UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

 

þ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended June 30, 2016March 31, 2017

 

or

 

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from _____________ to _____________

 

Commission File Number: 000-10822

 

One Horizon Group, Inc.

(Exact name of registrant as specified in its charter)

 

Delaware 46-3561419
(State or other jurisdiction of incorporation
or
organization)
 (I.R.S. Employer Identification No.)

 

T1-017 Tierney Building, University of
Limerick, Limerick,
Ireland.
  
(Address of principal executive offices) (Zip Code)

 

+353-61-518477

(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 ¨

  

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 ¨

  

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 companyþ
(Do not check if smaller reporting company) Emerging growth company

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).       Yes    ¨   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 03, 2016, 35,290,423May 11, 2017, 6,220,492 shares of the registrant’s common stock, par value $0.0001 per share, were outstanding.

 

 

 

 

TABLE OF CONTENTS

 

Part I – FINANCIAL INFORMATION 
  
Item 1.Financial Statements4
  
Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations2619
  
Item 3.Quantitative and Qualitative Disclosures about Market Risk3223
  
Item 4.Controls and Procedures3223
  
Part II – OTHER INFORMATION 
 
Item 1. Legal Proceedings25
  
Item 1.Legal Proceedings1A. Risk Factors3325
  
Item 1A.Risk Factors33
Item 2.Unregistered Sales of Equity Securities and Use of Proceeds3325
  
Item 3.Defaults Upon Senior Securities3325
  
Item 4. Mine Safety Disclosures25
  
Item 4.Mine Safety Disclosures5. Other Information3325
  
Item 5.Other Information33
Item 6.Exhibits3325
  
SIGNATURES3426

 

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.

 

SPECIAL NOTE REGARDING REVERSE STOCK SPLIT

Effective April 14, 2017, we completed a reverse stock split in which each six (6) shares of our common stock were automatically combined into and became one (1) share of our common stock. As of the effective date of the reverse stock split, the per share exercise price of, and the number of shares of common stock underlying, any stock options, warrants and other derivative securities issued by us were automatically proportionally adjusted, based on the one-for-six reverse split ratio, in accordance with the terms of such options, warrants or other derivative securities, as the case may be. All share numbers, stock option numbers, warrant numbers, other derivative security numbers and exercise prices appearing in this Report on Form 10-Q have been adjusted to give effect to this reverse stock split, unless otherwise indicated or unless the context suggests otherwise.

 

3 

 

PART I – FINANCIAL INFORMATION

 

ONE HORIZON GROUP, INC.

Condensed Consolidated Balance Sheets

June 30, 2016March 31, 2017 and December 31, 20152016

(in thousands, except share data)

(unaudited)

 

 June 30, December 31,  March 31, December 31, 
 2016 2015  2017  2016 
Assets                
                
Current assets:                
Cash $932  $1,772  $262  $260 
Accounts receivable (net),  2,963   3,560 
Accounts receivable, net  982   1,208 
Other assets  657   402   485   471 
Total current assets  4,552   5,734   1,729   1,939 
                
Property and equipment, net  68   96   36   42 
Intangible assets, net  9,168   9,823   7,883   8,407 
Investment  18   18   17   17 
                
Total assets $13,806  $15,671  $9,665  $10,405 
                
Liabilities and Stockholders' Equity                
                
Current liabilities:                
Accounts payable $174  $223  $352  $364 
Accrued expenses  186   220   404   206 
Accrued compensation  99   18   228   156 
Income taxes  90   90   90   90 
Current portion of long-term debt  -   5 
Convertible debenture, net  3,177   3,068 
Total current liabilities  549   556   4,251   3,884 
                
Long-term liabilities                
        
Amount due to related parties  2,343   2,354   2,343   2,343 
Convertible debenture  2,852   2,636 
Deferred income taxes  193   215   161   172 
Mandatorily redeemable preferred shares  74   73   62   62 
Total liabilities  6,011   5,834   6,817   6,461 
                
Equity        
Stockholders’ Equity        
Preferred stock:                
$0.0001 par value, authorized 50,000,000; issued and outstanding 170,940 shares (December 2015 - 170,940)  1   1 
$0.0001 par value, authorized 50,000,000 shares; issued and outstanding 170,940 shares  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 
$0.0001 par value, authorized 33,333,333 shares; issued and outstanding 6,236,729 shares as of March 31,2017 (December 2016 – 6,144,762)  4   4 
Additional paid-in capital  36,580   36,070   37,859   37,501 
Accumulated deficit  (34,875)  (33,591)
Accumulated other comprehensive income (loss)  (141)  29 
Total stockholders' equity  2,848   3,944 
              - 
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 
Total liabilities and stockholders’ equity $9,665  $10,405 

 

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,March 31, 2017 and 2016 and 2015

(in thousands, except per share data)

(unaudited)

 

 Three Months ended June 30, Six Months ended June 30,  Three Months ended March 31, 
 2016 2015 2016 ��2015  2017  2016 
              
Revenue $366  $108  $975  $853  $373  $609 
                        
Cost of revenue - Hardware, calls and network charges  49   47   75   108 
- Amortization of software development costs  493   580   1,005   1,092 
Cost of revenue - Hardware  2   26 
- Amortization of intangibles  500   512 
  542   627   1,080   1,200   502   538 
                        
