(Registrant’s telephone number, including area code)
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes þ No o¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer | Accelerated filer | ||
| Non-accelerated filer | Smaller reporting company | þ | |
| (Do not check if smaller reporting company) |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o¨ No þ
Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date. As of August 14, 2015, 34,893,49503, 2016, 35,290,423 shares of the registrant’s common stock, par value $0.0001 per share, were outstanding.
TABLE OF CONTENTS
| Part I – FINANCIAL INFORMATION | |||
| 4 | |||
| 26 | |||
| Item | 32 | ||
| Item 4. | Controls and Procedures | 32 | |
| Part II – OTHER INFORMATION | |||
| Item 1. | Legal Proceedings | 33 | |
Item 1A. | |||
| Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds | 33 | |
| Item 3. | Defaults Upon Senior Securities | 33 | |
| Item 4. | Mine Safety Disclosures | 33 | |
| Item 5. | Other Information | 33 | |
| Item 6. | Exhibits | 33 | |
| SIGNATURES | 34 | ||
| 2 |
CAUTIONARY NOTE CONCERNING FORWARD-LOOKING STATEMENTS
The statements made in this Report, and in other materials that the Company has filed or may file with the Securities and Exchange Commission, in each case that are not historical facts, contain “forward-looking information” within the meaning of the Private Securities Litigation Reform Act of 1995, and Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, both as amended, which can be identified by the use of forward-looking terminology such as “may,” “will,” “anticipates,” “expects,” “projects,” “estimates,” “believes,” “seeks,” “could,” “should,” or “continue,” the negative thereof, and other variations or comparable terminology as well as any statements regarding the evaluation of strategic alternatives. These forward-looking statements are based on the current plans and expectations of management, and are subject to a number of risks and uncertainties that could cause actual results to differ materially from those reflected in such forward-looking statements. Among these risks and uncertainties are the competition we face; our ability to adapt to rapid changes in the market for voice and messaging services; our ability to retain customers and attract new customers; our ability to establish and expand strategic alliances; governmental regulation and related actions and taxes in our international operations; increased market and competitive risks, including currency restrictions, in our international operations; risks related to the acquisition or integration of future businesses or joint ventures; our ability to obtain or maintain relevant intellectual property rights; intellectual property and other litigation that may be brought against us; failure to protect our trademarks and internally developed software; security breaches and other compromises of information security; our dependence on third party facilities, equipment, systems and services; system disruptions or flaws in our technology and systems; uncertainties relating to regulation of VoIP services; liability under anti-corruption laws; results of regulatory inquiries into our business practices; fraudulent use of our name or services; our ability to maintain data security; our dependence upon key personnel; our dependence on our customers' existing broadband connections; differences between our service and traditional phone services; our ability to obtain additional financing if required; our early history of net losses and our ability to maintain consistent profitability in the future. These and other matters the Company discusses in this Report, or in the documents it incorporates by reference into this Report, may cause actual results to differ from those the Company describes. The Company assumes no obligation to update or revise any forward-looking information, whether as a result of new information, future events or otherwise.
| 3 |
ONE HORIZON GROUP, INC.
Condensed Consolidated Balance Sheets
June 30, 20152016 and December 31, 2014
(in thousands, except share data)
(unaudited)
| June 30, | December 31, | |||||||
| 2015 | 2014 | |||||||
| Assets | ||||||||
| Current assets: | ||||||||
| Cash | $ | 870 | $ | 3,172 | ||||
| Accounts receivable (net), currrent portion | 5,448 | 9,072 | ||||||
| Other assets | 569 | 576 | ||||||
| Total current assets | 6,887 | 12,820 | ||||||
| Accounts receivable (net), net of current portion | 3,456 | - | ||||||
| Property and equipment, net | 126 | 212 | ||||||
| Intangible assets, net | 11,006 | 10,960 | ||||||
| Investment | 19 | 19 | ||||||
| Debt issue costs | 329 | 395 | ||||||
| Total assets | $ | 21,823 | $ | 24,406 | ||||
| Liabilities and Stockholders' Equity | ||||||||
| Current liabilities: | ||||||||
| Accounts payable | $ | 164 | $ | 556 | ||||
| Accrued expenses | 382 | 360 | ||||||
| Accrued compensation | 15 | 15 | ||||||
| Income taxes | 94 | 93 | ||||||
| Amounts due to related parties | 100 | 600 | ||||||
| Current portion of long-term debt | 10 | 73 | ||||||
| Total current liabilities | 765 | 1,697 | ||||||
| Long-term liabilities | ||||||||
| Long term debt, net of current portion | - | 108 | ||||||
| Amount due to related parties | 2,488 | 2,598 | ||||||
| Convertible debenture | 2,748 | 2,598 | ||||||
| Deferred income taxes | 190 | 235 | ||||||
| Mandatorily redeemable preferred shares | 90 | 90 | ||||||
| Total liabilities | 6,281 | 7,326 | ||||||
| Equity | ||||||||
| Preferred stock: | ||||||||
$0.0001 par value, authorized 50,000,000; issued and outstanding 170,940 shares (December 2014 - 170,940) | 1 | 1 | ||||||
| Common stock: | ||||||||
$0.0001 par value, authorized 200,000,000 shares issued and outstanding 33,281,069 shares (December 2014 - 33,281,069) | 3 | 3 | ||||||
| Additional paid-in capital | 32,442 | 32,163 | ||||||
| Deferred compensation | (107 | ) | (214 | ) | ||||
| Retained Earnings (Deficit) | (17,758 | ) | (15,227 | ) | ||||
| Accumulated other comprehensive income | 706 | 63 | ||||||
| Total One Horizon Group, Inc., stockholders' equity | 15,287 | 16,789 | ||||||
| Non-controlling interest | 255 | 291 | ||||||
| Total Equity | 15,542 | 17,080 | ||||||
| Total liabilities and equity | $ | 21,823 | $ | 24,406 | ||||
| June 30, | December 31, | |||||||
| 2016 | 2015 | |||||||
| Assets | ||||||||
| Current assets: | ||||||||
| Cash | $ | 932 | $ | 1,772 | ||||
| Accounts receivable (net), | 2,963 | 3,560 | ||||||
| Other assets | 657 | 402 | ||||||
| Total current assets | 4,552 | 5,734 | ||||||
| Property and equipment, net | 68 | 96 | ||||||
| Intangible assets, net | 9,168 | 9,823 | ||||||
| Investment | 18 | 18 | ||||||
| Total assets | $ | 13,806 | $ | 15,671 | ||||
| Liabilities and Stockholders' Equity | ||||||||
| Current liabilities: | ||||||||
| Accounts payable | $ | 174 | $ | 223 | ||||
| Accrued expenses | 186 | 220 | ||||||
| Accrued compensation | 99 | 18 | ||||||
| Income taxes | 90 | 90 | ||||||
| Current portion of long-term debt | - | 5 | ||||||
| Total current liabilities | 549 | 556 | ||||||
| Long-term liabilities | ||||||||
| Amount due to related parties | 2,343 | 2,354 | ||||||
| Convertible debenture | 2,852 | 2,636 | ||||||
| Deferred income taxes | 193 | 215 | ||||||
| Mandatorily redeemable preferred shares | 74 | 73 | ||||||
| Total liabilities | 6,011 | 5,834 | ||||||
| Equity | ||||||||
| Preferred stock: | ||||||||
| $0.0001 par value, authorized 50,000,000; issued and outstanding 170,940 shares (December 2015 - 170,940) | 1 | 1 | ||||||
| Common stock: | ||||||||
| $0.0001 par value, authorized 200,000,000 shares issued and outstanding 35,347,283 shares (December 2015 - 35,147,283) | 3 | 3 | ||||||
| Additional paid-in capital | 36,580 | 36,070 | ||||||
| Retained Earnings (Deficit) | (28,927 | ) | (26,201 | ) | ||||
| Accumulated other comprehensive income | 138 | (36 | ) | |||||
| Total One Horizon Group, Inc., stockholders' equity | 7,795 | 9,837 | ||||||
| Total liabilities and equity | $ | 13,806 | $ | 15,671 | ||||
See accompanying notes to condensed consolidated financial statements.
| 4 |
ONE HORIZON GROUP, INC.
Condensed Consolidated Statements of Operations
For the three and six months ended June 30, 20152016 and 2014
(in thousands, except per share data)
(unaudited)
| Three Months ended June 30, | Six Months ended June 30, | ||||||||||||||||
| 2015 | 2014 | 2015 | 2014 | ||||||||||||||
| Revenue | $ | 108 | $ | 1,304 | $ | 853 | $ | 2,489 | |||||||||
| Cost of revenue | - Hardware | 47 | 66 | 108 | 128 | ||||||||||||
| - Amortization of software development costs | 580 | 483 | 1,092 | 969 | |||||||||||||
| 627 | 549 | 1,200 | 1,097 | ||||||||||||||
| Gross margin | (519 | ) | 755 | (347 | ) | 1,392 | |||||||||||
| Expenses: | |||||||||||||||||
| General and administrative | 729 | 1,190 | 1,814 | 2,318 | |||||||||||||
| Depreciation | 16 | 46 | 36 | 94 | |||||||||||||
| 745 | 1,236 | 1,850 | 2,412 | ||||||||||||||
| Loss from operations | (1,264 | ) | (481 | ) | (2,197 | ) | (1,020 | ) | |||||||||
| Other income and expense: | |||||||||||||||||
| Interest expense | (284 | ) | (20 | ) | (374 | ) | (20 | ) | |||||||||
| Interest expense - related parties | (1 | ) | (35 | ) | (1 | ) | (75 | ) | |||||||||
| Foreign exchange | (76 | ) | (10 | ) | 9 | (19 | ) | ||||||||||
| Interest income | - | 1 | 1 | 2 | |||||||||||||
| (361 | ) | (64 | ) | (365 | ) | (112 | ) | ||||||||||
| Income (loss) before income taxes | (1,625 | ) | (545 | ) | (2,562 | ) | (1,132 | ) | |||||||||
| Income taxes (recovery) - deferred | (45 | ) | - | (45 | ) | (156 | ) | ||||||||||
| Net Income (Loss) for the period | (1,580 | ) | (545 | ) | (2,517 | ) | (976 | ) | |||||||||
| Net income (loss) attributable to the non-controlling interest | (31 | ) | (22 | ) | (36 | ) | (65 | ) | |||||||||
| Net Income (Loss) for the period atrributable to One Horizon Group, Inc. | (1,549 | ) | (523 | ) | (2,481 | ) | (911 | ) | |||||||||
| Less: Preferred Dividends | (25 | ) | (50 | ) | |||||||||||||
| Net loss attributable to One Horizon Group, Inc. Common stockholders | $ | (1,574 | ) | $ | (523 | ) | $ | (2,531 | ) | $ | (911 | ) | |||||
| Earnings per share attributable to One Horizon Group, Inc. stockholders | |||||||||||||||||
| Basic net loss per share | $ | (0.05 | ) | $ | (0.02 | ) | $ | (0.07 | ) | $ | (0.03 | ) | |||||
| Diluted net loss per share | $ | (0.05 | ) | $ | (0.02 | ) | $ | (0.07 | ) | $ | (0.03 | ) | |||||
| Weighted average number of shares outstanding | |||||||||||||||||
| Basic and diluted | 33,281 | 32,935 | 33,281 | 32,935 | |||||||||||||
| Three Months ended June 30, | Six Months ended June 30, | |||||||||||||||
| 2016 | 2015 | 2016 | �� | 2015 | ||||||||||||
| Revenue | $ | 366 | $ | 108 | $ | 975 | $ | 853 | ||||||||
| Cost of revenue - Hardware, calls and network charges | 49 | 47 | 75 | 108 | ||||||||||||
| - Amortization of software development costs | 493 | 580 | 1,005 | 1,092 | ||||||||||||
| 542 | 627 | 1,080 | 1,200 | |||||||||||||
| Gross margin | (176 | ) | (519 | ) | (105 | ) | (347 | ) | ||||||||
| Expenses: | ||||||||||||||||
| General and administrative | 878 | 569 | 1,842 | 1,492 | ||||||||||||
| Depreciation | 15 | 16 | 30 | 36 | ||||||||||||
| Research and development | 186 | 160 | 374 | 322 | ||||||||||||
| 1,079 | 745 | 2,246 | 1,850 | |||||||||||||
| Loss from operations | (1,255 | ) | (1,264 | ) | (2,351 | ) | (2,197 | ) | ||||||||
| Other income and expense: | ||||||||||||||||
| Interest expense | (176 | ) | (284 | ) | (356 | ) | (374 | ) | ||||||||
| Interest expense - related parties | - | - | - | (1 | ) | |||||||||||
| Foreign exchange | 2 | (76 | ) | 9 | 9 | |||||||||||
| Interest income | - | - | - | 1 | ||||||||||||
| (174 | ) | (360 | ) | (347 | ) | (365 | ) | |||||||||
| Loss before income taxes | (1,429 | ) | (1,624 | ) | (2,698 | ) | (2,562 | ) | ||||||||
| Income taxes (recovery) – deferred | (11 | ) | (45 | ) | (22 | ) | (45 | ) | ||||||||
| Net loss for the period | (1,418 | ) | (1,579 | ) | (2,676 | ) | (2,517 | ) | ||||||||
| Net income (loss) attributable to the non-controlling interest | - | (31 | ) | - | (36 | ) | ||||||||||
| Net Income (Loss) for the period attributable to One Horizon Group, Inc. | (1,418 | ) | (1,548 | ) | (2,676 | ) | (2,481 | ) | ||||||||
| Less: Preferred Dividends | (25 | ) | (25 | ) | (50 | ) | (50 | ) | ||||||||
| Net loss attributable to One Horizon Group, Inc. Common stockholders | $ | (1,443 | ) | $ | (1,573 | ) | $ | (2,726 | ) | $ | (2,531 | ) | ||||
| Earnings per share attributable to One Horizon Group, Inc. stockholders | ||||||||||||||||
| Basic net loss per share | $ | (0.04 | ) | $ | (0.05 | ) | $ | (0.08 | ) | $ | (0.07 | ) | ||||
| Diluted net loss per share | $ | (0.04 | ) | $ | (0.05 | ) | $ | (0.08 | ) | $ | (0.07 | ) | ||||
| Weighted average number of shares outstanding | ||||||||||||||||
| Basic and diluted | 35,185 | 33,281 | 35,165 | 33,281 | ||||||||||||
See accompanying notes to condensed consolidated financial statements.
