uncertainties that could cause actual results to differ materially from those indicated in the forward-looking statements include the limited number of potential customers, the highly competitive market for our products and services, technological changes and developments, potential delays in software development and technical difficulties that may be encountered in the development or use of our software, patent litigation, our ability to retain management and key personnel, and the other risks discussed under the subheading "Risk Factors" in Item 1A, Part II of this Quarterly Report on Form 10-Q, as well as elsewhere in this report. The occurrence of the events described in "Risk Factors" 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 this section and in "Risk Factors" below and other risks identified from time to time in our public statements and reports filed with the Securities and Exchange Commission.


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, 2012, which was filed with the Securities and Exchange Commission on September 7, 2012, 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", "our", "we" or "us") is an intellectual property and technology licensing company. Over the years, we have amassed a patent portfolio of approximately 200 issued United States and foreign patents and approximately 75 pending applications, many of which are considered formative to mobile communications.

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. Our principal executive offices are located at 170 South Virginia Street, Suite 201, Reno, Nevada 89501. Our telephone number is (775)_980-2345 .

Our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and amendments to those reports filed or furnished pursuant to the Securities Exchange Act of 1934, are available free of charge through our website at www.unwiredplanet.com , as soon as reasonably practicable after we file or furnish such material with the Securities and Exchange Commission (SEC).

Information contained on our website is not incorporated by reference to this Quarterly Report.

Unwired Planet is focused on pursuing a multi-pronged strategy to realize the value of our patent portfolio, which ranges from direct licensing or sale of our patents, 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.

Until recently, we were primarily a software company delivering mediation and messaging solutions to communication service providers. On January 12, 2012, we announced our pursuit of strategic alternatives for our product operations, and sold our product businesses as of April 30, 2012 - See Note 3 of Notes to Condensed Consolidated Financial Statements for further information.

19-------------------------------------------------------------------------------- Table of Contents Overview of Financial Results During the Three Months Ended September 30, 2012 The following table represents a summary of our operating results from continuing operations for the three months ended September 30, 2012, compared with the three months ended September 30, 2011 (dollars in thousands): Three Months Ended March 31, Percent 2012 2011 Change (unaudited) Revenues $ 3 $ 15,021 -100 % Operating expenses 9,885 4,336 128 % Operating income (loss) (9,882 ) 10,685 -192 % Interest and other income, net 50 62 -19 % Net income (loss) from continuing operations $ (9,832 ) $ 10,747 -191 % Revenues decreased during the three months ended September 30, 2012, compared to the corresponding period of the prior year. See discussion of Revenues below under the "Summary of Operating Results." Overall, operating expenses increased during the three months ended September 30, 2012, compared with the corresponding period of the prior year.

These increases are primarily due to increased spending on patent licensing, as discussed in further detail under "Summary of Operating Results" below.

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's judgment and estimates. These significant accounting policies are: • Revenue recognition; • Stock-based compensation; • Valuation of investments; and • Restructuring-related assessments.

There have been no material changes to our critical accounting policies and estimates since our fiscal year end on June 30, 2012.

For further discussion of our critical accounting policies and judgments, please refer to the Notes to our condensed consolidated financial statements included in this Form 10-Q and to our Management's Discussion and Analysis of Financial Condition and Results of Operations and audited consolidated financial statements and accompanying notes thereto included in our Annual Report on Form 10-K for the fiscal year ended June 30, 2012.

Summary of Operating Results Three Months Ended September 30, 2012 and 2011 Revenues We generate patent revenue, which is derived from licensing our intellectual property.

20 -------------------------------------------------------------------------------- Table of Contents To date our patent revenues have been from two customers, as shown in the following table: Three Months Ended % of Total Revenue Three Months Ended September 30, 2012 2011 Customer: Microsoft - 100 % Mobixell Networks 100 % 0 % Although we intend to broaden our customer base, there can be no assurance that this objective will be achieved.

The following table presents key revenue information (dollars in thousands): Three Months Ended September 30, Percent 2012 2011 Change Revenues: Patents $ 3 $ 15,021 -100 % Total Revenues $ 3 $ 15,021 -100 % Percent of revenues: Patents 100 % 100 % Total Revenues 100 % 100 % Patents Revenues During the first quarter of fiscal 2012, we entered into a license agreement with a third-party whereby we licensed rights to the majority of our patents for a fee of $15.0 million which was received during the second quarter of fiscal 2012. Additonally, we receive royalties related to patent license agreement entered into in the first quarter of fiscal 2011. We intend to continue to seek monetization opportunities for our intellectual property; however, there can be no guarantee that our efforts will be successful.