Gross margin  (176)  (519)  (105)  (347)  (129)  71 
                        
Expenses:                        
General and administrative  878   569   1,842   1,492   846   964 
Depreciation  15   16   30   36   8   15 
Research and development  186   160   374   322   134   188 
  1,079   745   2,246   1,850   988   1,167 
                        
Loss from operations  (1,255)  (1,264)  (2,351)  (2,197)  (1,117)  (1,096)
                        
Other income and expense:                        
Interest expense  (176)  (284)  (356)  (374)  (179)  (180)
Interest expense - related parties  -   -   -   (1)
Foreign exchange  2   (76)  9   9   1   7 
Interest income  -   -   -   1 
  -     
  (174)  (360)  (347)  (365)  (178)  (173)
                        
Loss before income taxes  (1,429)  (1,624)  (2,698)  (2,562)  (1,295)  (1,269)
                        
Income taxes (recovery) – deferred  (11)  (45)  (22)  (45)
Income taxes benefit  11  11 
                        
Net loss for the period  (1,418)  (1,579)  (2,676)  (2,517)  (1,284)  (1,258)
                
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)   -   (25)
                        
Net loss attributable to One Horizon Group, Inc. Common stockholders $(1,443) $(1,573) $(2,726) $(2,531) $(1,284) $(1,283)
                        
Earnings per share attributable to One Horizon Group, Inc. stockholders                
Loss 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)
Basic and diluted net loss per share $(0.21) $(0.22)
                        
Weighted average number of shares outstanding                        
Basic and diluted  35,185   33,281   35,165   33,281   6,176   5,857 

 

See accompanying notes to condensed consolidated financial statements.

 

5 

 

ONE HORIZON GROUP, INC.

Condensed Consolidated Statements of Comprehensive Income (Loss)

For the three and six months ended June 30,March 31, 2017 and 2016 and 2015

(in thousands)

(unaudited)

 

  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)
  Three Months ended March 31, 
  2017  2016 
       
Net loss $(1,284) $(1,258)
Other comprehensive income (loss):        
Foreign currency translation adjustment gain (loss)  (170)  372 
Comprehensive loss  (1,454)  (886)
         
Total comprehensive loss $(1,454) $(886)

 

See accompanying notes to condensed consolidated financial statements

 

6 

 

ONE HORIZON GROUP, INC.

Condensed Consolidated Statement of Stockholders’ Equity

For the sixthree months ended June 30, 2016March 31, 2017

(in thousands)

(unaudited)

 

  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 

  Preferred Stock  Common Stock           
  Number
of
Shares
  Amount  Number
of
Shares
  Amount   Additional

Paid-in

Capital

  Accumulated
deficit
  Accumulated
Other
Comprehensive

Income

(Loss)

  

Total

Equity

 
                         
Balance December 31, 2016  171  $1   6,145  $4  $37,501  $(33,591) $29  $3,944 
                                 
Net loss                      (1,284)      (1,284)
Foreign currency translations                          (170)  (170)
Shares issued for services          92       176           176 
Options issued for services                  59           59 
Warrants issued for services                  123           123 
                                 
Balance March 31, 2017  171  $1   6,237  $4  $37,859  $(34,875) $(141) $2,848 

 

See accompanying notes to condensed consolidated financial statements

 

7 

 

ONE HORIZON GROUP, INC.

Condensed Consolidated Statements of Cash Flows

For the sixthree months ended June 30,March 31, 2017 and 2016 and 2015

(in thousands)

(unaudited)

 

 2016 2015  2017  2016 
Cash provided by (used in) operating activities:        
Cash flows from operating activities:        
                
Operating activities:        
Net loss for the period $(2,676) $(2,481) $(1,284) $(1,258)
                
Adjustment to reconcile net loss for the period to net cash provided by (used in) operating activities:                
Depreciation of property and equipment  30   36   8   15 
Amortization of intangible assets  1,005   1,092   500   512 
Increase in allowance for doubtful accounts  200   -   -   100 
Amortization of debt issue costs  66   66   34   33 
Amortization of beneficial conversion feature  50   51   25   25 
Amortization of debt discount  100   99   50   50 
Amortization of deferred compensation  -   107 
Amortization of shares issued for services  4   -   22   - 
Shares issued for services  176   - 
Warrants issued for services  123   - 
Options issued for services  376   279   59   188 
Net income (loss) attributable to non-controlling interest  -   (36)
Changes in operating assets and liabilities:                
Accounts receivable  397   168   226   402 
Other assets  (125)  7   (36)  (71)
Accounts payable and accrued expenses  (2)  (370)  258   (106)
Deferred income taxes  (22)  (45)  (11)  (11)
                
Net cash provided by (used in) operating activities  (597)  (1,027)  150   (121)
                
Cash used in investing activities:        
Cash flows from investing activities:        
                
Acquisition of intangible assets  (207)  (560)  (129)  (116)
Acquisition of property and equipment  (4)  (1)  (2)  (2)
Proceeds from disposition of property and equipment  -   32 
                
Net cash (used in) investing activities  (211)  (529)  (131)  (118)
                
Cash provided by (used in) financing activities:        
Cash flows from financing activities:        
                
Increase (decrease) in long-term borrowing, net  (5)  (171)
Advances from (repayments to) related parties, net  (11)  (610)
(Decrease) in long-term borrowing, net  -   (3)
Dividends paid  (50)  (50)  -   (25)
                