| 5 |
ONE HORIZON GROUP, INC.
Condensed Consolidated Statements of Comprehensive Income
For the three and six months ended June 30, 20152016 and 2014
(in thousands)
(unaudited)
| Three Months ended June 30, | Six Months ended June 30, | |||||||||||||||
| 2015 | 2014 | 2015 | 2014 | |||||||||||||
| Net income (loss) | $ | (1,580 | ) | $ | (545 | ) | $ | (2,517 | ) | $ | (976 | ) | ||||
| Other comprehensive income: | ||||||||||||||||
| Forgin currency translation adjustment gain (loss) | 624 | (84 | ) | 643 | (65 | ) | ||||||||||
| Comprehensive income (loss) | (956 | ) | (629 | ) | (1,874 | ) | (1,041 | ) | ||||||||
| Comprehensive income (loss) attributable to the non-controlling interest | (31 | ) | (22 | ) | (36 | ) | (65 | ) | ||||||||
| Total comprehensive income (loss) | $ | (925 | ) | $ | (607 | ) | $ | (1,838 | ) | $ | (976 | ) | ||||
| Three Months ended June 30, | Six Months ended June 30, | |||||||||||||||
| 2016 | 2015 | 2016 | 2015 | |||||||||||||
| Net income (loss) | $ | (1,418 | ) | $ | (1,579 | ) | $ | (2,676 | ) | $ | (2,517 | ) | ||||
| Other comprehensive income: | ||||||||||||||||
| Foreign currency translation adjustment gain | 546 | 624 | 174 | 643 | ||||||||||||
| Comprehensive income (loss) | (872 | ) | (955 | ) | (2,502 | ) | (1,874 | ) | ||||||||
| Comprehensive income (loss) attributable to the non-controlling interest | - | (31 | ) | - | (36 | ) | ||||||||||
| Total comprehensive income (loss) | $ | (872 | ) | $ | (924 | ) | $ | (2,502 | ) | $ | (1,838 | ) | ||||
See accompayingaccompanying notes to condensed consolidated financial statements
| 6 |
ONE HORIZON GROUP, INC.
Consolidated Statement of Equity
For the six months ended June 30, 2015
(in thousands)
(unaudited)
| Preferred Stock | Common Stock | Additional | Retained | Accumulated Other Comprehensive | ||||||||||||||||||||||||||||||||||||
| Number of Shares | Amount | Number of Shares | Amount | Paid-in Capital | Deferred Compensation | Earnings (Deficit) | Income (Loss) | Non-controlling Interest | Total Equity | |||||||||||||||||||||||||||||||
| Balance December 31, 2014 | 171 | $ | 1 | 33,282 | $ | 3 | $ | 32,163 | $ | (214 | ) | $ | (15,227 | ) | $ | 63 | $ | 291 | $ | 17,080 | ||||||||||||||||||||
| Net income (loss) | (2,481 | ) | (36 | ) | (2,517 | ) | ||||||||||||||||||||||||||||||||||
| Foreign currency translations | 643 | 643 | ||||||||||||||||||||||||||||||||||||||
| Preferred dividends | (50 | ) | (50 | ) | ||||||||||||||||||||||||||||||||||||
| Amortization of deferred compensation | 107 | 107 | ||||||||||||||||||||||||||||||||||||||
| Options issued for services | 279 | 279 | ||||||||||||||||||||||||||||||||||||||
| Balance June 30, 2015 | 171 | $ | 1 | 33,282 | $ | 3 | $ | 32,442 | $ | (107 | ) | $ | (17,758 | ) | $ | 706 | $ | 255 | $ | 15,542 | ||||||||||||||||||||
| Preferred Stock | Common Stock | Accumulated Other | ||||||||||||||||||||||||||||||
| Number of Shares | Amount | Number of Shares | Amount | Additional Paid-in Capital | Retained Earnings (Deficit) | Comprehensive Income (Loss) | Total Equity | |||||||||||||||||||||||||
| Balance December 31, 2015 | 171 | $ | 1 | 35,148 | $ | 3 | $ | 36,070 | $ | (26,201 | ) | $ | (36 | ) | $ | 9,837 | ||||||||||||||||
| Net income (loss) | (2,676 | ) | (2,676 | ) | ||||||||||||||||||||||||||||
| Foreign currency translations | 174 | 174 | ||||||||||||||||||||||||||||||
| Preferred dividends | (50 | ) | (50 | ) | ||||||||||||||||||||||||||||
| Amortization of deferred compensation | ||||||||||||||||||||||||||||||||
| Issuance of common shares for services | 200 | 134 | 134 | |||||||||||||||||||||||||||||
| Options issued for services | 376 | 376 | ||||||||||||||||||||||||||||||
| Costs to raising of share issuance | ||||||||||||||||||||||||||||||||
| Balance June 30, 2016 | 171 | $ | 1 | 35,348 | $ | 3 | $ | 36,580 | $ | (28,927 | ) | $ | 138 | $ | 7,795 | |||||||||||||||||
See accompayingaccompanying notes to condensed consolidated financial statements
| 7 |
ONE HORIZON GROUP, INC.
Condensed Consolidated Statements of Cash Flows
For the six months ended June 30, 20152016 and 2014
(in thousands)
(unaudited)
| 2015 | 2014 | |||||||
| Cash provided by (used in) operating activities: | ||||||||
| Operating activities: | ||||||||
| Net loss for the period | $ | (2,481 | ) | $ | (911 | ) | ||
Adjustment to reconcile net loss for the period to net cash provided by (used in) operating activities: | ||||||||
| Depreciation of property and equipment | 36 | 94 | ||||||
| Amortization of intangible assets | 1,092 | 969 | ||||||
| Amortization of debt issue costs | 66 | - | ||||||
| Amortization of beneficial conversion feature | 51 | - | ||||||
| Amortization of debt discount | 99 | - | ||||||
| Amortization of deferred compensation | 107 | - | ||||||
| Common shares issued for services received | - | 65 | ||||||
| Options issued for services | 279 | 258 | ||||||
| Net income (loss) attributable to non-controlling interest | (36 | ) | (65 | ) | ||||
| Changes in operating assets and liabilities: | ||||||||
| Accounts receivable | 168 | (674 | ) | |||||
| Other assets | 7 | (715 | ) | |||||
| Accounts payable and accrued expenses | (370 | ) | 276 | |||||
| Deferred income taxes | (45 | ) | (156 | ) | ||||
| Net cash provided by (used in) operating activities | (1,027 | ) | (859 | ) | ||||
| Cash used in investing activities: | ||||||||
| Acquisition of intangible assets | (560 | ) | (637 | ) | ||||
| Acquisition of property and equipment | (1 | ) | (49 | ) | ||||
| Proceeds from disposition of property and equipment | 32 | - | ||||||
| Net cash (used in) investing activities | (529 | ) | (686 | ) | ||||
| Cash flow from financing activities: | ||||||||
| Increase (decrease) in long-term borrowing, net | (171 | ) | (30 | ) | ||||
| Advances from (repayments to) related parties, net | (610 | ) | - | |||||
| Dividends paid | (50 | ) | - | |||||
| Net cash provided by (used in) financing activities | (831 | ) | (30 | ) | ||||
| Increase (decrease) in cash during the period | (2,387 | ) | (1,575 | ) | ||||
| Foreign exchange effect on cash | 85 | (71 | ) | |||||
| Cash at beginning of the period | 3,172 | 2,070 | ||||||
| Cash at end of the period | $ | 870 | $ | 424 | ||||
| 2016 | 2015 | |||||||
| Cash provided by (used in) operating activities: | ||||||||
| Operating activities: | ||||||||
| Net loss for the period | $ | (2,676 | ) | $ | (2,481 | ) | ||
| Adjustment to reconcile net loss for the period to net cash provided by (used in) operating activities: | ||||||||
| Depreciation of property and equipment | 30 | 36 | ||||||
| Amortization of intangible assets | 1,005 | 1,092 | ||||||
| Increase in allowance for doubtful accounts | 200 | - | ||||||
| Amortization of debt issue costs | 66 | 66 | ||||||
| Amortization of beneficial conversion feature | 50 | 51 | ||||||
| Amortization of debt discount | 100 | 99 | ||||||
| Amortization of deferred compensation | - | 107 | ||||||
| Amortization of shares issued for services | 4 | - | ||||||
| Options issued for services | 376 | 279 | ||||||
| Net income (loss) attributable to non-controlling interest | - | (36 | ) | |||||
| Changes in operating assets and liabilities: | ||||||||
| Accounts receivable | 397 | 168 | ||||||
| Other assets | (125 | ) | 7 | |||||
| Accounts payable and accrued expenses | (2 | ) | (370 | ) | ||||
| Deferred income taxes | (22 | ) | (45 | ) | ||||
| Net cash provided by (used in) operating activities | (597 | ) | (1,027 | ) | ||||
| Cash used in investing activities: | ||||||||
| Acquisition of intangible assets | (207 | ) | (560 | ) | ||||
| Acquisition of property and equipment | (4 | ) | (1 | ) | ||||
| Proceeds from disposition of property and equipment | - | 32 | ||||||
| Net cash (used in) investing activities | (211 | ) | (529 | ) | ||||
| Cash provided by (used in) financing activities: | ||||||||
| Increase (decrease) in long-term borrowing, net | (5 | ) | (171 | ) | ||||
| Advances from (repayments to) related parties, net | (11 | ) | (610 | ) | ||||
| Dividends paid | (50 | ) | (50 | ) | ||||
| Net cash provided by (used in) financing activities | (66 | ) | (831 | ) | ||||
| Increase (decrease) in cash during the period | (874 | ) | (2,387 | ) | ||||
| Foreign exchange effect on cash | 34 | 85 | ||||||
| Cash at beginning of the period | 1,772 | 3,172 | ||||||
| Cash at end of the period | $ | 932 | $ | 870 | ||||
See accompanying notes to condensed consolidated financial statements.
| 8 |
ONE HORIZON GROUP, INC.