21-------------------------------------------------------------------------------- Table of Contents Operating Expenses The following table represents operating expenses for the three months ended September 30, 2012 and 2011, respectively (dollars in thousands): Three Months Three Months Ended September 30, Ended September 30, Percent 2012 2011 Change Operating expenses: Sales and marketing expense $ 78 $ 375 -79 % Patent licensing expenses 5,559 1,724 222 % General and administrative 3,791 1,686 125 % Restructuring and other related costs 457 551 -17 % Total Operating Expenses $ 9,885 $ 4,336 128 % Percent of Revenues: Sales expense *nm 2 % General and administrative *nm 11 % Patent initiative expenses *nm 11 % *not meaningful Sales and marketing expense Sales and marketing expenses include salary and benefit expenses and travel expenses for our marketing personnel, as well as any commissions related to our patent revenues. Sales and marketing expenses also include the costs of public relations, promotional materials and other market development programs.

Sales and marketing expense decreased by approximately 79% in the first quarter of fiscal 2013 as compared with the prior year's period. This decrease was primarily due to the fact that the expense in fiscal 2012 related to a commission on the patent deal signed during the quarter, with no such comparable payment made in the first quarter of fiscal 2013.

Patent licensing expenses Patent licensing expenses include legal and consulting costs related to licensing our patents, which includes litigation expenses to protect our patents and our licensing business when necessary, as well as labor costs for employees engaged in these activities on a full-time basis. Litigation, when necessary, forms the substantial majority of the expense.

During the three months ended September 30, 2012, patent licensing expenses increased by 222% compared with the corresponding period in the prior year. This increase is primarily due to a $3.6 million increase in legal expenses associated with patent litigation, which includes legal fees supporting the ITC and Delaware District Court cases filed and announced in August 2011, as well as the patent infringement cases filed against each of Apple Inc. and Google Inc.

filed in Federal Court in Nevada in September 2012. Additionally, there was an increase of approximately $0.2 million related to labor and related administrative costs in the first quarter of fiscal 2013 as compared to the prior year's period.

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 fees.

During the three months ended September 30, 2012, general and administrative costs increased 125% compared with the corresponding period in the prior year.

This increase is primarily due to an increase of $0.6 million in labor costs, mainly due to a $0.3 million increase in stock-based compensation related to option grants made since the prior year, as well as to an increase in bonus costs to key employees. We also experienced a $0.2 million increase in temporary resources assigned to the continuing operation to facilitate transitioning systems and processes suitable to a smaller company. Legal and professional fees increased $0.6 million which primarily related to assistance with potential strategic alternatives. Recruiting and travel fees increased by $0.3 million due to increased activity.

Restructuring and Other Related Costs Restructuring and other related costs for the three months ended September 30, 2012, remained relatively consistent with the prior year's period. The prior year's restructuring expense primarily consisted of a $0.5 million severance charge for an executive, while the current year's period contained a $0.3 million charge related to estimated severance as a result of our announced relocation to Reno, Nevada.

Refer to Note 9 in the notes to the condensed consolidated financial statements for more information.

22 -------------------------------------------------------------------------------- Table of Contents Interest Income Interest income was approximately $0.1 million for both the three months ended September 30, 2012 and for the three months ended September 30, 2011.

Interest Expense Interest expense was approximately $3,000 for the three months ended September 30, 2012, which was a decrease from the prior year's period primarily due to a decline in the outstanding amounts for our letters of credit.

Discontinued Operations We completed the sale of our location product line on February 1, 2012. On April 30, 2012, we completed the disposition of the mediation and messaging product lines, which completed the divestiture of the product business. We classified the product business' financial results as discontinued operations in our condensed consolidated financial statements for all periods presented.

Unwired Planet and Openwave Mobility also entered into a transition services agreement ("TSA") under which we provided accounting and other services to Openwave Mobility until October 2012. Openwave Mobility paid a flat fee for these services per month. Costs of providing these services that were incremental to the flat fee are reflected in discontinued operations on the statement of operations.

Net loss from discontinued operations decreased by $3.6 million in the three months ended September 30, 2012 as compared with the three months ended September 30, 2011. This was a result of the $37.4 million decline in revenues, offset by corresponding reductions in costs due to no longer operating the business. The costs during the three months ended September 30, 2012 primarily relate to the excess cost of providing the TSA services and facilities beyond the fees received, as well as severance payments triggered in periods following the sale of the product business, and professional service costs in connection with the transaction. These costs are expected to continue for a portion of our second fiscal quarter. See Note 3 of Notes to Condensed Consolidated Financial Statements for further information regarding the classification of these businesses as a discontinued operation.