Net cash provided by (used in) financing activities  (66)  (831)
Net cash used in financing activities  -   (28)
                
Increase (decrease) in cash during the period  (874)  (2,387)
Increase (Decrease) in cash during the period  19   (267)
Foreign exchange effect on cash  34   85   (17)  78 
                
Cash at beginning of the period  1,772   3,172   260   1,172 
                
Cash at end of the period $932  $870  $262  $1,583 

 

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, 2016 and 2015

(in thousands)

(unaudited)

Supplementary Information:

  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

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2016March 31, 2017

 

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. In addition, the Company either sells related user licenses and software maintenance services to or enters into revenue sharing agreements with telecommunication companies. Horizon, through its Chinese company Suzhou Aishuo Network Information Co. Ltd., provides the Aishuo App to end user customercustomers through App stores based in China. Our Aishuo customers purchase call credits for Public Service Telephone Network (PSTN) access using a variety of Chinese on-line payment services including Union Pay and Apple Pay.

 

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’Commission’s 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, 2015,2016, as filed with the Securities and Exchange Commission on March 31, 2016.April 10, 2017.

 

10

Principles of Consolidation

 

The condensed 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 Group Pte., Limited, Horizon Globex Ireland Limited, Global Phone Credit Limited and One Horizon Hong Kong Limited, and its wholly-owned subsidiary, Horizon Network Technology Co. Ltd. (“HNT”). In addition, included in the condensed consolidated financial statements as of and for the three and six months ended June 30, 2016,March 31, 2017 are the accounts of Suzhou Aishuo Network Information Co., Ltd. which is 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 by the Company. The amount of consolidated net loss attributable to the Company and the non-controlling interest, up to the time that the shareholdings were returned, are both presented in the face of the Condensed Consolidated Statement of Operations.

 

All significant intercompany balances and transactions have been eliminated.eliminated in consolidation.

 

Note 2.  Summary of Significant Accounting Policies

 

ReclassificationLiquidity and Capital Resources

 

Certain amountsAs we continue to pursue our operations and our business plan, we expect to incur further losses in 2017, which when combined with our continued investment in our intellectual property, will generate negative cash flows. As of March 31, 2017, the Company did not have any available credit facilities. As a result, we are in the 2015 financial statementsprocess of seeking new financing by way of sale of either convertible debt or equities. Whilst we have been reclassifiedsuccessful in the past in obtaining the necessary capital to conformsupport our investment and operations there is no assurance that we will be able to obtain additional financing under acceptable terms and conditions, or at all. In the 2016 financial presentation. These reclassifications have no impact on net loss.event, we are unable to obtain sufficient additional funding when needed in order to fund our ongoing research and development activities as well as our operations, we would not be able to continue as a going concern and maybe forced to severely curtail or cease operations and liquidate the Company.

 

Basis of Accounting and Presentation

TheseThe condensed consolidated financial statements have been prepareddo not include any adjustments relating to the recoverability or classification of assets or amounts of liabilities that might result from the outcome of these uncertainties. Our current independent registered public accounting firm included a paragraph emphasizing this going concern uncertainty in conformity with accounting principles generally accepted in the United Statestheir audit report dated April 10, 2017, regarding our 2016 financial statements.

 

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.

119 

 

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– Deposits are payable in accordance with the terms of the Agreement. Payment terms may vary from Agreement to Agreement, with payment due betweengenerally within 30 days to 9 months fromof the execution of an Agreement.

 

b)Software consultancy and hardware fees– The terms of payment are fixed terms, with payment normally due within stated terms, normally 30 days from the date of the invoice.

 

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'scustomer’s operation of the Horizon service. The proportion of a customer'scustomer’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 timing 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 has been similarly reduced. As at June 30, 2016 the remaining allowance for doubtful accounts is at $238,000 of which $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, and will include those amounts in other income (non-operating income).

The Company has strong collection history in category a) and category b) and generally does not believe that an allowance for doubtful accounts for these categories is necessary. For accounts receivable in category c) the Company records an allowance for doubtful accounts for the receivable balance that is expected to be collected under revenue share arrangements in more than 12 months. There was an allowance of $238,000 and $6,055,000 for doubtful accounts at June 30, 2016 and December 31, 2015, respectively. Receivables are generally unsecured. Account balances are charged off against the allowance when the Company determines that certain receivable will probably not be recovered.

 

The Company does not have off-balance sheet credit exposure related to its customers. As of DecemberMarch 31, 20152017 and December 31, 2014,2016, two customers accounted for 24%55% and 28%61%, 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.

 

1310 

 

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. Based on these valuations, no impairment charges were recognized during the three months ended March 31, 2017.

 

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 as incurred until technological feasibility has been established, at which time those costs are capitalized until the product is available for general release to determine ifcustomers. Judgment is required in determining when technological feasibility of a product is established. The Company has determined that after technological feasibility for software products is reached, the assets have continuing valueCompany continues to address all high risk development issues through coding and testing prior to release of the Company.  Costs for assets that are determinedproducts to be of no continuing value are written off.customers. The amortization of these costs is included in cost of revenue over the estimated life of the products.

 

During the sixthree months ended June 30,March 31, 2017 and 2016 and 2015, software development costs of $207,000$129,000 and $560,000,$116,000 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, 2016 and 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 athe 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 telecom entities is recognized at the date of invoices raised for installmentswhen payments are due under the agreement, unlessextended payment terms exceed one year, as described below, presuming all other relevant revenue recognition criteria are met.term arrangements. Revenue from sales of perpetual licenses to other entities is recognized over the agreed collection period.