Condensed Consolidated Statements of Cash Flows (continued)
For the six months ended June 30, 20152016 and 2014
(in thousands)
(unaudited)
Supplementary Information:
| 2015 | 2014 | |||||||
| Interest paid | $ | 76 | $ | - | ||||
| Income taxes paid | - | - | ||||||
| Non-cash transactions: | ||||||||
| 2016 | 2015 | |||||||
| Interest paid | $ | 69 | $ | 76 | ||||
| Income taxes paid | - | - | ||||||
| Non-cash transactions: | ||||||||
| Common stock issued for services to be provided | $ | 134 | $ | - | ||||
See accompanying notes to condensed consolidated financial statements.
| 9 |
June 30, 2015
Note 1. Description of Business, Organization and Principles of Consolidation
Description of Business
One Horizon Group, Inc., (the “Company” or “Horizon”) develops proprietary software primarily in the Voice over Internet Protocol (VoIP) and bandwidth optimization markets (“Horizon Globex”) and provides it to telecommunication companies under perpetual license arrangements (“Master License”) throughout the world. TheIn addition, the Company either sells related user licenses and software maintenance services as well. Theto or enters into revenue sharing agreements with telecommunication companies. Horizon, through its Chinese company also operates its own chinese retail VoIP service, branded Aishuo.
Interim Period Financial Statements
The accompanying unaudited interim consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States (“GAAP”) for interim financial information and with the Securities and Exchange Commission’ instructions. Accordingly, they do not include all the information and footnotes required by GAAP for complete financial statements. The results of operations reflect interim adjustments, all of which are of a normal recurring nature and, in the opinion of management, are necessary for a fair presentation of the results for such interim period. The results reported in these interim consolidated financial statements should not be regarded as necessarily indicative of results that may be expected for the entire year. Certain information and note disclosure normally included in financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to the Securities and Exchange Commission’s rules and regulations. These unaudited interim consolidated financial statements should be read in conjunction with the audited consolidated financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2014,2015, as filed with the Securities and Exchange Commission on April 1, 2015.March 31, 2016.
| 10 |
Principles of Consolidation
The June 30, 2015 and 2014condensed consolidated financial statements include the accounts of One Horizon Group, Inc. and its wholly owned subsidiaries One Horizon Group plc, Horizon Globex GmbH, Abbey Technology GmbH, One Horizon Hong KongGroup Pte., Limited, Horizon Globex Ireland Limited, Global Phone Credit Limited and One Horizon Group Pte.,Hong Kong Limited, and its wholly-owned subsidiary, Horizon Network Technology Co. Ltd. (“HNT”). In addition, included in the condensed consolidated financial statements for the three and six months ended June 30, 2016, are the accounts of Suzhou Aishuo Network Information Co., Ltd. together with Horizon Network Technology Co. Ltd. which is a 75%controlled by One Horizon Group, Inc. through various contractual arrangements (Note 3).
During the year ended December 31, 2015, the minority parties which held ownership interests in HNT returned their shareholdings to HNT such that HNT is now fully owned subsidiary.
All significant intercompany balances and transactions have been eliminated.
Note 2. Summary of Significant Accounting Policies
Reclassification
Certain amounts in the 2015 financial statements have been reclassified to conform to the 2016 financial presentation. These reclassifications have no impact on net loss.
Basis of Accounting and Presentation
These consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States
Foreign Currency Translation
The reporting currency of the Company is the United States dollar. Assets and liabilities of operations other than those denominated in U.S. dollars, primarily in Switzerland, Ireland, the United Kingdom and China, are translated into United States dollars at the rate of exchange at the balance sheet date. Revenues and expenses are translated at the average rate of exchange throughout the period. Gains or losses from these translations are reported as a separate component of other comprehensive income (loss) until all or a part of the investment in the subsidiaries is sold or liquidated. The translation adjustments do not recognize the effect of income tax because the Company expects to reinvest the amounts indefinitely in operations.
Transaction gains and losses that arise from exchange-rate fluctuations on transactions denominated in a currency other than the functional currency are included in general and administrative expenses.
Cash
Cash and cash equivalents include bank demand deposit accounts and highly liquid short term investments with maturities of three months or less when purchased. Cash consists of checking accounts held at financial institutions in the United Kingdom, Switzerland, Ireland, Singapore, Hong Kong and China which, at times, balances may exceed insured limits. The Company has not experienced any losses related to these balances, and management believes the credit risk to be minimal.
| 11 |
Accounts Receivable
Accounts receivable result primarily from sale of software and licenses to customers and are recorded at their principal amounts. The categories of sales and receivables and their terms of payment are as follows:
| a) | Master License Agreement (“Agreement”) deposits – |
| Software consultancy |
| c) | Maintenance and operational fees and end user licenses fees– Payments vary from customer to customer. For customers who have not entered into a revenue share agreement, the terms of payment are fixed and payment is due within stated terms, normally 30 days from the date of the invoice. For customers who have entered into a revenue share agreement, the Company will receive an agreed proportion of a customer’s revenue from the customer's operation of the Horizon service. The proportion of a customer's revenue received is used to pay the receivable balance until the balance is paid. |
The revenue share agreement was introduced in October 2014, and at that time the Company reported that it had converted a significant number of its customers to a revenue share basis of collection. Accounts receivable balances from certain customers arose from revenue recognised prior to September 30, 2014 (prior revenue was recognized in accordance with revenue recognition policies in place at that time - see Revenue Recognition note). Those revenue share arrangements changed the basis under which the customers would pay their existing balances, as described, effective starting as early as October 1, 2014.
At December 31, 2015 a significant portion of those receivables that will be paid under the revenue share agreement remained uncollected. Considering the effects of the revenue share arrangements on collection of accounts receivable and the timing of those collections, along with other factors, management estimated the amount of existing accounts receivable they expect to collect within 12 months of the balance sheet date from those customers operating under revenue share arrangements. The portion of the receivable balance expected to be collected in more than 12 months was considered a non-current receivable. The Company maintains its opinion that current and non-current accounts receivable continue to be due from their customers. Further, management is of the opinion that its customers are contractually obligated to pay the full amount due as provided under the Master License Agreements executed by each of its customers.
At December 31, 2015, management believed there was general uncertainty in the collection of those balances considered long-term and increased the general provision for doubtful accounts by $5.7 million to cover those balances. The slow-pay uncertainties arise from a number of factors, including the effects of revenue share arrangements, the extended time customers are talking to generate significant revenue under revenue share arrangements, and general technological changes in the industry.
| 12 |
At June 30, 2016, due to continuing uncertainty in the Company provides antiming of collections of amounts due from certain customers, management reassessed the collectability of its accounts receivable balances and has decided to write off balances where there is significant uncertainty over the timing of the collection against the allowance previously recorded.
As a result of the management decision the amount of the gross accounts receivable has been reduced by $6.0 million and the allowance for doubtful accounts thathas been similarly reduced. As at June 30, 2016 the remaining allowance for doubtful accounts is based on a reviewat $238,000 of outstandingwhich $200,000 has been provided in 2016.
For any future collections of amounts written off, the Company will account for those as recoveries of written-off receivables, historical collection information, and current economic conditions. will include those amounts in other income (non-operating income).
The Company has strong collection history in all categories exceptcategory a) and category b), and generally does not believe that an allowance for doubtful accounts for these categories is necessary. For receivablesaccounts receivable in category b), when we become aware of a specific customer’s inability to meet its financial obligations, such as inc) the case of bankruptcy or deterioration inCompany records an allowance for doubtful accounts for the customer’s operating results, financial position, or credit rating, we record a specific reserve for bad debts to reduce the related receivable to the amount we believebalance that is expected to be collectable.collected under revenue share arrangements in more than 12 months. There was an allowance of $592,000$238,000 and $492,000$6,055,000 for doubtful accounts at June 30, 20152016 and December 31, 2014,2015, respectively. Receivables are generally unsecured. Account balances are charged off against the allowance when the Company determines it is probable thethat certain receivable will probably not be recovered.
The Company does not have off-balance sheet credit exposure related to its customers. As of June 30,December 31, 2015 and December 31, 2014, two customers accounted for 21%24% and 28%, respectively, of the accounts receivable balance.
Property and Equipment
Property and equipment is primarily comprised of leasehold property improvements, motor vehicles and equipment that are recorded at cost and depreciated or amortized using the straight-line method over their estimated useful lives as follows: motor vehicles – 5 years, equipment –�� between 3 and 5 years, leasehold property improvements, over the lesser of the estimated remaining useful life of the asset or the remaining term of the lease.
Repairs and maintenance are charged to expense as incurred. Expenditures that substantially increase the useful lives of existing assets are capitalized.
Fair Value Measurements
Fair value is defined as the exchange price that will be received for an asset or paid to transfer a liability (an exit price) in the principal. Valuation techniques used to measure fair value should maximize the use of observable inputs and minimize the use of unobservable inputs. To measure fair value, the Company uses the following fair value hierarchy based on three levels of inputs, of which the first two are considered to be observable and the third unobservable:
Level 1 – Quoted prices in active markets for identical assets or liabilities.
Level 2 – Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
Level 3 – Unobservable inputs are supported by little or no market activity and are significant to the fair value of the assets or liabilities.
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Intangible Assets
Intangible assets include software development costs and customer lists and are amortized on a straight-line basis over the estimated useful lives of five years for customer lists and ten years for software development. The Company periodically evaluates whether changes have occurred that would require revision of the remaining estimated useful life. The Company performs periodic reviews of its capitalized intangible assets to determine if the assets have continuing value to the Company.
The Company expenses all costs related to the development of internal-use software as incurred, other than those incurred during the application development stage, after achievement of technological feasibility. Costs incurred in the application development stage are capitalized and amortized over the estimated useful life of the software. Internally developed software costs are amortized on a straight-line basis over the estimated useful life of the software. The Company performs periodic reviews of its capitalized software development costs to determine if the assets have continuing value to the Company. Costs for assets that are determined to be of no continuing value are written off. The amortization of these costs is included in cost of revenue over the estimated life of the products.
