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ONE HORIZON GROUP, INC. - 10-Q - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS(Edgar Glimpses Via Acquire Media NewsEdge) The following discussion provides information which management believes is relevant to an assessment and understanding of our results of operations and financial condition. The discussion should be read along with our financial statements and notes thereto contained elsewhere in this Report. The following discussion and analysis contains forward-looking statements, which involve risks and uncertainties. Our actual results may differ significantly from the results, expectations and plans discussed in these forward-looking statements. See "Cautionary Note Concerning Forward-Looking Statements." Overview Business Operating through our indirect wholly-owned subsidiaries, Horizon Globex GmbH and Abbey Technology GmbH, our operations include the licensing of software to telecommunications operators and the development of software application platforms (the "Horizon Platform") that optimize mobile voice, instant messaging and advertising communications over the Internet. Both subsidiaries do this by using proprietary software techniques that use internet bandwidth more efficiently than other technologies that are unable to provide a low-bandwidth solution. The Horizon Platform is a bandwidth-efficient Voice over Internet Protocol ("VoIP") platform for smartphones and also provides optimized data applications including messaging and mobile advertising. We license our software solutions to telecommunications network operators and service providers in the mobile, fixed line and satellite communications markets. We are an ISO 9001 and ISO 20000-1 certified company with assets and operations in Switzerland, the United Kingdom, China, India, Singapore and Hong Kong. The Share Exchange On November 30, 2012, the Company (then known as Intelligent Communication Enterprise Corporation ("ICE Corp.")), and One Horizon Group PLC, a public limited company incorporated in the United Kingdom ("One Horizon UK"), consummated a share exchange (the "Share Exchange"), pursuant to which ICE Corp. will acquire all of the issued and outstanding shares of One Horizon UK from One Horizon UK's then existing shareholders in exchange for 17,853,476,138 shares of ICE Corp.'s common stock. To date, the Company has acquired 99% of the outstanding shares of One Horizon UK pursuant to the Share Exchange. Under the terms of the Share Exchange, each One Horizon UK shareholder received 175.14 shares of ICE Corp.'s common stock for each issued and outstanding share of One Horizon UK stock. As a result of the Share Exchange, One Horizon UK is now a subsidiary of the Company, with former One Horizon UK shareholders holding approximately 96% of the issued and outstanding shares of ICE Corp. Having received share exchange acceptances in excess of 90% of the One Horizon UK shares, the Company intends to exercise its rights in accordance with Sections 974 to 991 (inclusive) of the Companies Act 2006 to acquire compulsorily the remaining One Horizon UK shares in respect of which acceptances have not been received to date. The transaction has been accounted for as a reverse acquisition, whereby ICE Corp. is the legal acquirer and One Horizon UK is the legal acquiree and accounting acquirer. On December 27, 2012, the Company changed its name to One Horizon Group, Inc. 4 -------------------------------------------------------------------------------- To record the accounting effects of the reverse acquisition, the assets and liabilities of One Horizon UK (the accounting acquirer) are recognized and measured at their precombination carrying amounts. The assets and liabilities of ICE Corp. (the accounting acquiree) are recognized and measured consistent with accounting for business combinations, including recognition of fair values, effective as of November 30, 2012, the date of the Share Exchange transaction. Pre-Share Exchange The Company was incorporated in Pennsylvania in 1972 as Coratomic, Inc. It changed its name to Biocontrol Technology, Inc. in 1986; BICO, Inc. in 2000; Mobiclear Inc. in 2006; and Intelligent Communication Enterprise Corporation in 2009. One Horizon UK One Horizon Group, PLC ("One Horizon UK"), a subsidiary of the Company (formerly ICE Corp.), was incorporated in the United Kingdom on March 8, 2004, and has three wholly-owned subsidiaries, Horizon Globex and Abbey Technology, both incorporated in Switzerland, and One Horizon Hong Kong Limited, which is incorporated in Hong Kong. On October 25, 2012, One Horizon UK sold a group of wholly-owned subsidiaries referred to as the Satcom Global business. The Satcom Global business was a satellite communication distribution business comprised of multiple entities located throughout Europe, Asia and the United States. As a result of the downturn in U.S. government expenditure in satellite communication, the Satcom Global business became unprofitable and One Horizon Group UK decided to sell the business for nominal cash consideration and the assumption of