 

 RevenuesRevenue for user licenses purchased by customers areis recognized when the user license is delivered.

 

 RevenuesRevenue for maintenance services areis recognized over the period of delivery of the services.

 

 14

●    

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 has been recorded by the Company when it invoices the customer for the revenue share due to the Company. Certain customers who entered into revenue sharing arrangements had outstanding balances due to the Company as of September 30, 2014, which balances were included in accounts receivable as at that date. Payments received after September 30, 2014, from those customers under revenue sharing agreements have been applied to the customer’s existing accounts receivable balances first. For those customers having balances due at September 30, 2014, revenue related to perpetual and user licenses and maintenance services are recorded only after existing accounts receivable balances are fully collected.

Revenues from Aishuo retail sales are recognized when the PSTNPublic Switched Telephone Network (“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 multiple deliverable 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 thatthe 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 Included in the arrangement, length of payment terms and economics of license arrangement.

 

During the three months ended June 30, 2016, $272,000March 31, 2017, $287,000 or 74%30% of the Company’s revenue was concentrated in the hands of one major customer. In the three months ended June 30, 2015March 31, 2016 the equivalent amount was $35,000$523,000 or 32%86% 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.  Advertising costs incurred during the six month periods ended June 30, 2016 and 2015 were $39,000 and $nil respectively.

11 

 

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 $322,000 respectively.

 

Debt Issue Costs

 

Debt issue costs related to long-term debt are capitalizedshown as a reduction of debt outstanding 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. Historically the Company has not filed income tax returns and the related required informational filings in the US. Certain informational filings if not filed contain penalties. The Company is currently addressing this issue with advisors to determine the amount, if any, of potential payments due. Given the complexity of the issue the Company is unable to quantify a range of potential loss, if any. Accordingly no liability has been recorded in the accompanying condensed consolidated balance sheets in respect of this matter

 

16

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,March 31, 2017 and 2016, and 2015, outstanding stock options, warrants and convertible 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.

12 

 

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 valuationoption pricing model, which includes subjective judgmentsjudgements about the expected life of the awards, forfeiture rates and stock price volatility.

 

1713 

Recently Issued Accounting Standards Not Yet Adopted

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. Suzhou Aishuo Network Information Co. Ltd.

The Company 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 Aishuo have been consolidated in the accompanying consolidated financial statements.

Summarized assets, liabilities and results of operations of Aishuo are as follows:(in 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 
  2016  2015 
       
Equipment $289  $291 
         
Less accumulated depreciation  (221)  (195)
         
Property and equipment, net $68  $96 

 

Note 5.3.  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 straight line over the greater of straight-line or the related asset’s pattern of economic benefit.(in thousands)

 

 June 30 December 31  March 31 December 31 
 2016 2015  2017  2016 
          
Horizon software $18,381  $17,879  $18,400  $18,634 
ZTEsoft Telecom software  457   469   441   438 
Contractual relationships  885   885   885   885 
  19,723   19,233   19,726   19,957 
Less accumulated amortization  (10,555)  (9,410)  (11,843)  (11,550)
                
Intangible assets, net $9,168  $9,823  $7,883  $8,407 

 

Amortization of intangible assets for each of the next five years is estimated to be $2,000,000$2,100,000 per year

 

1914 

Note 6.  Convertible Debenture

In December 22, 2014 the Company closed a private placement with gross proceeds of $3,500,000 under Regulation S whereby we issued to an investor a convertible debenture that is convertible into 1,555,556 shares of common stock, Class C warrant to purchase 388,889 shares of common stock, Class D warrant to purchase 388,8889 shares of common stock and the potential for performance warrants.

The unsecured convertible debenture is for a term of three years from 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 announced it has achieved the required number subscriber downloads and therefore the additional performance warrants are not issuable by the Company.

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 is 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 in 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 7.4.  Related-Party Transactions

 

Amounts due to related parties include the following: (in thousands)

  June 30  December 31 
  2016  2015 
         
Loans due to stockholders (current officers and directors) $2,343  $2,354 

At June 30, 2016,March 31, 2017, $2,343,000 of related party debt was outstanding and will mature on April 1, 2017,2018, which is unsecured and is interest free.

 

In March 2015 the Company entered into a sales contract in the normal course of business with a customer (Horizon Latin America) in which the Company holds minority ownership interest. The customer purchased perpetual software license for $500,000. As at March 31, 2017 Horizon Latin America owed the Company $250,000 (2016: $250,000)

The Company owns a cost based investment interest of 10% in the customer with limited voting rights or board representation, which is accounted for as investments in the accompanying balance sheets.

Note 8.5.  Share Capital

 

Preferred Stock

 

The Company’s authorized capital includes 50,000,000 shares of preferred stock of $0.0001 par value per share.value. 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 arewere convertible in whole or in part, at the option of the holders, into shares of common stock at $5.85 per share prior toin July 2016, the Maturity, and all outstanding shares ofscheduled maturity date. However, the Company is in negotiations with Series A Preferred Stock shall automatically convert to sharesinvestors regarding new terms. As of common stock upon 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 optionMarch 31, 2017, none 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, the Series A Preferred Stock will be redeemed at a price equalhave elected to convert the original purchase price plus all accrued but unpaid dividends.Series A Preferred Stock into shares of common stock. 