During the six months ended June 30, 20152016 and 2014,2015, software development costs of $560,000$207,000 and $637,000,$560,000, respectively, have been capitalized.
Impairment of Other Long-Lived Assets
The Company evaluates the recoverability of its property and equipment and other long-lived assets whenever events or changes in circumstances indicate impairment may have occurred. An impairment loss is recognized when the net book value of such assets exceeds the estimated future undiscounted cash flows attributed to the assets or the business to which the assets relate. Impairment losses, if any, are measured as the amount by which the carrying value exceeds the fair value of the assets. During the six months ended June 30, 20152016 and 2014,2015, the Company identified no impairment losses related to the Company’s long-lived assets.
Revenue Recognition
The Company recognizes revenue when it is realized or realizable and earned. The Company establishes persuasive evidence of a sales arrangement for each type of revenue transaction based on a signed contract with thea customer and that a delivery has occurred or services have been rendered, the price is fixed and determinable, and collectability is reasonably assured.
| ● | Software and licenses – revenue from sales of perpetual licenses to |
| ● | Revenues for user licenses purchased by customers are recognized when the user license is delivered. |
| ● | Revenues for maintenance services are recognized over the period of delivery of the services. |
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| ● | Effective October 1, 2014, the Company amended certain existing customer contracts with respect to the terms under which those customers would pay the Company for perpetual licenses, user licenses and maintenance services provided by the Company. Existing customer contracts required payments for maintenance services to be made based on contractually specified fixed amounts, which were billed regularly through September 2014. Through that date the Company recorded revenue for licenses and maintenance services when those licenses and services were billed. Revenue for user licenses was recorded as earned and revenue for maintenance services was recorded based on a fixed annual fee, billed quarterly. The Company has modified the payment terms under certain of those existing customer contracts by entering into Revenue Sharing agreements with those customers. Under the terms of these Revenue Sharing agreements, future payments will be due from the customer when that customer has generated revenue from its customers who subscribe to use the Horizon products and services. Hosted services are offered to customers on revenue share arrangements whereby the Company can provide fully terminated services and sells vouchers for minutes which can be resold by the customer. Sales for this service are recognized when the supply is made and the invoice raised. Effective October 1, 2014, revenue |
| ● | Revenues from Aishuo retail sales are recognized when the PSTN calls and texts are made. |
Where the Company has entered into a Revenue Share with the customer, then all future revenue from granting of user licenses and for maintenance services will be recognized when the Company has delivered user licenses and is entitled to invoice.
We enter into arrangements with telecommunication entities in which a customer purchases a combination of software licenses, maintenance services and post-contract customer support (“PCS”). As a result, judgment is sometimes required to determine the appropriate accounting, including how the price should be allocated among themultiple deliverable elements if there are multiple elements. PCS may include rights to upgrades, when and if available, support, updates and enhancements. When vendor specific objective evidence (“VSOE”) of fair value exists for all elements in a multiple element arrangement, revenue is allocated to each element based on the relative fair value of each of the elements. VSOE of fair value is established by the price charged when the same element is sold separately. Accordingly, the judgments involved in assessing the fair values of various elements of an agreement can impact the recognition of revenue in each period. Changes in the allocation of the sales price between deliverables might impact the timing of revenue recognition, but would not change the total revenue recognized on the contract. When elements such as software and services are contained in a single arrangement, or in related arrangements with the same customer, we allocate revenue to each element based on its relative fair value, provided that such element meets the criteria for treatment as a separate unit of accounting. In the absence of fair value for a delivered element, revenue is first allocated to the fair value of the undelivered elements and then allocated to the residual delivered elements. In the absence of fair value for an undelivered element, the arrangement is accounted for as a single unit of accounting, resulting in a delay of revenue recognition for the delivered elements until the undelivered elements are fulfilled. No sales arrangements to date include undelivered elements for which VSOE does not exist.
For purposes of revenue recognition for perpetual licenses, the Company considers payment terms exceeding one year as a presumption that
the fee in the transaction is not fixed and determinable. This presumption however, may be overcome if persuasive evidence demonstrates that the Company has a business practice of extending payment terms and has been successful in collecting under the original terms, without providing any concessions. In doing so, the Company considers if the arrangement is sufficiently similar to historical arrangements in terms of similar customers and products is assessing whether there is evidence of a history of successful collection.| 15 |
In order to determine the company’s historical experience is based on sufficiently similar arrangements, the Company considers the various factors including the types of customers and products, product life cycle, elements includedIncluded in the arrangement, length of payment terms and economics of license arrangement. The Company does not presently have any such contracts where this presumption has been overcome.
During the three months ended June 30, 2016, $272,000 or 74% of the Company’s revenue was concentrated in the hands of one major customer. In the three months ended June 30, 2015 the equivalent amount was $35,000 or 32% of the revenue. During the six months ended June 30, 2016, $795,000 or 81% of the Company’s revenue was concentrated in the hands of one major customer. In the six months ended June 30, 2015, $500,000 or 59% of the Company’s revenue was concentrated in the hands of one major customer
Advertising Expenses
It is the Company’s policy to expense advertising costs as incurred. No advertisingAdvertising costs were incurred during the three and six month periods ended June 30, 2016 and 2015 were $39,000 and 2014.
Research and Development Expenses
Research and development expenses include all direct costs, primarily salaries for Company personnel and outside consultants, costs related to the development of new products, significant enhancements to existing products, and the portion of costs of development of internal-use software required to be expensed. Research and development costs are charged to operations as incurred with the exception of those software development costs that may qualify for capitalization. The Company expensed research and development costs in the six month period ended June 30, 2016 and 2015 of $374,000 and 2014 of $252,000 and $nil,$322,000 respectively.
Debt Issue Costs
Debt issue costs related to long-term debt are capitalized and amortized over the term of the related debt using the effective interest method.
Income Taxes
Deferred income tax assets and liabilities are determined based on temporary differences between financial reporting and tax bases of assets and liabilities, operating loss, and tax credit carryforwards, and are measured using the enacted income tax rates and laws that will be in effect when the differences are expected to be recovered or settled. Realization of certain deferred income tax assets is dependent upon generating sufficient taxable income in the appropriate jurisdiction. The Company records a valuation allowance to reduce deferred income tax assets to amounts that are more likely than not to be realized. The initial recording and any subsequent changes to valuation allowances are based on a number of factors (positive and negative evidence). The Company considers its actual historical results to have a stronger weight than other, more subjective, indicators when considering whether to establish or reduce a valuation allowance.
The Company continually evaluates its uncertain income tax positions and may record a liability for any unrecognized tax benefits resulting from uncertain income tax positions taken or expected to be taken in an income tax return. Estimated interest and penalties are recorded as a component of interest expense and other expense, respectively.
Because tax laws are complex and subject to different interpretations, significant judgment is required. As a result, the Company makes certain estimates and assumptions in: (1) calculating its income tax expense, deferred tax assets, and deferred tax liabilities; (2) determining any valuation allowance recorded against deferred tax assets; and (3) evaluating the amount of unrecognized tax benefits, as well as the interest and penalties related to such uncertain tax positions. The Company’s estimates and assumptions may differ significantly from tax benefits ultimately realized.
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Net Loss per Share
Basic net loss per share is calculated by dividing the net loss attributable to common shareholders by the weighted average number of common shares outstanding in the period. Diluted loss per share takes into consideration common shares outstanding (computed under basic loss per share) and potentially dilutive securities. For the three and six month periods ended June 30, 20152016 and 2014,2015, outstanding stock options, warrants and warrantsconvertible debt are antidilutive because of net losses, and as such, their effect has not been included in the calculation of diluted net loss per share. Common shares issuable are considered outstanding as of the original approval date for purposes of earnings per share computations.
Accumulated Other Comprehensive Income (Loss)
Other comprehensive income (loss), as defined, includes net loss, foreign currency translation adjustments, and all changes in equity (net assets) during a period from non-owner sources. To date, the Company has not had any significant transactions that are required to be reported in other comprehensive income (loss), except for foreign currency translation adjustments.
Use of Estimates
The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the fiscal year. The Company makes estimates for, among other items, useful lives for depreciation and amortization, determination of future cash flows associated with impairment testing for long-lived assets, determination of the fair value of stock options and warrants, determining fair values of assets acquired and liabilities assumed in business combinations, valuation allowance for deferred tax assets, allowances for doubtful accounts, and potential income tax assessments and other contingencies. The Company bases its estimates on historical experience, current conditions, and other assumptions that it believes to be reasonable under the circumstances. Actual results could differ from those estimates and assumptions.
Financial Instruments
The carrying value of our financial assets and liabilities such as cash, accounts receivable and accounts payable approximate their fair values based on level 1 inputs in the fair value hierarchy because of the short maturity of these instruments. Due to the conversion features and other terms, it is not practical to estimate the fair value of amounts due to related parties and long term debt.
Share-Based Compensation
The Company accounts for stock-based awards at fair value on date of grant and recognition of compensation over the service period for awards expected to vest. The fair value of stock options is determined using the Black-Scholes valuation model, which includes subjective judgementsjudgments about the expected life of the awards, forfeiture rates and stock price volatility.
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Recently Issued Accounting Standards
In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standard Update (“ASU”) 2014-09 – Revenue From Contracts with Customers, which will supersede nearly all existing revenue recognition guidance under U.S. GAAP. The core principal of this ASU is that an entity should recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. This ASU also requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to obtain or fulfill a contract.
The original effective date for ASU 2014-09 would have required the Company to adopt beginning in its first quarter 2017. In July 2015, the FASB voted to amend ASU 2014-09 by approving a one year deferral of the effective date as well as providing the option to early adopt the standard on the original effective date. Accordingly, the Company may adopt the standard in either its first quarter of 2017 or 2018. The new revenue standard may be applied retrospectively to each prior period presented or retrospectively with the cumulative effect recognized as of the date of adoption. The Company is currently evaluating the timing of its adoption and the impact of adopting the new revenue standard on its consolidated financial statements.
Recently Issued Accounting Standards Adopted
There have been no significant changes to the Company’s significant accounting policies as described in the Company’s Annual Report on Form 10-K for the year-ended December 31, 2015. During the three months ended March 31, 2016, the Company adopted Accounting Standards Update (“ASU”) ASU 2015-03,Simplifying the Presentation of Debt Issuance Costwhich requires entities to present debt issuance costs related to a debt liability as a direct deduction from the carrying amount of that debt liability on the balance sheet as opposed to being presented as a deferred charge. As at June 30, 2016, unamortized debt issuance costs related to the Company’s convertible senior notes are reported on the Consolidated Balance Sheets as a reduction of the carrying value of the related debt. Prior to adoption, the Company reported the unamortized debt issuance costs in “other Assets” on the Consolidated Balance Sheets. As at December 31, 2015, the change in presentation resulted in a reduction of “other Assets” of $261,000 and a corresponding decrease in “Convertible Senior Notes” with no impact on the Company’s Consolidated Statement of Operations.
Note 3. China Operations
The resultsCompany has control of a Chinese entity Suzhou Aishuo Network Information Co. Ltd.(“Aishuo”) through various contractual arrangements. As a result of this control, one hundred percent of the operations, assets, liabilities and cash flows of HNT and AISHUOAishuo have been consolidated in the accompanying condensed consolidated financial statementsstatements.