Liquidity and Capital Resources Working Capital and Cash Flows The following table presents selected financial information and statistics as of September 30, 2012 and June 30, 2012, and for the three months ended September 30, 2012 and 2011, which includes cashflows from discontinued operations, (dollars in thousands): September 30, June 30, Percent 2012 2012 Change Working capital $ 48,866 $ 60,451 -19 % Cash and investments: Cash and cash equivalents $ 31,139 $ 39,709 -22 % Short-term investments 38,836 43,860 -11 % Long-term investments 7,305 9,423 -22 % Total cash and cash investments $ 77,280 $ 92,992 -17 % Three Months Ended September 30, 2012 2011 Cash used for operating activities $ (14,834 ) $ (17,454 ) Cash provided by investing activities $ 4,993 $ (5,949 ) Cash provided by financing activities $ 1,271 $ 119 We have obtained a majority of our cash and investments through public offerings of common stock, including a common stock offering in December 2005 which raised $277.8 million in net proceeds. In fiscal 2008, we sold Musiwave and our Client operations, resulting in $56.0 million of net proceeds in fiscal 2008, $11.7 million in fiscal 2009, $4.5 million in fiscal 2010 and $2.2 million in fiscal 2011. Additionally, in fiscal 2012, we sold our product businesses which resulted in $51.4 million of net proceeds in fiscal 2012. In the first quarter of fiscal 2013, we settled all working capital adjustments related to the sale of the product businesses, and a loss on 23-------------------------------------------------------------------------------- Table of Contents the sale of discontinued operations of $0.8 million was recorded.

We have an $18.0 million secured revolving credit facility with Silicon Valley Bank which expires on April 28, 2013. Although we plan to extend the maturity beyond this date, there can be no guarantee of an extension. Failure to extend the line of credit would require letters of credit to have cash collateral, which would be reflected as Restricted cash as opposed to Cash and equivalents once collateralized.

As of September 30, 2012 and June 30, 2012, we had letters of credit outstanding against the revolving credit facility totaling $17.4 million and $17.5 million, respectively, reducing the available borrowings on the revolving credit facility. Our letters of credit expire between October 2012 and June 2013. The majority of the letters of credit relate to facilities that will be exited by June 30, 2013. The revolving credit line is secured by a blanket lien on all of our assets and contains financial and reporting covenants customary to these types of credit facilities agreements which we are required to satisfy as a condition of the agreement. In particular, the revolving credit facility requires that we meet a specified minimum monthly liquidity ratio. In addition, the revolving credit facility requires us to provide to the bank annual financial projections, promptly report any material legal actions, and timely pay material taxes and file all required tax returns and reports. Further, without the bank's consent, we cannot take some material actions, such as change any material line of business, sell our business, acquire other entities, incur liens, make capital expenditures beyond a specified threshold, or engage in transactions with affiliates. As of September 30, 2012, we were in compliance with all debt covenants.

While we believe that our current working capital and anticipated cash flows from operations 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, or sell or license some assets. The sale of additional equity securities could result in additional dilution to our stockholders. We also may pursue contingency arrangements and/or alternative financing contracts to increase our available cash and fund our litigation and prosecution expenses.

If additional funding 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 and marketing efforts, 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 for the next twelve months as well as future acquisitions, if any.

Working capital Our working capital, defined as current assets of the continuing operations less current liabilities of the continuing operations, decreased by approximately $11.6 million, or 19%, from June 30, 2012 to September 30, 2012. The decrease in working capital balances can primarily be attributed to the use of $13.6 million of cash and cash equivalents and short term investments, primarily as a result of cash used for operations of $14.8 million.

Cash used for operating activities Cash used for operating activities was $14.8 million during the three months ended September 30, 2012. This use of cash is primarily a result of the operating results of both the continuing and discontinued operations for the period. Additionally, there was a decline in accrued restructuring costs of $3.7 million, primarily related to facility payments, and a decline in accrued liabilities of $1.6 million.

Cash provided by investing activities Net cash provided by investing activities during the three months ended September 30, 2012 was $5.0 million, which primarily was due to the $6.9 million of maturities or sales of investments, net of purchases of investments, partially offset by the $1.9 million of payments made related to transaction costs for the sale of the product business.

Cash flows provided by financing activities Net cash provided by financing activities during the three months ended September 30, 2012 was $1.3 million, resulting from the exercise of stock options during the period.

Operating Lease Obligations and Contractual Obligations Aside from us entering a lease for offices in Reno, Nevada, for the next three years at an average base rent of $93,000, there has been no material change to our contractual obligations during the first three months of fiscal 2013. As such, see our Annual Report on Form 10-K for the fiscal year ended June 30, 2012 for a description of our facility leases and Note 9 in the notes to the condensed consolidated financial statements. We currently have subleased all but one of our restructured facilities which will generate 24-------------------------------------------------------------------------------- Table of Contents contractual sublease income in aggregate of approximately $5.9 million, resulting in a net future obligation on these properties of approximately $9.9 million through our fiscal 2015. The decrease in our liability for restructured facilities since the fiscal year ended June 30, 2012, relates primarily to payments made in the normal course of business.

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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