 

170,940 shares of Series A preferred stock are issued and outstanding as of June 30, 2016.March 31, 2017.

 

Mandatorily Redeemable Preferred Shares (Deferred Stock)

 

The Company’s subsidiary OHG is authorized to issueOne Horizon Group Plc has 50,000 shares of deferredredeemable preferred stock issued and outstanding, par value of £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 20033.3 million shares of common stock, par value of $0.0001 per share.share, after giving effect to the reverse stock split.

 

During the sixthree months ended June 30, 2016March 31, 2017 the Company issued 200,000 shares of common stock for services to be provided with a fair value of $133,960.Company:

 

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 approximately $2.89 million, after deducting underwriting discounts and commissions and estimated offering expenses payable by us.

The warrants offered have a per share exercise price of $2.50 (subject to adjustment in the 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 date of issuance. Subject to applicable laws, the warrants may be offered for sale, sold, transferred or assigned without our consent.

Issued 92,000 shares of common stock for services provided with a fair value of $176,000.

 

2115 

 

Stock Purchase Warrants

 

At June 30, 2016,March 31, 2017, the Company had reserved 3,233,746887,919 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
         
 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
Number of Warrants  Weighted average
exercise price
  Expiry Intrinsic value 
             
 887,919   12.66  To December 2019  - 

 

During the sixthree months ended June 30, 2016 60,000March 31, 2017 no warrants were forfeited, no238,095 warrants were issued and none exercised. For services performed and valued under Black-Scholes valuation method.

 

If, atThe assumptions used in calculating the time of exercise offair value under the Black-Scholes option valuation model are set forth in the following table for warrants issued pursuant toby the financing of August 2015, wherein a total of 933,107 warrants were issued, thatCompany for 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.three months ended March 31, 2017 and 2016.

Common stock fair value $1.92 
Risk-free interest rate  2.5%
Expected dividend yield  0%
Expected warrant life (years)  0.5 
Expected stock price volatility  107%

16 

 

Note 9.6.  Stock-Based Compensation

 

The shareholders approved a stock option plan on August 6, 2013, the 2013 Equity Incentive Plan. This stock option planPlan (“2013 Plan”). The 2013 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. On January 1, 2014, 2015 and 2016 the number of shares available for granting awards under the 2013 Equity Incentive Plan was increased by 1,000,000 shares.

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, until January 15, 2024.

During the year ended 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 $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.

22

There have been no options issued in the sixthree months ended June 30, 2016March 31, 2017.

 

A summary of the Company’s 2013 Equity Incentive Plan as of June 30, 2016,for the three months ended March 31, 2017 is as follows:

 

    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 
  Number of  Weighted
Average
 
  Options  Exercise Price 
       
Outstanding at  January 1, 2017  141,250   14.82 
Outstanding at March 31, 2017  141,250   14.82 

 

The fair value of these options, using the Black-Scholes option-pricing model, is estimated to be $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, 2016 and 2015, respectively. As at June 30, 2016March 31, 2017 there was unrecognized compensation expense of approximately $411,000$140,000 to be recognized over the remaining vesting periods.

 

For the 2013 Equity Incentive Plan there were no options issued, exercised or forfeited during the six months ended June 30, 2016.

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, 2016, is as follows:

    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, exercised or forfeited during the six months ended June 30, 2016.

The following table summarizes stock options outstanding at June 30, 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   -   - 

23

At June 30, 2016, 6,875,700March 31, 2017, 822,667 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 atPrior to the date of grant using2013 Plan the Black-Scholes option-pricing model.Company issued stock options to employees “Other Stock Options”.

 

Note 10.  Commitments and Contingencies

Contractual Commitments

The Company incurred total rent expenseA summary of $33,000 and $28,000, respectively,the Company’s other stock options for the six month periodsthree months ended June 30, 2016 and 2015.

Minimum contractual commitments, as of June 30, 2016,March 31, 2017 is as follows:

 

  Operating 
  leases 
     
2016  4,000 

Legal Proceedings

  Number of  Weighted
Average
 
  Options  Exercise Price 
       
Outstanding at January 1, 2017  145,950  $3.18 
Outstanding at March 31, 2017  145,950  $3.18 

 

In 2012, we sold certain former subsidiaries engaged in provisionAs of satellite service in 2012March 31, 2017 there was unrecognized compensation expense of approximately $32,000, related 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 pursuantOther Stock Options, to which BSS continued to use Horizon Globex to supply software and IT services. Notwithstandingbe recognized over 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.remaining vesting period.

 

2417 

 

Note 11.7. Segment Information

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. ForAishuo for the three and six months ended June 30,March 31, 2017 and 2016 and 2015 activity in the business to consumer line is not material for separate segment presentation.

 

The Company’s revenues were generated in the following geographic areas:(in thousands)

 

 Three months ended June 30, Six months ended June 30,  March 31  March 31 
 2016 2015 2016 2015  2017  2016 
              
China $74,000  $4,000  $134,000  $7,000  $49,000  $60,000 
                
Rest of Asia $275,000  $86,000  $823,000  $270,000   304,000   548,000 
                
Europe and Russia $10,000  $7,000  $11,000  $7,000 
                
EMEA  20,000   1,000 
The Americas $7,000  $11,000  $7,000  $569,000   0   0 
                
Total $366,000  $108,000  $975,000  $853,000  $373,000  $609,000 

Note 8. Subsequent Event

On April 19, 2017, in connection with a special meeting of the shareholders of One Horizon Group, Inc. (the “Company”) which authorized the Board of Directors to effect a six-to-one reverse stock split (the “Reverse Stock Split”) of the Company’s issued and outstanding common stock, par value $0.0001 per share, the Company filed with the Secretary of State of the State of Delaware a Certificate of Amendment (the “Amendment”) to the Certificate of Incorporation of the Company to effect the Reverse Stock Split, which became effective on April 28, 2017.