Summarized assets, liabilities and results of operations of Aishuo are as the Company owns a controlling interest follows:(in HNT and has full control of AISHUO through contracts in place. The ownership interests in HNT held by parties other than the Company are presented separately from the Company’s equity on the Consolidated Balance Sheet. The amount of consolidated net loss attributable to the Company and the non-controlling interest are both presented on the face of the Consolidated Statement of Operations.thousands)
| June 30 | December 31 | |||||||
| 2016 | 2015 | |||||||
| Assets | $ | 11 | $ | 43 | ||||
| Intercompany receivables/(payables) | (261 | ) | (123 | ) | ||||
| Other liabilities | (39 | ) | (60 | ) | ||||
| Revenue | 134 | 56 | ||||||
| Net Loss | (154 | ) | (286 | ) | ||||
| 18 |
Note 4. Property and Equipment, net
Property and equipment consist of the following: (in thousands)
| June 30 | December 31 | |||||||
| 2015 | 2014 | |||||||
| Leasehold improvements | $ | - | $ | 265 | ||||
| Motor vehicle | - | 120 | ||||||
| Equipment | 296 | 348 | ||||||
| 296 | 733 | |||||||
| Less accumulated depreciation | (170 | ) | (521 | ) | ||||
| Property and equipment, net | $ | 126 | $ | 212 | ||||
| June 30 | December 31 | |||||||
| 2016 | 2015 | |||||||
| Equipment | $ | 289 | $ | 291 | ||||
| Less accumulated depreciation | (221 | ) | (195 | ) | ||||
| Property and equipment, net | $ | 68 | $ | 96 | ||||
Note 5. Intangible Assets
Intangible assets consist primarily of software development costs and customer and reseller relationships which are amortized over the estimated useful life, generally on a straight-line basis with the exception of customer relationships, which are generally amortized over the greater of straight-line or the related asset’s pattern of economic benefit.(in thousands)
| June 30 | December 31 | |||||||
| 2015 | 2014 | |||||||
| Horizon software | $ | 18,509 | $ | 16,936 | ||||
| ZTEsoft Telecom software | 499 | 495 | ||||||
| Contractual relationships | 885 | 885 | ||||||
| 19,893 | 18,316 | |||||||
| Less accumulated amortization | (8,887 | ) | (7,356 | ) | ||||
| Intangible assets, net | $ | 11,006 | $ | 10,960 | ||||
| June 30 | December 31 | |||||||
| 2016 | 2015 | |||||||
| Horizon software | $ | 18,381 | $ | 17,879 | ||||
| ZTEsoft Telecom software | 457 | 469 | ||||||
| Contractual relationships | 885 | 885 | ||||||
| 19,723 | 19,233 | |||||||
| Less accumulated amortization | (10,555 | ) | (9,410 | ) | ||||
| Intangible assets, net | $ | 9,168 | $ | 9,823 | ||||
Amortization of intangible assets for each of the next five years is estimated to be $2,000,000 per year
| 19 |
| June 30 | December 31 | |||||||
| 2015 | 2014 | |||||||
| Vehicle loan | $ | - | $ | 32 | ||||
| Equipment loan | 10 | 15 | ||||||
| Office term loan | - | 134 | ||||||
| 10 | 181 | |||||||
| Less current portion | (10 | ) | (73 | ) | ||||
| Balance | $ | - | $ | 108 | ||||
Note 7.6. Convertible Debenture
In December 22, 2014 the Company closed a financingprivate placement with gross proceeds of $3.5 million consisting of$3,500,000 under Regulation S whereby we issued to an investor a convertible debenture that is convertible into 1,555,556 units, whereby each unit included i) the right to convert, at any time, into one shareshares of common stock, at a price of $2.25; ii) one Class C warrant entitling the holder to purchase one quarter of a share388,889 shares of common stock, at a price of $3.00; iii) one Class D warrant entitling the holder to purchase one quarter of a share388,8889 shares of common stock at a price of $3.50 and iv) a pro-rata share ofthe potential for performance warrants.
The unsecured convertible debenture is for a term of three years from the date of issue and has an interest rate of 8% per annum, payable quarterly in arrears in either cash, shares of common stock or a combination of cash and shares of common stock. The Company has the right to repurchase the convertible debenture upon notice at any time after the first twelve months.
The Class C and Class D warrants have a term of four years and are each entitled to purchase one-fourth of a share of common stock. In total the Company issued 388,889 Class C warrants and 388,889 Class D warrants.
Performance Warrants associated with the convertible debenture were potentially issuable and exercisable based on the Company’s annual reported subscriber numbers, twenty-four (24) months after December 22, 2014, as reflected in our 2014 Form 10-K. In the first quarter of 2016 the Company will issue a maximum of 450,000announced it has achieved the required number subscriber downloads and therefore the additional performance warrants each entitlingare not issuable by the holders to purchase shares of common stock for cash at the then current market price, dependent on the number of subscribers the Company has as at December 31, 2016. The number of performance warrants issued will be a ratio with 450,000 performance warrants being issued if there is less than 5 million subscribers and no performance warrants if there are more than 15 million subscribers.
Proceeds received in 2014 from the convertible debentures were allocated between the convertible debenture and warrants based on their relative fair values. The resulting discount for the warrants is amortized using the effective interest method over the life of the debentures. The relative fair value of Class C and Class D warrants resulted in a discount of $598,500 at the date of issuance. After allocating a portion of the proceeds to the warrants, the effective conversion price of the convertible debentures was determined to result in a beneficial conversion feature. The beneficial conversion feature has a relative fair value of $302,994 at the date of issuance and will beis being amortized over the life of the convertible debenture. The beneficial conversion feature discount is amortized using the effective interest method over the life of the debentures. The amortization of the debt discount is included asin interest expense in the consolidated statement of operations.
A total of 1,555,556 shares of common stock have been reserved for the potential conversion of the convertible debenture.
Note 8.7. Related-Party Transactions
Amounts due to related parties include the following: (in thousands)
| June 30 | December 31 | |||||||
| 2015 | 2014 | |||||||
| Loans due to stockholders (current and former officers and directors) | ||||||||
| Due within one year | $ | 100 | $ | 600 | ||||
| Long-term | 2,488 | 2,598 | ||||||
| $ | 2,588 | $ | 3,198 | |||||
| June 30 | December 31 | |||||||
| 2016 | 2015 | |||||||
| Loans due to stockholders (current officers and directors) | $ | 2,343 | $ | 2,354 | ||||
At June 30, 2015, $2,588,0002016, $2,343,000 of related party debt was outstanding. $100,000 is interest freeoutstanding and will be repaid during 2015. The remaining balance of $2,488,000 maturesmature on April 1, 20162017, which is unsecured and carries an annualis interest rate of 0.21%.
Note 9.8. Share Capital
Preferred Stock
The Company’s authorized capital includes 50,000,000 shares of preferred stock of $0.0001 par value.value per share. The designation of rights including voting powers, preferences, and restrictions shall be determined by the Board of Directors before the issuance of any shares.
| 20 |
On July 21, 2014, the Company completed a private placement of 170,940 shares of mandatorily convertible Series A Preferred Stock that also included 100,000 Class B warrants, each warrant convertible to one share of common stock at an exercise price of $4 per share. The net proceeds of the offering were $982,000 after deducting offering costs.
The holders of Series A Preferred Stock are entitled to receive cumulative dividends during a period of twenty-four (24) months from and after the Issuance Date (the “Dividend Period”). During the Dividend Period for each outstanding share of Series Preferred Stock, dividends shall be payable quarterly in cash, at the rate of 10% per annum on or before each ninety (90) day period following the Issuance Date (each a “Dividend Payment Date”), with the first Dividend Payment Date to occur promptly following the three month period following the Issuance Date, and continuing until the end of the Dividend Period. Following the expiration of the Dividend Period, the holders of Series A Preferred Stock shall not be entitled to any additional dividend payment or coupon rate.
Shares of Series A Preferred Stock are convertible in whole or in part, at the option of the holders, into shares of common stock at $5.85 per share prior to the Maturity, and all outstanding shares of Series A Preferred Stock shall automatically convert to shares of common stock upon Maturity,maturity, provided however, at no time may holders convert shares of Series A Preferred Stock if the number of shares of common stock to be issued pursuant to such conversion would cause the number of shares of common stock beneficially owned by such holder and its affiliates to exceed 9.99% of the then issued and outstanding shares of common stock outstanding at such time, unless the holder provides us with a waiver notice in such form and with such content specified in the Series A Certificate of Designation.
Shares of Series A Preferred Stock are redeemable, at the option of the holders commencing any time after 12 months from and after the closing at a price equal to the original purchase price plus all accrued but unpaid dividends. In the event that the Company completes a financing of $10 million or greater prior to Maturity,maturity, the Series A Preferred Stock will be redeemed at a price equal to the original purchase price plus all accrued but unpaid dividends.
170,940 shares of Series A preferred stock are issued and outstanding as of June 30, 2015.
Mandatorily Redeemable Preferred Shares (Deferred Stock)
The Company’s subsidiary OHG is authorized to issue 50,000 shares of deferred stock, par value of £1.These£1. These shares are non-voting, non-participating, redeemable and have been presented as a long-term liability.
Common Stock
The Company is authorized to issue 200 million shares of common stock, par value of $0.0001.
During the six months ended June 30, 2015 no2016 the Company issued 200,000 shares of common stock for services to be provided with a fair value of $133,960.
On August 10, 2015, in connection with an Underwriting Agreement dated August 4, 2015 (the “Underwriting Agreement”) with Aegis Capital Corp. (“Aegis”), as representative of the several underwriters named therein (the “Underwriters”), the Company closed a firm commitment underwritten public offering of 1,714,286 shares of Common Stock, and warrants to purchase up to an aggregate of 857,143 shares of Common Stock at a combined offering price of $1.75 per share and accompany warrant. Pursuant to the Underwriting Agreement, the Underwriters exercised an option to purchase 151,928 additional shares of Common Stock and 75,964 additional warrants. The net proceeds of the offering were issued.
The warrants offered have a per share exercise price of $2.50 (subject to adjustment in the year ended December 31, 2014,event of certain stock dividends and distributions, stock splits, stock combinations, reclassifications or similar events affecting our Common Stock and also upon any distributions of assets, including cash, stock or other property to our stockholder), are exercisable immediately and will expire three years from the Company:
Stock Purchase Warrants
At June 30, 2015,2016, the Company had reserved 2,811,6423,233,746 shares of its common stock for the following outstanding warrants:
| Number of Warrants | Exercise Price | Expiry | ||
| 116,760 | $0.86 | no expiry date | ||
| 1,209,675 | 4.25 | January 2019 | ||
| 100,000 | 4.00 | July 2016 | ||
| 60,000 | 6.55 | December 2015 | ||
| 68,850 | 2.25 | December 2018 | ||
| 402,786 | 3.00 | December 2018 | ||
| 402,568 | 3.50 | December 2018 | ||
| 450,000 | - | May 2017 |
| Number of Warrants | Exercise Price | Expiry | ||||||
| 116,760 | $ | 0.86 | no expiry date | |||||
| 1,209,675 | 4.25 | January 2019 | ||||||
| 100,000 | 4.00 | July 2016 | ||||||
| 68,850 | 2.25 | December 2018 | ||||||
| 402,786 | 3.00 | December 2018 | ||||||
| 402,568 | 3.50 | December 2018 | ||||||
| 857,143 | 2.50 | August 2018 | ||||||
| 75,964 | 2.50 | September 2018 | ||||||
During the six months ended June 30, 2015.