debt so that it could focus its efforts on the Horizon Globex business (discussed above). Also on October 25, 2012, Abbey Technology sold certain satellite billing software utilized in the Satcom Global business to the purchaser of the Satcom Global business. The entire purchase price for the software was paid by means of an offset against amounts owed by Abbey Technology and its affiliates to Satcom Global FZE, an entity acquired by the purchaser in connection with the purchase of the Satcom Global business. Prior to the Share Exchange, the consolidated financial statements of One Horizon UK for its fiscal years ended June 30, 2012 and 2011 consisted of two main business segments, the Horizon Globex business segment and the Satcom Global business. In those historical financial statements, the financial results of the Horizon Globex business segment consisted of the financial results of the One Horizon UK and two of its subsidiaries, Abbey Technology and Horizon Globex. The Satcom Global business was sold in October 2012, prior to the Share Exchange. In the historical financial statement presentation of the UK Operating Company for its fiscal years ended June 30, 2012 and 2011, the operations of Satcom Global have been retrospectively restated for treatment as discontinued operations. Satcom Global was maintained in separate legal entities, all of which were sold in their entirety prior to the Share Exchange transaction. The Satcom Global distribution business represented a dissimilar business from the Horizon Globex software business. As a distribution business, Satcom Global had a different revenue and expense model (high volume and low gross margin), included different products and product marketing strategies, sold to different customers, purchased from different vendors, and had different management and operational personnel. The results of the Satcom Global business is not an indicator of Company management's past performance as all of the operational staff and management of the Satcom Global business remained with that business and are now employed by the purchasers of the Satcom Global business. One Horizon Hong Kong is a subsidiary of One Horizon UK, and was formed in 2012. One Horizon Hong Kong currently holds the Company's equity interest in the Chinese joint venture. Abbey Technology is a software development company that was founded in 1999 by our director and Chief Technology Officer, Brian Collins, and licenses proprietary software solutions for the banking sector. The Horizon software platform was invented/developed in Abbey Technology by Brian Collins and Claude Dziedzic with One Horizon UK (formerly Satcom Group Holdings) as its first customer for the solution (phase 1 - satellite networks). It is the named company on the filed patent for the Horizon Platform. Abbey Technology was subsequently acquired by One Horizon UK (formerly Satcom Group Holdings) in September 2010. 5 -------------------------------------------------------------------------------- Unless otherwise noted, references to "we" or "us" in this Report include the Company (post-Share Exchange) and all of its subsidiaries. Pre-Share Exchange Business of ICE Corp. Prior to the Share Exchange, the Company had two operational businesses: Modizo, and Global Integrated Media Limited (GIM). The Modizo business consisted of a celebrity blogging application, while the GIM business consisted of custom publishing, advertising design, brand building, media representation, website design and development and market research programs. As the GIM and Modizo businesses did not fit within the Company's business plan after the Share Exchange, both businesses were sold on December 31, 2012. Results of Operations Revenue: Our revenue for the three months ended March 31, 2013 was approximately $3.0 million as compared to approximately $2.3 million for the three months ended March 31, 2012, an increase of $700,000, or 31%. The increase in our revenue was due to the ongoing growth in sales of the Horizon Platform and licenses. The Company expects sales to continue to grow as more companies sign up for the Horizon Platform. Cost of Revenue: Cost of revenue was approximately $7,000 for the three months ended March 31, 2013, or 0.23% of sales, compared to cost of sales of $51,000, or 2.2% of sales for the three months ended March 31, 2012. Our cost of sales is primarily composed of the costs of ancillary hardware sold with the Horizon Platform. Gross Profit: Gross profit for the three months ended March 31, 2013 was approximately $3.0 million as compared to $2.2 million for the three months ended March 31, 2012, an increase of 36%. The main reason for the increase in gross profit is the growth in business and the smartphone market globally, as well as the Company's ability to capitalize on market opportunities by entering areas with high population density, high penetration of mobile phones, congested mobile cellular networks and high growth in the adoption of smartphones. Operating Expenses: Operating expenses, including general and administrative expenses, depreciation, and amortization