On April 20, 2017, the Company attended a hearing with Nasdaq’s Hearing Panel in which they presented their case for continued listed with The Nasdaq Stock Market LLC.

 

On April 26, 2017, the Company received a decision letter from The Nasdaq Stock Market LLC (“Nasdaq”) granting its request for continued listing, subject to the Company effecting a reverse stock split on or before May 15, 2017, and evidencing a closing bid price of $1.00 or more for a minimum of ten prior consecutive trading days.

On May 12, 2017, the Company received notice from The NASDAQ Stock Market LLC (NASDAQ) indicating that the Company has regained compliance with the minimum bid price requirement under NASDAQ Listing Rule 5550(a)(2) for continued listing on The NASDAQ Capital Market. Accordingly, the Company is in compliance with all applicable listing standards and its common stock will continue to be listed on The NASDAQ Capital Market.

2518 

 

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

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 sixthree months ended June 30,March 31, 2017 and 2016 and 2015 and notes thereto contained elsewhere in this Report, and our annual report on Form 10-K for the twelve months ended December 31, 20152016 and 2014,2015  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 its Subsidiaries (the “Company”) is the inventor of the patented SmartPacketTMSmartPacketTM Voice over Internet Protocol (“VoIP”) platform. 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 the expansion of enterprise bring-your-own- devicebring-your-own-device to work programs.

 

The Company designs, develops and sells white label SmartPacketTMtmsoftware 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; and theBusiness to Business(“B2B”) business. Current licensees include some of the world’s largest operators such as Singapore Telecommunications and Philippines Smart Communication and Indonesia Smartfren Tbk.Communication.

 

TheSmartPacketTMSmartPacket™platform, significantly improves the efficiency by which voice signals are transmitted from smartphones over the Internet resulting in a 10X reduction in mobile bandwidth and battery usage required to transmit a smartphone VoIP call. This is of commercial interest to operators that wish to have a high qualityhigh-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.

 

 

26

 

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, branding, hosting and operator services to smaller telecommunications operators, 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.world.

 

Based on the SmartPacketTM solution, the Company is the sole owner and operator its own branded retail smartphone VoIP, messaging and advertising service in the People’s Republic of China called AishuoTM; the “Aishuo” business. Since its inception in the second quarter of 2015 Aishuo has been downloaded over 3743 million times and has doubled its revenues for the first 4 quarters of operations and increased again in this quarter.times. 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 25numerous 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, China, India, Russia, Singapore, Hong Kong and Latin America.

 

In FebruarySince 2015 we announced the rollout of our platformhave rolled out a retail service available only in China with a brand named, Aishuo. The Aishuo platform provides VoIP services, a Value Added Virtual SIM solution delivered through a People’s Republicname of China (“PRC”) entity controlled by us via various contractual arrangements, Suzhou Aishuo.“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 sought 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, 2016, we had exceeded our two year target of 15 million and in July 2016 had grown to 37 million downloads of Aishuo smartphone app.

In addition to the developments in the rollout of Aishuo smartphone app brand in mainland China, we deliveredcontinue to rollout a data roaming VoIP solution with, Smart Communications, the Philippines' leading wireless service provider with an estimated 5564 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 2016.2017.

 

During this quarter we expanded our sales team with staff that speak Arabic, Hindi and Urdu in order to target mobile operators in Middle East and North Africa.

19 

 

Research & Development

 

DuringDuring the sixfirst three months to June 30th, 2016,of 2017, we spent approximately $207,000$129,000 on capitalizable research and development together with approximately $374,000$134,000 on expensed research and development.

 

During the sixthree months to June 30th, 2016,ended March 31 2017 we continued with our drive for innovation and our research and development teams brought us softwarea low bandwidth Video Calling solution that allows our customer to offer call and messaging Bundles. This is a common feature for SIM cards and popular with mobile subscribers whereby the user pre purchases bulk minutes at a lowerconsumes just 0.5MB per minute, rate7x lower than most other video services. This solution now means that when they pay for a call minute by minute. The Company now offers such innovations to its subscribers right inside the operators’ smartphone app supplied to Company thereby driving up the operator’s revenue per user.

During the six months to June 30th, 2016, we also continued our R&D Effort that allows our service to directly connect to an operators Unstructured Supplementary Service Data (USSD) service thereby allowing all mobile prepaid subscribers to add credit to their mobile account in a traditional wayusers can enjoy video calls across 2G, 3G and then allowing this USSD top up to be applied to a mobile VoIP smartphone app, an industry first.4G networks as well as HD video calls across Wi-Fi connections.

 

The expanded R&D team also delivered a cyber-secure VoIP service that leverages the low bandwidth benefits of Company’s patented technology to allow VoIP over the strongest security protocols on the Internet. By leveragingInternet with encrypted video calls that also supports in-call encryption for when a user starts a call in an unencrypted mode and they needs to secure the power of Virtual Private Networks (VPN) native clientline without having to hang up and restart the call.