If, at the time of exercise of warrants issued pursuant to the financing of August 2015, wherein a total of 933,107 warrants were issued, that the shares issued upon exercise are not able to be included in a registration statement then the holder may request that the warrants so exercised be done on a cashless basis.
Note 10.9. Stock-Based Compensation
The shareholders approved a stock option plan on August 6, 2013, the 2013 Equity Incentive Plan. This stock option plan is for the issuance of stock options, stock appreciation rights, restricted stock, restricted stock units, performance awards, dividend equivalents, cash bonuses and other stock-based awards to employees, directors and consultants of the Company.
There are 3,000,000 shares of common stock available for granting awards under the plan. Each year, commencing 2014 until 2016, the number of shares of common stock available for granting awards shall be increased by the lesser of 1,000,000 shares of common stock and 5% of the total number of shares of common stock outstanding.
During the year ended December 31, 2014, the Company issued options to purchase 500,000 shares of common stock under the 2013 Equity Incentive Plan. The options become fully vested on January 15, 2017 and are exercisable, at an exercise price of $4.54 per common share, tountil January 15, 2024. On January 1, 2015 the number of shares available for granting awards under the 2013 Equity Incentive Plan was increased by 1,000,000 shares.
During the periodyear ended June 30,December 31, 2015, the Company issued options to purchase 564,000 shares of common stock under the 2013 Equity Incentive Plan. The fair value of the options issued, using the Black-Scholes option pricing model is estimated to be $259,000.$370,000 prior to a point that forfeiture rate has been applied. The options have an exercise price of $1.09 and vest over three years.
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There have been no options issued in the six months ended June 30, 2016
A summary of the Company’s 2013 Equity Incentive Plan as of June 30, 2015,2016, is as follows:
| Number of | Weighted Average | |||||||
| Options | Exercise Price | |||||||
| Outstanding at December 31, 2014 | 500,000 | $ | 4.54 | |||||
| Options issued | 564,000 | 1.09 | ||||||
| Outstanding at June 30, 2015 | 1,064,000 | 2.71 | ||||||
| Weighted Average | ||||||||
| Number of Options | Exercise Price | |||||||
| Outstanding at December 31, 2014 | 500,000 | $ | 4.54 | |||||
| Options issued | 564,000 | 1.09 | ||||||
| Options forfeited | (120,000 | ) | 4.54 | |||||
| Outstanding at December 31, 2015 and June 30, 2016 | 944,000 | 2.48 | ||||||
The fair value of these options, using the Black-Scholes option-pricing model, is estimated to be $2,570,000.$2,576,000. This expense, less an estimated forfeiture rate of 30%, will be recognized over the three year vesting periods. The amount of $312,000 and $279,000 has been recognized during the six months ended June 30, 2015.2016 and 2015, respectively. As at June 30, 20152016 there was unrecognized compensation expense of approximately $1,050,000$411,000 to be recognized over a period of 3 years.
For the 2013 Equity Incentive Plan there were 564,000no options issued, and none were exercised or forfeited during the six months ended June 30, 2015.
Prior to the 2013 Equity Incentive Plan the Company issued stock options to directors, employees, advisors, and consultants.
A summary of the Company’s other stock options as of June 30, 2015,2016, is as follows:
| Number of | Weighted Average | |||||||
| Options | Exercise Price | |||||||
| Outstanding at December 31, 2014 | 584,650 | $ | 0.53 | |||||
| Options forfeited | 850 | 0.51 | ||||||
| Outstanding at June 30, 2015 | 583,800 | $ | 0.53 | |||||
| Weighted Average | ||||||||
| Number of Options | Exercise Price | |||||||
| Outstanding at December 31, 2014 | 584,650 | $ | 0.53 | |||||
| Options issued | 291,900 | 0.53 | ||||||
| Options forfeited | (850 | ) | 0.51 | |||||
| Outstanding at December 31, 2015 and June 30, 2016 | 875.700 | $ | 0.53 | |||||
The grant date fair value of the options issued, using the Black-Scholes option-pricing model, is estimated to be $255,000. This expense is being recognized over the 2 year vesting period. The amount of $64,000 and $nil has been recognized during the six months ended June 30, 2016 and 2015, respectively. As at June 30, 2016 there was unrecognized compensation expense of approximately $127,000 to be recognized over the remaining vesting period.
There were no options issued, or exercised and 850 options wereor forfeited during the six months ended June 30, 2015.
The following table summarizes stock options outstanding at June 30, 2015:2016:
Number Outstanding at June 30, | Average Remaining Contractual Life | Number Exercisable at June 30, | Intrinsic Value at June 30, | |||||||||||||||
| Exercise Price | 2016 | (Years) | 2016 | 2016 | ||||||||||||||
| $ | 0.53 | 291,900 | 4.00 | 291,900 | 67,137 | |||||||||||||
| 0.53 | 291,900 | 6.00 | 291,900 | 67,137 | ||||||||||||||
| 0.53 | 291,900 | 9.25 | - | - | ||||||||||||||
| 4.54 | 380,000 | 7.50 | - | - | ||||||||||||||
| 1.09 | 564,000 | 9.00 | - | - | ||||||||||||||
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Number Outstanding at | Average Remaining Contractual Life | Number Exercisable at | Intrinsic Value at | |||||||||||||||
| Exercise Price | 2015 | (Years) | 2015 | 2015 | ||||||||||||||
| $ | 0.53 | 291,900 | 5.00 | 291,900 | 764,778 | |||||||||||||
| 0.53 | 291,900 | 7.00 | 291,900 | 764,778 | ||||||||||||||
| 4.54 | 500,000 | 8.00 | - | - | ||||||||||||||
| 1.09 | 564,000 | 10.00 | - | - | ||||||||||||||
At June 30, 2015, 5,583,8002016, 6,875,700 shares of common stock were reserved for all outstanding options and future commitments under the 2013 Equity Incentive Plan.
The fair value of each option granted is estimated at the date of grant using the Black-Scholes option-pricing model.
Note 11.10. Commitments and Contingencies
Contractual Commitments
The Company incurred total rent expense of $28,000$33,000 and $47,000,$28,000, respectively, for the six month periods ended June 30, 20152016 and 2014.
Minimum contractual commitments, as of June 30, 2015,2016, is as follows:
| Operating | Long-term | |||||||
| leases | Financing | |||||||
| 2015 | $ | 20,000 | $ | 6,000 | ||||
| 2016 | - | 4,000 | ||||||
| Operating | ||||
| leases | ||||
| 2016 | 4,000 | |||
Legal Proceedings
In 2012, we sold certain former subsidiaries engaged in provision of satellite service in 2012 to Broadband Satellite Services (“BSS”), a company incorporated under the laws of England and Wales. Horizon Globex, a company incorporated in Switzerland and a subsidiary of us, had provided these subsidiary companies with software and IT services. In connection with its acquisition of our former subsidiary companies, BSS entered into three agreements with Horizon Globex pursuant to which BSS continued to use Horizon Globex to supply software and IT services. Notwithstanding the fact that Horizon Globex has provided such ongoing software and IT services, BSS has failed to pay our fees pursuant to the agreements. As a result, on December 23, 2014, we initiated legal proceedings in the High Court, Queen’sQueens Bench Division, Commercial Court No. 2014 folio 1560 against BSS in the United Kingdom to collect such fees in the amount of $640,000. Subsequently, BSS asserted counter-claimscounter claims in the amount of $5.8 million, alleging among other claims, civil fraud in connection with the sale of subsidiary companies. Based on the timing of these claims, which were never raised until we filed our action against BSS, it is our position that these claims are specious and represent nothing more than an attempt to improve BSS’sBSS's negotiating position with regard to our legitimate claims against it. As a result, we plan to continue to carry out our claims against BSS to the fullest extent possible and to defend BSS’sBSS's counter-claims vigorously. We note further that several BSS counter-claimsof BSS's counter claims may be time barred by applicable sections of the contracts and plan to assert the same as an affirmative defense to such counter-claim.counter claim. Notwithstanding our views with regard to our claims against BSS and BSS’s counter-claims,BSS's counterclaims, litigation is by its nature unpredictable and therefore we cannot guarantee with certainty the outcome of our dispute with BSS.
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Note 12. Subsequent Event
The Company has two business segments, both of which involve the development and licensing of software for mobile VoIP. One for business to business line and one for business to consumer line, primarily represented by Aishuo. For the three and six months ended June 30, 2016 and 2015 in connection with an Underwriting Agreement dated August 4, 2015 (the “Underwriting Agreement”) with Aegis Capital Corp. (“Aegis”), as representative of the several underwriters named therein (the “Underwriters”), we closed a firm commitment underwritten public offering of 1,714,286 shares of Common Stock, and warrants to purchase up to an aggregate of 857,143 shares of Common Stock at a combined offering price of $1.75 per share and accompany Warrant. Pursuant to the Underwriting Agreement, we granted the Underwriters an option for a period of 45 days to purchase up to 257,142 additional shares of Common Stock and/or 128,571 additional Warrants, in each case, solely to cover over-allotments, if any. The net proceeds from the Offering are approximately $2.64 million, or approximately $ 3.054 million if the underwriters exercise in full their option to purchase additional shares and warrants, after deducting underwriting discounts and commissions and estimated Offering expenses payable by us.
The Company’s revenues were generated in the date of issuance. Subject to applicable laws, the warrants may be offered for sale, sold, transferred or assigned without our consent.following geographic areas:(in thousands)
| Three months ended June 30, | Six months ended June 30, | |||||||||||||||
| 2016 | 2015 | 2016 | 2015 | |||||||||||||
| China | $ | 74,000 | $ | 4,000 | $ | 134,000 | $ | 7,000 | ||||||||
| Rest of Asia | $ | 275,000 | $ | 86,000 | $ | 823,000 | $ | 270,000 | ||||||||
| Europe and Russia | $ | 10,000 | $ | 7,000 | $ | 11,000 | $ | 7,000 | ||||||||
| The Americas | $ | 7,000 | $ | 11,000 | $ | 7,000 | $ | 569,000 | ||||||||
| Total | $ | 366,000 | $ | 108,000 | $ | 975,000 | $ | 853,000 | ||||||||
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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 unaudited condensed consolidated financial statements for the six months ended June 30, 20152016 and 20142015 and notes thereto contained elsewhere in this Report, and our annual report on Form 10-K for the twelve months ended December 31, 20142015 and 20132014, including the consolidated financial statements and notes thereto. 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
One Horizon Group, Inc. and license software to telecommunications operators through our wholly-owned subsidiaries Horizon Globex GmbH and Abbey Technology GmbH, each incorporated underits Subsidiaries (the “Company”) is the lawsinventor of Switzerland (“Horizon Globex” and “Abbey Technology,” respectively). Specifically, Horizon Globex and Abbey Technology develop software application platforms that optimize mobile voice, instant messaging and advertising communications over the internet, collectively, the “Horizon Platform.” Our proprietary software techniques (“SmartPacket™”) use internet bandwidth more efficiently than other techniques that are unable to provide a low-bandwidth solution. The Horizon Platform is a bandwidth-efficientpatented SmartPacketTM Voice over Internet Protocol (“VoIP”) platform forplatform. Our software is designed to capitalize on numerous industry trends, including the rapid adoption of smartphones, the adoption of cloud based Internet services, the migration towards all IP voice networks and tablets,the expansion of enterprise bring-your-own- device to work programs.