of intangibles, were approximately $2.0 million in each of the three month periods ended March 31, 2013 and 2012. The $2.0 million in operating expenses represented 66.7% of sales for the three months ended March 31, 2013 as compared to 86.9% of sales for the same period in 2012. Going forward, management expects these costs to rise due to various public company-related expenses including share-based compensation, and various legal, accounting and consulting services. Net Income: Net income for the three months ended March 31, 2013 was approximately $896,000 as compared to net income of $172,000 for the same period in 2012. The increase in net income reflected the growth in the business and sales while overall operating expenses remained at approximately $2.0 million for the same period in 2012 and 2013. Going forward, management believes the Company will continue to grow the business and increase sales if we are successful in selling the Horizon Platform solution to new telecommunications company customers globally. Management also expects profitability to increase as revenue is expected to increase more than new operating costs related to public company expenses. Foreign Currency Translation Adjustment: Our reporting currency is the U.S. dollar. Our local currencies, Swiss Francs and British pounds, are our functional currencies. Results of operations and cash flow are translated at average exchange rates during the period, and assets and liabilities are translated at the unified exchange rate as quoted by http://www.oanda.com/currency/historical-rates/ at the end of the period. Translation adjustments resulting from this process are included in accumulated other comprehensive income in the statement of shareholders' equity. Transaction gains and losses that arise from exchange rate fluctuations on transactions denominated in a currency other than the functional currency are included in the results of operations as incurred. 6 -------------------------------------------------------------------------------- Currency translation adjustments resulting from this process are included in accumulated other comprehensive income in the consolidated statement of shareholders' equity and amounted to approximately $63,000 for the three months ended March 31, 2013. Liquidity and Capital Resources Three Months Ended March 31, 2013 and March 31, 2012 The following table sets forth a summary of our approximate cash flows for the periods indicated: For the Three Months Ended March 31 (in thousands) 2013 2012 Net cash provided by (used in) operating activities (470 ) 1,212 Net cash (used in) investing activities (257 ) (822 ) Net cash provided by financing activities 488 (761 ) Net cash used by operating activities was approximately $470,000 for the three months ended March 31, 2013 as compared to net cash provided of $1.2 million for the same period in 2012. The increase in cash used by operations was primarily due to the increase in cash used for accounts receivable, which offset (and reduced) the overall cash used by operating activities. Net cash used in investing activities was approximately $257,000 and $822,000 for the three months ended March 31, 2013 and 2012, respectively. Net cash used in investing activities was primarily focused on acquisitions of intangible assets and property and equipment. Net cash provided by financing activities amounted to $488,000 for the three months ended March 31, 2013 as compared to a use of $761,000 for the three months ended March 31, 2012. Cash provided by financing activities in 2013 was primarily due to the advances from related parties. Cash used by financing activities in 2012 was primarily due to repayment in long term bank borrowing. Our working capital, excluding the current portion of deferred income (attributable to licensing fees to be realized over time), as of March 31, 2013 was approximately $2.4 million, as compared to working capital of approximately $600,000 as of December 31, 2012. In April, 2013, the Company received $2.79 million in respect of a $6.0 million investment in the Company's securities pursuant to a subscription agreement signed in February 2013 and reported on the Form 10-K. The balance of the subscription funds are expected to be received in June and September 2013 under the terms of that agreement. The Company paid an additional $1.4 million, the balance of its investment, $1.5 million, for its 75% equity stake in a joint venture in China with ZTE Corporation. Our joint venture partner, ZTE Corporation, is the second largest mobile handset manufacturer in the world and the fourth largest telecommunications equipment supplier in the world. The Company is not a guarantor of any debt related to the joint venture. The investment is held in a subsidiary, One Horizon Hong Kong Limited. 7 -------------------------------------------------------------------------------- Off-Balance Sheet Arrangements We have no off-balance sheet arrangements that have, or are reasonably likely to have, a current or future effect on our financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to the Company. |