The R&D team also delivered a complete Google AdMob advertising environment for our operator customers to further monetize their subscriber base. Intelligent ads are delivered based on the smartphone the Company’s VoIP protocols work where other traditional VoIP solutions cannot due to call quality issues with high data consumption protocols. Customer trials commenceduser profile and management expect this platform to drive a new revenue stream for Cyber Secure VoIP.their location.

 

 The R&D team also delivered a call transfer feature that allows one user to transfer a call from their smartphone app to another app user.

The R&D team also delivered the complete Apple CallKit solution from Apple Inc. that seamlessly integrates our smartphone app with the native iOS call interfaces making the usability of the application even more attractive.

The R&D team also delivered an advanced fraud management and detection that permits pre-paid users to only spend a certain amount of money and other server side fraud management that massively reduces risk of theft.

The R&D team also delivered an encrypted call from the smartphone to an enterprise voice server thereby ensuring staff calls are all encrypted and contained within the enterprise secure IT infrastructure

 

2820 

 

Results of Operations

 

Comparison of three months ended June 30,March 31, 2017 and 2016 and 2015

 

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  

Three Months Ended

March 31,

  Change 
 2016 2015 Increase/
(decrease)
 Percentage
Change
  2017  2016  Increase/
(decrease)
  Percentage
Change
 
                  
Revenue $366  $108  $258   238.8  $373  $609  $(236)  (38.7)
                                
Cost of revenue  542   627   (85)  (13.6)  502   538   (36)  (6.7)
                                
Gross margin  (176)  (519)  343   (66.1)  (129)  71   (200)  (281.7)
                                
Operating expenses:                                
                                
General and administrative  878   569   309   54.3   846   964   (118)  (12.2)
Depreciation  15   16   (1)  (6.3)  8   15   (7)  (46.7)
Research and development  186   160   26   16.3   134   188   (54)  (28.7)
                                
Total operating expenses  1,079   745   334   44.8   988   1,167   (179)  (15.3)
                                
Loss from operations  (1,255)  (1,264)  (9)  (1.0)  (1,117)  (1,096)  (21)  (1.9)
                                
Other expense  (174)  (360)  (186)  (51.7)  (178)  (173)  (5)  (2.9)
Loss before income taxes  (1,429)  (1,624)  (195)  (12.0)  (1,295)  (1,269)  (26)  (2.0)
                                
Income taxes (recovery)  (11)  (45)  (34)  (75.5)  (11)  (11)  (0)  N/A 
Net Loss for period  (1,418)  (1,579)  (161)  (10.1)  (1,284)  (1,258)  (26)  (2.1)
                
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, 2016March 31, 2017 was approximately $366,000$373,000 as compared to approximately $108,000$609,000 for the three months ended June 30, 2015, an increaseMarch 31, 2016, a decrease of approximately $258,000,$236,000, or 238.8%38.7%. The increasedecrease was primarily due to the growthreduction in income from the business in the B2C business in China and the B2B business in the rest of Asia. The management believes further growth in both sectors ofBusiness to Business (“B2B”) revenue and particularly the B2B sector with the launch of “Roam Like Home” software for Telecommunication companies will occur.

Cost of Revenue: Cost of revenue excluding amortization of software development costs, was approximately $49,000 or 13.3% of sales for the three months ended June 30, 2016, compared to cost of revenue of $47,000 or 43.5% of sales for the three months ended June 30, 2015. Our cost of sales excluding amortization of software development costs, is composed of the cost of ancillary hardware equipment sold and costs of PSTN calls breakout and other network charges.   The small increase in cost during the three months ended June 30, 2016, when compared to the same period in 2015 is due to the increase in the number PSTN calls made on the Aishuo and Horizon Globex networks.

Gross ProfitGross 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, an increase of approximately 419.7%. The significant increase was mainly due to the increased revenue as set forth above herein. Moving forward, management expects that gross margin will begin to increase with the growth of our business in both sectors of the Company.

29

Operating Expenses: Operating expenses, including general and administrative expenses, depreciation and research and development were approximately $1,079,000 and $745,000 during the three months ended June 30, 2016 and 2015, respectively.  The increase of $334,000 or 44.8% was primarily due to additional research and development costs expensed and other non cash items expensed in General and administrative costs. The management does not expect this level of increase to occur in the foreseeable future.

Loss before taxes: Loss before taxes for the three months ended June 30, 2016 was approximately $1,429,000 as compared to net loss of approximately $1,624,000 for the same period in 2015. The decrease in loss was primarily due to an 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 Asia and also elsewhere in the world.as a result of timing of license purchases by customers.

 

Comparison of six months ended June 30, 2016 and 2015

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 
  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, 2016 was approximately $975,000 as compared to approximately $853,000 for the six months ended June 30, 2015, an increase of approximately $122,000, or 14.3%. The increase was primarily due to the increase in B2C revenue in China together with the additional software revenue achieved in the rest of Asia. The management expects further growth in both sectors of revenue and particularly the B2B sector with the launch of “Roam Like Home” software for Telecommunication companies

30

Cost of Revenue: Cost of revenue, excluding amortization of software development costs, was approximately $75,000$2,000 or 7.7%0.5% of sales for the sixthree months ended June 30, 2016,March 31, 2017, compared to cost of revenue of $108,000$26,000 or 12.7%4.3% of sales for the sixthree months ended June 30, 2015.March 31, 2016. Our cost of sales, excluding amortization of software development costs, is composed of cost of ancillary hardware equipment sold and PSTN breakout costs of PSTN calls breakout and other network charges.   The decrease in cost during the six months ended June 30, 2016, when compared to the same period in 2015 is due sales in 2015 of hardware which has not occurred in the same period in 2016 and the cost of the hardware associated with those sales.   