The Company designs, develops and also provides optimized data applicationssells white label SmartPacketTMsoftware and services to large Tier-1 telecommunications operators. Our licensees deliver an operator-branded mobile Internet communication solution to smartphones including VoIP, multi-media messaging, video, and mobile advertising. Using our SmartPacket™ advertising; and theBusiness to Business(“B2B”) business. Current licensees include some of the world’s largest operators such as Singapore Telecommunications, Philippines Smart Communication and Indonesia Smartfren Tbk.
TheSmartPacketTMplatform, we have been able to significantly improveimproves the efficiency by which voice signals are transmitted by radiofrom smartphones over the Internet resulting in a 10X reduction in mobile spectrumbandwidth and battery usage required to transmit a smartphone VoIP call. We license ourThis is of commercial interest to operators that wish to have a high quality VoIP call on congested metropolitan 4G networks and on legacy 2G and 3G cellular networks. The following diagram (source GSMA Intelligence, GSMA Mobile Economy 2016) shows the global penetration of mobile broadband and with the Company’s patented technology being one of the leading mobile VoIP solution for all mobile network types management believes that this represents a very large opportunity for future growth in sales.
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By leveraging its SmartPacketTM solution, the Company is also a VoIP as a Service (“VaaS”) cloud communications leader for hosted smartphone VoIP that run globally on the Microsoft Azure cloud. The Company sells its software, solutionsbranding, hosting and operator services to smaller telecommunications networkoperators, enterprises, operators in fixed line telephony, cable TV operators and to the satellite communications sector; and the “VaaS” business. Our existing licensees come from around the world including USA, China, United Kingdom, Singapore, Canada and Hong Kong.
Based on the SmartPacketTM solution, the Company is the sole owner and operator its own branded retail smartphone VoIP, messaging and advertising service providers in the mobile, fixed line, cable TVPeople’s Republic of China called AishuoTM; Since its inception in the second quarter of 2015 Aishuo has been downloaded over 37 million times and satellite communications markets. has doubled its revenues for the first 4 quarters of operations and increased again in this quarter. Aishuo offers subscribers very competitive telephone call rates and a virtual number rental service plus lots of innovative smartphone social media features. Aishuo has been made available to users across 25 Chinese Android app stores and through iTunes. Aishuo subscribers pay for VoIP or can have a free VoIP call sponsored by advertisers. Aishuo supports top-up payment services inside the smartphone app including China UnionPay, Apple In-App Purchases, Alibaba’s Alipay and Tencent’s Wechat Wallet.
Our business model is focused on winning newB2BTier-1 telecommunications operators, winning newVaaSsubscribers and drivingAishuoretail revenues. We are also commercially focused on expanding sales of new and existing licensed products and services to existing customers, and renewing subscriptions and software support agreements. We target customers of all sizes and across a broad range of industries.
We are an ISO 9001 and ISO 20000-1 certified company with assets and operations in Switzerland, Ireland, the United Kingdom, Latin America, China, India, Russia, Singapore, Hong Kong and Hong Kong.
In February 2015, we announced the rollout of our platform in China, brand named, Aishuo. The Aishuo platform provides VoIP services, a Value Added Virtual SIM solution delivered through a People’s Republic of China (“PRC”) entity controlled by us via various contractual arrangements, Suzhou Aishuo. The Aishuo product has been delivered to the major stores in Chinese App marketplace including Baidu’s 91.com and Baidu.com, the Tencent App store MyApp.com, 360 Qihoo store 360.cn, Apple’s iTunes and the ever growing Xiaomi store mi.com. The Aishuo smartphone app is expected to drive multiple revenue streams from the supply of its value-added services including the rental of Chinese telephone phone numbers linked to the app, low cost local and international calling plans and sponsorship from advertisers. Subscribers can top up their app credit from the biggest online payment services in China including AliPay (from Alibaba), Union Pay, PayPal and Tencent’s WeChat payment service.
Since the commercial launch of Aishuo in early 2015 the Company has recorded continual growth in revenue generated in every quarter. In the three months ended June 30, 2016 the revenue totaled $74,000 which compared to $60,000 recorded in the three months ended March 31, 2016 and $7,000 recorded in the three months ended June 30, 2015. The management expects this revenue to continue to increase as the Chinese user base continues its growth.
| 27 |
Aishuo brand followed the first phase of our Chinese infrastructure rollout that commenced in 2014 in six major cities in China: Tianjin, Beijing, Chongqing, Changchun, Nanjing and Shijiazhuang. These initial locations will connect the national telephone network to our Aishuo brand. The smart phone app will be able to provide various optimized internet value added services to its mobile subscribers including but not limited to voice and social media services such as text, picture, video and geo-location messaging. Combined with One Horizon's location aware mobile advertising services, the Aishuo branded smart phone app is expected to drive multiple revenue streams from the supply of its value-added services. The service will seeksought to acquire 15 million new app subscribers for the smartphone app over a two-year period and expects to achieve industry average revenues per user (ARPU) for similar social media apps. By the end of June 30, 2015,2016, we had over 1.6exceeded our two year target of 15 million and in July 2016 had grown to 37 million downloads of Aishuo smartphone app already and as of the date of this report, we have more than 7 million downloads.
In addition to the developments in the rollout of Aishuo smartphone app brand in mainland China, we have commenceddelivered a data roaming VoIP solution with, Smart Communications, the Philippines' leading wireless service provider with an estimated 55 million prepaid subscribers. For the first time ever, prepaid subscribers that travel abroad are now able to call home on their operators' data roaming service free from roaming fees (http://smart.com.ph/smartroamer). The management expect this commercial rollout of an optimized data voice solution for roamers to drive further mobile operator interest in the Company’s products and to drive revenues from its rollout to Filipinos throughout 2016.
During this quarter we expanded our penetration into the Latin American market by signing a Horizon license contractsales team with a regional operator. We consider Latin America a hugestaff that speak Arabic, Hindi and growing market forUrdu in order to target mobile apps as Latin America growth is forecast to beoperators in line with the global averageMiddle East and is also forecasting very significant VoIP revenues growing to $12.8bn by 2018 according to Vision Gain VoIP Market Forecast (https://www.visiongain.com/Report/1107/The-Voice-Over-Internet-Protocol-(VoIP)-Market-2013-2018).
Research & Development
During the first half of 2015,six months to June 30th, 2016, we have spent approximately $560,000$207,000 on capitalizable research and development together with $252,000approximately $374,000 on expensed research and development.
During the six months endto June 30 2015,th, 2016, we continued with our focus ondrive for innovation and our research and development teams brought us software that allows our customer to offer call and messaging Bundles. This is a brand new call handoff solution. Applying this new call handoff solution,common feature for SIM cards and popular with mobile subscribers whereby the user pre purchases bulk minutes at a lower per minute rate that when they pay for a call that is in progress on Wi-Fi will automatically transferminute by minute. The Company now offers such innovations to 2G/3G/4G when Wi-Fi signal becomes too weak. Vice versa when a call is in progress over 2G/3G/4G and a known Wi-Fi signal is detected ,the call will automatically transferits subscribers right inside the operators’ smartphone app supplied to a stronger signal. Whilst others have partially solved this issue of radio-handoff,Company thereby driving up the Horizon solution works for all handset types on Android and on Apple's iOS and we believe that this will open up other mobile VoIP opportunities.
During the six months endedto June 30 2015, the R&Dth, 2016, we also delivered the only service in the world with a combo multi-installation App joined to a shared/peer landline or mobile. Using these features, especially for business, an App will ring on multiple devices at the same time not only on a smartphone and tablet but also ring a land line, mobile, and remote office etc. In this case, an end user can choose the most convenient way to answer a call. Whilst our competitors have partially solved this issue of simultaneous ringing with just the App, we have solved this for all phone types and we believe that this will open up other mobile VoIP opportunities for the Company.
The R&D team also delivered a cyber-secure VoIP service acrossthat leverages the low bandwidth benefits of Company’s patented technology to allow VoIP over the strongest security protocols on the Internet. By leveraging the power of Virtual Private Networks (VPN) native client on the smartphone the Company’s VoIP protocols work where other top four brands in China's smartphone marketplace including Samsung, Lenovo, Huaweitraditional VoIP solutions cannot due to call quality issues with high data consumption protocols. Customer trials commenced and Coolpad.
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Results of Operations
Comparison of three months ended June 30, 20152016 and 2014
The following table sets forth key components of our results of operations for the periods indicated.
(All amounts, other than percentages, in thousands of U.S. dollars)
Three Months Ended June 30, | Change | |||||||||||||||
| 2015 | 2014 | Increase/ (decrease) | Percentage Change | |||||||||||||
| Revenue | $ | 108 | $ | 1,304 | $ | (1,196 | ) | (91.7 | ) | |||||||
| Cost of revenue | 627 | 549 | 78 | 14.2 | ||||||||||||
| Gross margin | (519 | ) | 755 | (1,274 | ) | (168.7 | ) | |||||||||
| Operating expenses: | ||||||||||||||||
| General and administrative | 729 | 1,190 | (461 | ) | (38.7 | ) | ||||||||||
| Depreciation | 16 | 46 | (30 | ) | (65.2 | ) | ||||||||||
| Total operating expenses | 745 | 1,236 | (491 | ) | (39.7 | ) | ||||||||||
| Loss from operations | (1,264 | ) | (481 | ) | (783 | ) | (162.7 | ) | ||||||||
| Other expense | (361 | ) | (64 | ) | (297 | ) | (464.1 | ) | ||||||||
| Loss before income taxes | (1,625 | ) | (545 | ) | (1080 | ) | (198.2 | ) | ||||||||
| Income taxes (recovery) | (45 | ) | (0 | ) | (45 | ) | N/A | |||||||||
| Net Loss for period | (1,580 | ) | (545 | ) | (1035 | ) | (189.9 | ) | ||||||||
| Loss attributable to non-controlling interest | (31 | ) | (22 | ) | (9 | ) | (40.9 | ) | ||||||||
| Loss attributable to One Horizon Group, Inc. | (1,549 | ) | (523 | ) | 1016 | (196.2 | ) | |||||||||
| Three Months Ended June 30, | Change | |||||||||||||||
| 2016 | 2015 | Increase/ (decrease) | Percentage Change | |||||||||||||
| Revenue | $ | 366 | $ | 108 | $ | 258 | 238.8 | |||||||||
| Cost of revenue | 542 | 627 | (85 | ) | (13.6 | ) | ||||||||||
| Gross margin | (176 | ) | (519 | ) | 343 | (66.1 | ) | |||||||||
| Operating expenses: | ||||||||||||||||
| General and administrative | 878 | 569 | 309 | 54.3 | ||||||||||||
| Depreciation | 15 | 16 | (1 | ) | (6.3 | ) | ||||||||||
| Research and development | 186 | 160 | 26 | 16.3 | ||||||||||||
| Total operating expenses | 1,079 | 745 | 334 | 44.8 | ||||||||||||
| Loss from operations | (1,255 | ) | (1,264 | ) | (9 | ) | (1.0 | ) | ||||||||
| Other expense | (174 | ) | (360 | ) | (186 | ) | (51.7 | ) | ||||||||
| Loss before income taxes | (1,429 | ) | (1,624 | ) | (195 | ) | (12.0 | ) | ||||||||
| Income taxes (recovery) | (11 | ) | (45 | ) | (34 | ) | (75.5 | ) | ||||||||
| Net Loss for period | (1,418 | ) | (1,579 | ) | (161 | ) | (10.1 | ) | ||||||||
| Net loss attributable to non-controlling interest | - | (31 | ) | (31 | ) | (100.0 | ) | |||||||||
| Net loss attributable to One Horizon Group, Inc. | (1,418 | ) | (1,548 | ) | (130 | ) | (8.3 | ) | ||||||||
Revenue:
Our revenue for the three months ended June 30,Cost of Revenue:
Cost of revenue excluding amortization of software development costs, was approximatelyGross Profit
: Gross profit (excluding the Amortization of software development costs) for the three months ended June 30, 2016 was approximately $317,000 as compared to $61,000for the three months ended June 30, 2015,| 29 |
Operating Expenses:
Operating expenses, including general and administrative expenses, depreciation andLoss before taxes: Loss before taxes for the three months ended June 30, 20152016 was approximately $1,580,000$1,429,000 as compared to net loss of approximately $545,000$1,624,000 for the same period in 2014.2015. The decrease in loss was primarily due to reductionan increase in revenue mentioned above. Management believes the net loss will decrease and eventually become net income going forward with our growth in the business in ChinaAsia and also elsewhere in the world.
Comparison of six months ended June 30, 20152016 and 2014
The following table sets forth key components of our results of operations for the periods indicated above.
(All amounts, other than percentages, in thousands of U.S. dollars)
Six Months Ended June 30, | Change | |||||||||||||||
| 2015 | 2014 | Increase/ (decrease) | Percentage Change | |||||||||||||
| Revenue | $ | 853 | $ | 2,489 | $ | (1,636 | ) | (65.7 | ) | |||||||
| Cost of revenue | 1,200 | 1,097 | 103 | (9.4 | ) | |||||||||||
| Gross margin | (347) | 1,392 | (1,739 | ) | (124.9 | ) | ||||||||||
| Operating expenses: | ||||||||||||||||
| General and administrative | 1,814 | 2,318 | (504 | ) | (21.79 | ) | ||||||||||
| Depreciation | 36 | 94 | (58 | ) | (61.7 | ) | ||||||||||
| Total operating expenses | 1,850 | 2,412 | (562 | ) | (23.3 | ) | ||||||||||
| Loss from operations | (2,197 | ) | (1,020 | ) | (1,177 | ) | (115.4 | ) | ||||||||
| Other income (expense) | (365 | ) | (112 | ) | (253 | ) | (225.8 | ) | ||||||||
| Income (Loss) before income taxes | (2,562 | ) | (1,132 | ) | (1,430 | ) | (126.3 | ) | ||||||||
| Income taxes (recovery) | (45) | (156) | 111 | (71.1 | ) | |||||||||||
| Net Loss for period | (2, 517 | ) | (976 | ) | (1,541 | ) | (157.9 | ) | ||||||||
| Net loss attributable to non-controlling interest | (36 | ) | (65 | ) | 29 | 44.6 | ||||||||||
| Net loss attributable to One Horizon Group, Inc. | (2,481 | ) | (911 | ) | (1,570 | ) | (172.3 | ) | ||||||||
| Six Months Ended June 30, | Change | |||||||||||||||
| 2016 | 2015 | Increase/ (decrease) | Percentage Change | |||||||||||||
| Revenue | $ | 975 | $ | 853 | $ | 122 | 14.3 | |||||||||
| Cost of revenue | 1,080 | 1,200 | (120 | ) | (10.0 | ) | ||||||||||
| Gross margin | (105 | ) | (347 | ) | 242 | 69.7 | ||||||||||
| Operating expenses: | ||||||||||||||||
| General and administrative | 1,842 | 1,492 | 350 | 23.4 | ||||||||||||
| Depreciation | 30 | 36 | (6 | ) | (16.7 | ) | ||||||||||
| Research and development | 374 | 322 | 52 | 16.1 | ||||||||||||
| Total operating expenses | 2,246 | 1,850 | 396 | 21.4 | ||||||||||||
| Loss from operations | (2,351 | ) | (2,197 | ) | (154 | ) | (7.0 | ) | ||||||||
| Other income (expense) | (347 | ) | (365 | ) | 18 | 4.9 | ||||||||||
| Income (Loss) before income taxes | (2,698 | ) | (2,562 | ) | (136 | ) | (5.3 | ) | ||||||||
| Income taxes (recovery) | (22 | ) | (45 | ) | (23 | ) | (51.1 | ) | ||||||||
| Net Loss for period | (2,676 | ) | (2,517 | ) | (159 | ) | (6.3 | ) | ||||||||
| Net loss attributable to non-controlling interest | - | (36 | ) | 36 | N/A | |||||||||||
| Net loss attributable to One Horizon Group, Inc. | (2,676 | ) | (2,481 | ) | (195 | ) | (7.8 | ) | ||||||||
Revenue:
Our revenue for the six months ended June 30,| 30 |
Cost of Revenue:
Cost of revenue excluding amortization of software development costs, was approximatelyGross Profit
: Gross profit (excluding the Amortization of software development costs) for the six months ended June 30, 2016 was approximately $900,000 as compared to $745,000for the six months ended June 30, 2015,Operating Expenses:
Operating expenses, including general and administrative expenses, depreciation andNet Loss:
Net Loss for theLiquidity and Capital Resources
Six Months Ended June 30, 20152016 and June 30, 2014
The following table sets forth a summary of our approximate cash flows for the periods indicated:
For the Six Months Ended June 30 (in thousands) | ||||||||
| 2015 | 2014 | |||||||
| Net cash provided by (used in) operating activities | (1,027 | ) | (859) | |||||
| Net cash (used in) investing activities | (529) | (686) | ||||||
| Net cash provided by (used in) financing activities | (831) | (30) | ||||||
| For the Six Months Ended June 30 (in thousands) | ||||||||
| 2016 | 2015 | |||||||
| Net cash provided by (used in) operating activities | (597 | ) | (1,027 | ) | ||||
| Net cash (used in) investing activities | (211 | ) | (529 | ) | ||||
| Net cash (used in) financing activities | (66 | ) | (831 | ) | ||||
Net cash used in operating activities was approximately $1,027,000$597,000 for the six months ended June 30, 20152016 as compared to net cash used in operating activities of approximately $859,000$1,027,000 for the same period in 2014.2015. The increasedecrease in cash used in operations was primarily due to reductionthe increase in accounts payable and salescash generated from revenue during the first half of 2015six months ended June 30, 2016 as compared to the same period in 2014.
Net cash used in investing activities was approximately $529,000$211,000 and $686,000$529,000 for the six months ended June 30, 20152016 and 2014,2015, respectively. Net cash used in investing activities was primarily focused on development of software.
Net cash used in financing activities was $831,000$66,000 for the six months ended June 30, 20152016 as compared to net cash used in financing activities of $30,000$831,000 for the threesix months ended June 30, 2014.2015. Cash used byin financing activities in 20152016 and 20142015 was primarily due to the repayment of long term debt.
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Not applicable.
(a) Evaluation of Disclosure Controls and Procedures
Disclosure controls are procedures that are designed with the objective of ensuring that information required to be disclosed in our reports filed under the Exchange Act, such as this Report, is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls are also designed with the objective of ensuring that such information is accumulated and communicated to our management, including the chief executive officer and chief financial officer, as appropriate to allow timely decisions regarding required disclosure. Our management evaluated, with the participation of our current chief executive officer and chief financial officer (our “Certifying Officers”), the effectiveness of our disclosure controls and procedures as of June 30, 2015,2016, pursuant to Rule 13a-15(b) under the Exchange Act. Based upon that evaluation, our Certifying Officers concluded that, as of June 30, 2015,2016, our disclosure controls and procedures were not effective.
We do not expect that our disclosure controls and procedures will prevent all errors and all instances of fraud. Disclosure controls and procedures, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the disclosure controls and procedures are met. Further, the design of disclosure controls and procedures must reflect the fact that there are resource constraints, and the benefits must be considered relative to their costs. Because of the inherent limitations in all disclosure controls and procedures, no evaluation of disclosure controls and procedures can provide absolute assurance that we have detected all our control deficiencies and instances of fraud, if any. The design of disclosure controls and procedures also is based partly on certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions.
(b) Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the fiscal quarter covered by this report that has materially affected, or are reasonably likely to materially affect, our internal control over financial reporting except that, as one of our continuous methods to remediate the material weakness identifiedin connection with the evaluation of disclosure controls and procedures as of December 31, 2014,2015, we have engaged an external US GAAP consultant to advise the Company.
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We are not a party to any material legal proceedings and no material legal proceedings have been threatened by us or, to the best of our knowledge, against us except the following:
In 2012, we sold certain former subsidiaries engaged in provision of satellite service in 2012 to Broadband Satellite Services (“BSS”), a company incorporated under laws of England and Wales. Horizon Globex, a company incorporated in Switzerland and a subsidiary of us, had provided these subsidiary companies with software and IT services. In connection with its acquisition of our former subsidiary companies, BSS entered into three agreements with Horizon Globex pursuant to which BSS continued to use Horizon Globex to supply software and IT services. Notwithstanding the fact that Horizon Globex has provided such ongoing software and IT services, BSS has failed to pay our fees pursuant to the agreements. As a result, on December 23, 2014, we initiated legal proceedings in the High Court, Queens Bench Division, Commercial Court No. 2014 folio 1560 against BSS in the United Kingdom to collect such fees in the amount of $640,000. Subsequently, BSS asserted counter claims in the amount of $5.8 million, alleging among other claims, civil fraud in connection with the sale of subsidiary companies. Based on the timing of these claims, which were never raised until we filed our action against BSS, it is our position that these claims are specious and represent nothing more than an attempt to improve BSS's negotiating position with regard to our legitimate claims against it. As a result, we plan to continue to carry out our claims against BSS to the fullest extent possible and to defend BSS's counter-claims vigorously. We note further that several of BSS's counter claims may be time barred by applicable sections of the contracts and plan to assert the same as an affirmative defense to such counter claim. Notwithstanding our views with regard to our claims against BSS and BSS's counterclaims, litigation is by its nature unpredictable and therefore we cannot guarantee with certainty the outcome of our dispute with BSS.
Not applicable.
None
None.
Not applicable.
None
| ITEM 6. | EXHIBITS |
The following exhibits are filed herewith:
| Exhibit No. | Description | |
| 31.1 | Certifications pursuant to Rule 13a-14(a) or 15d-14(a) under the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
| 31.2 | Certifications pursuant to Rule 13a-14(a) or 15d-14(a) under the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
| 32.1 | Certifications pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | |
| 32.2 | Certifications pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | |
| 101.INS | XBRL Instance Document | |
| 101.SCH | XBRL Taxonomy Extension Schema Document | |
| 101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document | |
| 101.DEF | XBRL Taxonomy Extension Definition Linkbase Document | |
| 101.LAB | XBRL Taxonomy Extension Label Linkbase Document | |
| 101.PRE | XBRL Taxonomy Extension Presentation Linkbase Document |
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Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| ONE HORIZON GROUP, INC. | |||
| Date: August | By: | /s/ Brian Collins | |
| Brian Collins | |||
| President , Chief Executive Officer, | |||
| Chief Technology Officer and Director | |||
| By: | /s/ Martin Ward | ||
| Martin Ward | |||
| Chief Financial Officer, Principal | |||
| Finance and Accounting Officer and Director | |||
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