 

Gross ProfitGross profit (excluding the Amortizationexcluding amortization of software development costs)costs, for the sixthree months ended June 30, 2016March 31, 2017 was approximately $900,000$371,000 as compared to $745,000$583,000 for the sixthree months ended June 30, 2015, an increaseMarch 31, 2016, a decrease of approximately $155,000 or 20.8%36.4%. The increase was mainly due to the increased revenue as set forth above herein. Moving forward, management expects that gross margin will begin to increase with the growth of our business in both sectors of the Company.

21 

 

Operating Expenses: Operating expenses, including general and administrative expenses, depreciation and research and development were approximately $2.2 million$988,000 and $1.9 million$1,167,000 during the sixthree months ended June 30,March 31, 2017 and 2016, and 2015, respectively.  The increase of approximately $0.3 million or 21.4%overall reduction in Operating expenses was primarily due to additional researchreductions in employee salaries, legal fees and developmentprovision for doubtful accounts partially offset by increases in audit costs expensed and other non cash items expensed in General and administrativeoutside consultancy costs. TheGoing forward, management does not expect this leveloperating costs to rise significantly until revenue grows following the increase of increase to occur in the foreseeable future.end users.  

 

Net Loss: Net Loss for the ninethree months ended June 30, 2016March 31, 2017 was approximately $2.7 million$1,284,000 as compared to net loss of approximately $2.5 million$1,258,000 for the same period in 2015. The increase in loss was primarily due to the increase in operating expenditure less the 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 Asia and also elsewhere in the world2016.

22 

 

Liquidity and Capital Resources

 

SixThree Months Ended June 30,March 31, 2017 and March 31, 2016 and June 30, 2015

 

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)
 
  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)
  

For the Three Months Ended

March 31

(in thousands)

 
  2017  2016 
Net cash flows from operating activities  150   (121)
Net cash flows from investing activities  (131)  (118)
Net cash flows from financing activities  -   (28)

 

Net cash used ingenerated from operating activities was approximately $597,000$150,000 for the sixthree months ended June 30, 2016March 31, 2017 as compared to net cash used in operating activities of approximately $1,027,000$121,000 for the same period in 2015.2016. The decreaseincrease in cash used ingenerated from operations was primarily due to the increase in cash generatedcollected from revenue during the six months ended June 30, 2016 as compared to the same period in 2015.customers.

 

Net cash used in investing activities was approximately $211,000$131,000 and $529,000$118,000 for the sixthree months ended June 30,March 31, 2017 and 2016, and 2015, respectively. Net cash used in investing activities was primarily focused on development of software.

 

NetThere was no net cash used in financing activities was $66,000 for the sixthree months ended June 30, 2016March 31, 2017 as compared to net cash used in financing activities of $831,000$28,000 for the sixthree months ended June 30, 2015. Cash usedMarch 31, 2016.

As we continue to pursue our operations and our business plan, we expect to incur further losses in 2017, which when combined with our continued investment in our intellectual property, will generate negative cash flows. As of March 31, 2017, the Company did not have any available credit facilities. As a result, we are in the process of seeking new financing by way of sale of either convertible debt or equities. Whilst we have been successful in the past in obtaining the necessary capital to support our investment and operations there is no assurance that we will be able to obtain additional financing under acceptable terms and conditions, or at all. In the event, we are unable to obtain sufficient additional funding when needed in order to fund our ongoing research and development activities in 2016as well as our operations, we would not be able to continue as a going concern and 2015 was primarily duemaybe forced to severely curtail or cease operations and liquidate the Company.

The condensed consolidated financial statements do not include any adjustments relating to the repaymentrecoverability or classification of long term debt.  assets or amounts of liabilities that might result from the outcome of these uncertainties. Our current independent registered public accounting firm included a paragraph emphasizing this going concern uncertainty in their audit report dated April 10, 2017, regarding our 2016 financial statements.

31

  

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

 

Not applicable.

 

ITEM 4. CONTROLS AND PROCEDURES.

 

(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, 2016,March 31, 2017, pursuant to Rule 13a-15(b) under the Exchange Act. Based upon that evaluation, our Certifying Officers concluded that, as of June 30, 2016,March 31, 2017, our disclosure controls and procedures were not effective.

23 

 

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, 2015, we have engaged an external US GAAP consultant to advise the Company.reporting.

 

3224 

 

PART II – OTHER INFORMATION

 

ITEM 1. LEGAL PROCEEDINGS

 

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:us.

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.

 

ITEM 1A. RISK FACTORS

 

Not applicable.

 

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

 

None

 

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

 

None.

 

ITEM 4. MINE SAFETY DISCLOSURES

 

Not applicable.

 

ITEM 5. OTHER INFORMATION

 

None 

ITEM 6.EXHIBITS

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

3325 

 

SIGNATURES

 

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 9th, 2016May 12, 2017By:/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 

 

3426